33% increase in player budget seems paltry

Huge gains by teams from TV rights has not pushed up salary cap proportionately

The fourth big auction of the Indian Premier League will happen in Bangalore on Saturday and Sunday, with the eight teams bidding for 578 players.

Each team has been allocated a “salary cap” of ~80 crore, of which they have collectively spent ~197 crore in retaining a total of 18 players (See Chart 1).

With each team required to form a squad of up to 25 members, we can expect up to 182 players to be sold in this weekend’s auctions.

WINDFALL FOR TEAMS

The salary cap of ~80 crore is 33% higher than the ~60 Crore available in the 2014 auctions.

While this sounds like an impressive increase, it only implies an effective compounded annual growth rate (CAGR) of about 7.5%, which is well below India’s nominal GDP growth rate during this period.

Moreover, teams have seen a windfall during this time period thanks to the renegotiated broadcast rights (won by Star for ~3270 crore per year, about four times what Sony paid per year during the last 10 years) and title sponsorship rights (bought by Vivo for ~440 crore per year).

To put the latter number in context, in 2013 Pepsi had paid ~379 crore for title rights for 5 years (Pepsi subsequently surrendered those rights which then passed on to Vivo). In this context, the 33% increase in player budget seems rather paltry.

AN UNEQUAL AUCTION

Despite the modest increase in player budget, some players can expect to strike a grand deal during the auctions.

As previous auctions have shown, the distribution of budget across players tends to be rather unequal with a few highly sought-after players going for big bucks.

At the last big auction in 2014, for example, 25% of the total budget spent by teams went to 10 players (out of a total of 178 players who were recruited in that auction). Just 25 players accounted for over half the total budget. (Chart 2)

While the money that teams spent on players was unequally distributed, some teams were more unequal than others in the way that they distributed their available funds across their players. This is evident from Chart 3 which shows the same data by team.

Royal Challengers Bangalore, for example, went for a “superstar strategy”, exhausting 80% of its budget with only 5 players, four of whom were batsmen.

Given that this came back to bite it later in the auction (it finished second from the bottom in the 2014 IPL, mainly on account of an imbalanced team), we can expect teams to be more circumspect this year.

SALARY FLOOR

Perhaps for the first time in an IPL auction, the salary cap has been accompanied by an official “salary floor”, with each team being required to spend at least ~ 60 Crore a year as part of player salaries.

This is possibly in response to teams such as Rajasthan Royals and Kings XI Punjab who spent less than their permitted budgets in some of the earlier auctions.

The salary floor, combined with the limit on squad size, means that there is no incentive for teams to go with a completely counter-intuitive strategy and buy players who are otherwise undervalued.

This means teams might as well invest in a few star players, pushing up such players’ valuation.

In other words, while the salary floor will increase the aggregate amount that will accrue to players, this is more likely to go to star players rather than squad players or hidden talent.