Is There An Indian Cricket Bubble?

Sorry for the lack of posting; was away on vacation with the family. During the trip, I had an interesting conversation with my father about the IPL and the value of cricket. Our question was: How do you begin to attach a dollar figure to an obsession like cricket? It’s one thing to say, as many (annoyingly) do, that cricket is a religion in India. But is it also a lucrative one? If it is an obsession, are people making rational, properly modeled decisions, or ones based purely on sentiment and personal attachment?

At its heart, this question stems from a dispute between disciplines: economists like to think that buyers and sellers meet in a marketplace and are motivated purely by precise definitions of their own utility and prices (which are themselves decided by supply and demand). Sociologists and social psychologists, on the other hand, argue that societal norms have a lot to do with prices — why do teachers earn so little compared to finance executives? Why don’t we pay home care workers a living wage in America (hint: they tend to be poor, black and immigrants)? To apply this to cricket, my father thinks, for example, that Vijay Mallya invested in a franchise simply because of its star power, not because it will make any money, and that others invested as favors to Bollywood stars like Preity Zinta and Shilpa Shetty. In other words, social networks, not rational pricing, proved decisive.

Of course, economists do recognize that bubbles exist, but they are notoriously unable to predict them with any accuracy. When is an investment in a particular sector a sound strategy reflecting accurate valuation, and when is it part of a tidal wave of “irrational exuberance”? Take this piece of dialogue with an executive from STAR, which just purchased the rights to broadcast Indian cricket for $750 million:

You are paying 40-odd crore per match. The bid almost defies the market situation currently. What did you have in mind when you worked out the figure?

Given the viewership that cricket has in this country we feel that the value that we have attributed to it [each match] justifies itself. Our confidence comes from the popularity of cricket. And we think as the reach of media grows in this country, the penetration and popularity will automatically grow.

This reasoning doesn’t exactly inspire confidence, right? Yes, cricket is popular, but why do you think its popularity is worth $750 million over six years? Economics blogger Matt Yglesias asked a similar question about SuperBowl ads, which cost $4 million for 30 seconds of airtime. Here’s why he didn’t think it was worth companies’ money:

But are the ads really worth it? I’ll admit to being skeptical. The sale of Super Bowl ad time is essentially a kind of auction, a scenario plagued by what economists call the “winner’s curse.” We start with the basic assumption that people know more or less what they’re doing with their money, but aren’t quite infallible. If that’s right, then auctions should be won by whoever most overestimates the value of whatever’s up for bid. This is one reason why the annals of free-agent signings in most sports appear to be filled with blunders. In reality, most GMs are probably doing a good job of not offering players more money than they’re worth. The problem is that each player ends up signing with the team that most overestimates his value. The Super Bowl could be a similar story. Whichever firms’ executives happen to guess worst about the value of a Super Bowl ad are the ones most likely to buy them.

What do you think — did STAR overpay, or is it a worthwhile investment?

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