Privatising the Super Rugby franchises (well, partially)

Yesterday it was announced that there were two successful applicants for licences to operate the Hurricanes and Crusaders Super franchises next season. The Hurricanes franchise is to be run by a consortium including the Wellington Rugby Union, former Hurricanes directors and Welnix, the owners of the A-League franchise the Wellington Phoenix. The Crusaders deal is a little less clear, but is understood to involve a major figure from the West Coast mining industry. The licence for the Blues was understood to be on track for 2014, and the Chiefs had to resolve governance issues before an arrangement could be made to the satisfaction of the New Zealand Rugby Union.

Gareth Morgan of Welnix spoke to Larry Williams about the Hurricanes deal on Newstalk ZB last night - listen here (it's a good interview).

I'm left with more than a few questions surrounding this announcement, and I think an appropriate way to consider the impact of this new ownership structure is to consider the major 'players' impacted by the negotiations - the NZRU, the licencees, the provinces, the players and the fans.

From the New Zealand Herald (linked at the top):

"These new arrangements are a step forward in terms of putting Super Rugby on a stronger financial footing to ensure the game at the professional level is better placed to prosper and deliver for its fans,'' said NZRU chief executive Steve Tew.

Firstly, there is no question that the NZRU is a clear winner in this process. They get (desperately needed) injections of private funds into the Super franchises which are expensive to run, and have been a drain on the union's coffers. To understand just how they win, though, it is useful to know what the licence for operating a team entails. Also from the NZH article above:

The NZRU will retain full ownership of the franchises, the contracting process and coaching appointments.
Investors will get to select, market and manage their team as well as lobby for players outside New Zealand if that works in tandem with the sport's governing body.

The NZRU one of the partners in SANZAR rugby, the group that runs the Super Rugby tournament (the others being the South African and Australian Rugby Unions). As such, they are the recipient of the broadcast revenues that accrue to each nation. The licencees don't see any of this revenues - these revenues are used to pay the players. The NZRU therefore has the power to allocate the players to each franchise. Investors can do what they like once they get their player list, but a large portion of ownership responsibility is in fact taken away from them. It is a very different ownership structure from, say, US-based, Australian or European sports leagues. At least in the A-League, the Wellington Phoenix can employ whoever they want and sign any player they want. The NZRU retain control of which players can play in Super Rugby, what teams they play for and who coaches them. It is a very favourable set-up to the governing body, no question. It is understandable if the NZRU wishes to avoid any club/country conflict that affects many of our Pacific Island neighbours with overseas-based players contractually bound to overseas clubs that often conflict with commitments to the national team. Crisis averted. The other thing that the licencee model does for the NZRU is to wash their hands of the micro-level management that is often difficult when trying to run the game from a central level. The day-to-day running of a franchise is best done on the ground, and the rationale is that private investors will do the job of running the franchise more efficiently than the NZRU or a provincial-based board could. After all, there might even be some money in it for licencees if they do a good enough job!

Think next of the licencees - show me the money? Where is it coming from? And where are the wider incentives to invest in the franchises? As mentioned above, licencees will select, market and manage their team. That is, they'll do the best that they can with who they are given by the NZRU (who pay the players, after all). They are in the best position to eliminate inefficiencies in the day-to-day running of the franchise - they'll have a clear incentive to run a pretty tight ship. The Hurricanes are considered to be the most financially viable franchise in New Zealand, and it isn't hard to see why - above-average crowds at the Westpac Stadium go a long way towards making ends meet. They are also a well-run franchise - there's a small matter of a lack of hardware, though. If you are an investor in the Hurricanes, the licence allows you to market the team, keep gate revenues (while presumably paying stadium rentals too) and generate deals for sponsorship (including a sponsors logo on the front of the jersey). Gareth Morgan in the interview above talks about player academies as another source of opportunity for licencees. It's an interesting prospect - what incentives do the licencees have to develop talent (e.g. put together and run a development squad) that they have to pay for but run the very real risk of losing those players if the NZRU decides to add them to the contracted players pool? There would have to be some arrangement in place for teams to be able to have first rights to developed talent should they make the grade. Otherwise, player development is a very risky prospect. The other thing Gareth mentions in his interview, and it is also mentioned here, is altruism - that the licence is being purchased to keep the franchise in the city/region. That's admirable, and if I had loads of money to throw around, I'd be rather keen on altruistic projects too. There's another factor at play here, though, in the case of the Hurricanes, and that is the now close relationship with the Phoenix. Given that the Welnix group now have ownership stakes in both franchises, it gives them greater bargaining power with the Westpac Stadium, and also the city and regional council. (Gareth doesn't want to stop with these two franchises, though - he wants more!) This is, in several respects, a clever decision by the Hurricanes licence holders. This has to be tempered, however, with the reality that the market in New Zealand cities are small ones, and becoming increasingly competitive markets at that. The more control of sporting alternatives that you have locally, the more you stand to gain under the NZRU licence arrangement. The big question for me is how long licence holders will be happy to simply receive players rather than selecting their own. I see it like this: you invest in a business but you have to use a consultant as a condition of the investment. How happy are you when you find out that the consultant is in fact in the same position with all of your competitors? Seems a bit odd, doesn't it? That's why sports leagues were famously described as 'peculiar' by a founding sports economist in 1964.

This brings me to the provinces. Yes, provinces are struggling - we've seen this on several occasions in recent times. If your Super franchise is a money drain, you'd be jumping at the news that some other poor unfortunate soul will take them off your hands for you. If your Super franchise gives you valuable dividends that often mean the difference between finishing the financial year in the black or red, then you'd be thinking twice as to whether this new ownership deal is a good thing or not. The dividends arent likely to have been large in recent years, but they'd still be welcomed in Hurricanes country by the smaller unions that make up their catchment area.

And what about the players? What does the new ownership structure mean for them? Well, in my view, they are the biggest losers (in terms of the alternative). Nothing changes - they are presently contracted by the NZRU, and they will still be contracted by the NZRU under licence arrangements. If the licencees were able to pay for players, well, the ballpark would be markedly different - imagine free agency. Imagine a less-free structure by which players could be paid a central contract by the NZRU but franchises who really want/need them would pay extra to get them. Free agency has its critics, but it has fundamentally changed the landscape of sports that have adopted it. Licencees would have a greater incentive under free agency or something similar to identify and develop talent - not only within these shores but also overseas. Giving licencees the power to pay players would quite likely make players winners in this deal. As it is, that's one of the least likely things to happen.

Last, but by no means the least, are the fans - what does this mean for them? Well, I've alluded to a couple of things that would make fans a little nervous (greater franchise power in the Wellington area, for a start, along with more centralised key decision-making influenced by broadcast deals), but on the surface it would appear that there has been (and will be) very little change. In many respects it will be business as usual.

For this economist, I am left wondering where this step might lead to. It is a first step to many possibilities. Exciting ones, too, if done right. There just has to be a little more loosening of the reins.

UPDATE: I was curious, so I did a brief analysis of the franchises in the four US major league sports in 2011 by examining revenues and expenses to see how many would 'survive' under a system like what is proposed for the Super franchises. It is only crude, but it is rather insightful. I used Rod Fort's Sports Business Data site (an unparalleled resource) and did a quick calculation of the difference between gate revenues and expenses less player costs. I didn't have the exact breakdown of revenues beyond gate and total revenues, so I just used gate revenues. The NHL had 15 of its 30 teams that broke even or better using this model. They aren't even playing this year. Major League Baseball would have 10 of its 30 teams breaking even or better. Only four of the 30 NBA franchises would break even or better, and none (yes, zero) of the NFL franchises would meet their costs. If anything, this highlights that sport is a risky business to succeed in, with a pretty low probability (29/122 = 23.8% in 2011) of 'success'.

The climax to the ORFU saga

So a deal has been reached! The Otago Rugby Football Union (ORFU) has staved off liquidation! Just a few short weeks ago liquidation was a fait accompli, now they live to fight another day, in the finest traditions of the battling underdog overcoming the insurmountable odds that is so synonymous with sport.

But the tipping point wasnt't due to money being coughed up by a benevolent benefactor, rather it was the Forsyth Barr Stadium, the fear of losing a tenant and what it would do to facility revenues.

After a seven and a half hour meeting yesterday, the Dunedin City Council has agreed to 'forgive' a $480,000 debt from the ORFU to ensure that professional rugby remained in the city, and more importantly, guaranteed the new stadium at least one rugby tenant. But they were not exactly happy with either the ORFU, and the need to do so. This from Dunedin Mayor, Dave Cull, on the ORFU:

"I think there is pretty much universal agreement that they cocked up, and that they cocked up on a chronic basis. Pretty reprehensible really, but we have to deal with the situation as we find it."

and on reasons for the bailout:

The ORFU was bailed out because "the financial model around the so-called private sector funding component of building the stadium is dependent on revenues from the games that professional rugby play there.
"I'd have to say, before it was being built and right up until now, that was the most imprudent, risk-laden way of financing anything. It was basically pretty stupid, but we've got it, and we have to find a way of maintaining the revenue stream for that, or it falls back on the ratepayer. This deal has avoided that,'' he told Radio Sport.

While I can totally understand the frustrations, and the fact that the DCC have painted themselves into a corner, the story gets murkier yet. Why? Because of this juicy tidbit, revealed later in the article:

Cull said it had been discovered that there were no agreements in place for either the Otago ITM Cup team or the Highlanders to play at the stadium.

''Whether the ORFU went into liquidation or not, DVML was left with a very risky situation, as there were no contracts in place guaranteeing an income stream from professional rugby in our region. DVML had taken on the running of the stadium under the impression that those contracts were in place, underpinning that revenue stream.'' 

I'm sorry? I didn't just hear that. There are NO agreements in place for ANY local rugby teams/franchises to play at the new stadium? The one that is very, very dependent on future revenues from rugby to make ends meet on a regular basis? I have to scratch my head in amazement. It wasn't long ago that the ORFU admitted that they hadn't factored in the cost of playing in the new stadium into their cost projections, and now it emerges that there wasn't in fact anything actually tying them to the new stadium at all? Where is the communication here? What is going on? There really doesn't seem to be any semblance of coordination between two parties who obviously need each other to survive. If this is the state of play with rugby in the new stadium, I'd hate to know what the security of the other anticipated relationships is like.

So, when it boils down to it, the DCC (and the ratepayers who paid for the majority of the Forsyth Barr Stadium) are actually behind the eight ball to the tune of almost $500,000 when they should have been 'ahead' due to the revenues earned from rugby being played at the stadium. The other way you can look at it, I guess, is that it has just cost the DCC and ratepayers almost $500,000 to lock in a rugby presence in the new stadium. Was this cost in the budget for the new stadium? I should think not. And what of the Highlanders? They are higher profile than the ITM Cup. I can just imagine them saying: "Now, Mr Cull, you've just helped out the ORFU. How much do you want to pay us for to play at your swanky new stadium? You need us. Your figures show you'll have a very hard time without us, in fact. There is nothing stopping us from hightailing it elsewhere to other parts of the country for a better deal. Show us the money!". My goodness! Shades of the US professional sports now start to appear before my eyes, ones where franchises and cities are at war with new stadiums smack bang in the middle.

I'm sure that there will be more to this story...

Taranaki as a Super Rugby host

As I mused on Monday about the fate of the Highlanders Super Rugby franchise, The Taranaki Daily News reports that the Taranaki union has yesterday reiterated its interest in becoming a Super Rugby franchise. But it is no ordinary one-for-one bid. Firstly, this:

Taranaki's bid involves a radical expansion to the Super Rugby competition at the end of its existing broadcast deal in 2015. The union wants up to eight New Zealand sides involved, and the current national provincial championship acting as a feeder competition. 

I have no problems with the national provincial problem being a feeder competition. In many ways, it mirrors the present relationship between the Heartland Competition's relationship with the NPC. But eight teams? How will that work? The chairman of the Taranaki Rugby Union (TRU) suggests the following:

"What we are saying is maybe in New Zealand rugby there is the potential for eight professional teams and the rest go back to not being even semi-professional but almost reimbursement type teams where the maximum you can pay a player is $25,000." 

Let's evaluate this proposal objectively.

Before I do so, I should confess to having a Taranaki link - my family lives on the Taranaki side of the South Taranaki/Wanganui border, and I went to secondary school under Mt Taranaki in New Plymouth once upon a time and went to several Taranaki games in my time.

I have very serious reservations with an eight team NZ conference. While the present five team conference has been the status quo since Super Rugby debuted in 1996, Australia has expanded from its original three teams (NSW, Queensland and ACT) to five with the addition of the Force (Perth) and the Rebels (Melbourne). South Africa has gone about things a different way, expanding their four original teams - Sharks (Durban), Bulls (Pretoria), Cats/Lions (Johannesburg) and Stormers (Cape Town) - with the expansion Cheetahs (Free State), and they plan to add the Port Elizabeth Kings franchise from 2013, but it is unclear as of yet whether there will be an expanded competition or whether the Kings franchise will replace one of the existing South African franchises.

In any case, I believe the status quo represents the best arrangement for New Zealand teams. Any expansion would involve an increase in player costs, which will not only put pressure on the bottom lines of existing franchises but also those of new franchises. While I acknowledge that New Zealand has an exceptional talent base, it is a small one relative to other countries due to our small population, and the addition of franchises will potentially stretch the already limited talent base further, raising potential question marks over the overall quality of players, particularly at the lower end of the scale. The talent dilution question is often raised in North America, where competition for expansion teams is fierce, and opinions there differ markedly.

If we look at the host cities of the Super franchises in this country, the they are based in the five of the seven largest urban areas in the country - Auckland (1), Wellington, (2), Christchurch (3), Hamilton (4), and Dunedin (7). At number 5: Napier/Hastings. The Hawkes Bay union has also indicated interest in a Super franchise. New Plymouth ranks as number 11, behind Tauranga (6), Palmerston North (8), Nelson (9) and Rotorua (10). It would appear New Plymouth would struggle to have the support base of the existing franchises and even some of its potential competitors for the eight franchises it envisions. Lets not forget that expansion of the present conference will have impacts on existing franchises - for instance, the Hurricanes franchise would be impacted if two of its participating unions, Taranaki and Hawkes Bay, were to become new franchises, drawing support away from the Wellington-based franchise. While some may argue that the existing franchises are largely supported by the fans in the host cities and not so much by those in their partnering unions, I fear that the smaller unions are being drawn into Rugby World Cup-type hype - that the attendances they received in the RWC would be similar to what they would command on a regular basis with a new Super franchise. Longer term, teams need a sizeable and stable fan base. I would suggest that there would be a stronger correlation between average attendance and local area population than with RWC attendances.

I am particularly interested in the suggestion of a revamp of player payments alongside expansion. If there was an eight team professional Super conference, the other six non-Super ITM unions would be involved in a semi-professional feeder or 'minor league' competition. There would be a clear distinction between Super and non-Super players as a result. Non-Super players would basically be on a maximum reimbursement of cost contract, and would basically have to play for the love of the game. While this is admirable, what does this do for the incentive for fringe Super players to play at non-Super level? There is a clear choice if they don't make Super contracts - play for the love of the game, or go overseas. This may result in a dilution of talent in the non-Super level so that a gap in talent between Super and non-Super rugby similar to the talent gap presently existing between the NPC and the Heartland competition. Would this be good for New Zealand rugby? I would argue it isn't. Will it be a case of the rich getting richer, with larger unions getting more of the talent (and revenues) than smaller ones? How will players get into Super franchises if not through the NPC? Talent identification at schools and national age group teams will become crucial and development through academies will see players continue to bypass club and provincial rugby for professional contracts. Rather than propping up the professional game as suggested in this proposal, it may end up eroding the game at the grass roots and harming the very future of the professional game.

A fair question as a result - would contraction be a more feasible option? I don't think so. With fewer Super franchises, I can only see a widening of the talent gap between the Super and NPC levels. Fewer opportunities for Super contracts would result in an exodus of fringe players overseas, where they can command higher salaries than they can in New Zealand.

I remain to be convinced of the merits of expansion of the New Zealand Super conference in the present operating environment. Even though Taranaki is a proud and ambitious rugby province, I find it difficult to imagine a small provincial city making a Super franchise work. The fan base alone is a big question mark.