Privatising the Super Rugby franchises (well, partially)

By Sam Richardson 13/11/2012

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’.