Professional rugby in New Zealand faces numerous challenges post Covid-19 to shed costs and rebuild.
Today, we begin a seven-part series, The Business of Rugby, which sees Gregor Paul explore the economics of our national game in unprecedented depth, answering key questions about the future — including whether private equity could ever help fund the All Blacks.
Today, it's the money-go-round and where the dollars go, and tomorrow, we explore what's next for Super Rugby.
Professional rugby in New Zealand is big business. The elite game generates lots of money — in the past four years, the industry has earned more than $1 billion.
New Zealand Rugby typically turns over close to $200 million a year, while Super Rugby clubs generate about $40m annually.
The game has made a lot of people rich. The big-name players of today enjoy incomes of around $1m a year and some make almost half again in endorsements, while NZR came into the Covid-19 lockdown with $114m of cash reserves.
"If you did a straight profit and loss account of professional rugby since 1996 I would imagine it has made a significant amount of money," says Rob Nichol, boss of the New Zealand Rugby Players' Association. "Professional rugby has been a massive financial success."
But while the money has flowed, balance sheets across the country make dismal reading. NZR has lost $9.2m in the last two years and has made a surplus only once in the last five. Super Rugby clubs have all taken private investment since 2011 and yet they budget to break even.
Over the last few years various provincial unions have had to be bailed out with six-figure emergency loans - after they received millions in grants.
Rugby generates enormous sums of money, but it spends it, too. It comes in fast but goes out faster and this series is an attempt to understand why the financial system is not working and how it could be fixed.
Rugby's economics are complex and to see where the opportunities and threats lie, the mechanics, distribution and regulations around the money generation and flow have to be understood.
It starts with the agreement between the professional players and New Zealand Rugby Union.
The players agree to let NZR use their labour and sell their intellectual property to broadcasters and sponsors.
In return, 36.5 per cent of NZR's income goes into what is known as the Player Payment Pool (PPP) – this is the fund from which the players' salaries are paid.
The national body sells and collects the income to the broadcast rights for all its properties – All Blacks, Black Ferns, Super Rugby and Mitre 10 Cup. The deal with Sky Sport is worth about $70m a year. NZR owns and collects the sponsorship and licensing rights to the All Blacks, which last year were worth $73m.
The bulk of that came in sponsorship deals, with Adidas and AIG contributing about $30m between them and others such as ASB, Vodafone, Tudor and Gatorade each making seven figure contributions.
Licensing agreements that enable companies to produce official All Blacks merchandise ranging from towels to calendars to slippers are thought to be worth about $10m-$12m a year.
About $16m came from ticket sales to All Blacks tests and a further $20m was paid as compensation by World Rugby for the World Cup curtailing the usual test programme.
It's a model the players like: they share in the revenue they generate and in 2016, it was forecast that a total of $191m would be paid into the PPP in the next three years.
But the distribution of that $187m NZR is complicated. The agreed 36.4 per cent was paid into the PPP, with $23.25m allocated to Super Rugby.
Each team received $4.65m, with which they had to contract 32 players with a maximum individual payment of $195,000 and minimum of $75,000.
NZR then used the PPP to top up the payments made to the likes of Sam Cane and Beauden Barrett as about 40 or so All Blacks are paid considerably more than $195,000.
NZR also had to pay the Black Ferns and Sevens players out of the PPP, while it also had to give an agreed percentage of its broadcast revenue to Sanzaar, which used that money to meet the operating costs – flights, accommodation – of Super Rugby and Rugby Championship.
And NZR paid a grant to each provincial union, with the total allocation coming in at about $30m and a further $14 m was paid to the national body's staff.
NZR is the financial hub so it can own the players' contracts and the licenses to the Super Rugby teams. NZR's iron grip on the purse strings and intellectual property has delivered rugby success.
Centralised control has brought the All Blacks two World Cups in the last decade, an 89 per cent win ratio and helped them keep talent and attract more sponsors and bigger broadcast deals.
But the system has two obvious flaws. Money going out exceeds money coming in and the balance sheet is overly reliant on the All Blacks which has seen Super Rugby diminish in value to the point where it is a financial drain on the system.
The quest to run a leaner business is the easier fix and was already in progress before the lockdown.
NZR commissioned McKinsey to review the rugby landscape and the US firm found ways in which $30m could be taken off the bottom line.
That cost cutting has intensified in recent weeks with further job losses and the players agreeing a pay cut.
Cost cutting alone, though, won't fix the system. More needs to change if professional rugby is to make ends meet and NZR is grappling three major considerations, all of which lead back to the fundamental question of control and ownership.
They must decide whether the time has come to allow a major investment of private capital into the All Blacks [which will be explored later in this series], but more immediately, NZR have to reconsider the way the commercial landscape is regulated and whether a loosening of control would enable Super Rugby to generate more revenue and attract increased external investment.
Should NZR retain tight control of the assets, licenses and commercial properties or should they allow Super Rugby clubs greater financial autonomy?
NZR chief executive Mark Robinson says NZR would not consider allowing Super Rugby teams to own the players' contracts, but just about everything else is on the table in regard to how the clubs operate in the future.
"We have taken a blank canvas approach to Super Rugby," he says.
"We are open-minded about a governance model. What we want are resilient, highly capitalised businesses that are entrepreneurial and commercially successful."
Which they are not for now, as Super Rugby teams don't receive any direct share of the broadcast income they generate. They don't have any direct representation within Sanzaar.
They don't own their players and there is little ability to 'bulk' up contracts to compete for talent. They don't own their own brand – just a licence to use it – and they are restricted to some degree in the sponsors they can sign.
The door is open to private investors but with limited ability to control the playing roster and gate receipts – on games agreed and scheduled by Sanzaar - serving as the dominant revenue source, Super Rugby clubs carry little investment appeal.
Murray Bolton, the high net-worth investor who had a 40 per cent stake in the Blues between 2012 and 2019 worth $4.5m, says the set-up has to change if Super Rugby is to ever win significant private capital and become self-sufficient or profitable.
"There has got to be a legitimate revenue sharing model between the franchises and New Zealand Rugby. The current system where NZR takes all the TV money and then distributes it as it sees fit is never going to work," he says.
"The system is out of whack but I invested because I felt the system would evolve because it had to, and that it was better to be inside the tent when it did. If circumstances ever changed – and they will have to change as the system is out of whack – then maybe I would look at it [investing] again."
Professional rugby's biggest short-term challenge is not necessarily creating more money, but finding a way to better distribute it.