A special Crikey investigation into the financial state of rugby union has delivered a big tick for the code.

In our first offering to redress the balance, Crikey’s Sydney correspondent, Crullers, has clapped the peepers on the Australian Rugby Union’s 2001 annual report and attempts to make sense of where the money comes from and goes to in the game played in heaven.

We’ll be paying a fair bit of attention to rugby over the next 18 months or so in the lead-up to the World Cup in Australia next October/November. Already the NSW government is trumpeting the economic benefits that the world cup will provide and we’ll run the ruler over these predictable claims in due course.

Crullers readily admits that he knows about as much about rugger as Steve Price knows about League. So in this first dip of the toe into the pool that is the business of rugby, let’s have a glance at the financial health of rugger in Australia.

Big tick for transparency, ARU

A bouquet to the ARU first up.

Go straight to the head of the class, ARU, for transparency.

Principal Crullers gives your annual report an “A” for transparency and completeness. A far more detailed financial statement than the AFL’s. Not nearly as detailed as your typical company report, but the ARU’s annual report answers more questions than it poses.

Thank you, Uncle Rupert

So where does the ARU get its dosh?

Most of it comes via a broadcast agreement with News Ltd.

In the current environment of grossly-inflated sport broadcast agreements being written down like there is no today (let alone tomorrow), we’ve had a nagging suspicion that, like other sports, Australian rugby is unsustainably dependent upon the largesse of Uncle Rupert to keep it going.

That suspicion seems well founded when you consider how expensive it must be to run the southern hemisphere Super 12 and Tri-Nations series and cart teams between Australia, New Zealand and South Africa.

The ARU receives its broadcast licence revenue under a 10-year agreement with News Ltd, which terminates in 2005.

Given that it started in 1995, before the recent blowout in licensing agreements (witness the AFL’s recent $100 million a year deal), it’s probably at the more conservative (i.e. moderately priced) end of the scale of broadcast licensing agreements.

The agreement gives News Ltd the broadcast rights to the Tri-Nations series (two tests a year against both of New Zealand and South Africa) and the Super 12 competition. The latter currently involves a 12-team competition where each team plays the others once, then two semi-finals and a final are played. The News Ltd broadcast agreement also requires the ARU to stage three tests in Australia against a recognised rugby-playing nation.

Of the ARU’s $57.6 million in revenue in 2001, $24.9 million (43.2%) came from broadcast licence fees. (2000: $20.8 million of $42.9 million total revenue, or 48.5%.)

Compare that to the AFL, where in 2001 45% of its $116.6 million revenue came from its old broadcast agreement with Channel 7 and sponsorship revenue. (Unfortunately the AFL’s annual report doesn’t split up broadcast revenue and sponsorship revenue, as the ARU’s does.)

So it’s fair to say that the ARU has been more reliant on broadcast fees than has the AFL in the past, although that will change in 2002 when Uncle Rupert’s (and friends Kerry Packer and Izzy Asper) over-the-top broadcast deal with the AFL kicks in.

Another interesting factor was that in 2001, the ARU’s net gate takings were up substantially ($11.4 million, 2000: $6.8 million) thanks to the British Lions tour, which included sell-outs at the ‘Gabba, Colonial Stadium in Melbourne and Stadium Australia.

The upcoming June test matches against France at Colonial and Stadium Australia will do well to match these figures.

Given the one-off boost to gate takings that the British Lions tests provided, the proportion of revenue that Rupert’s broadcast agreement provides will probably be back closer the 50% mark in 2002, all other things being equal.

So is the ARU overly dependent on its broadcast revenue and will Rupert dramatically cut the broadcast fee when it comes time for renewal in 2005?

Probably not on the first count, perhaps on the second.

As to whether it is too dependent on broadcast revenue, we can say for sure that the ARU is not living beyond its means right now, and we reckon there are a couple of areas in which it can bump up substantially on existing revenue streams (see below).

The question of whether Rupert will drastically cut future licence fees when from 2005 is a murkier one.

It’s hard to assess because there is no data available on how much advertising and subscription revenue rugger contributes to pay TV, but there is no questioning its popularity as a pay TV sport in Australia. The anecdotal indicators would suggest that Fox Sports gets a pretty good deal out of rugger, although we’ll only know for sure how much they are willing to pay come renewal time in 2005.

With the prospect of no pay TV competitor in 2005 and the likelihood that the free-to-airs still won’t be interested in rugger (except perhaps for the AFL-less Channel 7), News Ltd may be able to get substantially better terms next time around.

Sponsorship

Crullers has always been impressed by the way rugby attracts the top end of town the Vodafone Wallabies, the HSBC/Citibank Waratahs, the Bank of Queensland Reds, the Bundaberg Rum tri-nations series.

The ARU’s sponsorship revenue of $14.3 million represented almost a quarter of total revenue, down only slightly as a proportion of total revenue from the previous year.

It’s an impressive achievement that the ARU increased its sponsorship revenue by almost $2.8 million in absolute terms (almost 25% in relative terms), although the 2000 numbers were probably deflated slightly due to advertisers choosing to spend on the Olympics instead of other sports like rugger.

With all three Australian teams being reasonably successful in the Super 12 competition this year and the World Cup to come next year, sponsors should be clamouring to pour money into rugby, if not during the remainder of 2002, then certainly in 2003.

So this is one area the ARU should be able to capitalise on significantly over the next 18 months and then some.

Other revenue

The rats and mice of the ARU’s revenue account include corporate hospitality ($3.1 million more than double the 2000 figure) and licensing fees ($1.6 million; 2000: $1.4 million).

Again, both of these should grow in the next 18 months for the same reasons as sponsorship money should grow.

If one could be critical of the ARU, it is perhaps that they don’t milk the licensing side of things as well as they could.

By comparison, the AFL raked in $6.6 million from “publications” and $5.9 million from “consumer products” in 2001.

If we assume that rugby has about half the supporter base of the AFL (and that’s just an assumption, there’s no science behind it), then the ARU should be tracking at about $6 million a year for licensing revenue. Even if we halve the assumed supporter base, the ARU is snaffling only half of the licensing revenue (per capita) that the AFL does.

That’s a pretty crude analysis, admittedly, but I think it’s fair to say that the ARU could lift its game in this area.

What goes out?

Not surprisingly, player payments are the big ticket item in the ARU’s outgoings, making up just over half of the ARU’s $50.3 million in total expenses (down slightly in relative terms from 58% of total expenses in 2000).

With the ARU’s expenses up more than a third (from $36.8 million in 2000), a fair whack of the increase has been in the back office functions of “commercial operations” and finance/admin a combined $14.5 million in 2001 (2000: $9.6 million).

From an outsider’s point of view, it’s a little hard to figure out how rugby was that much bigger in 2001 compared to 2000 that a 50% rise in back office costs is warranted.

The other interesting line in the expense account is “rugby operations and community rugby”. This has almost doubled from $3.6 million in 2000 to $7.1 million in 2001.

Without wanting to seem dismissive of the work of the pencil pushers in the ARU, we wouldn’t mind seeing a split between “rugby operations” and “community rugby” and see how much of the increase went to the pencil pushers and how much was ploughed into “grass roots” rugby.

As we said above, from our vantage point it doesn’t seem like rugby has expanded so markedly over the past two years that any great increase in administrative costs is justified.

In our view, rugby’s Achilles heel is (still) that it has a limited “grass roots” player base to build off that old stereotype of players largely coming from a few Brisbane and Sydney private schools. If the ARU is to accomplish its mission statement of “rugby becoming the number one winter participant sport in Australia”, it has a lot of work to do, so it needs to spend every cracker it can spare on game development.

The growth in player participation in rugby has mostly come from its strongholds New South Wales and Queensland. Since 1997, national participation in rugger has gone up from 98,403 to 119,261 (excluding “social” players, which aren’t split on a state-by-state basis), a 20,858 increase.

Of that, 18,728 comes from NSW and Queensland.

So over 5 years, participation in the “non-rugby” states has increased a total of 2,130.

Compare that to the AFL, which in NSW alone has increased its Auskick registered players from 2,115 in 1997 to 15,183 in 2001. This is only junior players, mind you it doesn’t take into account increases in registered adult players.

So in the battle of the codes in enemy territory, the big-spending AFL ($5 million spent on development in NSW/ACT 2001) is so far the hands-down winner.

But on top of the development expenses recognised in its profit and loss statement, the ARU also made $6 million in “allocations to member unions” (each of the state and territory unions), which are also responsible for development of the code in their respective jurisdictions.

Even taking this into account, the amount spent on development of the code looks to be far too little. Within the constraints of continuing to live within its means, we suspect the ARU would do well to trim whatever fat it can from its back office functions and plough that money into development.

Again, that’s an outsider’s view, so anyone with a better handle on the situation is free to pull us into line.

The bottom line

The ARU, the NSWRU and the QRU all reported marginal profits for the 2001 year.

That’s not really all that important to the “stakeholders” in rugby, because the concept of “corporate governance” and returns to stakeholders has a different meaning in the sporting context than it does in the context of a for-profit company.

The “stakeholders” in rugby the fans first, but also, those who have a commercial interest in the sport (suppliers, lenders, broadcasters etc) don’t care too much if the ARU runs the sport at a profit. All they care for is that the ARU earns enough to sustain the sport long term.

The NSW rugby union in particular was a problem child (if not basket case) for much of the past 20 years, coming close to going bust in 2000. The ARU and News Ltd provided a $4.6 million loan facility (which is all but fully drawn) in December 2000. But since the ARU effectively took control of the NSWRU, it seems to have fallen into line.

Since going professional in the early- to mid-1990s, the custodians of the game have really got its house in order (except for the troubled NSWRU for a time), especially here in Australia.

The southern hemisphere triumvirate of Australia, New Zealand and South Africa have a great tri-nations tournament going on. While the tri-nations series itself is a comparatively new concept, the rivalries between the three countries is deep-seated and forms a great platform to build on.

The Super 12 competition also leverages off this international rivalry, but also off provincial rivalries even “manufactured” rivalries including newer teams like the ACT. The Waratahs-Brumbies record crowd at the Sydney Football Stadium earlier this year was evidence of that.

The tri-series takes off quite nicely after the Super 12 series has been wrapped up and the best of the best are well and truly match fit.

The ARU is pushing for a fourth Australian team in the provincial competition, which reflects the fact that the Aussies have the depth to consistently match it with the South Africans (no great accomplishment at the moment) and Kiwis, except for the seemingly indomitable Canterbury.

So rugger has a heck of a lot going for it in this country. With the World Cup just around the corner, it is well placed to secure its long term future.

We’ve only really scratched the surface of the business of rugby and we’ll look at plenty more issues, but we’d have to say at first blush that rugger is one of Rupert’s big success stories in international sport.

And that’s remarkable itself, because there haven’t been many of them.

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Peter Fray

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