The AFL, the largest and wealthiest sporting code in Australia, likes to consider itself on a par with some of Australia’s biggest corporations. With revenue of $425 million and one of the highest-paid executives in the country (Andrew Demetriou earned $2 million last year), it should by rights be impeccably managed. However, if the financial disaster brewing at Gold Coast Suns and Greater Western Sydney is any indication, Demetriou and the AFL board (led by Rio Tinto director Mike Fitzpatrick) may end up grateful they don’t answer to shareholders.

To paraphrase Warren Buffett, making deals is fun, running a business is boring — and back in 2009, it was getting pretty boring down at AFL HQ. The AFL Commission determined to relocate struggling North Melbourne to the Gold Coast. Its moves were ultimately thwarted by North Melbourne members, who didn’t fancy their team being relocated 3000 kilometres away.

Not done with the Gold Coast, the AFL decided to create a new club, forgetting the fate of the Brisbane Bears, which cost the league and various owners (including Christopher Skase) tens of millions of dollars. The Fitzroy Lions eventually moved to Brisbane where the on-field performance of the merged club improved but off-field performance remained lacklustre. The club reported a loss of $1.8 million in 2011 and 2.5 million in 2012.

If a club that  won three consecutive premierships in the early 2000s is unable to operate profitably, it follows that a second team in Queensland would struggle financially. But that didn’t concern Fitzpatrick and Demetriou, who remained resolute in their plans to expand the game into new territory.

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To the AFL the logic for expansion was clear — superficially, having more teams meant more games could be broadcast, which meant more money. Moreover, the Gold Coast (and Western Sydney, which would soon follow suit) had large and growing populations so would be natural fits for an expansion of the country’s largest code. The problem is, not all expansions work. In fact, more often than not, corporate takeovers or overseas expansions end up costing the aggressor money. It’s no different in sport as it is in business.

Former AFL executive and Etihad Stadium chief Ian Collins was last week especially critical of the plight of the expansion clubs, telling Inside Football: “Having two teams in Brisbane/Gold Coast and Sydney has not accelerated significant growth in support or football development … rather, it has divided the existing supporter and development bases.” Collins observed: “The AFL is haemorrhaging due to the cost of its investment in these clubs [and] runs the risk of disenfranchising other stakeholders in the competition, especially clubs in the traditional football market that are finding it increasingly difficult to balance the books.”

“The two expansion teams have been and will remain a financial noose around the neck of the 16 other teams.”

Collins’ comments are borne out by the financial data. In 2011, the AFL lost more than $23 million — largely blamed on start-up costs related to the Gold Coast team. In total, the league (which is in reality the 16 non-expansion teams and their members) are spending upwards of $200 million on the new teams.

The problem: the investment will never provide any sort of return.

1. The TV rights argument

The key plank of the expansion was the argument that broadcasting into the Gold Coast and Western Sydney would push up the value of the TV rights, the windfall being spread across the other 16 sides. The problem? AFL doesn’t rate in Queensland and NSW, so much so that Chanel Seven relegates AFL matches to its lowly 7Mate channel. This is in stark contrast to Demetriou’s optimistic predictions, when he forecast the new teams would “help the industry through the broadcast rights and other means to generate significantly more revenue”. If anything, the new sides diminishes the value of broadcast rights as Seven and Foxtel would lose money on those matches.

2. Match-day crowds

Despite their improved performance, the Gold Coast Suns have struggled to gain any sort of crowd momentum. Average crowds have slipped from more than 18,000 in 2011 (the Gold Coast’s first year) to around 13,000; a substantial drop-off (despite the team’s improved on-field performance). Moreover, the expansion clubs cause a serious financial drain on existing teams, with matches involving Gold Coast and GWS drawing anaemic crowds across the country. Since 1997, seven of the 10 worst-attended matched have involved GWS. The new teams cause existing teams to lose hundreds of thousands of dollars for each poorly attended spectacle.

Ironically, Demetriou recently criticised the off-field performance of the Melbourne football club, claiming that ”it hurts Hawthorn when Melbourne play them in a Hawthorn home game and the attendance is estimated at 15,000 or 20,000 people … That’s a $200,000 impact to Hawthorn.” Demetriou neglected to point out that Melbourne crowds are usually three times that of GWS.

3. List building

In an attempt to ensure that Gold Coast and GWS become competitive fast, the AFL introduced a raft of advantages, including salary cap allowances, extraordinary draft concessions, and the ability to poach uncontracted players from other clubs. This allowed Gold Coast (with money paid by other clubs) to lure the AFL’s best player, Gary Ablett, from Geelong. It also allowed GWS to poach Melbourne’s Tom Scully, a number-one draft selection from two years prior. GWS were able to obtain Scully with funds provided from other clubs (ironically, including Melbourne) and also employed Scully’s father as a recruiting agent.

More embarrassing was the recruitment of rugby league star, Israel Folau in 2010 on $4 million contract, making him one of the highest paid AFL footballers. Much of Folau’s contract was paid for by the other 16 teams through incentives. At the time of his recruitment, Demetriou gleefully boasted: “Our expectation is that he’ll be a player who will develop, and over time he’ll develop further and continue to learn the game.” After only one unsuccessful season, Folau dumped AFL and returned to play rugby union for the NSW Waratahs for $650,000 a year, far less than his AFL salary.

Demetriou continues to defend the two expansion sides, saying, “the 16 clubs are delighted with the progress of both of these clubs, [and] the last time I checked, we have money in the bank, we have no debt”. However, that indicates the AFL is charging too much to supporters to attend matches, or forcing supporters to pay $1000 per year for a Foxtel subscription. The fact that the AFL is flush with cash is no reason to spend it on costly and needless new franchises.

The two expansion teams have been and will remain a financial noose around the neck of the 16 other teams. But on the bright side, they certainly will ensure Demetriou and Fitzpatrick leave a legacy.