(39) Preview of my blog over 2017-18 and 2018-19 – seasons of financial issues

“The most likely sustainable model I think for a region going forward will be a combination of union and private investment. It’s finding the sweet spot and the model that works for that. So I don’t think lifting the New Zealand model and plonking it here or Ireland or anything else is the right answer, but I think the smaller nations that seem to be more hooked up have got that kind of balance between central and decentralised control right.” – Martyn Phillips, Group Chief Executive, Welsh Rugby Union

“I think, outside of Newport, the Dragons didn’t emotionally connect. I know, I talk about my family, my Grandad, all rugby fans, they barely went to the Dragons. My Grandad was still taking the bus to Pontypool to watch a game. I asked him about it and he didn’t feel emotionally connected to the Dragons.  And so for me, that’s the starting point. Any great sporting club at a local level needs to connect to the community. It’s not that complicated. We need to create that connection at more than just a Newport level. It needs to be everywhere, it needs to be Gwent’s team, it needs to feel like Gwent’s team, act like Gwent’s team, and there’s lots we can do to make sure that happens. And I think that’s the bit that got missed the last few years.” – David Buttress, new Chairman, Dragons (Gwent) region

“We can tap into history in terms of what Gwent teams have done in the past and the traditions of Newport rugby and the traditions of Valleys rugby. But we’ve got to bring it all under the umbrella of the Dragons and be a region that people are proud to support and the next generation want to play for. For me the exciting thing is the amount of people who say they support us now because it’s just the Dragons.” – Bernard Jackman, new head coach, Dragons (Gwent) region

As this blog enters a third Welsh rugby season, it is surprising how much progress has been made in the lower (non-Test) tier of Welsh professional rugby since my initial article on 30 June 2015 (link).

Yes there remains an awful long way to go, even at the level of the regions.  And we have barely begun to scratch the surface of the problems in the club game below, including the many trickle down problems from the regions and not just the self-inflicted wounds within the club game and the negative societal pressures at work.

But at least the lower (non-Test) tier of Welsh professional rugby is no longer a running joke.  Increasing numbers of rugby fans now care about the problems in this troubled regional tier of the WRU pyramid, which is progress in itself following the disenfranchisement of North Wales and the alienation of much of South Wales.

If nothing else, events in Gwent earlier this year have brought matters to a head.  A union model, with value adding additional private investment, is the future.

Without becoming “honorary Englishmen” in their set-up, in the way four Welsh professional teams are in soccer, there is no point in any “super” clubs in Welsh rugby.  That opportunity disappeared forever in the 1990s, although the English clubs were able to resuscitate it in the form of a mirage in 2013-14 to achieve their European objectives.

New Zealand have shown this mixed model, and Ireland will increasingly also take this root unless the broadband/broadcaster conflict and benefactor charitable donations fuelling the excess in several domestic club primary markets begin to cool.

There is a certain irony in a country with one of the highest domestic rugby incomes requiring ever longer seasons to address ever mounting financial losses, due to the flawed model imported from soccer and to the detriment of player welfare.

The landscape was pretty depressing at the regions in the summer of 2015, Welsh regional rugby seemingly embarked on a one way trip to a “super” club ethos oblivion.  The trade body of the regions had even re-named themselves “Pro Rugby Wales”, thankfully in the longer term surrendering the “regions” word back to the WRU member clubs but, an incredible act of commercial stupidity by the regional leadership.

The Gwent region had been treading water for years, operating on a shoestring budget and contributing little to Wales in return for the WRU funding received.  The eastern Glamorgan region was going more and more awry with every passing season, rudderless for far too long and with an inherited archaic club governance.

The western Glamorgan region was at least more harmonious, but the “Galactico” side of 5 years earlier was long gone with the financial retrenchment.  The Dyfed region, whilst already punching above its weight on the field, looked decidedly sickly in both its profit & loss account and its balance sheet.

There had been a long and increasingly bitter conflict between the WRU board/executives and the regional funding directors, ended by the 2014 “armistice” of the Rugby Services Agreement (RSA), I say “armistice” for “peace treaty” would be overdoing it, and neither the conflict nor the armistice had achieved anything.

The nearest thing to an “achievement”, after failing to cope with the UK recession and the arrival of French broadcaster Canal+ v beIN inflationary pressures and the arrival of BT Sport within rugby (to counter Sky’s increasing penetration of its domestic broadband market), was the handing over of European competition power to Anglo-French funding directors and the reduction of the Welsh share of “the European revenues pie” from 13.25% to around 8.50%.

The RSA had addressed none of the underlying causative structural problems, limiting itself to introducing the weakest form of central contracts – a limited form of non-wage structure controlling marquee player contracts of the dual variety.  Without a player contracting model that includes reinforcement and underpinning by central control of the complete wage structure, any “play in Wales to play for Wales” efforts are undermined and doomed to failure.

It was obvious even in 2014 that the regions would be in financial trouble again by 2017-18, with the RSA loan flow reversal commencing in 1st September 2017 just as rising salaries/revenues across the Severn would impact (under their announced salary cap plans and the impact of a new participation agreement from 2016), although this was brought forward to 2016-17 by the sheer lack of Welsh financial resilience.

Not even some scintillating rugby played by the Scarlets region in 2017 has been able to remotely disguise these long-term problems with the business fundamentals.

The Welsh regions were able to borrow up to £325,000 each from the WRU member clubs in September 2014, the first tranche of three loans, with repayment of this 1st tranche on 1 September 2017.  We know that the Dragons borrowed the maximum amount permitted and repaid all three tranches (£900,000) in full, as part of their disclosure upon takeover by the WRU this summer.

Today, with the publication of the latest WRU annual report (link), we found out what, if any, of the 1st tranche repayments were made by the other regions in accordance with the 2014 agreed contractual terms.

It was no surprise to discover that these secured loans have been re-financed in their entirety, with repayments of the £2.7 million re-scheduled from the Scarlets, the Ospreys and the Blues until 2025 (rather than the due full repayment by 2019).

There is no excess money within any of these three regional rugby businesses, with both the Scarlets and the Blues each losing about £1.5 million in their last published annual accounts, so the WRU had little choice in the matter.

The catalyst for change has undoubtedly been Martyn Phillips, the WRU Group Chief Executive from November 2015.

He came on board with a number of advantages in terms of driving modernisation and transformational change within Welsh rugby, including being from outside “the goldfish bowl” after decades in exile and in not being Roger Lewis.

Not in a confrontational manner, just quietly going about his business and slowly modernising the unfit for purpose disjointed rugby and business models.

Providing short term aid, whilst seeking long-term sustainable solutions to the mess he inherited due to the numerous errors and omissions over the preceding two decades and none of which could be remotely laid at his door.

I discussed in Essay (32) how the current flawed “model” works against the desired virtuous circle in Welsh rugby (link), including with numerous alienation, disenfranchisement and duplication blockages, and in Essay (36) why a representative regional model solution has to be embraced in its totality to truly provide solutions as many of the benefits are only gained when the final pieces are put in place at the end and linked together (link).  The full regional rugby package, as it has been described.

The WRU leadership, to their credit, took a long look at the incredibly successful NZ regional franchise model and spent a fair amount of time with one of the Kiwi regions in the summer of 2016.  The biggest obstacle to the WRU more closely following the far more mature NZ regions model is the absence of developed devolved union structures equivalent to historic provincial unions, as I discussed in Essay 37 (link).

Martyn Phillips personally certainly has the skill sets to identify the problems and to seek solutions, with empathy for the game, an understanding of consumerism, and a retail history in hedging against and managing risk.  This “ECR” test was discussed in Essay (35) (link).  A retailer is perfect for a rugby pyramid that has unsuccessfully for far too long been trying to impose producer driven offerings on unwilling consumers.

With the Dragons entering WRU salvage, and since making excellent initial progress, the final Essay (38) last season looked at the need to avoid a domino collapse (link).  None of the other three professional regions are healthy both on and off the field, with two of them arguably currently sick both on and off the field, but the WRU needs to work on the regions one at a time to prudently manage its own financial risk.

2017-18 is a pivotal financial year, which will undoubtedly be dominated by the renewal of UK/Irish TV rights for the Pro14 from 2018.  The regions are believed to have received about £500,000 each per season from South Africa, net of travel costs, as a result of the Cheetahs and the Southern Kings joining the expanded Pro14 this season.

This is a positive development, but expectations must be realistic.  The big four South African rugby markets in Johannesburg, Durban, Cape Town and Pretoria have remained with SANZAAR’s Super Rugby.  At least for the time being.  The off field politics in the Eastern Cape have been troubled for some years, and neither South African team could properly prepare for the 2017-18 Pro14 season.

Leaks depressingly indicate that the renewal of European Cups TV rights from 2018 will apparently see little increase in income, with gains in France mostly being offset by losses in the UK.  The English clubs apparently wanting some live terrestrial TV exposure in Europe, not just a BT Sport subscription monopoly for live matches, sacrificing income for greater exposure to add insult to injury for the Welsh regions.

The Pro14 will be looking for a bidding war between Sky Sports and BT Sport, or even including Eurosport, but 2018 looks a singularly inauspicious year to extract more money out of either Sky Sports or BT Sport for very different reasons within those two organisations.

The Pro14 will be all too aware that only the strong Irish provinces are realistically in a position to risk a wholly pay per view option.  Exclusive pay per view TV is a great way of monetising a strong product, but it is usually a catastrophe for a weak product.  The Welsh regions need the oxygen of at least one live terrestrial match per week, and 2022 looks the earliest they could realistically consider a terrestrial TV highlights show only.

But the Pro14 will equally appreciate that there is little money in terrestrial TV, even in Wales.  There is not substantial money within BBC Wales for sports rights, even less within S4C where even outside broadcasting costs are probably a struggle.  The future of senior adult male rugby broadcasting at S4C looks increasingly the WRU Premiership and the WRU Cup.

The culture within Welsh regional rugby, inevitably within any long-term cash starved business structure, is short-termism and blindly chasing the next commercial sponsorship deal.  The regions will require Gareth Davies and Martyn Phillips to exercise guidance and commercial caution, for long-term strategic thinking will desperately be needed over the 2018-2022 TV regional product for Welsh rugby consumers.

Get this wrong, and Welsh regional rugby really will be thrown into crisis.  And then the conspiracy theorists will emerge with the collapse, that the WRU collusion in a live non-terrestrial only TV product indicating that they wanted to crash the existing businesses all along and start afresh.

Whatever solutions are adopted in Welsh rugby, obtaining greater income, however vitally important that requirement is, will not in itself provide a complete solution.  We will always lose “the arms race” in relation to total income and even if we successfully plug into primary markets such as South Africa and (in the years ahead) the USA.

We additionally need to spend our money better, to further close the residual income gap, and to more efficiently close-up our pyramid into an integrated structure in the manner that New Zealand and Ireland have successfully done.  Not just more income raised, but far more efficient expenditure of it.  One coin, two sides.

The player contracting model remains a joke, with no overall control of the wage structure by anybody and playing into the hands of agents, a hostage to the last vestiges of benefactor hobby-horsing and their feeling of devolved possession and control.  Universal central contracting, utilising the current circa £20 million+ of central income, cannot come quickly enough to the Welsh regional game.

There are only two so-called “wild cards” in 2019-20 under the RSA, a World Cup year, unless the so-called “Gatland’s Law” (oh how Warren Gatland must hate that colloquial title for the “Senior Player Selection Policy”!) is abandoned altogether.

Dan Biggar becomes the latest player to leave for England.  Rhys Webb is now seriously at risk of following him out of the Ospreylian door.  A timely reminder of those 24 marquee players excluded from the English club salary cap, perhaps more with creative multi-year accounting within the Premiership cartel.  Please don’t get me started on allegations of outright breach and “confidential settlements”.

As regards the Welsh professional regions, for there is a 5th northern region still confined to semi-professional status, there are broadly two types of income – central and devolved.  Each is itself broadly divided into two.

Central income is divided into two between central competition platforms income (mostly broadcasters of the Pro14 and in Europe, but also some corporate sponsorship e.g. Guinness, Heineken and Turkish Airlines) and WRU funding income under the RSA (the cross-subsidy from Welsh Test revenues).  This is over 50% of regional income.

This cross-subsidy from “the financial engine” of the Welsh Test team remains pivotal.  Remove this £9-10 million from the professional regional game, and fall back on World Rugby’s Regulation 9, and the three nominally independent regions collapse instantly.

In smaller countries the union funding invariably becomes a higher percentage of overall income for a professional team, and Wales is no exception.  Hence the absurdity of a model without direct WRU equity in the professional regions, prior to the WRU lock stock and barrel takeover of the Dragons of Gwent.

Devolved income is also broadly divided into two, although some prefer to divide it between rugby income and non-rugby income and others prefer to divide it between match day and non-match day income.

The devolved income streams are miscellaneous.

For example, shirt and other long-term commercial sponsors, any stadium naming rights, corporate boxes, executive suites, merchandising including replica shirts, season ticket and match day ticket sales/programmes, income from advertising, income from stadium food and beverage outlets, any all year round 3G pitch rental, any rent from a professional soccer club tenant, general venue hire including conferences, functions and business meetings rooms, events such as weddings, any profit from children’s holiday rugby camps (if commercially run) etc etc.

And, of course, stadia state aid and, in the case of one region, a multi-million commercial loan from the council repayable in 2023!  That loan will desperately need to be written-off, or as a minimum converted into a long-term interest only arrangement beyond 2023.

And, of course, and unsustainably, charitable donations from funding directors.  Either specifically, such as infrastructure spending like Tony Brown and Martyn Hazell funding the construction of the corporate East (Bisley) Stand at Rodney Parade, occasionally on a specific overseas player signing, but sadly more generally simply covering year on year routine business operating losses.

Obviously, under the full regional rugby package, synergies are gained by some devolved income streams being done as the central level.  This can vary from one kit supplier paying an uplift to acquire the replica shirt monopoly over the entire Test and regional game (e.g. Adidas in New Zealand), to more mundane matters such as procurement and insurance premiums, to centralised professional player contracting.

Stands have been built in Wales to cash-in on the lucrative and desperately needed corporate income streams; the West Stand at the Liberty, the South Stand at Parc y Scarlets, the East (Bisley) Stand at Rodney Parade, and of course the East & West “behind the posts” stands at the Arms Park.

Having lived in Cape Town in the mid-1990s, and entertained clients and seen how far ahead South African rugby was at that time in this servicing the local business community role, with banks of corporate boxes already built in numerous stands at Newlands (and at the other main provincial stadia across the country), when the old WRU Stadium had none, it is pleasing that this Welsh amateurism is long gone.

But this has left a financial problem with playing “missionary” matches at secondary venues in regions where a low alienation/affinity “cap” has negligently been allowed to take root (last season’s Dragons v Blues Pro12 match in Caerphilly was a not “a missionary match”, but purely the result of an unfortunate fixture clash in Newport).

An occasional “Bisley Plus” novelty league match should be played in Gwent (link), to re-engage with the hinterland and especially Blaenau Gwent, but even this is not made easy by the absence of an integrated strategic fixture list between region and feeder clubs that easily facilitates such Saturday afternoon and evening double venue/double headers that retains a corporate offering at Rodney Parade before the hinterland novelty event.

Albeit with Newport RFC licking their wounds in 2017-18, re-grouping and with everything still too raw, a double header across venues was probably a non-starter this season in any event.

When will Welsh rugby finally arrive at a strategic fixture list, with a region and its main feeder clubs alternating weekends to provide a weekly “home” consumer offering across both products within the same Welsh rugby market?

At the moment we are still battling to avoid open and crazy commercial competition on a Saturday afternoon, so immature is our regional rugby model after 14 years.  Wales needs to be a multiple affinities nation (link), to offset overall population numbers.

There will certainly be interest in the new post-takeover business model at the Dragons, with the arrival of Just Eat co-founder David Buttress as Chairman and investor under a new and more inclusive regional support growth model.

With full region “A” teams some years off, their premature introduction being a sure fire way of plunging Welsh rugby back into major open conflict, the cross-border Premiership Selects in the British + Irish Cup will continue to be a commercial vacuum.

If we are entering four teams, and shutting down the WRU Premiership to accommodate those weekends, should a fifth place be obtained for RGC?  They are a development region, not a South Walian semi-pro club.  And would that place too much of a burden on their playing resources and/or give them an unfair advantage in the WRU Premiership?

There is no chance of resolving the problems in the club game, and especially in the semi-pro “A” licence game, until the regions above them are reformed and stabilised.

The over £1.5 million of WRU funding for the WRU Premiership, given the wrong criteria in the “A” licence, will continue simply to artificially inflate player wages at the expense of the required pathway environment role.

But there are improvements with the WRU Premiership, if not the double round robin format so beloved by the older generation, and an improved league in 2017-18.  Senior WRU executives have listened, including Geraint John, and the main WRU board has acted.  29 league matches is more appropriate, without the pointless Fosters Cup.

The new player postcodes allocation policy within the Blues region is long overdue, with hopefully the Dragons adopting a similar policy.

Last Saturday afternoon at Sardis Road once again saw regional players on Pontypridd and Merthyr duty, and with regional reserves such as Dillon Lewis and Jarrod Evans watching their club ahead of their evening match for their region against Glasgow.

Club, region and country.  Others having a dual club allegiance, their local grassroots club and their nearest “1st class” semi-pro club in the WRU Premiership.  One market, Welsh rugby, but four distinct products for every potential Welsh rugby consumer.

If we can move as many regional matches as possible to a Friday evening, more regional fringe players will get badly needed game time for their semi-pro club.  And the senior regional coaches will be free to observe them.

The WRU Premiership ring-fence is not a straight battle between meritocracy and strategic thinking, for this ring-fence is not a true strategic resource concentration and is frankly completely indefensible in strategic terms.

There is no franchise application to be a ring-fenced WRU Premiership club, and no sensible strategic criteria.  Gazebo’s and car-parking, when the priority should be the pathway.  Just a snapshot of a distorted meritocracy on a given date in May 2016.

In the case of Gwent, Caerphilly Council has three clubs and Torfaen Council has no club.  Despite the critical pathway role, the traditionally strong Pontypool Schools District (Dewar Shield winners as recently as 2015) have no WRU Premiership club to feed into.  To misquote Mr Spock, “It’s strategic thinking, Jim, but not as we know it“.

The WRU Premiership might have a brighter future in terms of profile through broadcasting.  If S4C lose their Saturday evening slot for Pro14 rugby, their budget may extend to outside broadcasting one weekly Sunday afternoon WRU Premiership match from 2018-19 even if rights payments are negligible or non-existent.

So, in the coming season in this blog, we shall tie-up some loose ends such as imprecise language and regional nomenclature before moving on to the financial issues.  First analysing the rugby business model at the global, hemisphere and Welsh national level before turning our intention to the regions and club game generally and then looking at each region individually.  The latter will be sobering, for those unfamiliar with the picture even in general terms.

For it is important, as the unfit for purpose 2003 model (amended in 2004 and 2014, without success), the worst possible improvement upon the collapsing club meritocracy by 2003, will need to give way to a more strategically logical and viable small country representative model from 2020 if non-Test professional rugby is to remain within Wales.

For once we sort out the representative regional game, both the Test game above it and the club game below it will also be in a better position to finally move forward.

Please keep reading this blog for a third rugby season, and keep commenting and otherwise interacting on social media such as Twitter and Facebook.