BNE2.2: The Gemba Report
Previously, in our series on Brisbane expansion:
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The short version is that twelve NRL clubs have chipped in to get a study (that the ARLC probably should have commissioned themselves) to look at the impacts of expansion on the competition. They have engaged Gemba Sports Group to do this and The Australian has actually published the report in full (not paywalled).
That the existing NRL clubs, who may have to face another competitor and who stand to have their ARLC voting power mildly diluted and potentially lose future funding, commissioned the report to make a specific point needs to be kept in mind. That I want to make a different point probably also needs to be considered.
This has not generated much interest, largely because the content has been paywalled at The Australian and the articles are largely made up of quotes from the heads of Manly, Penrith and the Gold Coast talking their own book.
It is common knowledge that the player talent is not there. If there is enough talent for another team, you wouldn’t have the Bulldogs trying to get (Matt) Burton or the Wests Tigers wanting Dane Laurie. It doesn’t pass the pub test.
Brian Fletcher, Panthers CEO, 26 March 2021
On that basis, a club should be worth $50m. So what I am saying is … if a club wants to come and have a seat at the table, they have to be stumping up.
Scott Penn, Manly owner, 1 June 2021
But if expansion is done quickly at the cost to the game and the existing clubs, then we need to pause and think it through.
Steve Mitchell, Titans CEO, 23 June 2021
The basic breakdown of the report is that there’s four “sprints” (?):
- Impact on Fans
- Impact on Revenues
- Impact on Operations and Football
- Investing in NRLW and Participation
The executive summary covers the most important information over about the first 40 pages or so and then goes into more depth in the remaining 160 pages of the report.
My inclination is not to document every item of interest. You can read the report for that. My goal is to look at the arguments being made, not as the words of Gemba Group but as those of the incumbent NRL clubs, to see if they hold water.
Sprint One: Fans
This sprint boils down to the following key points –
- The Queensland market has had declining interest in NRL over the last few years
- The Queensland market is pretty well saturated, as measured by self-declared interest in the NRL and self-declared support of existing NRL teams
- Therefore, for a new club to survive, they will need to convert the small group of uncommitted NRL fans (approx. 22,000 in south-east Queensland) and cannibalise the existing fanbases to get to the 150,000 or so the smallest NRL clubs have to sustain them
Fundamentally, that’s a more or less sound argument and not one that I dispute, other than to note that the declining interest in NRL in Queensland over the last few years can be easily correlated with the performance of the three Queensland clubs, having peaked in 2015 with the all-Queensland grand final.
There is, however, some issues with the numbers. This slide shows what Gemba estimates to be the fanbase of each team.
They’ve got some of the clubs right, although I have no idea about the accuracy of what they’re measuring, but there’s some obvious exceptions that don’t really square with the other big source of fan data: TV ratings. The idea that the Roosters are the third most popular club in the NRL is laughable, as evidenced by any other data point you care to name. The Storm are big – and bigger than most would credit them – but not Broncos big. The Rabbitohs are not less popular than the Raiders.
Some of the discrepancy can be explained by using point in time data in 2020, rather than over a longer time frame and factoring in other sources of information to synthesise a more wholistic view of the size of fanbases.
More of the discrepancy can be explained by the difference between what people say they do and what people actually do. The point of a new team is to get eyeballs on TV and, to a lesser extent, attend games and buy merchandise. Having people identify as fanatics is great but does not necessarily align with what the NRL are looking for. It might also mean their methodology has misestimated the number of casual or uncommitted fans, which changes the business case if some supposed fanatics are actually more malleable in their allegiances.
Half of NRL Fanatics that reside in Greater Brisbane currently support the Brisbane Broncos
The risk of fan cannibalisation is not limited to Queensland Clubs, with there being more NRL Fanatics in candidate locations that support interstate teams than the Cowboys or Titans
pp16
Cannibalising the existing Broncos fanbase is inevitable and perhaps even desirable. After all, the fans of the Cowboys came from somewhere and the same applies to the Titans. Indeed, the Broncos fanbase is made up of people who either were or would have been self-declared fanatics of the BRL clubs. People can change.
Gemba notes that they have not undertaken the bespoke research – code for the clubs didn’t stump up the fees – required to draw any conclusions here.
The Broncos have been awful of late and, as evidenced by the increasing ratings and attendances of the Lions now and in the early ’00s, the people of Brisbane prefer to follow a winning team. If the new team comes in and is successful, they will find fans (if they aren’t successful in the medium term, they will be another Titans). If the fans come from the Broncos, the Broncos have fans to spare. Having one team in the league loom commercially over the rest has its drawbacks, specifically forcing the country to watch a terrible Broncos team get pasted on free-to-air most weeks, lest the commercial base of the sport collapse.
The most important point this section could make is actually irrelevant to expansion but incredibly important to the future of rugby league (so will be ignored), which is the slowly dwindling interest as other global behemoths invade the market, especially among younger fans. These globalisation risks are something I highlighted earlier in the year.
Sprint Two: Revenue
Gemba have suggested that a seventeenth team would add twelve matches a season and modelled revenues improvements based on that. The total audience would grow but its likely, in their view, that average ratings per match would remain stagnant.
They seem to be working from the assumption that their estimate of the fanbase size is correct but the ratings don’t correlate well.
I think they have this backwards. The ratings are the goal and the number of fanatics is largely immaterial except as a means to generate ratings. In fact, I think ratings give you a better estimate of the fanbase size than whatever data they’ve used. Gemba probably would have been better spending the money on buying an Oztam subscription than commissioning a survey.
Their assumption is that the new club will have a small fanbase is probably valid and consequently will generate minimal ratings (similar to that of Penrith or Cronulla), excepting for the newly created Queensland derbies and additional matches, and this underpins their subsequent analysis. Given that averages remain about the same and the increase to total audience is driven by the additional matches, the implication is that another team is not required to play more games to generate that revenue.
This is not a view I subscribe to. I think it’s likely that a new Brisbane team will have reasonable-to-good ratings because people in Brisbane like watching football and want skin in the game, even if it’s not their preferred team. Most weeks, the new Brisbane team will play in lieu of a below average team and raise the average ratings for each round and that, even without extra games, average and total ratings will rise in the short to medium term.
I’d be surprised if broadcasters or the players’ association agreed to a longer season. While there is scope to amend the value of the broadcast deal based on expansion (but who knows whether or how this will be triggered), I think any uplift in average and/or total ratings would only accrue to the broadcasters under the current deal. I talked about this in BNE2.1.
Overall, Gemba forecasts small benefits for the league as a whole. They do this in a logical way with some evidence but I think they’ve understated the upside. You can make up your own mind.
Sprint Three: Operations
In summary –
- NRL costs are going up, which is largely because the new team will be entitled to the central distribution plus some additional costs to move the morass of Sydney clubs to south-east Queensland more frequently (estimated by the report at $345,000).
- Based on the AFL experience, promoting existing clubs into established markets results in league-average contributions to the new clubs. Starting new clubs from scratch in new markets requires significantly more investment.
- It costs about $23.6 million per year to run an average NRL club, so a new club needs to find about $10 million a year over their distribution to break even.
- A new mouth to feed means less sponsorship revenue for everyone else.
- With a new club increasing the total salary pool from $147 million to $156 million, salary inflation will result in putting existing clubs under pressure to manage their lists.
Cap management is a challenge that clubs currently face, but may be compounded in the short term with the addition of a new team
pp139
It would be a shame if clubs had to do their jobs better, a wholly unprecedented situation not found anywhere else in society.
After that, it starts to get maddening.
If you’re not familiar with corporate risk analysis, it’s largely about identifying qualitative concerns and less about quantitative analysis and that’s how this sprint largely runs.
There will be dilution of talent as a result of more players entering the league, but there are concerns that the quality of talent will not be up to NRL standard.
pp26
There’s no evidence for this, simply the assertion which is backed by a logic but its a logic that suits the needs of the existing clubs. Where benefits are noted for balance, there are considerably fewer bullet points when compared to the risks.
In reality, if there’s a shortage of talent, it’s in the club offices, not on the football field. It is particularly galling to hear these sentiments echoed by the Panthers, while they were undefeated in first and second grade football at the time of the report’s writing, forcing Matt Burton to either play in reggies or as a first grade centre, because they are just so overladen with talent. That he can go elsewhere for an opportunity to play first grade in the halves is considered a failing of the current system, which is baffling.
There is a concern amongst interviewed clubs about the quality of the players that would be entering the league to fill the additional spots created by a new team. However, there is a general sentiment that there are enough players to fill an additional team of 34 players.
pp143
The corollary is the fate of the 2019 Sunshine Coast Falcons and how other NRL teams just allowed Melbourne to keep their most talented members, which included at various points Harry Grant, Justin Olam, Nicho Hynes, Tui Kamikamica, Tino Fa’asuamaleaui and Ryan Panehuyzen, without a fight. Instead, Melbourne’s rivals preferred to wait until their market value had risen beyond cheap before showing any interest.
Feedback from current NRL clubs suggests there is currently a lack of incentives and structures in place for clubs to prioritise the development of junior talent. If a new club does not take a development mindset towards building junior talent, there is a risk that current Queensland based clubs will be negatively impacted as they may lose junior talent for little compensation
pp161
For mine, it’s clear that the talent is there but the scouting and development structures are not, which is ironic considering the report states that clubs are concerned that there’s no reward for developing talent. It pays huge dividends because the rest of the league won’t scout outside their postcode. This self-serving analysis is not a useful contribution to the discourse.
It may become increasingly more challenging for a new club to establish talent pathways, as existing teams continue to grow their presence in Queensland from a talent identification perspective (e.g. Melbourne Storm’s affiliation with the Sunshine Coast Falcons and Brisbane Easts, and the NZ Warriors’ affiliation with Redcliffe Dolphins)
pp34
The report notes that clubs who rely on Queensland talent will have to spend more to maintain their pipeline. There are three unaffiliated clubs in the Queensland Cup, two of which will sign up with any NRL club that will have them. Of the three clubs that might come into the NRL, they all exist in some form in QCup, meaning the Storm might have to shift partners from Easts (or rely solely on Sunshine Coast), the Warriors might re-enter the NSW Cup with their own side (which might happen anyway) in lieu of using Redcliffe and the Jets would obviously link up with their currently unaffiliated namesakes. There are still substantial opportunities for more clubs to utilise Queensland in their pathways.
The report rightly identifies that there are unanswered questions about how the new team will operate. Will they be given cap dispensations? How will the draw be structured? What’s going to happen to distributions? That’s on the NRL to address. But if the result of expansion is player salaries going up and additional playing and coaching jobs being created, this is presented in the executive summary as a bad thing (the body is more balanced). It is, of course, bad if your business is running a football club but it is less so if you are ordinary fan who simply wants to see the people responsible for playing the game rewarded for their efforts.
Outside consultants are unlikely to publicly publish a report which states that their clients could and should actually be a lot better at their jobs. What’s irritating is that this has been relayed, verbatim, with little to no analysis or interpretation or context, by the media. Fortunately, it’s been paywalled so no one else seems to have picked up on these extremely lazy talking points.
Sprint Four: Women/grassroots
The final sprint talks about the current risks and opportunities for the women’s game and grassroots. This seems like a non-sequitir, given the report is notionally about adding another NRLM team in Brisbane, but there is an opportunity cost. The money that’s invested in a new team is money that can’t be invested in the NRLW and women’s game.
To a level that’s true. Of course, the unstated assumption is that the existing clubs’ central distribution is to be left untouched, even though a large number of clubs do not generate sufficient commercial return to justify such a generous grant and their existence is largely subsidised by the Warriors, Broncos and other big clubs. Perhaps we should cut the men’s club distribution by $1 million a year and reinvest that in the women’s game? We could then have our cake and eat it. That this would come at the expense of a number of precariously balanced legacy clubs wouldn’t bother me in the slightest.
One strange thing to note is that the report states that the NRLW has the fewest passionate fans but also shows that it rates better than Super Rugby, A-League, AFLW and NBL. Gemba seems to have again confused their fan metrics with what actually matters. The NRLW has the least ability to drive subscriptions, because it is bundled with the NRL rights. What is not stated is the commercial impact if NRLW gets its own broadcast deal. The competition could become self-funding and realise its potential. When you think about the NRLW in terms of the failure of the current administration to capitalise on its potential, then this negates the opportunity cost and makes this entire line of argument redundant in the context of expanding the NRLM.
Personally, I find it gross that a number of NRL clubs have shown little to no interest in the women’s game, not even bothering to pretend to want a NRLW franchise, but will use it as a distraction to further their case that they should not be subject to any further competition in the men’s league.
The real opportunity cost is using this time and money to put another team in Brisbane, presumably at the behest and benefit of Nine, when the report notes that the demand for a team in Western Australia or South Australia is about the same as it is for a second Brisbane team. Of course, that would cost the NRL a lot more money.
Conclusion
Consultancy, irrespective of the discipline, is fundamentally about giving the client what they want within the legal and ethical bounds of the profession. Most reports of this nature are used by C-suite executives to bludgeon their counterparts on the opposite side of the board room table, rather than being works of science. Many simply go unread, their heftiness being the primary goal.
Gemba’s brief was to develop a report that highlights the heretofore unexplored impacts of the second Brisbane team, with an emphasis on commercial and quantative analysis, and they’ve hit it out of the park. It’s clear that sprint one and two is their own work. As I get older, I realise in these grey-scaled scenarios, there’s not a right or wrong, so much as a more defensible or a less defensible position and while I could quibble here or there, their arguments are sound. I disagree with their conclusions but that doesn’t make me right and if I had done a similar report, not only would it look terrible but it would have had a very different goal in mind.
Where it falls down is where Gemba have been guided by their clients, the football clubs. Sprints three is about repeating the club’s concerns, dressed up in the language of corporate risk management. The implication is that the clubs see what’s good for them as being what’s good for rugby league.
Nothing could be further from the truth. The sport would greatly benefit from not only removing these lunatics from control of the ARLC but also shedding several or more from the top tier of the sport and redirecting their central funding to support expansion and the women’s game and grassroots or country football. On that basis, it’s difficult to swallow the conclusions reached in this part but it’s created the most talking points in the media, so in that sense it’s mission accomplished.
Still, it’s better to have some information out there, than not all, as long as we understand the context in which it was created, which is that most of the existing clubs do not want any further competition. There are a lot of interesting bits of information that I have not covered.
The ARLC pursued something similar under the Greenberg administration and this was subsequently buried in a dark hole by V’Landys. It seems unlikely that we will ever see that report.
Nor will we likely ever know on what basis the ARLC makes their decision about the successful expansion option. The information released by the clubs themselves is fairly scant – Easts held a press conference that could have been an email to talk finance and there’s reports the Jets are short on bank guarantees – and I assume the contents of the bids will remain commercial-in-confidence.
Irrespective, I have no doubt that a second Brisbane team will be announced in about a month. I guess we’ll see what happens and if its a disaster, at least the Panthers and Titans will be able to say I told you so.
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