@flippikat is right. Demotion from NRL to NSW Cup isn't the end of the world as Newtown have demonstrated.
Relegation to a lower tier is the way to go in my opinion.
Mergers are a shit show of infighting and instability, and relocations are expensive, risky, take decades to establish themselves in the new market, and don't work the way that people think they work, so unless people are okay with relocating clubs in the same style as the best relocations in America are achieved (which most wouldn't be), then really relocations are an expensive waste of time and money that'll probably create as many problems as they solve.
Relegation on the other hand has the least impact on fans and the club it's self, the club doesn't have to leave town and can still play out of their home ground and use their current facilities, their current fans are more of less unaffected by the change, the club doesn't need to engage a new market, and apart from big ticket sponsors and donors the clubs sponsors and corporates are more or less unaffected, etc, etc.
The only significant difference is that they'll be playing in a different competition against different clubs and their salary cap will be lower.
Now the problem with relegation in the NRL is that no suitable competition exists for them to be dropped down into, so if I was going to rationalise the competition what I would do is spend a decade or so before hand building a new national second tier competition, sell it as a product independant of the NRL, get all it's games broadcast somewhere, introduce some sort of duel registration system, etc. . . Then once being moved from one competition to the other is more or less a seamless transition where the clubs aren't going to have a major loss of exposure and the such, I'd start relegating the excess clubs from Sydney down into the second tier comp (and who knows, maybe one of the clubs in the second tier comp is going so well that we consider promoting it).
It's a win-win for everybody if we go down the relegation route: Taipan and the other fans that's clubs are effected can still support the Sharks or their respective clubs in the same manner as they always have, the NRL not only drops the burden that carrying the excess Sydney clubs was creating, but it gains another product to sell and a place for clubs that are struggling to go if things go south for them.
Not only is the Telstra premiership freed up to spread it's wings, but the we've created a second tier comp that has reasonable national exposure and is cheaper to operate in which creates better opportunities for expansion in smaller and emerging markets through the new second tier comp.
More opportunities are created for players to become professionals and their isn't a giant drop off in exposure for players that can't or aren't up to NRL standard.
