They were sacrificed as part of the Broncos exclusivity deal when the NRL was formed.
The ARL had well-backed clubs aligned with it (Parra, Manly, Easts, Norths) but also traditional clubs (Souths, Balmain, Saints) with generations of support behind it. This was what Superleague lacked- if Bullfrog Moore hadn't steered Canterbury towards SL, Superleague wouldn't have got off the ground. It needed a traditional Sydney club like the Bulldogs to give it a sense of legitimacy.
Otherwise it would've essentially been a competition full of teams with not much history to their names (Broncos & Raiders had less than 20 years of existence) or new teams with no success whatsoever and virtually no time to have built up any real support (Adelaide, Perth, Hunter, Warriors). The reason the World Club Challenge was a failure is because who really cared? Superleague just felt like it was run for the Broncos benefit and the rest just made up the numbers.
Cutting/ merging a whole stack of traditional clubs won't grow the NRL- turning away your most loyal customers to try and attract new ones isn't growth. The AFL has been a success because of it's traditional clubs and their widespread following, not in spite of them.
So many falsehoods in your post.
FACT 1: Super League drew higher attendances than ARL.
Super League drew 12,347 vs 9,915 for ARL.
So how exactly were the "traditional" fanbases of the established NSWRL clubs more loyal?
They sure weren't loyal to their clubs during this period.
FACT 2: The expansion clubs drew better attendances in 1997 than the "traditional" NSWRL clubs.
Brisbane Broncos 19,298
North Queensland Cowboys 17,539
Auckland Warriors 15,442
Adelaide Rams 15,330
The best attended Sydney club in Super League was Cronulla Sharks at 13,558!
Canberra drew 11,622, whereas the second best attended Sydney club was Canterbury Bulldogs at a lousy 8,815!
Even the Perth Reds manage to draw 8,776, which was higher than Penrith Panthers at 7,673!
Rugby League Tables - NRL Stats & Tables
afltables.com
That's just Super League, which pissed all over the ARL in attendances. The attendances for Sydney clubs in ARL were just as bad.
On the ARL side of the war we had Illawarra Steelers (8,695), Westerb Sydney Magpies (8,602), St George Dragons (7,222) and South Sydney Rabbitohs (5,287) draw lower attendances than the Perth Reds. Steelers weren't much older than the Broncos but drew less fans than the Reds and were still better attended than three long-standing NSWRL clubs.
The two stand out winners in ARL were Parramatta Eels (15,647) and Newcastle Knights (14,257). Knights were no older than the Broncos and from outside of Sydney but drew less than Adelaide Rams!
Parramatta Eels were behind Brisbane Broncos and North Queensland Cowboys but marginally ahead of Auckland Warriors and Adelaide Rams.
Manly Sea Eagles (11,816), North Sydney Bears (11,713), Balmain Tigers (10,355), Sydney City Roosters (9,430) and Gold Coast Chargers (8,958) were the best of the rest. South Queensland Crushers (7,003) were ahead of South Sydney!
Rugby League Tables - NRL Stats & Tables
afltables.com