Brought to your by TJ13 Editor in Chief: Andrew Huntley-Jacobs
The European Union Article 82 was the lever used to pry the commercial rights from the FIA back in 2001. The EU commission ruled that the FIA was in violation of Article 82 because of the manner in which TV broadcast rights were awarded.
Here is the relevant clause.
“Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States.
Such abuse may, in particular, consist in:
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts”.
The talk of the paddock in recent weeks has been whether the EU will intervene in the current crisis facing Formula One. Specifically to answer whether the bigger teams may be deemed to be in collusion with the commercial rights holder, and specifically in breach of a) and c) above.
This belief is based upon the concluding comments associated with the 2001 EU investigation into Formula One. The result was the FIA were forced to sell off the commercial rights to Formula One, and the issues then were surrounding the abuse of a ‘dominant position’, and it is this which once again is raising its head.
“The European Commission has concluded a thorough investigation, prompted by a number of complaints, into the way international motor sports is organised and commercially exploited. The Commission has now formally told the Fédération Internationale de l’Automobile (FIA), the body in charge of international motor racing, that it considers the FIA to be abusing its dominant position and restricting competition” (June 2001).
We should note it was not just the FIA criticised for abusing dominant positions, the commission added the following.
“The Commission has sent the same statement of objections to two companies controlled by Mr Bernie Ecclestone: Formula One Administration Ltd (FOA), which sells the television rights to the Formula One championship, and International Sportsworld Communicators (ISC), which markets the broadcasting rights to a number of major international motor sport events. A statement of objections is a preliminary procedural document and not the Commission’s final verdict on the case”.
“One of the Commission’s most significant conclusions is that many of the contracts concerning the commercial exploitation of international motor sports, particularly those involving broadcasters, were concluded on the basis of a situation unlawful under European Union (EU) competition law. These contracts would therefore have to be renegotiated if the Commission’s initial view is ultimately confirmed. The Commissioner responsible for competition, Mr Karel Van Miert, stated: ‘We have found evidence of serious infringements of EU competition rules, which could result in substantial fines.’
Specific measures were enacted to loosen the stranglehold on TV broadcasters and race promoters, though the detail is not relevant to the here and now.
However, the recent creation of the F1 Strategy Group and the F1 Commission has been a divisive issue within Formula One during 2014. The question being asked is whether the FIA has reversed it’s position that appears limited to being a ‘sports regulator’ and once again via it’s participation in these bodies, has acquired some partial responsibility for current alleged ‘commercial conflicts of interest’.
To this end, the leaked letter this week from the ‘smaller teams’ to Bernie Ecclestone – appearing to plead for a last ditch effort to resolve the current discrepancies between funding for the F1 teams – deserves a closer examination.
The broad issue contained within the correspondence relates to whether the distribution of funds amongst the teams by the commercial rights holder is equitable. Yet this document is in fact a well structured complaint and prima facie evidence that the FIA and Formula One is governance is once again in breach of EU statutes on competition.
The smaller teams claim they have no voice, as they are excluded from the F1 Strategy Group, which consists of 6 teams and 6 delegates from each of the FIA and FOM.
The leaked letter states clearly,
“70% – 80% of the FOM income has to be allocated to the engine. For us, as engine customers, the engine technology, i.e V6 or V8 turbo-charged or hybrid, is of much less significance, as opposed to engine manufacturers, who are using Formula One as a marketing tool to showcase high-end technology. Unlike manufacturer-owned teams, our core business is Formula One.
“Yet, we have no choice but to spend most of our income on the engine, and the remaining 30% is by far not enough to construct, enter and run a team over a twenty race season.”
The smaller teams have attempted to mitigate the impact of this by suggesting cost control measures, amongst others, one suggestion was limiting the number of front wings allowed to be used per team during a season. However, the F1 Strategy Group has veto’d these topics for further discussion and regulation.
The letter then continues, by attempting to demonstrate that the exclusion of teams from certain processes and decision making forums is anti competitive and those involved are effectively a ‘Cartel’.
This is a loaded phrase and alone designed to catch the eye of the EU Competition Commission.
“The shareholder’s (sic) focus during the negotiations was on securing the co-operation with big teams in view of the planned IPO; we were effectively given no room for negotiation. Furthermore, the impact of providing various share options to key people and entities may well have clouded their judgement in respect of creating what is effectively a questionable Cartel comprising, the Commercial Rights Holder, Ferrari, Red Bull, Mercedes, McLaren and Williams, controlling both the governance of Formula One and apparently, the distribution of FOM funds.
Yet the power packed punch is in a mere sentence towards the end of the document. It is alleged, “Whilst the FIA are involved in The Strategy Group, they are impotent to act”, which if true is clearly in breach of the Formula One 2001 ruling given by the EU.
Looking back again to 2001, once the FIA had enacted the sale of the commercial rights in 2001, the EU Commission released a concluding statement, which stated; “Following discussions with Competition Commissioner Mario Monti, the FIA agreed to modify its rules to bring them into line with EU law. After consulting interested third parties and the Member States, the Commission is now ready to close the file. The modifications introduced by FIA will ensure that: The role of FIA will be limited to that of a sports regulator, with no commercial conflicts of interest”.
So the argument is simple. Did this action from the EU Competition arm of the Commission enshrined the principle in relation to Formula One that the FIA alone should regulate the sport? Or is the current system whereby certain teams are involved in regulating the sport through the ‘Cartel’ of the F1 Strategy Group acceptable?
The Strategy Group consisting of only 6 teams, the FIA and FOM, forms the basis for the agenda to be put before the F1 Commission. It is run on a simple majority-voting basis.
So, the allegation of the smaller teams is that should a majority refuse to ‘send up’ an issue – including regulatory proposals – to the F1 Commission where all the teams are represented – then that topic will remain stymied inside the remit of the F1 Strategy Group and the hands of the FIA are tied.
If the EU Competition Commission does decide to investigate the FIA’s ‘independence’ from commercial influence, there are number of matters for consideration.
Of these, the new 2013 funding arrangements for the FIA based upon the F1 teams entrance fees may demonstrate undue influence is being imparted by the bigger teams.
All teams pay a flat fee of $500,000 to enter a Formula One season. Then the winning constructor from the previous year must pay $6,000 for every constructor point scored, the others pay $5,000 for each point they accrue.
At present this means should Mercedes finish in Abu Dhabi with a 1-2, then they will owe the FIA over $4.4m more than Caterham, Marussia, Sauber, and Lotus. Of course the FIA will represent that with them – money does not buy influence.
However, it may be expedient and quick for the EU Competition Commission to initially just issue a clarification on their 2001 conclusions, which appear to enshrine the independence of the regulator in F1 from any commercial influence.
In most sports, the representations of the competitors are duly considered by the regulators, and a path deemed to be for the good of the sport may be plotted.
Yet in Formula One, it is the teams who are heavily involved in agreeing or vetoing the regulations – both technical and sporting.
There appears little rebuttal that this is currently the practice. When asked during the Abu Dhabi Friday Press Conference, “Is it logical that the competitors in the sport make the rules?” Claire Williams replied, “We don’t have an alternative and until we do, that’s the option available to us’.
Despite indicating earlier this year that they were observing Formula One, The EU Competition Commission has yet to self initiate an examination of matters within the sport.
Yet it may be the case, that it is more expedient for the EU Competition commission arm to act when a complaint is lodged.
If this is the case, then The Times is reporting that Anneliese Dodds, a British politician, has written to the European Commission’s competition arm with grave concerns about F1’s governance.
Whilst F1 has appeared historically to lurch from periods of crisis to relative calm and back again, the current chaos and the plethora of bizarre proposals to resolve the status quo, is indication amongst the forums and comment sections of Formula One websites, that the fans of the sport believe Formula One is at an all time low.