Time for F1 race promoters to play hard ball

untitledFormula One is losing race venues as quickly as it can sign up new ones.

Gone are India, South Korea and now Germany for 2015. As the teams touch down in Kuala Lumpa, there is a question over the future of the Malaysian GP, now in its 17th year. 2015 is the final year of Sepang’s contract with FOM and in February, Sepang circuit CEO Razlan Razali was optimistic that a new agreement will be in place by the upcoming weekend.

“We are still finalising our discussion with Formula One,” he said. “Unfortunately I can’t reveal any more than that. We just have to wait until the race weekend”, Razali claimed. “Both parties have come to some kind of an agreement, but certain items – we are still discussing the finer points.”

Yet no deal has been made as the Bernama news agency reveals today and was the case with this year’s German GP, fees are one of the sticking points.

“We are still in discussion with Formula One Management and studying the latest terms of agreement,” said Sepang chairman Mokhzani Mahathir. “We want a win-win situation”. However, “There are several issues which I’m still not very satisfied and if we can discuss this further, we will renew the contract for another three years.”

Sepang was the first of the new Hermann Tilke designed tracks to join the Formula One calendar back in 1999 and has been heavily reliant on state support. Back in 2007 Ecclestone described the venue as ‘shabby’ and in need of a ‘facelift’.

“They did such a fantastic job when it first started, but now it has become, if you don’t mind, like an old house that needs a bit of redecorating.” The work was slow and painful and procuring the finance was difficult as Razali revealed 3 years later. “The Malaysian government was fully supportive of the Grand Prix for the first four or five years but then lost interest”.

Improvements have been made in the intervening period though not to Ecclestone’s satisfaction as in 2013 he issued a wakeup call. “They need to finish what they started. It is obviously not the same as Singapore. Maybe because they don’t spend the money.”

Sepang signed a new deal with MotoGP last autumn which sees them host a round of that championship until 2016, though observers were surprised at the contract extension being relatively short. The fact that Sepang Chairman Mokhzani Mahathir is now talking only of a three year extension to the F1 contract – at a time when Ecclestone is desperate to sign longer contracts to increase the value of CVC’s investment – is also revealing. The days of a long line of nations jostling for position to host Formula One are definitely over – as is the “how much??? (shock)… but where do I sign?” automated response to Ecclestone’s demands.

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28 responses to “Time for F1 race promoters to play hard ball

  1. Ecclestone has gone a step too far with portraying F1 as an elitist form of sport with accompanying prices and hosting fees. F1 is too expensive for tracks to host F1 and still be profitable without government support, tickets prices but also prices for things such as mobile apps and TV package have become so absurd that the average motorsport fan feels F1 (read: FOM and Bernie) only want people who are far richer than average to enjoy the sport and spend money on the sport, so why should the average rich fan do the same if the sport is not aimed at him?

    F1 elitist image is what is holding back F1’s growth and ability to attract new fans, new sponsors and new places to hold races. Bernie has priced F1 out of the market

  2. If Malaysia goes off, it will truly be missed. To me, the best “Tilkedrome” we have to date. And the races there are more often than not interesting because of the weather and the nature of the circuit. Hopefully Mr.E balances his books and collects more from Azerbaijan and leave Sepang as such for atleast the foreseeable future.

    • Agrees to the fullest. One of the most exciting races during the year. Great track and the weather is more off the charts than in spa. What’s not to like about that? 😉

  3. “at a time when Ecclestone is desperate to sign longer contracts to increase the value of CVC’s investment”

    Are we sure of that? From what I see, Ecclestone’s actions in the past couple of years have been consistent with maximizing profits in the short-term, while eroding the long-term value of the business (hence decreasing the sale price). Dropping Germany, soon Monza, is only latest in the long string of his actions to devalue the sport…

    I sure do hope Donald Mackenzie and CVC as majority owners are happy with the management of their business…

      • Bernard always has an angle that most no one realizes or is aware of. In the owners vs managers debate, Ecclestone is one untrustworthy wackadoodle that you can have little doubt will act NOT in the interest of the owners.

        What does CVC want? Maximum profit today and maximum resale value. The profit squeezing is clearly working as desired, whereas the sales value is plunging every year.

        What does Bernard want? That’s the trillion dollar question. My suspicion is that he is driving down the value of the sport (either for himself or for the Spice Boys), while playing his usual smoke and mirrors games.

        • From a corporate perspective, as CVC suck out more and more, they would have satisfied their investors with a positve IRR (internal rate of return) on their F1 investment. So when a new buyer enters F1, he will do a discounted valuation of the future cash flows (long term) which will invariably be relatively lower and he in turn will buy F1 for a bargain price. Its a win-win for both CVC and Bernie as the terminal value (sale) will only add to the already fat IRR they have achieved.

          • When computing the return, there are two separate parts: (1) the cash flows coming from the investment (i.e. the dividends) and (2) the resell price relative to the purchasing price.

            So for CVC, if the dividends all these years have already dwarfed the purchasing price (all properly discounted or compounded), then yes, the resell price matters little and they may as well give it away for free and still make a positive return on their investment.

            If not, however, then the resell price matters. If it’s zero (e.g. the EU commission nullifies the original sale), then CVC may even find themselves in a position where they made an overall loss on their investment. So driving the price down isn’t in their interests, as far as I can see (i.e. no win-win). A lower price may mean that they would not make the overall return as originally intended…

    • CVC don’t care about F1. They give Ecclestone numbers and he has to come back with the equivalent in currency. If the product dies in the process is irrelevant. They haven’t invested in F1 for the love of the sport, but the love of currency.

      • But if this is the model that CVC loves, then the value would be eroded completely in 3-5 years time. Would CVC wait till that point to offload F1 or they have a plan to suck out as much as possible in the coming year and piss off?

        • Your last sentence sums it up really. They’ll squeeze every last drop out of it and then sell to Red Bull. Which will be good as CVC’s departure will mean Bernard goes as well, paving the way for Audi as E. is the sole reason for Piech’s veto.

          • Red Bull? (That means Horner will replace Bernie, who I suppose he is well qualified in the art of speaking with a forked tongue).

            Good news – in the sense that it will be run by someone with a historical connection to the sport.

            Bad news – in the sense that the owners will not be in it for the sport (Red Bull and CVC do not have the same attachment to F1 as the likes of McLaren, Ferrari, Williams, …. )

          • Red Bull would be in it for marketing purposes, so they’d have an interest in making the spectacle as good as possible unlike CVC who only care about what the bottom line is. RB give many points for criticism, but if F1 were run the way they organized last year’s Austrian GP, we’d be much better off than we are now.

          • “CVC’s departure will mean Bernard goes as well”

            I wouldn’t bet my lifesavings on it. Last time round Bernard drove the price of the business down (even if he owned it) and bribed his way just to make sure that he held onto the glitzy manager position after the sale.

            This time he seems to be driving the price down, while RB is rumored to buy the sport. Horner and Bernard have been rumored to be in cahoots throughout RB’s domination years, also suggested by the hefty bonus they’re getting from FOM. Only this week Horner and Ecclestone were cheerleading for each other. So if RB gets their sticky hands on the commercial rights, then I fear we’re in for yet more Bernard, one way or another.

            I’m afraid natural causes is pretty much the only hope…

          • If we look at Red Bull’s public crying about F1 during the past year, it would appear that if Red Bull were to purchase FOM, it would be a horrible catastrophe for F1…

            We would have a spec engine combined with Newey writing the chassis regs!

            That would be total crap, very similar to nauseating absurdity that IndyCar / CART has devolved into today.

          • @VM

            Yeah, I too fear for F1. Seeing how the Styrian Spice Boys get all naughty in front of the cameras, it may be a travesty if they get their hands on the commercial rights… With the poisonous dwarf as a counselor… The horror!

    • Perhaps because Bernie’s looking at his life as “short-term” and thinking, “apres moi, le deluge”.

    • Part of the reason to sign longer contracts is that FOM’s business model has been elevator contracts, ratcheting up the costs year after year.

      It was good for the Judge to highlight that feature. It appears Malaysia is wisely playing hardball with FOM.

      Perhaps Sepang is anticipating the negotiating conditions may well change to their favor in the future (as F1 collapses, certain costs and values may decline).

      • Yep, you’re right. I just did a quick spreadsheet calculation with the following criteria:

        1) Initial fee is $20 million/year.
        2) The fee goes up 10%/year. I believe that is what Bernie was getting until recently.

        After 10 years the race fee is $47.16 million/year.
        The total paid over ten years is $318.75 million!!!!!!

        Unbelievable.

  4. Before people get too crazy with the Bernie/CVC are greedy angle, do remember for every $3 they get out of a promoter/TV company etc. $2 goes to Formula1 teams.

    Start asking the teams if they would appreciate lower hosting fees. If hosting fees were slashed in half teams like Lotus, FI and Sauber would see $9-10+mln less *each* per season. Can they afford that??

    • They (teams/fom/cvc/bernie) will have to deal with that as the days that fans pay a shitload of money to see the current shitshow are gone. The income will drop and so will the money for the teams. Germany off the calender for example means also x % less income for all involved. TV deal negotiations are also not going too well.
      CVC and teams will have to deal with less income. On the flipside, it should be distributed a bit fairer. In fact the small teams might get a bit more, but the big boys will loose tens of millions.
      They cannot go on like this. Even the rich and famous that Bernie wants to attract are not going to races with less and less exposure as that is not good for their brand image.

      • “In fact the small teams might get a bit more, but the big boys will loose tens of millions.
        They cannot go on like this.”

        Either that, or the small teams will go bust one by one, until the concept of small teams will apply only to McLaren and Williams. From the gruesome sideshow that we see, the big boys and CVC have already taken their pick…

    • Wrong. After expenses, the money is divided. What do CVC and Bernie do to extract their third – not a lot. The teams have to employ thousands out of their share and as we’ve seen, put everything on the line in the hope they will earn enough to keep racing. Bernie and co chance nothing. If the income drops, they share out less to the teams.

      And don’t get me started on F1 running on the backs of thousands of unpaid marshalls, who get sod all from Bernie.

      • The marshal situation is a disgrace and it will come to bite F1 in the future. There needs to be a professional group of marshals who travel the world and do this job just as there are logistics people who ensure each race venue is set up properly.

    • TV money is nothing but sleight of hand by Bernie to make it look like the teams are getting a fair deal. The fact of the matter is that CVC has twice renegotiated debt for a total of over $4 billion.

      This is where CVC shareholder payout comes from, and the teams get exactly $0 of this money, yet the debt created will ultimately be paid for by them.

  5. @Nathan Clifton … They already lost Germany this year so there goes a bucketload of cash. So the real question is “can they continue to lose more tracks?”.
    I recently went to Sao Paulo race and was really disappointed to find that we were locked into the specific grandstand. There was absolutely no ability to walk around anywhere else. Come in through the entrance gate, go to your seat, that’s it. Food choices were limited to the sole concession stand.
    Not sure what other events are like these days, but no way am I going to keep shelling out cash for that.
    Compare this to Indy Car where you can walk around to various “standing room” spots on the track, large variety of food vendors, and visit the auxiliary pits to see the mechanics and drivers up close. All for a fraction of the price.

    • Yes. The best race I ever attended was a CART race at Road America. Fantastic track, great racing, sitting on the grass slopes in the sunshine, and able to wander the whole track (except the back), friendly pits, drivers, and crews, good food. I guess that’s why I hate the painted concrete bullsh*t tracks like Abu Dhabi et al. F1 is quickly losing its soul (and its customers).

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