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How F1 is killing its competition.
Formula One can be viewed primarily from two perspectives. F1 the business and F1 the sport.
Given the big talk about the 2017 sportive changes, F1’s business-related changes have been kept relatively quiet. But maybe we should step back for a moment and again view the flying circus from both perspectives. Without the sportive side, there is no business and vice versa, yet some believe 2017 represents a pivotal point in F1’s history.
The fans of Formula One have recently been mollified by ‘listening’ survey’s and promises of a better F1 future in 2017, but let’s consider for a moment whether in fact the commercial interests of the sport are already undermining the intentions for 2017 and beyond
So, F1 attracts crowds, and these crowds can be monetized. The commercial right to monetize these crowds is owned by Bernie Ecclestone/CVC, through the FOA (Formule One Administration) and his investment company Delta Topco which provides financial backing. Delta Topco is a Jersey -based investment firm.
BTW, Jersey has a great climate….for taxes and Bernie/CVC owns the commercial rights for F1 until 2110. This is a monopoly, which is great for business!
F1 at its core, offers its product essentially like a marketplace, to the highest bidder. Income generated by the selling of this product, is divided by a 60/40 split between the teams and Delta Topco respectively. Now, the level of income can artificially be inflated by simply adding more money to the income from a different source. This is easily done by taking up massive loans, which probably won’t ever be repaid and the cash raised is then shared with everyone involved. So everybody wins! As long as the sportive side of the business brings in enough money to maintain the interest on these loans – currently estimated at around $4bn.
This is then considered a great ‘investment’ for both shareholders and the teams.
Now, teams sign independent commercial agreements with Bernie to acquire a part of the 60% of total income. These contracts favour certain teams quite heavily. As teams receive a fixed percentage based on performance, and basically preferential treatment. As the total income of the sport has grown, due to the massive influx of loaned money, so have the individual shares of preferred teams. In a timespan of roughly 10 years, the total cash payout has risen by roughly 140%. This has also caused an expanding divide between the cash-payouts between team 1 and team 10.
Preferred teams simply have the money guaranteed to them, and sponsors are less of a critical factor. The baseline of costs, in order to compete, is therefore already met for them. Now, teams will spend whatever they can to gain an advantage. The basic lower limit of competing is therefore dictated by the top teams, by way of overspending for performance gains. This squeezes the smaller teams even more, when sponsors walk away from the sport at an alarming rate. The determining factor for success for any team, now relies on loan-based, ever-inflating payouts, to finance ever-increasing spending. It is a vicious cycle, which guarantees existence for some, and a slow death for others.
And that is exactly why the sportive side of the business is running around headless. In its attempt to close up the competition in 2017, the FIA is simply ignoring the reasons that have created the tilted playing field to begin with. What if F1 has lost track of what the product should be like from a sportive perspective, because F1 stopped being a sport and became a product?
F1 is in effect a financial derivative. It relies on ever-increasing costs for fans and teams alike, to sustain its debt-fueled payout frenzy to investors. It is in the interest of Bernie to divide the teams whenever he can, and pretend as if they are the ones waving the sceptre around . The engine cost caps are small peanuts if you take into account that the engine providers, take in nearly 10x the amount from simply showing up. But even with such amounts, it is not the sport that brings in the money, so it has no power.
Closer competition cannot be regulated by changes in the sportive regulations, if the business itself is setting the competition up for an exponentially widening divide. This is the main problem of F1, which trickles down through the teams, the drivers, the circuits to the fans paying the increased price for entry and viewer-ship. As an investor, it is great business. As a fan, it is a whole lot less appealing.
If F1 is to truly appeal to its fans, it has to engage on a level that people can connect with. That becomes very difficult to do, if the marketing side of your business is so ham-fisted, that it actively tries to block fans who could add value to your core product. Or even worse, by wilfully blocking your product from reaching bigger audiences than it potentially can. F1 needs a different business model, plain and simple. And the faster its managers are challenged by both fans and teams alike, the better. It is a shame that the teams we love, are just as guilty as the investors running it. Seems they forgot that motor racing enabled Bernie to take this position of power, and that one cannot live without the other. If they truly wanted, they would try to remember it.