Disclaimer: TheJudge13 provides a platform for Formula 1 fans to publish their voice on matters relating to Formula 1. The views expressed in Voice of #F1 Fans are those of the contributor and not those held by TJ13. Thanks to first time TJ13 contributor Daniel van Bree
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.
Nice insight Daniel and a great write-up,one thing to add is lack of investment back into the product. MrE and Co have been on a huge take over the last few years,they have paid the teams with ever increasing percentages while increasing costs to the venues and viewers. This has lead to some tracks being dropped as they can’t afford the hosting fees and can’t make the profit needed to justify the event,this then leads to a dropping tv viewing audience and then the spiral of decay is self fueling. F1 is at risk of losing its core identity and sadly we know where that leads.
+ 1 oddball, yes, great insight, great write-up by Daniel, a change is not only needed, it has been in need for some long time now, a change now seems to be truly on its way, a long time ago a change was effected, but that change only amounted to 50% of the needed change. the latest doings/sayings as regards the Australian GP fees goes to show how things are done in F1, formula one cannot continue to be managed in such a way.
Thanks for the comments, much appreciated. I believe everyone who watches F1 is pretty frustrated with the business side of F1, as it has become more and more visible in both the public eye and the sporting side of the event. Many of the comments here provide additional detail on how this business model is destructive to the sport as a whole, and I am happy to see that people are fully aware of it.
A monopoly? FOM / FOA don’t own all car racing or all sports. And there’s blackrock (water?) and the norwegians.
Change is needed, bit I think it only can be achieved if the sport dies first.
Unless they find a leader who wants to go in opposite direction as bernie. And one who can do that too. The wanting part is easy. It’s the being able to that’s hard.
FOM has commercial monopoly over F1 and all related activities. This is one of the main arguments brought before the EU Commission by Sauber and Force India (namely, abuse of dominant position; see also AJ’s take on this), and this can be seen very clearly in the astronomic prices imposed on stakeholders (circuit fees, hotel arrangements for teams during weekends — whereas FOM snatch up all hotels just prior to publishing next year’s schedule and generously propose it to the teams at 3x multiples —, fans attending circuits or watching Pay TV at home, etc.). The regressive distribution of the income is a form of abuse of dominant position, when it drives teams out of business (HRT, Caterham, Manor at one point, now Sauber and Force India). We should not forget that it is the Saubers, Manors and Force Indias who heavily subsidize the spendthrifts like Ferrari and Red Bull…
Where’s Adam Parr when you need him?
“It’s wrong, it’s just wrong. To force a team into bankruptcy and cause the loss of all those jobs is in my view absolutely and categorically an abuse of a dominant position.”
And when the Commercial Rights Holders (via their dwarf executive) openly declares they don’t want the new teams in F1, and in the following years they all go bankrupt, it doesn’t take rocket science to connect the dots…
Thanks Landroni. I was unaware that Bernie uses such an underhanded tactic to even the Hotels in the surrounding area. Classic banking mindset there. Squeeze supply to increase demand and thus prices. I did some research on the logistical side of the sport, which displays the same greedy mindset as the hospitality. Now that I think of it, hospitality generates around 80-90 million a year for FOM. Wonder if that comes from the hotels, or just the paddock VIP areas?
I recall reading once (not sure I’ll find the reference) that after a price hike from FOM the promoter couldn’t keep up so as a desperate measure imposed (again, from memory, might be off by a couple of orders of magnitude) something like 100$ internet access per hour to journalist staff. The journalists went berserk and threatened to write on this in the media, which forced the promoter to relent and lift the internet fee. (On a side note, talk about subservient journalistic standards…)
I don’t suspect there is a single circuit promoter out there making a profit these days: they’re either keeping tight for sake of history (the Monzas and Silverstones) or for the sake of political PR (the Sochis and Bahrains and Bakus), not that the FIA nominally allow this according to their statutes…
Journalists should be writing about it, but make mention of it and your pass will be revoked. It is corruption materialized.
“talk about subservient journalistic standards?” may be not all, but the vast majority, the accreditation of which is nothing more than a spanner in the FOM tool box for maintaining and managing F1.
The dutch commenter Olav Mol made a point to not call himself a journalist. I think that’s an honest point of view.
I feel that with all of this downward spiral of Formula 1, An A1GP esc style competition would thrive. If they make sure to have similar rate of development, maybe disallow engine suppliers to own teams, and then fix all of the obvious issues that F1 has, I am sure a bunch of teams would switch to the new series. The only issue is the huge task of starting it…
I am OK with Teams building their own engines but not with them supping engines to others which opens a can oF worms. So I would let Ferrari build their own but noT supply anyone else. In my world you could be an engine supplier but not run a team. It would of course be necessary for the spec of the engine be such that it could be commercially developed and sold at a much lower price that the current power units. The FIA would not want that, the manufacturers would not want that but that is what I think the sport will need to survive and if both have to go then that is OK with me! I think it has to be viable for new entrants who are not multi-national car makers to enter the sport and expect to build a competitive car. Unless that is possible the sport probably has a limited future. Perhaps we need more Ken Tyrells and less Toto Wolfes
Very considered piece, thank you.
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.
My feeling is that the 2017 regulations shake-up are in effect an attempt to close up the competition for Ferrari, Red Bull and McLaren, all other teams unable to sustain the financial brunt be damned… If this season’s lapping of the entire field seemed at times perverse, next year the spread risks getting bigger (assuming some teams survive altogether through the changes).
And so much for Jean Todt fulfilling his cost-cutting mandate… The peanuts on the engines “caps” would make nice for a poster in Place de la Concorde, but it will surely do nothing when stacked against the costs entailed by the enormity of the aerodynamic changes coming up.
Todt.
He could’ve made such a difference, but he just wants to be an International politician. So mr. “Can you print my emails” just goes for stinking compromise after stinking compromise.
I have a piece where in the end I say my ideaal candidate but my editor wtf_f1 takes his time 😉
@ Landroni, this reflects Bernie’s comments that he would rather see 4 healthy teams than 10 unstable ones. He really does not care about the sport itself. And who can blame him? he bites the dust in a few years, so why would he care about the consequences?
Ref cost cutting on engines…my bug bare, yes a team can reduce cost and stick within budget but it’s very easy to skirt around the edges and fluff the accounts. Mercedes did this when they developed their cut price engine ‘roll eyes’. The true figure will never be known but it’s definitely not the £100 million that was mentioned
And who wanted and pushed for the aerodynamic changes and all others midway through the formula?
Interesting article Daniel…..
Formula Money on twitter wrote an article similar to this, touching on some of the areas you’ve mentioned, in relation to where the money comes from and where does it go. I read somewhere recently, can’t remember if it was this week, that a letter was sent to Bernie, informing him that there’s a strong possibility that some teams may not make it to the end of the season, due financial difficulties, currently i believe that team to be Sauber.
I said it awhile back, if you want to know how to run a business badly and still make sh!t loads of money at the same time, look no further than F1.
Thanks Fortis for the comments. The pressure is on for many teams now due to this business model and I expect to see more messages from other teams, trying to sandbag themselves against what is coming. The letter will be kept a secret, and Bernie will reiterate the same message as always, putting the blame at the teams for overspending. Sauber will become a B team for Ferrari, as Manor will be for Mercedes. Its spreading the risk and increasing the chance of the prize money. It is a monopoly, being led by a dictator under the guise of a oligopoly, and the proletariat left to sit back and watch if come tumble down after the great leader topples over.
He’s clearly trying to portray himself as the victim in all this and that he’s doing everything within his power to fix things, but the teams aren’t willing to play ball.
All this nonsense started with the disbandment of FOTA.
I need to start making note of where i read these things, because i am sure he said somewhere this week that the teams are trying to overthrow him. Or was that Ron Dennis?
it was him (Bernie) who said so, I have read it too.
Sauber has been has been up to their necks for several years now. They have yet to score a point which means they are fighting for 10th where a lucky finish due to attrition could decide the position and the 13million that comes with it.
The worst part for the little teams is that they don’t see their full winnings until completing the following season.
that’s all true, nice and so on You Lads have said here in the article itself and the comments above. But there is one small problem – how to make all this to change for the better? Who to speak with? Or where to start from? Some teams are plotting for BCE to be fired? And so what? – as long as He or CVC pays them enough nothing will change as that’s that ”dwarf executive” and the gang who own all the rights for this playground!
Thought-provoking read, Daniel.
@Landroni, +1 to your subsequent comment/contributions.