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How F1 could boost its profits by £370m

NEWS STORY
08/08/2019

It is a matter of record that since buying F1 at the beginning of 2017, the sport's spending has increased dramatically, as the new owners sought to stamp a new identity on it.

Along with a new London HQ and a vastly increased headcount, there was the theme tune and logo, and as a result in the first two years under Liberty' Media's ownership costs increased by 35.3% to £422m ($514m).

Meanwhile, in those same two years, revenue went up by just 1.7% to £1.5bn ($1.8bn) as a result of limited growth in it four main revenue streams.

Contrary to what Chase Carey believed, sponsors were not falling over one another in a bid to get involved with the sport, and as a result, two-thirds of F1's current partners came on board under the previous management.

This year, the sport's finances will receive a boost from the deal Bernie Ecclestone signed in the UK with Sky Sports, however as more regions see F1 move behind a paywall this is an area where there is limited grown in the future.

With no new races joining the calendar until next year, when the sport returns to Holland as well as heading to Vietnam, the revenue from hosting fees has been restricted, while the lack of new races has impacted another major revenue stream that of corporate hospitality.

New boss Chase Carey introduced a fifth revenue stream to the sport on joining, that of streaming as Formula One finally discovered new media and went digital, courtesy of its streaming service F1 TV.

At the time of F1 TV's launch in 2018, investment bank Morgan Stanley forecast that it would attract just 104,000 subscribers in its first year.

From the outset however, the service has been beset by issues which have resulted in refunds being issued on a number of occasions, and mounting frustration from fans let down by woeful lack of reliability.

Interestingly, despite streaming being seen as the 'next big thing' for F1, in a report issued by Bank of America Merrill Lynch on Monday, new media is shown as making no revenue this year, or indeed in 2020 and 2021.

While Merrill Lynch might not recognise the income from new media as being significant, the associated expenses are, with running cost due to increase by 3.1% to £436m ($530) this year… all that money and they can't tell the difference between quite and quiet.

In Hungary, Toto Wolff revealed that the teams have given the green light to a 22-race calendar next season and while the full calendar has yet to be revealed, we now know that Mexico is set to remain, along with Spain, Britain and Italy, while the other race under threat, Germany, looks set to be dropped.

Along with reduced deals for Silverstone, it is expected that Barcelona and Monza will also have their hosting fees cut, while the private investors who have saved the Mexico City race will be paying only slightly less than at present.

Forbes reports that Mexico, which is currently paying £27.9m ($34m), will drop to £24.6m ($30m).

In addition to the £16.4m (£20m) paid by the Hockenheim organisers, F1 will also miss out on the £2.5m ($3m) paid by title sponsor Mercedes, however, the Dutch and Vietnam events should more than compensate for this.

Organisers in Zandvoort are thought to be paying £18.4m ($22.4m) for their event, while the hosting fee for Hanoi is thought to be in the region of £28.7m ($35m).

However, while the hosting fees for the two races will more than make up for Germany, the costs of the flyaway Vietnam event will have an impact.

Looking at the bigger picture, a well-placed source tells Forbes that, all this aside, there is a way in which the sport could boost its profits by £370m, but it would require some hard-nosed leadership.

As we all know, the sport is currently working on a major overhaul of the rules and regulations in 2021, and while much of the attention is focussed on "aggressive" looking cars and "overtaking", it is the financial side of things which appear to be the sticking point.

From the outset, Liberty bosses made no secret of their desire not only to reduce spending but to level the playing field, this being done by means of a budget cap and a more even distribution of the prize pot.

Over the last five years three teams have crashed into administration, Force India as recently as last year. At a time the average team budget is £218m ($265m), with the likes of Mercedes and Ferrari are spending twice that.

Around 48% of the prize pot goes to Mercedes, Ferrari and Red Bull, the 2018 pot being worth £751m ($913m)

As the 2021 rules negotiations continue, much like Brexit, Forbe's source has a cunning plan.

"It's very easy," they say, "if I was Chase I would have made a nice contract and I would say to the teams ‘these are the regulations for the championship, this is the deadline and this is what we will pay you. You have got ten days to sign it'.

"I would put on there that this will not be extended under any circumstances and I would put it out to the press that the teams have got to sign it.

"I would get them all signed within ten days giving them half what they get now and regulations that I think would be best.

"The teams haven't got any choice," adds the source. "What are they going to do? Close the factories and lay off 800 or 900 people? They have got a lot of commitments already to drivers and sponsors beyond 2020.

"I'd like to be in Chase's shoes because he could do this and comfortably forecast what the increase in profit will be over the next five years. He would walk off with a nice bonus."

Indeed, such a move would allow some of those Pay TV deals to be scrapped, while the increased exposure on free-to-air would give F1 a firmer foundation and would be in the interests of fans, sponsors and stockholders.

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READERS COMMENTS

 

1. Posted by Chris Roper, 13/08/2019 7:16

"Being an American Company I am surprised they have not used the Microsoft/Google approach to contracts.
Select an important race and at a critical point in that race post an official Looking person at the pit exit holding a sign that reads "By entering this Track you agree to the new Terms and Conditions"............."

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2. Posted by Tony Soprano, 12/08/2019 12:07

"Carey and Company don't have a clue about F1. I found it amazing that John Malone, a very smart guy by all accounts, would put a couple of marketing guys (including Bratches) with zero experience in motorsports in charge of running what's supposed to be the world's premier motorsports series. It doesn't matter what the sport is. If you don't have fans you're not a "spectator sport". Yet these clowns have done everything possible to drive fans away. Those who commented before me are absolutely right. The teams should just find some smart guy who knows how to run the show and start their own series. If they followed the NHRA model, they could approach the promoters and, basically, rent the venue. Guarantee every promoter will make a small profit and then the teams get the entire revenue stream from tickets to hospitality, on-track signage to TV. Bernie understood F1. He had been involved as a driver and team owner. I think he wound up taking too much for himself but he did grow the sport. But Liberty Media brings nothing to the table. F1 doesn't need some corporate owner. As I understand it, the biggest reason the teams don't start a new series is that the FIA controls the venues and will not allow any other FIA-sanctioned series to run at a venue that hosts a "breakaway" F1 series. In my book (in the U.S.) that's called illegal whether you use the term "anti-trust" or outright extortion. Those who follow such things might agree that the European Commission on Competition is no fan of the FIA. I agree with Corkscrew - start a new series and save the ridiculous cut that Liberty Media takes for doing nothing to grow the sport. And when the FIA tries to interfere, take their sorry asses before the Commission and get the FIA out of F1 too."

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3. Posted by Interestedparty, 10/08/2019 19:01

"The fundamental issue is what is Formula 1 - A sports property with a primary focus on generating revenue for corporate investors ? or the ultimate motor sport (Best machine and driver) which delivers for all stakeholders. I believe that Corkscrew's comment is THE solution. A new championship without the burden of corporate investors. (A model similar to the Premier League) Plus minis 48% more revenue could be distributed to all Stakeholders from Teams - Circuits (local race promoters) - Fans ! The teams just need the courage to get on with it."

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4. Posted by Corckscrew, 10/08/2019 16:31

"Of course the teams got a choice. They could just start their own new championship. Ross will willingly preside over that I guess, exactly his cup of tea. This way Chase and his palls are standing with empty hands at the end of this year. "

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5. Posted by zoom, 09/08/2019 19:16

"Before I begin I should say that I'm philosophically against team budget cuts but I also understand the dilemma of underfunded teams. Why not have a soft cap like the NBA's salary cap? The way it could work. Set a soft cap of say 100 million--or whatever. If Ferrari or Mercedes, for example, want to spend more they may. However they pay a "tax". Every $1 over the soft cap would be taxed at, say, $1.50. At certain points, the tax escalates. The taxes collected are distributed to teams who didn't spend over the cap. I think this is a winning solution. It benefits both deep pockets by not limiting them & the underfunded teams receive some sorely needed cash."

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6. Posted by Kallie61 , 09/08/2019 9:55

"Maybe before streaming F1 they should make sure people can actually download. Even today my screaming 1/2 mg broadband would not allow me to download races..... rural living!!! Also think it's about time they made spending a lot fairer to allow more teams to compete for top 3 places, how much more exciting would that be🤔"

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7. Posted by TokyoAussie, 09/08/2019 3:25

"Before they start thinking of increasing paying subscribers, they might want to give some thought to how to hang on to their current subscribers."

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8. Posted by trackrecords, 09/08/2019 0:55

"Oh please get rid of Pay TV - sponsorship needs more viewers not less. Let Sky have exclusive early broadcast of blockbuster films, but leave F1 alone. "

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9. Posted by elsiebc, 08/08/2019 21:16

"If he did that he wouldn't have a championship. "

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