A paddock full of Robert Duvalls

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The Formula 1 narrative for the past five years has been centered on the concept of reducing costs but a new technology hybrid engine package has increased the cost to an additional $20 million per year on top of the already bloated team budgets that are seen in the sport.

Three small teams entered the sport back in 2010 under the premise that they would be able to participate in F1 for a reduced cost of £30 million per two-car team per season. That was the thinking behind the cost cap concept in 2009 and it is what lured these teams to the sport.

HRT, Caterham F1 and Marussia have all now either left the sport or have filed for administration process and will most likely leave the series in 2015 unless there is a buyer found for the two remaining teams—Caterham and Marussia.

Looking back

The original intent was that the cars would be far less refined in detail because the teams would have less to spend. Instead, the sport drove toward the most refined, technical and complicated format in its history at an exorbitant cost.

Are we surprised with the downfall of these small teams? The cost-cap idea never took root and even the team’s self-regulated Resource Restriction Agreement (RRA) failed to find purchase with the big teams and thus disappeared like a controversial tweet from a politician.

The concept of third-cars has been a common topic of discussion around the F1 kitchen table and while many are trying to divine the nuance of this secretive option, the discussion has now moved on to the equity and efficacy of the current F1 business model.

Social justice to the rescue!

As with many things in this current culture, F1 is now being viewed through the social justice lens that permeates much of the major media today. The narrative is that F1 isn’t fair to small teams and if you simply divide equally the total distribution of prize money from FOM, it would be more like $60-70 million per team in payout and wouldn’t that be justice for everyone and save the small teams? The thought is that applying equity to the financial distribution of the prize money and in some cases paying for the small teams and their debt is the way forward. At the very least the payout should be scaled down from 4.5-to-1 closer to something like 1-to-1 or 1.5-to-1. That’s justice right? That equity. That’s unanimity for all right?

Well, it might be on the upside but not on the working side of the equation. Marussia, Caterham and HRT never brought the operating capital, sponsor investment, means, risk and resources to F1 that Mercedes, Ferrari and Red Bull have. I grow tired of reading/hearing the familiar refrain denigrating the “energy drink” company for its base and pointless reason for being which is in stark denial of what the company represents to F1 and the world of sports at large.

Has anyone at Marussia or Caterham F1 taken the kinds of contextual financial risk and liability that Ferrari, Red Bull, Mercedes or McLaren have in F1? The answer to that rhetorical question is no.

Formula 1 has not addressed this new narrative about its fleecing of the sport and the accusations of obscene avarice at the hands of its owners and top teams. It has not felt compelled to defend its business model and nor have the teams engaged in debunking the narrative. The FIA is also in the crosshairs over its desire to usher in massive technical regulations and expensive power units at the same time it was giving lip service to a more austere F1.

Two factors seem to be under fire from the smaller teams—the massive costs associated with participating in F1 and the F1 Strategy group that consists of the commercial rights owners, the FIA and the top five teams in the sport. This consolidation of power and regulatory direction of the sport is something that the small teams, such as Force India and Sauber, are not comfortable with. Force India’s Bob Fernley said:

“We’ve had three new teams since 2010, and all three have collapsed,” Fearnley said. “The writing was on the wall from the beginning. Only five teams have a say in the running of Formula One – we’ll lose more teams if we carry on like this. If there had been cost control and more equitable distribution of the prize money maybe Caterham and Marussia wouldn’t have failed.”

Some accuse the FIA of selling out to F1 and ultimately the criticism suggests that a series cannot be accurately ran if the governing body is in lockstep with the consolidated power group. The FIA did try to usher in some sort of cost-cap idea this year but the top teams categorically shot that down. The FIA could then say, hands-raised, “Well, we tried”.

F1 is expensive and now the top teams have made it more expensive. Some feel that you have to pay to play and anyone interested need only apply if they have $1 billion in cash in which to part. The sport makes millionaires out of billionaires, so the saying goes. Perhaps with a little tinkering, we could make six-figured owners instead of millionaires and the F1 world wouldn’t be comprised of the “have’s and the have yacht’s”.

To some that may sound appealing but I tend to think of the thousands of people employed by these teams and the terrific families they support. Call me old fashioned and a person lacking vision if you must.

In 2009…austerity that never came

In 2009, many were waiting for F1’s austerity program—as the rest of the world and most industries were engaging in some sort of global financial crisis restructuring—but it never came. Instead, F1 doubled down and decided to institute the most sweeping and expensive regulation changes in its recent history. No wonder the new teams amassed millions in debt trying to compete and are now in administration with creditors holding the bag.

Back in 2009, FIA president Max Mosley was trying to institute his cost-cap concept and when asked if this was truly needed as the Formula One Teams Association (FOTA) had the RRA that would see teams reduce spending by 50% in 2010, Mosley said:

“Back in December when we met the teams in Monaco, we would have agreed. However, the world-wide economic crisis has worsened very significantly since then. No-one can say the situation will not deteriorate further in the coming months. If this happens, we may lose other manufacturers or even independent teams, despite their best intentions. If we wait and things get worse, it will be too late. Conversely, if economic conditions suddenly improve, we will at least have some new blood in Formula One. It is obviously the FIA’s duty to try to plan for the worst case rather than just hope for the best.”

As it is, Max was right. The teams didn’t cut their spending—in fact they increased it substantially and as it turns out, unsustainably.

max-mosley-290

Max felt that the small teams should be allowed much more freedom in technical regulations with lots of room in which to develop. No rev limits for engines, movable wings, a different underbody, no restriction on the number or types of updates, no homologation, no limits on testing, wind tunnel or simulation work, higher KERS output etc. This would give the small-budget teams a real competitive edge in which to compete with the top teams.

You can see right away why that never took wing and the top teams killed it before it ever left the nest. Instead, the sport consolidated around the top teams and the direction taken was completely antithetical to what Mosley was trying to do which was reduce the cost of F1 and make it sustainable for the future.

Hoping for the best

It seems now that we are either “hoping for the best” or we are simply shedding the last vestiges of the Mosley-era small teams. That could be the case until we start losing midfield teams such as Sauber, Force India or Lotus F1. Then we are in uncharted waters and the third car rule may have to be something the sport looks at in earnest.

I advocate a comprehensive plan for the future of F1 that can be explained to its fans. Fans are just as worried as the pundits in pit lane and we need to know what the going forward plan is. Here is what we see:

High ticket prices, big sanctioning fees, far-flung races in disinterested nations, lower global TV viewership numbers, empty seats, teams in administration, 18-car grid, lack of sponsors on cars, paying drivers, defunct feeder systems, massively expensive and lackluster technical changes and the continued narrative that F1 eats its young and merely skims gross, obscene profit out of the sport for the top teams and commercial rights owners at the expense of fans and small teams.

Paddock full of Robert Duvalls

I’m not a social justice guy as I’m apparently old and I think life is more nuanced and diverse than white work clothes for every human so we can all look like Robert Duvall (THX 1138). Having said that, I don’t subscribe to the narrative currently making the rounds. F1 is not a charity but I do believe there are strange things afoot at the Circle K and that change can and should be made.

The series needs to get ahold of itself and, at some level, address the situation of losing teams. There has been no official statement that I can find other than a few quotes of Mr. Ecclestone in the press. Would CVC Capital not want to protect their investment with some sort of positioning statement? Apparently not. They must be busy re-painting their Lola T70’s in white and putting lights on top of the car…at least that’s what Wikipedia says they used.

ROI

In short, F1 has to keep top teams engaged and investing resources in the series. They mean more to the business model than Marussia does by a long mile. Keeping them involved in the direction of the sport and luring new big-spenders to the sport is needed to sustain the model at current returns. Until such time as those levels of return are not expected and the big teams become dissatisfied with their ROI, then you will continue to see this cost structure in F1.

The system will always move toward growth and continued increase on returns. It will seek the highest ROI and resources will be spent on at least two fronts: Return on investment to turn profit in which to sustain a team through sponsorship, investor, prize money or other means (paying drivers) and revenue generated through commercial deals for the right to access the sport be it TV, radio or advertising/sponsoring.

The FIA will seek a larger piece of the revenue to provide regulatory services of the series but also to sustain itself through motorsport governance and provide a profit in which to compensate the staff and stakeholders of the organization and build cash reserves to sustain the organization in times of difficulty.

Money is the root but evil is elsewhere

Cash is not the evil of the F1 system. Simply dividing the cash in equal proportions is not an answer but would be a comprehensive failure for F1. It would destroy the series in short order. That is why a cost-cap system was being proposed. It was attempting to reduce the expense side of the balance sheet without impacting the revenue side potential.

No manufacturer in their right mind would make the commitment to a series that paid equally for last place as it does for first place regardless of the effort, time, risk, resources and investment given to their racing programs. To be in F1, you have to create a business model and it has to work within the confines of F1’s playing field. If it doesn’t, you should probably look at GP2. No other group goes into business without a model that will work and those who do, fail.

But Wikipedia says Hegel says…

Let’s stop attempting to apply dog-eared notions from dusted-off philosophy books and internet-assembled ideologies to F1. It is a business that is straining under the weight of a crap economy and nothing more. It will be reduced or built on the decisions made and avarice will most likely be punished by a reduction in revenue due to poor management decisions and misguided applications of resources. That applies to teams and the commercial rights owners as well as the FIA.

The sport owes it to smaller teams to find a way to retain the spirit of the privateer but it is not under any obligation to pay their debts and operating expenses. It’s been that way for decades. Should the sport lose all the privateers, then the sport will pay for any avarice and shortsightedness. It will face a cliff edge moment and a correction will be demanded for its very livelihood. In short, the business model will need to be changed in order to be profitable within F1’s new playing field.

Profitable at any level

F1 will need to be profitable at whatever level its revenue is. If that is $1.2 billion, then the model will look one way, if it is $650 million, it will look another way. It must remain profitable at whatever level it is selling at. The same applies to the teams involved. If a team cannot remain profitable and still cover the expense of participation, then that model doesn’t work.

Right now, that may be half of the field and that, my friends, is the evil of F1, not cash. That, I argue, is the devil in the detail and the cost of participation at this level of technical advancement has priced F1 out of the realm for half of the teams involved.

So either we keep this level of technical advancement and find new parties who can afford to play at this level or we take a long look at what Mosely said is a different category of team.

A small team that has big incentive and unfettered advantage for spending less as well as remaining competitive and garnering sponsor interest and a sustainable business model with reduced expense-side balance sheet sensibilities and a modest revenue-side balance sheet opportunity. The big question is—is there room in F1’s playing field for such a team or such a model?

I suspect there will be a middle ground and perhaps Haas F1 will be a good litmus test for a new team, non-manufacturer budget and modest facilities. Time will tell.

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