An F1 Fan’s Christmas Wish

It’s not unusual to become a bit melancholy at the end of the year. After each F1 season, I look back and enjoy many of my favourite moments on and off the track. This season, I had the pleasure of being the guest of Mercedes and Red Bull at races in Montreal and Austin. Nothing, absolutely nothing is as exciting or rewarding for me as a fan as spending time talking to F1 team personnel inside their garages. It’s a truly magical place. An awe-inspiring place, and one that deserves to be respected and revered. The people working in F1 all share a common spark of passion, imagination and intensity.

But for the last few weeks, a worry has been growing inside me. A worry that we’re so distracted by the Regulation changes and driver contracts that we’re not paying attention to the core problem in F1: cost.

This isn’t a new problem. Since the sport’s earliest days, teams have scraped by, spending everything they had (and often even money they didn’t) to build their cars. In the purest sense, they were racers. Money was a means to an end. And the end was a point, a podium, a win or a Championship.

Today though, while the fire of competition burns just as brightly inside the teams, the table stakes for participating, and more importantly, for competing, are astronomical when compared to those early days. The sport today is much more complex, and much more global. Thanks to the genius that is Bernie Ecclestone, the wealth generated nearly rivals that of the Middle East Princes who now enjoy the spectacle in their own countries. It’s easy to look at the sport and think it’s nothing but a massive cash generating machine, and that everyone is making money hand over fist. But you’d be wrong. The economics of F1 are misleading.

When Max Mosley tried to address the cost control issue, he faced the same issues that we’re facing today. The “big” teams have large staffs, factories and infrastructures that facilitate their ability to deliver competitive cars each season. They understandably resist any call to cut back on this because they fear it will have an effect on the speed and reliability of their cars. And because it’s not possible to guarantee one team will be affected more than any other, the fear that the change will unfairly affect them becomes akin to paranoia. Nobody wants to take a hit. The smaller teams, some who were promised the sport’s costs would be managed down, like the dearly departed HRT, are begging for cost controls. They cannot compete fairly against teams with bigger budgets. They cannot continue to generate 7 figure operating losses. But they have no power to change things. So, the sport is deadlocked.

In 2013, Caterham, Marussia, Sauber, Williams, Force India and Lotus all appeared in stories about costs and budget challenges. Driver decisions are being made well into the top half of the grid based on economics and not primarily on talent. Pay drivers have always been a part of F1, but never to the point we’re seeing today. The fact that Lotus, the team that finished 4th in the Constructor’s Championship, made the decision to go with Pastor Maldonado over Nico Hulkenberg is sad proof of how high this problem has reached.

An F1 team has only two primary sources of meaningful revenue: sponsors and FOM Championship payments. Since most teams would be happy to break even by spending every dollar they receive to make their car faster, you can understand why an investor would view investing in an F1 team with some scepticism. The true racers aren’t there to grow company earnings.

The magical formula that has been used over the years in the Concorde Agreement to dole out the cash to teams at the end of the season is largely a secret. Some details have leaked out, and at least one old copy of an agreement. But now, there are special side deals for the top teams, and guaranteed payments. The cash awarded to the winner actually depends on who the winner is. The European aristocracy and class system has been reborn in the Formula One Constructors Championship.

In 2014, teams are building or buying brand new power units. Engines are a very expensive part of a team budget. The goal of limiting the number of engines to both reduce cost and focus on road-relevant reliability is a good one. But the fact is competing in Formula One next year is going to be more expensive than last year. And last year, the top team spent nearly $500 million while the smallest team spent nearly $70 million.

This isn’t sustainable.

This isn’t a challenge that can be addressed solely through cost controls. The revenue sharing between the commercial rights holder and the teams needs to be adjusted more in favour of the teams who build the value. The goose that laid the golden egg is getting tired. And the revenue available for the teams needs to be more evenly shared. Is it more sporting or less to have the best of everything and want for nothing when competing with a poorly funded team? Winning begets winning because you maintain your economic advantage. Should we not be rewarding creativity and efficiency? A team that wins a race gets 25 points whether they did it with the backing of 400 people in a factory or 200.

I don’t pretend to have all the answers. But when faced with a business problem, I look to find examples of how others have handled similar situations. In global sport, there’s the NFL, NHL, NBA, MLB, FA and others. Most North American sports have had to deal with the cost issue in one way or another. Those looking for a model should perhaps look to the NFL. It sorted out cost control for players, revenue sharing for the massive TV rights, and realized that having a league of teams that were more closely matched created more value for the sport (and shareholders) than constantly feeding most of the money to a small set of big market teams. Sound socialist? Hardly. This revenue sharing model has helped grow the NFL into one of the most valuable sporting assets on the planet.

I hope the stories at the end of 2014 are about great Championship battles, right down to the last race. I fear they will continue to include stories about teams’ struggle for survival, looking for the next wealthy and connected youngster to save them for another season.

I love Formula One. But I don’t want Formula One to become a racing series between Ferrari, McLaren, Mercedes and Red Bull. And their customer teams. We need to sort this out. Unfortunately, most of the focus right now is directed at the legal issues surrounding Bernie, and CVC’s desire to float their investment on the public markets.

But time is not our friend in this matter. Every day that we lose costs the sport millions. Those leading this sport need to take action. And they need to do it soon.

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