F1 contemplates Ecclestone succession; what’s wrong with F1?

CVC Capital is a bit of a silent owner of Formula 1 but when the CEO of the sport is Bernie Ecclestone, it’s not hard to be in the shadows given the high profile the octogenarian has. There was supposed to be a board meeting of CVC’s Delta Topco (holding company of F1’s interest) Tuesday in which the group would review the state of F1 including the sport’s stalled profitability and lack of sponsors. According to the Telegraph’s Daniel Johnson, it was also going to bring up the discussion of a successor for Bernie Ecclestone.

There have been a few stories lately regarding comments that Eccletone made with regards to the state of the sport as well as it’s current constructor’s champion, Mercedes. Ecclestone said he wouldn’t pay to see the sport and argued that Mercedes and Ferrari have joined to create a cartel that is running the sport. He’s no fan of the hybrid engine and isn’t too happy about an additional £50 million bonus payment to Mercedes for winning back-to-back championships.

We’ve covered this ground before but Ecclestone’s comments are more pointed and accusatory of late. The EU is discussing a complaint by Force India and Sauber over the prize money payment structure and some suggest that they may strongly advise the series to get its financial model sorted out with a warning of pending investigation should they fail to do so. That’s speculation as the EU have offered no further insight as to their opinion on the current team contracts.

This leads me to the imbalance of the sport and reason the criticisms are being leveraged. In my mind, it’s an imbalance between the technical and sporting regulations and the individual commercial contracts the teams have with F1 as well as the contract F1 has with governing body, the FIA.

What happened to the Concorde Agreement?

For years the sport was governed by a tripartite agreement between the FIA, Formula One Management (FOM) and the teams. This contract was known as the Concorde Agreement. What I found intriguing is that when the Concorde agreement had expired, Ecclestone, or others in control, could not or did not want to get a new Concorde Agreement signed. Instead they sought to pierce the Formula One Teams Association (FOTA) and lure Red Bull and Ferrari away from the group with individual contracts.

Eventually FOTA folded and the big teams signed direct commercial agreements with FOM—at least that’s my understanding—and the small teams eventually came along but in a far weaker position contractually speaking.

It seems, to me at least, that these new individual commercial contracts are very lucrative to the top teams and when combined with the F1 Strategy Group formation and voting control, they have given teams like Mercedes serious leverage over the sport. I’m not picking on Mercedes as Ferrari have similar leverage and it’s compounded now that these two have the only competitive hybrid engines and that fact drags the technical and sporting regulations into the equation.

With power units like the Mercedes and Ferrari, the two teams are, effectively, the show. Their works teams and anyone powered by their engines as a customer are the only thing between having F1 races and having very little to nothing. This would be far less of an issue if, as has been the past, we had BMW, Audi(VW), Porsche and Toyota in the series as well but we only have Renault and Honda and neither of those manufacturers have an engine remotely capable of beating Mercedes. The hybrid engine dilemma might be very different if there were multiple competitive alternatives than just Mercedes and Ferrari.

It’s a perfect storm of commercial contracts and regulatory decisions that have placed F1 in this precarious situation. The decision by the FIA—strongly supported by Mercedes—to move toward hybrid engines has created a complex and very expensive engine that put, effectively, three teams in receivership (HRT, Caterham and Marussia).

The sport isn’t bifurcated by the nuance of chassis design which can be changed and manipulated throughout the season to gain lost performance advantages. It’s shackled by an infinitely complex and expensive engine that, until recently, was frozen in development. This breeds a performance disparity which has a knock-on effect that ripples through the commercial agreements and manifests itself in millions of pounds for Mercedes due to its lock on power unit performance advantages and ability to exercise its leverage over the sport via the F1 Strategy Group and supplier of one of only two competitive engines that give F1 any semblance of competitiveness.

I understand Ecclestone’s commentary and criticisms and given my long-term understanding of how Ecclestone works the media, I understand his points are meant to create tension to move toward a particular outcome. He’s a deal maker and it isn’t the money, it’s the deal that fuels Ecclestone. Money is just the measurement of how good the deal is—a sort of ranking of the deal’s efficacy. Instead of rating a deal with 3 or 5 stars, it’s ranking is determined by its cash component.

Having said that, I will submit, humbly, that the current bipartite arrangement he has done with the teams and then the FIA individually may be one of his less effective deals. The FIA got more money and promptly moved toward a hybrid engine format prompted by calls—and even threats—from Mercedes and Renault. The teams got 65% of the prize money—instead of the 50% previously distributed—and this was heavily weighted toward the top teams offsetting a large portion of their operating expenses. This left the small teams with less of the prize money and a hugely expensive new engine supply that doubled or tripled, depending on who’s number you like, their costs.

This deal isn’t the best I’ve seen Ecclestone cut and it has given more power to the top teams as well as the FIA. If CVC were going to contemplate a succession plan for Ecclestone on Tuesday, they may start with a person who can systematically un-weave themselves from this bipartite agreement structure.

Perhaps the EU’s decision will help in that process and that’s why I said Ecclestone would welcome the EU’s involvement at this point and to be fair, I was right. He has been positive in his comments about a possible investigation and re-writing of the commercial prize money distribution.

One way to begin to unravel this situation is to have more competitive manufacturers in the sport but Audi’s announcement this week that F1 isn’t even on their radar means that VW may not be an option any time soon. Honda has a lot of ground to make up and perhaps Toyota or BMW might be interested again as an engine supplier but it seems that F1’s commercial agreements would make their investment in F1 a risky move given the teams they would align with would be far less compensated via prize money and the manufacturer could carry a large portion of the financial burden of running a team.

The successor to Ecclestone will need to work toward a comprehensive agreement such as the Concorde Agreement that ties all three components (commercial, teams, regulatory body) together in a carefully planned contract that includes well thought out scenarios of how the commercial exploitation of the agreement would impact the sporting or technical part of the agreement and vice versa.

Ultimately I’m not sure there is one person to fill Ecclestone’s role. More likely a committee will be formed with a CEO, COO, CFO and CMO to refashion F1 into a working business and we should be careful what we ask for. Death by committee isn’t a colloquialism for nothing you know.

Hat Tip: Telegraph

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runnah

You hit the nail on the head “death by committee” is the future we have to look forward to. I expect it to be commercialized to the brink of extinction. Reality TV shows, audience participation, scripted events, forced diversity and a cartoon bear.

Sometimes having one visionary in charge of things is a bit erractic but it sure is better than a bunch of empty suits trying to run a passion filled enterprise with as much passion as a cold bowl of oatmeal.

Negative Camber

I would hope that a calm, measured committee would do things right. If you took F1 assets and tried to simply NASCAR it up from a marketing standpoint, you’d seriously damage the brand. Nothing against NASCAR, they have their own brand message and appeal but that marketing model wouldn’t necessarily be the best for F1. Folks at FOM know their brand and message, so let’s hope they would steer things correctly.

MIE

F1 needs a dictator (preferably a benevolent one) in order to force through the changes that are required to ensure its future. Trying to run a motor racing championship by committee doesn’t work, look at what happened to CART.

Negative Camber

I agree with MIE, I think Ezpeleta carries a big stick.

Tom Firth

Ezpeleta does but more in the commercial aspects. The Manufacturers association hold a heck of a lot of weight on the direction of the series in MotoGP. Look how hard it was for him to control the Rossi/Marquez situation, where it seemed both Dorna and the Manufacturers looked at one another as if to say, whose going to solve this. The same with the ECU debate, and how long that dragged out.

Whereas Ecclestone holds control over the whole circus and would of resolved it, or did once upon a day. It’s heading more towards the joint influence admittedly.

Negative Camber

Yeah, I don’t know Tom, I completely understand your point and you may very well be right but I think the Manufacturers have a lot more pull in F1 with the Strategy Group these days than they had in the past and Mr. E struggles more for control , now, than he has in the past. He doesn’t have Max either.

Tom Firth

Who does have the closest to FOM’s brand message, MotoGP, which is effectively run by a commission, right?

runnah

In a perfect world maybe where logic and common sense were more important than greed and power.

Anyways, I am not saying that every company needs to be run by some iron-fisted megalomaniac, just that they need to be led by men and women with a vision that is carried out by the smart people that surround them.

Tom Firth

On the rest of the article, aside from succession, you mention that you don’t feel Ecclestone made the best deal post Concorde, with what effectively created the strategy group, because of the new layout in the relationships between various stakeholders and the commercial rights holders. I’d agree that it wasn’t Ecclestone’s best deal, but I don’t think we should under-estimate the distraction caused by the fallout of the Gribkowsky Affair, and subsequent allowance for the lunatics to run the asylum when negotiating these agreements, which has led to the strategy group creation, and the awkward position F1 finds itself in… Read more »

Negative Camber

All good points and he’s not known for making bad deals so I think there are other forces at work here that played his hand.

geeyore

NC: “it’s the deal that fuels Ecclestone. Money is just the measurement of
how good the deal is—a sort of ranking of the deal’s efficacy”

That nails it, and is a much higher level of understanding than much of the F1 commentary out there.

“we should be careful what we ask for. Death by committee isn’t a colloquialism for nothing you know.”

But unfortunately that looks like the trajectory. Make sure your parachutes are in good working order.

Negative Camber

Let’s hope that a group of folks would pull from those who have ran the sport (there are other employees other than Mr. E at FOM who do a great job) for years and can make good, sound decisions.

Tom Firth

Indeed are, is it time for those to be more visible? Allow for an easier transition should succession come sooner rather than later?