F1’s economic acid reflux causes serious heartburn

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The summer break has brought time for reflection on the first half of the Formula 1 season and it also has given us time to consider the second half of the 2013 season as well as the future of the series. To those ends, one of the painful underpinnings of the 2013 season could be the cost of Formula One.

Like all major sport series, finances are the least common denominator for every touch point of that series. Fans are sensitive to ticket prices, teams are sensitive to participation prices, promoters are sensitive to event hosting prices and owners are sensitive to ad and TV revenues as well as cost structure to actually operate the series.

Lotus F1 boss Eric Boullier told AUTOSPORT that cost is a critical topic at this point in F1’s storied history:

“Don’t forget that in the beginning of the 90s, a top team was spending maybe £40 million; by 2008, a top team was spending £100 million.

“We have to put that cost down.

“The problem today is 80 per cent of the teams are in favour of this but 20 per cent are not.”

How do you balance a multidimensional sport and keep teams, fans, commercial rights holders, promoters and circuit owners in the black? We’re seeing our fair share of pay drivers and waning sponsorship within F1 and while many teams are experiencing these elements, none are championing these situations as the optimum for the sport rather necessary to keep it afloat.

Formula One seemed to varnish over the 2008 economic collapse but as time has progressed, the series is starting to show signs of stress fractures and financial wounds that leak to the press and expose the rodeo clown with no makeup.

Increase F1’s brand

If the sport were to grow in popularity and see increased TV revenue through new and existing channels, it would help the overall health of the series. Teams are paid proportional to their finishing positions in the championship and if that total were larger than it is currently, then the benefits are tangible to not only F1 stakeholders but to the teams themselves.

The problem with this gambit is that Formula One Management does very little marketing. It prefers to let the brand float in the seas of team and sponsor marketing and those fickle, biased and self-serving waters aren’t really representing Formula 1 so much as trying to sell oil, sun glasses, watches and spirits on the sweaty back of Formula 1.

Mobile’s investment in Formula 1 is limited to promoting their product and using the F1 series as the metric by which their product is tested and found superior to other competitive products. If Mobile had a marketing spend of $2 million per year, how much of that is really improving the overall brand of Formula 1? Mobile’s first inclination is to promote itself and it is doing so through the vessel of McLaren as it is attached to the F1 brand. It is a convoluted three-tier marketing program that places Formula 1 at the tail of its ultimate interests.

Formula One needs to take itself seriously and start its own marketing campaign to promote itself and find new revenue streams through online distribution and stronger terrestrial broadcast opportunities with a quality of standard for broadcast talent and features.

Formula One has already pre-empted their TV service through the FOM world feed instead of relying on local broadcasters for live video footage. This package could range from $1 Million per year to several million depending on the level of services the local broadcasters wish to purchase.

Formula One fans transcend the indigenous nuance of cultural digestion needs and a stellar, world-class broadcast team with video-rich features and commentary would be a complete package that could be designed for foreign markets and scripted to craft the exact message Formula 1 wants the world to know about itself.

Would it lack independent thinking and journalistic integrity? Sure, but that industry is alive and well in the pages of magazines, newspapers and sports broadcasts. The main broadcast can afford to be a Formula 1 production and still maintain integrity. It could even be a joint effort from someone like Sky Sports F1 and FOM.

Sponsors

Sponsors have flown the coup in Formula 1 and are very difficult to appeal to when teams are running on thin balance sheets and pay drivers to finish a season in 9th place. The sport has reached its lowest common denominator by simply shrugging the sponsor dollar gambit onto young drivers instead of creating a compelling program for teams and sponsors to find a better program in which to promote each other’s brands.

Teams need to take their sponsorship programs more seriously these days as each dollar counts and there needs to be a compelling story created as to why Coke, Pepsi, McDonald’s or the YUM corporation would invest in Williams F1 or Lotus F1 and place a sticker on their car. TV time is not enough these days and Formula 1’s lack of self-promotion isn’t helping this marketing channel.

Costs

There are two ways to make money—go sell something or save it. Cutting costs is a first reaction in any red ink situation and teams are straining under the cost of participation. Formula One boss Bernie Ecclestone says that’s always been the case in Formula 1 and that is true but today’s case is not yesterday’s case.

Most challenging is the cost of participating in the world’s most advanced form of racing and some teams may be hanging by a thread but changing engine formats and other expensive regulation changes is not a way of safeguarding your stable of teams participating.

Should the FIA have more control over team balance sheets and institute a budget cap? That is far easier said than done and to be honest, it is not a very feasible notion. Better to work within the regulations to attempt to reduce costs and expensive initiatives that thwart team participation.

You have two choices in the purest sense—increase top line or decrease expenses. If teams aren’t increasing their own top line, then cost reduction is the only method of survival. If pay drivers, sponsors and alternate cast-off businesses from team technology is not paying the bills, then reducing costs is the only road to travel.

As Sauber and Lotus F1 recently sold a portion of their operation to external investors, it is obvious that cutting costs is a challenge for the teams as cutting costs means reducing their competitiveness against Red Bull, Ferrari, Mercedes and McLaren.

Fans

Ultimately fans are the revenue stream. Fans are the reason Formula 1 exists as it is. Fans are the reason period. Fans are also some of the most marginalized in Formula 1’s marketing and services efforts.

If you juxtapose Formula One with NASCAR, NFL, FIFA, MLB and other major sporting events, the difference in the way the fan is treated, the cost the fan bears to participate and the product the fans is given is dramatically different.

Can Formula 1 continue to create brand equity and value for stakeholders if the fans are the least of their equations when trying to determine a survival mode in a challenged economy?

Fans must be a entirely new marketing activation for Formula 1 and not simply left to circuit owners, promoters and team sponsors. Those three entities have disparate goals and that disjointed marketing approach to fan loyalty and investment is tangible whether it’s in the grand stands or on the couch.

Circuits and promoters

Circuits are losing their charm and precious few fans would pit Spa Francorchamps, Monza, Silverstone or even Canada or Australia against Singapore, Valencia, China, India or Korea as comparative circuits of desire, emotional investment etc.

As the economy strangles some of the older, historic and emotionally favorite tracks, Ecclestone and company have had to move to new venues to keep the sport alive. There is little denying that fact but then asking Belgium to foot a $25 million bill with a 10% escalator over 10 years is something that few economies can afford in these challenging times.

Oddly, it seems to be the new circuits that are struggling with India’s announcement last week and rumors of Korea, China and Russia all living in the danger zone of distant memories. Austria, Belgium, Canada, Australia, United Kingdom and Italy are still here even if they are narrow or no margin business ventures. That is a testament to Ecclestone’s sensibility and understanding that the historic races are key to Formula 1’s brand.

End game

Ultimately Formula 1 has to be held responsible for bigging itself up and initiating a program to increase the top line of the sport. It can work with teams, team sponsors and broadcasters to improve the product but it has to be focused on one thing—the fans! It has to create a new package of products and services that appeal to a changing generation.

Will that happen? Perhaps not as Ecclestone told the Associated Press:

“There are always people who have lots of money and people who haven’t,” he told The Associated Press. “The British teams used to be a little bit short in the finance department and Ferrari was well supported and we were racing all the way thru. I am just going to see (Team Principal) Frank Williams now. (When) Frank started, I don’t think he had a budget. He was on a race by race basis. It’s always been like that. The world is like that. There are always people who are successful and people not quite successful.”

Does anyone have a ‘purple pill’ for this size of acid reflux?

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