Not 24-hours later, cheap engines aren’t enough…told you so

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Not 24 hours after our post regarding the reduced engine supply contract amounts, my comments have come true. Reducing engine contracts certainly helps but it is the prize money that is the focus.

I argued that the smaller teams would still grouse in 2016 about how they are barely hanging on and how they can’t afford the astronomical costs of F1 regardless of this new lower engine supply agreement between manufacturers. Now they have a champion in FIA president Jean Todt as he is calling for a redistribution of the prize money.

“The FIA has nothing to do with that. It is a link to the teams, the manufacturers and the commercial rights holder,” he said.

“Clearly it is a question if you give to the richest the most money and you give to the poorest the least money guess what happens? But I know exactly where I have the power and the strength and I don’t have the power to say ‘give this much money to this one relative to this one’. It is not in our hands.

“So in this case let’s try to identify regulations which are not penalising people who have less money than the others.”

“We have people who have a boat of 50 metres, we have people that don’t have a drink of water. That is life. That is why is I say in our golden gate of Formula 1 we should be facing sensible people and doing what is good for our sport,” he added.

“Unfortunately very often it is self-interest rather than global interest which is discussed. I agree it would be much healthier if you have a good governing body who give rules which would make things much more equal for everybody.

“We should have a governor for that, so if they want I am very happy to take that on board.”

While I believe the reduced engine supply costs are a big step in the right direction—as they were really the straw that broke the camels back in 2014 and 2015—I still believed that the teams were intent on the prize money as Force India and Sauber had complained to the EU Commission about the legality of the current prize money structure.

I also argued that F1 boss Bernie Ecclestone may have little issue with the EU finding the structure unruly as it would give him a chance to re-craft a more equitable Concorde Agreement or at least manufacturer/team agreements in which to move forward.

The issue at hand is that for some teams, the prize money has become its main revenue stream and is essential for survival. If they fall in performance due to new engine regulations or FIA technical regulations that hamper their performance, then they lose even more money by placing lower in the constructor’s championship. It’s a spiral of reduced revenue and hard to overcome although Williams did it with a Mercedes engine supply.

Jean Todt is calling for equity among the teams in prize money. Now this gets into economic models and that usually raises the specter of politics, which I want to avoid here, but the simple fact is, if Mercedes makes the same as Manor for their involvement in F1, Mercedes won’t participate. The upside of branding, marketing and performance development isn’t enough to keep a major team like Mercedes or Renault in the sport if they are not incentivized with a proportionate level of prize money tied to their achievements and investment in the sport.

This is very much similar to free-market enterprise theory in that many will do no more than the minimum if they are not incentivized to overachieve. Prize money distribution isn’t weighted to give those who spend little in the sport an equal or even lion’s share of the profit, it is geared toward those teams who spend a lot in the sport (which keeps the sport relevant and viable) and rewards their long-term investment and achievement.

I have no issue weighting the prize money and what I would suggest as a way to help small teams is to improve the sport and spectacle to bring more sponsorships into the sport so these smaller teams can get back to F1’s original main revenue stream which was sponsorships and partnerships that generate capital.

All things being equal, your product has a value and if a small team’s product isn’t viewed as a valuable commodity in which to invest, then you have to do things to improve the value. In this case, value is gauged by fan interest in the team and TV time the team gets during race weekends as well as fan exposure for those folks who attend race weekends. Start there and look for ways to capitalize on what assets you have. Lobby F1 for other tangible and intangible ways to allow your team to monetize itself that doesn’t step on Mr. E’s toes and find ways to create a reverse flow of demand from the end user (fan) back through the system.

Now I know much of this isn’t rocket surgery for those involved in F1 but sometimes it seems like the things I am suggesting are completely lost on some of the teams. They need to spend a few hours on a white board and sort out a way to generate revenue.

Could the current prize money equation use some tweaking? Of course it could but contractually it can’t be until it is time to renew contracts or the EU determines they are not legally sustainable therefore opening a window to re-negotiate them. That has its own danger as well but we’ll cross that bridge if we get there.

Hat Tip: Sky Sports F1

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mom93rsa

Todt needs to put down the crack pipe and stop watching Obama speeches.

geeyore

He (Todt) expresses a lot of nothing with such eloquence. Perfect man to run a bureaucracy.

Giraffes

If the prize money is divided in hard percentages the smaller teams could be given more simply by CVC taking less. If the prize money is divided by monetary amounts agian the smaller teams could get more by CVC taking less. In both these scenarios the bigger teams would not be affected at all and therefore the changes could be put in place tomorrow. The only thing stopping this is Bernie who would not want to reduce his cash stream.

Alianora La Canta

Prize money is in a combination of hard figures (the CCB “entrance fee” given to Mercedes, Ferrari, McLaren, Red Bull and Williams) and percentages (the “reward fee” given to teams in sliding proportion of their performances.

MIE

While redistribution of the FOM prize money may help it is never going to equalize the difference between Manor (£60 million) and Mercedes (in excess of £500 Million if you include the spend on Power Unit development). Especially when Toto Wolff rates the value Mercedes gets from its F1 participation to be worth £3 billion.
https://joesaward.wordpress.com/2016/01/19/a-positive-meeting-in-geneva/

Alianora La Canta

It doesn’t have to. Mostly, it just has to make participating possible for the likes of Manor. I doubt it will happen because Bernie would prefer Manor to go away, and depending on which side he got out of bed from, would also prefer to give money to a smaller number of wealthier teams. This is because he thinks it will gain him more money than having many diverse teams.

geeyore

I believe he prefers to have a big churn at the back of the grid, so that he can pay the big manufacturer teams what they demand, screw the newcomers, and keep a relatively full grid for what he and other insiders call “the show.”

Richard Piers

Please tell me which sport gives the same “entrance” reward to the make weights as to those the public comes to see. The rewards in F1 have always been skewed in this way and always will be. And still the dreamers and chancers keep coming. It’s like a banana republic where the first slice of the cake disappears into the principals pockets.

Negative Camber

Grand Am or IMSA has a lot of access. I really enjoy attending those races and seeing the fan access. Also, Indycar was also very accessible.

Richard Piers

Sorry Mr Camber, obviously didn’t make myself clear I meant the financial appearance fee not the accessibility. I wholly agree with you, being much older than you I was able to wander around amongst the drivers who were generally happy to say hello as long as you respected their space. This all changed with the dictator: example about 1990 when I was a team manager at Silverstone and looking at, not touching or photographing, an F3000 car that had just been left unattended one of the goons/heavies threatened without introduction to throw me out of the circuit if I didn’t… Read more »

Negative Camber

plus c’est la même chose. ;)

Alianora La Canta

In the current system, more money is given as “entrance fee” (to the highest 5 teams only, for a fixed amount agreed in 2012) than as proportional “reward fee”. The former (known as the CCB) is surely the thing that should be targeted. Redistributing it would lead to better rewards for the smaller teams, a bigger reward for winning the championship (as distinct from “a reward for having great negotiators in 2012”) and, possibly, more money for CVC.

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