This is a platform for User Generated Content. G/O Media assumes no liability for content posted by Kinja users to this platform.

The Money Dance: Trying to Understand F1's money schemes

Illustration for article titled The Money Dance: Trying to Understand F1s money schemes

What a great race we had in Texas. The US GP became a thriller, as the mid pack battled for positions to the very end (I'm looking at you Crashtor). Now after all the joy and champagne has been drank, lets try and make an understanding of some of the more somber news that came from around the paddock.

Advertisement

Meanwhile at the back of the Grid

As the Russian GP was being raced, mysteriously Kamui Kobayashi was pulled in from the race and forced in to the garage. Unknown to him, but probably a thought already in the back of his head, it became the last race of Catherham, as the team would enter administration after a spat between Tony Fernandes (ex-owner) and the new owners would surfaced all over the news over who paid what and what not. As the weeks progressed news emerged that Marussia would be following suite, as they announced they would not be participating in the US and Brazilian races, which required them to travel half way across the globe. During the Texas GP it was rumored that some midfield teams might boycott the race in a desperate push to renegotiate the way prize money is is awarded. Although I'm sure these were widely exaggerated because the damage to the sport would be greater, I still think the idea was initially floated to get the teams talking on the issue as soon as possible. Teams like Lotus, Sauber and possibly Force India have been linked with the news of being on the brink of folding at some point next season.

Advertisement
Illustration for article titled The Money Dance: Trying to Understand F1s money schemes

Bernie's Fault?

During the Texan weekend it was interesting to hear F1 Supremo Bernie Ecclestone taking some of the blame for the dire situation of some of the teams:

"If we were in a position where we could help these teams in trouble, we would do it. But we are not allowed to. They say if you give this team $10,000, everyone has to have $10,000. The trouble with lots of regulations and lots of contracts is that we don't think long-term. "

Advertisement

We've seen him squeeze races out of every penny, support dictatorial ideas, and even changed the rules (Double points) for money, but I don't think he had previously accepted to be wrong.

Illustration for article titled The Money Dance: Trying to Understand F1s money schemes
Advertisement

Maybe it was his mind distracted by his upcoming trial at the time, but it was nice of him to own up to his own shortsightedness.

"It makes no difference to me how the money is shared out. If they sat down here with me now and said they want to share out all of the money we get in a different way, I would say, 'Good, give me the bit of paper'."

Advertisement

The teams wobbles in renegotiating new sponsor contracts or charging what they used to has been well documented this season. With McLaren being the most notable team without a title sponsor for most of 2014. With the burning days of Tobacco already gone, and alcohol looking to be next, F1 is in a race against itself and other sports for sponsorship money.

Let me quote Marco Mattiacci, because he makes a point when taking about competitiveness.

Entrepreneurs have to find a reason why … we're doing an excellent job with Haas but it's very clear what he wants to do. He has a long term plan, project, solid investment and a good reason – a business reason – to get in to Formula One.

"We need competitive teams. I'm not here to say small or middle, we need competitive teams with a solid business background and a solid financial background."

Advertisement

Now I am not questioning HAAS, I'm glad he is joining F1, and he has been up front about his low expectations for the first couple of seasons. But I'm sure he's not happy already that his future engine is the worst on the grid right now. Which bring's me to Monisha Kaltenborn, Sauber's team principal:

"Wasn't it Marco who also said that he's getting questions on ROI (return on investment) from his partners?" Kaltenborn asked. "How does he plan to keep that so well going if the way things are going here? What if his partners – who are probably paying a lot – come and say 'What's my return on investment with results? What's my return on investment with viewers going down, with the show not being attractive?'

"So I wonder if his business model is going to work if he didn't have the backing of those kind of partners or a manufacturer? Because I think if the manufacturer wouldn't put that money in there you would have a business model that is defunct. And I know what I'm talking about."

Advertisement

We've had BMW, Toyota, Honda, Ford, Crosworth, Lamborghini, Renault and others, come and go from the sport, whether it be as a whole manufacturer (car + engine) or engine supplier. With only 4 engine suppliers and two official teams next season and LeMans beginning to put technological and budget pressure on F1, the series really needs to start controlling cost, yet motivating innovation.

Dollar Dollar Bill y'all

Disclosure: Since I couldn't get my hands on a copy of the actual agreement between the rights holders and the F1 teams (also it's a 498 page document), I recompiled the figures from several articles from ESPN F1, Forbes, Bleach Report and others in order to come up with the following BALLPARK FIGURES. Some of the number might not add, not only because I rounded them to get nice clear numbers, but because I had to work my maths in different ways, since everyone claims different figures from seasons, will sometimes only use percentages, or mention there is such an expense/prize without an actual number. So please feel free to give me feed back or add to the information in the comments.

Advertisement

F1 Teams as a whole have negotiated their contract with the rights holders to be a total payment of 63% of the underlying profit the series makes. Given that in 2013 revenue of F1 was U$ 1.7 billion, lets try and crunch some numbers.

First let's take a look at where the money comes from:

Illustration for article titled The Money Dance: Trying to Understand F1s money schemes
Advertisement

As you can see, race hosting fees are the major revenue generator. Given that their is only a limited amount of GP's that can be run in a given year, this has made it quite the commodity specially amongst countries that want to advertise their economic advancements and sell themselves as part of the 1st world. Not only have the fees increased about a 60 percent in the past five years, most contracts also include up to a 10% annual hike in the fee. No wonder circuits in countries that don't have a strong motorsport heritage tend to cry foul every year, specially when local or national governments withdraw their support or tax excemption expire. Please take in mind that the sponsorship money listed above also includes circuit/championship sponsorship (those Johnnie Walker, Santander, ING, DHL, Rolex signs). So actually circuits don't see that ad money in their balances, its the Rights holders that rake it in. But circuit mismanagement or mistreatment is not the point of this article. So back to the teams.

Illustration for article titled The Money Dance: Trying to Understand F1s money schemes
Advertisement

Although F1 gets a 63% share of the profits, 47.5% comes before income taxes, depreciation and amortization (EBITDA). That means Prize money comes in close at a whopping U$ 800 million dollars. Yet here is where it gets a bit tricky.

Illustration for article titled The Money Dance: Trying to Understand F1s money schemes
Advertisement

Red Bull, McLaren, Ferrari pull an additional U$ 100 m or 7.5% (whichever is greater) since they where the last constructors to win the title in the previous years before the new agreement was signed.This is called the Constructors Championship Bonus (CCB). In case you are wondering the CCB is split 37/33/30 respectively. I'm sure here many will whine about Ferrari, since it gets and additional 5% or 62.2 million dollars whichever is greater of the Prize money because they are the longest running team. Fair or not, whichever you believe it means the Italian squad racks in U$ 123 m before even taking into account current championship performance. No wonder the smaller teams are fuming about cost reduction.

Now, lets see how the actual prize money is distributed. Fist of all this is split half ways, into what I'll call Tier 1 and Tier 2 money. Tier 1 is distributed equally among the top ten teams and given the above numbers, would award each team U$ 40.8m. In order to belong to Tier 1, you must have placed 10th or higher in two of the last three championships. Tier 2 teams on the other hand are the Top 10 teams of the season. These winnings are spread percentage wise as the chart below shows.

Advertisement
Illustration for article titled The Money Dance: Trying to Understand F1s money schemes

There is a "consolation" prize for teams that finish outside of the top. As listed below

Advertisement

Surprise, I'm actually a Ferrari fan so I'll use the Maranello team as an example. Given the above figures, if Ferrari where to become champions lets say, in 2015 (bet your local bookie would laugh at you right now) the team would be making U$ 240 m on championship winnings. Given that their annual budget is estimated to be U$ 300 m the team would be on the red for U$ 60 m. But hey, this is not taking into account team sponsorship deals. Remember Marlboro? Well it was said they alone pay Ferrari (deal runs out in 2015) about U$ 160m a season.

The F1 Manifesto

It's no wonder Ferrari and Red Bull are so blatantly against the cost cap, given that they are the highest payed teams before prize winnings.

Advertisement

I'm sure someone will denounce me as a communist after this, but I think the Tier prize money should be decreased to 40% of EBITDA and be equally divided amongst all teams. Then the CCB would be increased by 7.5% which is what we took from the Tier 1 money and be handed to the top 3 teams respectively in the last 4 or 5 seasons. If we face a full grid which is supposedly caped at 13 teams that would still give everyone a 50% bump in earnings for participating.

Obviously that isn't the only change I'd make. You'd have to add in a cost cap somewhere near of U$ 200 m mark, but also free up regulations. This would have added benefit of lowering the cost of part development for teams. Given the tight restrictions you just have to funnel to much money into lets say a front wing to gain half a tenth or maybe a tenth of a second. This could also attract a new wave of Adrian Newey's to the sport, and help the running order of a season change more quickly, thus making it more exiting for the viewer.

Advertisement

Now, you may argue that Ferrari receives that additional 5% of money, but with the cost cap in place, basically it would mean that in a championship winning year, they would most likely be racing for free. And that should be the direction where the sport is headed, profit.

Spending first, politics, second, winning third...

And the main motivation to all of us is to compete for victory, it's not to come 3rd, 4th, 5th or 6th. I race to win as long as I feel it's possible. Sometimes you get it wrong? Sure, it's impossible to get it right all the time. But I race designed to win, as long as I feel I'm doing it right.

Advertisement

I quote Ayrton Senna because at times it seems like the sport is slowly losing it's long term battle. Don't get me wrong, we've had some great past season filled with beautiful racing (although at times marred by DRS zones) but the general perception of the sport has become that the more you spend the more you win, yet there is only one winner. And that is why we need a cost cap. Sure the big teams can afford to spend upward of the U$ 300m mark, but in a time where sponsorship money is becoming more and more scarce, the sport needs to start reigning in on itself. Sure Ferrari can spend this much because it is their biggest marketing platfrom. You buy Ferrari's due to their heritage (aside from the fact that you are probably stinking wealthy). But what about the truly big manufactures? We've seen bigger manufacturers than Ferrari leave the sport because at some point the spending race surpasses the benefits of development and marketing a brand can get from a single channel.

It's no wonder Ayrton always expressed his love for karting, the lowest from of motor racing. Why, because it was all driver, machine second. Now-a-days we hear to much money talk. I'm not advocating for a series were there is one engine/chassis. I like F1 with its independent teams. I'd also love to see more manufacturers like Toyota, Volkswagen AG (under any of its brands), BMW, Ford (under HAAS) or any other to return to the sport. But it is the current F1 business model that drove them out. And that is why it is also important to protect the midfield and smaller teams. Their success on track will only attract more investment in the sport. Why? Because manufacturers as well as technology firms will see the positive impact they can have on the field, ultimately maximizing their return on investment.

Advertisement

For this and other ramblings you may follow me on Twitter @Menebrio

Share This Story

Get our newsletter