F1's unending financial woes; or "It's the income, stupid."

[Richard]

Wasn't there an epically long post here a few moments ago (like I should talk)? I was going to take a shot at responding to it.

Aha - It's a new profile and something in it triggered the need for mod approval - the first few posts of all new members are checked for naughty words or suspect links. The post is rather long so I'll not comb through trying to find out what innocent word were accidentally caught in the spam filter.

I approved the post this morning, but I see the post was then edited so it went back for approval. That's why it disappeared. I've approved the new version so we're back to where we were.

[Pup]

Thanks Richard.

The initial post, and this reply are probably better suited for x's more general thread. Nonetheless, some comments...

So how is it possible that this crisis is the result of the teams' excessive spending when they're spending only half as much as they did 10 years ago but the sport is far more profitable?

There are two issues: one is the total spending, yes, but also there's the difference in spending from the front to the back of the grid. In addition, we have the problem of static incomes, even at the top - thus this thread.

Most importantly, the figures we see for team budgets are wildly divergent. This is particularly true for Ferrari, since no one outside of the company ever gets to see them. For teams who's numbers are verifiable, the figures are typically lower than rumored. Here, for example, are McLaren's expenditures, which come from their published financial reports (credit to Ross Stonfield on the autosport forum for the research - I've converted his numbers to dollars):

2012 - $201,967,000
2011 - $165,678,000
2010 - $147,737,000
2009 - $143,684,000
2008 - $134,386,000
2007 - $129,459,000
2006 - $129,549,000
2005 - $137,019,000
2004 - $131,578,000
2003 - $141,162,000
2002 - $123,201,000
2001 - $108,155,000
2000 - $87,711,000
1999 - $76,566,000
1998 - $63,172,000
1997 - $46,013,000
1996 - $49,942,000
1995 - $47,285,000

Formula 1's biggest scandal

Thanks for the link. Is there a way to see the entirety of this without the paywall?

Every race and every test session, for instance, Formula One World Travel, a subsidiary of the FOG, receive advance notice of the schedule dates. They block-book all suitable lodgings near the circuit, which leaves the teams no recourse but to book through FOWT, who charge them double what they otherwise would have had to pay.

This is news to me. I know that I've read comments from the teams in the past talking about making arrangements themselves, so is this a new arrangement?

The teams are obligated to use DHL, the FOG's official logistics partner, for shipping all freight in excess of a 10,000 kilos to the fly-away races. Even in the post-refuelling era, teams all still need to ship well in excess of 10,000 kilos, and are charged a king's ransom for the overage. Rencken cites as a source "one team boss," who stated that the excess surcharge was well more than what a non-FOG-encumbered shipper might have charged for the entire shipment. When asked why he didn't use the less expensive option, the team boss stated that their non-DHL shipments wouldn't clear customs in time (implying that the speed of the customs officials was influenced by the name of the shipper).

This is a bit one-sided of Renken. It should be pointed out that FOM ships everything up to the weight limit for free, and the reason the extra goes on the same planes is, as Renken's source says, necessity. It's obviously much easier to put everything together in one shipment for customs than it is to allow teams to chose their own. And Bernie can't allow the teams to ship essential items on their own, since if they get lost or held up, then he's on the hook for not providing the circuits with 22 cars. But non-essential items are shipped separately all the time.

FOG's standard fee for hosting a race weekend is $30 million...

Agreed, the fees are excessive, and I've said elsewhere that I think it would be in the sport's long term interest to lower them. One of the problems now is that the teams are getting the lion's share of this money, so they aren't as likely to make a fuss over it as they may have before.

Perhaps most bizarrely, once having won funds from the FOG in the guise of World Constructors Championship prize money, they still aren't exempt from Bernie's pocket-picking. The following season's entry fee is graduated, according to how much WDC money a team was paid on the preceding.

These fees are the FIA's, not the FOM's. And I think making the fees progressive seems fair.

The outcome of all this price-gouging is eminently predictable. Marussia, who have shown a considerable financial acumen outside of F1, and who were lured to the sport by Mad Max Mosely's promise of a ￡32m/$40m budget cap, after three seasons find themselves ￡140m in the hole. Williams recently posted a ￡5m loss. Sauber had to sell part-ownership to the Russians to remain afloat. Lotus famously could not afford to pay its drivers (not even its reserve and test drivers, just come to light).

In 2012, McLaren won six races and came third in the WDC, yet profited a mere ￡3.1m in the doing (almost ￡19m less than in 2011). The 2014 entry fee alone for the team coming third in the 2013 WDC (Ferrari) is ￡1.4m. And surely the financial acumen of any F1 team which has managed amass more than ￡1 billion in on-track revenues must be beyond reproach, so accusations of mismanagement on McLaren's part should be greeted with a healthy portion of skepticism. And both Force India and Caterham remain on the F1 grid entirely due to the largesse of their billionaire benefactors.

The counter argument is that none of these teams had to spend what they did. Racing teams in every category will spend what they earn, and often then some.

On the other hand, in its most recent financial statement, the outcome of all its penny-pinching, usurping and --- is that the Formula 1 division of the CVC Capital Partners posted a combined total profit from the sport of a bit more than ￡2 billion.

That would be $3B US, which is a full $2.5B more than has been reported elsewhere. I suspect that number includes what they received for selling part of their stake, and may even including payouts from refinancing. Again, Renken seems to be fudging the numbers here, and must be why he's able to argue that F1 has the same income as the Premier League, as I questioned below.

This link gives a better idea of their yearly finances. Income is around $1.4B, while profit is around $450M, pretax (It mentions a 1-time payout of $2.1B from selling shares, and another 1-time payout of $350M from restructuring - so there's Renken's missing $2B to $2.5B): http://www.telegraph.co.uk/finance/news ... -865m.html

Bernie is wont to point out that the FOG's payout to the teams now is 62% of profits (increasing to 68.7% in 2014), as opposed to the 47.5% previously stipulated under the most recent (now expired) Concorde Agreement, conveniently omitting the fact that the teams occupying the more destitute half of the grid will never see so much as a single farthing of the additional 14.5%. He simply distributes it among the top five, thereby quelling all incentive to form a break-away series, and leaving the lesser teams without a rebellious leg to stand on.

I didn't know that the teams share was increasing from 50% to almost 70%. I think we all agree that the payment is doled out inequitably. But I don't think you can blame FOM for this so much as you can Ferrari, McLaren and Red Bull, etc. The inequitable distribution is mostly a reflection of the inequitable influence these teams have. But yes, it should be changed.

Give only as much as is absolutely necessary to the most influential of recipients, and the rest goes to defraying Tamara's and Petra's bills for Cristal and Beluga caviar.

For the record, Bernie does still have some ownership, but his money was made when he sold the rights initially. So what CVC earns may well be paying for caviar and champagne, but not Tamara's.

Rencken speculates that it is Bernie's undeclared objective to strangle one of the remaining teams to financial death, then to divide the 10 that remain into an 'A' (constructors) tier and a 'B' (customers) tier, a structural change which will afford opportunity to further reduce the pay-outs to the B-tier teams.

I don't know why he'd have to eliminate a team to do this. All it takes is a new concorde, and looking at the distribution percentages, it seems obvious that the small teams have little to no say in how the sport is organized.

Personally, I'd agree with Bernie in this case - customer teams are really the only way to eliminate the rich-team/poor-team problem. The issue in restructuring in this way doesn't lie so much with the financing of the sport going forward, as it does with the smaller teams worrying about the initial hit the move would take on their value.

To cut to the chase, the F1 teams are starving while CVC Capital Partners and the Formula One Group grow fat(er) off of the sweat of their collective brows.

I think the biggest problem with this thesis is the fact that the teams take the lions share of what CVC earns. If they're getting 70% of whatever CVC can make, then it's impossible to argue that CVC making money is what's starving them, even if it might be in the worst interest of both the teams and the sport in the long term.

I see Dieter Rencken's name already has been taken in vain.

Call me a heretic.

[Pup]

For starters, Rencken isn't pulling figures from places he's desperately googled...

No, it appears that he was pulling those figures from somewhere else. See below, but essentially it looks like he was including two one-time payments for selling part of the company and for taking on some debt. That way he could say that the two sports had similar income.

[strad]

I haven't seen these links posted yet
http://bleacherreport.com/articles/1927 ... of-control
http://motorsportstalk.nbcsports.com/20 ... omparison/

[CMSMJ1]

Quality thread

Carry on..

[Tommorris747]

Don't know if anyone has posted this already (and apologies if its a repeat) but Ferrari came out and publicly slammed the Rencken article for being inaccurate. Here's the link to where I first saw it:
http://formula1.ferrari.com/news/horse- ... r-blunders

I seem to remember reading another piece about errors in it so don't think it was an isolated case. To be honest it doesn't surprise me. AFAIK Ferrari's figures are not public so it's fair to assume that any number you find will have been pulled off the top of someone's head. If it has been slammed in such a public way by a team it says a lot about the accuracy of that one I think.

The clearest explanation I have seen of F1 finances is this one:
http://edition.cnn.com/2013/07/30/sport ... -business/

It's a bit out of date but I found this update of sorts: http://www.autoweek.com/article/20131006/f1/131009861

[Pup]

Via TJ13, another big sponsor heads out...

In 2010 the Swiss bank UBS signed a 5 year sponsorship deal worth $200 million with Formula 1 to become its global partner. The deal saw UBS’ logo sit above the start lights at every race, a first for a sponsor in the sport, while the company’s branding appeared in a variety of television friendly locations, including angled logos in the white sections of kerbing.

News reports now suggest that current chief executive Sergio Ermotti is studying the “wisdom” of the deal entered into by his predecessor Oswald Grubel and in all likelihood will exit the sport at the end of the year. The news that UBS is considering exiting the sport at the end of the year is not really significant as this is the last year of the deal so it is more than likely that they will be reviewing their strategy.

[FW17]

Ironically, the current financial crisis was foreseen by Martin Whitmarsh, McLaren’s former team principal who used to be chairman of the Formula One Teams Association (FOTA) before he was fired by McLaren a year ago. At the time, he said: “I cannot see how you can construct a sustainable business model and I fear that we will have a crisis and then we will have to get real and sort it out.”

Whitmarsh was speaking from experience. Under his watch McLaren lost, first Mercedes as its engine supplier and bankroller, and then Vodafone as its title sponsor — together they were worth an estimated $140m a year of income. This year McLaren was forced to go racing, for the first time in its proud 50-year history, without a title sponsor paying the bills. Deeply humiliating, it ultimately cost Whitmarsh his job and the only upside was that he was uniquely positioned to predict the current crisis a year in advance.

Formula One’s finances have changed a lot in the last ten years. A decade ago sponsorship was plentiful and it paid more than half of all the bills with team owners picking up 30 percent of the cost and Ecclestone contributing less than 10 percent. Now that has completely changed round with sponsorship scarce and contributing only 20 percent with team owners providing as much as 40 percent and Ecclestone’s contribution gradually rising to 40 percent.

It is a massive structural switch that has gone hand in hand with other changes. In 2004, the top three teams then — Renault, Ferrari and McLaren — shared 40 percent of the central income. Now the top three teams — Ferrari, Red Bull and Mercedes — take 50 percent of the Ecclestone revenues. A 10 percent shift in the revenues may not mean much but to the smaller teams it is the difference between surviving or not. In 2004, the bottom three teams got 25 percent of the money but in 2014 the bottom three got just 10 percent. It is these imbalances that are testing the finances of Formula One.
But how has it come to this?

The heart of Formula One’s problems lies in the huge decline in sponsorship over the past ten years. In 2004 pure cash external sponsorship was $1.2bn a year; ten years later the cash has dwindled to less than $350m and many of the major sponsors that used to bankroll the sport have left. Big spenders such as Hewlett-Packard, Vodafone, Japan Tobacco, Orange, British American Tobacco, ING, West, Telefonica, Siemens, Panasonic, RBS and Credit Suisse have all left the sport with only Santander and Martini arriving as replacements.

Twelve major sponsors have been replaced by two and the sums just do not add up. The truth is that big sponsors have effectively rejected Formula One as a marketing platform. So much so that in the past eight years only one new title sponsor has entered the sport, Martini & Rossi at Williams and even then at barely a quarter of the price that Hewlett-Packard paid Williams back in the good old days. It seems that sponsoring a Formula One team as an effective global marketing tool has fallen out of fashion completely.

What has really happened is that Formula One’s lost sponsorship has migrated to a sport called soccer. Whilst Formula One has seen its sponsorship dwindle away the top soccer teams across the world in the German, Spanish, Italian, French and English leagues have been booming. Shirt deals that used to cost $6m for a season now sell for $50m and Formula One’s traditional sponsors have moved their money across.

Sponsorship cash
2004 - $1.2 billion
2014 - $350 million

FOM Money for bottom 3
2004 - 25%
2014 - 10%

[emaren]

Personally I think that the revenue share is perfectly fine.

Teams are paid based on their position in the championship. If you come dead last, do you really deserve a decent slice of the pie ?

If you win, then surely your slice is the biggest ?

Given that entry fees are also based on championship position (points), then the winners pay considerably more for their place next year - in Mercedes case it is something like $500K + 701 * 5K just for the entry. The zero points scorers will jus pay the $500K.

One argument is that the winners choose to spend the money to win, Mercedes are rumoured to have 'invested' something like $500M to win this year, wether that is over the last two years or just this year is in doubt. But regardless, they have spent their way to the top. With enough backing, even Caterham could be right up there.

Of all of the issues that are prevalent in F1, the distribution of price money to help ailing teams seems to me to be pretty irrelevant.

Ticket prices that are so outrageous that ardent fans stay away are right up there for me - Silverstone cost a fortune this year.

Then there is the helpless TV coverage, specifically the sound, that fails to capture the noise and the speed. The lock-down of TV coverage that makes it plain expensive for fans to watch it (PayTV), then horrific 'free' TV coverage (NBC I'm looking at you). None of this is attractive to advertisers.

If advertisers are seeing low race attendance and poor TV coverage and audience diminishing, they are not going to spend the money on plastering their names on the cars.....

Less TV eyes, less 'live' eyes equals less advertising potential.

Somehow F1 seems to be steadily pricing itself out of existence....

[Richard]

Teams are paid based on their position in the championship. If you come dead last, do you really deserve a decent slice of the pie ?

In the pre-FOM days most of the money came into F1 via the teams and circuits. Now most of the money coming into F1 is channeled to FOM via circuit fees, central sponsorship and TV deals.

Hence if the money coming into F1 is diverted to the centre, then more of it needs to be distributed from the centre to balance the books.

This has been exacerbated by a financial cirsis reducing the number of sponsors willing to pay small teams, and the new engines resulting in much higher fixed costs for the smaller teams. So it's a bit hard for a small team to balance the books when their fixed costs have doubled due to central dictat at the same time as reducing income.

[notsofast]

If you come dead last, do you really deserve a decent slice of the pie ?

You can't have winners without losers. In order for F1 as a whole to survive, both the winners and the losers must be supported. Surely no one is going to watch F1 when Mercedes is the only competitor.

The major professional sports in the US are quite successful, financially. A major contributing factor is that there are mechanisms in place to ensure some level of parity. This year's biggest loser can be a winner next year.

I don't know how you go about putting Sauber in a position to be a winner next year, but I do know that depriving them of a fair share of the F1 profits isn't going to help.

[Blanchimont]

Good news, Qatar is going to save F1

http://autoweek.com/article/formula-one ... ecord-2017

[mcdenife]

Personally I think that the revenue share is perfectly fine.

Teams are paid based on their position in the championship. If you come dead last, do you really deserve a decent slice of the pie ?

If you win, then surely your slice is the biggest ?

I have no problem with the winners getting a bigger slice but that does not mean whoever comes last doesn't deserve and therefore shouldn't get a decent/fair share. 1st or last, they are part of and make the championship or show what it is. In any championship or competition, someone has to come last and without an equitable share, pretty soon we will be shedding competitors who come last at the end of every season. As notsofast said, who wants to watch a series were Mercedes, or Ferrari, or red bull is the only competitor?

[turbof1]

Joe Saward made a very nice cash flow/income diagram. It's based on informal data, but very much detailed:


Note that the CVC shaves off a massive 36.1 percent from the total operating profit (the same as earnings before interests and taxes, EBIT). So operating costs have already been subtracted. That's 650m from which I'm sure it's diverted in such constructions taxes will barely be of any concern.

CVC&co is basicilly getting 650m a year for doing absolutely nothing. If you reduce their 'share' to 25%, you have around 200m to redistribute among the teams. Preferable among the lower ranked teams. 4 teams each getting 50m would mean each financial position is safe and secure.

[Richard]

CVC&co is basicilly getting 650m a year for doing absolutely nothing.

They aren't do nothing. They put up an investment, what they'd call "skin in the game". On the income side they are doing rather well, but rule 1 of any VC or equity fund is to know your exit strategy, everything else is merely a route to cashing in on the growth at the exit.

However, they'll struggle to get their money back at the moment. Their original exit strategy fell apart when the flotation was abandoned. So we can assume that the market rate was less than they needed to hit their targets. I also suspect selling their share privately would be at a discount to the planned flotation price due to the uncertainty in the sport.

So in a nutshell CVC are stuck with a rather nice income stream, but their reason for existence is capital not income. The capital locked into F1 can't be used to fund their next investment, and they can't return growth to their funders.