Force India and Sauber's EU complaint

[turbof1]

I feel one should make 2 distinct differences:

1. Costs made to actually being operational in F1. I'll include costs for developing next year's car in this category.

2. Costs made to actually raise one's competitiveness. In season development basically.

Marussia last year was not able to operate on a pure operational level last year. The only update they made last year was taping over a slot between 2 wing elements. Lotus this year is in the very same situation, despite having tried to reduce costs massively. The same goes for Sauber.

Bhall, I do agree with you when say that in a spending competition teams have their own responsibility to not take it too far, that they don't raise too much the costs in category 2. However, teams should at all times be able to cover costs in category 1. You'll probably argue developing next year's car is a spending you can make as big as you want, and while that's true, this is also an essential part of F1. You can't drive around with last year's car year after year after year. Manor is doing that currently, but it's basically nothing more then going at track venues.

When several teams stop being able to cover costs in category 1, then you know there's something hugely wrong. I personally it's no longer a struggle to compete, it's a struggle to survive at all!

[mrluke]

What do you think is the minimum you require to compete in F1?

I don't think anyone knows, because we've not yet seen a team willing to do only what's necessary to comply with the sport's 107% rule.


Source: Autosport

An equitable disbursement of the so-called "premium" payments results in each team collecting roughly $24.9 million.

Adjusted 2015 budget (actual 2015 budget):

• Red Bull Racing - $486 million ($530 million)
• Mercedes - $520 million ($529 million)
• McLaren Honda - $517 million ($526 million)
• Ferrari - $401 million ($473 million)
• Williams - $225 million ($210 million)
• Lotus - $182 million ($157 million)
• Toro Rosso - $180 million ($155 million)
• Force India - $171 million ($147 million)
• Sauber - $142 million ($117 million)
• Manor - $118 million ($94 million)

Mercedes and Red Bull swap places. Otherwise, the running order remains the same. (Incidentally, the 10th place F1 team earns considerably more than most other series' champions.)

Actual Budget / Cost to Compete

• Red Bull Racing - $530 million / $374 million
• Mercedes - $529 million / $403 million
• McLaren Honda - $526 million / $428 million
• Ferrari - $473 million / $309 million
• Williams - $210 million / $127 million
• Lotus - $157 million / $106 million
• Toro Rosso - $155 million / $101 million
• Force India - $147 million / $87 million
• Sauber - $117 million / $73 million
• Manor - $94 million / $46 million

I have taken the actual 2015 budget shown above and deducted out the prize money the team will get for last years performance.

Notice that this is the first year Marussia will receive any payment, in previous years their cost to compete would have exceeded several of the mid grid teams.

The other thing to taken into account is that Mercedes and Ferrari will also have PU subscriptions from their customer teams that will bring down their cost to compete. Presumably they also see an increase in sales and I would expect Ferrari to sell enough merchandise to pay a significant portion of their costs.

Taking it to the extreme each team could receive an equal share of $88m which would go along way towards covering the costs of the mid grid teams while making a significant dent in the expenditure of the top teams thereby bringing the whole grid closer together and more competitive..allowing everybody to have a smaller piece of a much bigger pie.

Im not trying to stomp around for equality but the 4 top teams receive in bonus money more than the mid grid teams spend in a whole year. This effectively doubles the budget for the top 4 teams. We then sit around wondering why the same 4 teams win and why it is so hard for the mid grid teams to take a step forward. Then we remove all of the technical freedom from the regulations to prevent the top 4 teams "spending too much".

[bhall II]

As a matter of principle, I think most people agree that F1 revenues should be more equitably disbursed.

In practice, and because I'm far from a supply-sider, I tend to think the best way to increase overall value, especially long-term, is to make everyone stronger...

...the system is clearly flawed and arguably unfair...

I can easily sympathize with the affected teams, and I absolutely think they should receive a greater percentage of the sport's revenue. It's only fair.

In other words, the system would be more fair, which I've always supported in principle...

Can we please dispense with the portions of this conversation that attempt to sell me on the idea that the system is unfair and that smaller teams should receive more money? 'Cause I'm already there (and have been for a while).

Just because something should happen doesn't mean it can or will happen, and just because something is happening doesn't mean it's effective. Truly resolving any problem requires a critical examination of its constituents. That's what I'm talking about here.

[turbof1]

That I can agree on. The EU Commission is fickle. I don't inmediately see legality issues being an obstacle, but you can't predict how the Commission will see things.

[mrluke]

Sorry bhall, wasn't trying to make a straw man for you, I was thinking out loud based on the data you provided. There's probably a series of posts that would be better placed in the "engine crises" thread rather than the legal principals you are trying to discuss.

More on topic, I think the point to remember is that with these types of laws it is not as simple as a black and white "this is what this law means" as long as Sauber and FI can demonstrate that their position could be considered to be part of an internal market then the commission can look into it. No doubt Bernie will try and shut it down but I doubt he wants somebody looking into all of the deals and agreements that have been done.

[bhall II]

I just wanted to make my position clear in order to move this thing forward.

That I can agree on. The EU Commission is fickle. I don't inmediately see legality issues being an obstacle, but you can't predict how the Commission will see things.

I see plenty of obstacles, most of which appear insurmountable. Moreover, I don't see how a win can genuinely change things for the better, because an equitable disbursement of "premium" payments would only have a minor effect on the teams' economic running order. So, why start a contentious fight if it can't really accomplish anything? It's a waste of political capital and a distraction from problems that can be solved.

And does anyone really think a team that already spends more than it earns will suddenly become a model of fiscal responsibility if given more money? If not, how much is needed for them to be held fully accountable for their actions?

Just look at how this is being framed...

In London, Kevin Eason reported Ecclestone warned last night that Red Bull could walk out of F1 if EU investigators demand that they hand back £46M ($70M) in special payments. He said that Red Bull Owner Dietrich Mateschitz had "tired of the sport and could pull the plug imminently" on his four-time world champion team. Ecclestone: "He has probably had enough of everything going on. I am doing everything I can to make sure Red Bull stay with us, but things need to come together quickly. He is serious when he says he will quit if things don't improve."

"I understand some of the teams are complaining to the European Commission and saying what I've just said, it's anti-competitive. But there are lots of other things that are anti-competitive for the teams, for Formula One. So they've got a lot more complaints than just the amount of money. And if they got all of them as Max (Mosley) said, more or less a level playing field, there should be no complaints, they all then can do the same thing."

They're playing right into Ecclestone's hands, making his usual strategy of divide-and-conquer that much more effective, while he and his FOM cronies continue to bilk the sport of $448 million from revenue streams the teams generate. That's 273% more than anyone else. For nothing.

These people have the strategic foresight of a hot dog bun.

[Phil]

I think the general problem starts with Ferrari receiving a special status. They receive more money than the rest because Ferrari is deemed to be worth more to the sport and its success than other teams. That may be true. But the problem then starts because at some point, Mercedes, RedBull and Renault seem to think (rightly so) that they have equally contributed to the success of the sport by the amount of money they as well have invested. Also true. So on some ground, Bernie gives in and the pot of "special premium" payments increase, while the pot for actual price-money shrinks. And here are teams like Sauber who have been with the sport for decades as a pure race-team.

It's a shame that those that are already winning and reaping rewards by using their success for PR and marketing can also benefit financially beyond price-money payments to reap even greater rewards that is then used to invest even more to add their chances of winning. This ain't right. This is the best way to further encourage that the sport becomes even more expensive and the gap between the have's and the have not's increase...

With Renault in talks over buying Lotus and wanting a higher "premium" share... well, I wouldn't be surprised if this is only adding fuel to the argument of ForceIndia and Sauber.

[bhall II]

I tend to think the general problem starts elsewhere...



Unfair is Ecclestone's acquisition of the sport's commercial rights for a term of 100 years for a mere $360 million. Given annual revenues of roughly $1.6 billion, the contract is worth about $160,000,000,000, which constitutes an absurd 44,444% ROI.

[turbof1]

Inflation-corrected?

[mrluke]

Its amazing that Bernie can continue to get away with it really.

[bhall II]

Inflation-corrected?

That would be too depressing.

This is the battle teams need to fight, not whatever it is Force India and Sauber have initiated. Those two need to be saved from themselves; the sport needs to be saved from a business model that's hemorrhaging money and the value that goes along with it.

Unlimited testing reportedly cost teams $15-35 million per year. Put to use for the benefit of the sport, instead of lining unrelated pockets, FOM's share could pay for every team's testing expenses at the highest level and then some.

It could pay for 99 years of continuous wind tunnel use at average retail price (about $500/hour).

It's enough to buy the world's most powerful supercomputer, which is capable of calculating in one second what would take nearly 22 years under current CFD restrictions. (And you'd still have over $40 million left to spend on something else.)

It could cover the cost to assemble 46 cars.

It could buy over 2.8 million three-day passes to grands prix at average face value ($154)

All of these things are possible right now; the money is there. Yet, the sport is somehow constantly in crisis mode.

[VerleneDP]

I wish them the very best of luck. I absolutely hate to say Im not holding my breath, but I sincerely hope Im wrong (despite the endless corruption) and that there WILL be an equal distribution of funds, much like IndyCar.

[Cold Fussion]

I tend to think the general problem starts elsewhere...

http://i.imgur.com/mqDhc32.jpg

Unfair is Ecclestone's acquisition of the sport's commercial rights for a term of 100 years for a mere $360 million. Given annual revenues of roughly $1.6 billion, the contract is worth about $160,000,000,000, which constitutes an absurd 44,444% ROI.

It's hard to reconcile how purchasing an entity for 23% of it's yearly revenue is legal.

[turbof1]

Inflation-corrected?

That would be too depressing.

This is the battle teams need to fight, not whatever it is Force India and Sauber have initiated. Those two need to be saved from themselves; the sport needs to be saved from a business model that's hemorrhaging money and the value that goes along with it.

Unlimited testing reportedly cost teams $15-35 million per year. Put to use for the benefit of the sport, instead of lining unrelated pockets, FOM's share could pay for every team's testing expenses at the highest level and then some.

It could pay for 99 years of continuous wind tunnel use at average retail price (about $500/hour).

It's enough to buy the world's most powerful supercomputer, which is capable of calculating in one second what would take nearly 22 years under current CFD restrictions. (And you'd still have over $40 million left to spend on something else.)

It could cover the cost to assemble 46 cars.

It could buy over 2.8 million three-day passes to grands prix at average face value ($154)

All of these things are possible right now; the money is there. Yet, the sport is somehow constantly in crisis mode.

You always have a good chance that Commission share that view of yours. I still feel you are looking too much from the point of laws. The reality is that the Commission has the authority to intervene and restructure markets at will. We have a case in Belgium where Telenet wants to take over Base. Perfectly legal for the law, no breaches whatsoever. However, the Commission fears it'll cause the telecom market to become less competitive. If it wants, it can forbid the take over. It does not need to look at laws. And no matter what case Bernie puts in front of the Commission, even if he argumentates it is not a market, if the Commission sees it as one, it'll be judged by the Commission as one.

The commission is quite an anti-democratic organ for a democratic institution the European Union is, now to think of it. And it has power, a lot of power. It brought companies like Microsoft completely down on its knees. That being said, the Commission could just as well destroy F1.

[bhall II]

Earlier this month the EU agreed to look into a complaint made by Force India and Sauber over what the teams claim to be an "unfair and unlawful" division of F1's revenues and setting of the rules.

With regard to the rules...

As indicated, the EC competition rules may apply only to the activities of "undertakings," a term, which the EC Treaty does not define. The European Court of Justice has interpreted the term broadly, holding that the:

concept of an undertaking encompasses every entity engaged in an economic activity, regardless of the legal status of the entity and the way in which it is financed

The European Court of Justice has defined an "economic activity" as any activity, which could, at least in principle, be carried on by a private undertaking in order to make a profit, or, in other words, that actually competes or that could potentially compete with the activities of profitmaking undertakings. Any activity consisting in offering goods and services on a given market is an economic activity.

Some have argued that an entity that carries out at least one economic activity must be deemed to be an undertaking for purposes of EC competition law for the entire range of its activities, including those that are not economic. For example, since the IOC sells tickets and media rights to the Games, which clearly are economic activities, the IOC should be deemed an undertaking for all its activities, including when it exercises its regulatory powers. However, this position finds no support in the case law of the European Courts, and in the decisional practice of the European Commission. Rather, the approach followed to date, at least outside the sports sector, confirms that one must determine whether an entity acts as an "undertaking" in a particular case in light of the particular activity at issue in that case.

More generally, the European Court of First Instance held that rules do not cease to be sporting rules (and therefore outside the gambit of EC competition law) if they have economic repercussions, or if they are seemingly excessive, provided they are not discriminatory and remain limited to their proper objectives, such as those just described with respect to anti-doping rules. It also held that the fact that the IOC might have had in mind the concern of safeguarding the economic potential of the Games, when adopting the anti-doping rule at issue, would not be sufficient to alter the purely sporting nature of the rule.

Regardless of how F1's rules are devised and introduced, they're implemented and enforced under the authority of the FIA World Motor Sport Council, a body that cannot reasonably be considered an "undertaking." Additionally, the current rules were developed in order to promote sustainability, which is not inherently an economic activity. Therefore, F1's rules do not fall under the jurisdiction of European Commission competition law.

At least, that's the argument I'd make (and I'd win, too).

The commercial aspects are decidedly more complex, and I haven't made much headway looking into it.

EDIT:

It's hard to reconcile how purchasing an entity for 23% of it's yearly revenue is legal.

It was pretty much ordered by the European Commission after it decided the FIA shouldn't have both regulatory and commercial control of Formula One. No one anticipated that Max Mosley would swindle his own organization in the process.