NOVEMBER 26, 2008
Global partnerships and F1
The announcement of a global partnership between LG and the Formula One group seems set to mark the start of a campaign to raise money for the sport from marketing partnerships. This is logical given what has been seen with the Olympic Games and the soccer World Cup. It may not please the Formula 1 teams, as it cuts into their potential sources of revenue, but conversely it may help them in the longer term as the Formula One group will need to pay them more money in order to keep them satisfied.
At the moment the teams get 50% of all the revenues generated by the Formula One group. And while they want more, the Formula One group hopes that it will be able to satisfy those demands by increasing the size of the overall pot.
It is worth looking at the other marketing programmes to see just how much more money F1 may be able to generate with these schemes.
The Olympic Partner Programme was created by the International Olympic Committee (IOC) in 1985 and offers considerable exposure to the partners during the two week periods in which the Winter and Summer Games occur (in other words, once every two years). The partnerships are currently limited to 12 and currently include Coca-Cola, IT company Atos Origin, General Electric, Johnson & Johnson, Panasonic, Omega, Macdonalds, insurer Manulife, Kodak, Lenovo, Visa and Samsung. For the period 2005-2008 the programme generated a total of $866m, which was around 34% of the IOC's total revenue. This means that the average annual contribution by each sponsor is in the region of $18m. Given the amount of exposure (and the limits of that) it is quite possible that Formula One would be able to demand more. For this the companies involved in the Olympics have exclusive global marketing rights and opportunities within their designated product categories. They are able to develop marketing programmes with various members of the Olympic Movement and can use all Olympic imagery, have access to hospitality opportunities, direct advertising and promotional opportunities at the Games and preferential access to TV advertising slots. They are also allowed on-site concessions at the events.
The FIFA World Cup soccer competition offers similar opportunities for sponsors. FIFA offers the use of its official branding, in-stadium exposure, hospitality opportunities and the same direct advertising and promotional opportunities and preferential access to FIFA World Cup broadcast advertising. The FIFA budget for the period 2007-2010 is aiming for revenues of $3.2bn and according to the latest figures for 2007 the sale of marketing rights brought in $223m. FIFA boasts six major partners: Adidas, Coca-Cola, Emirates, Kia, Sony and Visa, which would seem to suggest that each company is paying $37m per year for the four-year deals. In order to justify this cost FIFA is using other smaller events between the World Cup competitions to add to the exposure and the marketing value.
The big difference between Formula One and the IOC and FIFA programmes is that the Olympics and the World Cup do not generate income to make the shareholders wealthier, but rather plough large amounts of the money back into the sports in question. This is obviously part of the attraction as companies can claim that the money they invest is used for the assist national Olympic movements to train their athletes. Coca-Cola, in particular, uses this to spread goodwill about itself around the world. The IOC gives 92% of its revenues back to the sport, keeping just 8% for itself. FIFA reinvested 51% of its income in the period 2003-2006 and intends to increase this to 70% between 2007-2010.
One can argue that the payments that are made to the F1 teams are a contribution to the sport, but this is a contentious issue as there is little or no filtering of that money down to the lower echelons of the sport, where the money is most needed to create better venues and fund young drivers. This makes F1 partnerships rather less attractive than those of the IOC and FIFA as the element of social responsibility which exists in the other schemes is less clear and thus sponsors cannot use the sport to engage with their customers and must rely on basic exposure, which is a rather old-fashioned way of looking at sports sponsorship in the modern era, where there is so much advertising clutter in the world.
The problem is easily solved but that would need the shareholders in the Formula One group to be willing to take lower financial returns and there is no sign of that happening as the major shareholder CVC Capital Partners seems to be interested in the sport only as a means of making money and has left the running of the business almost entirely in the hands of Bernie Ecclestone. The cost of an international driver scholarship scheme for promising youngsters or the funding of karting facilities in regions where none exist would not take a big chunk out of the profits and would help to solve some of the perceptions that exist.