Honda website
Honda website

DECEMBER 28, 2001

The need to look at the bigger picture

THE complicated dealings of Europe's media companies may not seem to have much of an influence on the future of Formula 1 but they are rather more significant than they would appear to be. Pay-per-view television has not been a big success in Europe and most of the firms dealing in the business have been making substantial losses on the purchase of rights made in the mid-1990s. They are bargaining on the sector picking up but as the pressure has grown the result has not been big increases in viewers willing to pay but rather the consolidation of the pay-TV industry with the big multinational media companies such as News Corporation, Vivendi Universal, Bertelsmann and Kirch all fighting for position and gobbling up the small fry. For the moment the US giants Disney and AOL Time Warner have kept a low profile in the European markets, preferring to run their own operations rather than buying into existing businesses.

The trend has also been to move away from the higher pricing for premier services such as the F1 "super-signal" towards bundling of the sport with old movies and other sports for a more modest subscription. This is likely to continue.

The consolidation of the TV business is a danger to the sport as it chops at the heart of F1's revenue streams. The recent days have seen Bertelsmann increasing its grip in the free-over-air RTL channel, which owns the terrestrial rights for F1 in the important German market. Rival Kirch owns the pay-per-view F1 rights (and the entire F1 organization) but is under pressure because of the enormous debts that have been incurred buying up TV properties in recent years. This has led to suggestions that Kirch could fall victim to the bigger players.

Bertelsmann, the world's third biggest media company behind Disney and AOL Time Warner, is currently in the process of looking at a bigger share of the British market and could buy up Granada, the parent company of ITV which owns the terrestrial F1 rights for Great Britain.

In France free-over-air F1 rights holder TF1 has just announced a deal to get a much bigger share of the pay-TV service TPS. This puts TF1 into direct competition in the pay-TV sector with Canal Satellite, a subsidiary of Canal Plus, which owns the F1 pay-per-view TV rights for around 60 countries but has failed to make the service pay. Canal Plus did a deal in 1996 with Formula One Management for 10 years at an estimated $60m a year, which makes it one of the major revenue sources for the Formula One group of companies. Since then however the French firm (which is controlled by Vivendi Universal) has off-loaded the rights in Italy and in Latin America to try to make up for losses. There has been much talk in recent months of a possible merger between TPS and Canal Satellite to consolidate the French pay-TV market and stop bidding wars between the two channels. TPS currently has a million subscribers and Canal Satellite has 1.8m. The latter has recently made its first profits but the F1 service costs more than the basic subscription and is still believed to be making a loss.

The current trend on pay-TV is towards such mergers and in several countries this has already happened, leaving the trading for pay-TV rights in the hands of the big multinational players.

Having said that, there are a lot of people in F1 who may be the missing the point of Kirch's investment in the Formula One group. Kirch's purchase of SLEC, the Formula One holding company, is not just about F1. Kirch paid only $300m for the commercial rights to F1 for 100 years. That may sound a lot but it is nothing in the billion dollar trading currently going on.

Kirch's major investment was in SLEC and with that deal it has acquired the technology of the Formula One Television business and it is this which could turn into the goose that lays golden eggs in the future. The mobile TV facility which goes from race to race produces a product which is well in advance of all rivals. As broadband technology becomes more widespread this technology can be applied to other sports and entertainments and this could generate considerable income as other sports will be competing against one another to get the technology to enable them to present their activities in the best possible way. Supplying such programming free-over-air would effectively wipe out the attraction of high-priced pay-per-view programming.

Thus it is not impossible that Kirch would keep the Formula One TV technology and sell on the F1 rights (which are troublesome and for which it paid little) and use the sport's greatest asset against it in the future.

Kirch may even be happy to let the manufacturers run their own series in place of F1 if they agree to use his TV technology. The alternative is to try to develop a better service but this will take time and the F1 television technicians are constantly developing to stay ahead of the competition.