MARCH 22, 2006

The big picture

The FIA World Council has accepted the 2008 FIA Formula 1 World Championship Sporting Regulations. Entries for the 2008 championship will open on Friday and will close on Friday March 31, seven days later.

The FIA World Council has accepted the 2008 FIA Formula 1 World Championship Sporting Regulations. Entries for the 2008 championship will open on Friday and will close on Friday March 31, seven days later. The FIA says that this small window of opportunity is necessary in order to ensure that teams are ready in time for the first race in March 2008, nearly two years away. The teams which have their entries accepted (and it is not clear what criteria will be used as any number of opportunists may wish to get involved) will then be able to discuss the 2008 rules before they are finalised on June 30.

While one can easily be sucked into the detail of who said what and when and what it all means, we believe that the best course of action for the sport is now to let the problems be solved behind closed doors rather than with one party trying to score points off the others in the public domain. Suffice to say there will be a solution in the weeks ahead and it will almost certainly be a compromise between the quibbling parties. If that does not happen the championship will have fewer manufacturer teams than is currently the case and will lose some of its credibility. Whether this damages its ability to generate money is a question which can only be answered by going down that illogical path.

The FIA has a perfect right to do as it pleases for 2008 as it owns the F1 play room. It is at liberty to break the toys or throw them out of the window if it sees fit to do so. The only slight problem is that breaking too many of the toys will make it rather less interesting for those who watch the sport and those who have paid to control the commercial rights of the World Championship. Political instability is not going to help the bankers.

Bankers and venture capitalists may be fans of the sport, or enjoy the associated glamour, but they are far more interested in what the sport can give them in terms of profit and with a sport that generates F1-sized profits, there is much money to be made. It is likely that their plan is to complete the purchase of the business, tidy it up a little and then launch a new bond issue to instantly recoup the money they have invested and thus make the sport pay for its own purchase in the years ahead. By buying the company and then borrowing money against future revenues, the bankers can wipe out their risk and that will leave them to enjoy moderate profits (in hundreds of millions) until the bond is paid off. At that point they have an impressive asset for which they have paid only the interest on the bond, which is more than covered by the profits along the way.

This process can be repeated over and over again as long as the goose continues to lay the golden eggs. If the goose starts to complain or tries to fly away the bankers can come unstuck. Thus their desire is for stability more than anything and tying teams into a long-term contract is their ultimate goal. If a financial deal has been agreed and it is jeopardised by quibbling over sporting regulations or rule-making procedures, the bankers are going to push very hard to make sure that their investment is not threatened.

Whether the constant exploitation of the sport is a good idea is not something which seems to attract much attention from anyone but the fact is that the commercial rights of F1 - and thus the company that exploits them - is now a commodity to be traded and it is in the best interests of the sport that whenever the bankers are between bonds and Concorde Agreements, someone fights to bring some of the money back to where it belongs. If the sport does not do that, it is simply a slave for the bankers.

The governing body may one day conclude that it is best to borrow the money to buy back the rights to the sport and stop this exploitative cycle repeating itself over and over. The best way to get the banks to leave the sport is to reduce their profit margins by making them pay more of the profits to the performers.

The current cycle of negotiation is now coming to a close but the extended Concorde Agreement will last only five years and so we can expect the same political problems to revive in around three years when the workers of the world will once again have the opportunity to unite and rid themselves of the chains in which they are currently trapped - or at least negotiate for padded handcuffs.