JANUARY 22, 2009

The financing of Formula 1

In recent days there have been a flurry of stories on F1 websites about the F1 teams getting less money than before. These all come from a story in the Financial Times which quotes Formula One group chief executive Bernie Ecclestone as saying that teams are going to have to accept less money. This is a sensational quote but not very realistic and it is odd that the FT would fall for such a story.

The global economic crisis is hurting everybody, except a few oil-rich states which have money to burn and as the slowdown is hitting all big companies this means that they are spending less on promotions. That in turn means that F1 teams are struggling to find sponsorships, TV stations are suffering from reduced advertising revenues. All this means that there will be less money available for Formula One group unless new deals are signed. The group recently signed an official supplier deal with Korea's LG which may help balance the books - but there is no getting away from the fact that times are hard and they are probably going to get harder. This may mean that teams will get less money in the short term. The current arrangements, under which the teams get 50% of the money that comes into the business, last until 2012 after which a new contract will need to be negotiated. The Formula One Teams' Association (FOTA), which is run by Ferrari boss Luca di Montezemolo, has made it very clear that any new deal will need to include substantial increases in money for the teams. Ecclestone may say that the teams have no choice but to take what he gives them, but this hard line is not realistic when talking beyond the current deal.

The Formula One group can, however, only compromise a certain amount without then needing to renegotiate the enormous loans it took out when CVC bought into the business. These used F1 as a "cash cow" for the investment firm and it has to make substantial debt repayments each year. Thus reducing its revenues by giving more to the teams is not really what CVC wants to do. However, if the line adopted is too hardline, CVC could find itself in trouble. A breakaway series would be hard to organise but it is a lot easier than it used to be. F1 is a brand of sorts but it has not really been developed and it is always possible that there could be a situation in which a new brand was created, just as MotoGP has been with motorcycle racing as recently as 2002.

There are all kinds of competition laws that did not exist in the 1980s and sports federations are no longer allowed to legislate against championships they do not like, unless they have good cause to do so. This means that we have seen the Intercontinental Rally Challenge running in parallel to the World Rally Championship. We have seen GP2 and A1GP and other single-seater series which are independent of the FIA-organised mainstream. It is now a question of the survival of the fittest.

Formula 1 is a big draw but when one analyzes the brand, there are several key elements. The sport is technical, it is international, it has glamour. It has the best drivers, the Monaco Grand Prix and Scuderia Ferrari. Ferrari is the supplier of engines to A1GP and that series could very easily form the basis of a new championship. The words "Grand Prix" are generic and the world of the automobile does not have any specific claim on them.

The position of the FIA is interesting. It could go on supporting a Formula 1 without Ferrari and the other big teams - an upgraded GP2, if you like - but that would not be good for its prestige. Thus if there was a breakaway, it would probably in the interest of the FIA to give any new series World Championship status - although much would depend on what is the FIA-FOM contracts.

As we have seen in the United States, no good comes from running two competing championships and in the end the IRL and Champ Car were forced to merge. Much money was wasted. Thus compromise is always the best option for all concerned but the teams feel, quite rightly in the minds of many fans, that they are the stars and they should be earning the money. There is room for a promoter to take a share, but around 15% of the take seems a more realistic figure. The FIA should also be getting more cash, but only so that it can use the money to help grow the sport around the world. The best way forward is probably for everyone to work together to strengthen the brand and the business and then work out a way to find more income and then change the way that money is divided up.

These thought processes are not very welcome with the current management but there will come a day, whenever that may be, when such discussions will have to be dealt with.

The latest idea being flogged around the rumour circuits is that Sir Fred Goodwin might take some role in the post-Ecclestone/Mosley world. The former head of the Royal Bank of Scotland is only 50 but his banking career is over and he is a passionate fan of the sport. Goodwin's credentials have been hammered somewhat of late because of the problems that hit RBS but it is being suggested that he could be a candidate for the FIA Presidency. This seems unlikely as he would need to be adopted by an FIA member club and would then need to win the support of clubs that have been loyal to Mosley and his allies for more than 15 years. That would be a challenge. Understanding how the FIA works is not easy and it is hard to imagine that the clubs would take someone with no previous understanding of the organisation.