Deals on Wheels: Formula 1 as a Billion Dollar Business

Despite the global economic downturn, Formula 1 has continued to generate record revenues in recent seasons. With sponsors, race organizers and millions of TV fans queuing up for a piece of the action, the sport and its star names are firmly stuck in the financial fast lane. 

HOW FORMULA 1 GROUP GENERATES ITS REVENUES 

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The big cash comes from TV and race fees, as it was expected. No wonder Bernie Ecclestone wants to add more races to the calendar. Formula 1 will host 20 races next season, which should further increase revenues. FOM (Formula One Management) has also drifted the sport into a pay-to-view system in Great Britain, after establishing a deal with Sky Sports.

COST OF HOSTING A GRAND PRIX

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Abu Dhabi and Singapore, among the newest race tracks on the calendar are also among the most expensive. Floodlights, big grandstands, “F1 Rocks” concerts are one of the few attractions that cost a fortune for Abu Dhabi and Singapore to host a grand prix. Night races is what Bernie Ecclestone was pushing for and he got them. He is recently attempting to turn the Australian Grand Prix into a night race, which should add Albert Park to the list above.

MOST WELL PAID DRIVERS

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It’s no surprise that Fernando Alonso and Lewis Hamilton top the list. Ferrari and Mercedes are the most well known brands in the sport, while Red Bull is currently establishing itself as the magnum opus. The two giants have the largest resources of all teams from the paddock, with Mercedes luring Paddy Lowe and other famous technical directors with their high quality deals. As Hamilton and Alonso are the clear stars at these two teams, it’s only natural that they are the most well paid.

SPONSORING A TOP TEAM’S CAR

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Sponsorship is crucial for the survival of any team. All top teams operate under a title sponsor: Ferrari under Santander, McLaren under Vodafone, Mercedes under Petronas, Red Bull under Infiniti. Title sponsors are what transform a midfield team into a top team. It’s usually a company that invests heavily in the team’s technical developments as well as some even for driver salaries, if the driver happens to bring a title sponsor, which is rare. Other, larger well-known sponsors that operate within Formula 1 include Total, Kingfisher, Geox, Puma, BlackBerry, Monster Energy, Rexona, Burn.

Recently, energy drink companies have started taking over tobacco sponsorship. Large tobacco companies including Marlboro, Camel and West were essentially banned from the sport. Still, even today, Marlboro use Ferrari in their advertisement campaigns, for which Ferrari receive money of course. The tobacco giant still pays the Italian squad $100M per year. Johnnie Walker is using the same strategy with McLaren.

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WHO OWNS FORMULA 1?

Formula One Group is the company that owns commercial rights to Formula 1. It is made up of multiple companies (around 30 or 40) that invest in multiple jurisdictions – UK, Jersey, Luxembourg, Switzerland, etc. But the parent company is called Delta Topco, with headquarters in Jersey. They are the ultimate owners.

The Group is also 35.5% owned by a private equity firm called CVC Capital Partners. The second biggest shareholder is an American company called Waddell and Reed, owning about 20%. The third biggest shareholder is the estate of Lehman Brothers — they have somewhere in the region of 12%. Bernie Ecclestone’s family trust has circa 10% and Ecclestone himself has around 5%. It’s a complex and highly complicated structure.

HOW IS MONEY GENERATED IN FORMULA 1?

Generally, $500M comes from fees payed by promoters to host races and another $500M comes from the fees that broadcasters pay to screen the sport. After that, you have approx. $250M from sponsorship, like trackside advertisers and series sponsors. The remaining $250M is coming from corporate hospitality.

The key driver for Formula 1’s growth is the fees that come from the circuits. Most of these contracts mention clauses that increase the rate by up to 10% annually. You can identify several key points behind the financial success of Formula 1, Asia being one and the most important.

The sport moved to Asia because countries such as Singapore, Malaysia, China, India and South Korea realized that hosting an F1 race is an excellent way to put their countries on the global sporting map. F1 is the most watched sport in the world — 500 million viewers a year — so this is a good way to get your country seen on TV, drive tourism and make yourself look credible alongside other sporting nations.

HOW MUCH OF THE PROFITS GO TO THE TEAMS?

About 47.5% of the profits are split between all of the teams. That is what is known as the prize fund. In 2011, profits came to $1.1, 1.2 billion so 47.5% of that amounts to around $400-500 million and that is shared between the top ten. It’s not shared evenly, it’s based on performance.

In addition, certain teams get additional money, with Ferrari being the key beneficiary with 5% of profits all to itself. Then there are two or three funds which are split between the best performing teams — which generally tend to be Ferrari, McLaren and Red Bull. The top teams are given that bonus because they have the heritage and the prestige. It’s actually an incredibly clever strategy because the reality of the matter is that the majority of the other F1 teams have changed names at least once in the past five years. Caterham was Lotus, Sauber was BMW, Sauber was Spyker. Nobody stopped watching F1 because of these name changes, but if you get rid of Ferrari, McLaren or possibly now Red Bull that could cause trouble with the viewers.

Ferrari get a special treatment because they are the only team that has competed in Formula 1 every year since its inception. It’s also the only manufacturer-owned team that directly signs contracts with F1 giving its owners more security.

Source: CNN 

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