Monday, 22 June 2009

Industry Practice – Formula One – Competing for Pole Position in the F1 Business Model.

It was a very long time ago that motorsports were the amateur sport of choice for European gentlemen. Today, homage runs such as the Mille-Miglia is where the leisured money is directed , even if behind the scenes passionate classic car owners also consider the importance of Mille-Miglia vehicle valuations, keeping P&L and balance sheet accounts as an important “aside”.

As a raw commercial counterpoint to VSCC, RAC and other leisure-class racing, Grand Prix's post WW2 popularisation has grown exponentially, with it snowballed commercial rewards. Firstly from day & weekend gate receipts, from track advertising, then from vehicle/team sponsorship and of course in the last 30 years from global TV transmittance. As F1 popularity expanded so increasing multi-stream revenues were devised and implemented, the monies enabled the sport's participants to hone every dimension of their competitiveness, from R&D facilities that led to the paradigm-shift of carbon fibre to the use of telematics to the offered sizable salaries that drew top driver talent.

Unsurprisingly, as that ever expanding liquidity pot attracted business acumen, deals and contracts followed leading to what has essentially become the agenda- driven forces of power-broking parties.

The FIA regulates the sport - presided by Max Mosley - and prescribes the specification 'formula' to which the race-cars must accord. Whilst it was Bernie Ecclestone that created the modern template, as a past team owner of Brabham he saw the value of the sport's commercial rights potential back in the late 70s, In doing so set-up FOCA (Formula One Constructors Association) with Mosley, then as legal council, to fight the cause for commercial change which he/they won.

A finance vehicle was created called FOPA (Formula One Promotions & Administration) which split the income as: 47% to the Teams, 30% FIA and 23% to FOPA (ie Ecclestone). FOPA latterly morphed into FOM (Formula One Management) and FOA (Formula One Administration) under the Alpha Prema investment umbrella with latter-day CVC Capital Partner's; interest thereby taking on much of the operational responsibility and financial rewards of the sport.

Thus for nigh on 3 decades these 2 prime arbiters of F1 have orchestrated, with understandable periodic tensions; the Teams obliged to take their cut as prescripted. But Grand Prix's exponential popularisation based on national patriotism and auto-brand affiliation has both encouraged and demanded a ballooning of financial injection – F1 has been the veritable financial snowball. YoY F1 grew as the dynamic global advertising medium, Team inter-rivalry pushing R&D limits that required, and were met by, increasing corporate sponsorship spend; as was regional race-track infrastructure spend.

This means that where once the FIA garnered much of the income from motorsport, latterly split that growing pot from event operators and TV broadcasters to Ecclestone's FOM/FOA , the rise of 'Team Turnover' means that billions of US$ the sport has encouraged is being handled by the Teams. Unsurprisingly, they have argued for some years that the former 47% agreement - and the associated 5 Concorde Agreements – do not represent a fair/true representation of level of their contribution or share of the sport's profitability. As to the size of that 'contribution' to the sport, FormulaMoney's calculations and research estimates the top 8 Teams 2008 budgets to total $2.906bn, of which only $771 represents sponsorship contract fees, the remainder (>$2bn) made up of manufacturer's and constructor's monies.

[NB. Whilst the manufacturers undoubtedly have a case to set forward, those sponsorship numbers do appear low and may be a result of dramatically cut-back 2008 corporate marketing budgets, whilst the incurred Team costs presented could be taken from the more buoyant 2006/7 seasons, so generating such a wide 'manufacturer contribution' gap. Such figures as always must be drilled into to understand the underlying accounting sources and exceptions. Such self-regarding evidence will of course be expected from all 3 parties].

Today ironically, the cyclical wheel of progress becomes apparent once again.

Just as Ecclestone as an ex-team owner leveraged combined Team's muscle in the 70s, so now 35 years on, Flavio Briatore - ex Benetton owner and now Renault Team MD – is undertaking a similar move with FOTA (Formula One Team Association) with the acumen and influence of FOTA's founder Ferrari/FIAT's President, Luca Cordero di Montezemolo. [NB Cordero di Montezemolo's previous condemnation of FIA regulations regards the 2005 US GP's single tyre per race controversy].

So, today there are 3 in a bed within the GP kingdom, the latest of which FOTA – a body born from the frustration - continues to recoil against the FIA prescribed 2010 season team budget capping at $40m. This represents a fraction of modern team budgets and is what FOTA calls “resource restriction”. (Given the fact that today's pit-stop crew consists of 26 members each undertaking a specific task, and the size of other team HR 'service demands' such as trailer staff and complementary guest overhead the FIA will try to present a case for Team fiscal over-indulgence).

However, in the face of such growing criticism, FOTA threatens that to operate normally, at near today's cost levels, it will form a breakaway championship; thus carrying-away with it the big auto-names such as Ferrari, Renault, McLaren, BMW Sauber, Toyota, Brawn GP, Red Bull and Torro Rosso, threatening to leave F1 with only the commercially low-yielding Williams and Force India.

Thus today we witness a re-run of the historic schisms that have been part and parcel of any sport as differing power-players endeavour to maximise their 'take' relative to media spend – seen in UK football over the last 5-10 years and seen with Kerry Packer in Australian cricket back in the 1970s.

Thus, eventual outcome will be decided by the influence of the global TV audience, and critically their waking hours. For it is the ability to reach that expanding audience that forms the very foundations of a 21st century GP business model. Just as the sport expanded into EM regions from Istanbul to Shanghai, and so was forced to schedule night races – re-formated as a new dimension in F1 – to access western hemisphere audiences, so the 21st century business demands will also shape the GP business model.

Such a format - created by Briatore and Ecclestone - is already being laid-out under the GP2 Series banner; the feeder series for F1 which replaced F3000. The GP2 Series operates as GP2 and GP2 Asia, the remit of which is to create an Asian-based mirror to its western counterpart; incorporating an intended bias to Middle-Eastern and Asian drivers to whom EM audiences feel a greater connection. Ecclestone's FOM owns the TV rights and since the GP2 races are held a support events to F1 races, there appears strong evidence that it is being used as a template for an improved business model format for F1 itself.

However, the FIA although an income beneficiary well understands the FOM GP2 strategy to wrestle control, and so a year ago announced a countermeasure – a competing interest - via the return of F2 in 2009. Stock vehicle chassis and engines are supplied by MotorSportVision (MSV) with the vehicle designwork done by Williams – hence William's loyalty to F1's and the FIA's status quo. But MSV also acts as promoter of the race-series so with no doubt ambitions to emulate Ecclestone's FOM success.

Given GP2's “lead”, this of course begs the question, can F2 truly compete or will it be required to buy-out Ecclestone GP2 interests to gain commercial traction?

investment-auto-motives suspects it will, and in the process create F2 and F2 Asia: more formalised templates for a longer-term traditional F1 and a new F1 Asia.

FOTA, whose members are perhaps the prime players, well understands the global potential of the sport as both a massive income generator in its own right as well as the 'magic halo' for their own brands and road-vehicles – none more so than Ferrari, understandably the greatest protagonist.

Details as to whether FOTA has managed to persuade financial backers remains unclear, as would the championship's name/title, though the existence of A1GP – based on 'National Teams' does raise questions as to how that could be leveraged, by FOTA or indeed the FIA and FOM in F1.

[NB RAB Capital as 80% A1GP shareholder will be keen to 'turbocharge' its investment bought from A1GP founder His Highness Sheikh Maktoum Hasher Al Maktoum – probably partly by using GCC SWF monies to create a competing set of GCC Teams].

As the FIA endeavours to rationalise the engineering difference between F1 vehicles, laying out what FOTA detractors state as “generic basic skateboard chassis that reduces Team innovation”, could the real end-game be to effectively swap-over F1 participants? In essence promoting the possibilities for:

1. Shifting automakers into their own alternative field of conventional ICE technology.
2. Introducing Nation-based Teams using greater eco-tech powertrains :
This echoes the 1930s Auto-Union/Merc Silver Arrows era where national budgets were directed at GP – this time however it is the US Government who as owners of much of the US auto industry could display US.
3. Thereby creating a roadmap for latter-year 'demand-pull' for the automakers to buy back into F1 as representing National Champions :
It is suspected that the Briatore-Sarkozy and Cordero di Montezemolo – Berlesconi links are strong enough to complete this outcome in the years ahead.

For the moment the Mosley, Ecclestone, Briatore & Cordero di Montezemolo self-interested 'scripts' continue.

[NB As an aside MSV has its testing facilities in Bedfordshire UK, a county also houses Nissan's UK/European development centre known as NTEC and houses various motorsport R&D and production centres. Interestingly, the recent government review of the UK auto-industry calls for a new ideology called 'Test-Bed UK' which appears to focus on extolling the virtues of the region, with nearby Northamptonshire, and possibly make it an auto-sector clean-tech hub with trickle-down tech from F1, F2 etc into mainstream production cars].