Monthly Archive: November 2014

F1 Crisis – Part 2

 

The current F1 crisis has several root causes:

1. Revenue Distribution and disparity

A lot of the revenues from the sport are being extracted to pay the returns demanded by the current owners, and the remaining revenue distribution is hopelessly inequitable. Not surprisingly, the leading teams are not about to voluntarily give up revenues, and they all have signed contracts protecting their positions. Realistically, the only way that more money can flow to the teams is if the governing body (FOM) reduces the revenues that it takes from the sport before the revenue distribution to the teams.  This by itself will not entirely cure the issue. The revenue distribution needs to become more equitable.

A contirbutory factor is lack of transparency. Major corporations, as a rule, are fans of transparency, because they are mostly publicly quoted, and they therefore find it difficult to enter business areas where the rules are secret. If they are not allowed to explain the rules in public, it becomes more difficult to justify participation to stockholders.

PROPOSAL

Tear up the entire contractual mess. Rewrite it with transparent rules on how teams earn money.

Moving towards an equitable revenue distribution will require F1 to stop tip-toeing around the 350 pound gorilla in the room – Scuderia Ferrari. With its history as a founder member of F1, Ferrari has always succeeded in punching above its weight. However, in recent decades Ferrari has accumulated a ludicrous amount of power. The news that Ferrari held a veto over all aspects of the Technical Regulations was a shock to many when revealed a few years ago. More recently. the revelation that Farrari collects a percentage of net revenues “off the top” (i.e. before distributions to any other participants) has caused further angst.

Ferrari has been treated like a special child, and, as one might expect, children treated in this way tend to become spoiled, entitled adults. The time has come for F1 to rein in Ferrari’s disproportionate influence. This will likely be painful, and it may lead to Ferrari leaving the sport. But, sports are fond of stating that nobody is bigger than the sport, and Bernie is always saying that nobody has a divine right to be in F1. So, it is time for F1 to rein in Ferrari, and, when the inevitable hissy-fit and threats to leave occur, the response should be “we will be sorry if you leave, but make sure the door doesn’t hit you on your way out”. My prediction is that if Ferrari leaves F1, they will be back within 5 years as a more respectful participant. Sure, they can win at Le Mans, but that event lacks the global reach of F1.

2. Lack of budgetary limits

This is one of the 350 pound gorillas in the room (the other being Scuderia Ferrari). It is no use having a more equitable revenue distribution model if the revenues are still insufficient to give a well-run team a chance to survive. Previous attempts to agree on budgetary limits such as the Resource Restriction Agreement, and other ideas floated by FOTA, failed because the teams could not agree among themselves on the rules, and Bernie Ecclestone lost patience and did deals with all the teams individually, beginning with the grandees (Ferrari, Red Bull) and concluding with the minnows. In practice he had to do that to ensure that the financial governance was structured enough to assure revenues and profits for CVC into the future. Because the most powerful teams refused to consider a budget cap, ergo, there was no budget cap. I have limited sympathy for the teams on this issue. They allowed themselves to become divided.

Budget limits are not rocket science. The skill exists to write regulations to prevent teams and manufacturers from hiding expenses and activities elsewhere. These are enforceable using forensic accountants. If a team is found to be cheating, a large fine (enough to hurt) plus the attendant bad publicity will keep it in line. Budget limits also reduce the chances that a manufacturer will be criticized for excessive spending. In the past, ungodly sums have been spent by the likes of Honda and Toyota on F1, sometimes to little overall effect. Budget caps will reduce the chance of that happening/

3. Broadcasting and marketing 

Back in the late 1990’s, FOM set up its own pay per view TV channel (FOCA Television, aka BernieVision). The aim was (I believe) to gradually move all broadcasting to FOCA Television, away from host broadcasters. However, because PPV was not yet mature, not enough people paid for the channel so it was abandoned. However, FOM has since signed deals with a lot of PPV channels and moved live broadcasts to those channels. As a result, it is becoming increasingly difficult to find live coverage of the sport on major and free-to-air networks.Viewing figures have dropped in many countries.

Add to that the contributory marketing issues of a loss of viewership and ineptitude in social media engagement (both of which will impact a team’s ability to gather sponsors), and it is easy to see why we have arrived at the current situation where two teams have effectively disappeared within a few weeks of each other, and a team like Sauber, with a great history of participation in the sport, is reduced to a pay-driver merry-go-round just to make ends meet in the short term. This is not good enough. It makes the sport look out of touch with reality, and inept.

PROPOSAL

1. Stop attacking social media. Social media fans want to sample before they buy. They are the ones that need to be nurtured to replace the ones that will eventually die. Formula 1 needs to avoid “Cadillac Syndrome” (the eventual arrival at a point where all of the sport’s consumers are dead)

2. Look for opportunities to do hybrid TV deals with both PPV and FTA channels, offering better packages to PPV.

4. Technical Regulations

The current chassis regulations are way too restrictive (and yes this is going to sound ironic) while allowing too much aerodynamic influence on car behavior. Gary Anderson has already made some suggestions about how to greatly reduce aero influences.

PROPOSAL

Form a committee not including current teams (who will try to pack the decisions) and empower the committee to slaughter Sacred Cows. This will result in weeping and wailing from the teams. Too bad.

5. Reliance on Manufacturers

Max Moseley, when he was leading the FIA, was very concerned about F1 not pandering to manufacturers. As he correctly observed, motor racing is not their core business. They will come and go as they please. While they are in the sport they will often spend lots of money, but then they can (and will) depart on a whim when a recession hits, or when they find something else to spend the money on. This leads to a boom-bust cycle, which prevents sustained growth.

The plan to have Cosworth supply engines to mid-grid teams from 2007 onwards was an honorable attempt to create a lower-budget base for those teams. However, it failed, mainly because of what economists call The Law Of Unintended Consequences. The V8 engine freeze reduced the costs of the other manufacturers to the point where they could undercut Cosworth and price it out of the market.

While it is dangerous to think too far back into the past, the era in F1 from 1973 to 1982, when a team could buy engines from Cosworth, transmissions from Hewland and have a good chance of being competitive, is the model that F1 needs to move back towards. It is no coincidence that many of the current “grandee” teams got their start in that era.

PROPOSAL

1. Rewrite the engine and transmission regulations to allow for customer powerplants and transmissions to be used and for the teams using them to be competitive, possibly via a lower weight limit.

2, Introduce caps on the amount of money that the manufacturers can charge teams for engine supply. F1 may lose a manufacturer or two, but that is preferable to the current boom-bust cycle of manufacturers entering and then bailing at the first sign of poor results or economic trouble.

7. Public Relations

F1 has always looked remote and pretentious compared to most other sports, partly because of the bubble tendency, but also because the rules do not force drivers and teams to be open to the public, directly or indirectly.

The remoteness of many of the sport’s current leading figures, who in some cases have become very wealthy from it, makes discussions rooted in reality occasionally difficult. Many of them have an unerring ability, when put in front of the media, to say things that lead one to conclude that they live in a bubble, with no real connection to what you or I would recognize as reality. The mostly obsequious nature of media coverage makes breaking the bubble difficult. Asking a team principal “why are you managing to sound like a totally out of touch wanker?” would be a good start, but I do not see any reporter having the cojones to do it. Absent any blunt reality check, we can expect leading figures to continue to say head-scratchingly useless and non-empathetic things in public, usually some variant of “I’m all right, those other folk need to shape up or ship out”. That is, until they also begin to suffer financially, at which point they will start whining and complaining and playing the part of the downtrodden.

PROPOSALS

1. Mandated open times at race circuits and on social media for teams and drivers.

2. For persistent public verbal idiocy – a mandated evening of mockery in a bar with some real-world people at least once every 3 months

 

SUMMARY

In the short-term, if teams continue to disappear, F1 will have a credibility issue based simply on the number of participants. While Bernie may continue to insist that 14 cars constitutes a race weekend for F1, any outside observer looking at a grid of that size is going to come to a rather different conclusion, especially if they compare it to NASCAR, which routinely has 43 grid places filled. In the late 80’s through early 90’s, F1 often had full grids with pre-qualifying sessions to eliminate the slowest cars. The current three-part qualifying with only 20 cars, while fairly exciting in a structured way, is a pale shadow of that era.

 

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Crisis? What crisis? Says Bernie Ecclestone – Part 1

Back in 1979, then-Prime Minister James Callaghan left the UK, which was at the time impacted by rolling electrical blackouts due to power generation workers strikes, to attend the Commonwealth Prime Ministers conference in Mustique. TV viewers in the UK were treated to images of him and other dignitaries sitting under palm trees and mugging for the media while their power supplies cycled in and out.

When Callaghan returned by RAF plane to Northolt, a member of the media asked him whether it was a good idea of him to have traveled to Mustique in view of the crisis at home. “Crisis? What crisis?” was his reported response.The quote, as is the case of so many infamous quotes, was pulled out of a much longer series of responses. 

That response, reported countrywide, was probably a major contributor to his and the Labour Party’s resounding electoral defeat, and his replacement as Prime Minister later in 1979 by Margaret Thatcher.

I repeat that tale, not as a cautionary reminder, but as an illustration of how a few words can be pulled out of a longer statement and used for a long long time as a stick with which to beat a person or a governing body.

Today Bernie Ecclestone, the CEO of Formula 1 Management (FOM), is quoted thusly by the BBC:

“People say F1 is in crisis. Absolute nonsense. We’ve had a couple of teams in crisis.”

He pointed out that many F1 teams had failed over the years and criticised Marussia and Caterham for what he said was poor financial management.

“People come and go,” Ecclestone said, adding that team bosses needed to know “how much is coming in and how much is going out”.

So, according to Bernie, Formula 1 is not in crisis, just a couple of teams.

Hmmm. OK then. I guess we will need to overlook a few other salient points.

1. The signing by Sauber of no fewer than 7 drivers at various times in calendar 2014, culminating in their announcement of two new drivers for 2015 prior to the Brazilian Grand Prix, leading to two of their current contracted drivers (one race driver and one reserve driver) issuing statements that leave you in no doubt that they feel that they have been badly treated (possibly contractually). This article in Auto Motor Und Sport makes it clear that the underlying reason for all of the driver signings is Sauber’s desperate need for cash with which to make it to the end of the current season. (The article also reveals that Ferrari’s engine supply is secured via the use of the FOM money to Sauber as an escrow account from which Ferrari is paid directly, rather than Ferrari invoicing Sauber directly – a pretty good indication that Ferrari has a problem with Sauber’s ability to pay).

2. The rumours that Force India only received their fifth power unit component collections from Mercedes when they paid $6m of outstanding invoices from Mercedes by October 27th. Without that payment, they would have not had any race-worthy engines for the last 3 races of the season. (They could have participated in practice using older power units, but they would not have been able to race). The auditor reports on their 2013 accounts also revealed a massive loss of over $50m in 2013, and issued a warning about the “material uncertainty” that the company can continue to operate.

3. The failure of one of the most successful Formula 1 teams of the last 30 years, McLaren, to obtain a title sponsor since the departure of Vodafone at the end of 2013. While they may not need the money, since Vodafone left a year before the expiry of their contract, and would therefore have had to pay a penalty for early termination, it is jarring to see a “Grandee” team running with a mostly blank silver car, with a rotating collection of sponsors from race to race.

4. Worldwide viewing figures for Formula 1 are declining. Google “formula 1 worldwide viewing figures” and see what hits and websites you get. Nearly all of them talk about drops in viewing figures.

5. The publication of the distribution of Formula 1 revenues for 2013 that shows a large disparity between the amounts of money that top teams receive, and the amounts distributed to the bottom teams.

6. The almost total lack of transparency in the operation of Formula 1 from a financial perspective. Unlike most other forms of motorsport, where the amounts of money gained by competing are published, and all teams stand to win the same prize money amounts, Formula 1 is managed by a complex web of secret bilateral contracts between FOM and the teams, where officially no team knows what any other team is getting in terms of revenue and prize money. Ferrari apparently obtains over $200m just for showing up in 2014, while Marussia obtained a mere $10m.

7. The escalation of the cost of engine supply for a 2 car team from $10-12m in 2013 to at least $24m (and in some cases up to $30m) in 2014, due to the introduction of new V6 hybrid power units, replacing the frozen-specification normally aspirated V8 engines.

8. The utter failure of the sport’s governing body to understand the extent to which social media publicises leisure events. When people cannot even put up 1 minute clips of race highlights on Youtube without being hit by takedown notices, you know that you are dealing with a governing body that is clueless about the current media landscape.

9. The creation of the “double points for the last race” idea, voted into existence with seemingly no understanding for what it could do to the Drivers championship. Now that the leading team (Mercedes) has realized that the double points rule has the capability of destroying the credibility of the Drivers championship in a single race, they now think it is a bad idea. However, the sport appears to be stuck with the rule for this season.

This is only events in 2014. Think back to 2013.

1. We saw a supposedly well established F1 team (Lotus) lose its #1 driver Kimi Raikkonen to Ferrari because, if you believe the paddock rumours, by the time he stopped driving for the team, they still owed him all of his 2013 salary. Throughout 2013 we heard stories about how Lotus was going to be bought by a collection of investors, but after months of variations on “the money’s coming soon – honest”, no purchase occurred, and Lotus instead signed Pastor Maldonado for 2014 in order to be able to continue. Concurrently they lost their Technical Director and a number of other senior staff.

2. Sauber (again) spent most of the latter half of the 2013 season in crisis, with suppliers threatening to file court petitions which would have closed the team down

Bernie Ecclestone, smart guy that he is, is not about to be trapped into wringing his hands and shouting “the ship is sinking!”. He is going to continue to ra-ra and cheerlead, It is part of his job. However, those of us outsiders who have been following the progress of the sport over the last few years, it is difficult to not conclude that there is indeed a crisis developing. Maybe those of us not directly involved in the sport can see it better than he can.

 

 

 

 

 

 

 

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