The control of the commercial rights of Formula 1 racing is the key to the stability of the sport. The news that the teams have hired DC Advisory Partners to look into the potential of buying a stake in the business is good news, although it is long overdue. It is the obvious solution to the F1 problem. If all the money being generated by the sport was being sensibly shared between “the stakeholders” then there would be much less tension and things would work better. The Formula 1 world would become like a proper corporation, rather than a disparate group of businesses all pulling in different directions, and fighting one another.
Because he had foresight (and because no-one else did) Bernie Ecclestone created his own system and made himself (and many others) very rich. He did a deal with a compliant FIA and bought control of F1′s commercial rights and since then he has reaped the benefits. A bunch of venture capitalists (CVC) borrowed money to get control of the business and gave the pile of cash to Mr E, who locked it all away in trust funds so that his daughters could buy big houses and have expensive weddings. Since then F1 has been paying off CVC’s debts. F1 has been a cash cow. It is only in recent times that the teams have come to the realisation that collective bargaining would give them more power. They have tried before but on each occasion Bernie has divided and conquered. The main tactic was always the same: divide Ferrari from the others by any means possible and the Italian team will settle for a sensible deal. Ferrari is not a complicated business: it makes supercars and it did not really want to be involved in sports rights deals, so a decent offer to Ferrari usually sufficed. The other teams had to get what they could get.
Things have changed a little now. Ferrari realised that there was even more money to be made and so started FOTA as a counter-balance to CVC. They have now indicated that the cash cow wants to own the field in which it lives. This is simply logic. If a bunch of financiers can borrow money to do something, so too can a bunch of racing teams. The key is to create the right “consortium” to raise the finance. Bernie’s venture capital partners will go away when the cheque on offer is big enough to impress them and if that happens then Mr E will be working for the teams (and for himself because he still owns a share in the business, along with some other execs in his empire).
The question is really only one of how to structure such an arrangement and how much money the teams can raise in these troubled times. There is still money around if the investment looks solid enough (like gold, real estate and such things) although the world is running away from paper money. F1 deals in real cash not paper and so it is a pretty safe bet and while Ecclestone is a master at squeezing more from everybody, others are capable of generating similar sums because they can delve into areas where Mr E has no interest.
In order for such a thing to be successful there would need to be some kind of trust or foundation created to manage the money, but this is simply work of lawyers. Keeping the FIA happy is also important as it remains the owner of the rights and wants a rather better deal than its previous president and his sidekicks managed to achieve. The FIA is quietly being restructured into a much more corporate entity, with a much more professional approach than was previously the case, so it should be able to live with.
It is in the best interests of the sport for the cash to flow into the sport, rather than out of it. What happens after it is divided up between the players is up them… But if the structure keeps everyone happy, then the sport is better off.
Joe,
As a person in business and a lover of the sport from Tappets to Politics this is probably one of the most interesting things I have read about the sport in a long time.
Many a year ago I can imagine Bernie talking to the teams and getting the rights with assurances from him to them that this is the best thing for them and for many years I believe it has been.
As this article says times have changes and F1 teams have grown into the business side of the sport more in the last 15 years rather than just the fastest car and great drivers. As you say the balance has shifted.
The question I need help with is how much can the FIA expect to get as the rights have been sold so what clauses are in the that contract that the FIA can look at to get them a share of any new ‘deal’?
My concern is that the teams will go back to the mid-2000′s spending with huge budget and all this money won’t get back into the sport, but it will go into R&D which is rendered as useless every 2 years with new rules.
I hope they start investing back into the motor racing in order to make F1 much more popular and expand their businesses like Williams & McLaren are recently doing in other motorsport fields.
Can you explain what “other areas” might be.
Sorry I meant “delve into areas where Mr E has no interest.”
Joe,
An interesting and entirely logical development. Notwithstanding all the positives of such a move, how do you think new entrants will fare? Presently there is a very large financial hurdle for a new team to make it into the sport to race around at the back of the grid. I assume a new team would also need to find the stakeholder fee for the consortiam as well. To not do so would you end up with a two tier system where those holding the equity guard it and benefit from the coffers of new players, further extending the gap between the tier’s.
As you say, it’s all about how they structure the consortium. In order to have a say in how things are run they would need a certain % stake I am sure, which then leaves the problem of the consortium members agreeing how to cast their vote/influence. Challenging but hardly impossible.
I would imagine there could be a divide of interests between consortium members who are wholly or par of a public listed company. I could see how the ever present pressure to meet revenue targets might annually influence those members to seek a cash dividend (it’s a reality that being a listed company forces you to make some bad deals in exchange for immediate benefit), whereas the private companies might take a longer term view and be happier to reinvest.
Speaking of listed companies, I wonder if Williams share price might get a little boost if they were to be in an arrangement that gets an annual dividend from the rights holding company, along with a voting ability – I might have to have a little punt on that.
Thank you for a brilliantly clear and simple explanation. Bernie’s age and therefore grasp on everything must be a factor accelerating towards a moment of change.
Whoever wins the power battle I hope, in my simple way, that the incredibly loyal, long-suffering fans are valued more highly (and rewarded in some way) than they have been.
It would be great if the teams could own F1. And when they do, they could direct some of the profits to the benefits of the fans. For example:-
- lower ticket prices
- races in locations where the fans exist and not in Asian industrial estates.
- more inclusive television rights
Sounds like a good idea, at least the rights would be held by someone who gives a stuff about the sport. There might be a bit of conflict if a GP in a certain country defaults on payment and is set to lose it’s race, maybe if its an attractive market for teams sponsors or owners it would be kept rather than allowed to drop off the calendar. This wouldn’t be a massive problem and might be advantageous to the sport long term if Bernie’s march to the middle and far east is checked a little. I suppose as long as the teams can remain united and not squabble and seek advantage it could work very well.
Just wonder if the above is achievable before the signing of the next Concorde agreement…
Keeping the EU happy is just if not more important than keeping the FIA happy.
Well the teams are businesses so I wouldn’t expect a huge reward to fans, though I can imagine more would be done to ensure viewing figures remain and perceived ‘value’ is increased. Most sports have realised they are commodities in themselves and are competing against other sports franchises.
CVC has always been inherently short-term in it’s view of F1. While the cash rolls in they have very little incentive to look long term or make any changes at all, though if F1 is going to thrive and expand (rather than just remain standing) it needs some long-term growth. The teams aren’t charitable to fans, but I’d rely on them more to develop a long term strategy for the sport itself if they’re the co-owners.
If nothing else it might help alleviate those incredibly boring ‘breakaway’ talks that are akin to the driver silly season on steroids…
Does this mean that F1 will become an even more closed shop, in regards to new teams entering the competition?
If this works out maybe the teams could use some of the money to buy circuits like Spa and Hockenheim to assure proper venues in the future instead of racing before empty grandstands on the other side of the world.
These guys should hire Frank Quattrone.
F1 has more in common with the Valley, than mostly stodgy dumb as shit undaring attitudes elsewhere.
Get that right, you get a whole market F1 has utterly failed at for, what, how long?
Here’s the guy’s contact, why not, someone might be listening:
http://qatalyst.com/contact.html
I’d want to be on that man’s side in a knife fight. Think he could handle F1.
Why am i rudely banging this drum, well, you need a very aggressive new structure to solve F1, or you get legacy interests messing about, and also you need investors who can wipe their mouth if they tap out on a hundred million or so at a time. So, go where that is. A smart American marketer might even sell the European root as exotic, rather than a Will Ferrel / Sasha Baron – Cohen parody.
Oh, and then you get loads more tech companies talking to F1 . .
hmmm.
– j
Consortium = committee = death.
I see that as very different from laying off the deal to various investors.
But Bernie is no consortium, and if anything, the moment he laid off the deal to a bunch of others, trouble started.
This needs very aggressive structuring, to keep meddling hands out. That’s a different style. Very hard to do. To throw an arbitrary cliché at everyone, that works better in America in terms of accepting individualism, versus our more collaborative method, derived from having to go slow due to needing to speak a few languages to get any deal done in size.
Possibly the word being reached for here is Syndicate.
To me, these things are night and day, and have well defined meanings in finance.
– j
As you say Joe, long overdue!
It makes all the sense in the world, the people that are generating the money getting the bigger slice of the pie and a larger portion of it flowing back into the sport, maybe for crazy things like promoting the sport, exploring all the avenues being created by the new media forms and so on. I sincerely hope they manage to do it, it would be great for the sport.
The question would be how could the smaller teams come up with their share of the money, I am sure the likes of McLaren, Red Bull and Mercedes can manage to find investors, Ferrari was already involved in exploring this idea through some of their shareholders, but can an HRT, Force India, Sauber or even Williams and Renault for that matter come up with the cash to make this work?
It would be great if they managed to set up something like the NBA have here in the US, a central promotion entity looking out for the best interest of the sport, looking for long term growth of the audience and making it approachable for the fans (at the rate things are going under CVC’s control, the only people that will be able to afford going to a race will the rich, major corporations or governments willing to spend the money to promote their country).
So in effect it means Fota having lawyers drawing up the papers to put the group together. I suppose the previous rounds of hearing about AbuDhabi/Quatari/Bahraini backers, as well as the owners of Ferrari, possibly Mateschitz&Co. did a lot to establish the interest and likely served well to clear what capital can be made available.
With these, and allowing for some of the other team owners/backers like Slim, Fernandes, Mallya/Mol ?, Branson, … to get in as well might make for a very good deal for the future of F1.
Ivan
I don’t think you will see the teams going back to a spending spree, exactly for the reason that by now their owners have realised thats not working and need to have a better return rate on their investments.
Shake n Bake
It might well be, that the sale of the Williams shares will give the team owners the option of participating in the deal. In effect such a deal would indeed make a new team either have to buy an existing franchise/licence holder with a stake or buy into the deal in some form. But that is not much different from now, when only the first 10 teams (and only if they are in there over 3 years) get TV money. The lower placed teams/new do not get much of that now anyway.
Maybe the big teams owning the sport in the first place could replace the current payments for being there long term (giving them dividends instead) and share TV money and circuit fees more based on results, with a pot left for investments in the future and helping backmarkers improve.
In an ideal world, there would be a system set up to give potential new entrants a way in, something that is failing currently.
Finally Joe. I’ve posted here and else where that the teams taking over the commercial rights is in the best interests of everyone. Now like you say here, it’s crucial what kind of structure they put together. They would need to ensure the big teams and small teams are happy in the new arrangement.
Great, as long as the teams do not lose their way as did the American CART teams in the 1990′s.
Joe,
As long as you are dealing with (venture) capitalists, I doubt there will be much to split. The price the teams, or anyone else, will have to pay would be around all the future profit they (CVC) would get if they kept their stake.
The only option (to pull the price down) would be to threat CVC that we´re walking and I think the teams have been down that road.
Or, there is something I don´t understand – and I would be surprised if it is the VC logic (DNA) part …
Joe,
A thought which was suggested by this and the Cape Town post — would be interested to hear your thoughts:
Given that there are more good drivers than there are seats in F1 — and more circuits and promoters than there are spots on the calendar — and a large population of potential F1 fans around the world whose interest would be piqued by direct exposure to the sport…
I wonder if it’s time for F1 to create a second division? Regulations and machinery would be as for F1. Customer cars permitted, or prototypes for those that want to build them. Races only at circuits which are not on the F1 calendar, either on the same day as F1 races but staggered in time, or on opposing weekends a la DTM. Schedule designed to be as cost-effective as possible; other cost-control measures in place to keep operating, promotion and ticket prices low. Drivers would presumably be a mix of top-level prospects getting experience in F1 machinery, test drivers keeping their eye in, gentleman drivers bringing funding, and one-off tests. You could even have one or two teams a year being relegated or promoted between the divisions.
Manufacturers of equipment get economies of scale, Three-car Monty gets his dream of customer Ferraris, new drivers and engineers and team managers have a way into the sport, and fans get an opportunity to see a more accessible but just as exciting version of F1 at Kyalami, or Watkins Glen, or Dijon-Prenois, or Estoril, or Mosport, or…
So Joe, is the DC part of Advisory Partners David Coulthardt taking a new direction?
I’m sorry, i went over the top there, with expletives. But for me, the difference between talking with an American capital firm, and a European one, is the American one won’t mind if you go over the top, let rip, and get in their face. Almost a disadvantage if you don’t, just the once. (Please excuse me, i am not talking East Coast here) Sometimes you have to do that. My own experience, is that if you want something to fly in Europe, you must package your deal in nice easy bite sized chunks, couched in terms of business that are defunct. Safety is the watchword. We bloody well atrophied. Bear in mind, that when i was in my twenties, kids i went to school with were cutting pretty big deals. (I have never sussed why, but scale is an amazing thing, when you look, the world just gets bigger) However they were the front men to a stultifying system. Amusingly, one guy i knew had the sales chops dropped finance for advertising, because despite a great position, he could not deal the way he wanted. Hey buddy, i was here all the time! Not on their lonesome, mind, but you have no idea how dull i found the buttoned down attitudes. I am not ageist. I can remember my dad calling mature men “boy”, and i hated that. I worked with guys much my senior, and that was the best thing ever for mem but note no burocrisy involved. But also i see my dad’s point was calling out stupidity which he thought immature intellectually. I think that who are young so rarely get any good direction, oh so particularly in business. There is a big direction change going on in VC to capture youth, which i dislike for reasons i am acting on as fast as i can.
I think it fair to get a bit angry over the way deals are done. There’s a bloody great recession creeping up on everyone, and so i want to step up. I want F1 to step up. It is the only sport which can take me out of my own thoughts. <y annoyance echoes this whole. "but we are working with MegaCorp" idea of safety. Befriend playground bullies, by all means, but don't get in with them.
As to Formula 1, a few things which bother me:
– where is the capital?
– why are teams so often playthings, not in their own right?
– where is the actual equity in the overall sport?
as much as i like Williams, bought a share or two, they actually fail those tests for me. (another post required, as i am still getting my ideas straight on them)
What proper firms do is put actual equity in. Equity is what you are prepared to loose. Say that again. Put in what you can forget about. It's your life, actually, equity. You do not get it back. Time, contacts, money. Same thing. The word consortium got my goat, it makes me think of government sponsored, risk adverse deals like Airbus SE, which are about protecting things, not risking them. (though that is touché Messieurs Le Boeing) About sharing spoils, not saying, "we play this card, for that".
Can you possibly think of a more needy time to hit heavy?
Also, if done on actual risk money, not bonds and whatever living off the income derived from existing earnings, the tithes to the Bernie empire might be broken. CVC wasn't risking a damned thing. That's why the next sale price will be so high. I got a email from one broker today, would i like 50 grand of bond backed by them at 7.5%. So i read it. They can pay me back any time they like. Ha ha, i suss embedded puts. Thanks pals, maybe you are a bit tight. Not like banks even lend to another any more. Just like some black dude was long the Swiss Franc and got done on his trade because they deliberately devalued that 8% overnight, a long expected move, so he couldn't get out of his trade in time. They are calling this guy the next Nick Leeson. Rubbish.
When Bernie bandies about 6 Billion as a sale ticket, he was asking. Not trying to say "Not For Sale". What it takes is taking CVC out of their cushy number, and someone to build a model to get to that value. That is risk capital. This must be the only time i regret going into finance for a career, because i'd be hammering the phones.
And the fun thing is, nothing has to stop if it goes wrong. *Unless*, oh unless, you make the underlying messy. That's what actual capital does, it cleans up the mess. F1 has a huge mess of debt deals, intertwined all sorts. So that 6 Billion figure is actually the cost to unwind all that, down to the track promoters, and then you carry on, unimpeded. Bernie got all that stitched up. Knicker in a twist, all of it. To be honest, he sold it short.
So, nuts to the wall, there's a huge deal to be done. Who i mentioned above if every involved would be part not all of it. But i am convinced this has to be led by a real tough guy to get the right result for F1, which is what i want, end of day.
I'll step off the soap box, because i think this is better written, and much more positive. Tom Wolfe on a guy i grew up wanting to be like, written back when, oh, a blink ago, when America knew how to sell itself:
http://www.stanford.edu/class/e140/e140a/content/noyce.html
I find it hard to be up and positive on deals, because first i have to buy them. And when i sell them i really need to know my ground. But that article is far closer to my ideals than i can articulate myself, so goodnight all. – j
Agh, one thing about that bond i got emailed about. What it means is they can choose the duration. Bill Gross, of PIMCO, biggest out there, just went very long duration, for a lot of reasons i’ll leave you to look up, but it means effectively rates will be kept super low with current printed cash, and will rise later to pay it all back. Basically the bond put, ability to sell back to me, means it’s no bet at all. LIBOR (interbank rates, which don’t exist) are nominally at that level or higher. So all this broker wanted to do was get overnight money from a sucker.
How frightening is it, that a big broker instead of calling one of their counterparties, big banks, who don;t even talk to eachother, wants to hit up a little guy like me? That’s reason for my comment. I am being hit up to fund short term a rather large broker. This is why equity counts, and F1 needs to get out of debt. – j
Totally agree! It would be best if the team can whistle up the cash. But history tells a different story. Good luck to the likes of Martin Whitmarsh where Ron Dennis failed.
Joe
As you rightly point out in this and other posts, CVC are in it to make money. To lever them out of their position will require a lot of money. My question is whether the sport is in a growth or slow decline phase compared to when the manufacturers supported it. Look at sponsorship budgets, attendence, TV rights deals etc. All are in decline. That may be to do with the world economy and make a come back. However, the teams (and any other backers) will need to pay a premium to buy the rights. This will need to be funded somehow. Do the principal teams have this money? Or is it better invested in their own teams?
Given the current structure, I think the better option for the teams is to renegotiate the terms (as they have tried) or perhaps strike (seems to work in other sports). This way they have the benefits of increased revenue share but none of the costs. Nor do they bear the full ownership risks given the current state of the sport.
Hi Joe
Very informative information and very much this kind of background information we the few in Down Under and not privy too. Bernie has done very well finacially and also in the exposure and structure that F1 has now developed into a very high profile sport. He is 81 years old and time is ticking away. Hopefully what I am assuming from your article that there is succession planned for the future of F1 commercial rights and ensure that F1 Future is in capable hands?
John,
my own view is that Bernie, in no small part because he was herding kittens, tied up F1 into knots within knots, so that only he could deal with it. Which he has, selling it at least twice lately. My take is i think he will make one final sale, and i risk being totally stupid now, but if it were my legacy, i’d not want lots of people moaning about me for niggle after niggle once i’m gone. The logic i apply is that i am – was anyhow by people who knew – always accused of being a control freak. I leave things in deals which allow me leverage, all the time. I’m private, i’ve nearly been bankrupted a few times, i use clauses as protection and potential counterblows / penalties. I always aim to use all of this to make sure my customers* are not dicked over, because if they are fine, i am fine. But boy is it a mess. My mid life crisis is realizing i don’t enjoy hacking the terms definitions and legal language any more. Too personal.
*this is where i am in a twist, because you have a moral line to take when there are two counterparties, publisher and advertiser, both are customers in different ways. I am trying to find ways to codify this, so that i can expand. Doing so myself, it’s something i weight privately. I can make my biases clear, and deal with that by being straight up. (on tape, always on tape) One hand you have advertisers who have tons of money and deal with lots of publishers, other way about, you have a publisher and the interesting ones tend to be smaller. I’ll not give anything away, but i think part of the solution is mathematical, Maths is lovely, has elegance, but is very limited, law is often too blunt, but wide ranging, how else do cases drag on so long . .and they have to work lock step. Gives you an idea why derivative contracts go wrong, eh! The real solution will be when i manage to match all that jargon with a tangible simple code to deal with the moral side that hires can grasp quickly. Man walking down the street, sees other man banging head against wall. “Friend, why you hurt yourself”. “Brother, it is so good when i stop”. So I shall stop. – j
You seem to have given them (the constructors) a game plan Joe – perhaps they should let you orchestrate it.
At the end of the day it’s the teams game and their train set (as long as they stay united) it’s not the FIA’s game and it’s not CVC’s game (arguably it’s not even Bernie’s game any more)
Someone explain to me how teams that are competing against one another then go and form a company that owns the rights to the competition?
The only objective organization that can run the competition side is the FIA. Buy back the rights they so cavalierly “sold” to Bernie and set up a board to run the thing in a fair and equitable way.
The first beneficiaries should be the fans and the circuits, with reduced sanctioning fees and ergo lower ticket prices creating more attendance. Then reduce the costs to broadcasters so that even more access is offered.
Adrian Newey Jnr,
the 64,000 dollar question is how long will recession last? 5, 10, 15 years? All possible, so you have to wonder far ahead of where you can predict. (I’m at 7, because i have a little faith in the tech we have in so many hands)
but this blog alone has offered countless ways of improving, expanding and generally getting F1 cracking on a a whole other level.
and not to be forgotten, there is no place for the trillions and trillions printed seemingly every other week to go to get yield.
provided it is not more debt, i see no reason why F1 has to think downbeat. Tons of Joe’s posts and other comments amount to a brains trust of ideas to expand and profit in neat ways.
Isn’t the rolling Concorde problem a kind of rolling strike, in all but action? I’m not sure if i were a sponsor i’d cough up for missed races. Thorniest of Q’s ever. The divide and rule does dwindle, as BE ages.
If i get a weekend off (i mean next race weekend, i work or do home chores the others) i’m going to see if i can fantasize and dream up anything (crackpot even) which might work in theory if the whole shebang, tip to toe, was bought, excluding the teams. I can’t believe i just even said i’d try. Bit of a biggie would be understatement of a few decades. Forgive me if beer or wine get involved in the process, and my ultimate excuse is plain stupidity
. . .
Ash,
I’m with you on the second division idea. I’ve been harping on a while that sort of thing could be the non championship side of things, in effect. Just don’t call it Formula 2 . . Really my idea is segregation pre qualifying into a more manageable game where those who DNPQ actually get a race.
What blew my child mind, was not being able to work out who would be in the mix, and draw my attention. I’d like some of that again, and i think it would go down well. Think also of the social message: oh, economy up the creek without a paddle, but even this rich sport you might get into, with a dose of luck.
That last bit may matter more than i can imagine. You can’t build a world sport on closed elites. I knew a guy who played Polo with Packer. Yeah, easy, just fly to Argentina, have stables there . . how the heck does that sell anything to a big telly audience? Another reason why shutting F1 up in the Sky box is a terrible signal to send. I guess the scary version of proletariat F1 is having diaper ads on the liveries. But would we care? Who do Target sponsor?
all best to all,
– j