Finding a budget in Formula 1

People often ask how Formula 1 teams are funded. It is not a subject about which there is much information available. Most of the teams have annual tax returns which become public but these do not (generally) give breakdowns of where revenues were generated. Teams gain money from different sources: notably sponsorship, merchandising and in some cases from selling their expertise to others teams, or using them in other industries. Sponsorships are not always what one sees on the side of the car, there are, for example, title sponsorships where a company buys the naming rights for the team (such as AT&T Williams or Scuderia Ferrari Marlboro). There are also “off-car” deals in which companies are allowed the right to use an association with the team to sell their products. In most cases the sponsorship is the primary source of revenue for an F1 team. Merchandising is still underdeveloped in F1, with only Ferrari really enjoying big revenues.

Under the terms of the 2009 Concorde Agreement the big Formula 1 teams make a lot of money from the prize fund. This is made up of 50 percent of the revenues of the sport, which means around $500 million at the moment. Ferrari has a special deal and gets 2.5 percent of the overall figure ($12.5 million) and the rest is then split into two different prize funds: the first is divided equally between the top 10 teams, this means that they get around $25 million apiece; the second is based on the performance of the previous season and is divided up on a scale that is detailed in the Concorde Agreement. The World Champions get around $47 million, with runners-up getting $40 million, third-placed getting $32.5 million, fourth place $27.5 millon, fifth place $25 million and so on down to 10th, which gets $10 million. Thus Red Bull Racing will be picking up around $72 million this year, based on its performances in 2011, while Ferrari will pick up $70 million despite having been beaten to second place by McLaren, which will get around $65 million. There is believed to be side deals for McLaren and Williams, but it is not clear how much that is worth, although it is unlikely to be more than $5 million apiece. If that.

At the bottom end of the scale the numbers are less impressive. By finishing 10th for the second consecutive season Caterham F1 Team has jumped from earning $10 million as a new team to earning $35 million in 2012. This is why the battle at the back of the grid is so intense. HRT and Marussia, which finished 11th and 12th, remain with $10 million apiece. All the teams also get some of their freight and travel bills paid for as part of the deal.

If the teams were better organised and could gain control of the commercial rights they would make considerable gains in the longer term, based on the current system, although loans to acquire those rights would take a few years to pay off. If, after that, the teams were to share 85 percent of the revenues, rather than the current 50 percent, the World Champions would make more than $120 million a year and the 10th placed team would get nearly $60 million. With sensible cost restrictions in the future this would mean that with other incomes from sponsorship, merchandising and so on, even the smaller teams could always be profitable.

Given that the absolute minimum that a team can be run on at the moment is in the region of $40 million, there is still a good amount of money that is required to allow the little teams to survive. A pay-driver these days will need to be able to bring $10 million, although one or two of them turn up with a lot more. Despite this the smaller teams still struggle to break even. In part this is because they do not get much TV exposure. However, increasingly this is not the goal of the sponsorships as companies buy teams (or buy into teams) in order to promote their brands, so it is part of their marketing budgets and they have the added benefit of being able to use F1’s corporate hospitality as a place to entertain their corporate customers and to do deals.

What the small teams really need is investors who are willing to swallow losses for a few years in order for the teams to move up the F1 ladder and then either enjoy the profits, or cash in and sell up. This is what is going on at Marussia Racing, with Virgin and Lloyds Development Capital; and – apparently – at HRT with Banco Popular aiming to recoup the loans it made (unwisely) to the Carabante Family before selling the business at a later point. Ultimately, however, it all depends on performance, which is why Marussia (for example) is buying technology from McLaren.

31 thoughts on “Finding a budget in Formula 1

  1. Joe,

    With your regular hints that the teams should buy the rights I think you are readily placed to become the team consultant for F1 Rights purchases… what is your daily rate??

  2. The Mclaren merchandise didn’t seem to be doing too badly at all at Silverstone this year. I imagine its no where near as good in Italy or Spain though…

  3. The teams should buy F1, including Bernie. Without his skill, revenues drop and 85% of half the revenues is less than 50% of the current revenues…
    Who will take Bernie’s place? Is there anyone with the same skills?

    1. No, but there are some who argue that his role will not be taken by a single person but rather by people who have expertise in different areas: thus one will negotiate TV deals; another will negotiate race deals; another will close sponsorship deals and others will concentrate on areas where Mr E does little or nothing, such as merchandising, movies, Internet etc. There is no reason in that circumstance why the revenues would drop.

      1. Does Bernie operate more as a one man band rather than having a team behind him then? Must get that book you recommend on him.

    2. Bernie really isn’t that shrewd when it comes to negotiating rights deals. There is no reason why the teams couldn’t do what he’s done. They do need unity when it comes to commercial aspects of the sport. It’s been done in most other major sports so it’s ridiculous that these supposedly tough, ambitious, shrewd businessmen cant do so here.

      1. Forgot to add that the teams would clearly hire executive staff to take care of running the sport as a whole on their behalf. As other major sports have done.

  4. I guess the problems involved in getting the teams together to buy the rights are always going to huge. As you say Joe, the loans would need to be paid off, would all the teams still be there by that time? History tells us probably not, how much would the smaller teams have to contribute? Would having 12 or 13 well funded teams effectively close F1 to new smaller teams? If HRT were guaranteed to remain in profit why would they spend more than the minimum required to compete? It might have the effect of locking in existing bigger teams as they would want to benefit from their investment, this could be good for the sport, but again would make it harder for manufacturers to enter F1 as anything other than engine suppliers (maybe a good thing). Maybe the sensible thing would be for a few of the big teams to go it alone and do it on their own, this would be a very magnanimous thing to do for the smaller teams though, what if they started using the extra cash to overtake the big boys? Problems at every level, but then nothing worth doing is ever easy!

  5. “Ferrari has a special deal and gets 2.5 percent of the overall figure” But why, and why don’t the other teams make a fuss about it? I’ve never really understood things like this, and the veto they are rumoured to still have with the FIA.

    1. I do not believe there is a veto. The 2.5 percent was a clever bit of negotiating by Ferrari when Bernie Ecclestone needed the team’s support a few years ago. It was just business. Ferrari has clout, based on its longevity in the sport. The company simply monetized that. End of story. McLaren and Williams tried something similar but the terms of their deals has never been clear.

  6. Teams joining together to buy the commercial rights is obviously the best way
    forward both for them and the sport as a whole. Unfortunately they seem to lack the foresight, financial recourse, or joint commitment for this ever to become a feasible option.

  7. 1. So, if something were to suddenly happen to Bernie, who then would take over?

    2. When do you think Bernie would retire, he’s getting up there and is starting to look as rough as Keith Richards.

    3. Who (collectively) would you guess might take over for Bernie or purchase the commercial rights? You mentioned it may be a group, are you thinking within F1 or outside investors or a combination of the two?

  8. Whilst Bernie has undoubtably done a great job, as you point out there is so much lacking in marketing to the public, certainly on the Internet. F1 is years behind other sports and Bernie’s infatuation with taking any fan videos off youtube within minutes is a good example. I know TV rights are a difficult subject these days but the current attitude needs to be brought up to date.

    There are millions more to be made with the right approach and if the teams did go it alone I’m sure they could capitalise on this mistake.

  9. Video games seem to generate billions. F1 has been woeful in this area. A top quality game hasn’t been produced for a good five years or so. In fact the best game I have is Grand Prix Legends which is over ten years old and in gaming terms is ancient. Bernie is great for generating some revenue streams, not so good at others.

    1. Actually, Codemasters has made a critically acclaimed top-tier F1 video game for two-years running. I have played the game and can personally attest to it being a stunning piece of software. There was an official game by another maker which was not as good. Anyway, the Codemasters game is doing quite well.

      While Bernie is behind the times in many areas, there is a lot to be said about the business value of his being essentially a dictator who can unilaterally make heaven and earth move to accommodate any new GP host, series sponsor, media etc. who is wiling to pay F1 big money. When a business/city/sport is ruled by committee, big decisions and projects often become protracted, messy and/or bloated. A good and famous example of this is the city of Chicago and the famous Daley “machines” (both father and son). An undemocratic process surely, but one that has been so successful that both Jr. and Sr. were and are practically worshiped by Chicagoans. This is not to say that I think Bernie is necessarily as affective or good for the teams as other potential models.

  10. “the first is divided equally between the top 10 teams”

    “and so on down to 10th, which gets $10 million.”

    “This is why the battle at the back of the grid is so intense. HRT and Marussia, which finished 11th and 12th, remain with $10 million apiece.”

    I presume you meant to add that 10th, 11th and 12th *all* get $10M?

  11. Would Formula One survive without Ferrari? Yes, of course it would.
    The viewing figures may dip in the short term but what are Ferrari’s alternatives? Racing in America, Le Mans? Nothing has the cachet of Formula One.

    Formula One needs to look at broadening it’s appeal outside of the motor racing season.

    1. It may “survive”, but it would be a shell of its former self after Ferrari mobilized an offshoot series and lured other top teams away from a Ferrari-less Formula 1.

      1. That is not going to happen. The one thing that they all want (and need) is the World Champion status. And only the FIA can grant that.

      2. There are figures that show the fan base but I would suggest that there are a lot of fans like myself who does not really focus on a team or driver but just enjoy the sports for what it is and Motor sport in general. In fact I probably have drivers I do not like to see winning rather than the opposite.

        I would suggest that there are fans in this sport who would not miss Ferrari and would like stand against them if they left.

        Count me as one.

  12. Great article Joe!

    It’s rare you see this sort of information put together, let alone as well as this!

    Do you think Ferrari will get something more like this again when it comes to the next concorde agreement?

    I don’t really ‘understand’ why Ferrari should get the extra money. Sure they have been there for a while, since the beginning to be precise, but if Ferrari weren’t in F1 I wouldn’t mind that much.

    If there were only 11 teams in F1 and Ferrari wasn’t one of them I would still watch that over a Formula Ferrari-friends-only championship.

    I think the teams need to get over the past and realise that what makes F1 is the formula, the drivers, the people and the teams*. NOT JUST Ferrari.

    *by the teams I mean Ferrari, McLaren and Williams ALONG WITH manafacturers.

    I watch LeMans because of the great competition, it doesn’t have Ferrari, nor any of the other teams demanding more money. It has a high level of machinery and high level of racing.

    WRC similiar situation.

    Sure Ferrari fans want Ferrari in F1, and prefrably with more money, but I don’t think for the sake of competition anyone else would want Ferrari in with more money than not having Ferrari at all.

  13. It wouldn’t be a massive deal (or wouldn’t exist) if the same teams from the 50s and 60s were still around. They’re not. There’s tremendous value in having a team that’s been around from the beginning still competing. Ferrari capitalized on that and I believe they deserve it. The teams may not like it but they must recognize that beating Ferrari is much better than beating a Benneton/Red Bull/Renault/Toyota/etc.

  14. Thanks for the financial breakdowns of how the earnings are split. This system will never allow the minnows to grow into a larger fish because they are grossly underfed!

    Why not divide the earnings with base money that is equalized across all of the entered teams? Then pay out bonuses for the top three or top five teams as further incentive?

    Investing into an underfunded team with expectations of a return based on performance increases has to be the worst investment risk I’ve ever heard of.

    The minnows will always be minnows, unless a buyer like Red Bull, with a preexisting focus on sports related performance and advertising, can come along and throw away millions based on a world wide marketing strategy.

    1. OIf you give them more money they will become cruise-and-collect operations, which is not the point. The small teams willmove up if they are good enough. It is a reverse incentive scheme.

      1. Hadn’t thought of that aspect Joe, you’re probably correct; F1 doesn’t need drive and park teams like NASCAR has. Find the budget or go away makes sense.

  15. I’d be interested to hear Karen’s position on this argument!

    I would argue that Ferrari have a valid and important role to F1. The problem is that the participants in this blog are too hardcore an audience to capture the wider spectrum of viewers. If you speak to the casual viewer, most of them have no idea of the teams and thier history. Typically they only know of Ferrari and Schumacher (even through he doesn’t drive for the team anymore!). Without this cache, I think the typcial casual viewer would have less interest in the sport.

    You can try this for yourself. Pick some random sport where you don’t know any of the competitors. Its hard to get interested. However, pick a sport where you might have heard of one or two, then your interest picks up. Extrapolate this to the casual fan (or corporate guest) who might be convinced to see a GP in their town or watch it on TV with a mate. Then you see the impact multiplied across the hundreds of millions that supposedly watch the sport. This would indirectly bring revenues to the sport as a whole through TV rights, ticket attendence, corporate sponsorships, etc.

  16. Is it just me, or is there some serious irony in the fact that the teams need to circumnavigate Bernie and CVC to get the best deals for them all on the whole?

    It seems nothing changes because disregarding 2012, if the teams could have seem eye to eye in the 70s and stopped the infighting all of this could have been avoided by means of a cooperative to look after F1’s common interests.

    Did Bernie really set out to do the best for all of F1 when he started? Or was it just a really long game to make himself insanely rich? He seems to be a racer so it doesnt seem clear cut to me!

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