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.