Formula 1 fans pretty much agree that the cost of tickets is too high. You don’t hear many people singing the praises or the Formula One group, Bernie Ecclestone, or CVC Capital Partners. They are seen to be greedy and exploitative. They do not much care because they are printing money which they then give to bankers who have already loaned them vast sums of money, secured on the future profits of the business. The question that fans often ask is whether the Formula One group can go on pulling rabbits out of hats, finding new promoters in the countries that are relevant (as opposed to totalitarian dictatorships and other such unsavoury locations). Judging by the fact that we will have a 19-race calendar in 2013 some think that this may not be the case, even if there are due to be two new races in 2014 (Russia and New Jersey) and possibly another two new events (Mexico and Thailand) in 2015.
The Formula One group makes its money selling four major things: races, TV rights, concessions and advertising. It has few assets beyond a filing cabinet full of contracts. There are a raft of things that could be done better, such as promoting the F1 brand more successfully, marketing the entire championship, working with media companies to create movies and so on, and making more cash from official supplier/product deals. As previously mentioned, the TV deals are pretty impressive. The race deals bring in a lot of money, the rest is fairly patchy. It is a very good business but their customers are not all happy. Race promoters have the problem of how to fund their businesses with a mix of ticket sales and public and private investment. This means that the circuits are always under pressure and that this means that they squeeze the fans for every cent they can get. There is little incentive for the circuits to do anything that improves the F1 experience, unless it is demanded of them. The structure also means that tracks cannot easily upgrade their facilities, or increase the number of seats because they do not have the cash to do it. Track ownership is an attractive business if one does not deal with Formula 1. As we have seen in a number of places, the regional authorities want the economic impact brought by an event, but they do not want to have to pay for it.
Thus F1 may have strategic aims around the world, but it cannot go everywhere it wishes to go, unless it can find someone willing to take a risk on its behalf.
There is an economic model that would increase the assets of the Formula One group and create much more enthusiasm among the fans… It would mean that governments would no longer HAVE to help, and so would be more willing to do important things such as new access roads, mass transportation links and even such things as event promotion. It would also take out the middle men. And if the new business model was well-managed it could also create more profits and useful economies of scale. Perhaps that is not the kind of thing that a here-today-gone-tomorrow private equity firms would like, but longer-term investors would no doubt see the benefits of this “miracle cure”.
The answer is one that NASCAR worked out a long time ago. Rather than keeping around half the profits of the business, NASCAR gives 65 percent of the money it makes to the circuits. It gives 25 percent to the teams and it keeps just 10 percent for itself. The circuits are allowed to do their own trackside signage, sponsorships, VIP hospitality and concessions, in addition to keeping the ticket revenues. This gives them a lot more money than is currently the case, although as part of the deal they have to pay the teams substantial sums in prize and appearance money, which boosts the team revenues to around the same figure as they are now getting with the F1 model. The teams add to their revenues by selling sponsorships, merchandise and so on, as is already happening.
The secret of NASCAR that the France family, which controls NASCAR, also owns around half of the tracks, through its International Speedway Corporation (ISC). They make money from this so that their share of the overall business is not far short of that of the Formula One group. They are careful to avoid questions of monopolies, by allowing Bruton Smith’s Speedway Motorsports Inc (SMI), another listed company, to promote a significant number of other races, and there is even room for a few independent operators.
What this means is that while the money is spread around a little differently, the incentives are all aligned. The NASCAR brand has a positive image and ambitious promoters want to buy into it. Taxpayers will not complain that their money is being spent on frivolity and, most important of all, the tracks have the money they need to provide better facilities for the fans. They can afford to build and maintain grandstands and thus can charge more reasonable prices for tickets, while also creating better concessions, better comfort, additional entertainment attractions and better access. The whole motor racing experience is thus constantly being improved, keeping the audience happy.
And, of course, well-run circuits that do not have to stretch to pay F1 fees can turn very decent profits in a year, with tests, track days, hotels, presentations, conferences, functions, exhibitions, museums and even shopping malls.
Perhaps when they crunch the numbers, the suits at CVC Capital Parties will see that this could create even bigger profits, perhaps not, but what is clear is that everyone involved would be happier and more positive about F1.