You can read today that Formula 1 is in crisis, because there is not enough money about. That is true, but only up to a point. In reality there are two problems: the F1 teams cannot agree on how to stop spending, and not enough money being created by the sport is finding its way back into the business.
The first problem is really just a question of 11 Team Principals being unable to agree on a cost cap, so they go on spending, even if they cannot afford it, as though they are in some kind of 1970s nuclear arms race. It is plain stupid. This could be solved by the FIA instigating a financial regulation that required the agreement of more than 50 percent of the teams. Without a Concorde Agreement, the rule-making process is not set in stone and the federation can do as it pleases, within the limits of its own rules. However, the federation is incredibly cautious in all matters relating to F1 so it is hard to see any decisive action in the short term.
Last year a team with a budget of around $145 million (Williams F1) won a Grand Prix, fairly and squarely. The team had the technology and the prowess to beat bigger organisations which have budgets that climb to atmospheric figures, the biggest being $344 million if one counts the holding company of a team that claims to have a smaller budget. Winning should not be about who has the most money to throw at the competition, but rather who is the cleverest. In this respect, racing with a budget cap would be a far better advertisement for the best team, as it would have achieved success in the most cost-effective manner, which is of course attractive to modern car manufacturers who are always looking for ways to create cars at less cost.
The major teams today spend around $240 million apiece each year, which Williams proved last year is about $100 million more than you need to do the job. A cost cap would turn all the money being spent above the $145 million limit into profit for the big teams, adding value to their businesses and allowing them to expand into other sectors and by doing so create more stable enterprises. The smallest teams this year are running on budgets of $100 million, and, judging by the track action this year, this is enough to keep them within reach of Williams.
TV money should provide for everyone, including the 11th team in the Constructors Championship, in an equitable fashion. It is daft not to make allowances for the tail-ender because if there is no 11th team then it will mean that the bottom four or five teams can cruise along and take the money rather than worrying about dropping out. It is in everyone’s interest that the 11th team gets something to help it survive, but not enough money to make 11th an attractive place to be… and, of course, all the midfield teams face the prospect of ending up in P11 if they make one really bad car.
The same basic problem has existed in soccer for some years with ambitious team owners spending wild amounts of money to buy all the top talent and to build bigger stadiums to capitalise on their success. The result was that by 2009 UEFA concluded that around half of the 650 or so teams in Europe were in deficit and that their combined debts were around $1.6 billion. Today, four years later, that figure is reckoned to be closer to $11.5 billion.
In consequence UEFA developed the Financial Fair Play Rules (FFP) for teams that compete in its competitions, hoping that the domestic championships would also follow suit. Britain’s Football League has done that with its own version of the FFP with the aim to enable teams to break even and control salaries. The wages for the Premier League clubs are now limited to a percentage of the team’s turnover and to ensure that the teams comply there are transfer embargoes that will be applied. The rules that will begin in Britain next season will mean that Premier League clubs cannot make a loss in excess of $165 million across a three-season period, and even then only if the loss is guaranteed by the team owners; the financial projections are shown to the Premier League and if almost all of the loss is covered by injections of equity from the club owners. There are also restrictions on the amount of Premier League Central Funds that can be used to increase player wages. If a club exceeds this cap then additional wage cost must be funded by increased commercial revenues that the club itself made during the season in question.
It is not exactly a budget cap, but it is a smart way to solve the problem and one that the F1 teams would do well to look at. Perhaps someone should hire Richard Scudamore, the CEO of the Premier League, to fix this problem. He is in his mid-fifties, he’s trained as a lawyer, he has done some stonking deals during his career and dealt very effectively with a bunch of competitors who cannot see the wood for the trees. And he’s done the same job for 15 years and might like a change…
The second problem that needs to be addressed by F1 is that despite the huge commercial success there is not enough money coming back into the sport. It is rather out of kilter with the normal sport/promoter split of the earnings. The private equity people who control the Formula One group have already made vast fortunes out of their F1 investment, and now they want to strip out even more cash before they depart. They do not care a jot about the sport, nor about any damage they do while they are involved. Their sole aim is to extract money and all decisions are made based on what will produce maximum returns for them. Private equity companies exist to exploit, so one cannot blame them for doing what they do, but it would be best for the sport that this be stopped in the future. With a change of control mechanism in the 100-year commercial deal between the FIA and the Formula One group, it should be possible for the federation to insist that any new owner is less profit-oriented and gives more back to the sport. A renegotiation might thus be possible because CVC will want to protect what is left of its investment. If that does not happen then the commercial rights must either be bought by the interested parties, or they must be taken away from the current lessee and given to a more benevolent organisation, which is not going to be easy to achieve, unless there is a good legal reason to terminate the 100-year deal.
The plans to float the Formula One company are teetering (at best) and the uncertainty has led CVC Capital Partners to try to entice buyers with a $290 million dividend after the deal is done. In other words, if you buy shares you will get money back straight away. That is a pretty desperate step and an indication that the float is pretty unlikely to happen. It has achieved one aim, however, of putting a nominal value on the business and now it is a question of finding which investment firms will pay the most. The financial markets of the world are not peopled by idiots (for the most part) and investors are likely to be very wary. Perhaps there are some investors who are willing to take a risk on the commercial rights remaining with the Formula One group, but even they must consider what might happen if, for example, the situation in Munich gets any worse.
There have been signs for a while that the FIA is waiting for an opportunity to terminate the commercial agreement and create a new structure which will better serve the federation, providing money for club development around the world, road safety campaigns and assistance for talented youngsters to climb the racing ladder. The 100-year contract may have looked good 13 years ago (which is arguable), but today it looks like a very poor deal. There have been hints in recent weeks that there might be a second candidate in the FIA elections this autumn, but these have now faded away again as the problems in Munich are likely to reach a head before the FIA election.
For the moment the teams are not doing anything about this. The biggest teams have been pacified with larger payments from the Commercial Rights Holder, which means that it is not in their interest to rock the boat too much. However, everyone knows that F1 with only four teams is not a sensible option and the idea of customer cars is just padding the grid and disguising the problem. There need to be changes in the deals for the smaller teams, but all this is only possible if an earthquake occurs.
The key question therefore is whether or not there will be an earthquake.