The next few days may turn out to be some of the most important in the history of Formula 1 in the last 30 years. It is increasingly clear that someone is on the verge of lodging an official complaint to the European Commission about the way the sport is operating, on the grounds that the commercial and governance structures are anti-competitive. It may not happen because people are looking for solutions to avoid this scenario, but it will take some serious compromises if this is all to be avoided.
It is clear that some of the big players in the F1 world are nervous about scrutiny from the European authorities, particularly as it will make waves at a time when there is much scrutiny on the politics and financial structures in sport, following the recent revelations regarding FIFA. This provides a climate for possible change because although motorsport is not anything like the soccer world, it is nonetheless in need of restructuring, better governance and more transparency. If one has nothing to hide, what is the problem with transparency? Thus fans can be hopeful that this will open the way for new ideas, attitudes and business models. There is, naturally, some opposition to change because this is also about money, power and ego.
The sport is worth a lot of money and so, when push comes to shove, solutions must be found or else the whole business will fall apart. Perhaps there are some who are even hoping that this might happen so that they can pick up the pieces and get more control and more money. This is all very short-sighted and the wisest voices in the sport are looking at the bigger picture.
“The biggest asset Formula 1 has is its fan base,” says Graeme Lowdon of the Manor F1 team. “It’s global and it’s massive. There are millions and millions of fans and it’s the root of this entire sport. Everything channels from that, so it’s very, very, important to understand what fans want, not just now but in the future, and how they would like to integrate and engage with the sport.”
There is a lot of tosh talked about what fans want and while surveys are to be welcomed, they are also dangerous weapons in the wrong hands. If, for example, one does online surveys, one can prove that F1 has a younger demographic than is actually the case, because the older fans don’t do much online. So the sport needs to be careful that it does not get led up blind alleys.
It is fairly clear that fans want cheaper tickets, free-to-air TV, better facilities, a good show and more engagement. They want to feel that the sport cares about them. It is harder to figure out what to do with the younger generations, because they seem to have different attitudes towards cars. But, having said that, the Disney franchise “Cars” shows that kids still like cars and it is up to F1 to figure out how to translate that interest into a new fan base.
Defining the problem is part of the route to a solution and different groups have different views, and they have been busy muddying the waters. The key point is this: How can a sport that generates $1.8 billion a year in revenues be incapable of supporting 12 two-car teams which race one another on only 20 occasions each year? The only possible answer to this question is that the business model is not a very good one for all concerned, even if for some F1 is filling their pockets, pumping up their egos and making them feel powerful. These people do not really want things to change, unless they see that they can get more money or more power. They are clever people and so their arguments sound very plausible, but in reality this is largely smoke and mirrors with everyone dressing up their own interests as things that are best for the sport.
The big teams are now in the process of trying to sell the sport on the idea of customer cars. They say that the motivation is to get full grids and to help the small teams to survive. When you stop and think about it, the customer car concept could equally be seen as a cunning way for the big teams to get a bigger share of the revenues of the sport. The Formula One group will not give them more (probably it cannot afford to) but the big teams have realized that if they sell copies of their cars to the small teams, they will gain more money, without needing to spend very much more than they currently are. Their goal, therefore, is to have four or five teams selling their cars to the other entrants. And this is not just about the sport because some of the numbers involved are useful for other reasons. Ferrari, for example, might be able to charge customer teams $60 million a year to provide everything required. If there are three Ferrari customers the deals would be worth $180 million. However, these figures can be used for other things. If the team does five-year deals with three customer teams this means that it can book $900 million in guaranteed future revenue and with an IPO coming up that will help to hike the price of the shares, which means that the parent company can raise more money from the markets to pay off its debts and to invest in new models.
The small teams that would be forced to buy cars in order to remain competitive are, inevitably, spitting razor blades about the idea, while Bernie Ecclestone, the CEO of the Formula One group, which makes the money by selling commercial rights, is sufficiently canny to have spotted that this would give the big teams much of the political power in the sport and so he is proposing a one-chassis concept which would provide all the teams with the same basic car, which would undermine their powerbase and make him money. Fans might be led to believe that this will produce better races because it would all be down to driver talent, but that is not how it works. That system exists in IndyCar, but the same three teams have won the IndyCar title for the last dozen or so years…
The problem with both of these business models is that once teams have been forced to become customers, they will need to lay-off many of their staff and will have no need for the R&D and manufacturing infrastructure that they all have and that means that they cannot easily move up and become constructors in the future, without huge sums of money. There is clear evidence of this with Scuderia Toro Rosso which, for a time, was allowed to run Red Bull chassis. This led to opposition, particularly after Sebastian Vettel won a race in a Toro Rosso, and so the loophole was closed and Toro Rosso has spent the last five years reconstructing a manufacturing base. Today it is able to compete with Red Bull Racing, without using the same chassis. The problem is that this has cost a fortune.
Destroying the manufacturing base of the sport makes no sense at all and the customer car argument is flawed in that the idea might be presented as six manufacturers each having a factory team and a customer team, but in reality it would take very little time for this to change into six teams, each running four cars. It simply makes sense from the point of view of economies of scale and so on. After that the weakest of the teams would become vulnerable because the best it can hope for is 21st position on the grid and so the number of these constructors would thin out.
Allowing the big teams to supply more cars is a recipe for disaster. This has been shown in the United States where NASCAR allowed teams to run as many cars as they wanted to run. They added more and more cars and using race-by-race sponsorship managed to suck up all the money from the smaller lower-ranking teams by offering the sponsors fewer races but a higher profile. The result was that there was a serious contraction in the number of teams. The problem was solved by NASCAR limiting the big teams to four cars each and today the midfield is building up again, but that has taken time and money.
Part of the problem is that manufacturers and big team-owning sponsors tend to create boom and bust cycles in the sport. They come in, in order to promote their products, they spend until they win and then when they have achieved their goals they depart and they do not care what damage that might do. The spending races put pressure on the little teams because they simply cannot compete. And yet manufacturers and rich people have been a part of the sport from the beginning. Grand Prix racing only exists because the French car companies rebelled against the system which was originally based on nations competing against one another. France had a much stronger car industry than other countries and so the manufacturers pushed the Automobile Club de France to stage events open to anyone. That was more than 100 years ago and the same patterns of behaviour have been seen ever since. The most effective are championships in which the manufacturers agree to create an environment in which everyone can win and work closely with the series owners. In that case, everyone wins, but it is more show business than pure motor racing and there is no room for ambitious and innovative engineering. It is expensive show business and the competitive urges of those involved are dulled by the artificial realities.
There are some who argue that technology is not important and that the rules must be changed, but they forget that the key to success has always been to build cars that are faster than the opposition and that this is what makes F1 different and fascinating. People like to see David fighting Goliath. There is much talk of changing the rules to make the racing better but this makes no real sense. The best way to reduce spending and improve the show is to leave the rules as they are because the law of diminishing returns means that the field will get closer together as the technology spreads, so the racing will be better and the ability of the teams to spend more is rather limited. Changing the rules costs a fortune and tends to create disparity of performance as we are seeing at the moment.
The show will come back if the rules are left alone. It might help to try to control spending or getting rid of wind tunnels, but these ideas tend to undermine the high technology image of the sport, which is important to sponsors.
The desire for change comes because there is a perception that the racing is not exciting and yet those in the sport do not really complain because they have greater insight into what is going on and they see how competitive it is. The skill is to ensure that the public also understands the level of competition and that can only be done by investing in media technology and using communication. The Formula One group does not make massive investments and wants to charge for everything. This drives away fans.
The other problem is that even if a solution can be found, no-one can agree on it. And this is where the biggest problem lies. The governance is a mess. The Strategy Group came into existence because Ecclestone needed to get the big teams to support him when new commercial agreements were put together after the end of the Concorde Agreement in 2009. This gave the big teams more power and more money. Ecclestone is believed to have negotiated financial guarantees with the biggest players to stop them pulling out unexpectedly for the 10-year term of the deal, which runs until 2020. The word is that the big players all agreed to penalties running to a $1 billion over the 10-year period, but reducing by $100 million each year. Thus the cost of leaving F1 is reducing all the time, but they are still tied into the sport for another five years. Things are complicated by the fact that the FIA can no longer tell the sport how things should be. This is because the FIA, under Jean Todt, agreed a deal in the summer of 2013 that gave the federation money to give up its power as the rule-maker. This was a dreadful error by Todt, but he did it because he had a different agenda and was not interested in the sport and wanted to go after his own personal ambitions in the world of road safety, using the FIA as his springboard. Right now the FIA is failing in its duties in F1 but there seems to be no opposition within the federation to give Todt a hefty boot up the rear end and get him to fix the problems he has created. In F1 circles, the feeling is that the disappearance of Todt would not create rivers of tears.
The FIA risks getting into hot water as a previous EU investigation, which ended 12 years ago, saw the federation agreeing to act only as the sports regulator and not to get involved in commercial matters. The Formula One group agreed to deal only with commercial matters and not be involved with governance. However, the deal that created the F1 Strategy Group may be deemed to have overstepped the mark in both respects.
The ironic thing is that the person who now stands to gain the most from the dismantling of the Strategy Group is Ecclestone himself. If the European Commission does demand a new structure, Ecclestone could justifiably tell the big teams and the FIA that he is not able to honour the agreements made because they are against the law and it could end up with the Formula One group getting more money for itself. The downside is that if the deals are cancelled, Ecclestone will struggle to get the financial guarantees that currently exist that lock the team owners into the sport for the term of the contract.
On paper, Ecclestone works for CVC Capital Partners, the private equity company that owns the commercial rights business. This company seems weak and terrified to do anything other than support Ecclestone, but if he gets into trouble they would likely jump to support the strongest group, which would be the big teams and manufacturers. CVC seems to know very little about the sport, highlighted by the daft idea discussed recently of bringing back refuelling, which appears to have been a CVC idea. The bad news is that CVC does not care about the sport. They want to take as much money as possible and so do not want to make sensible investments for the long-term. They don’t want to improve the business because if there is no margin for improvement, the price of the business goes down. Almost everyone in F1 agrees that the sport can do a great deal better financially than it does, but that it needs to change strategy so as not to squeeze so much money out of TV companies and race promoters that they give up. This is what is driving the fans away because ultimately the costs are passed on to the fans.
Into this mess has walked former FIA President Max Mosley, too old to make a comeback, but happy to tell the world what is wrong.
Mosley’s solution to the problem is the most intelligent.
“Income should be distributed equally,” he says. “Bernie says that is communism and the big teams would be against it but it is a sport and sport demands a level playing field. If you’re giving one team five times as much as another team that is not a level playing field. I would bring in a second set of rules – run under current rules or a second set on condition you operate under a cost cap. Because you have more freedom your car would be as quick as the expensive teams. Then you’d get very competitive racing and the smaller teams wouldn’t be in as much financial trouble.”
The big teams argue that this does not matter because the small teams are now so weak that they will probably fail anyhow and say that there is no point in giving the small teams more money because they have already proven that they will compete beyond their means and build up debt.
About the only thing everyone agrees about at the moment is the fact that F1 costs too much money and there need to be cuts. The problem is that the big teams are not really interested in actually making cuts because they fear that their competitiveness on the race track will be affected. Thus they may say that costs need to be cut, but they make sure that they are not.
The interesting thing is to see whether and how someone will make an official complaint to the European Commission and trigger the process that will perhaps fix the problems. The small teams will do it if necessary, but some feel that it might be better for someone else to do it. There has been talk of Colin Kolles. He is close to Bernie Ecclestone and was in charge of a small team (Caterham) that went out of business because of the way the sport now is. He has nothing to lose because he’s not involved in F1 at the moment. And perhaps if he plays a role in fixing it, he can get into it again in the future.
The EU will probably jump at the chance in order to be seen to be doing things after the Americans started the action at FIFA.
In times of crisis what is required is leadership. The EU may break up the current structures, but what it really needs is a leader to build new ones.