"Menebrio" (menebrio)
11/03/2014 at 20:30 • Filed to: F1, Racing, Money
5
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"Menebrio" (menebrio)
11/03/2014 at 20:30 • Filed to: F1, Racing, Money | 5
| 10 |
What a great race we had in Texas. The US GP became a thriller, as the mid pack battled for positions to the very end (I'm looking at you Crashtor). Now after all the joy and champagne has been drank, lets try and make an understanding of some of the more somber news that came from around the paddock.
Meanwhile at the back of the Grid
As the Russian GP was being raced, mysteriously Kamui Kobayashi was pulled in from the race and forced in to the garage. Unknown to him, but probably a thought already in the back of his head, it became the last race of Catherham, as the team would enter administration after a spat between Tony Fernandes (ex-owner) and the new owners would surfaced all over the news over who paid what and what not. As the weeks progressed news emerged that Marussia would be following suite, as they announced they would not be participating in the US and Brazilian races, which required them to travel half way across the globe. During the Texas GP it was rumored that some midfield teams might boycott the race in a desperate push to renegotiate the way prize money is is awarded. Although I'm sure these were widely exaggerated because the damage to the sport would be greater, I still think the idea was initially floated to get the teams talking on the issue as soon as possible. Teams like Lotus, Sauber and possibly Force India have been linked with the news of being on the brink of folding at some point next season.
Bernie's Fault?
During the Texan weekend it was interesting to hear F1 Supremo Bernie Ecclestone taking some of the blame for the dire situation of some of the teams:
"If we were in a position where we could help these teams in trouble, we would do it. But we are not allowed to. They say if you give this team $10,000, everyone has to have $10,000. The trouble with lots of regulations and lots of contracts is that we don't think long-term. "
We've seen him squeeze races out of every penny, support dictatorial ideas, and even changed the rules (Double points) for money, but I don't think he had previously accepted to be wrong.
Maybe it was his mind distracted by his upcoming trial at the time, but it was nice of him to own up to his own shortsightedness.
"It makes no difference to me how the money is shared out. If they sat down here with me now and said they want to share out all of the money we get in a different way, I would say, 'Good, give me the bit of paper'."
The teams wobbles in renegotiating new sponsor contracts or charging what they used to has been well documented this season. With McLaren being the most notable team without a title sponsor for most of 2014. With the burning days of Tobacco already gone, and alcohol looking to be next, F1 is in a race against itself and other sports for sponsorship money.
Let me quote Marco Mattiacci, because he makes a point when taking about competitiveness.
Entrepreneurs have to find a reason why … we're doing an excellent job with Haas but it's very clear what he wants to do. He has a long term plan, project, solid investment and a good reason – a business reason – to get in to Formula One.
"We need competitive teams. I'm not here to say small or middle, we need competitive teams with a solid business background and a solid financial background."
Now I am not questioning HAAS, I'm glad he is joining F1, and he has been up front about his low expectations for the first couple of seasons. But I'm sure he's not happy already that his future engine is the worst on the grid right now. Which bring's me to Monisha Kaltenborn, Sauber's team principal:
"Wasn't it Marco who also said that he's getting questions on ROI (return on investment) from his partners?" Kaltenborn asked. "How does he plan to keep that so well going if the way things are going here? What if his partners – who are probably paying a lot – come and say 'What's my return on investment with results? What's my return on investment with viewers going down, with the show not being attractive?'
"So I wonder if his business model is going to work if he didn't have the backing of those kind of partners or a manufacturer? Because I think if the manufacturer wouldn't put that money in there you would have a business model that is defunct. And I know what I'm talking about."
We've had BMW, Toyota, Honda, Ford, Crosworth, Lamborghini, Renault and others, come and go from the sport, whether it be as a whole manufacturer (car + engine) or engine supplier. With only 4 engine suppliers and two official teams next season and LeMans beginning to put technological and budget pressure on F1, the series really needs to start controlling cost, yet motivating innovation.
Dollar Dollar Bill y'all
Disclosure: Since I couldn't get my hands on a copy of the actual agreement between the rights holders and the F1 teams (also it's a 498 page document), I recompiled the figures from several articles from !!!error: Indecipherable SUB-paragraph formatting!!! , !!!error: Indecipherable SUB-paragraph formatting!!! , !!!error: Indecipherable SUB-paragraph formatting!!! and others in order to come up with the following BALLPARK FIGURES. Some of the number might not add, not only because I rounded them to get nice clear numbers, but because I had to work my maths in different ways, since everyone claims different figures from seasons, will sometimes only use percentages, or mention there is such an expense/prize without an actual number. So please feel free to give me feed back or add to the information in the comments.
F1 Teams as a whole have negotiated their contract with the rights holders to be a total payment of 63% of the underlying profit the series makes. Given that in 2013 revenue of F1 was U$ 1.7 billion, lets try and crunch some numbers.
First let's take a look at where the money comes from:
As you can see, race hosting fees are the major revenue generator. Given that their is only a limited amount of GP's that can be run in a given year, this has made it quite the commodity specially amongst countries that want to advertise their economic advancements and sell themselves as part of the 1st world. Not only have the fees increased about a 60 percent in the past five years, most contracts also include up to a 10% annual hike in the fee. No wonder circuits in countries that don't have a strong motorsport heritage tend to cry foul every year, specially when local or national governments withdraw their support or tax excemption expire. Please take in mind that the sponsorship money listed above also includes circuit/championship sponsorship (those Johnnie Walker, Santander, ING, DHL, Rolex signs). So actually circuits don't see that ad money in their balances, its the Rights holders that rake it in. But circuit mismanagement or mistreatment is not the point of this article. So back to the teams.
Although F1 gets a 63% share of the profits, 47.5% comes before income taxes, depreciation and amortization (EBITDA). That means Prize money comes in close at a whopping U$ 800 million dollars. Yet here is where it gets a bit tricky.
Red Bull, McLaren, Ferrari pull an additional U$ 100 m or 7.5% (whichever is greater) since they where the last constructors to win the title in the previous years before the new agreement was signed.This is called the Constructors Championship Bonus (CCB). In case you are wondering the CCB is split 37/33/30 respectively. I'm sure here many will whine about Ferrari, since it gets and additional 5% or 62.2 million dollars whichever is greater of the Prize money because they are the longest running team. Fair or not, whichever you believe it means the Italian squad racks in U$ 123 m before even taking into account current championship performance. No wonder the smaller teams are fuming about cost reduction.
Now, lets see how the actual prize money is distributed. Fist of all this is split half ways, into what I'll call Tier 1 and Tier 2 money. Tier 1 is distributed equally among the top ten teams and given the above numbers, would award each team U$ 40.8m. In order to belong to Tier 1, you must have placed 10th or higher in two of the last three championships. Tier 2 teams on the other hand are the Top 10 teams of the season. These winnings are spread percentage wise as the chart below shows.
There is a "consolation" prize for teams that finish outside of the top. As listed below
Surprise, I'm actually a Ferrari fan so I'll use the Maranello team as an example. Given the above figures, if Ferrari where to become champions lets say, in 2015 (bet your local bookie would laugh at you right now) the team would be making U$ 240 m on championship winnings. Given that their annual budget is estimated to be U$ 300 m the team would be on the red for U$ 60 m. But hey, this is not taking into account team sponsorship deals. Remember Marlboro? Well it was said they alone pay Ferrari (deal runs out in 2015) about U$ 160m a season.
The F1 Manifesto
It's no wonder Ferrari and Red Bull are so blatantly against the cost cap, given that they are the highest payed teams before prize winnings.
I'm sure someone will denounce me as a communist after this, but I think the Tier prize money should be decreased to 40% of EBITDA and be equally divided amongst all teams. Then the CCB would be increased by 7.5% which is what we took from the Tier 1 money and be handed to the top 3 teams respectively in the last 4 or 5 seasons. If we face a full grid which is supposedly caped at 13 teams that would still give everyone a 50% bump in earnings for participating.
Obviously that isn't the only change I'd make. You'd have to add in a cost cap somewhere near of U$ 200 m mark, but also free up regulations. This would have added benefit of lowering the cost of part development for teams. Given the tight restrictions you just have to funnel to much money into lets say a front wing to gain half a tenth or maybe a tenth of a second. This could also attract a new wave of Adrian Newey's to the sport, and help the running order of a season change more quickly, thus making it more exiting for the viewer.
Now, you may argue that Ferrari receives that additional 5% of money, but with the cost cap in place, basically it would mean that in a championship winning year, they would most likely be racing for free. And that should be the direction where the sport is headed, profit.
Spending first, politics, second, winning third...
And the main motivation to all of us is to compete for victory, it's not to come 3rd, 4th, 5th or 6th. I race to win as long as I feel it's possible. Sometimes you get it wrong? Sure, it's impossible to get it right all the time. But I race designed to win, as long as I feel I'm doing it right.
I quote Ayrton Senna because at times it seems like the sport is slowly losing it's long term battle. Don't get me wrong, we've had some great past season filled with beautiful racing (although at times marred by DRS zones) but the general perception of the sport has become that the more you spend the more you win, yet there is only one winner. And that is why we need a cost cap. Sure the big teams can afford to spend upward of the U$ 300m mark, but in a time where sponsorship money is becoming more and more scarce, the sport needs to start reigning in on itself. Sure Ferrari can spend this much because it is their biggest marketing platfrom. You buy Ferrari's due to their heritage (aside from the fact that you are probably stinking wealthy). But what about the truly big manufactures? We've seen bigger manufacturers than Ferrari leave the sport because at some point the spending race surpasses the benefits of development and marketing a brand can get from a single channel.
It's no wonder Ayrton always expressed his love for karting, the lowest from of motor racing. Why, because it was all driver, machine second. Now-a-days we hear to much money talk. I'm not advocating for a series were there is one engine/chassis. I like F1 with its independent teams. I'd also love to see more manufacturers like Toyota, Volkswagen AG (under any of its brands), BMW, Ford (under HAAS) or any other to return to the sport. But it is the current F1 business model that drove them out. And that is why it is also important to protect the midfield and smaller teams. Their success on track will only attract more investment in the sport. Why? Because manufacturers as well as technology firms will see the positive impact they can have on the field, ultimately maximizing their return on investment.
For this and other ramblings you may follow me on Twitter !!!error: Indecipherable SUB-paragraph formatting!!!
R Saldana [|Oo|======|oO|] - BTC/ETH/LTC Prophet
> Menebrio
11/04/2014 at 10:02 |
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I must go, my people need me. Hey do you remember when I came in second in a Sauber at the Japanese GP?
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R Saldana [|Oo|======|oO|] - BTC/ETH/LTC Prophet
> Menebrio
11/04/2014 at 10:20 |
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I do wish Haas and Ford would link up to build a chassis and power unit, but with the Ferrari backing there is no way. Although they could brand it with some Dodge elements? Has Dodge ever competed in any form in Formula 1?
Also, I am completely in agreement with you on this, the spending on the most minute detail for the car detracts from the overall spectacle, that fans of the Senna/Schumacher/and even Coulthard eras grew to love. While I believe that certain elements of the engineering should have some sort of impact on passenger cars, however far down the line in time, I feel that the over-engineering of these machines removes the mystique of being a racing driver. On the current grid, we have a huge amount of former world champions, drivers who know how to turn their tools (the car) in to a part of themselves. There is something missing in the onboard shots with todays drivers, you don't see Lewis, JB, or Kimi truly maintaining control of the car anymore, this would have been entirely different a few short years ago. Oddly, asI am recollecting the past couple of years I am reminded of watching Mark Webber, he seemed to be driving the car vice the car driving him, more so than anyone else on the grid two years ago. Seb never looked like he was struggling, and maybe that is a testament to his skill, but the struggle is something that humanizes the drivers, makes us realize that they have to work hard too, albeit at something far more glamorous and polarizing than most of us fans.
End rant, I got lost toward the end, TL:DR = I agree with you that the budgets and prize payout system are hurting this sport tremendously.
uofime
> Menebrio
11/04/2014 at 12:33 |
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I'm think that being innovative and controlling costs are not two things that can both be done at the same time.
even if you give up innovation I still don' know how you can really cap expenditures beyond what they're already doing, limiting engine swaps per year and tire usage, you can freeze the car desgns on a season to season basis, but that will likely create serious problems with competition and also be really hard to enforce completely.
its hard to find any racing series where the costs are really controlled beyond the fact that teams move up series as their budgets grow. even series with car/engine buy outs teams still risk it and spend tons on their equipment.
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Menebrio
> uofime
11/04/2014 at 13:52 |
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If you want an example of being innovative on a budget look at Williams F1. When the KERS was first introduced they came up with an innovative solution that was an electric flywheel. Porsche was able to successfully race it . It wasn't as powerful as the batteries, but it was cheaper, more compact, and lighter than the lithium based KERS the rest of the grid had. This was done because you opened up the regulations. Also, look at the different solutions we have for the phallic noses this season. Sure most are not pretty, but that was done because the regulations allowed a bit of freedom in this area.
On the Cost Cap issue. Actually it's easy to control it. Teams just have to be financially upfront about their cost. Problem is many teams hide the cost amongst their sub-branches and divisions. Investors wouldn't be particularly happy if they new the true cost. As an example, Ferrari & McLaren do everything under a "single roof." So it would be easier for a forensic financial analyst to reconstruct their expenses. Red Bull on the other hand, has been estimated to spend around U$500 m (against Ferrari's U$ 300m) in the past couple of seasons. They claim lower numbers, but many analyst believe that they are hiding cost in their different divisions, since they are not all car related (Red Bull: Technology, Aerospace, etc). It's easy to throw money at the problem when you have it. But true innovation comes from being able to maximize your return on investment; which ultimately will lead to the teams being profitable.
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uofime
> Menebrio
11/04/2014 at 14:56 |
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they made a lower cost solution that wasn't as good, sounds like a failure in racing.
yup hard to cap costs when everyone lies and cheats, which you know is kind of a hallmark of racing, if you're not cheating you're not trying to win
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Menebrio
> uofime
11/05/2014 at 06:51 |
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Well, then KERS in general was a failure if you think of it. Even the Big Three (Ferrari, McLaren, Red Bull) at the moment couldn't stop Brawn GP from running away with the Championship that year. Williams Finished 7th that reason, but those Toyota engines were also garbage engines (by F1 standards)
MFEJAL grey because who knows...
> R Saldana [|Oo|======|oO|] - BTC/ETH/LTC Prophet
11/06/2014 at 10:41 |
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No.
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R Saldana [|Oo|======|oO|] - BTC/ETH/LTC Prophet
> MFEJAL grey because who knows...
11/06/2014 at 12:09 |
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Not me, I was talking about Kobayashi
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MFEJAL grey because who knows...
> R Saldana [|Oo|======|oO|] - BTC/ETH/LTC Prophet
11/06/2014 at 16:12 |
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LOL I know, but I don't remember that. Suzuka races are too early in the morning.
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R Saldana [|Oo|======|oO|] - BTC/ETH/LTC Prophet
> MFEJAL grey because who knows...
11/06/2014 at 16:58 |
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F*cker, making me question my memory. ;-)