Formula 1: Understanding The Economics Behind an F1 Race

Editor’s Note: This is the second of a series on Formula 1 (F1) Racing. While the first part touched upon the manpower and the tech involved, here I will talk about its economics.

 

The Economics of Formula One Management

 

The contracts, distribution, and commercial management of rights and licenses of the F1 circuit is controlled by London-based Formula One Management Limited.

 

The company provides media distribution and promotion services to the FIA F1 World Championship. Let us look at its revenues and expenses.  

 

Revenues

 

F1 is the 9th highest revenue generating professional league in the world, with a top-line close to $1.83bn in 2017.

 

Formula One Management Limited (FOM) primarily has 3 sources of revenue:

 

1. Race Promotion: This is the fee paid by the race organizers at every venue across the world. They are driven by predesigned contracts and increase by a few percentage points each year. As per Forbes, organizers pay an average of $31.5 million annually to host a race . These are medium to long-term contracts ranging from 5-10 plus years. Teams also must pay an amount per season to enter the next season, along with a base price of $0.5m plus. In addition to that, teams need to shell out $5,161 for every point scored, whereas Constructors Champions have to pay $6,194 per point. Race promotions contribute to almost 30-35% of the revenue.

 

2. Broadcasting: There are close to 100 broadcasters of F1 globally, in almost all languages. Rights may be given for an entire-season or part-season. These contracts are also escalated yearly by some percentage. Contract length varies from 3-6 years. Broadcasting contributes to another 30-35% of the revenue.

 

3. Advertising and Sponsorship: Global and Official Sponsorship deals with Emirates and Rolex (as of 2018, worth c. $200 million over 5 years each), Heineken (till 2023, worth $250 million), Tata Communications, DHL, Pirelli, Mercedes AMG, Amazon Web Services (AWS) and Johnnie Walker bring in the major chunk of ad revenue – through trackside advertisements, race-specific title sponsorships and official supplier deals. These are mostly multiyear deals, lasting at least 3 or more years. Advertising and sponsorships contribute around 15% of the revenues for F1.

Formula 1: Understanding The Economics Behind an F1 Race

 

4. Others: These include introduction and registration of new teams, hospitality, freight, TV production, licensing etc. These back close to 20% of the revenues.

 

Now Speaking of Costs

 

1. To F1 Constructors: FOM distributes a major portion of the revenue it receives amongst the teams in 9 monthly payments. This works as a royalty to remain in the sport and constitutes a good percentage of funding for the teams.

 

2. Others: Running costs, administrative costs, organizing events etc.

 

The biggest teams have the deepest pockets. They also spend the most on technological developments to pit against their rivals. Teams incur huge costs, sometimes much more than they can raise as revenue from FOM.

 

The Economics of Formula One Teams

 

Now let’s move on to the operations of the individual teams.

 

Revenues

 

1. Share from FOM: F1 teams receive payments from FOM every year as a share of the revenue generated annually. In 2018, FOM distributed $940 million, i.e. 68% of the underlying revenue to the 10 qualifying teams. However, the distribution is not equal. Here is the breakdown of money distributed to each team:

Source: Autosport

*Force India is now known as Racing Point Force India

Amt1: Payments based on classification over two of the past three years

Amt2: Payment based on end of season finishing in constructor’s championship

LST: Long- Standing Team Bonus

Bonus: Constructor’s Championship Bonus

 

Each team gets $36 million as a part of participation in two of the past three seasons. Haas were excluded because this was their first completed season in F1. Every team gets a proportion of payment depending on their finish in the Constructor’s Championship.

 

Ferrari received the most money from FOM - $180m in total; which included a long-standing bonus of $68 million, exclusively given to them. Mercedes, the Constructor’s Champions of 2016, received a $35 million bonus for achieving its target of winning two championships. Red Bull Racing received a bonus of $35 million (other) for signing the current bi-lateral agreement. Williams received a heritage bonus (other) of $10 million.

 

2. Sponsorships: Another source of revenue for the teams is sponsorships. Every car has a list of sponsors. The revenue from each depends on different contract lengths, and where the brand is placed on the car. For example, a sponsor would have to pay more if their brand is placed on the rear wing, as compared to the sides or near the driver seat. Ferrari reportedly gets $220 million from sponsorships alone. This amount is much smaller for midfield teams, which unlike Ferrari, Mercedes, Red Bull Racing or McLaren are not big brand names commercially. 

Formula 1: Understanding The Economics Behind an F1 Race

 

3. Engine and Parts Sales: Manufacturing teams such as Ferrari, Mercedes and Renault always receive payments for supplying engines and parts to other teams. E.g. Ferrari received close to $60 million from engine leases alone in 2016. (Ferrari supplied engines to 3 teams in 2016; each engine lease is c. $20 million per year) .

 

4. Merchandise Sales: Mercedes, Red Bull Racing and Ferrari have considerable merchandise sales from clothing, accessories etc. that adds to their topline as well.

 

Costs

 

1. Building Costs: The major cost incurred by teams is for building the car. An F1 car is different not only in terms of the engine, but also aerodynamically. Official figures are never revealed for how much a car costs, but an average estimate is given below:

 

Source: WTF1

 

So, one F1 car costs close to $8 million on an average. This cost goes up for the bigger teams as they have more resources and capital to invest in the development of the car and its tech over time. Remember, this is just an estimated cost of building a car at the start of the season, any damage means new parts, some tracks demand change in aerodynamics - hence new front wings are needed sometimes. And in case, the car suffers a crash, the chassis or the entire car has to be rebuilt.

 

Formula 1: Understanding The Economics Behind an F1 Race

 

2. Other costs for Formula1 teams include:

 


F1 racing is an expensive business; spending as much as what these teams do, barely earning a fraction of the same amount, but continuing to stay in the game for years is no small feat.

 

In the next article, I will explore how Formula One teams have sustained their positions so far and how Liberty Media (F1 Group’s owner) would be F1’s Ride or Die. 

 

Stay tuned.

 

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