Key decisions in the next 12 months could permanently change the shape of Grand Prix racing. From the commercial management to the future health of race teams and circuits, we pinpoint the challenges F1 is facing – and offer some potential answers
By Christian Sylt and Caroline Reid
Formula 1 seems to thrive on uncertainty and chaos. Rarely is there a time when the regulations are certain, no teams or race promoters are at risk of going under and the ownership of the sport is stable. However, even by its usual standards, F1 has a lot of balls in the air right now. Bernie Ecclestone is the sport’s master juggler but he turns 82 this year, raising the inevitable questions about how long he can go on. At the same time F1’s majority owner, private equity firm CVC, is planning to float some of its shares on the stock market in a move which would allow fans to buy in to the sport. What they would actually buy remains to be seen.
Will the ownership of F1 change and what effect would this have on the sport?
Since CVC is a private equity firm it is almost certain that it will eventually sell its 63.4 per cent stake in Formula 1. Private equity firms use funds of money provided by investors to buy companies with a view to selling them for a profit once their value has grown.
When CVC bought F1 in 2006 it used €798m from its investors and the terms of its agreement with them state that the fund which the money comes from will be liquidated by 2018. This means that CVC needs to sell up by then, and there is an even more pressing deadline: F1’s second-biggest shareholder is bankrupt bank Lehman Brothers, which holds a 15.3 per cent stake in the sport. Lehman has committed to selling its stake by 2014 to pay its creditors.
CVC’s preferred way out is to float some of its shares on the Singapore stock exchange this year, and Lehman Brothers is expected to cash in the bulk of its stake that way too. Around 20 per cent of F1 will be floated and Singapore has been chosen as the stock exchange since the sport will be a flagship for it. In contrast, if F1 floated in Europe it would be just another in a long line of big names on a stock exchange.
The float will allow anyone from all over the world, not just those in Singapore, to buy shares in F1. It will also allow CVC to reduce its shares gradually while benefiting from the growth still left in the sport. This will encourage it to develop even more money-making opportunities such as merchandise, entertainment at the races and an increased focus on pay-per-view television.
Will the teams take control of F1?
Ecclestone and CVC have agreed to give seats on the board of F1’s parent company to Ferrari, McLaren and Red Bull. This will give them a say in how the sport is run, but CVC will still have majority control as it does now.
The move also means that these top teams will have fewer reasons to threaten to leave F1 as they have done in the past.
Will F1 end up as pay-per-view only?
Floated companies have to show the public that their revenue and profit is growing every quarter, and the value of their shares can plummet if they don’t. This gives F1 even more motivation to look for more money-making opportunities than it already does.
Splitting broadcast of F1 between free-to-air and pay-per-view is a good way of doing this because it doubles the fee paid. It also has added benefits, as has been demonstrated in the UK where Sky Sports has created a dedicated F1 channel. This increases promotion of the sport and forces the BBC to try to improve the quality of its broadcasting to compete. Expect more deals like this to come.
Which countries are likely to be the next to get F1 races?
The United States (Austin, Texas in 2012 and New Jersey in 2013) and Russia (Sochi in 2014) already have confirmed places on the calendar, while South Africa is on the verge of announcing a race in Cape Town for 2015.
It also seems virtually certain that there will be a revival of the French GP at Paul Ricard, alternating annually with Spa in order to cut costs for both venues. Other likely additions to the calendar are Mexico, owing to the rising popularity of Sergio Pérez, and Thailand, where a recent Red Bull Racing demo in Bangkok attracted 100,000 spectators. Hong Kong, Argentina and even Iran have also been rumoured to join the calendar recently, but any plans for such additions appear to be very much in the early stages.
Will any races need to be removed to fit in upcoming Grands Prix in Russia and New Jersey?
It’s likely that in future more races will alternate as has happened in the past few years with the two German races at Hockenheim and the Nürburgring. The Spanish venues at Barcelona and Valencia are likely to follow suit.
This will help free up space for the new races, but since many teams are believed to be unwilling to run more than 21 or 22 races per season, something will have to give.
Are any races at risk because of the recent economic downturn?
F1’s circuits have had financial troubles even when the economy was booming so it should be little surprise that many of them are struggling now. The European venues have been particularly badly hit since they are more likely to rely on ticket sales for revenue rather than a hefty grant from a local government to promote the region internationally.
As a result, concerns have been voiced about the Nürburgring, Valencia, Silverstone and Spa, but it isn’t only the European races that are at risk. Canada was off the calendar for a year in 2009 because it couldn’t pay its bills and Korea is thought to be particularly vulnerable. It recently negotiated a reported 50 per cent reduction in its hosting fee.
Is the circuits’ business model sustainable and will fans end up paying more for tickets?
The circuits’ biggest problem is that most race-hosting contracts contain a clause which means that the fee they pay to the F1 Group increases by as much as 10 per cent annually. Inevitably these higher fees, which have soared to an average of around £18.5m annually, mean higher prices for fans, since for many circuits ticket sales are the only substantial source of revenue.
Research from F1 industry monitor Formula Money indicates that the price of a premium grandstand ticket at the British Grand Prix will hit £530 by the time Silverstone’s contract expires in 2026, which is a 26 per cent increase on 2012 prices.
Will a buyer be found to take a lease on Silverstone and is it necessary?
In 2009 Silverstone’s owner, the British Racing Drivers’ Club, saved the British GP after the event’s move to Donington fell through. The BRDC signed a new deal with Ecclestone which costs around £13.2m annually and increases by five per cent every year. It also committed to bringing Silverstone up to the same standard as the gleaming new government-funded venues elsewhere in the world.
To fund this the BRDC has been trying for the past year to sell a 150-year lease on Silverstone for an estimated £500m. In August last year, after a protracted tender process, the BRDC entered into negotiations with a single bidder to take a lease on Silverstone and land around the circuit. However, progress has been slow with this preferred bidder, believed to be a party from Qatar, and its offer reportedly met with resistance from some BRDC members. The search is now back on for other potential partners.
According to a letter sent in August by BRDC chairman Stuart Rolt to Club members, the board always had the option of going back to the shortlisted companies if negotiations stalled with the preferred bidder. Reports suggest that the fall-back option could be an Anglo-American syndicate including Sir Richard Branson as a commercial partner.
It isn’t clear what effect it could have on Silverstone and the British GP if no bidder is chosen. Silverstone has not completed its redevelopment and its latest accounts show that in 2010 it made a £562,000 after-tax loss despite the sell-out British GP, with a race-day crowd of 122,000 last year, taking its revenue to £45.5m. It leaves it with no net profits to invest and in 2010 the BRDC itself only had £3.5m cash in the bank, down from £19.9m the previous year. It took out a £14m loan to fund the redevelopment and if no one takes over the lease this could lead to it needing even more debt which in turn could force it to increase ticket prices to cover the interest payments.
What will be the outcome of the trial against F1’s former chairman Gerhard Gribkowsky and will Bernie Ecclestone be affected by it?
Gribkowsky faces a number of serious charges, including corruption, after authorities in Munich discovered that he had been paid £27m whilst working for German bank BayernLB, which owned 47 per cent of F1 until it sold the stake to CVC.
Since Gribkowsky did not declare the payment in Germany or to BayernLB he was charged with tax evasion and breach of trust.
He has been charged with bribery because Ecclestone has admitted that the money was paid by him (Ecclestone) and his family trust. The authorities believe he paid it to convince Gribkowsky to sell to CVC, which wanted to retain him as F1’s boss. Judgement is believed to be due in the summer but no witnesses in the case so far have confirmed the authorities’ view. It seems likely that Gribkowsky will be found guilty of tax evasion but the bribery charge is harder to justify. That said, if he is found guilty of it then the authorities’ next target would be Ecclestone since he has admitted to paying him.
Who will replace Bernie Ecclestone and what effect will this have on F1?
Ecclestone turns 82 in October but he shows no signs of stopping and still rules F1 with an iron grip. However, floated companies require a board of directors complete with not just a chief executive but also a chairman. Accordingly, it wouldn’t be a surprise if an executive search company was already on the case preparing a list of candidates to take on the role of F1’s chairman as soon as the company floats.
Will all the teams sign the Concorde Agreement and how will it change the future of F1?
In previous years the period coming up to the Concorde Agreement’s expiry has been characterised by threats from the teams to start a rival series unless they receive a larger share of the revenues. Their prize money currently stands at 50 per cent of F1’s profits, with additional payments to Ferrari because it is F1’s oldest team. However, this time round, eight of the teams have signed up nearly a year before the deadline with no trouble whatsoever. There are several reasons for this.
Firstly, the current Concorde prevents the teams from talking about a rival series until the end of 2012. Next, although the Concorde runs to hundreds of pages, the agreement which has been signed is a 30-page document which commits them to the bigger contract. It speeded up the procedure and so did the strategy of offering Ferrari, Red Bull and McLaren seats on F1’s board. Having F1’s strongest teams apparently on-side further minimised the likelihood of breakaway threats.
The other teams soon fell into line. It is understood that under the new contract additional payments will go to any team which has competed since 2000 without making an unapproved change to its name, with further payments to reward past Constructors’ Championship winners and back-to-back champions. The three newest teams – Caterham, HRT and Marussia – had not even been asked about signing the Concorde by April because they really have no other choice.
The only exception is Mercedes, which is annoyed because it hasn’t been given a board seat and isn’t eligible for additional payments since it has changed names so many times in recent years. It has threatened legal action but, like the new teams, it has little choice except to leave F1 if it doesn’t like the terms. Nico Rosberg’s maiden win at the Chinese GP in April may well have given the team renewed interest in staying even if it isn’t entirely happy with the commercial arrangement.
Are any teams at risk because of the global economic downturn?
Despite efforts to cut the costs of competing in F1, many teams are still struggling financially. The increasing number of pay drivers in the sport is a sign that sponsorship is getting harder to find, and the largely barren liveries of team such as HRT are not encouraging signs.
Many teams now rely heavily on a single team owner or driver for the majority of their budget. This puts them in a precarious position since the team can be plunged into financial crisis if just one person decides to quit the sport or move to a different team.
Will the teams’ costs continue to rise in F1?
The Resource Restriction Agreement has helped to cut costs in F1 over the past few years, but the spending of the top teams is still close to ten times that of the smallest. In 2011, Formula Money estimated that Ferrari’s spend was £240m compared with just £28m at HRT.
However, even this level of spending was a big reduction from the days before the economic crisis when F1 was dominated by manufacturer-backed outfits. Teams such as Toyota and Honda were spending close to £300m annually. As the economy picks up, more money may become available to the bigger teams again and budgets will begin to edge towards pre-2009 levels. The main problem is that once one team decides to increase its spending, others will follow suit.
If Red Bull’s winning streak comes to an end, is it likely to leave F1?
Red Bull’s boss Dietrich Mateschitz has committed to staying in F1 and he is likely to be personally taking up a seat on the board of the sport. However, since the drinks company became a team owner it has spent well over £500m in F1, which is a huge amount.
If the economy nosedives and this coincides with a drop in Red Bull Racing’s performance, cutting the F1 programme could be an easy way to save money. For now at least, that isn’t on the horizon. What is more likely is that in the medium term Red Bull may sell the lacklustre Toro Rosso team and this may prompt speculation that it is pulling out of F1.
What effect will V6 engines have on the sport and business of F1 from 2014?
Thanks to the efforts of F1’s circuits, fans shouldn’t notice much difference between the V6 engines and the current V8s. The FIA’s original plan was to introduce an environmentally friendly 1.6-litre four-cylinder engine, but the circuits joined together and protested that spectators could be put off because the putative four-cylinder engines would lack the visceral impact of the current V8s.
Thus the specification changed to six-cylinder single turbos. The teams will notice the difference, though. Not only will manufacturers have to invest a considerable amount in developing the new engines, customer outfits such as Force India and Sauber may have to pay much more. Sources also say that the FIA may try again to make F1 more environmentally friendly by introducing a green hybrid engine with some sort of sound augmentation. It is understood that the circuits would certainly oppose this and, if the previous case is anything to go by, they would probably win.
When will more manufacturers join F1?
Car manufacturers tend to join F1 when the economy is booming then cut their involvement once the going gets rough. Accordingly, when the downturn began in 2008/09 F1 lost Honda, BMW and Toyota, while Renault went from being a team owner to engine supplier.
Once the economy picks up, the big manufacturers will have more money to spend on marketing and F1 may once more become an attractive prospect to them. There are frequent rumours that Volkswagen is looking at entering F1, possibly through its Audi brand, though it is unlikely to do so in the current financial climate.
Which series will provide the Formula 1 drivers of tomorrow?
All the evidence is that GP2 will continue to be the dominant feeder series for F1 over the next few years. Since it was created in 2005 it has supplied F1 with an impressive line-up of drivers including Lewis Hamilton, Nico Rosberg, Heikki Kovalainen, Bruno Senna, Kamui Kobayashi, Nico Hulkenberg, Pastor Maldonado and Sergio Perez.
The series was acquired in 2007 by the F1 Group, which subsequently added GP3 to the ladder. The access GP3 offers to drivers through its role as an F1 support race makes it a strong alternative to Formula 3 as a feeder series.
Will there be more pay drivers in F1?
Only a few years ago it looked like pay drivers had finally vanished from F1. The economic downturn has changed that and even historic names such as Williams are now reliant on sponsorship brought in by drivers such as Pastor Maldonado and Bruno Senna.
The shift away from big manufacturer teams to smaller operations has had a dramatic effect on the driver market and this will probably continue until the current smaller team owners are bought out by car manufacturers or other large corporations. As this is not likely to happen until the economy picks up, pay drivers will be around for a few years to come.
Everyone, from the race teams to the promoters to Bernie himself, is chasing the money. They always have. But with so much at stake and more pressure from an uncertain world, traditional sporting values take second place to what makes good business.