The per­ils of an F1 fran­chise fu­ture

F1 Racing - - POWER PLAY -

Whether they hoped teem­ing rain or track ac­tiv­ity would shield them as they con­vened in a hos­pi­tal­ity unit in Mon­tréal’s pad­dock dur­ing FP2 or sim­ply did not care ei­ther way, the tim­ing of a meet­ing be­tween Mercedes, Fer­rari, Red Bull and McLaren was in­trigu­ing. No sooner had they sat than The Fi­nan­cial Times re­vealed a po­ten­tial EU in­ves­ti­ga­tion into F1’s var­i­ous covenants.*

Adding fur­ther spice to pro­ceed­ings was a visit by the FIA’s tech­ni­cal del­e­gate Char­lie Whit­ing for a por­tion of the meet­ing, so clearly this was no ad hoc get-to­gether over wafes and maple syrup. In­deed, as later tran­spired, the agenda cen­tred on the prickly sub­ject of what are usu­ally re­ferred to as ‘cus­tomer cars’.

How­ever, that term took on low-rent con­no­ta­tions af­ter For­mula One Man­age­ment CEO Bernie Ec­cle­stone pro­posed a sort of GP1 op­tion, com­pris­ing low-cost chas­sis pow­ered by old V8 en­gines sup­ple­mented by a rudi­men­tary KERS to lend a ‘green’ aura and supplied as a gi­ant kit at list price, as a so­lu­tion for F1’s nan­cial cri­sis. Thus the Big Four now dub their own of­fer­ings ‘fran­chise cars’.

De­spite sound­ing rather up­mar­ket, these are es­sen­tially cars supplied by a team to one or more oper­a­tions in con­sid­er­a­tion for a fee, with some form of li­cens­ing agree­ment per­mit­ting fran­chisee outts to op­er­ate the in­tel­lec­tual prop­erty and as­so­ci­ated tech­nol­ogy with­out fear of sanc­tion.

The ma­jors jus­tify the con­cept as a con­tin­gency plan to ‘save’ F1 in the event of a worst case sce­nario – two or three teams go­ing un­der – but this con­ve­niently over­looks the fact that F1’s skewed rev­enue and gov­er­nance struc­tures, of which they are the pri­mary benecia­ries, lie at the very core of F1’s pre­vail­ing woes, which forced one team into ad­min­is­tra­tion and left at least three oth­ers sur­viv­ing hand-to-mouth.

Un­der this scheme, chas­sis (with or with­out en­gines), hy­brid sys­tems and trans­mis­sions, may be supplied, depend­ing upon fran­chisor busi­ness mod­els, with fran­chise agree­ments out­lin­ing mu­tual obli­ga­tions, terms and con­di­tions, up­grade sched­ules, re­pairs and oper­a­tions. Think McDon­alds meets F1, and you get the pic­ture.

Clearly the quar­tet would rather sup­ply their own tech­nol­ogy than have a pro­pri­etary man­u­fac­turer proting from such ac­tiv­i­ties, with the com­mer­cial rights holder tak­ing a slice. If money is to be made through selling tech­nol­ogy to in­de­pen­dent teams, then they, as ma­jor teams, want to prot, not FOM… One word denes the de­bate: prot. The con­cept spells the end of F1’s cur­rent busi­ness model: it would af­fect F1’s rev­enue struc­ture as fran­chisees would ef­fec­tively sign over their earn­ings, and likely be dic­tated to as to which driv­ers they may run and which spon­sors adorn which cars – much as McDon­alds agree­ments dic­tate patty, bun and ketchup ven­dors, menus and livery. For a fee, of course.

They en­vis­age a sce­nario whereby each sup­plies two fran­chisees, mak­ing 24-car grids com­pris­ing 12 teams. Now imag­ine a com­mu­nity in which McDon­alds, Burger King, KFC and Sub­way ply their trade and then force a ban on in­de­pen­dent restau­rants. True, folk won’t starve, but will they be sated? Imag­ine the eld day the EU would have there…

While there is no doubt that F1’s rev­enue struc­tures re­quire a root-and-branch over­haul – as ex­clu­sively re­vealed two months ago, for 2014 Fer­rari’s fourth place earned them dou­ble Wil­liams’ FOM take ($166m plays $83m) de­spite nish­ing be­hind Wil­liams – fran­chis­ing fur­ther tilts the ta­ble against the in­de­pen­dents, who are pow­er­less to re­sist as they have lit­tle inuence on F1’s Strat­egy Group.

Equally, while the Group (be­lieved to be the pri­mary fo­cus of the EU in­ves­ti­ga­tion on ac­count of a struc­ture that per­mits a se­lect few to frame rule changes) should be dis­as­sem­bled be­fore it de­stroys the fab­ric of the sport, so po­tent would the fran­chisees be through hav­ing the en­tire grid un­der con­tract that they could spell an end to the Strat­egy Group, thus neu­tral­is­ing the grip of FIA/FOM over F1. But some sug­gest that FOM hold­ing com­pany CVC Cap­i­tal Part­ners, said to be frus­trated by Ec­cle­stone’s style and the FIA’s pow­ers, could align it­self with the Big Four to re­duce dis­burse­ments to prospec­tive fran­chisors – who re­ceive a col­lec­tive $250m in an­nual pay­ments from FOM – on the ba­sis of in­come from fran­chisees.

All the while Mar­grethe Vestager, the EU’s for­mi­da­ble com­pe­ti­tion com­mis­sioner who led charges against Google and Gazprom within a few months of her Septem­ber 2014 ap­point­ment, main­tains a watch­ing brief. The Big Four should not be sur­prised if she calls for the min­utes of that Mon­tréal meet­ing.

*The Fi­nan­cial Times re­port con­tained in­for­ma­tion re­vealed by sis­ter ti­tle Au­tosport.

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