The perils of an F1 franchise future
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 wafes 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 outts 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 beneciaries, 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 proting 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 prot, not FOM… One word denes the debate: prot. 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 inuence 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.