James Allen on risk vs reward in the Formula 1 business
Formula 1 teams know all about the balance of risk vs reward. The drivers weigh up every overtake in those terms; Verstappen’s judgement veered slightly toward the ‘optimistic’ when he put himself in a vulnerable position going around the outside of Lewis Hamilton at the Chinese GP.
The race strategists weigh up the dynamic when plotting a strategy switch. A perfect example was Red Bull pitting both drivers under the Safety Car in China – a bold, winning move. Mercedes and Ferrari were cautious, preferring track position, but they lost their chance of victory.
And when you are building up a business like F1, there’s a sweet spot of shared risk and reward to be struck between all the stakeholders. This seems to be off centre at the moment, however, as we enter the ‘squeaky bum’ phase of negotiations for a post-2020 Formula 1.
Liberty Media have taken a significant risk in paying $8 billion to buy control of the sport. They believe there is untapped value in a business Bernie Ecclestone built up, but then allowed to stagnate in the final years of his reign.
Formula 1 has some circuits and some good TV contracts signed up beyond 2020, but it doesn’t yet have its star actors signed up – the teams and drivers. The new strategy of marketing F1 on the drivers’ star power is clever, because not only are they F1’s greatest appeal, they ensure consistency of allure – were Ferrari and Mercedes to leave the sport, for example. Even without these two grandee teams, the drivers would still be there.
The use of the word ‘marketing’ in the context of F1 is also instructive; Ecclestone didn’t believe in spending money on it. This approach worked well for many years and kept costs down.
But the model was disrupted by a fast-changing media landscape and the absence of a central F1 marketing department during the late Ecclestone era started to look completely anomalous.
This is one of a number of areas in which Liberty have invested. Operating costs have risen significantly as a result, but Liberty argue that investment is essential at this point to grow the sport. The powerful teams, however, would like all
Ferrari and Merc feel that putative post-2020 rules will add to their costs while reducing their earnings of that investment to come from Liberty’s pot, not theirs. Not much alignment of shared risk/reward there, it would seem.
The plans for the new post-2020 F1 were unveiled to the teams over the Bahrain GP weekend – and in a very vague, top-line, sort of way to the media and public. They essentially contain a five-point plan to ‘make F1 great again.’ But on two points in particular the leading manufacturers are unhappy.
The narrative from Ferrari and Mercedes especially is that Liberty are making changes that impact the manufacturers on cost, though without giving them a means of earning the money back. They argue that simplifying the engines and making them louder (a Liberty goal) means those power units will need to be redesigned, at considerable cost. But those same engines must be sold to customer teams at maximum of €10m – ie at a loss to the power unit manufacturers.
On the thorny issue of F1 revenue division, Liberty propose that Ferrari’s up-front payment for their historical participation (they’re the so-called ‘longest standing team’) should be more than halved to $40m a year, with the sport’s wider income shared more evenly. A team such as Williams, or Force India, would thus become more valuable as an asset and potential buyers would have a much more attractive risk/reward profile when considering coming into F1.
And not all the risk would be on the manufacturers’ side. They would each get an additional $10m a year for participation, under Liberty’s proposals, and there is also a small sop to new manufacturers such as Porsche – and even Aston Martin – who stand on the sidelines, poised to enter.
One of the best examples of a wellstructured balance between risk and reward in F1 is the Singapore Grand Prix model. This is the most professional F1 promoter set-up around, based on the Singapore government and entrepreneur Ong Beng Seng sharing the risk of hosting the Grand Prix 60-40. They share the upside in a similar ratio. If that model had been in place at all those circuits that have come and gone over the past 10 years, they’d mostly still be on the calendar and viable.
Of course, any risk/reward relationship relies on trust: drivers weighing up a risky move need to trust the other guy isn’t going to drive them off the road. Any teams and manufacturers buying into Liberty’s F1 vision will need to have confidence in their ability to chart a course for growth.
But at the highest levels, where the future of F1 is being negotiated, trust seems in somewhat short supply right now.