F1 Racing (UK) - - CONTENTS - @Jame­sal­lenonf1 face­­ing­mag JAMES ALLEN

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.

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