The Business of Formula One
“If you want to make a small fortune in auto racing, you should start with a huge fortune.”
Formula One, the 72-year-old motorsport has been my personal favourite sport since the late 2000s. I’ve always been fascinated by the strategy and technology which is applied to grab each position in a race. F1 has also gained a lot of traction ever since Netflix released its popular series ‘Drive to Survive’. Drive to Survive has stepped in and given new fans an ‘in’. The series has helped to put F1 in front of the 208 million subscribers that Netflix currently has which hosts a whole range of potential new fans. But have you ever wondered how F1 makes money and what makes it the second most expensive sport in the world? Keep reading to learn more!
Key Stakeholders of F1 and their Business Model
The key business stakeholders of F1 are the participating teams, Fédération Internationale de l’Automobile (FIA), the drivers and TV channels. FIA is an association established on 20th June 1904 to represent the interests of motoring organisations and motor car users. But what’s the scale of money which flows in F1? Just to give you a hint, F1 earned 2 billion dollars in revenue in 2019 alone! Let’s learn how this money flows among these stakeholders.
1. F1 Teams
Let’s start with the costs borne by the participating teams such as Red Bull, Ferrari, McLaren etc. The costs incurred can be broadly classified into 4 categories:
- Salaries: Paid to drivers, staff (such as engineers, pit crew, designers etc.) and team directors. Fun fact: Lewis Hamilton receives a paycheck of 40 million pounds from Mercedes!
- R&D: Track testing, development of technology such as DRS require massive amounts of investment as the competitive advantage for a team comes from its car’s design.
- Operations: IT for detailed performance monitoring, fuel, transportation for the crew and cars, factory etc.
- Production: Purchase of key automobile components, building or purchasing the engine and manufacturing the car are the major production costs.
Mercedes total cost in 2019: $425 million
The revenue of teams can also be broadly classified into 4 categories:
- Sponsors: Brands pay millions to advertise themselves on F1 cars. Note that the duration of contracts range from 2–5 years. I don’t think anyone can forget the Marlboro and Shell logos on the Ferrari cars.
- FOM: Income from Formula One Management as shown below-
- Investment from parent company: This is when the parent company (Daimler, for example) pays $80 million for the Mercedes F1 team to perform better! This can contribute almost ~25% of the team’s income.
- Driver linked income: This primarily happens in smaller teams. Drivers pay to get a chance to drive the car and they usually bring this in the form of sponsorship.
- Merchandising
Revenue of Mercedes in 2019: $420 million
2. FIA/Organizers of F1
The following are the revenue streams for the organizers of F1:
- Race-sanctioning fees: This is the fee for hosting a race in a location. All F1 venues in the world have to pay a massive fee to F1 to be added to the calendar. All contracts have built-in confidentiality clauses that keep promoters from publicizing the fees and terms. But SEC filings show that F1 made $654 million in sanctioning fees for the 2016 season, which featured 21 races.
- Television rights: Like any other sport, channels of various continents all over the world need to pay F1 a hefty amount for broadcasting rights.
- Partnerships with companies: Since FIA decides certain practices to ensure uniformity among teams, for example, the brand of tyres used for the season, companies often bid huge amounts to get these deals.
- Ticket sales: F1 gets a portion of the ticket sales from each of the race venues and this is usually built into the contract.
3. Drivers
- Salaries: Take a look at the list below to get an idea about drivers’ paychecks. Apart from this, they also earn performance-based bonuses based on the number of points they earn in the season.
- Endorsements: Like all other sportspersons, F1 drivers too are in huge demand for brand endorsements. For example, Sebastian Vettel has signed a deal to become a brand ambassador for Best Water Technology (BWT) just this year.
- Prize money from F1 organizers
4. Television Broadcasting
There are no surprises in this segment. TV channels such as ESPN, as usual, make money from affiliate fees (fees per subscriber charged to cable companies and other pay-TV operators), advertising, and online streaming. They can also gain exclusive rights for broadcasting and earn more.
Conclusion
As you could notice, Formula One is a billion-dollar industry with teams spending and earning millions. Not all teams manage to make a profit though as many factors such as tech upgrade, loss of championship etc., affect the bottom line. But this legendary motorsport is here to stay as the fanbase worldwide is growing year on year. I hope you liked this article. Drop your thoughts below! :)
~Business Barista
