TAKING CARE OF BUSINESS
TAKING CARE OF BUSINESS
THE FIRST MANUFACTURER ERA
They dip in and out to suit their own agendas, often infuriating other stakeholders as well as the fans, but car manufacturers have led the way since the earliest days of motor racing, whether by running their own in-house teams or supplying private customers. In the early 1950s, racing’s governing body was given a sharp lesson in the importance of manufacturers in ensuring Formula 1’s health.
Postwar shortages of raw materials meant racing in the late 1940s and early 1950s was a make-do-and-mend affair, featuring self-built cars assembled from foraged scraps or aging racers that had first seen action in the 1930s. The Alfa Romeos that dominated F1’s first two seasons, 1950 and 1951, dated back to 1937, when Enzo Ferrari was running Alfa’s competitions department. In the interim, he had set up on his own and now his former employer was in his sights.
But nobody else seemed able or willing to rise to the challenge properly, so in late 1951 the governing body hastily drew up a new set of rules—most significantly, reducing the size of naturally aspirated engines from 4.5 liters to 2.5—due to come in to effect in 1954. The idea was to allow plenty of time for interested parties to develop cars and engines for the new formula, but it also meant there was little point in committing design resources to the present one. Faced with sparse grids, race promoters forced the FIA to open the World Championship to Formula 2 cars in 1952–1953.
Fortunately, the dawn of the new formula in 1954 brought a wealth of manufacturer interest, and not only from Ferrari. Mercedes joined, and their works team set new standards of professionalism. Perhaps more significantly, though, Maserati pitched in as both a “works” team and as a supplier of private entries. The sweet-handling Maserati 250F was a mainstay of F1 grids for the following five seasons.
TAKING CARE OF BUSINESS
SPONSORS TAKE OVER
Watch any modern automobile race, from the club level on up, and you’ll see cars bedecked in varying quantities of sponsor logos. For race fans, this is as unsurprising as the coming of the dawn each day.
Until the late 1960s, though, most teams raced in their national colors: blood red for Italy, deep blue for France, green for Britain, and so on. Sponsors’ badges might be discreetly stitched onto a driver’s overalls or displayed as banners around a team’s pit, but on the cars? Unthinkable—and forbidden by the rules.
The turning point came in 1968, after a number of tire, fuel, and lubes suppliers ended the long-established practice of supplying their Formula 1 customers for free in exchange for . . . well, that was the problem. Without being able to explicitly connect their brand with the cars, there wasn’t much return on their investment. Responding to the threat of dwindling sponsorship, the governing body grudgingly relaxed the rules on displaying logos.
Many people within the sporting firmament reacted with horror, especially when Lotus—then one of the leading teams—dropped their British racing green color scheme entirely, decking out their racing cars and their transporter in the red and gold of the Player’s cigarette company. At a non-championship race at Brands Hatch in the UK that March, circuit authorities refused to let Lotus on track unless they blacked out the Player’s logo on the side of their cars.
Part of the problem was that many race promoters were used to cutting their own deals for trackside advertising and event sponsorship, expecting a degree of exclusivity. But the tide could not be stopped. For teams, keeping up with the latest technology was an increasingly expensive business, and the most successful on track were those who embraced all the commercial opportunities that came their way.
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ECCLESTONE’S REBELLION
No look at Formula 1 history is complete without the man who shaped its fortunes for the better part of forty years. Bernie Ecclestone was a sharp-eyed motorcycle and automobile dealer from London who got involved in motor racing through 500cc-engined Formula 3 in the early 1950s, later graduating to driver management and team ownership.
A consummate wheeler-dealer, Ecclestone was said to be able to value an entire showroom of cars at a glance. Having bought the Brabham team in 1972, he spotted a much greater business opportunity.
When Ecclestone got involved, teams were still having to bargain individually with race promoters for their fees (known as “start money”), generally based on their box office potential. During the 1970s, Ecclestone in effect unionized the teams, pulling them together as a collective-bargaining force. Many of the team owners viewed themselves as gentlemen and racers first, feeling that the grubby matters of commerce were beneath them; they were happy to let Ecclestone do the legwork in exchange for a cut.
Since the race promoters were usually bigwigs from auto clubs that formed the membership of the FIA, this put Ecclestone into opposition against the FIA itself. Still, he and his legal expert, Max Mosley, managed to play hardball. By 1981, they went toe-to-toe with the FIA and threatened a breakaway series if they didn’t get a fair cut of the money and a say in the rules.
The truth was that Ecclestone’s Formula 1 Constructors’ Association (FOCA) didn’t have the resources to arrange a breakaway series. They were almost out of money. But the FIA could only count on the backing of two or three manufacturer-backed teams (one of which, Ferrari, delighted in playing both sides off against one another). As both sides stepped back from mutually assured destruction, Ecclestone largely got what he wanted.
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A GLOBAL SPORT
Television was the key to unlocking mega-revenues and expanding Formula 1 from what had been a mostly European sport into one that properly straddled the globe. But this was not properly understood until the late 1970s, when Bernie Ecclestone—whether by happy accident or farsightedness—began to pull in TV rights deals as part of his drive to expand his influence.
Before then, the prevailing view of many—particularly race promoters—was that screening a race on television would harm ticket sales, and therefore best avoided unless the broadcaster came bearing a pot of gold. Self-interest blinded them to the potential of growing the overall audience.
Broadcasters, on the other hand, were most likely to be interested in screening an event based in their territory—but were in no rush to commit themselves to screening “foreign” races or a full championship, particularly for a niche interest such as motor racing. This, remember, was a time when satellite technology was in a state of relative infancy. Transmitting sports footage long-distance was costly and difficult, and most territories had just a handful of TV channels, many of which didn’t broadcast 24/7.
But all that changed during the 1980s and 1990s as satellite technology forged ahead. As the number of channels grew, so too did the competition between them. The rights to transmit live sports became a key area of conflict and Ecclestone, having parceled up the F1 TV rights cheaply at a time when most people thought they had no value, was well placed to take advantage.
In the early 1980s, Ecclestone had to strong-arm broadcasters into screening all the races; by the late 1990s, they were desperate to pay him ever greater sums for the privilege. Formula 1 was one of the biggest sports in the world, commanding huge viewing figures. Governments in countries such as Malaysia, China, Korea, and India were falling over themselves to build lavish new circuits and get involved.
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WHO ARE THESE PEOPLE?
As the wealth generated by Formula 1’s emergence as a global sport increased in magnitude, so too did the arguments over who should share in it. The result were year-on-year battles for control and ownership of the sport.
In the early days of Bernie Ecclestone’s “rule,” team owners were mostly happy to let him do the commercial hard work in exchange for a cut of the proceeds. Fast forward a decade or more and much had changed. First, having got out of the team ownership game (he sold Brabham in 1989), Ecclestone had turned his attention fully to the business of F1.
Teams, for their part, had become more corporate, as car manufacturers and other large companies sought a piece of the action and bought in. The days of teams being run by the person whose name was above the door were over.
A turning point came when Ecclestone tried to float his holding company, which owned the commercial rights to the sport, on the stock exchange in 1997. Only then did the teams properly grasp the extent to which F1’s “ringmaster” had opened up new revenue streams (such as from trackside signage and hospitality) and concealed them from scrutiny via offshore companies. Even the accountancy firm doing due diligence for the flotation struggled to pin down what was going where.
The float did not happen, and a health scare prompted Ecclestone to transfer ownership of the commercial rights holding company to a family trust, based offshore, to benefit his wife and daughter in the event of his death. Ecclestone remained, but now as an employee. The trustees then sold significant holdings to a media company that almost immediately hit financial trouble. German media magnate Leo Kirch bought the assets, then went bust, leaving a trio of banks holding the rights. Then, in 2006, having been passed around like a tray of cakes, the rights were sold to a venture capitalist company, CVC Capital Partners.
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F1 POST-ECCLESTONE
All venture capitalists like to cash out, sooner rather than later, so CVC Capital Partners’ decade-long tenure as majority owner of Formula 1’s commercial rights underlines how profitable the business is. Late in 2016, CVC agreed to sell to US giant Liberty Media. The clock was ticking on Bernie Ecclestone’s reign.
Liberty immediately installed veteran US sports media executive Chase Carey, a longtime associate of Fox magnate Rupert Murdoch, as chairman, and an uncomfortable few months ensued as Ecclestone clung on to the levers of power. As soon as the deal went through in January 2017, Ecclestone was shunted into a non-executive “chairman emeritus” role and Carey assumed the top job.
No longer would F1 be run as a “one-man show,” as Carey put it. Describing the sport’s decision-making processes as “somewhere between ineffective and dysfunctional,” Carey laid out a plan for a more conventional corporate management structure and a new focus on marketing the business. Ecclestone had been notably dismissive of digital media and increasingly short-term in his deal-making—largely because the leveraged nature of the CVC buyout made the sport hungry for cash.
To emphasize the new approach, Carey hired former ESPN vice president Sean Bratches to head up commercial operations, and the vastly experienced Ross Brawn—who had been both a technical director and a team principal in a forty-year F1 career—as sporting director. Bratches will be responsible for delivering Liberty Media’s stated aim of increasing revenue by expanding the calendar, improving race promotion, engaging with the audience more widely and improving the spectator experience.
Brawn has the challenging mandate of rethinking the technical formula to deliver more on-track spectacle. This is likely to bring him into conflict with the FIA, which views the rules as its territory, and with the teams, who have been pressing for more influence on sporting as well as commercial matters. It’s going to be a bumpy ride.
GLOSSARY
BUDGET CAP
A controversial measure first mooted in 2007 but now back on the table under the Liberty Media regime, a budget cap would aim to prevent teams from out-spending one another in their bid for success on the track. Without a cap, the richest teams will always win and the poorest will struggle to compete. New sporting chief Ross Brawn’s stated aim is to enable small but clever teams to reap the rewards of agility.
CCB
Constructors’ Championship Bonus payments are another commercial area of argument. While the top ten teams are given a share of the commercial revenues according to their finishing positions in the constructors’ championship, Ferrari, Mercedes, Red Bull, and McLaren receive additional payments, regardless of where they finish. This dates back to the Ecclestone era, when these teams negotiated the extra funds as a condition of committing to F1 until at least 2020.
CONCORDE AGREEMENT
The top-secret contract between the FIA, Formula One Management, and the teams, this agreement lays out how Formula 1’s commercial revenues are divided. The first was signed in 1981, the most recent in 2013. It has often been a fiercely contested area of negotiation—the 1997 Agreement expired at the end of 2007 without a new one put in place until 2009.
ESCALATOR
Each circuit that hosts a Grand Prix pays a sanctioning fee (see below) to Formula One Group, the commercial rights holder. Typically, the contracts to host races include an “escalator clause” under which the amount paid increases 10 percent or more year-on-year.
FOCA
The Formula One Constructors’ Association became a potent entity with Bernie Ecclestone and Max Mosley at its head during the 1970s and 1980s, in effect unionizing the teams as a collective bargaining force against race promoters. By the end of the 1980s, it had metamorphosed into Formula One Management (now the Formula One Group), which collected revenues and then passed the teams their share.
FOTA
The Formula One Teams Association was a short-lived body formed by the teams in 2008. For many years the teams had suspected that Bernie Ecclestone’s Formula One Management was acting hand-in-glove with the FIA, whose president was Ecclestone’s former associate, Max Mosley. They united to demand more of a voice in sporting and commercial matters; once Mosley stepped down in 2009, their unanimity dissipated and the organization collapsed.
GPWC
In 2001, BMW, FIAT, Ford, Mercedes, and Renault founded GPWC Holdings, a joint company that would run their proposed breakaway series, the Grand Prix World Championship. They were moved to do so by Bernie Ecclestone’s transfer of the sport’s commercial rights to a family trust and the subsequent sale to media organizations involved in subscription television services. The fear was that migrating F1 coverage from terrestrial TV would reduce their audience reach, and therefore the value of their investment.
PADDOCK CLUB
Hospitality has been a lucrative revenue stream for F1, although for many years those sums remained hidden from view because the rights to run the luxurious and exclusive on-site “Paddock Club” facilities were leased to a Swiss company, Allsport Management.
RRA
The Resource Restriction Agreement was an idea proposed by FOTA, similar to the concept of a budget cap. Under its terms, the teams would reduce their factory head counts as well as the number of personnel travelling to races, while spending less on research and development. Only a few members stuck to it, and those that did soon had to reverse course.
SANCTIONING FEE
The payment for the right to host a Grand Prix, this fee is usually agreed upon by the race promoter and the commercial rights holder.