Formula One industry

Formula One is a huge global sport estimated to be worth $4 billion annually. With the commercial rights by themselves generating a yearly revenue of $1 billion. With an audience base of 600 million viewers, it isn’t hard to understand why. It’s made stars of the likes of Michael Schumacher, Lewis Hamilton, Ayrton Senna and of course made Ferrari a house hold name. Hundreds of multinational companies around the world have wished to become affiliated with these names to increase the appeal of their brand and global recognition. Even in retirement, F1 stars are still attractive to sponsors, with Nigel Mansell (retired for fifteen years) recently appearing in a car insurance advertisement in the UK for price comparison website Money Supermarket.

 

The beginnings

Originally Formula One was predominantly the arena of rich aristocrats, such as Enzo Ferrari, who would indulge themselves in their passion for racing. This was the age of no seat belts and no sponsor logos. The sports only revenue was from the occasional TV spot and mainly ticket sales at the event which each team negotiated on an individual basis with track owners.

Then, in 1968 Lotus boss Colin Chapman started a revolution by arranging a sponsorship agreement Gold Leaf cigarettes, for his Lotus F1 cars to carry the sponsor logos and change their traditional British racing green colours to Gold and red. It wasn’t long before other teams were emulating Chapman’s initiative, and upon the arrival of the 1970s, it was difficult not to find a car with a sponsor’s logo on it. 

A certain Mr Bernard Ecclestone was in the right place at the right time. Having made a significant amount from various business deals during the 1950s and 1960s, Mr Ecclestone was a wealthy man, wealthy enough to buy the Brabham team in 1971. Steadily Ecclestone built up the team to return them to winning ways by the end of the 1970s making him a well respected figure in the F1 community, and also highly influential resulting in him being elected the leader of the Formula One Constructors Assocation (FOCA) in 1978. Ecclestone suggested that the teams group together to negotiate revenue from tracks, having previously negotiated their appearance money individually. Track owners were offered a take it or leave it package, forcing them to surrender all track side advertising space to FOCA.

However, the sports governing body FISA were not prepared to surrender power of the sport to the increasingly powerful Ecclestone, which resulted in years of conflict between the parties, with FISA threatening to set up a breakaway series. Eventually FISA gave in, and although they maintained control over the sporting regulations, crucially FOCA had acquired responsibility of negotiating and distributing television revenue. This began the era of big money, with increasing TV audiences together with Ecclestone’s astute business mind resulting in the sport now being broadcast in 128 different countries and bringing in a global audience of nearly 600 million viewers.

Continued expansion

This would not have been possible without expansion to none traditional Motorsport countries which continues to this day. Max Mosley was given responsibility of overseeing this in 1990 and the sport now visits 19 different countries a year, with Bahrain, China, Korea, India, Singapore and The United Arab Emirates being the most recent new additions to the F1 calendar, all being added in the past six years. This opens the sport up to an even bigger audience, making the sport even more attractive to any company that should wish to become affiliated with it.

Formula One’s financial peak

Formula One reached its financial peak between 1998 and 2002, with seven different manufacturers being involved in the sport for the 2002 season, each investing upwards of $100 million. Toyota were the biggest spenders, with rumours suggesting they spent upwards of $445 million per year.            

Money continued to be ploughed into the sport from the ever expanding audience base, with TV revenue and ticket prices being distributed to the teams in the form of prize money for championship position, with this estimated to have been a pot worth $2.9 billion in 2006.

Formula One’s adaptation to the financial crash

During the 2002 season, F1 entered an era of Schumacher and Ferrari domination, and TV audiences and ticket prices suffered. This combined with the problems in the global financial crisis following September 11^th resulted in a period of decline.

Big manufacturers like Ferrari and Toyota continued to plough money into the sport and eventually smaller privateer companies such as Jordan Grand Prix, couldn’t keep up and their performance suffered. Without performance, there is was less prize money and hence fewer sponsors wishing to become affiliated with the teams. Between 2002 and 2008, five separate privateer teams failed in their attempts to remain in operation reducing the number of starters to twenty for the 2008 season (two of which were additional cars fielded by Red Bull). Of these twenty cars, twelve were part of a manufacturer run team.

 Then came the credit crunch and the car buying market was critically hit and expenditure on Formula One became difficult to justify amid mass redundancies. This resulted in the withdrawal of BMW, Toyota and Honda, which would of reduced the field to just 14 if it hadn’t been for the efforts of Bernie Ecclestone and the newly formed FOTA (Formula One Teams Association) who rescued most of the manufacturer teams from collapse (Honda racing became Brawn GP) and set about reducing the cost of participation to make smaller teams more competitive. A new selection process to encourage new teams to enter was initiated by the sports government body (now the FIA) which resulted in the establishment of Virgin Racing, Hispania racing and the return of Lotus.

The future

The sport continues to get itself embroiled in controversy and political disputes, with Ferrari recently having a highly public dispute with the FIA over their alleged use of team orders. This combined with the uncertainty surround the sport following an attempted breakaway series set up by FOTA last year (sound familiar?), the Mclaren spygate controversy of 2007 and the Lewis Hamilton liegate of 2009 have damaged the image of the sport and its attractiveness to potential sponsors. However, Chairman of FOTA (Mclaren team principal Martin Whitmarsh) has conceded that the sport has much work to do in increasing its appeal to audiences by further utilising the Internet, lowering ticket prices at circuits and improving the on-track action. These plans are in place, with a new set of regulations being drawn up for 2013 which should achieve these objectives as well as lowering the general costs for teams. This combined with F1’s continued expansion into new markets (the first Indian grand prix in 2011, the return to the United States in 2012 and rumours of a Russian GP for the same year) should put F1 back on the right track to profitability by further improving sponsor appeal.