Going round in circles: Formula One and the financial tightrope

Ahead of the second annual edition of the Black Book Race Forum on 30th June, we examine the financial conundrum being faced by many Formula One Grand Prix promoters.

Ahead of the second annual edition of the Black Book Race Forum on 30th June, SportsPro published a special report on the business of motorsport in the June edition of the magazine.

As the Honourable Artillery Company in the heart of the City of London prepares to play host to high-level debate and discussion on the state of play in Formula One and the wider motorsport industry, David Cushnan examines the absence of the German Grand Prix from this year’s Formula One calendar as an example of the financial conundrum being faced by many Grand Prix promoters, especially those in Europe and those unsupported by public funds.

Despite its huge revenues, enormous global reach and the riches gleaned by majority shareholder CVC Capital Partners over the past decade, financial strains exist across Formula One. Teams, faced with the huge costs associated with the latest set of engine regulations, are struggling to stay afloat – one failed to make it to the end of last season, while another was patched together just days before the 2015 campaign began – and continue to be unable to agree the type of cost-cutting measures which would make a significant difference. At the same time, sponsorship is more and more difficult to accrue and the sport’s byzantine central distribution system has been weighted hugely in favour of the largest, most successful teams, resulting in further headaches for those operating at the other end of the grid. The cost of competition is far too high.

Broadcast numbers, meanwhile, are on a gentle decline in several major markets, in part at least as a result of the sport’s decision to eschew free-to-air broadcast coverage for more lucrative pay-TV deals and in part due to a fragmenting media world. As this has played out, though, Formula One has fallen well behind the social media and online content curve – a snazzy new website, a newly opened YouTube channel and a more active Twitter feed are recent moves in the right direction, but catching up with major sports properties will not be the work of a moment.

Formula One’s venues are feeling the pinch, too, particularly those that stage Grands Prix without the financial muscle and appetite of soft power-seeking governments. The sport’s hosting model is well-established and undeniably successful, for Formula One Group at least: to stage a Grand Prix costs a multi-million dollar annual franchise fee, which escalates by as much as ten per cent annually. With only a few exceptions, usually based on history, Formula One Group controls all the trackside advertising and hospitality, leaving the venues themselves with only ticket sales as a major income stream.

Slight variations on that model exist around the world but the general rule is that without sustained government support – or, in the exceptional case of the revived race in Austria, the backing of a company like Red Bull – turning a profit as a Grand Prix promoter is a mere pipedream, even if the global visibility and economic impact provided by a Formula One race remain impressive.

“Profits cannot be generated in the absence of state support, so it is all the more necessary at least to cover costs by attracting a large number of spectators,” confirms Georg Seiler, summing up the predicament faced by the modern-day Formula One promoter. Seiler is managing director of Hockenheim, the long-time host of the German Grand Prix. In more recent times, it has hosted the event in alternate years, sharing the financial burden with another historic German venue, the Nürburgring. 

In 2014, despite a returning German world champion in Sebastian Vettel, a German championship contender in Nico Rosberg and a dominant German team in Mercedes-Benz, the crowd for the Grand Prix at Hockenheim barely got over the 50,000 mark, less than half of the 120,000 circuit capacity.

Theories abounded as to why: high ticket prices, the failure of Vettel and Rosberg to capture the German public’s imagination as Michael Schumacher once did, and the return of the Austrian Grand Prix, just over the border, were all cited. “Germany is a very vibrant market,” noted former Jordan GP marketing director Mark Gallagher, who remains a close observer of the business of Formula One, earlier this year. “Interest in Formula One in Germany remains undiminished, particularly in the corporate world – they still love it. However, somehow there’s been a disconnect at the fan level. It’s very surprising.”

For his part, Seiler suggests that the decline “is due in part to technology and regulations, but also to the age distribution of the fans, who form an ageing demographic”. He adds: “Motorsport plays only a minor part in the ever-growing range of recreational activities, particularly for young people.”

Alternate German Grand Prix host Hockenheim could not agree a deal to cover for the Nürburgring.

As part of the system of alternation adopted in 2007, Hockenheim has a contract in place with Formula One Group to stage a German Grand Prix in 2016 and 2018. This year’s race was due to take place at the Nürburgring, but financial and management turmoil over the past year meant the venue was unable to reach an agreement for 2015. Formula One turned back to Hockenheim.

“According to the 2015 contract, it was not our turn to hold the Grand Prix,” Seiler explains. “This is the basic initial position and has determined our conduct. We would nonetheless have stood in for the Nurburgring as replacement organisers, and we accordingly made an offer that would have been financially viable for us.”

Formula One chief executive Bernie Ecclestone has recently claimed to have offered a 50 per cent discount on the usual price, in a bid to retain a German Grand Prix for 2015. “That still left them in trouble,” he told the BBC in April. Seiler won’t be drawn on specifics – he still holds a contract with Formula One Group, after all – but a deal could not be reached. For the first time since 1960, a Grand Prix season will take place without a stop in Germany. Seiler calls it “most regrettable”. An offer of assistance from Mercedes-Benz came too late to save the race.

For critics, it is another example of the sport’s central rights holder, still fronted by Ecclestone, disregarding the mostly European heritage of the sport. They point to the loss of the French Grand Prix in 2008, the continuing struggles faced by historic venues such as Spa-Francorchamps in Belgium and Silverstone in the UK, and the growing murmurs that Monza, home for so long to the Italian Grand Prix, may be struggling to meet Formula One’s financial demands when its current contract expires in 2016.

All are venues without significant government support. Seiler could be speaking for several circuit promoters across the continent when he says of Hockenheim: “Previous discussions with regional and state political institutions offer little hope of future support.”

In parallel with the growing financial pressures for promoters across Europe over the past decade, Formula One has engaged in rampant geographical expansion – new events in ambitious new markets, often with little or no motorsport pedigree, almost always funded by the state. Many within Formula One believe the balance between tradition and modernity has become skewed, to the detriment of the sport.

Since 2004, stops have been added in Bahrain, China, Abu Dhabi, Singapore and Russia. These followed the lead of Malaysia, commonly viewed as the first of the new-generation Grands Prix – government-funded and designed to promote a nation as a venue for tourism and business – when it was first staged in 1999. More recently Formula One has returned to the United States, with a largely privately funded event in Austin, Texas, while Mexico returns to the calendar in 2015. A race on the streets of Baku, the capital of Azerbaijan, is scheduled for 2016, titled as the Grand Prix of Europe to fit in with the central Asian country’s vision of closer ties with and positioning amidst more westerly nations.

If Singapore’s night race and Abu Dhabi’s twilight event have gelled immediately, becoming popular and glamorous additions to the calendar, some of the others have taken rather longer to bed in. Bahrain was beset with well-publicised political issues, prompting the cancellation of the Grand Prix in 2012, while the jury is still out on whether Formula One can plug the large legacy gap in Sochi, stage of the 2014 winter Olympics and then, a few months later on a new permanent circuit wending its way through stadiums and arenas on the Olympic Park, the first Russian Grand Prix.

By no means have the new breed of races all been successful. Since 2005, events in Turkey, India, Korea and Spain’s third city Valencia have all been and gone, their departures hastened by a mix of bureaucratic and financial problems, but the pattern is clear. It is little surprise that Qatar, where resources match the ambition to become a sporting capital, is rumoured to be the next country to pay its way on to the Formula One schedule. With 19 races already on the 2015 calendar, even without Germany, the pressure increases by the year on European venues, unable and unwilling to pay what some governments can and do elsewhere.

“The history of Formula One should be respected here,” says Seiler of Europe. “Traditional races should remain fixed in the calendar, since they have contributed greatly to Formula One’s success story in the past and continue to do so.”

Even the newer batch of state-backed events are beginning to examine more closely the return that Formula One delivers. The sport has often used the promise of an annual economic and visibility boost, making the comparison with one-off mega-events such as the Olympic Games and Fifa World Cup, to strike deals for races, but the signs are the numbers will be crunched much more finely in the future, as tourism and event strategies mature.

There are also indications that circuit promoters even in the most resource-rich markets are aware of the decidedly mixed fan reactions to the new, rather less visceral, live Formula One experience, as caused by the new generation of hybrid power units – undeniably sophisticated and impressive they may be, but they are also significantly quieter than what came before. April’s Chinese Grand Prix was attended by 145,000 over three days and the local government’s contract for the race has two years to run, but quotes attributed to Yang Yibin, the marketing manager of local race promoter Juss Events, by the Shanghai Daily newspaper suggested the draw of Formula One is not what it once was.

“The races are not as brilliant as they were a decade ago,” Yang said, frankly. “Changes have to be made to the sport,” he added. ”UBS was the title sponsor of last year’s Chinese Grand Prix, but they didn’t extend the contract this year, and there must be a reason for it.”

In Bahrain, meanwhile, the budget for the 2015 Grand Prix in April, encompassing local market and promotion, was slashed by over a quarter on the previous year, while Malaysian politicians took their time before signing a three-year extension to their contract to host a race at the government-funded Sepang International Circuit in March, a period shorter than the usual five or seven-year contracts Formula One prefers.

Back in Europe, race promoters and circuit executives are being forced to find creative uses for their vast sites simply to be able to afford Formula One. Hockenheim employs around 70 full-time staff and is hired out for around 300 days of the year. “Day-to-day business is our most important source of income,” says Seiler, referring to track and corporate days, driver safety training courses, hotel accommodation, catering and conferences. Formula One aside, the circuit’s big ticket events are the DTM, Germany’s leading touring car championship, the NitrOlympX drag racing event which celebrates its 30th anniversary this year, and a summer season of music festivals and concerts, including AC/DC. With Formula One draining resources, he is not the only Grand Prix promoter on a constant search for alternative revenue streams.

“We essentially have two businesses,” notes Silverstone’s new managing director Patrick Allen. “We have a thing called the British Grand Prix and lots of other things that we do, which is the other half [of turnover]. If we expand the other half and make that more profitable, then that can help subsidise the cost of running Grands Prix.” Allen, who has embarked on a savings plan in parallel with a new focus on customer service at the British Grand Prix venue since arriving at the turn of the year, has plans for concerts, food festivals and to “sweat the asset” of The Wing, the Northamptonshire circuit’s vast pit building, which was designed to also host a variety of events.

While Silverstone expects a 120,000 sell-out for July’s British Grand Prix, helped in no small part by Lewis Hamilton’s homecoming as world champion and some new Allen-led ticketing initiatives, Seiler offers a more worrying assessment of Hockenheim’s chances of filling its own grandstands come the return of Germany to the calendar in 2016. “Unfortunately, there is little that can be done to influence buying patterns,” he reports, indicating that Hockenheim faces a peculiarly German problem. “We hope that the 2015 season will be an exciting and spectacular one – as it is already promising to be. That is the best advertising.”

And, perhaps speaking for many, he adds: “A partial return to the golden days of Formula One, with less technology and simpler rules, would also be worth working towards.”

This article appeared in the June 2015 issue of SportsPro. To subscribe, click here.

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