“Old Bernie F1 business model” may not be sustainable – Wolff

2018 F1 season

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Mercedes executive director Toto Wolff says the high races fees F1 commanded under Bernie Ecclestone may no longer be a business model the sport can rely on.

Several F1 race promoters are known to be pressuring Liberty Media, the sport’s commercial rights holder, to reduce their fees. Wolff said some promoters are struggling economically because of them.

“The sanction fees were one of the three key revenue generators in the old Bernie Formula One business model,” said Wolff. “And he was exceptional at these deals.

“I am not sure it is sustainable. It is clear when there is a change of regime that people and promoters will negotiate and try to restructure the business model.

“Bernie was squeezing the last cent out for the benefit of the shareholders and the teams but it left certain promoters in a very difficult economic situation.”

Last year the British Racing Drivers’ Club, which promotes the British Grand Prix, activated an exit clause in its contract with FOM, allowing it to pursue a new deal to host the race from 2020.

The Azerbaijan Grand Prix promoter has the option to do the same after its 2020 race. Baku circuit executive director Arif Rahimov said it is seeking a reduction in its fee, bringing it closer to the average price of $30.6 million paid by the promoters.

“Obviously we want to be closer in that mid-range of fly-away races,” said Rahimov. “You cannot just take the average of all the races because obviously European races pay less for a lot of reasons, starting from logistics and cost of operation. But we definitely want to be there in the average of the fly-away races.”

Races outside Europe pay around $40 million on average.

“That’s not the only thing we’re discussing with FOM,” Rahimov added. “It’s most of the other commercial terms in the contract too. They want to try a new approach, it’s a bilateral kind of effort to make this viable for all of us.”

Wolff believes Liberty Media will have to look to new areas to increase revenues as race fees come under increased pressure.

“I have confidence in the current management team that they will take the right decisions,” he said. “Find the right agreements with promoters, sign new racetracks. I think Miami is very exciting.

“But it is also clear that one pillar is going to be difficult to maintain on the levels we have seen before. We have to go in other areas, we have to grow broadcast deals, digital revenue and modernised, alternative revenue streams.”

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Dieter Rencken
Dieter Rencken has held full FIA Formula 1 media accreditation since 2000, during which period he has reported from over 300 grands prix, plus...
Keith Collantine
Lifelong motor sport fan Keith set up RaceFans in 2005 - when it was originally called F1 Fanatic. Having previously worked as a motoring...

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  • 22 comments on ““Old Bernie F1 business model” may not be sustainable – Wolff”

    1. What’s not sustainable is the FOM/Liberty capital structure because that capital structure is dependent on the excessive hosting fees and pay TV walls. The sooner the capital structure is blown up the sooner F1 can reset to a more appropriate and sustainable business model. Ferrari, Mercedes and Red Bull hold the cards and hopefully they will play them correctly.

      1. @gary, can you explain a bit about the ‘capital structure’? I’m really not sure that I understand what that is.

        1. It’s a debt of $8,000,000,000 that’s billion with a B. @nickwyatt

        2. Liberty Media paid $8 billion for F1, debt plus equity. And in what is this $8+ billion invested? Just goodwill and other intangible assets, as Formula One Management has no hard assets other than a few TV cameras and fancy place settings for a few hundred (Paddock Club). This $8.0 billion of invested capital simply represents the legacy of Bernie and CVC, who capitalized the future earnings stream of F1 on their way out the door, despite the fact that both of these parties had made a windfall fortune on F1 without consideration of any sale proceeds. The resulting capital structure requires a minimum of $800 million in annual after tax (pre interest expense) operating profit to satisfy the cost of capital. And yet this diversion of 50% of the sport’s earnings power does not benefit the sport, rather is just the perpetual (legacy) “payoff” to Bernie and CVC.
          This sport’s commercial rights should not be owned by a third party, rather it should be owned by teams and the FIA. This is how it works in the Premier League, the NFL, MLB, NBA, etc. Whatever skills and expertise are resident at Liberty Media are easily replicated in the commercial arm of an entity owned by the teams and the FIA. There is simply no reason to have this third party albatross consuming $1.0 billion of revenue produced by the Sport, and which therefore forces this unsustainable business model.
          I’d be pleased to write up a more thoughtful analysis on this subject for Dieter. I know of what I write.

          1. “This sport’s commercial rights should not be owned by a third party, rather it should be owned by teams and the FIA.”
            The championship and the commercial rights are owned by the FIA. But the commercial rights are leased out, currently to Liberty Media.
            This arrangement is due to the 100 year agreement, a result of the EU Commission ordering that the rule making and the commercial sides must be separated as previous to the deal it was all run by the Bernie and Max club. The FIA sold a 100 year lease on the commercial rights for a piddling $300m. Part of the reason for the ridiculously low figure was to compensate Bernie for the large amounts he had spent setting up digital tv coverage, unfortunately he was 20 years ahead of his time and it was wasted.
            The EU commission ruling can be found by a simple internet search.

            When Liberty bought the remainder of the lease from FOM/Delta Topco etc there were several huge loans of billions which Bernie had negotiated, only to give the money away to shareholders as bonuses. Thus it was very deep in debt and in my opinion worth about zero for several years.
            They are about to loose well over 50% of UK fans next year when there is no FTA tv coverage.
            The reduction in tv audience makes it even more less likely that teams will find sponsors, thus be reliant upon prize money for survival. So it is both essential that the distribution is changed and that there is a cost cap brought in. (Though I cannot see a cost cap ever working without continuous dispute)

            1. Many thanks to you all (gary, rpaco, @hohum) for the explanation. It really does seem like a mess!

            2. Unfortunately there is no way back. They need to service their loans and pay back the debt. They can only do that by bringing in large sums of money. The only way to really do that is to make sure they get large payments from the tracks and large payments from TV companies. Also even if they wanted to offer Free to air coverage they can’t in the high value markets as Bernie signed up to long contracts with Pay wall TV stations. This is leading to fewer viewers and so less value in sponsorship for the teams.

              F1 is pretty much a dying beast and it would be more humane to put it out of its misery and start again with a fresh new born…

            3. lee1,
              That is exactly my point. The “way back” is to blow up the capital structure. That would happen if the major teams broke away in 2021. FOM would be forced into administration, eliminating the capital structure, and the lease with the FIA would break due to violations of contractual commitment. Formula One could then be reorganized and run the right way, without the onerous capital commitment due to the legacy of Bernie and CVC.

          2. Seems like Liberty didn’t pay 8 billion. F1 had been valued at 8 for the purpose of the sale. They paid 4.4 through various ways and means and inherited debt. Not the same as paying 8. If they had paid 8 they’d be debt free I would think.

            1. They paid $8 billion for the enterprise, including the assumption of debt. That’s how it works.

    2. What a surprise, squeezing the many so that a few can be billionaires is not sustainable. If nobody believes in bankrupting themselves to watch/host F1 then F1 is worth nothing. I pray more tracks refuse to host F1 so this foolishness ends.

    3. If the cost to the promoters are lower they have flexibility on pricing. If this is exercised the cost per seat can move into an area where more fans can attend. More fans in the seats can begin a butterfly effect e.g. more fans in seats can increase what promoters make on misc sales such as food/drink, teams have the chance to sell more merchandise and the eye balls could increase for races outside of the host country. There is a 3 ways benefit to promoters, teams and Liberty.

      There is a balancing act to finding the price point that can cause a 3 way business benefit and increase the fan base.

      Bernie did a great job growing F1 internationally, but his greed created an unsustainable business model.

      1. F1 was effectively a giant pyramid scheme devised by bernie to line his pockets at the expense of everyone else. Just like most pyramid schemes it seemed fine for a while but then suddenly all the interested parties find themselves screwed. I think liberty have also been stung too. I just can not see how they are ever going to make their money back.

    4. Neil (@neilosjames)
      2nd June 2018, 13:59

      I think the hosting fees chunk of the income stream is far more sustainable than the TV rights side. And probably more sustainable than sponsorship.

      But that’s a bit like saying one lump of fresh elephant poo smells nicer than two other lumps of fresh elephant poo.

    5. One of the issues with the current model is the organizers pay huge fees but then have limited choices for generating revenue. I think they’ll have to be able to sell add-ons to a race or weekend ticket like pit lane access between sessions, driver autograph sessions etc.

    6. Most of the countries F1 gets their fees from have economies in the hundreds of billions per year. $30 million to thumb your nose at all the countries in the hood is not only worth it, its cheep. The return on investment is significant, not just in tourist dollars but in messaging that your country is safe and sophisticated. Build a hotel, build a factory we have workers that are cheep and live in peace. All those knock on effects count up to big money returns on that $30 million dollar investment.
      Right now the world is celebrating almost ten years in a low level economic recession, the US economy looks like it starting to take off and this little engine drives the world economy.
      Here come better times, the FOM should make deals which address the lagging local economies but with that typical increase as each year goes by. The classic FOM income streams still can work, its just about tweaking at this point.

      1. it would be interesting to know the full cost to a promoter besides the $30M+ fee for the race. You have security, parking attendants, clean up, bathrooms, facility & track updates, etc – if you are street circuit you have cost to setup & tear down. I wouldn’t be surprised the total cost to put on a race is 2-3x the $30M+ fee.

      2. You have a point. However the countries willing to foot the bills are often unstable dictatorships and they are the ones that value the glory over anything else. Silverstone do not get any Government money and neither does the US GP and Australia as far as I know. Dictators however are not exactly reliable. They can change their minds just because they woke up in a bad mood or someone made them a bad cup of coffee… If China or Russia decided to stop their contracts mid term then their is little Liberty could do about it.

        What would be better is to go with a more sustainable business model and one that benefits all involved including the fans.

        1. Aus GP is assisted by the local government. Not all taxpayers in Victoria are too pleased about it, either.

          1. Local government yes. National government no. This means that Melbourne needs to balance the feelings of the local population with what they perceive as the benefits. So the GP needs to benefit Melbourne in order for them to stump up any money. If they feel the price is too high they will dump it.

            This is not quite the same as dictatorships paying whatever the cost in order to get one up on their neighbours.

    7. we have to grow broadcast deals, digital revenue and modernised, alternative revenue streams.

      Reducing expenditure expectations is a big hurdle for F1. None of the teams believe they can survive with less money than they currently get, but they are going to have to accept that is the future. Liberty Media’s idea of a budget cap sounds like an anathema, but the truth is F1 is itself in a race for consumers’ money, and thanks to Mr Ecclestone’s belief F1 is better for being seen by less people, F1 can expect to have less money to go around. I believe F1 is poorer for being a series dominated by a few teams, especially since those teams are favoured by F1’s TV rights payout.
      One can’t expect the host of a Grand Prix to run at a loss from the event, and it needs to make a profit that can support the track at least until the major next race they host. Demanding a hosting fee means a track has to recover that money from elsewhere so they can make a profit. Not making a profit attracts the attention of banks and accountants, and the idea it would be cheaper for the track to remain idle than to stage the Grand Prix looms on the horizon.
      F1, as the premier open wheel racing series, should be seen at the best race tracks in the world. Unfortunately, paying to race at those tracks means there’s less money going to the teams. So we’re stuck with tracks that are prepared to pay a hosting fee. If one track equates to the price of one and a half new engines, then 20 tracks will have paid for half the engines required for the season.

    8. European races pay less for a lot of reasons

      How ironical! Wasn’t Baku’s first race tipped as European Grand Prix? Anyways those hosting fees should be divided by two for everyone.

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