It is doubtful that Naisbitt, best-selling author of Megatrends, followed Formula 1 or even knew about the sport’s existence given he spent his business career with the likes of IBM and (Kodak) Eastman before serving as special economic adviser in the White House in the sixties. But his words surely provide the key to unravelling the year ahead, at least as it pertains to off-track activities.
Here’s a pointer: On December 25th, F1’s FWONK share price traded just 23 (US) cents above its 12-month low, which it hit in November immediately after owner Liberty Media’s annual investor meeting.
Given that share price provides the primary indicator of Liberty’s performance as F1’s commercial rights holder, this trend illustrates the extent of the uphill challenge they face in 2019. True, share prices are all about perception, as the inflated values of new technology companies surely proves. But to investors, perceptions are reality until disproven.
Liberty has an awful lot of disproving to do in the year ahead. This applies across the board, from ensuring its direct-to-consumers F1 TV Pro streaming service is worthy of the term ‘Pro’, through to signing up all 10 teams to sustainable Concorde-type agreements that encompass equitable revenue structures and full-participation regulatory processes, to budget caps and technical/sporting regulations that promote better-quality racing.
And these are only the headline items.
Pulling all this together is a big ask. But the company has held F1’s rights for a fortnight under two years, so time for excuses has expired. A recent interview in the Sunday Telegraph with F1 CEO and chairman Chase Carey refers to “the building of core operations spanning sponsorships, promotions, television marketing, [and] digital and communications at offices in London’s St James Market development.”
FOM’s London workforce has “doubled from about 75 [heads], while F1 also has about 300 people based at Biggin Hill in Kent, most involved in producing television feeds” it continues, which points to an overall increase in headcount of 125 over 2016, or 40% growth. The question on many paddock lips, though, is: ‘Are they the right people?’ In short, quantity or quality? Value for money?
Liberty will need to provide answers to such questions in 2019, particularly as F1 teams are indirectly funding the salaries of dozens of ‘whizzkids’ given the team ‘pot’ comprises approximately two-thirds of F1’s underlying revenues (after operating costs), and the payroll is very much an operational cost. Hence they have every right to question the overall performance of Liberty’s appointments.
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The key subject for 2019 will be 2021, for unless a Concorde-type agreement is sorted soon, F1 risks going racing in a ‘no deal’ scenario, as the current covenants expire at midnight on 31st December 2020. Just as national chaos is forecast for Great Britain under a ‘no deal’ Brexit, so No-Concorde F1 threatens to be utterly chaotic, with Liberty having no assurances of entries, and teams no assurances of racing.
Optimists point to a two-year window between now and then. But that overlooks the fact zero tangible progress has been made over the past two years. Liberty’s stated policy is not to negotiate in public, but teams are adamant that nitty-gritty talks have yet to begin. While a broad-brush roadmap was presented behind closed doors at the Bahrain Grand Prix in April, the mooted changes to engine regulations have since been scrapped and an 18-inch tyre contract signed without team input.
Agreement on the structure of a budget caps, let alone exact levels and specific exclusions, seems to have stalled. This is further compounded by pending changes at the very top of F1’s three manufacturer-run teams: Daimler’s Dieter Zetsche will shortly be replaced by Olla Källenius, Carlos Ghosn (Renault) faces serious legal issues in Japan and the position of Ferrari’s interim CEO Louis C Camilleri, replacement for the late Sergio Marchionne, is also under threat.
Furthermore, as outlined yesterday, the Scuderia faces (short-term, at least) management upheaval. Under such circumstances the default approach for Ferrari could well be to invoke its veto over everything…
During the run-up to Christmas a senior team figure told RaceFans that policing of budget caps is likely to prove virtually impossible due to the different company structures of teams. As explained in our two-part analysis of F1 teams’ budgets, the likes of Ferrari does not report its F1 expenditure separately, while Red Bull Technologies supplies both Red Bull Racing and Toro Rosso.
Liberty is trying to solve a decades-old problem. As Ron Dennis remarked to the now-defunct Grand Prix International in 1983 while in charge of McLaren: “Teams like Ferrari and Renault spend far more on their racing than they like to admit. Drivers paid out of corporate PR budgets, engine development written off against R&D costs: people like them don’t dare add up the true cost of going racing.” Take a look at the figures we reported last month to see which of today’s teams that applies to.
Mercedes supplies complete rear ends to Racing Point (under whichever guise the team formerly known as Force India intends to race in future) and who is to say that the price charged is fair and equitable for non-controlled items such as transmissions, hydraulics and electronics, plus trackside support? Of course, standardised parts are expected to be introduced as part of Liberty’s package, but others are likely to slip through the net.
A possible solution to the budget cap problem could be to make it a conditions of participation that each team is entered by a dedicated company registered for the sole purpose of competing in F1, with that entity’s books being totally transparent and accessible upon demand – including by the ultimate arbiters, the media and their readers – which would need to reflect the exact value of inter-company transactions. True, some could remain hidden, but that would be a wilful act…
If, though, this problem has perpetuated for four decades, what chance of Liberty plugging that gap within two years by demanding that totally separate operating entities be established without risking walk-outs by the top two or three teams? And that is even before discussions turns to equitable revenues, the scrapping of the Strategy Group that provides the elite few with enormous regulatory power, and suchlike.
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The teams received a sharp wake-up call in July when the FIA issued calls for a tyre tender without reference to the Strategy Group. This was a gutsy move, for certain teams believe their bilateral agreements with FOM – which hark back to pre-Liberty days – empower them to approve regulatory changes (by majority vote) until 31st December 2020, regardless of the effective date of any changes. Yet there was not a whimper.
When asked about the situation, FIA F1 Director Charlie Whiting told RaceFans: “There’s no need for [post-2020] regulations to go through the Strategy Group because that governance expires,” adding, “The separate matter of whether or not [changes] need to go to the F1 Commission; [they don’t], strictly speaking, because there’s no government beyond 2020. There’ll probably be a Formula 1 commission, but it may be a different one.”
Thus, in the absence of any post-2020 regulatory body – specifically the Strategy Group and F1 Commission – the FIA (in tandem with Liberty) are relying on the provisions of Clause 18.2.2 (headed as “Technical design of the Automobile”) in the FIA’s International Sporting Code, which can only be overridden by exceptional agreement and states:
“Changes to technical regulations… will be published no later than 30th June each year and come into effect no earlier than 1st January of the year following their publication, unless the FIA considers that the changes in question are likely to have a substantial impact on the technical design of the automobile and/or the balance of performance between the automobiles, in which case they will come into effect no earlier than 1st January of the second year following their publication.”
That’s clear, then: F1’s post-2020 technical regulations, which will have obviously a ‘substantial impact on the balance of performance between automobiles’, need to be done, dusted, approved and published by 30th June 2019, or the FIA could find itself in serious breach of its own regulations and/or face hefty litigation from aggrieved teams.
The same applies to the equivalent sporting regulations, changes to which are provided with identical timeframes under Clause 18.2.3.b of the ISC, which further provides for a reprieve under 18.2.4: Shorter notice periods than those mentioned above may be applied, provided that the unanimous agreement of all competitors properly entered for the championship, cup, trophy, challenge or series concerned is obtained.
Let us recap: Teams are unlikely to ‘properly enter’ the championship unless they know exactly what they’re signing up for, and this hinges as much on commercial terms as it does on technical and sporting regulations, one or both of which could, indeed should, contain clauses providing for cost controls and any penalties associated therewith. Plus, in most instances, main board approval will be required for participation.
Having totally revamped its stall since first setting it out in Bahrain last year, Liberty thus has one last shot at persuading the teams to sign up to its ‘Remain’ campaign. That process continues next Wednesday in Geneva, when the FIA, CRH and all teams convene for a Strategy Group meeting in the morning (where the five disenfranchised teams will be reduced to mere bystanders) followed by a F1 Commission meeting after lunch.
Although the Strategy Group session holds no sway over 2021, as outlined above it remains empowered to vote on 2019/20 matters. Both meetings provide Liberty with opportunities of presenting its wares ahead of the first World Motor Sport Council meeting of the year on the 7th of March, again in Geneva, and timed to coincide with the city’s motor show.
Thereafter a single chance of approving 2021 regulations within ISC provisions remains: during the second WMSC meeting of 2019 on 14th June, coinciding with Le Mans.
To be clear, while the Strategy Group can be (and is being) bypassed, and the F1 Commission requires re-configuring, particularly as the current edition is constituted in terms of existing bilateral agreements that expire at the end of 2020, the FIA’s WMSC needs to ratify all regulations changes by the 30th of June 2019 for the 1st of January 2021. A massive task.
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There is a theoretical alternative, one relied upon in 2008/9 after the 1998-2007 Concorde Agreement expired without a replacement being in place. That is to extend the validity of the current bilaterals by mutual agreement. But this would risk maintaining the present inequitable status quo, including Mercedes domination, Ferrari veto and F1’s current ills.
However, due to the 18-inch tyre agreement and the associated structural requirements, the existing technical regulations could not simply be rolled over, meaning all change on that front would be required in any event. Thus, retaining the status quo (akin to extending Article 50 if we stretch the Brexit metaphor) is in real terms unlikely to be an option.
Formula One has a tradition of delaying decisions until well beyond sensible deadlines, then finding itself rushed into the worst possible compromises. This seems to be a continuation of that practice: despite Liberty having already spent over two years attempting to find solutions to F1’s self-inflicted issues.
At the root of all this lies Liberty’s patent inability to comprehend F1’s present, and therefore inability to predict (let alone provide) a solid future, whatever form that may take for F1.
The CRH is not only up against vested interests such as Mercedes and Ferrari pushing for no change, but equally faces real life restrictions in the form of sporting codes, regulatory procedures and, crucially, F1’s greatest enemy on- and off-track: time. From the latter, there simply is no escape.
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