How can Liberty Media extend the F1 calendar while also introducing a budget cap which would limit how much teams can spend? And how can they hope to attract new teams to F1 while dismantling the ‘B-team’ model which allowed Haas to thrive?
These are the contradictions the sport’s owners much resolve in the next four months, explains @DieterRencken.What’s the difference between Brexit and F1’s post-2020 regulatory process? Brexit could be delayed…
Time is running out for Liberty Media to win support from F1’s team for its 2021 overhaul of the sport. At least six teams – Renault, Haas, Racing Point, Sauber, Toro Rosso and Williams (plus possibly McLaren) – are unlikely to agree to any extension of current agreements that outline F1’s regulatory and commercial framework beyond the end of 2020.
Their reasons are not hard to fathom: the current bilateral agreements, entered into with all teams individually and euphemistically referred to as a ‘Concorde Agreement’, favour Ferrari, Red Bull Racing, Mercedes, and – to lesser degrees – McLaren and Williams. The rest are massively disadvantaged by the inequitable commercial and regulatory clauses, as their financial situations show.
To many – including this writer – the brightest moment of CVC’s custodianship of the F1 was undoubtedly the moment Formula One Management and its ownership of F1’s commercial rights were signed over to Liberty Media. Given current ructions surrounding the sport, that surely says everything about CVC’s tenure.
In terms of common law, any extension of contracts requires unanimous agreement, and thus all teams would need to concur before the expiration date of the agreements could be pushed out beyond the end of December 2020. However, for the reasons outlined above, a least half the grid is unlikely to agree, particularly as the future survival of the vast majority hinges upon an equitable revenue structure.
[smr0901]The first milestone F1 needs to hit is the 30 June 2019 cut-off for regulation sign-off, as demanded by the FIA’s International Sporting Codes, which applies in the absence of any superseding agreement – as outlined here.
Could a superior agreement be struck before that time? Possibly, but unlikely given that such a deal would require the agreement of the FIA, Liberty and all 10 teams, each of which have entrenched interests. The last such umbrella agreement, the 2010-12 Concorde, took almost three years to ink.
Equally, bear in mind that we are only not concerned with F1’s future technical regulations. These are likely to be based upon the current rulebook, with amendments for 18-inch wheels and tyres, possibly some brake changes (due to larger wheels), provisions for upgraded safety items, plus provisions for increased power. The latter was indicated in the FIA’s call last week for a gearbox cassette supply contract, the tender for which outlines:
“An average input speed increase of around 14% from [2019], and a power increase for 2021 relative to today, not just because of natural development, but also because of a 30kW increase in the MGU-K output.”
Thus some tweaking of the current rule book will be required; overall, though, the anticipated 2021-onwards technical regulations are likely to be more evolutionary rather than downright revolutionary.
Not so the sporting regulations. The same deadline applies: 18 months before the applicable season (2021), so 30 June 2019 – just four months hence. These regulations are likely to see substantial changes, particularly as the sporting regulations control items such as weekend formats and testing, in addition to items such as standardised and listed/non-listed parts.
Here there may be some crossover between sporting and technical regulations. Using the gearbox cassette as example, the sporting regulations may state that standardised gear sets are mandatory, and outline related matters such as penalties etc…, while the technical regulations specify nuts-and-bolts stuff. Should, for example, refuelling be mandated, the sporting regulations will specify number of stops and flow, while technical regulations provide tank size, coupling and valve details.
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To further complicate matters, the 2021 regulations (thus far) represent the first regulatory change in which the teams have had no overall say since the early eighties. True, they have given input into the current process and have been consulted along the way but, in terms of the ISC, the changes need not be put to the team vote as is currently the case, and has been since the 1981 Concorde Agreement was signed. Don’t underestimate the significance of that change.
But the significant variable in the sporting regulations is what form of spending restrictions F1’s masters might decide on. For the broad outline (at the very least) needs to be enshrined in the sporting regulations for a budget cap to be enforced, and level of penalties handed down in the event of breaches.
Delay the cap beyond 2021, and Liberty may as well admit defeat – an all-out spending war between Ferrari and Mercedes will be the result.
Thus the latest proposal centres upon a $185m cap – excluding power units, reckoned to be capped at $15m/annum for a two-car supply, allowing for an effective ceiling of $200m – for 2021, reducing by $25m for each 2022/3 respectively. Yet, to the majors even that is too tight despite three years’ notice before the end game is reached, for they stand to lose up to 400 heads each unless they are able to redeploy them.
Meanwhile Liberty is targeting more races. But the reality is that additional rounds costs more, which a ‘hard cap’ does not cater for. Another complicating factor is that flyaways can cost twice as much as European rounds – even after FOM subsidies – yet Liberty is increasingly targeting more of these far-flung races: Vietnam already has a spot on the 2020 F1 calendar, Miami and others are being courted, while Silverstone, Catalunya and Monza are endangered.
The idea is that more races – particularly flyways – deliver increased revenues for Liberty and, therefore, the teams. Yet what use more money unless it can be used to offset additional costs, which a “hard cap” does not permit?
Any wonder, then, that Liberty is battling to get the concept of a budget cap ‘across the line’ before the sporting regulation cut-off date. True, there are ways and means of forcing the issue, but that risks alienating the sport’s top draws, namely the ‘big three’ who may just decide to go play elsewhere – particularly given the motor industry’s love affair with electrification.
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Consider: Mercedes and BMW are jointly investing a billion Euros in ‘new era mobility’ solutions initially aimed at 90 cities, which basically translates to ridesharing, renting, charging, and autonomous driving. Does F1 fit into that lot in any way, shape or form? Hardly. And while it may not need to, against that background F1 needs to make more economic, technological and marketing sense than ever before.
Thus, Liberty should rethink the entire concept of a “hard cap” and link expenditure to race calendars, with realistic values allocated to European and ‘international” rounds, in turn adjusted for double-headers. Thus Euro rounds could be worth, say, $5m and a set of European back-to-backs $4.5m each. Equally, flyaways could be valued at $10m, and a set at $9m each.
As for manning levels: teams in any event take on contractors at peak periods, so linking headcounts to fluctuating annual budget caps is elementary human relations stuff as undertaken by their parent companies on a regular basis as they cater for the ebb and flow of production volumes. The calculus applies equally to Mercedes and Ferrari for road cars, and Red Bull for drinks cans.
Another challenge facing Liberty is the question of new teams. Although 20-car grids are acceptable, the loss of just two outfits (see above) could spell disaster, and not only due to taking the number of cars (16) perilously close to the minimum which race promoters are contracted to receive, but also for the negative impact on the ‘show’. Thus, it would be prudent for Liberty to attract at least one, preferably two, start-ups.
Twelve teams would, after all, be better than ten, and would leave F1 less vulnerable to the departure of one or two teams. However, the structure of modern F1 is such that its costs of entry are prohibitively high for all but multi-billionaires.
Tellingly, four of the last five teams to enter F1 as start-ups plunged into administration within a handful of years, with Haas being the only exception – having entered F1 in 2016, and immediately scored points. Last year Haas placed fifth in the classification and had the fourth-quickest car. How did Haas manage to succeed where four others failed spectacularly?
In short, by adopting a ‘listed parts’ business model; to wit, purchasing all permitted components from a team (Ferrari), and out-sourcing the balance of parts. Thus, Haas’s Banbury base is effectively an assembly / race shop, where the various parts procured from (mainly) Ferrari and Dallara are bolted together.
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Yet if early indications are on the money, Liberty plans to outlaw this kind of model by increasing the quota of certain listed parts – those that teams need to hold the intellectual property to – while standardising others that render a Ferrari/Haas approach either impossible or uneconomical.
Overall this approach makes sense, for it ensures bona fide teams are genuine stand-alone entities, able to compete on merit. However, the flipside is that, by banning the ‘listed parts’ model outright, the sports risks not attracting incoming teams.
A potential solution is to permit fledgling teams to enter into ‘mentor’ arrangements with willing teams – F1 internships, so to speak – for limited periods, say three years. Thereafter they would be required to adhere fully to prevailing sporting and technical regulations. Thus start-ups could have three-year ‘runways’ before flying on their own.
Amongst the objections raised by teams against the ‘listed parts’ model is that supplier teams profit from the arrangement, in turn providing them with larger war chests. However, under the budget cap model, flexi or not, spend is restricted, and income from ‘intern teams’ would be written to profits, not performance.
Thus, everybody wins, and, crucially, nobody loses – while providing employment for folk who would otherwise be laid off. And, as befits this most capitalist of sports, a team stands to make a genuine profit.
All this will, though, take time to convert into regulations, and herein lies the rub: Unlike Brexit, there can be no extensions.
RacingLines
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- Todt defied expectations as president – now he plans to “disappear” from FIA
- Sir Frank Williams: A personal appreciation of a true racer
Witan
27th February 2019, 12:56
A good clear explanation of the problems and pitfalls for the new era being designed. Thank you.
I get the feeling that it all might just fall apart by trying to be too clever.
Aleš Norský (@gpfacts)
27th February 2019, 13:31
Very good analysis as always @DieterRencken. Sounds like too many knots need to be untied in impossibly short time, and it would be very interesting to see where it all ends up. Just to illustrate how things have changed in the past 30 years, it is worth noting that in 1989 a total 47 drivers tried to qualify for a World Championship race, and over the course of 16-race season, 40 of them did, 29 scored top-ten finish and no less than 12 stood on the podium. There were 20(!) constructors and seven engine manufacturers. It was a different world and in many ways, things have been going downhill ever since.
anon
27th February 2019, 18:26
@gpfacts, mind you, when you look at the list of teams that were competing in 1989, 15 of those teams no longer exist.
A lot of those teams lasted for barely a few years – EuroBrun lasted just three years, whilst Rial lasted for just two – and almost all of them were gone by the middle of the 1990s. There might have been a lot of teams in that year, but when nearly three quarters of those teams have vanished within five years, it indicates that things really were not sustainable in that era either.
Aleš Norský (@gpfacts)
27th February 2019, 18:59
Yet it still shows that there was great interest to be in Formula 1, whether as driver, team owner, engine supplier, or sponsor. The circumstances turned against such trend, and today, we can hardly get ten teams together, while for half of them it still is a struggle.
@HoHum (@hohum)
27th February 2019, 21:34
@gpfacts, Nice, glad someone cares about the facts, I’m guessing that the design rules were less restrictive when those teams entered, and even though many fell by the wayside (nearly 15 according to anon ?) obviously some new teams entered thereafter as F1 would not have survived with only 5 (or 6) teams if anon is correct.
Aleš Norský (@gpfacts)
28th February 2019, 1:47
@hohum Yes it is true that of the 20 constructors present in 1989, only three are intact today and three more exist in another guise after various acquisitions. But the point is that 1989 was the year when Formula 1 began to retract. Until then, every team that disappeared was replaced by another, and probably for every three falling, four new would appear. Haas aside, the newest team on today’s grid are Red Bull, founded in 1997 as Stewart.
José Lopes da Silva
28th February 2019, 9:27
Quite correct.
Who was responsible for selling F1 to CVC in the first place?
@HoHum (@hohum)
28th February 2019, 11:47
Max Mosley, by dint of his sweetheart deal giving Bernie a 100+ year ownership.
ruliemaulana (@ruliemaulana)
27th February 2019, 13:41
Just like Brexit, extension of uncertainly only prolong the leader reign and damaging teams ability to adapt.
Liberty can have six more races for all I know, but the teams should had the right to earn more too.
Liberty should not afraid to imposed ‘hard cap’ if they able to show financial sense of how much it cost to enter F1 and how much Liberty as commercial holder guaranteed minimum earning for every teams, existing or new entries.
The more Liberty show their fear to make decision, the more the chance they gonna cave in to handful oligarch teams interests.
Fudge Kobayashi (@)
27th February 2019, 13:56
I met Chase Carey in a pub in Central London a couple of weeks ago – he said everything was on track for 2021. He was clearly just trying to get rid of me as he wanted to watch the football! 🤣
Phylyp (@phylyp)
27th February 2019, 14:04
“I came here to get away from it all and this guy Fudge accosts me, all chirpy about F1” :-D
Fudge Kobayashi (@)
28th February 2019, 9:34
@phylyp
It was almost exactly like that I was far too enthusiastic. ��🤣��
I did get a picture though, then explained to the two young ladies why I was so excitable about this old dude with a funny tash.
@jerejj yes I know, I literally had to walk up to him and say excuse me are you Chase Carey. It was so random
Phylyp (@phylyp)
28th February 2019, 10:09
@ftruth – LOL! I just hope Mr. Carey took note of your enthusiasm! For all our criticism of Liberty, they are the best hope for F1’s continuation, so a fan willing to engage with the boss is a good thing.
Also, if it were Bernie, I’d wonder if someone would have approached him in such a manner, for fear of walking away with a contract for annual payments to Bernie for the privilege of having shaken his hand once.
Fudge Kobayashi (@)
28th February 2019, 12:55
@phylyp If it were Bernie I doubt he would have been drinking in a pub in Piccadilly to be fair. Nice to know that the powers that be are somewhat less elitist than in the past!
Jere (@jerejj)
27th February 2019, 14:32
@ftruth @phylyp LOL. What a coincidence nevertheless.
socksolid (@socksolid)
27th February 2019, 15:48
I think the biggest issues for new teams are the car, the full race season and the delay of payments. This makes it almost impossible to survive the first 3 years before the money situation becomes balanced. All the while the new team has its weakest car with weakest results and biggest need to do well to attracts ponsors.
The car is difficult because you need to build a full f1 car for your first season. I think this could be helped massively if new teams were allowed to buy more of their parts from the competitors. For first year let them buy almost full car from someone else. For second year cut that in half and in for third year same as everyone else. This allows the team to grow gradually into its role as manufacturer. It can hire the people it needs without having to worry about gardening leaves and availability of personnel on super short notice. It also allows them to buy or build the infrastructure it needs after their second season. There is even enough time to build wind tunnels in that schedule. It also makes these teams little more competitive for their first season which makes it easier for them to attract sponsors and make f1 entry more interesting for others who are thinking about joining.
The full season requirement could be made more reasonable. Let them have just one car or do select races. Or both. On their first season. Again this allows the team to gradually grow into the sport and f1 does not need to worry about whether the new team is at the next race or not. Of course these races need to be scheduled beforehand and not done on moments notice. Then on second season they need two cars and be in every race.
Third thing is the money. F1 needs to establish a system where new teams are automatically entered into certain contracts so you don’t have situations like haas where they had to compete for two years before they got their full column 1 payments. These should not be special occasions where one tries to get their share and the other doesn’t want to pay it. There should be clear process for new teams how to enter into f1 that lays out a clear economical plan that has requirements for both sides.
GongTong (@gongtong)
27th February 2019, 20:14
Now that F1, F2 and F3 are all under the same umbrella, I’d really love to see a promotion/relegation system start to get serious mention. For both drivers and teams.
The first step that’s required is for them to push for more viewers in those two feeder series, the easiest ways to me are A) online FREE viewing of both (even if F1 really must stay behind a paywall). B) spice them up with silly gimmicks like FE has. This second part serves a few purposes, it brings younger viewers to the sport that, in the future will mature into F1 viewers. It also keeps F1 “pure” of such toys as FanBoost etc.
If the feeder series were relevant ways to get viewers they could be used as the “runway” into F1 for teams. And, hopefully, could be used to keep the customer team relationships from spilling too far into the top tier. Job losses would always be less of a concern for folding teams/withdrawing manufacturers, because maybe more options would exist for a cheaper arena to compete in.
This is a far bigger fish to fry than the current issue though. And they already have a big enough fish to be getting on with.
Gabe
27th February 2019, 16:31
The model for success is full factory support. The model for survival is close alignment as a “B” team. That basically leaves Williams and McLaren as outliers and that independent model doesn’t seem to work any more. It feels like the rule changes are done in part to continue to prop up these types of teams a bit longer. I don’t have any problem with ‘listed parts’. But I’d be happy watching a 20 car Ferrari parade every other week, and think Liberty should just do whatever needs to be done to keep Ferrari happy.
GongTong (@gongtong)
27th February 2019, 20:18
On the other hand, personally I’d rather see Ferrari finally follow through on their quit threat and watch 10 relatively “low glamour” teams get on with racing. If that was what was necessary to take a punt at some form of level playing field.
Coanda (@ming-mong)
27th February 2019, 16:54
And how will all this be policed? $ or funny hidden $, tax, wind tunnel time, scaled model sizes, secret testing, the list goes on..
If you think the giants will play by the book think again. Even if they wanted too they cant. In their mind they would always be thinking a rival team would be breaking the cap using deceptive ways to compete therefor so must we.. No different to PED in sport.
Klon (@)
27th February 2019, 20:31
It’s fairly simple: all F1 teams need to become seperate companies (IIRC most of them are already) and said companies have to open their books at any time to FOM/FIA. Every expense by a company has be noted in bookkeeping, failing to do so could mean not only trouble as far as FOM/FIA are concerned, but also as far as tax offices are concerned. Are you really willing to cheat at a sport if you run the danger of having tax auditors/police running around the office if the sports’ controlling agency find bookkeeping irregularities?
Obviously there are still ways around this, but all it takes is for the FIA to pull the trigger once. If they have the courage to say “You, you, you and you are all disqualified. The 202X WCC champions are (e.g.) Haas.” just once and teams will be much more cautious about breaking the rules. Of course there is going to be occasionally shady things happening still, but if the fear of it being circumvented ought to stop anybody from introducing rules, no code of law could ever exist, let alone rules for a sport.
Alianora La Canta (@alianora-la-canta)
27th February 2019, 21:13
Not sure that’s an option for the UK-based teams, as they’re not required to have books fully together for inspection until the September following each year’s completion. The bookkeeping can exist (and it’s recommended part of it is done as soon as possible after the relevant income/expenditure). However, it certainly doesn’t have to all be in the same place, much less verified to the standard necessary for an external audit to be valid. The law requires all these steps have to be possible for the company to make a full accounting of itself by the September-following-accounting-year deadline, but a potentially irrevocable sporting decision can’t be made on a provisional audit unless the team has done something comically foolish (more likely to happen with a small non-listed team – Williams has stricter requirements in some senses – with no reason to cheat, than the teams with enough money to have an incentive to do so on purpose)
If the FIA said a team failed inspection, and the official tax office version eventually received indicates the team should have passed, the FIA would have a big credibility problem on its hands, that it wouldn’t be able to fix because the sporting records for motorsports races aren’t alterable beyond mid-December of the year they occur unless the appeal has already started. Unless the FIA plans to make every F1 team’s position provisional every single year (and therefore only have the trophy ceremonies at the FIA Gala a year after the competition, long after everyone outside F1 had forgotten about it), that isn’t going to work… …and disqualifying on that sort of technicality is likely to make viewers think they can’t trust anything they see on screen due to lack of proximity between offence and the attempt at justice. It would be the financial equivalent of cycling before and after the major 1990s and 2000s doping scandals.
Also, some of the steps to create a full accounting in UK law can’t be done “in the moment”, only in the context of a complete month’s accounting, meaning it would be impossible to give a valid external audit until the month with the last race of the season at the very earliest, even if the FIA felt like taking the legal risks associated with attaching sporting decisions to provisional auditing. If an FIA investigation triggered the tax office/police’s intervention, those authorities would take this into account, giving the team time to get the accounts into the version required to defend themselves against the FIA (assuming the team hasn’t been so foolish as to break a law requiring immediate action).
If the only allegation is that a team has not met the finance rules, neither the tax authorities nor police would care, thus they would not bother the team; it would be a contract law matter, which is not a criminal offence in the way tax evasion (not testable until long after the FIA would have stopped caring about the information) or, say, fraud would be. Contract lawyers might look at the books with an independent auditor in tow, but they’d be doing it with the requirements of law and reasonable contractual expectations in mind – and most likely, they’d be under the instruction of the team’s own lawyers (each side being required to divulge relevant information to the other on request unless a good reason exists to do otherwise, means the other side would probably just request the independent auditor’s information to the extent the law requires).
If the last race of the season is near the end of the month, teams would most likely be justified in stating a court would uphold their right to not have an auditable monthly report until the following month ends. If F1 is to avoid the situation described in the previous paragraph, and wished to continue sealing F1 events along with other international motorsport events in mid-December, it could not hold any races after early November. This would require Liberty to foreshorten its calendar by a month (so much for the 25-race calendar idea), or else have a total rejig of the calendar to start earlier (difficult, as events held in November and early December on this year’s calendar wouldn’t automatically work climate-wise in February or early March).
I am told the Italian and Swiss accounting systems aren’t necessarily any more amenable to external auditing of the type necessary to make a budget cap practicable the way the FIA and Liberty seem to want, though the American accounting system might. I’m not even 100% sure the Italian system permits an outside private organisation to levy a penalty onto another for not meeting desired structural requirements, and Ferrari’s never going to accept being told how to structure itself if it can get away with it in law…
Alianora La Canta (@alianora-la-canta)
27th February 2019, 21:14
(Sorry, that was meant to be a separate comment at the end of the comment chain, not a reply to anybody).
Coanda (@ming-mong)
28th February 2019, 1:58
I’m sorry to say this however I think your being naive.
Alianora La Canta (@alianora-la-canta)
27th February 2019, 20:41
Also, different accountancy practises in different nations would pretty much force everyone to risk being in breach, especially since if it’s set by the FIA, none of the teams uses the same accountancy protocols as it, and if it’s set in the USA, only one team (Haas) has even partially the same accountancy protocols as it. The extent to which different national accountancy methods differ (and despite efforts in the last few decades to homogenise, there’s still subtle and important ones), would naturally result in some sailing close to the edge and others going over. Probably without this being detected for a year or two while the information from the different systems came in. By which point it would be too late to reverse the sporting consequences of even deliberate cheating.
Only if every act of cheating could be guaranteed to be caught as it was happening or more or less immediately thereafter could a budget cap be feasible, especially given that the teams with the most incentive to do it have the most methods available to them to lose or hide extra funds, and come from two quite different accountancy regimes (three, if you consider that some of Red Bull’s accounts go through Austria as well as the UK).
Jimmi Cynic (@jimmi-cynic)
27th February 2019, 21:34
@alianora-la-canta: Spot on.
If the ‘budget cap’ is introduced, at least we’ll get some new teams… Panama Mercedes F1, Jersey Williams F1, Torro Caymans Racing F1, Red Barbados Racing F1, Racing Luxembourg Points F1, Andorra Renault F1, Haas Belize F1 and Bahrain McLaren F1 (no change there).
Of course Sauber…er… Alfa would be unaffected because… Alfa Switzerland Romeo Racing, and it’s new wholly independent subsidiary, Marlboro Ferrari Swiss F1.
;-)
Coanda (@ming-mong)
28th February 2019, 1:53
Haha good one..
rpaco
27th February 2019, 19:07
It is encouraging only insofar, that the word “Franchise” does not appear to have been mentioned recently. When Liberty took the commercial rights lease they seemed to be considering a McDonalds type approach, with the teams becoming franchisees and paying and being beholden to Liberty Media
It is very obvious that the cost cap (if one is ever made to work) must be an amount per race or an escalating amount based on 20 races with an amount per season pro-rata to the number of races. It is very simple. However maybe it is not because the team costs are not linear, they increase when the second travelling team crew take over the original having been worn down by exhaustion. This is not only inefficient but dangerous but then some continuity and process memory (like mucle memory) is lost.
Originally bernie used to arrange cheapair transport for the teams, if this were re–introduced by Liberty the effect of more far flung flyaway races could be ameliorated.
Alianora La Canta (@alianora-la-canta)
27th February 2019, 20:44
As far as I know it’s continued for teams featuring in the top 10 for 2 out of the previous 3 years – but I think Bernie Air only paid for the first 2 tons in excess of the minimum number of cars required by the regulations, for all that it was willing to transport more than that if the appropriate bill was paid. It’s been a long time since even the smallest team considered this sufficient to run a team (and not just because teams tend to sail non-speed-critical items such as hospitality furniture).
Dieter Rencken (@dieterrencken)
27th February 2019, 23:13
It’s 10 tons and 20 econ air tickets per GP
@HoHum (@hohum)
27th February 2019, 21:53
Also keep in mind that Bernie paid for that air freight out of general revenue so the pot was smaller.
Jimmi Cynic (@jimmi-cynic)
27th February 2019, 23:22
@hohum: And Liberty pays for ‘marketing’ out of general revenue, so the pot is smaller again.
With a smaller pot, budget caps seem the best approach. For Liberty. Expanding the race calendar increases revenue. For Liberty.