Back in the day when Bernie Ecclestone headed Formula 1 – whether for his family’s account, a syndicate of bankers who acquired the F1’s commercial rights by default or CVC Capital Partners, to whom they sold the majority rights – the only inkling the specialist media had about the sport’s financial performance was revealed each September, when myriad F1-related entities filed annual accounts with Companies House.
However, since early 2017, when Liberty Media acquired F1’s commercial rights, NASDAQ and Securities Exchange Commission regulations make it mandatory for the listed entity (FWONK and FWONA) to publish quarterly results, and provide disclosures.
Thus Liberty Media Corporation, the holding company for numerous entities including F1, hosts quarterly earnings calls, during which headline numbers are revealed and explained to analysts. The last such call – with 11 analysts – took place last week, with Liberty revealing its performance in the second quarter of 2019.
The report shows that the Formula One Group registering a turnover of $620m (up from $585m in the same quarter last year) – of which $531m (versus $491m) was directly attributable to F1 activities, with the rest being generated by associate companies – delivering operating income of $26m (versus $14m).
Expressed differently, these numbers equate to an overall return of 4.1%. More worrying, given that F1 currently carries $2.9bn (yes, billion) in debt, projected annualised operating returns of little more than $100m mean Liberty could still be settling its loan commitments for the nest 30 years unless profitability improves dramatically.
Who knows what shape the overall motorsport landscape – more particularly F1 – will be like in 2050?
Encouragingly, though, payments to teams increased by 9% from $307m to $335m – a stark reversal from previous quarters, when revenues dropped due to increased expenses and overheads, primarily due the costs of the new St James offices, increased head counts and marketing/research programmes.
During the investor call F1 CEO and chairman Chase Carey had much good news to crow about: race contract renewals in Australia and Great Britain, through to 2025 and 2024 respectively (although Silverstone’s deal was, strictly speaking, signed in Q3), plus the signing of Zandvoort.
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Ditto, much was made about thrill-a-minute races in Austria, Britain, Germany and Hungary – but these fell into Q3, while the controversies and torpidity of Canada and France respectively were glossed over…
Understandably, Liberty’s report and painted a rosy picture of the state of F1, yet Carey’s subsequent responses to questions from analysts suggest that F1 remains very much a work in progress for Liberty, particularly with respect to television coverage and regulatory matters. Some responses to fundamentally straightforward question about the state of F1’s various TV offerings – F1 TV, free-to-air and pay channels – were bemusing.
Having told analysts “F1 TV is steadily improved throughout the first half of the season and we’re getting closer to our targets, both in terms of content and reliability,” Carey’s answer to a direct question from an analyst about the product’s (well-documented) issues was less than illuminating:
“In a nutshell I’d say that Formula 1 TV, the over-the-top product, is certainly still a work in progress and certainly I think probably improving, expanding, and enhancing the content component of it, it is certainly a part of that.
“If we think about it, there are sort of three steps you have to get through to really build this and they have to happen in sequence, first, which is we’ve been working on.” He described the steps as follows: “The platform has to be reliable, then we need to find the content experience that’s how somebody is going to buy it and then you need to sell and market it.”
Carey finished off his answer to the questioner by admitting F1 TV was still a ‘work-in-progress’: “We had a foundation, but it’s clearly a foundation to be enhanced and I think what we expect, [we] will have there. I think there is something that it does, can and will appeal to the passionate fans we have for the sport, which is significant around the world.
“And I think we believe it’s an important opportunity for us to continue to build on, but it is a work in progress.” F1 TV has been under development for almost two years now.
Equally, a question on F1’s overall TV’s ratings, particularly in the UK – where the loss of Channel 4’s free airings have hit eyeballs – did not elicit a direct response, but rather a vague blaming of the aftermath of the (Russian-hosted) FIFA World Cup, which was said have affected Brazil’s ratings.
Carey also spoke about the return of the ‘Formula 1: Drive to Survive’ Netflix documentary, humorously asking ‘who’ll be the Guenther Steiner of season two?’ – with Carey confirming all ten teams are participating in the new nine-part series. It will be interesting to see how they intend forcing 10 teams into nine programmes…
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Although Carey spoke about F1’s 70th anniversary in 2020 – by referencing the season’s opening round in Australia – he steered clear of mentioning (rumoured) plans to produce a ‘Seventy Years of F1’ documentary on a multi-part style basis. A production deal is believed to have been inked between Liberty and Sky TV in early August, with the series scheduled for next summer.
A pertinent question homed in on the crucial balance between viewership and income, and how he saw the situation evolving.
“There’s no question that’s the ongoing dynamic, they both are important,” he said. “We don’t have a formula to look at it, I mean there are too many factors to try to sort of put a formula in place that plays over, and each market is different.
“I think what I’d say is generally, which had been true and sort of all sports content, probably content in general, [is] the trend continues to certainly be toward pay platforms.”
Carey believes that Liberty “will continue to move toward pay platforms, because that’s where the world is going. I think also as you look forward, people have to realize and get educated that reach is taking on a very different meaning. Realistically, if you want to reach a 20-year-old today, it’s [via] a device you hold in your hand, it’s not [with] a 60-inch screen you put on a wall.”
The good news for fans, though, is that a recent expansion of the partnership with Magneti Marelli means, “This will enable our ability to transfer more live data from the Formula 1 cars to the broadcast centre, and improve the quality and quantity of race information that can be shared with audiences worldwide.”
An modified version of the tracking data feed was recently introduced to the media which vastly improves our ability to ‘read’ races by visually tracking cars in smaller segments, and here’s hoping that the final version eventually flows to a screen near you.
Liberty recognizes that Esport is a massive growth area, one the company hopes will eventually cross over to the bricks and mortar F1 circuits and thus in his address Carey provided demographics on F1’s latest contest:
Over 109k participants took part in qualifying across 156 territories, with 79% of participants being below the age of 34, and half being under 24. All 10 teams selected their drivers during the Pro Draft on July 17th and these will join their official teams to prepare for the Pro Series comprising of 12 races contested over four live events.
Carey alluded to Liberty’s plans for a new sustainability programme which, as revealed here previously, will include the introduction of synthetic fuels.
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“One of our priorities, and we are going to [reveal] more in the fall, is really an untold story in Formula 1, [in] the strides we’ve made to date in terms of sustainability.
“The hybrid engine that was launched a few years ago was an incredible step forward in terms of fuel efficiency while retaining power, and we are working aggressively on things like synthetic fuels, actually working with the oil industry as a whole on synthetic fuels, biofuels, hydrogen fuels.
“I think you’ll see between now and year-end, the sustainability issue becoming a much more front and center part of our story, and something actually, we think – we’ve talked in private with a number of our partners that are quite excited about [it] – that the environmental issue is important to everybody.
“A big part of making strides forward in that is how do you reduce carbon emissions from the combustion engine, and I think that it could be as important as anything out there.”
According to sources, F1 plans to undertake a root-and-branch analysis of its activities across the entire sport with a view to developing sustainability projects in conjunction with partners, sponsors, teams and suppliers. Initiatives could even include ‘green’ companies as race title sponsors and partners.
While such a project is welcome and overdue, the sport would still trail Formula E, which appointed a sustainability officer almost two years for a carbon footprint about a tenth that of F1, understandably in view of the electric championship’s different structure and calendar.
“We’ll also have other initiatives in terms of environmental steps around our live events [and] freighting things to events, so it’s a multi-dimensional story around this,” Carey added.
“But I think the part we’re putting particular energy into is the degree to which we’re reducing – [the target is] reducing carbon emissions with the combustion engine, and I think that has more upside for us than anything.”
As regards future calendars and revenues, apart from stating that Liberty’s Miami and Vegas dreams are still alive, Carey was guarded, saying the 2020 F1 calendar would shortly be announced, but adding “In general what I’d say about the calendar is I think we expect the number of races over the next few years to increase a bit.
“I think there is a limit to how much, but I think we do expect it to go up marginally. And, as we announce the calendar, we’ll provide more insights [as] to when and where that occurs.”
There’s little new in those comments, not even a definition of ‘marginal’, but his later references to the number of events proved more illuminating, for he referenced ‘supply and demand’ before adding. ‘We value our historic relationships, but it’s important to carve out opportunities to add a new race when demand is there.”
“I think there are some places where, and I’ve touched [on] them before, we inherited situations where we were not receiving what we should be receiving when we came in,” he added. What was this in reference to? Possibly Brazil, said by our sources to be on a zero sum contract, or Monaco, which has long had among the most favourable terms due to its perceived status.
Carey’s response to questions about progress towards the 2021’s technical, sporting and financial regulations were brushed off with comments about the complexity of the ongoing discussions, which must produce a resolution by the end of October. Surprisingly, apart from the word ‘Concorde’ being mentioned thrice and fleetingly at that, no reference was made by either side about the expiring teams agreements, which lapse at the end of the 2020 F1 season.
These lapsing agreements dictate team payments – and thus Liberty’s operating income – so it seems a surprising omission, or was it by design on Carey’s part? Either way, it’s the big elephant on the grid, particularly given that team payments made up $335m of F1’s primary Q2 income of $531m – or 63%. Movement in either direction will surely affect Liberty’s share price commensurately.
As updates go, this one provided very little in the form of hard information save for statutory information being revealed. That said, the analysts may consider themselves fortunate: While Carey takes questions from analysts every quarter, that is four times the access the F1 media as a whole has had to the boss of F1 lately.
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