Chase Carey, Circuit of the Americas, 2019

Will F1’s teams buy into Liberty’s latest prize money plan?

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With Formula 1’s 2021 technical, sporting and financial regulations having been published by the due – albeit delayed – date of 31 October 2019, two further components remain outstanding. These are an agreed, more equitable revenue structure and a revised, inclusive governance process.

The first-named is self-explanatory: the business of Formula 1 generates around $2 billion in revenues annually off the back of ‘the show’, and thus it is only fair that all players receive fair portions of its proceeds after expenses, known as EBIT (earnings before income tax).

The exact EBIT ‘portion’ and how it is distributed between teams is central to their remaining in the sport and, in some instances, remaining solvent. It is therefore of paramount importance to both teams and F1.

Although the size of the ‘pot’ grew substantially from 2013, significant sums are disbursed as annual bonuses to a select few teams to induce them to remain in the sport until 2020. Hence F1 operates under an inequitable revenue structure that has resulted in all grands prix – without a single exception to date – being won by the three largest recipients of these bonuses. No coincidence, that.

Equally, the sport’s governance is crucial to the welfare of the sport of F1, for it determines the nuts and bolts of the regulatory process, and is thus effectively its legislative handbook. The current process is convoluted in structure in that it has four levels, and is discriminatory in execution in that it excludes half the teams, and hence the constant logjams and regular bog-downs that have blighted recent seasons.

2021 F1 car rendering
It’s not just the cars that are getting overhauled in 2021
Thus, if Liberty as commercial rights holder and the FIA as regulator are to grow F1 as per their stated plans, they need to ensure that the both the sport’s revenue and governance structures are fit for purpose – which the prevailing equivalents patently are not.

Immediately after both sets of regulations for F1’s new era were published and in place, discussions for these outstanding components stepped up a gear. A presentation on prize money was made to all teams by Liberty executives during an F1 Strategy Group meeting held in Paris on October 16th.

Although such presentations are by their nature strictly private – particularly as Liberty is a public company, being listed on NASDAQ, and such information affects the share price – the fact is that by the nature of F1 nothing remains confidential. Particularly as grievances about F1’s financial and regulatory shortfalls have long been under the spotlight, including at EU Commission level, and remedial action openly discussed.

[icon2019autocoursempu]Indeed a meeting was convened on Thursday in Abu Dhabi, attended by all team bosses, at which Liberty’s proposals were discussed. The team’s primary intention was to push for greater shares of the proposed ‘pot’, but it appears they have left matters too late, and thus have zero leverage. For starters, insufficient time remains to threaten a breakaway series for 2021 given the complexities, formalities and logistics involved.

Various team bosses spoke to RaceFans after the meeting and, while some were more open than others, it was possible to glean their takes on the proposals. One described the situation as the sort of “arm-wrestling you have in any such negotiation” adding, though, that Liberty’s proposals would be largely accepted.

Crucially, following an EU directive handed down in 2000, the FIA may not involve itself in F1’s commercial matters, and thus the intention is for the sport to operate under two distinctly separate agreements:

1) A commercial agreement between Liberty (F1) and all teams, outlining prize monies and commercial matters. During a select media session held in Abu Dhabi, F1 CEO Chase Carey told RaceFans that the draft commercial agreement would be circulated imminently, probably during this or next week.

2) A governance agreement between the FIA, Liberty (F1) and all teams outlining sporting and other regulatory matters. No timeline has been provided for what will effectively be the ‘Concorde Agreement’, but better later than a hash-up.

Both covenants will run for five years, namely from 2021-25, although teams may terminate their agreements provided notice of termination is given before March 1st for the end of that year.

Revenue structure

Start, Circuit de Catalunya, 2016
F1 last had 11 teams in 2016
According to sources within teams and the commercial rights holder, Liberty’s October presentation was based on tables presented to the teams in Bahrain in April 2018, but these have been adjusted marginally since, with finer points added after feedback from teams. Among other factors, they were concerned F1’s drive to attract new teams would disproportionately dilute the prize fund.

For example an eleventh team, welcome though it would be for the overall health of the sport, is unlikely to result in an immediate 10% growth in revenues. Yet average team incomes would drop by that amount. A twelfth team would further compound the matter, and hence the teams’ understandable concerns.

Thus the proposed solution – originally revealed here – is to levy an anti-dilution payment of $200m on new teams, to be distributed equally amongst all existing competitors. Under the October presentation, the payment may be waived in part or full at the discretion of Liberty subject to any newcomer(s) not boosting grid sizes beyond 10 teams, in which case unanimous team consent is required for partial/full waiver(s).

Thus, Liberty plans to protect F1 in the event that any exits drop grid strengths below 10 teams, while simultaneously ensuring that team income is not diluted in the event of grid growth unless the newcomer brings a substantial boost to the sport. Think Porsche, Audi or BMW.

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Base Fund

Esteban Gutierrez, Haas, Melbourne, 2016
Future newcomers will have to pay to join
F1’s present structure comprises two ‘pots’: a base pot shared by all teams to lesser or larger degrees, and a bonus pot that favours Ferrari, Mercedes and Red Bull, in that order, with others (McLaren and Williams) benefitting marginally.

The base pot is further divided into two sub-funds, known as Column 1 and Column 2, with the former rewarding the top ten finishers equally for their participation, and the latter paying according to championship classification on a sliding scale ranging from 19% through 10% for fifth place to 4% for tenth place.

All teams currently qualify for Column 1, being effectively 10 per cent of that pot, provided they have been classified in the top 10 at least twice during the three previous years. Newcomers do not presently qualify for Column 1 monies during their first two years (this is why the question of whether Racing Point is a new team has been disputed by 2016 newcomers Haas.)

However, under the proposal this will change. All teams old and new will be rewarded for their participation, with any new team receiving (at least) an amount equal to the last place payment – regardless of where that new team finished in the classification. Thus the Column 1 and Column 2 points structure will be merged into a single combined percentage.

Bonuses

Mattia Binotto, Ferrari, Circuit of the Americas, 2019
Ferrari will have to accept a payment cut
While Ferrari’s current bonuses will run to a projected $110m this year – with Mercedes and Red Bull on approximately $75m apiece – the plan is to reduce the red team’s future special payments to $50m per year (around 5% of an overall fund estimated at $1 billion) – and drop all special payments to the other beneficiaries.

As previously revealed, the existing bonus structure will be replaced by a rolling 10-year matrix covering the top three teams in each season, with points awarded on the basis of three for first, second for second and one for third, and additional points awarded for historic constructors championships victories.

The rolling tallies will entitle qualifying teams to proportionate shares of the performance payment pot, in turn comprising 20 per cent of the overall prize fund, with Ferrari’s heritage payment taking it to 25 per cent. By way of comparison, the current bonus fund comprises approximately 30 per cent of the overall fund, with the balance ensuring a more equitable, albeit marginally so, revenue distribution structure.

Prize fund summary

Thus, the championship-winning teams will receive an effective 10% (Column 1) and 18% (Column 2), making for 14% before any bonuses, versus 14.5% under the current structure. Equally, fifth place currently receives a flat 10% of both funds, but benefits from a 10.4% merged payment from 2021.

According to sources the top- and bottom-placed teams lose out marginally, while the midfield teams benefit markedly, making for fairer overall distribution.

Finally, where the current annual prize fund and bonuses are a fixed percentage (of the sport’s EBIT (earnings before income tax), Liberty plans to incentivise the teams by boosting the fund via a complex formula according to growth, thus rewarding them for the sport’s success.

The bottom line, though, is that the mainstream teams will be better off, while the likes of Ferrari, Mercedes and Red Bull will continue to benefit from bonuses provided they continue to perform on-track. The days of ‘by right’ bonuses are over, save for Ferrari’s (halved) heritage fee.

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Governance

The current deals, introduced in 2013, have faced criticism
Few details on the governance proposal are known, but it seems certain the current unwieldy structure will be simplified markedly.

Currently it consists of working groups which feed into the Strategy Group on which five teams sit, with Liberty and FIA representation. This forwards proposals to the F1 Commission (teams, FIA, Liberty, promoters, partners), in turn escalating them to the FIA World Motorsport Council for ratification.

The Strategy Group and F1 Commission are likely to be merged, with representation restricted to teams, FIA and Liberty only. Working groups for promoters, commercial and technical partner and broadcasters will be called upon to provide input on an ‘as-and-where-and-when’ basis, dependent upon topic.

This will, for example, prevent situations where promoters are required to vote on changes of engine manifold pressures or sponsors are called upon to decide on an amendment to tyre usage regulations or the shape of front wing elements. Any wonder the sport’s regulatory processes found themselves bogged down by such minutiae?

Timeframes and voting structures for regulations changes will also be relaxed to eliminate the need for last-minute unanimous agreement for what are on the surface sensible amendments, that are all too often caught up in some or other team agenda.

Conclusion

While no structure could ever tick F1’s myriad boxes, teams bosses seem largely comfortable with the commercial proposals, and save for some last-minute arm-wrestling – call that ‘posturing’ – the teams are likely to sign up sooner rather than later.

Certainly, should one or more decide to exit the sport, it will be for reasons other than F1’s covenants, for as proposed they provide more equitable structures while providing for flexibility and all-important growth. Coupled with the financial regulations they make F1 a vastly more affordable sport for current competitors, if not newcomers.

Barring any unforeseen hiccups, it seems to be a matter of ‘mission accomplished’ for Liberty and the FIA. This may in turn be reflected by the FWONK share price, which last week hit a peak of $44.93 – well up on its 2019 opener of $30.84.

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Author information

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...

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  • 19 comments on “Will F1’s teams buy into Liberty’s latest prize money plan?”

    1. It could probably be argued that, unless those presentations create a risk to commercial performance or competitiveness should they be made public, the presentations should in fact be made public as soon as realistically possible to inform their owners (being the shareholders) as to their plans and the financial implications of such.

    2. @RacingLines if you are happy…I am happy. Still, hopefully this is just a baseline from which other steps are taken in the following seasons…particularly in regard to funds distribution.

    3. EBIT (earnings before income tax).

      EBIT = Earnings Before Interest and Taxes. It is a comon ‘operational profit’ indicator we use eliminating how the company is financially structured (and how much taxes you pay); thus fairer to compare various companies/investments.
      @dieterrencken

      Next lecture will be on EBITDA, excluding non-cash costs ;)

      1. You’re right of course, a gremlin in my part. Thanks for alerting me.

    4. As previously revealed, the existing bonus structure will be replaced by a rolling 10-year matrix covering the top three teams in each season, with points awarded on the basis of three for first, second for second and one for third, and additional points awarded for historic constructors championships victories.

      Presumably the last part of that sentence means teams like Williams and McLaren will benefit from this as well given their past achievements?

      1. Williams, McLaren, possibly Renault/Lotus as well, since all have been around the top 3 a few times in the last decade or won races.

    5. I’m not sure charging $200 million on top of whatever other costs come with starting an F1 team helps the situation at all. Would humbly suggest Liberty scrape off a relatively small amount each year to go into a holding account (put it in a bank or fund to accrue interest even). Maybe even take it from the Ferr/Merc/RBR special funds? Use that money to go toward the anti-dilution costs if a new team comes on.

      1. @hobo – good point, and I agree. Apart from the capital costs of a new entry (not taking over another team), such a charge is only going to further disincentivize any new entrants. And it’s not like we exactly had a crowd beating a path to join F1 in the first place, either.

        On that note, has anyone in Panthera F1 offered any comment about this $200MM payment that is being considered?

      2. I agree, charging $200M to join a racing series starved of competition seems rather rich (excuse the pun). One would expect a new competitor to rank towards the bottom of the World Constructors’ Championship, meaning they’d be in the region of the 4% payout. If you compete for a whole season then you should be paid for being there, just like all the other teams.

      3. @hobo Makes sense now why interested new entrants have been turned flatly prior to 2022. Paying 200m to all other teams for the pleasure of joining the series with said team already being at a distinct disadvantage is ludicrous. Seems to me like they are trying to guarantee no new entrants, ever.

    6. Out of interest which current team (if any) gets the various ‘additional points awarded for historic constructors championships victories’?
      Does the Brawn GP point go to Mercedes? Does Mercedes get the points of the old entries in 54/55?
      Does Renault get the Benneton point?
      And where does the Lotus point go?

    7. It’s always been clear that this “redistribution of wealth” was never really going to change much. However this new proposal looks like pretty much nothing changes at all!

      Apart that is, from Williams losing their heritage bonus while they will get nothing back from the performance related payouts. Which would be fair, but still.

      So our only hope still is the budget cap. Let’s hope that at least that sorts some effect in reducing the performance gap between F1 and F1.5. Perhaps from 2022 we could see things getting somewhat closer.

      1. Discharitable reading on your part, @f1osaurus of a difficult evolution out of the patchwork Ecclestone Concorde into a more businesslike arrangement. For example, Ferrari’s heritage payments are cut by 50%. Ask Ferrari if that’s “nothing changing at all!” This scheme evolves the payments out of the two column menu into a single payment scheme, and both distributes some monies evenly between teams and some monies according to finishing results. This isn’t simple, but it’s also very much not “nothing at all!”

        1. I’m with @f1osaurus and a bit underwhelmed, @rohnjaymiller.
          Ferrari’s heritage bonus might drop from $110M to $50M, but they’ll get part of the $200M ‘performance payment pot’. Based on their current 10yr rolling WDC performance plus historic constructors championships victories this should be more than 31%, thus $62M extra or $112 in total.
          Thus Ferrari will either say ‘nothing has changed’ or more likely ‘thank you very much’.

        2. Yeah if you read only half of the article you can arrive at incorrect conclusions.

          The article refers to the changes being marginal too:

          with the balance ensuring a more equitable, albeit marginally so, revenue distribution structure.

          the bonusses will go from 30% to 25% of the total prize pot. I call that “pretty much nothing”

          As @coldfly shows, it could even benefit Ferrari.

      2. “Apart that is, from Williams losing their heritage bonus while they will get nothing back from the performance related payouts.” – they will until 2025, because they finished in the top3 in WCC in 2014 and 2015.

    8. I can see the real world necessity of caving in to Ferrari’s demand for huge subsidy, but it only provides justification for every other team to ask for their free and unearned slice of the pie.

      Can anyone give an example of another auto racing series where there is an official structure in which, by design, certain teams are handed huge subsidies that create competitive advantages while other teams receive smaller subsidies that do less to affect their competitiveness and some teams effectively receive no subsidy to help them be more competitive against other teams?

      I think that a case can be made for teams to get a bigger chunk of cash based upon superior performance. That may make them more competitive in the following season, but at least they earned it. I think they should completely do away with any bonuses based upon anything except actual performance in the current year.

      If my Mom had been brilliant, had fond a cure for some form of cancer, and received the Nobel Prize for her achievements, should then be lauded and supported lavishly for the rest of my life and my children after me for doing nothing out of the ordinary? Why should any team receive bonuses for the achievements of a completely different collection of car designers and drivers in the 1970s or1980s?

    9. The way to think of the Ferrari special heritage bonus is that when Bernie went to sell F1 to the highest bidder F1 needed to lock in the top talent. Ferrari’s name, in Bernie’s estimation, was worth a chunk of money because it was the flagship of F1 brand equity for sponsorships–no Ferrari, no f1–or so Bernie and many buyers thought five years ago. Argue if you want, but it was the boss locking in the talent so he still had a show to sell to a high bidder.

      Now the question is how does F1 get out of this less justified payment scheme for Ferrari. I don’t think Ferrari, and more importantly, any of the other F1 teams, feel Ferrari shouldn’t get some of that same heritage bonus they’ve been getting. Since it’s only money, you can slap into a spreadsheet and dither the amount paid to Ferrari down over time. Right now this is the proposal on the table for 2021. Could the drop enforced on Ferrari be lower? Okay–how much lower? If Ferrari and most of the f1 teams think some heritage payment is fair, then toss a number or percentage of this or that on the table, and start negotiating.

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