F1 Wealth Creation

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68 FALL 2013



69RACER.com

For more than three decades, Bernie Ecclestone has been relentlessly focused – and hugelysuccessful – in his quest to turn Formula 1 into a multi-billion dollar commercial colossus.

WORDS Caroline Reid ILLUSTRATION Paul Laguette/iStock

(RIGHT) Aged 83,

F1 supremo Bernie

Ecclestone continues

to be the prime

mover in pushing the

multi-billion dollar

business forward.

(LEFT) Ecclestone’sastute business

savvy not only grew

the sport, but made

fortunes for many of

his contemporaries.

No. 1 / THE SPORT

t’s no secret that Bernie Ecclestone is

responsible for Formula 1’s scale and reachas a truly global sport. But the extent of his

impact is only apparent when comparing

the F1 of today with how it was before the

83-year-old billionaire recognized and

nurtured its vast, underexploited potential.Four decades ago, F1 was a shadow of

what it is today. It was a disparate collection

of tracks with often lamentable safety

standards, a freewheeling circus of teams

and drivers that rarely acted in unison, and

piecemeal TV that made it a challenge to

follow for all but the most ardent fan. Sure,it had Ferrari, Monaco and Jackie Stewart,

but it was an adrenaline-fueled spectacle

despite itself. One savvy opportunist saw the

potential, however, and his transformationfrom team owner to an exponentially

Agreement, that commited them to

appear in every grand prix. The agreement

also granted FOCA, the teams’ associationheaded by Ecclestone, the TV rights to F1.

With a guaranteed grid and the broadcast

rights now “leased” to his own company,

Formula One Promotions and Administration

(FOPA), Ecclestone held all the aces. FOPA

negotiated the deals and took a share ofthe proceeds, with the rest going to the

teams and the governing body, the FIA. In

1982, he signed a three-year deal with the

I

A l a s t a i r S t a l e y / L A T

increasing role as organizer, agitator and

catalyst for change forged the modern F1.Ecclestone bought the Brabham team

at the end of 1971 and enjoyed a certain

level of success, culminating in F1 Drivers’

World Championships for Nelson Piquet in

1981 and ’83. However, the Englishmanalways had an eye on the bigger picture: TV.

Into the heart of the 1970s, teams still

made separate deals with event promoters,

and event promoters mostly made whatever

deal they could with a local TV network.

Ecclestone made inroads into organizing

teams to deal with promoters as a singleentity and formalizing TV deals when

possible. But the defining moment came in

1981 when, after a period of conflict with

F1’s governing body, the FIA, he persuadedthe teams to sign a contract, the Concorde

European Broadcasting Union which would

ensure consistent coverage in F1’s biggest

markets in Europe.At last, the pieces of the puzzle were in

place. With guaranteed TV, sponsor rates

rocketed and teams morphed into the

high-tech powerhouses they are today. At

the same time, drivers like Alain Prost,

Ayrton Senna and Nigel Mansell becamehousehold names to further fuel F1’s

superheated growth spurt.

In 1990 FOPA had revenues of just

$14.6m, but by 1995 this had ballooned

to $129.7m and Ecclestone’s salary of$85.1m made him the world’s highest-

paid executive. He still wasn’t satisfied. He

had turned 65 and suffered from heart

problems which culminated in him having

a triple bypass in 1999. The outlook wasfar from clear and Ecclestone wanted to

leave a significant financial legacy for his

“F1 was an adrenaline-fueledspectacle despite itself.One savvy opportunist saw

the potential, however”



70 FALL 2013

now ex-wife Slavica, who he had married

in 1985, and their two young children.

Ecclestone’s initial idea was to float

FOPA, but he was told this would be toughsince it did not directly own the commercial

rights to F1. They are ultimately owned by

the FIA, which had granted them to the

teams, who let FOPA manage them. To

swerve around this, the FIA transferred toEcclestone’s personal investment vehicle,

FOCA Administration (now Formula OneManagement), the commercial rights to

The best business move of his career had

handed him the keys to the billionaires’ club.

Since then, Ecclestone has made $3.9bn

from selling stakes in the company and

taking out loans secured on its revenues.Despite the company changing hands

repeatedly, he’s managed to stay in the

driving seat. Crucially, he also ensured that

F1’s main revenue streams stayed within

the company. Many major sports let venues

arrange the advertising and corporatehospitality during their events, but not F1.

The latest financial statements for F1’s

parent company Delta Topco are for the

year-ending Dec. 31, 2011 and showrevenues of $1.5bn. This generally comes

from four main sources (see table, page 72).

Trackside advertising at each race and

series sponsorship comprises 15 percent

of the total revenue. This comes from

companies such as the Emirates airlineand watch manufacturer Rolex, which are

two of F1’s official partners. Corporate

hospitality, freight fees and revenues

from the GP2 and GP3 support series

add around 20 percent of the total.Fees from F1’s 63 TV contracts bring in

32 percent of the revenue and are second

only to the money received from the races

on the calendar. Together, the race hosting

fees comprise 33 percent of the total,adding up to $512m in 2011.

Just five years earlier, the revenue

from race hosting fees “only” came to

$304m. But it’s been boosted by more

than $200m, thanks to a bidding war

for the prized slots on F1’s calendar.For many countries, holding an F1 race

F1 for 14 years beginning Jan. 1, 1997.

Incredibly, in 2001, a new deal added

another100 years to the agreement, giving

a new expiration date of Dec. 31, 2110.Ecclestone owned 100 percent of

FOCA Administration, giving him complete

control of F1’s rights for the first time in

history. In return, the FIA received a paltry

annual sum of $10.3m. In 1997 alone,FOCA Administration made a net profit of

$90.7m, giving Ecclestone an annual returnon investment of more than 900 percent.

(ABOVE) TV rights

were the catalyst

that set F1 on teh

financial fast track in

the early 1980s and

they remain key today.

(ABOVE RIGHT) The

’72 season was Bernie

Ecclestone’s first year

as an F1 team owner,

helming Brabham.

YEAR

1 9 8 1

1 9 9 5

1 9 9 0

1 9 8 2

1 9 9 6

1 9 9 1

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2 0 0 0

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2 0 0 1

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1 9 9 2

When Bernie Ecclestone rolled out the original 1981 Concorde Agreement, the document that defines

Formula 1’s commercial protocols, 10 of 15 grands prix were based in Europe. In 2013, just seven

of the 19 races were located in F1’s old heartland, with non-traditional markets now dominating.

EUROPEAN EXIT

0

201918171615

910

5

N U M B E R

O F R A

C E S14

8

13

7

12

6

11

KEY: EUROPEAN NON EUROPEAN USA

C h a r l e s C o

a t e s / L A T

L A T

h i



7RACER.com

No. 1 / THE SPORT

Unlike most other major sports, F1 racepromoters don’t generally get to keep any

of the revenue from trackside advertisingor corporate hospitality. Neither do they get

a share of revenue from TV broadcasting.

A race promoter’s primary source ofincome from a grand prix is usually ticket

sales, and this typically barely covers the

hosting fee paid to the Formula One Group.

According to F1’s industry monitor Formula

Money , national or local governmentsinvest almost $450m in races every year.

On average, ticket sales comprise

$22m of the $27m average revenue for

permanent circuits and $29.5m of the

$32.5m brought in by street races.

With hugely popular races such as

Singapore and Australia, street circuitsattract a higher average attendance.

Venues get around 25 percent

commission on food and drink sold at track

outlets. This brings in around $1m, whilepremium parking makes around half that.

Less obvious is that helicopter take-off

and landing slots at permanent tracks

can bring in $1.5m. The world record for

most commercial aircraft movements in asingle day is Silverstone’s heliport during

Neither is cheap, but how do F1 road and street track costs compare?

the 1999 British Grand Prix, with 4,200.It now averages 1,500 per race, with each

slot charged at approximately $1,000.Race costs differ significantly between

permanent and street tracks, with the latter

more costly to organize. The biggest cost isthe hosting fee, averaging around $27m for

both track types. However, street tracks

average $8m to rent portable pit buildings,

another $8m for safety fencing and barriers

and $14m on grandstand rentals.This gives permanent circuits total race

costs estimated at $48m, whereas street

races pay $87.5m on average. It leaves

permanent venues with an annual deficit

of $21m, with street races losing $55m.

Singapore’s government invested

$66.9m in its race last year, but the latesttrend comes from the U.S., where Texas

has an innovative scheme which could

mitigate much of the risk for governments

investing in a grand prix. The state isinvesting up to $25m annually in the

U.S. Grand Prix at Austin’s Circuit of

The America’s via a fund which makes a

payment to the race promoters based

on the amount of tax income generatedby spending as a result of the race.

PUTTING ON THE SHOW

Singapore is a popular F1

venue and a terrific advertfor the Southeast Asian

city state, but government

funding is a must.

Ticket sales $22m $27mOther revenues $5m $2.5m

TOTAL $27m $29.5m

Costs -$48m -$87.5m

LOSS BEFORE -$21m -$55m

GOVERNMENTINVESTMENT

Source: Formula Money

PERMANENT CIRCUIT VS. STREET CIRCUIT



72 FALL 2013

is part global coming-of-age statement,

part tourism driver, played out in front of a

massive TV audience. Last year F1 attracted

more than 500m TV viewers, making it theworld’s most-watched annual sporting

series (the Olympics and soccer’s World

Cup are bigger, but on a quadrennial basis).

In recent years, emerging economic

powerhouses like Abu Dhabi and Singaporehave woken up to the promotional power of

F1, while superpower candidates such asChina, India and – for 2014 – Russia view a

grand prix as an obligatory status symbol.

Central or regional governments are

prepared to bankroll or underwrite thehosting fees for several of the new races,

fueling a grand prix arms race and driving

by up to 10 percent annually. This goes a

long way to explain why F1 is one of thefew industries (and it is an industry) with

consistently rising revenue over the past

five years. It took in $1.07bn in 2006, rising

to $1.16bn in ’07. Since ’08, when revenue

hit $1.39bn, it’s increased at a compound

annual growth rate of 3.1 percent.F1 doesn’t own any tracks, so its costs

are kept under tight control. It only has

313 staff and its biggest single cost is the

payment of prize money to the teams (seepage 74). The bulk of it is 47.5 percent of

F1’s profits remaining after all fixed costs

have been paid. It’s split into two equal

amounts, with one half divided equally

between the top 10 teams and the otherpaid out based on final points. Heritage

payments to Ferrari and a Constructors’

Championship Bonus (CCB) divided between

Red Bull Racing, Ferrari and McLaren furtheradd to the earnings of F1’s big dogs.

Giving the top teams the richest rewards

may seem like a bad idea because it means

that the same teams are the most likely to

win. However, it helps secure F1’s future.In a sport where teams enter and exit

on a frequent basis, or change identity

almost at will, Ferrari, McLaren and,

latterly, Red Bull are marquee names,

beacons of stability, and successful, too.In total, the 2011 prize money came to

$698.5m. Although it’s F1’s biggest cost,

being a profit share links it directly to

financial performance. The more money

F1 makes, the more the teams get. In

2011, that left F1 with a $474m profit,and a great deal of media attention has

been given to how private equity firm

CVC Capital Partners benefited from this.

Last year alone, CVC netted $2.1bn

through selling 28.4 percent of F1 to threeinvestment companies. That left it with

35.5 percent, keeping it as the biggest

single shareholder. In addition, it has

received hundreds of millions of dollars individends from F1’s profits. However, CVC

has been far from the only beneficiary.Prize money rose by $450.5m in just the

four years to 2011, and since CVC bought

F1 in 2006, the teams have banked more

than $3.7bn. Even if you include the income

from the share sales, the sum that CVC hasreceived from F1 is roughly similar to the

amount received by the teams. It makes

Bernie Ecclestone’s current $3.9m salary

seem small in comparison, but such is the

gargantuan scale of F1’s finances.

After years ofreceiving little more

than pocket change,

relatively speaking,in return for handing

over the commercial

rights to Formula 1,

the FIA is set tofinally receive somemeaningful payback.

The UK’sTimes

newspaper says thatracing’s governing

body received $5m

for signing the latestConcorde Agreement,

with $200m more dueduring its eight-year

life. A share in revenue

if and when F1 ispublicly floated is also

said to be on the table.The new deal is

a considerable

improvement over

the $10.3m per yearthe FIA previously

received from F1.

FIA FLIESHIGHER WITH’13 CONCORDE

(LEFT) Ferrari and McLaren are

two of F1’s marquee brands and

that’s reflected in the prize and

bonus money they receive.

(BELOW) Bernie Ecclestone

with FIA president Jean Todt.

Here’s a breakdown of where F1’s

revenue came from in 2011, the most

recent year where full accounts are

available. Race hosting fees top the list.

Source: Formula Money

REVENUE STREAMS

Race hosting fees $512m

Television rights $489m

Trackside ads and sponsorship $222m

Corporate hospitality $80m

Feeder series $55m

Other sources $164m

TOTAL REVENUE $1.5bn

COSTS $350m

Team prize money $698.5m

UNDERLYING PROFIT $474m

“Most of F1’s key contractscontain clauses whichincrease fees paid by up

to 10 perc ent annually”

up hosting fees by $15.7m per event since2003. The average fee was $27m in 2011,

pricing many countries out of the running.It’s a particular problem in F1’s traditional

European heartland, where F1 isn’t needed

to boost tourism, or governments are

loathe to subsidize such flagrant shows of

conspicuous consumption. In the past five

years, Eurozone races have been lost inFrance, Germany, Spain and Turkey.

Making matters harder for self-financing

grands prix, most of F1’s key contracts

contain clauses which increase fees paid

S t e v e

E t h e

r i n g t o n / L A T

C h a r l e s C o a t e s / L A T





74 FALL 2013

When it comes to the all-important TV

exposure that ensures manufacturers and

sponsors are getting value for their

investment, Formula 1 is an unforgiving

meritocracy. Teams racing for the top

positions get more screen time, which

makes them more attractive propositionsto sponsors than the guys at the back.

WORDS Caroline Reid MAIN IMAGE Andy Hone/LAT

TV TIME EQUALS DOLLARS



75RACER.com

If you think Formula 1 teams make huge profits, think again.

Just about every last cent is spent in the pursuit of victory.

ORGANIZATIONS

Sebastian Vettel’s nine wins

from the first 15 grands prix

of 2013 gave Red Bull some

serious TV exposure. But the

correlation between winning

and screen time isn’t always

clear cut – win too easily and

the director’s going to linger

on the brawls behind you...

No. 2 / THE TEAMS

his year, the 11 teams in the Formula 1World Championship will take over $2bn

in revenue. It’s a remarkable amount to

generate from 22 drivers racing around a

track for a couple of hours 19 times a

season. However, although the teamsreceive those vast sums of money, they

will finish the year with next to no profit.

Welcome to the weird world of F1 finance.

Generally, F1 teams are run to break

even. This involves the team principalsspending whatever is available to them, and

they do it in the single-minded pursuit ofvictory. The established theory is that it’s

better to race for wins and championships

and make no profit, rather than make

money and finish low down the standings.

BUILDING VALUESimply, winning races increases the value of

the team – which gives the owners a futurepayout if and when they come to sell it. It

also increases the team’s ability to bring in

more money from sponsorship, since

brands are prepared to pay more to be

associated with a winning team.But while team owners may get a financial

return from selling a team in the long run,what’s in it for them in the short term?

If the team is owned by a private

individual, such as Sir Frank Williams, whohas a 50.8 percent stake in his eponymous

team, they can take an annual salary. This

comes out as a cost to the team just like

salaries paid to staff. Eight F1 teams are

based in the UK and therefore have to filepublicly available financial statements. The

most recent year for which a complete set

is available is 2011, and this reveals that

the team with the highest-paid director

was Red Bull Racing. Its team principal is

Christian Horner, and he’s believed tohave received the sum of $2m (£1.3m)

shown on the financial statements.

If the owner is an auto maker like

Mercedes, or a commercial concern suchas Red Bull, the benefit they get while the

team runs to break-even comes from TV

and media exposure of their brand as logos

on the cars and drivers. According to

F1’s trade guide Formula Money , Red Bull

was the most exposed brand in F1 forthe past three years. Its Advertising Value

Equivalent (AVE) – the price to buy a

similar amount of on-screen exposure –

was an estimated $414.9m in 2011. That

fell to $322.8m last year, due to SebastianVettel winning fewer races, but was still

14.2 percent of the total for all teams.

PAYING TO BE SEENIn 2011, the accounts show that F1’s

UK-based teams had average revenues of

$150.8m (£97.6m), with Red Bull highest ata staggering $273.2m (£176.8m) and

Caterham lowest at just $33.2m (£21.5m).

The teams’ revenue generally comes

from three sources, with each providing a

similar amount. They are all fueled by

T

A l a s t a i r S t a l e y / L A T



76 FALL 2013

F1’s huge television audience, which wasestimated at slightly more than 500m

viewers last year. The first key revenue

source is sponsorship and in this fieldmoney certainly talks. The greater the

potential exposure, the higher the cost.

Generally speaking, the rear wing,

engine cover and sidepods are the prime

logo positions, and a sponsorship dealwith a top team involving any one of

these locations is likely to cost around

$25m. At the lower end of the spectrum,

small logos placed on the cockpit sides or

These are F1’s aptly-named pay driversand, even if they fall well short of a Vettel

or Fernando Alonso in terms of pure talent,

the money they bring to a team can often

make up for it, since it can be used to pushforward development of the car itself.

Some sponsors don’t even get presence

on the cars and are instead known as

suppliers. This is a cheaper alternative, and

often doesn’t involve a cash cost. Instead, acompany provides equipment or services

and, although they don’t get TV exposure,

usually receives many of the perks which

come with on-car sponsorships – passes

into F1’s exclusive paddock, use of the team

logo in advertising and sometimes evendriver appearances at company functions.

Formula Money ’s data shows that

around 42 percent of team revenue comes

from team-sourced sponsorship, withanother major source being investment

from team-owning companies at

24 percent, but the marketing benefit from

AVE compensates for this investment.

POINTS MEAN PRIZES

The other major source of revenue comes

from the teams’ profit share with F1.

Here’s what it costs to put your logo on

some prime Formula 1 real estate – the

bodywork of a front-running team such as

McLaren for a season (estimates are for

both cars). Source: Formula Money

REAR WING/ENGINE COVER/SIDEPODS (LARGE LOGO)

$25M FOR EACH

REAR WING ENDPLATES (MEDIUM LOGO)

$5MLOWER SIDEPOD (SMALL LOGO)

$1M

The new-for-2014Formula 1 enginescould double thecost of supply fornon-factory teams.

Radical 1.6-liter,turbocharged V6units with advancedenergy recoverysystems will replacethe naturally-aspirated, 2.4-literV8s used since ’06.

A single-season,two-car supply is nowin the region of $13m,but is predicted to hit$25-$30m in 2014.The manufacturerssay costs will falldramatically insubsequent years.

NEW ENGINE

RULES ADD TO

TEAM COSTS

Ferrari’s Fernando Alonso is said to be on an

annual retainer of $40m, a figure comparable

with the highest-earning NFL quarterbacks.

Based on accounts submitted, Red Bull

Racing team principal Christian Horner

is believed to have earned $2m in 2011.

SUPPLY AND DEMAND 1 SUPPLY AND DEMAND 2

nose of the car can generally be purchasedfor less than $3m with a front-running

team. Bearing in mind that these are annual

figures, the total cost of the deal can bemuch greater as partnerships last for

around three years on average.

In the vast majority of cases, a team’s

marketing department secures the

sponsorship, but occasionally it is broughtonboard by a driver. Lower ranking teams

sometimes take drivers purely on the

understanding that companies they have

connections with will provide sponsorship.

G l e n n D u n b a r / L A T

L o r e n z o B e l l a n c a / L A T

S t e v e n T e e / L A T

M d



77RACER.com

Under the long-in-the-making 2013 version

of the Concorde Agreement – the contract

that binds together the FIA, the teams andthe commercial rights holder, Formula 1

Group – the teams are set to receive a total

of 63 percent of the sport’s annual profitsas prize money (compared with 50 percent

in the previous Concorde Agreement that

lapsed at the end of 2012). Under theprevious Concorde Agreement, that

comprised around 29 percent of total team

revenue and came to the not inconsiderable

sum of $698.5m in 2011, according to

F1’s most recent financial statements.What you receive from the profit share

isn’t just based on your most recent

on-track performances. Taking multi-

season achievements into account, three

teams – Red Bull Racing, Ferrari andMcLaren – receive varying Constructors’

Championship Bonus (CCB) payouts

which add up to whatever is the greater

of 7.5 percent of total profits or $100m.Based on its historic status and the

importance of the Prancing Horse to F1,

Ferrari receives an additional payout. Under

the old agreement that was 2.5 percent,

rising to 5 percent in the latest version.In real terms, winning the constructors’

title in 2012 gave Red Bull Racing an

estimated $87m from the prize money pot.

The remaining 5 percent of F1 team

income comes from miscellaneous sources,

such as the previously mentioned paydrivers, who typically bring $10m each to

drive. The other drivers are paid to drive,

and this averages at $5.2m per driver, rising

to an estimated $40m for Ferrari’s Alonso.

Drivers aside, after manufacturing andR&D, staff salaries are the second biggest

cost for F1 teams, averaging $42.5m per

outfit, thanks to 600-plus staff numbers at

the bigger teams. It’s a huge figure, but it’s

just one more example of how F1 teamsmanage to spend almost every dollar they

receive in the relentless pursuit of victory.

Mercedes’ Formula 1 activities are split

into two: Mercedes Grand Prix (race

operation) and High Performance

Engines (supplying McLaren and Force

India, as well as its own race team) are

separate entities. However, HPEcannot be isolated; nor can MGP’s

engineering satellite operating

from Daimler’s Stuttgart base.

Combined, Mercedes has by far

the largest spend in F1, withcommensurate headcounts. These

are offset (marginally) by the engine

supply contracts with Force India

and McLaren, the latter expiring

after 2014 when it switches to thereturning Honda. Williams will also

join Mercedes’ customer ranks

next season, when the new F1

engine formula come into play.

These activities explain top-heavystructures, with recent intensive

staff recruitment drives pointing to

a ramping up of activities and

corresponding budget increases.

Mercedes GP is financed by a

combination of Daimler funding,sponsorship (the largest being the

Malaysian national petro-chemical

company Petronas), customer activities

and FOM payments. Shareholding was

diluted recently through an allocationto motorsport director Toto Wolff

(30 percent) and non-executive

chairman Niki Lauda (10 percent).

Although a member of F1’s

Strategic Committee, the Mercedes GPoperation is not a full member of the

CCB, qualifying for annual incremental

payouts of £8m until 2015, which

from then on increases to £10m.

MERCEDES GRAND PRIX

CASE STUDY

INCOME BREAKDOWN

33.33%($80M)DAIMLER

40%($96M)

SPONSORS26.67%($64M)FOM EARNINGSFROM 2012

2013 estimated spend and income:

Spend: $256m (inc. engines)Income: $240m

SIDE OF TUB (MEDIUM LOGO)

$10M

TOP OF NOSE (SMALL LOGO)

$3M

WING MIRRORS (SMALL LOGO)

$5M

(LEFT) On average,

around 42 percent of

a Formula 1 outfit’s

budget comes

from team-sourced

sponsorship. (BELOW

LEFT) Ferrari has

been part of the F1

World Championship

since its inception in

1950. Its special

payments from the

sport’s annual profits

reflect that history

and the marque’s

massive fan appeal.

L A T

a r c h i v e

No. 2 / THE TEAMS

Documents

F1 Wealth Creation