The Struggling Economics of Modern Formula One

   Formula 1, it is the pinnacle of all motorsports around the world. Only 11 teams and 22 drivers have the opportunity to race in the “World’s Most Glamorous Sport.” However, a sport that annually profits in excess of $1 billion, is struggling financially. Within one season alone, the sport went from 11 teams to just nine, leaving just 18 cars on the starting grid for the final three races of the season. Teams are struggling to survive in a sport that is beginning to focus on making a profit rather than actually participating in a sporting manner. How are these problems occurring? Because there have been many bad decisions made without long-term effects in mind. This is my favorite sport in the world and I have been following F1 racing for a year and a half. My passion for this sport goes further than just a simple viewer, I feel that I might be able to make a difference in the sport one day. These bad decisions make me upset with the Formula 1 Group. When one team has $425 million to spend and another only has $60 million to spend over the course of one season, how can there be level and fair competition? If Formula 1 wants to survive as a sport as well as a business, regulations on money distribution need to be put into place.

   There are several big teams in Formula 1. The teams that are considered “big” are Infiniti Red Bull Racing, Mercedes AMG Petronas, Scuderia Ferrari, and Mclaren F1. These teams all have several things in common. First of all, they all produce consumer cars for the public: Red Bull is sponsored by Infiniti, Mercedes AMG Petronas by Mercedes-Benz, Scuderia Ferrari by Ferrari S.p.A., and Mclaren by Mclaren Automotive. This means that these huge car manufactures are willing to invest millions of dollars into the Formula 1 team that they sponsor. Additionally, Ferrari and Mercedes produce their own engines and sell their engines to other teams to make more profit. Smaller teams like Williams-Martini Racing (using a Mercedes powered engine) do not have such support at the international corporate level. Instead, private investors and small sponsors fund the team. The privately owned teams in F1 are: Williams-Martini Racing, Sauber, Marussia, Caterham, Sahara Force India, and to some extent Lotus F1 Team. This data shows that more than half of the teams in Formula 1 are small and privately owned teams. I believe that it is good to have a balance of big teams and small teams because it brings economic diversity to the sport. Also, it creates a healthy gap in performance; it is natural for a big team to outperform a smaller team. The teams with big name sponsors have more money to spend than smaller teams because of the large sums of money that are coming in from their sponsors.

Head of the Formula 1 Group, Bernie Ecclestone chats with Head of Mercedes-Benz Motorsport, Toto Wolff.

Head of the Formula 1 Group, Bernie Ecclestone chats with Head of Mercedes-Benz Motorsport, Toto Wolff.

   The next way that teams acquire money is through prize money. This is determined by how the cars finish in the constructor’s championship, the best team gets the most money; the worst gets the least amount of money. From 2011-2013, Red Bull received the most prize money from the FIA because they won the Constructors Championship. The Formula One Group has a budget of $800 million in prize money reserved to distribute to all teams. According to Autoweek Magazine, “Red Bull Racing's prize money payment increased from an estimated $86.5 million in 2011 to $94.2 million last year” (Sylt). Combining the prize money and the two large corporations sponsorship money, Red Bull have the highest budget cap in the 2014 season.

   Another asset that is given to the top teams is an extra bonus in cash just for showing up to the race. According to Red Bull’s Strategic Review of 2013, they stated, “Red Bull is committed to participating in Formula One for the foreseeable future having agreed terms with the commercial rights holder to sign up to a Concorde Agreement to 2020.” From this contract with the commercial rights holder, not only are they insured a position in F1 for 6 more years, but they are also receive a $160 million bonus each year. The money comes from the “CCB Fund,” a budget that is dedicated to paying Scuderia Ferrari, Mclaren F1, and Red Bull Racing an additional amount of money each year that they participate in the sport. The CCB Fund is valued in excess of $500 million a year. According to Christian Sylt and Caroline Reid (two renowned journalists that solely cover economics in F1) of Espn.co.uk, the money is distributed to the three teams by the following procedure, “The Team ranked first receiving 37% of the CCB Fund (with a minimum payment of US$37 million), the second Team receiving 33% of the CCB Fund (minimum US$33 million) and the third Team receiving 30% of the CCB Fund (minimum US$30 million)" (Sylt and Reid). The smaller teams get $0 for showing up. Is this right? These top teams get a huge advantage every single year over the smaller teams. I don’t believe this is right because it doesn’t make the competition fair. When one team has a higher budget they will have a better car, thus scoring more points and earning more money in the long run. Having a $160 million advantage is a huge difference, especially when the smallest team (Marussia F1) in F1 caps its budget at just $60 million. But the difference is even greater. Red Bull’s budget totals to $425 million, Marussia’s just $60 million. This budget difference equals to $365 million. A difference like this means the difference between first and last place. In 2013 Red Bull scored 596 points and Marussia scored 0, leaving Marussia dead last and Red Bull first.

Inside the Marussia factory in England.

Inside the Marussia factory in England.

   Red Bull used their advantage “wisely”, however. They spent upwards of $100 million dollars in engine and chassis research in 2013, more than Marussia even has to spend on every single part of their F1 racing budget. Additionally, Red Bull spent $13 million on hospitality all over the world for their big name sponsors, something Marussia could not afford to spend money on. Spending more in hospitality will give teams higher paying sponsors. Not only does Red Bull have enough money to do extensive research and treat their major sponsors, but they also have over two times the amount of employees as Marussia. According to a graph on infogram.com, Red bull has 710 employees and Marussia with a mere 200. With more workers, they can be more efficient, get a higher number of researchers, and higher quality engineers to work on the cars research and development.

   The current state of Formula 1 is not a great state. Smaller teams cannot compete with larger teams that monopolize the business and economy of F1. Thus, teams fall out of the sport leaving many people without jobs, drives, and fans find themselves lost, with no sense of direction in terms of who to support. When a team falls out of contention it is quite depressing to everybody involved with the sport. Money and budget caps must be more equal amongst all teams in the paddock. In an interview I conducted with Caroline Reid of Formula Money, F1’s economic monitor, she told me that the two teams that have become obsolete this year (Caterham and Marussia) were “told by the Formula One Group when they entered the sport in 2010 that all teams would have a budget cap of $60 million a year. This never happened. Instead, they have had to spend 2.5 times that to compete” (Caroline Reid). It was only a matter that they would eventually fall out of the sport with these conditions; it was inevitable to some extents.

   While Formula 1 is an immensely complicated sport, its economics run like a regular business. Set up like the capitalistic lifestyle in the US, F1 is set up with an upper class, middle class, and lower class of teams. The upper class of teams has higher budgets than the lower class teams, a simple principle that many of us can understand. An interesting interpretation about my research is how Bernie Ecclestone has made some very bad decisions in his tenure as Chief Executive of the Formula One Group. The way that he has distributed large sums of money in an unfair way has greatly contributed to the current economic problems today (especially since the recession of 2008-2009). These findings have confirmed my initial thoughts on Ecclestone’s decisions to fund teams. Ecclestone came out in a recent interview with BBC Sport and admitted, “There is too much money being distributed badly- probably my fault” stated Ecclestone. “I know what’s wrong, but don’t know how to fix it.”

Red Bull driver Sebastian Vettel celebrating his fourth championship with the team.

Red Bull driver Sebastian Vettel celebrating his fourth championship with the team.

   There is no definitive answer to the problem. There have been some plausible solutions brought to the forefront by various F1 experts, however, some of those ideas are unlikely to become true. One reform, however, must happen though. There must be new regulations and updates to the way CCB money is distributed. Also, the money that is given to teams in long-term contracts with Formula One Management must be significantly cut down, at least by half.

   Although I have researched extensively there are still many unanswered questions. While Ecclestone is the Chief Executive of the Formula One Group, how much power does he really have? Is he the only one that can make big decisions? Additionally, since F1 is for the fans, how much say do fans get when it comes to their sport?

   Formula 1 has always been about time. Who can go the fastest? But now, unfortunately, F1 is all about money. Who has the most money? This problem needs to be solved within the next several seasons if the sport wants to still be around in the coming years. The “World’s Most Glamorous Sport” may soon be unglamorous and non-existent.