The Economics of F1

Formula 1 racing is truly the pinnacle of auto racing, and, in many ways, the most international sport in the world. It is the stage where the best drivers in the world team up with the best car and engine makers to achieve a singular goal - be the first to the finish line.

However, one thing that many people don't realize is that F1 (and auto racing in general) is also probably one of the most 'businesslike' sports in the world as well. Due to the huge costs in both fielding a team and staging a race, F1 is extremely economically sensitive. A top team like Ferrari or McLaren will spend upwards of $500 million a year to design/build/race 10 cars. Even the smallest teams need at least $20-30 million a year, comparable to the top NASCAR teams. Staging a race is not cheap either. Just to have the right to have a race costs $20+ million (in fact, the only other sport that generates more dollars/event is the NFL), then the promotion, infrastructure, etc. costs need to be factored in as well. Needless to say, you really need to pay to play.

I Do Have A Point...

The reason I bring up F1 is because recently there has some significant developments on the business front of the sport. Because of it's economic sensitivity, F1 has been hit hard by the downturn. In fact, one of the major teams - Honda - even pulled out of the sport - an abrupt surprise. Furthermore, the sponsors that help pay for many of the costs associated with running the sport have been pulling out as well (the most popular sponsor was financial institutions).

A Strange Management Structure

Unlike most other sports, F1 is actually split up into 3 main bodies:

1. Teams - The actual teams that participate in the sport. Some are private owners that build cars and race them
2. Commercial - The entity responsible for making the sport profitable and making sure the sports owners' (primarily a consortium of banks) interests are met
3. FIA - The not-for-profit governing body responsible for making the rules of the sport and long term longevity.

As you can probably see, there's bound to be some conflicts of interest here. This has been especially true the last few weeks when the FIA instituted mandatory $40 million budget caps on all teams starting next year. The teams, many of which spend well above that amount were infuriated at this unilateral decision and have threatened to pull out of the sport and start their own series. However, the FIA has so far refused to give in to the teams demands of more say in the rule making process, resulting in a classic game of chicken in the frontier of motorsport.

Dangerous Waters

Conflicts like this really help one understand the business side of a sport and it's impact on daily business - sport! I strongly believe that not coming to a compromise on this issue will cause irreperable harm to the sport and can even lead to the downfall of F1 (something similar already happened in the US with Indycar racing). Each of the divisions of F1 need to have the same goal - a racing product that the fans will enjoy. And they need to work together to achieve this goal. Hopefully they'll come to their senses and reach this compromise before it's too late.

Keep track of the latest F1 news here



Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.