Time to look at the F1 business model?
July 24, 2012 by Joe Saward
The German Grand Prix was an interesting race, but what was most interesting (apart from the whereabouts of Bernie Ecclestone) was why there were so few fans in the grandstands. Hcokenheim is the second largest sports stadium in Europe (after the Nürburgring) and boasts 120,000 seats. On Sunday, however, only 59,000 of these had bottoms in them, (although there were one or two fairly large bottoms spotted so there may have been some encroachment on the 61,000 empty ones).
To put it another way, Hockenheim was half-filled. And that is worrying. Europe is the middle of some fairly major economic hardship, but Germany has been one of the strongest economies up to now. Admittedly, on Monday the credit rating agency Moody stripped Germany of its AAA credit rating and lowered its outlook from “stable” to “negative”, but for the man on the street in Germany there are none of the privations that have been seen in countries such as Greece, Italy, Spain and, to a lesser extent, France. It was no great surprise to see small crowds in Barcelona and Valencia this year. Last week Valencia became the first Spanish autonomous community to apply for help from the Spanish government’s new €18 billion rescue fund. Valencia needs to repay €2.85 billion in loans by the end of the year. Catalonia is rumoured to be on the verge of following suit. One out of every four Spaniards are unemployed, but under the age of 25 that figure rises to 52 percent.
The crowd in Hockenheim (or rather the lack of it) was disconcerting for a number of reasons. Germany boasts five F1 driver and two former World Champions. F1 racing has been very entertaining this year. Hockenheim is no more remote than Silverstone; the traffic management is better than at most tracks and the circuit design is good enogh to provide overtaking.
So why is there a problem?
The conclusion that one reaches is that the ticket prices must be too high when compared to the experience the fans enjoy. This is very bad news. With modern communications technology, fans can now sit at home and watch the racing and see such things as live timing, from the comfort of their own homes. They do not need to worry about endless queues, muddy puddles and overpriced food and drink. It does not make sense for them to buy tickets.
To a large extent, this is due to the Formula One business model, which extracts all possible revenues from the circuits. They cannot easily cover their costs and so have to rely on public investment to survive. But this also means that they struggle to maintain their fixed assets, which naturally deteriorate over time. This means that the fan experience is not as good as it could be. We have seen many circuits simply give up on F1, others have run into financial trouble. Race promoters try to justify their high ticket prices by saying that they must charge this much in order to pay the fees required by the Formula One group. The result of this is that fans look at the Formula One group as being exploitative. The teams are not happy because they feel they should get more than they do. The circuits feel exploited and the fans pay the bills. No-one is happy, apart from the investors in the Formula One group.
There is as a result very little incentive for promoters to get involved in F1, unless the race serves a specific purpose for the government involved. F1 can buy you prestige, but the countries that want prestige are perhaps not the best places for a sport to be seen.
The only series that one can really use to compare business models is NASCAR in the United States of America. This operates in a very different fashion. The sanctioning body does all the marketing of TV rights (as with F1), but it divides up the money very differently. It gives 65 percent of its TV revenues to the circuits, 25 percent to the teams and keeps 10 percent for itself. The circuit promoters are allowed to earn additional revenues through sales of tickets, sponsorships, VIP hospitality, concessions, and merchandise. They, however, then share this money with the teams, offering substantial prize money funds, which boosts team revenues. Like in F1, the teams add to their revenues by selling sponsorships and merchandise. This means that circuits work hard to keep NASCAR happy, because it is in their interest to do so. This fee structure makes track ownership attractive and there is no need for government help, except perhaps when it comes to access roads. This means that the governments get the economic impact for free, which makes the sport popular with the authorities. The NASCAR brand is thus associated with success and tracks want to buy into it. The France family, which controls NASCAR, is also in control of the International Speedway Corporation (ISC), which owns around half the tracks that are used. They thus make more money. They are careful not to have too many venues and have a strong rival in Bruton Smith’s Speedway Motorsports, Inc (SMI) and there are even one of two independent operators still in business. What this means is that the incentives are all aligned and all the businesses are stronger as a result. Most importantly, however, tracks have the money they need to provide good facilities. They can afford to build plenty of grandstands and thus can charge reasonable prices for tickets. There is also money for upkeep and improvements and the circuits are always working on better concessions, better comfort, additional entertainment facilities, better access and even such things as exhibition centres, museums and shopping malls.
Given the state of the finances of some of the F1 tracks these days, buying a string of F1 venues would not be that difficult. You cannot buy Monaco, but who is to stop the Formula One group buying Monza, Spa or even the Nurburgring and Hockenheim and then turning them around by being nice to the fans, rather than driving them away?
In F1 circles the thought-process usually rejects ideas that they did not think about, but it might be wise to look at the NASCAR model and see the advantages it brings.