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The $500 Million Championship

The $500 million championship | Formula 1 Blog

F1B Op-Ed
Negative Camber

Oct 14, 2014

According to an article at the Independent by Christian Sylt, the Constructor’s Championship secured this weekend by Mercedes AMG Petronas cost the team $520 million.

The article, sourcing company documents, shows Mercedes’ F1 engine manufacturing division experienced a 17% increase in engine development for a total in the neighborhood of £133.9m. It also states that Mercedes has spent £190.7m in running the team.

Financial data in F1 is a shifting business and difficult to get an accurate and absolute number on but if the numbers are remotely close, you have a level of spending that is staggering in proportion to the small teams such as Caterham and Marussia. If you consider that these smaller teams are 3-5 seconds off the pace per lap, you get an idea of how much it costs per second of performance in F1.

Mercedes clinched the Constructor’s Championship last weekend in Russia and driver Lewis Hamilton’s win hauls him 17 points ahead of his nearest rival and teammate, Nico Rosberg, in the Driver’s Championship. Either way, the team looks set to claim both titles in 2014.
Why the big spend?

The increase in engine development by 17% was due to the new engine regulations that moved the sport from a normally aspirated 2.4-litre V8 engine to the new 1.6-litre V6 hybrid system. This move was played down as to the financial impact it would have on teams and was completely antithetical to the prevailing and dangerous reality that F1 had become too expensive and costs were too high to compete.

That very sentiment is why former FIA president Max Mosley led a charge to reduce the costs, propose a cost-cap and brought in Marussia and Caterham as teams who could participate for $60 million per year. This noble cost-cutting cause was scuttled by the large teams with an attempt at self regulation called the Resource Restriction Agreement. Unfortunately that soon fell apart with the Formula One Teams Association disbanding.

F1 has been facing strong criticism this year over the sound of the new engines, competitive performance and direction these new engines have taken the series. The increased R&D costs from manufacturers, one would assume, was passed on to customers of their power units such as Lotus, Red Bull, Toro Rosso, Williams, Force India, Sauber, Caterham and Marussia.

F1 has backed itself into a corner of astronomical expense and yet the racing is arguably the most contrived it has ever been. Constructs such as DRS, high degradation tires, restricted fuel flow rates, hybrid engines and more have all been applied in order to find a balance for the disparity that is clearly present between the teams given the differing budgets.

While this may be a reality, others suggest that teams such as Sauber and Force India are doing just fine mid-field—or slightly worse—given the anemic budgets they possess. But those mid-field performances don’t score enough points to harvest life-sustaining F1 revenue that is shared with the top 10 teams by the commercial rights holders at the end of the year. Of the nearly 70% of the one billion in revenue F1 enjoys, the payout is a secret scale based on the points scored in the championship.
Who to woo

Ultimately the new engines were championed by FIA president Jean Todt and a technical group of team representatives as the way forward but the move applied an additional £133.9m to the expense structure and has left many fans cold. It was, however, said to be a lure for the big manufacturers to get them back in the sport due to the road relevancy of the hybrid engine. Honda returns as a supplier to McLaren in 2015 and while that’s good, it is not a Honda works team.

As much as Mercedes is relishing their new title, manufacturers can be fickle in their commitment to the series. Toyota, BMW and Honda all pulled out of F1 within a matter of a few months in 2009 and left a gaping hole in the series both financially and competitively.

With the new American effort, Haas F1, coming in 2016, F1 boss Bernie Ecclestone implied that anyone entering F1 would need a billion dollars to make a chance of it. That’s a tall order and perhaps a reason that Honda is coming back as an engine supplier only and one would presume they will be paid for their engines when the begin supplying more than just McLaren—possibly in 2016.
$100m per second

A half a billion dollars is a lot of money for four seconds per lap but as Red Bull’s Dietrich Mateschitz said, the budget for their racing team is a drop in the bucket compared to the company’s total marketing budget for the year. It could all be relative and much ado about nothing but it seems like a lot when you’re Sauber, Caterham and Marussia.

It strikes me as a two-sided conversation pandering to small teams about cost cutting in one breath while designing regulations with massively expensive and controversial engines in another breath—saying the sport needs small privateers while doing everything it can to attract manufacturers. Truth be told, it probably needs to do both but that is a serious challenge.

Ultimately the quality of the product is what keeps the sanctioning fees in the neighborhood of $25 million with a 10% escalator per year. It keeps sponsors knocking on doors spending 10, 20 and 30 million for their name on the car. It keeps fans glued to the TV and bums in seats.
Still watching?

The real concern is sliding TV ratings and empty seats in 2014 and should that continue there could be a reckoning—a correction or breaking of the F1 bubble as it were. It all depends on the fans and while the FIA were keen to woo manufacturers, it seems the last group being wooed was the fans.

Unaffordable ticket prices, outlandish merchandise prices, far-flung races in parts of the world that are too expensive to travel to, a lack of competitiveness in the series and an engine format that appeals to only a certain portion of the fan base—regardless if Honda or other manufacturers like it. Add to that the constructs that seem, at the very least, patronizing to watch in an attempt to “spice up the show”.

The F1 brand image has taken a hit and initially, the press were in lock step with many of the fan’s concerns but it seems even they recognized their livelihoods could be jeopardy (perfectly understandable) as TV ratings began falling and social media began a backlash of outrage amongst fans. Even Bernie Ecclestone and some team bosses were critical of the new changes.

However, the narrative within the F1 media changed to a positive endorsement of all the constructs and changes and often delivers commentary suggesting this is the best F1 racing in decades. They argue that this is the zenith of F1 as it is road relevant and sustainable. All of that may very well be true and perhaps they are not merely protecting the source of their livelihood but foretelling the future of automotive industry technology.

All of that is fine; I’m not keeping score here but as a subscriber of Road & Track, Car and Driver, Autoweek and Automobile magazines, it was not lost on me how quickly the journalists went from fun-loving floor-it and roar-it types of car reviewers to name, shame and blame anyone in the industry that wasn’t hybrid, electric or corporately responsible.

It must have been difficult to be legacy journalists to publish car magazines shaming the very things that provided their livelihood. I don’t envy them the task just as I don’t envy F1 journalists the task of putting on a brave face and cheering for F1’s new direction and the spice of its show.
Stop smiling at that V8

Like the car magazine journalists who struggle to subdue their elated smiles of glee when testing the Ferrari 458 and muscle up huge grins when puttering around in a Prius, they have a new narrative to promote and so does F1. The key for both industries is—will the fans come along for the ride? I’ve let my subscriptions to car magazines expire because I find the new agenda boorish.

Electric car sales have plummeted—you’d never know it by Googling it—and the rash of manufacturers clamoring to get into F1 is not something I am currently seeing. I am seeing a complete loss of interest in F1 and that, more than infinitesimal fuel savings during an F1 race, has me concerned.

F1 is behind the road car manufacturers in electric technology—that horse has already run—so why not leap frog to a new type of power to lead by example? Or how about perfecting traditional methods to increase mileage while the industry discovers a new energy? Surely perfecting the current system would be beneficial to humanity? Reduced emission, increased mileage? Maybe even look at new means of transport for a global series.

How long will Mercedes spend $500 million to win? Maybe until the fans stop watching and buying and the countries stop paying for races that fans don’t show up for. They may stay just long enough to turn out the lights on their way out.
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