F1 business: Interview with Zak Brown - "F1 is exploding in costs"

F1's rule makers are in the final stages of finalising a new package of aerodynamic and chassis regulations for 2017, which will push up costs for teams, while at the same time trying to pin down the manufacturers to a cheaper supply of engines from 2018 onwards.

An attempt to finalise everything this week stumbled, because the F1 Commission was not sufficient in numbers, so it will be subject to an online vote in the coming days.

But one of F1's business leaders has called for the sport to put cost control right at the centre of all its thinking, as he believes that runaway spending drives many of F1's current problems, not only for teams but for fans as well.

Zak Brown, CEO of Chime Sports Management and F1's pre-eminent sponsor finder, says that if the industry as a whole could make a concerted effort to bring down the costs then not only would the smaller teams face less of a struggle for survival, but attendance at races would increase.

"We have an industry that is exploding in cost and collectively between them, they are not able to gather and get those costs under control," says Brown.

"How it trickles down is because the teams have such a thirst for money, they need to get as much money as they can so F1 Management does an unbelievable job getting massive sanctioning fees. They in return then have to charge a disproportionate amount of money to the spectators.

"Why are you or I paying more money to go to Silverstone? Because of where it starts, we’re feeding the teams and if the teams didn’t have such a big appetite to spend, everyone’s ratios could stay the same but you’d actually make it more accessible. To me, the biggest problem that Formula 1 needs to solve is the expense to put on the circus. That is the starting point. Everything starts to become fixable and manageable from there."

While costs are coming down on the engine side, to around €12m a season for a two car team, partly by using only three engines per driver each season, the new chassis regulations will be more expensive. At Williams F1 team's recent financial results presentation the finance director was unable to put a figure on how much the 2017 changes would cost but did concede that they would be more than the current spend.

Team sponsor revenue in decline

In addition to prize money, which is not distributed evenly, but is heavily weighted towards Ferrari, Red Bull, McLaren and Mercedes, the F1 teams share a prize pot of almost $900m between them and on top of that they have sponsorship income. However this team sponsor income has fallen steadily in the last three years, according to Brown.

"From about $950 [million], to $750 and I think that number knocks on about $700 this year. Now there are two ways to address that: build the value up, but the biggest problem Formula 1 has is amount the teams spend.

"You would think most sports would live very healthily on $700 million in sponsor revenue in addition to the FOM [prize money] and in addition to the manufacturers. The costs are, to me, the single largest issue and the one that then drives many of the other issues."

F1 behind a TV paywall

As F1 looks for new sources of revenue, recent developments have seen a new deal for SKY in the UK to show F1 exclusively behind a paywall from 2019 to 2024. Deals like this come with the accompanying headlines of a decline in TV audience numbers, inevitably. However there has been substantial growth at the same time of fan engagement via digital channels and social media, which has not been properly quantified or valued.

"[Bernie Ecclestone] is moving from free-to-air to pay channels because he’s getting more money," says Brown. "Where the big miss is that there is no economic benefit, yet, to the whole digital and social media. That’s the big opportunity and if you think about what digital advertising entities do [is] they build scale and then they monetise it.

"Formula 1 has an unbelievable opportunity because of its scale - that’s got to be one of the biggest opportunities. I think we could point to the loss of television that as being a combination of pay-to-view– that’s probably been the biggest chunk, but it would be nice if we could point to some of the audience as just consuming Formula 1 through digital channels. However, there is not enough sophistication yet in the sport to be able to categorically prove that.

"So I think where Formula 1 is most behind, as I look at other sports, is digitally. We all talk about that and know that and I’m not being Albert Einstein in uncovering that. I do think the automobile is a passion point for almost everyone in the world because many people drive and so many people have felt like a race car driver at some point. I believe that is why it is more gender neutral – yes, male dominated – than probably some other sports, as I do think women have a passion for the automobile. So that’s a good thing.

"We also need to make sure we keep the scarcity of Grand Prix racing – 21 races this year is the most there’s ever been. It’s also a little bit market dependent: do I want 22 races? No. [But] if you told me the 22nd race would be New York I’d say, “yes.” So I think we need to make sure that we trade up into new and interesting markets, as opposed to just bolting on more races. I think one of the challenges that Formula 1 needs to watch, and that I think happened in NASCAR, was that I think it was too frequent. There are so many NASCAR races now that the individual races started to lose some of their overall importance in the calendar because it was “if I didn’t see the race this weekend I’ll just catch it next weekend.” And we’re getting to a point where north of 20 races [in F1] you start getting into, “if I miss next weekend’s I’ll just catch the following weekend’s.”

Future opportunity in F1

While acknowledging the challenges that F1 currently faces, Brown is nevertheless broadly optimistic that there is plenty of long term opportunity in the sport,

"I think there is tonnes of opportunity. I’m very bullish on Formula 1 and if I am advising sponsors, which I am, I’d say 'buy in now and don’t miss the ride'. It is a little bit of a volatile stock, but long term, I’m bullish. I like where I think Formula 1 will be in 10 years. I’m little nervous where it is going to be in two years, but I like where it is going to be in 10 years.

"Formula 1 is still very sellable. [But] it’s a big-ticket item and it is a controversial topic at the board level. Something like golf: those people that don’t support golf, don’t passionately not support golf. Formula 1 has more people who are passionately for it or they have a strong view against it. So it is a sport that people have strong opinions of. If you walk in with a golf proposal, [some] people passionately love it but those that aren’t for it is a little bit more of “I could take it or leave it.”

"What drives the anti-F1 feeling? The headlines that Formula 1 has had over the last five years have been too much to digest for some people."

How F1 can appeal to younger audiences

Brown also has some interesting things to say about how F1 can engage with younger audiences.

"If you think about it, if a consumer product group is testing a new product that is targeted at 14-year-old, you wouldn’t have a 50-year-old do your taste testing would you? But that’s something that we do a little bit.

"We, as an industry, we live in our own little world and stuff is “my idea” or “your idea” and we need to go out to the fans that we don’t have - and ask them why they aren’t fans.

"My kids showed me this virtual reality headset and I was sitting next to a guy driving a Porsche. Now if they thought that was cool, stick them next to Vettel!

"I think it’s there. Hotwheels are still massively popular and the video games are [too]. So I think that the race car is inherent in most kids and I think it’s one of the things we’re not capturing. If a bunch of kids came in here, [a racing car] is what they’d all look at but we’re not talking their language so they’re not turning on the TV at 2pm [on a Sunday] they’re out doing other stuff; on [smart phones] with apps.

"But they’re also playing football on these [smart phones] and they’re doing it at school. That’s one of the disadvantages of motorsport; it’s not a participatory sport like football and rugby. You’re not doing it when you’re eight years old at school, but when my kids are out at recess, they’re playing football and then using their smartphones so there is a different level of engagement with those sports, but they have the advantage that all you need is a ball and some grass."