Analysis: Why F1's $43 million prize money drop has caused alarm

Analysis: Why F1's $43 million prize money drop has caused alarm
Jonathan Noble
By: Jonathan Noble
Nov 22, 2017, 10:07 AM

As their prize money income takes a major hit for the first time in recent memory, just how worried should Formula 1 teams be?

No issue is guaranteed to get Formula 1 team bosses more revved up than the prize money they get to take home.

The number of dollars that teams get to put in the bank from F1’s commercial rights income has underpinned almost all the major skirmishes between the competitors and sports chiefs over the years.

So when Liberty Media announced earlier this month, as part of its regular quarterly updates, that the prize money pool for teams was going down for the first time in recent memory, it was no surprise that it caused some angst.

Tucked away inside its presentation was the fact that for the recent quarter, the pool of income to be shared out among teams will be $273 million (USD), which is 13 percent lower than the same period last year when it came in at $316 million.

The $43 million fall is a consequence of increased spending from F1’s new owners. There are plush new offices in London, more staff, more investment in digital and a bigger push to ramp up events around grands prix – like the London Live event.

But with sources suggesting that projections spoken about in the recent F1 Strategy Group meeting are for an overall fall in F1’s earnings of between 4-5 percent and with income likely to further drop to as profitable races like Malaysia fall off the calendar, the unease is clear.

As teams juggle budgets, with costs also on the increase and showing no sign of a slowdown, the potential risk of going into the black is not something that delights anyone.

No wonder then that Sergio Marchionne said amid his recent quit threat over engine rules that Ferrari’s shareholders would be dancing until the cows came home if it walked about from F1’s expense.

Lauda worried

Niki Lauda, Non-Executive Chairman, Mercedes AMG F1
Niki Lauda, Non-Executive Chairman, Mercedes AMG F1

Photo by: Steve Etherington / LAT Images

The first shot over the team income was fired by Mercedes non-executive chairman Niki Lauda, who told Gazzetta dello Sport over the Brazilian GP weekend that F1’s real issue right now was not the 2021 engine row that had upset Ferrari so much.

“The heart of the problem is something else,” said Lauda. “In the face of cost growth of some €70million from one year to the next, revenues have declined.

"But where do we want to go from here? There should be ideas for generating more money, but I do not see them. I heard from Sean Bratches, who would like to see the drivers accompanied with grid kids. Is imitating football having new ideas?"

McLaren racing director Eric Boullier echoed that it was obvious teams would not be delighted if they are facing a fall in income, but said there is little choice but to accept it.

“If they drop we will not be happy, but our revenue model in F1 is based on the one FOM is giving us based on their own EBITDA [earnings before interest, tax, depreciation and amortisation],” he said. “So if their EBITDA is down, what we are going to get is down. This is how it works.”

But not everyone was so alarmed by the situation, and there remains a mood among the smaller teams – who know that future plans for a budget cap and redistribution of the prize money structure will help them in particular – that the situation now is one of short-term pain for long-term gain.

Force India COO Otmar Szafnauer said: “If we can be assured that that spending will pay dividends in two to three years' time, then you have to take a step backwards to take two steps forward. I get that.

“You have to invest and then your investment will reap its return – if that happens in two/three years' time, then that is fine. We just have to make sure that we invest wisely.”

Haas team principal Gunther Steiner said he would be happier if there were assurances that there were justifiable reasons behind the fall.

“I wouldn’t say [I'm] worried, but it’s a concern,” he said. “If they can explain that there are investments made and in the end there is more coming, then that will be good.

“They are the promoters, they need to promote the sport and we get more money. So if they can explain how they do it, then I’m fine. It’s a big business, F1, and you can’t change things from one day to another, it will take time.”

Pushed on whether he shared Lauda’s ‘worries’ about F1, Steiner said: “I’m not pessimistic about it to be honest. There are always… we have concerns. The easiest way is to continue to do the same. Nobody wants change in normal life. If something changes, you have difficulty changing to it.

“Niki was with Bernie for the last 60 years, I guess, so for him change is maybe more difficult to accept than for other people. He needs to be convinced. That’s the job of Liberty Media.”

New culture

Sean Bratches, Managing Director of Commercial Operations, Formula One Group, Chase Carey, Chairman, Formula One
Sean Bratches, Managing Director of Commercial Operations, Formula One Group, Chase Carey, Chairman, Formula One

Photo by: Sam Bloxham / LAT Images

Boullier is aware that Liberty has some tough decisions to make soon – especially when it comes to judging which section of the paddock it needs to appease the most.

But, as he ultimately puts it, Liberty is the one that paid big bucks for the sport, so it has every right to take the sport in the direction it sees fit.

“There is a little bit of a change of culture in F1,” he said. “Liberty owns the business and intends to run it the way they want, because this is their business.

“If you go to a model where it is like FE and it is only car manufacturers, and if there are no car manufacturers then the series doesn’t exist, then that is their choice.

“If they go to more a franchise model, which is more a sport/showbiz model, then maybe the car manufacturers have less relevance in this model so we will see. It is up to them to tell us and show their cards on what they want to achieve.”

Is it that latter future, where the manufacturers wield less power, what Lauda and Marchionne are really worried about?

F1's managing director of motorsport Ross Brawn, who has operated on the other side of the fence when he negotiated favourable prize money terms for Mercedes, hopes the prize money issue doesn’t get blown out of proportion and wreck Liberty’s efforts to push forward in other areas.

“We need to convince the teams not to throw the baby out with the bath water,” he said about the unease over the fall in prize money.

“There is a bigger discussion on the whole commercial side that needs to take place. We [recently] had our first discussion about a fair and sustainable cost control system for the future, so that is part of it as well. We need to make sure that we are all grown up about it, and we have a commercial discussion.

“That is going to be a fierce and tough discussions but we have the technical side of the sport to try to push forward. We’ve got the cost control side of the sport to push forward. We've got the sporting side of the sport to push forward.

“If we spoil all of that because we are having this debate about the commercial side, we are foolish because this makes the business better, it makes it more sustainable.”

F1’s battle lines have started to be drawn ahead of what will be a fascinating winter as Liberty lays down its vision and moves to appease the sceptics.

Brendon Hartley, Scuderia Toro Rosso STR12
Brendon Hartley, Scuderia Toro Rosso STR12

Photo by: Sutton Images

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