CVC and the FOG bleeding F1 dry

Blog Zbod

Podium Finisher
Dieter Rencken writes in a recent Autosport Plus (sorry, full version is pay-only) that the Formula One Group have created something of a "company town" among the F1 teams, reminiscent of the old time mining towns where the miners were forced to buy housing and other necessities from their employers, which ended up costing them more than they were paid.

Teams are dramatically overcharged for all cargo sent to fly-away races in excess of the FOG's meagre weight allotment. One account told that the surcharge for the excess surpassed what would have been the total cost for the entire shipment, if they were to use and independent 3-rd party shipper. But if teams should use any shipper apart the FOG's official partner, DHL, their equipment never seems to reach the circuit in a timely manner. HHhhhmmmm....

The FOG's travel agency subsidiary, Formula One World Travel, who always have advance notice of the sport's schedule, monopolises all accommodations within a reasonable distance of the circuit. Then they charge the teams double for their bookings. This goes for testing sessions as well as races. One "trusted source" told the author that just hours after the FOG had scheduled a test session at Bahrain, teams began calling to book rooms, only to find none were availble. Shortly thereafter, they all were contacted by FOWT offering accommodations, a price.

The FOTA technically control testing and the testing schedule, but the FOG have wrested control of so many of the essential peripherals that no testing can be conducted unless they arrange for it. The FOG control circuit rentals, rental of moving car film crews, and, critically, commercial rights to the event, to include revenue sharing with promoters. In the end a team can own the film footage recorded during the event, but only if they test alone. If they choose instead to share fixed costs by testing with another team, the FOG becomes owner of all film footage. Not stated in the article but I can well guess, they will gladly sell the film back to the teams ...for a price.

The FOG have jacked up race fees so much, and are so prone to making the use of any circuit contingent on facilities "modernisation," promoters are driven to desperate measures to cover the increases. At Melbourne, teams were charged a year's rent for the one weekend's use of a small hut. In Malaysia, five day's rental for a pit scooter amounted to more than the moped's retail cost. At another venue, teams were charged £60 rental for two coat hangers.

One promoter tried to charge credentialed journos £100 for a Grand Prix weekend Internet connection. When the journos pressed him for a reason for the outrageous cost, the promoter said he was in a pinch to make up for increased hosting fees. But he relented when asked by journos why they should bear the brunt of his poor negotiating skills.

In each instance of eye-popping charges, when confronted by team management, promoters claimed their hand was being forced by exorbitant overcharges from the FOG & CVC.

But it isn't just the teams feeling the FOG's bite, so are the fans. Hotel rates for them also are artificially boosted by FOWT's monopoly. And some promoters have joined forces with local politicians to have F1 surcharges added to race weekend hotel and taxi rates, which kicks back to the promoters (which directly affects both the fans and F1 teams' personnel). And the F1 teams' preferred airline, Emirates, raises the rates out of proportion to its competition for all seats on all their flights around an F1 weekend. All but the teams' very top white collar members end up flying coach.

The effect of this "company town" scheme is predictable. Bottom feeding Marussia just posted losses of £59M. In its three years participating in F1, which it was lured to by Mad Max's proposed £32M budget cap, Marussia have incurred an indebtedness of £140M.

Might Marussia simply be a victim of its own mismanagement? Not an unreasonable question, but its management's record of success in other ventures, particularly in Formula 3000, argues against it. It also is noteworthy that Lotus recently posted a similar loss, and famously was unable to meet Kimi Raikkonen's salary, despite their having won two races in the last 12 months. Sauber was forced to sell core Swiss assets to Russian interests to stay afloat. And Williams went in the hole by £5M, in spite of having received a one-time "heritage" payment from the FOG.

And in 2012, despite having six race wins to its credit, and despite coming third in the WCC, McLaren still lost £3.1M. Clearly, something is rotten in the state of Ecclestone.

So (apart from 2012 McLaren), why no mention of "the big four" teams? Because they struck their own individual deals with the FOG in the form of the Constructors Championship Bonus Agreements when the 2010-2012 Concorde expired. The lesser teams lacked the leverage to negotiate anything similar. When payouts from the FOG to the teams went from 47.5% of earnings to 62%, the increase was divided entirely between the big four. In spite of inflation, and the return of in-season testing, everyone else is stuck paying 2013 expenses from 2010 compensation rates. Compensations to the lesser teams are so meagre that if by some miracle one of them should win the WCC, their total payout still would not match what any one of the big four receives just for showing up, without their scoring so much as a single point.

So how is CVC, F1's majority commercial rights holder, faring? They're managing to squeak by. The same week Marussia announced they were not quite £60M in the red, CVC posted total combined earnings from all F1 sources of near as makes no difference £2Bn.

Rencken calls it Formula 1's biggest scandal. He writes that it's almost as if -- leaving himself wiggle room to later claim that's not what he meant -- CVC are keen to see one more team join HRT in the sport's rear view mirror, even using its influence to cause it to come to pass, possibly so it can create a two-tiered F1 grid, neatly divided into five "A-level" teams and five "B-level" (which he also alluded to in another article this past July) so they can futher limit payouts and increase profits.

Next season, with the added expense of the 2014 constructor's rules and its V-6 turbos (with their €21M leases), probably will amount to jumping out of the fry pan and into the fire. And if F1 should collapse under the strain? Well, CVC already have siphoned off five times its original investment in the sport, so there isn't much danger of their Cristal being watered down by the tears rolling off their cheeks. F1's fans, OTOH, are not likely to be so lucky.

Rencken writes in closing that probably the only thing that can save F1 from the inevitable would be if the EU could be moved to intervening, taking action to stop CVC's and the FOG's unfair business practices, which he wrote about the possibility of back in December of 2012.
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Great article Blog Zbod, with practices like this I can't understand how the breakaway hasn't happened yet. With CVC as rich as they are, would even the EU be able to do anything about them?

Also you mentioned Williams one-off 'heritage' payment, would this be in anyway linked to Williams being the first to abandon FOTA over the Concorde negotiations?
Apparently the Marussia boss said the latest agreement allows his team a bit more leverage and weighiting in the running of F1.

However David Ward is right that F1 needs to allow smaller teams to produce more upsets and have a chance to be competitive now and then

I fear Jean Todt - the master political player will no doubt make sure he ends up unopposed
Great article Blog Zbod, with practices like this I can't understand how the breakaway hasn't happened yet. With CVC as rich as they are, would even the EU be able to do anything about them?

Also you mentioned Williams one-off 'heritage' payment, would this be in anyway linked to Williams being the first to abandon FOTA over the Concorde negotiations?
The walls of my home are cratered with holes from my reflexive headbanging every time there's been a rumour of a breakaway that comes to naught. It fair boggles the mind why Ferrari et al have never followed through on the threats.

Allegedly, one of the reasons Bernie is only considering Asian markets for the pending F1 flotation is that it compounds the difficulty and expense to the EU of going after CVC/FOG. That and he is very keen on a nice cuppa soba noodles.

The timing of the heritage payment to Williams coincided with the Monaco Agreement and might have assured Bernie's control of Williams' proxy on the new "Strategy Committee" created by the agreement. Perhaps it also has implications for the new Concorde Agreement, too.

Apparently the Marussia boss said the latest agreement allows his team a bit more leverage and weighiting in the running of F1....
Another point made in the source article is that Marussia apparently engaged in some sabre-rattling concerning lodging an anti-trust complaint to the European Commission, which Rencken writes, "is said to have worked wonders." This might well be what he was referring to.
They are ultimatly killing the goose that lays the golden eggs. Everyone will get so fed up with it all, and by everyone I mean teams, fans and media, that the whole (sport !!?) will collapse.
One of the witnesses in the chrome gnome's bribery trial yesterday testified that Bernie paid the principals of the three leading F1 teams $10M each to get them to sign his 1998 Concorde Agreement. Common sense tells me the terms of the Concorde were not to their liking -- not in their teams' best interests -- else they wouldn't have had to be bribed into signing it.

In Bernie's world view, this is not "bribery," it is simply "business."

So long as actors such as he remain in the sport, you can't count on even a team's own chief taking decisions in its best interests, or the sport's. There is no guarantee the sport will get better once he is gone, but it is a certainty it can't get better so long as he remains.
Autosport Plus recently ran a follow-up from Rencken in an article titled, The perils of F1's business model, which did not have a great deal of new information, but it did mention that Raikkonen's salary exceeded the total income Lotus receives from all commercial its sponsorships.

He also mentions that Bernie did not include Lotus among the teams eligible to receive the "Constructors Championship Bonus," which are the only teams presently operating at anything like a reasonable profit, despite the fact that essentially the same team, only then named Renault F1, had won the WDC and WCC in 2005 & 2006. IIRC, Bernie's rationale for excluding them was that Lotus did not merit the bonus because they had changed their name.

Under the expired Concorde Agreement, the FOM would cover the lesser team's shortfalls with a share from the sport's profits. But in the absence of an active Concorde, the FOM and CVC just get fatter. Which increases the incentive to the teams to sign any old agreement, regardless how bad a deal it otherwise might be, just to be guaranteed a reasonable return on their investment.
I considered making this a new thread, but it does go to the OP's topic (after a fashion), and updating it will move it BTT.

This is what Auto Motor und Sport list as the prize money (and bonuses) the F1 teams have coming to them for their 2013 performances:

WCC# : Team : WCC$$$ + Bonus$$$ = Total$$$

3 : Ferrari : 72M + 99M = $171M
1 : RedBull : 90M + 72M = $162M
2 : Mercedes : 80M + 12M = $92M
5 : McLaren : 62M + 12M = $74M
4 : Lotus : 65M + 0 = $65M
6 : Force India : 59M + 0 = $59M
9 : Williams : 47M + 9M = $56M
7 : Sauber : 53M + 0 = $53M
8 : ToroRosso : 50M + 0 = $50M
11: Caterham : 40M + 0 = $40M
10 : Marussia* : 0 + 20M* = $20M

Even coming third in WCC, Ferrari make more money than anyone else in the sport because Bernie pays a special bonus to all teams with a predominantly yellow emblem featuring the image of an equine animal. The yellow equine emblem bonus pays more than the total winnings by any team which did not win the WCC.

The size of Red Bull's heritage bonus reflects the fact they actually represent two financially stable teams on the grid, and they play a valuable role in the feeder series. Plus, the Red Bull brand has more market penetration than all the rest of F1 combined, they are a prominent sponsor for top-flight teams in more sports world-wide than any other entity, and F1 is the most prestigious arena they compete in. Meaning all that they do elsewhere also attracts attention to F1.

*Marussia receive no prize money for coming 10° in WCC because the rules provide that no team is eligible apart they came top 10 for at least two of the previous three seasons. Neither do they receive a "heritage" bonus. So 11° Caterham "inherit" the $40M for 10°. The (rumoured) $20M to Marussia was as recipient of the 2013 annual "Thank you for not ratting me out to the EUC" Bernie Bonus.

I don't know about the bonus monies but the WCC prize money is not payable until the close of the 2014 season.
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Dieter Rencken writes in the latest Autosport Plus that he has been privy to minutes from a Strategy Group meeting indicating they formally are considering reducing F1 to an eight team grid with three cars each. Which effectively kills off any hope for use of customer cars.

Bernie obviously created this new strategy group to improve his leverage (financially and otherwise) over F1. WCC payments currently go to the top 10 teams so it doesn't take a nukular rocket surgeon to figure who ranks highest on the list to profit from this manoeuver.

To clarify the bonus situation, Ferrari, McLaren, Mercedes and Red Bull receive Constructor's Championship bonuses. Williams receive a Heritage bonus. And Marussia receive a STFU bonus. Lotus' name change ostensibly disqualified them from the CCB but Bernie obviously makes up the rules as suits his whim. Since this makes the third team in 20 years to carry the Lotus badge, he doesn't much fear them taking their toys and going home. And they haven't yet threatened to put Bernie back in the dock, ergo they do not merit any bri... ...uh ...I mean bonuses.
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