On The Money

[genji]

This is my first thread. <pause for applause>

*tumbleweed*

Er... I have to say I was surprised by this report on Autosport: McLaren buys back Mercedes stake. Influenced largely by the tooth 'n' claw Pitpass, I thought it would take a good deal longer than it has for McLaren to get to the point of reducing the Mercedes stake even to 11%.

That's not really my topic, though. It's likely that my topic has been discussed here before because it's not particularly topical at the moment but it was last year. If so, I'll be grateful for a pointer but even if so, this is my opinion on the way F1 is financed. The McLaren/Mercedes situation simply reminded me.

It's based on the failed attempt to introduce a budget cap, although 'failed' might be too strong a word if the real reason for introducing the concept was to reign in spending by whatever means. I find it difficult to believe that a budget cap was not the true intent, however, because if it wasn't then the FIA effectively committed fraud by tendering for new teams under conditions that it knew, or even suspected, would not be met.

Initially I was horrified at the prospect of a two-tier system, in which teams that operated within the FIA's budget cap received technical freedoms over and above the higher spending teams. Secondarily, I was very uncomfortable with an independent business being told what it was allowed to spend per season.

My solution to the need to cut costs (which I do believe in on the basis of the spending gap between overly-financed teams and the less well-funded teams - I don't believe the distinction between manufacturers and privateers remains, although you could make a distinction between corporate-funded teams like Ferrari, McLaren, Red Bull and the personality-focused teams like Williams, Force India, Lotus; even then, the backing some of the latter receive is not to be sniffed at) was for all the teams to declare their operating budgets for the coming year to the FIA (and this would be open to scrutiny in the same way the budget cap would have been - by an independent accountancy firm).

With their budgets set, teams would be obliged to spend, say, 33% of it on entry to the season. Therefore a team that wants to spend $300m would only have a budget of $200m to go racing, likewise a $60m team could only spend $40m.

The money received by the FIA would be the prize money awarded to constructors at the end of the season, but this would be greatly weighted towards the low-spending teams. I can't remember the percentages, but basically a high-spending team would not recover the costs of its entry fee, and a low spending team would recover perhaps half the costs of its entire budget including entry fee. FOM money could then be spent on reducing that ridiculous debt.

In addition to that, all fines would be commensurately higher for high-spending teams. In effect, the cost of going racing would be significantly higher for high-spending teams than for low-spending teams.

In return, the restrictions on testing, development, attendance - every aspect - would be relaxed or removed. If Ferrari wanted to spend within their budget on private test days then they could. The more successful the smaller teams were, the more funding they would have available to spend on test days, too.

It would, to a degree, make F1 self-financing (the richer teams supporting the poorer teams) without the need for artificial levelling rules, which the top teams always manage to exploit anyway, and it segregates the financial issues from the sporting and technical issues.

 

[Brogan]

The best man to respond to this is GM (now Galahad) as he has a really good understanding of F1 finances.

I will however link to this old thread which discussed the 2 tier system: Budget Cap - Good, Two Tier System - Bad

I think there have been a few threads in a similar vein so I'll see if I can dig them out.

 

[cider_and_toast]

I can't help thinking that any attempt to monitor the finances of an F1 team will be doomed to failure no matter how hard they are looked at. It's far too easy for large companies to hide the figures in the books. 1 Million here for loo rolls, 2 Million there for the staff Christmas party. It really would be impossible to police and perhaps the biggest problem with the whole budget cap idea.

If you look back over the last 30 years, on only 4 occasions has the constructors title been won by anyone other than a Ferrari, Mclaren or Williams. Look back at the last 20 years in Football and on only 2 occasions since 1990 has the top flight of English football been won by anyone other than Manchester Utd, Arsenal or Chelsea.

Mclaren and Ferrari are very much in the same position as Manchester Utd, Chelsea or Arsenal in so much as they were at the top of the heap at just the right time to capitlise on the amount of money entering the sport. It's a lot easier for them to remain at the top than it is for teams to claw their way up to that level. We've alread seen teams (I'm talking F1 now) who have been bankrolled with large investments (Toyota and BMW for example) fail to knock the top guys off their perch. This is comparable with Football teams such as Leeds or Portsmouth who break the backs of their clubs in an attempt to compete on the same level.

Teams in both Football and Motorsport have to cut their cloth according to the money available.

 

[Galahad]

I do think your idea has a lot going for it, genji. It combines a certain amount of freedom with financial control, and, vitally for me, would mean everyone could keep racing to the same rules.

Unfortunately I tend to agree with c_a_t that the accounting issues would be massively concerning. If a company like Enron can get away with it...well. Governing bodies are invariably chasing the teams when it comes to closing loopholes and I'm sure this would be no different. Budget caps can work in sports where wages are the bulk of the expenditure, but that isn't the case in F1. The level of monitoring required to ensure true compliance is, I fear, beyond the current resources available to the FIA.

I don't want to bang on about this, because it was all covered last summer in the FOTA battle business, but it is worth remembering that F1's incomes would be sufficient to ensure that all the teams are viable, and even profitable, were it not for FOM/CVC creaming off their 50%.

I was reading only today about the revenue sharing arrangements in my other love, the English Premier League. There, the twenty clubs are the rights holders, and they appoint an executive board to negotiate broadcasting and sponsorship rights. When decisions need to be made, it's one member one vote. Of course, they have to pay the board for their expertise and various admin costs, but a far, far larger share of the proceeds go back to the teams - which is not unreasonable considering that without them, there is no show.

Furthermore the revenue allocation is an eye-opener. 50% is given in equal proportions to all clubs regardless of status, while the other half is split according to league position and televised matches. Last season, the biggest winners, Manchester United, earned £52.3m from the collective pot compared to the least rewarded, Middlesbrough, at £31.4m.

I only wish such an arrangement operated in F1.

 

[Brogan]

Now we all know that Bernie owns (owned?) the rights to F1 and sold out to CVC who took out a crippling loan to finance it.
Hence the huge cut they take which goes mainly towards paying the interest on the loan.

I know how Bernie came to be in charge and started organising things, etc. but who gave him the right to basically take ownership of the whole show and make ludicrous sums of money from it?

As you say G, the Premiership clubs effectively control the administration of their sport themselves, albeit via an appointed board.
In F1 though Bernie just seems to have taken total control with no-one's permission or even anyone voicing any objection.

A very strange state of affairs.

 

[fat jez]

I know how Bernie came to be in charge and started organising things, etc. but who gave him the right to basically take ownership of the whole show and make ludicrous sums of money from it?

The impression I get is that he walked into it practically by default with no challengers.

 

[Galahad]

Whenever I read about it it seems that the team bosses were so amazed and delighted at the results Bernie was able to achieve on their behalf that they were happy to let him get on with it.

Worth remembering that the team bosses at that time (late 1970s/early 1980s) were mainly "motor racing people" rather than businessmen or accountants. Perhaps there wasn't a full appreciation of the implications of the steps he took to separate the commercial activities from FOCA and under his own aegis.

He would say, he took the risks, and like any entrepreneur should be entitled to the rewards of those deals coming off. Which was fine then, but there's little or no risk now! F1 is a mature business to put it mildly. Still, what's done is done, and CVC, or whoever are the owners at any given time, are hardly likely to give it away. I can envisage a situation in which the teams bought the rights back themselves, and we caught a glimpse of how the process might start last summer, but it wouldn't be pretty, and I'm sure nobody wants to lead the mutiny while Bernie's still got his hands on the tiller.

 

[fat jez]

Thing is, Sir G, is they have the rights for 100 years, which I seem to recall he picked up for a song. I don't think there's much the teams could do about it, short of setting up their own series (which we saw the threat off before). But that presumably couldn't compete at any venue where Bernie hosted F1 and presumably couldn't be FIA sanctioned. Or could it?

 

[Brogan]

presumably couldn't be FIA sanctioned. Or could it?

We're probably drifting away from genji's main point but as far as I'm aware, the FIA will sanction any series as long as it complies with the requirements.

As you say, the issue would be the circuits and to some extent the F1 name and prestige that goes with it.

I agree with G though, I can see a time when the teams take back ownership and it won't be too soon in my opinion.
Let's face it, if the teams walked away tomorrow, Bernie and CVC would have nothing.

 

[fat jez]

I agree with G though, I can see a time when the teams take back ownership and it won't be too soon in my opinion.
Let's face it, if the teams walked away tomorrow, Bernie and CVC would have nothing.

Absolutely

 

[Galahad]

Well, the sale of the rights for 100 years was a really incredible piece of business. How the FIA ever considered that valuation appropriate...well.

As for the break away, if the teams all stuck together and left Bernie in the cold there would be no "F1" to compete with, effectively. CVC would have to come to the negotiating table, and perhaps accept whatever was on offer from the teams, since the alternative would be to retain a business worth next to nothing. In that situation the FIA would be very much on the sidelines and, I guess, would seek to come to an arrangement with the "winners" of the commercial battle.

Of course, keeping the teams together would be extraordinarily difficult, and perhaps impossible. They'd have to be thinking of the sport, and the future, rather than their own self-interest. As we have seen, that hardly ever - maybe never - happens.

 

[Brogan]

Indeed.

I think we came very close last summer though so who knows...

 

[genji]

Thanks for your responses. Monitoring actual expenditure is the sticking point, but the budget cap suffered from the same issue and that was seriously proposed as a solution - indeed, the new teams signed up with that understanding. The budget cap was dropped for other reasons (than being unenforceable) and in its place is an undertaking from the teams that they will cut costs in their own way and time. The details of how and when are secret, but I don't remember any undertaking that teams like Ferrari and McLaren would ever operate at around £40m - correct me if I missed something.

In light of that, today's Virgin story is interesting, especially when considered alongside Red Bull's 26% increase in spending. Branson seems to be trying to fix the £40m target in the public's mind, perhaps to cry foul when it is never achieved?

 

[Galahad]

Yes, a "solemn and binding" agreement. Which is presumably secret because it doesn't go anywhere near as far as people probably think it does.

Now, I'm not in favour of costs being restricted in general, but it is unfortunate when teams sign up on the basis of one set of rules, and then the rules change. We saw the same thing with Super Aguri/Prodrive in the customer cars row, and I'm afraid on both occasions it was the FIA President acting beyond his authority - accepting new applications before the rules had been changed to accommodate them.