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The biggest danger to F1? Short term thinking
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Posted By: James Allen  |  23 Aug 2012   |  11:19 am GMT  |  63 comments

The Summer break has dragged on, with all F1 factories shut down for two weeks since the last Grand Prix. But that does not mean that nothing has been happening.

Behind the scenes F1 is moving forward on several fronts, at the same time as keeping an eye on the prosecutor’s office in Munich for any signs of a follow up to the conviction of Gerhard Grobkowsky, who said he had accepted a “bribe” from F1 commercial boss Bernie Ecclestone.

The teams are closing in on a deal to secure their involvement for the medium term, the next 8 years. The new Concorde Agreement is pretty much sorted out, but the outstanding issue is the sporting regulation and particularly cost control. And here the danger is that the teams revert to type and think short-term rather than long-term.

Before the break I interviewed Lotus F1 boss Gerard Lopez for a Financial Times feature. One of the subjects in our interview was cost control and it was interesting to hear his take, as a man with extensive business experience outside the sport, on the way the teams have been tying themselves in knots over the Resource Restriction Agreement.

He made a very interesting point about how people whose sole focus is on finding fractions of a second, struggle to see long term and I think he’s right.


“Some of the stuff that happens (in F1) is a bit strange,” says Lopez. “But there is so much at stake in terms of performance. We are talking about tenths and hundredths of a second. So it’s always edgy because the moment you give something up in a contract, you think you are losing something on the track. And the moment you lose something on the track you feel that you have the potential to lose sponsors or prizemoney. So there is an economic angle to whatever decision gets taken.

“The problem is everything is so tight, negotiation becomes really tough because of it. And that’s what marks this sport. When you think in terms of tenths of seconds, how does that combine with long-term thinking? Long term is years. Tenths of seconds is what defines winning and losing and all the contracts that we discuss always have some sort of impact on performance. “

FOTA split over the issue of cost control and the lack of trust between the teams and this loss of perspective is at the heart of it.

It’s easy to see how competitive individuals find it hard to change focus from short-term to long-term. But change they must if F1 is to secure the right formula for the future. A sport turning over the billions F1 does, should not see teams in financial trouble. The payments to the 12 teams in the current Concorde Agreement are well over $600 million, not divided equally of course, but it’s still a lot of money. Teams will always call for more money, while the sport’s owners will want to keep as much as possible. Controlling costs, like a proper business has to be the solution, as long as its the same for everyone.

Another problem that all the stakeholders have been wrestling with this summer is that while Ecclestone’s Formula One Management business is in charge of the Concorde Agreement, which is essentially a commercial contract, the FIA is in control of the sporting regulations, of which cost control is part. Some teams argue that they need to be controlled by the same body. So who should regulate the new RRA?

The answer needs to for be long term – like the thinking that needs to go behind it.

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1

Where does the $600m – 690m come from?

Sounds like a very high annual figure.

TV rights must only make up about $300m at most, so that leaves the rest from the circuit fees?

2

Why would a team that could otherwise afford to outspend its competitors year-in and year-out agree to the restriction of the very resources providing it with a competitive advantage, if it’s in no danger of losing access to those resources by failing to secure/renew sponsors?

If a team is adept at marketing itself and its sponsors (almost one in the same), and it can consistently find and sign-up high-value commercial partners that derive value from their association with the team and placement in the F1 milieu, what incentive do they have to curtail the practice and effectively give away a portion of their competitive force?

By its very nature a resource restriction agreement cuts against the massive spending of enormous sums of money sufficient to attract the beautiful people to F1 who make it such a glamorous and exclusive sport. The last thing F1 needs is the kind of democratization that will result in the replacement of the fabled denizens of Monte Carlo with the fat, disgusting, piggish-slobs who chunder their way through Indy and NASCAR in the States.

3

“Teams will always call for more money, while the sport’s owners will want to keep as much as possible.”

That statement is the crux of F1’s problem. Why is it that F1 is a for-profit enterprise for FOM/CVC? Ideally, FOM would serve the purpose of managing and marketing the sports (hence, Formula One Management). As it stands, FOM’s job is to generate as much revenue as possible for its owners (CVC and the other entities that have come to own shares). FOM takes from the tracks, takes from the television rights, and technical partners. A fraction of that should be able to pay FOM operational costs (not to mention FOM doesn’t even market or have a marketing department). The majority of that revenue should be divided amongst teams, and television revenues should go back to the tracks to keep them financially viable.

The fact that much of the pie goes to shareholders, and the rest to the teams makes for a financially untennable situation for those left outside of those two bodies.

Additionally idllyic:

For the teams, sponsorship revenue + prize money from FOM should be more than enough to finance a grand prix team, with room to turn a profit.

For venues, reduced FOM fee + gate (with tickets at a reasonable price) + local government/private funding + percentage payout from FOM television renevue should be more than enough to finance the operations of a track, with room to turn a profit.

Create a platform in which teams and tracks can break even or turn a profit, and you’ll have more teams and more tracks knocking on the door to participate.

4

I think that at this time spending needs to come down (obviously) but the thing that worries me is the way that the FIA is trying to cut costs. The best example of this for me anyway is engine development and limiting the engine rpms. Obviously don’t give mercedes ferrari and renault unlimited budgets, but say each manufacturer gets a set budget to spend on engine design and development. F1 just needs to avoid becoming a spec series while all of this financial “stuff” is going on

5

Now that they had the ball to take Lance’s 7 TDF victories is Schumi the only 7 time champion of a sport? I remember how those two were reaching their win counts at the same time – what an amazing 5 year period for sport that was. Whatever you want to say about the Schumi era it was darn fun to watch. And so was the Lance era.

6

Sebastian Loeb. 8 going on 9.

7

Figures that Loeb would end my small dream of F1 having the only 7 time champ.

Now if there was ever a combination of driver/car in a series that caused manufacturers to withdraw – Loeb is it. He’s so dominating that not only do I forget to watch WRC, I forgot WRC existed thanks to his steam roller ways. I’m shocked he’s only at 8!

It’s a good time for me to be named Sebastian. Seems Sebastian club memebers are champions in motorsport everywhere. Need a Sebastian @ LeMans…

8

KGBVD wrote :

…”Much in the same way that Senna’s crash ushered in an era of unprecedented driver safety. When was the last time someone in F1 suffered a career ending crash while racing in F1?”…

The day before (April 30th) : Roland Ratzenberger

9

Agree the RRA is nonsense. You need the following:

One group running both commerical and sport

Budget cap for the team

The budget cap will never happen because it will have the effect of reducing the valuation of the existing F1 teams. You will never – get anyone to agree to it….

So my question is this – what/where is the “Tipping Point” in all this…

10

Biggest danger to F1?

Long-term recession – not short-term thinking.

A RRA would be impossible to monitor and is nonsense in a sport so highly dependent on rapid technological development.

If you’re having to ‘grossly out-spend’ rivals to gain a 1/10th second advantage is it because you’re employing the ‘wrong’ people or do the ‘right’ people simply demand better compensation for their expertise and more sophisticated resources with which to work?

11

By far the biggest problem with F1 is that too much money leaves the sport and that’s Bernie’s fault for being too greedy and selling the rights to CVC and others for huge sums. Rightly, they demand a return on their investment.

However, taking FOM out of the picture and leaving F1 in the hands of the FIA would actually be worse.

The FIA is run by an old boys network consisting the heads of national clubs from all over the world. It’s essentially a political organisation and that’s why it was so disasterously run by previous two appointed heads.

Much to my surprise, Jean Todt appears non-partisan and keeping a low profile.

Unfortunately another Concorde agreement just perpetuates the problem with vast sums being drained from the sport and entities like CVC contributing nothing in return.

A breakaway series run by the teams without FOM or the FIA would have been the best option for the fans and race organisers :

Ticket prices could be lowered, free to air TV guaranteed and at the same time European race promoters would be left with some money to invest in their facilities and they might even make a profit ! Oh, and pigs might fly……….

12

“A breakaway series run by the teams without FOM or the FIA would have been the best option for the fans and race organisers”

That actually would have been worse. If teams can’t get together to decide how to put together a young drivers test how do you expect them to run a series?

Also look what happened to CART, Lots of internal politics, teams doing what was best for them & not the series.

While CART looked great on the outside it was a shambles on the inside as teams internal politics ripped things apart.

13

I was excited for the breakaway series last time it “seriously” came about. I knew it was never going to happen, but how cool would it have been?

For a start there’s be two series to follow for a while, while one or the other deteriorated, meaning even more boozy race weekends! 🙂

14

The RRA is problematic because it requires “resources” to be defined and quantified – and this in a sport which is full of clever people and which has a culture of looking for and exploiting loop holes. The original plan, as proposed by Max Mosley was far better – just limit what the teams can spend on the activities of designing, running and developing their car.

This has nothing to do with their income from FOM or from sponsors, and it specifically excluded driver salaries so that you could still, if you could afford to, offer packages that would attract the best drivers.

But let’s say that monitoring of “resources” is continued but with FIA auditing and having the power to impose meaningful penalties. There is no conflict between this and the Concorde. The Concorde controls how much money teams get from the revenues directly generated by F1. The RRA or cost capping or whatever is about limiting what you can spend on the car – it’s a limit on expenditure, not on income.

15

Pie in the sky stuff here. Could we somehow team each of the top half teams with the bottom half for technology/resource sharing?

16

In reality the RRA is “un-police-able”. The competitive edge will always make teams find ways around it, same as they do with the tech regs. The only realistic way to make the sport more affordable for small teams is to do the same as has been done on engines, powertrains and (effectively) tyres on lots of other parts. For example, making wings standard would save a lot since the development engineers seem to spend a lot of time on wings.

Allowing the smaller teams to use more of other makers kit would make life lots cheaper for them. Last years cars should be available to them, maybe with certain exclusions and additions.

F1 has not to decide about the RRA, it has to decide what it wants to be. The pinnacle of motor sport is not achieved by restricting budgets.

17

Here is a somewhat outrageous idea. Instead of restricting resources, all the technical regulations could be completely dropped. True, smaller teams could be at a disadvantage however, there is a point where no additional money is going to make any significant difference at all. I personally don’t believe that a budget of $1 billion is necessarily going to deliver any further results on track than a budget of $400 million.

The key point in this is revolutionary, innovative ideas which, with all technical restrictions removed, a ‘lesser’ team with a relatively smaller budget could potentially come up with a completely ‘out of the box’ idea and win with it.

All the cars on the grid look pretty much the same these days. In the 70’s there was all these weird and wonderful concepts being fielded; some serious diversity amongst the cars was the result.

Technology and designs like traction control, ground effect, active suspension, continuously variable transmission, ABS, moving aerodynamic parts, KERS, TERS, blown diffusers, multiple wheels, different size tyres and many others should all be fair game. I am sure there will be other brilliant innovations that engineers are yet to conceive.

18

“all the technical regulations could be completely dropped.”

And just watch the amount of cars flying into walls and breakneck speeds… It’s a solution to the ‘not enough chances for newer drivers’, but not a very practical one!

19

Ridiculous! Safety standards would still be high and besides, teams do want their cars to finish.

Active suspension, traction control, ABS and other technologies would actually make the cars safer to drive. This is why high end road cars feature these systems.

20

That’s more or less my point. One would think that the pinnacle of motor racing is the pinnacle of technical diversity. We can watch any number of racing series where the cars are pretty much the same, and F1 has always purported to be greater than that, but now we have locked-down engines, powertrains, control systems, tyres, etc. The *only* area of significant diversity is aero, which in itself is not so interesting to fans, and consumes a vast percentage of the budgets.

I can only repeat that this issue is not about the RRA – that’s only the short term view. I ask this question – What defines the pinnacle of motor sport?

21

We’ve been hearing about cost cutting for 4 years now and though I follow this site and others I am still rather in the dark where all the money goes. It would be nice to see some kind of basic breakdown of what a team spends money on.

If most teams buy their engines from a supplier I am inclined to believe the chassis and aerodynamics takes up a big chunk since Virgin tried to save money by forgoing the prohibitive cost of a wind tunnel and doing everything in a computer.

If the teams share on-track testing facilities, would it save money by also sharing other costly things such as wind tunnels?

22

An always contentious issue.

I think its got to come down to FIA requiring teams be reorganized in such a manner that some cast iron accounting rules can be implemented and a large (and expensive) firm appointed to oversee it. And there would be plenty of “Hollywood Accounting” attempts, I am sure!

Many ppl as always blame Bernie and wonder why the FIA doesn’t run the whole thing. Apparently those ppl have a short memory.

FIA *can’t run the whole thing. The EU courts stripped them of that role.

Bernie and his investors saved it, plain and simple. And made it what it is today.

You may claim others could have done better etc etc but the fact is they did not step up.

So that is all ‘coulda/shoulda/woulda’ wishful thinking. You are criticisig the goose that laid the golden eggs.

23

I think the article is spot on regarding the importance of thinking in the long term but your´e not going be there in the long run if you dont make it in the short run 🙂

Kind regards

Johan

24

What FOM has done with this 5 week break can only be described as a form of torture. They are darn lucky it’s followed by Spa because it has crossed my mind to protest by torturing myself further by not watching the first race back.

Poor Spa – can only accomodate 50K or so, and now will get poor TV ratings as everyone has forgotten about F1.

Quick, we have 7 days to brew up a scandal and get in all the papers. Ideas?

25

James off topic sorry.

Have you heard from Lewis lately? Last we heard he had rushed back to the UK to see his Aunt who is in hospital with cancer. This could upset his state of mind for the remainder of the season.

26

Visioning is important whatever industry you work in. Good leaders should provide this.

People need to know what they are working towards.

27

James you can see why Whitmarsh was quoted as saying …” its better to be a f1 fan than it is to be a team principal” obviously Lopez is feeling the same way. I don’t see this being resolved very quickly and the only way to really deal with this is to take the decision away from the teams.

I think it’s the FIA that needs to manage this process of cost control as clearly the teams cant reach a consensus.They need to say it’s clear you guys ( the teams ) cannot reach consensus in the manner that will sustain the sport in the long term ( and clearly this is in everybodys’ interests) . Hence the sporting rules will include a framework of budget that will be required in conjunction with the sporting rules that allow all teams to operate fairly well into the future. I don’t see how else it could work because the commercial rights holders are only Interested in return on investment and this could be the Public in the future. At the end of the day it’s only the FIA that could control this or sanction penalties anyway. So they maybe need to get external assistance on this -big Audit Firm springs to mind. I don’t see this happening next year but but from 2014 onwards needs to be the target. This will also work in tandem with the new engine regs.

I’m sure it will bring some wholesome changes to F1 , but I can’t think of a better time with whats happening with Bernie and his future, the global Financial situation, and the long term goals of the teams themselves ( Mercedes AMG, Force India, spring to mind). The closeness of the racing and generally a greater respect between the teams as a result of FOTA it would be a shame to loose that momentum.

Is there a time frame that the teams have considered for budget restrictions and is it the usual parties that are still against it ? Wasn’t it Lotus themselves that relaxed their stand on the matter given new long term sponsorship deals – and no doubt improving championship performance.

Cheers

28

[mod]

Short term thinking. I don’t think you can stop it in F1. At the end of the day Bernie and his crew think only as far as the next time they can flip the shares for CVC. So they have a time horizon of no more than a few years.

As to the engineers – how can they have a time horizon any further than maybe a year into the future when they know the regulations change on a rapid basis? It doesn’t make sense to think long term on that basis.

That leaves the managers. Who are influenced by the engineering concerns and also by the very real short term need for cash flow and sponsorship in a world where you can’t plan your income unless you can guarantee your finishing place in the championship each year.

OK that makes things easy for the back of the field guys. They are more than likely to stay there, so they can plan for that level of spend.

But if you’re say a Williams type team where you used to be at the front and think you still should be, how to do you plan into the future with that level of spend when the last decade says otherwise?

I suspect only Ferrari and RedBull can cast iron plan knowing they have enough money. McLaren, maybe, maybe not.

29

F1 teams are like politicians, they may think 1 year ahead, but rarely more than 3 years.

Id be willing to bet one of the fairly major teams is either renamed or doesn’t exist within 3 years. (or 3 months if we are talking about Benetton, I mean Renault, I mean Gennii capital)

30

$600m to be shared among the twelve teams?
Someone tell me how it is shared.

31

It’s £438 million (US$690 million)

£356 million for the top 10 teams.

£19 million for Ferrari

£51 million in back payments when the new Concorde is signed.

And £12 million for the remaining teams.

32

Never understood how or why the heck B.Eccelestone is in charge of the commercial side anyway, always seemed a bit odd to me. I’ve always thought the commercial side should also be under FIA’s control.

33

” how or why the heck B.Eccelestone is in charge of the commercial side anyway”

Maybe because he is the guy that was a big part of F1’s commercial rise.

It was Bernie that got most the teams to unify & form FOCA in the late 70s, It was Bernie that helped get the teams better commercial deals though the 70s/80s & Bernie played a big role in making a lot of the teams a lot richer than they would have been without him.

34

You need to read some F1 history, I suggest “Bernie” by Susan Watkins and “Bernie’s Game” by Terry Lovell.

But basically the FIA had the commercial side taken away by the EU Commission. It was rented out to Bernie for not much at all for 100 years.

FISA FOCA FOTA FICA FIA it’s a huge roller coaster with some giant characters involved. Nowadays it’s all sweetness and light by comparison with the past.

35

I think this is a case of F1 being a victim of its own success. As long as there is value for sponsors in being successful in F1, they will plough in as much money as is needed to win.

In my opinion, the best thing to have happened to F1 in recent years was the departure of the big car manufacturers and the return of private teams. I think the only way to enforce the RRA is to achieve a similar effect by getting the big companies still left (Santander, Red Bull, Mercedes Benz and Philip Morris) to voluntarily restrict the amount of money they pump in.

Unfortunately, I just don’t think that’s realistic…

36

These days I’m firmly of the opinion that F1 needs to be torn up and started again with the FIA firmly in control, and no Bernie. With so many interested parties involved, not least the teams who will never stay united for more than a few years at most, there will always be serious problems to hammering out such deals and the result is that F1 is a mess off track.

37

This is all nice wishful thinking, but it doesn’t really have any realistic chance of happening.

38

Yeah I know, which is a shame because we’re just going to limp from one farce to the next with some particularly useless people sucking the sport dry.

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