• FIC Hansraj

Formula 1: A money minting machine

“It’s lights out and away we go”. A Formula 1 fan may never get tired of hearing this line repeatedly. F1 is the ultimate pinnacle of motorsport where the fastest cars on the planet compete on the track to come out on top at the end of 20+ races, each one in a different venue spanning across 4 continents. This festival of motorsport has 10 highly competitive teams and a season goes on from March to December.


F1 : A billion Dollar Industry | FIC Hansraj Refined
Formula 1 : A billion Dollar Industry

Understanding the rules of F1 seems like a task to many but in this piece, we would only focus on how this sport is a multibillion-dollar industry that employs more than 50,000 people in 30 countries. Formula 1 is quite different from other sports like Football or Basketball where it is much easier to succeed without money. On one hand, where other sports can be seen as pay to win, F1 can be instead seen as pay to play or compete in the first place. Let’s dive deep into how F1 and the teams make money.


Liberty Media bought control of the Formula One Group for $4.4 billion in 2016. With a mammoth 433 million viewers last year, it doesn’t come as a surprise that most of the revenue comes from TV rights. The Netflix sensation “Drive to Survive”, a documentary on F1 that has aired 3 seasons since 2018, and the legendary 2021 season with an epic final race has only ensured that the fanbase of F1 is set to increase at a very fast rate. Thus, it’s only fitting that the sale of TV rights comprise the biggest source of revenue which was worth $4 million in 2017 in the US alone and has been increasing ever since to date. Globally, Liberty Media’s balance sheet has television contracts adding up to more than $587 million.


The other massive source of revenue is the fee that each track has to pay to host a Grand Prix, i.e., race. The venue organizers try to cover this with the help of ticket sales and government support as they don’t receive a share of the sponsors. Things get tricky here as not every country funds this fee. The British Grand Prix relies primarily on ticket sales to cover the $23 million hosting fees each year. This loss-making venture makes this track a dicey affair going forward in the future but several other tracks are government-funded due to the rewards on offer like boosting the local business and tourism. Ticket sales and sponsorships constitute a hefty portion of revenue too. If you’ve ever watched a race, you'd see the track littered with billboards for race sponsors like DHL, Aramco, Rolex, and Heineken. Every space in the driver’s suit and car too has logos of sponsors too, tactically positioned.


F1 Racing Increasing trend in Revenue | FIC Hansraj Refined
Increasing trend in Revenue (Source: startuptalky)

In 2019, Liberty Media had revenue of $2 billion from all the discussed sources of revenue. Almost half of this is distributed to teams as prize money. It’s the unusual distribution that catches the eye. For example, Ferrari earned $205 million in 2019 which is 28 million more than Mercedes, which defeated Ferrari to win the title. A 35 million payment goes to the teams that have competed in two of the previous three seasons. Thus, all the 10 teams receive this. Then according to the team’s standing in the championship, they receive rewards ranging from $15 million for the last team to $66 million for the winning team. The controversial payments include ‘heritage payment’ that was worth $10 million and goes to team Williams for ensuring its longevity in the sport. However, the biggest payment goes to Ferrari as it’s the only team to participate in every F1 season since 1950. This amount came to $73 million in 2019 and owing to this Ferrari has been on top of the pile in terms of earnings despite not winning the championship since 2008. There are other bonuses that exist like the Constructors Championship Bonus and the implication of the Concord agreement.


Apart from the above-mentioned source, the teams also earn from sponsors. For example, Petronas has pumped over $735 million into Mercedes over the last 10 years. Investments and driver-linked income is another source of revenue as some teams down the grid are desperate to earn revenue and they get it from the drivers who pay to drive the car. Current examples are Nikita Mazepin and Aston Martin driver Lance Stroll. Talent is not the foremost priority here. The costs of running an F1 team is insane as it includes Research and Development costs, Productions and Operations costs. Apart from this, the employee cost that includes the salaries of marketing, engineering teams, drivers, team directors, etc. constitutes a huge amount. Lewis Hamilton receives a paycheck of more than $40 million a year, not to our astonishment. To ensure the sustainability of sport and guarantee a level playing field, a budget cap for what the teams can spend on car development was set at $145 million in 2021, decreasing to $140 million in 2022 and finally to $135 million from 2023 onwards.


F1 Racing | FIC Hansraj Refined
Major Red Bull Racing’s 2019 sponsors (Source: sportstechbiz)

The multitude of costs involved doesn’t guarantee a profit to the teams. In fact, in 2019, Mercedes ended up losing $5 million approximately. So, one may imagine why do teams invest in F1 if they don’t make much money. Another way of looking at F1 through the lens of car companies is that of a marketing platform. The companies want to prove the supremacy of their cars and F1 indirectly brings huge profits to the likes of Ferrari, Mercedes, McLaren through their sales.


We can safely conclude that despite its neatly organized revenue system, F1 is plagued by the rat’s nest of politics and handshake deals from the previous century. We get a context about how it is difficult for lower teams like Aston Martin and Alpha Tauri to make it big in the sport and equal financial capabilities for all the 10 teams seems like a distant dream. It’s said that “money makes the world go round.” and Formula 1 proves this to the core.


References:

Driver61

Sports-Tech Biz

OneStop Racing



Author: Mayank Kedia

Illustration by: Harsh Agarwal