FORMULA FOR entering formula one

– Penned by Jeevan Joseph and Rajdeep Sil

Formula 1 is undoubtedly one sport that owes its popularity to the elements of technology, showmanship and high adrenaline action on the tracks. Needless to say, the glamor and the grandeur sport rakes in a lot of investment from top players in the automotive industry. Audi and Porsche had recently announced that they would literally be ‘joining the race’ either by virtue of collaborating or acquiring an incumbent player in F1. This edition of the Macroscan explores the revenue streams in this sport and the motivation for new brands to join F1.

Let’s have a look at the incumbent players in F1. A typical race grid has 20 cars, with 10 teams having 2 drivers each. Names like McLaren, Mercedes, Ferrari, Alfa Romeo and Aston Martin may already be popular with both autoenthusiasts and others. Redbull, an Austrian constructor, has its main line of business in the beverage industry, where it sells energy drinks (hence the branding synergy). AlphaTauri is also owned by Redbull. Williams Racing is a British team and has businesses in advanced engineering and commercial applications in the automotive sector. Haas, based out of the United States, focuses on machinery and tools apart from its F1 endeavor.

Next, we explore some of the revenue streams for the teams in F1. The most lucrative way for F1 teams to make money is through sponsorships. The contributions made by F1 sponsors can vary from as little as €500k to as much as €50M a season depending on the stature of the team and its performance on the grid. As is obvious, the more successful a team, the more sponsorship revenue they can ask for from sponsors. Around €1M a year could get your company’s sticker on one of the mid-tier teams’ cars, while it would cost €3-5M a year to get your logo on a Redbull, Ferrari, Mercedes (which showcase the best results on the podium).

Second to that is through winnings and incentives paid by Formula 1 directly. For participating in the championship, all teams combined reportedly received nearly $711 million USD in 2020. The money comes from various sources of income like TV rights and circuit sponsorship. Major media and entertainment houses like SkySports and ESPN contribute to the revenue stream by purchasing broadcasting rights of F1. Sky Sports paid $1.5 billion for a 6 year contract and ESPN pays nearly $70 million a year to F1. Recently, Netflix launched a series in partnership with F1 by the name of ‘Drive to Survive’ to appeal to the younger audience. It is estimated that Netflix paid $5 million to F1, part of which was redirected to the teams and drivers.

Since the sport is global in its structure, races are conducted in tracks across Asia, Europe, Australia and North America. The tracks that host F1 pay a sum, to the tune of tens of millions of dollars for hosting rights. F1 also makes money by selling merchandise and auctioning old cars, which raced on the grid. The ones with more history, such as F1 legend Senna or Schumacher’s cars go for 6 digit dollar sums at a minimum.

Some F1 team budgets are supplemented by payments from manufacturers, or what’s known as a ‘pay driver’ such as Lance Stroll (Aston Martin) and Nicholas Latifi (Williams). These drivers hail from wealthy families and their respective families pay a sizable sum of money to the company by way of investment or direct ownership in the teams. Lastly, the bigger teams such as Mercedes lend the engine components to players such as Williams and Aston Martin for a fee. Ferrari sells their engine tech to Haas and Alfa Romeo.

The primary purpose & motivation for the auto companies to participate in F1 is to showcase the superiority of their product in what is arguably the toughest and most intense auto competition. Further, there is no other test environment that can recreate the extreme conditions and extreme load that is found in endurance races. It might even be safe to say that no other motorship championship can match F1’s popularity and performance. To add on to the previously stated reasons, there is the benefit of advertising as well of their product in addition to the monetary benefits.

Audi’s parent, Volkswagen, already owns supercar brands like Lamborghini and Bugatti. Audi has been active in other racing formats like DTM, Le Mans and Formula E. An F1 entry should then be seen as a natural extension for Audi according to Audi’s Chairman. Further, with changing regulations in the sport, hybrid technology and sustainability are being pushed to the forefront. From an R&D perspective, this is also an opportunity for players like Audi and Porsche to test and push the limits of their vehicles, while developing applications for cars on the road.

REFERENCES