Silver bullet?
Racecar Engineering|December 2020
Proposed new cost controls in F1 go far beyond just limiting how much teams can spend on technology
DIETER RENCKEN

Formula 1 is governed by the Concorde Agreement, which outlines the mutual obligations of the sport’s governing body (FIA), its commercial rights holder (Liberty Media, trading as F1) and all competing teams. As such, the agreement provides F1’s commercial structures and its regulatory framework, last named having the powers to supersede the FIA’s International Sporting Code on all matters save for safety provisions.

The Concorde Agreement is effectively F1’s constitution, and renewing (or extending) the document can be longwinded. The 1998-2007 Concorde was replaced on 1 January 2010, but only after F1 had been pushed to the edge of breakaway threats. That consensus is not readily forthcoming is no surprise. The 12 signatories have disparate agendas and differing business models.

Having been introduced in 2013, the current Concorde expires at the end of 2020, and so the renewal process commenced late last year. That said, in March 2018, during its first full teams presentation, Liberty outlined its future vision, with a key aspect being a re-distribution of F1’s billion dollar prize ‘pot’, which currently sees the top three cream a third offthe top in bonuses, before the remainder is split amongst all teams.

Under this structure, Ferrari receives $100m annually simply to pitch, with results payments on top, while a team such as Renault, currently fifth in the championship chase, is hard pressed to earn more than $70m, assuming it finishes in its current position.

To put that into context, Ferrari, currently sixth at time of writing, stands to pocket a total of $160m this year (including that bonus), even if it places lower than Renault. Similar astronomical bonuses apply to Mercedes and Red Bull. Any wonder then that, between 2013 and 2019, the top three were the only winners, and generally locked out the podiums?

Revenue revamp

Clearly, such a revenue structure is unsustainable in a sport where money and performance are largely synonymous. During this same period, at least four teams faced bankruptcy before being sold, hence Liberty tabled its revamp. Talking like for like under the incoming structure, Ferrari’s take would drop to around $120m and Renault’s increase to $85m. Not parity, but more equitable, and slated to tighten further.

Of course there was pushback, but not even Covid, and the best attempts of Mercedes F1 boss, Toto Wolff, who crudely accused his peers of being up the ‘arse of Liberty’ when they refused plans to maintain the status quo, could derail the renewal process, completed on schedule by the end of August. This, despite the swingeing reductions in said bonuses offered by CVC Capital Partners, the previous commercial rights holder, who sold to Liberty.

To achieve the objective, F1 CEO, Chase Carey, offered the teams a $5m ‘early bird’ signing fee and a binary choice; like it or lump it. In short, if they didn’t like what was on offer, they could go play with their racecars elsewhere. As Red Bull Racing boss, Christian Horner, put it, ‘negotiating with Chase was a lot less fun than negotiating with [predecessor] Bernie [Ecclestone]. With Chase there was no negotiation…’

Carey had three aces up his sleeve. First, there is no long-term commitment requirement. Where before teams were required to commit to the full term of the agreement, the latest covenant contains annual break clauses (31 March for the end of that year). So the boards of Renault and Mercedes could commit to F1 in the knowledge they could walk should subsequent circumstances so dictate.

Secondly, the agreement contains a $200m ‘anti-dilution provision’, effectively a franchise fee that requires incoming teams to buy into F1, with the proceeds equally distributed amongst existing teams. This clause boosts the franchise value of each outfit, making their signature a no-brainer: no commitment, no value, particularly as the clause may be waived by Liberty when there are fewer than 10 teams.

Finally, Carey and FIA president, Jean Todt, were absolutely determined to introduce a budget cap under the auspices of new-for 2021 Financial Regulations, which (now) restrict annual spend to $145m, including engines and tyres but excluding travel, marketing / hospitality, driver costs and the salaries of three top earners. These, though, potentially take final spend up to $200m, more in the case of Mercedes and Lewis Hamilton.

Half the spend

True, these are still eye-watering amounts with which to operate two racecars on 20odd Sundays per annum, plus a couple of three or four-day tests, but they represent half of what Mercedes and Ferrari currently spend. Oh, and this excludes engines, which are currently accounted for separately, and easily add another $200m to their budgets, even after deduction of income for engines and ancillaries sold to customer teams.

By reducing costs via regulations, rather than voluntary agreements that have twice previously collapsed, Carey was able to persuade The Big Three they would be spending less, and therefore should earn less from the prize pot. Bonuses will still be paid, but on a 10-year rolling matrix basis for the top three finishers in each season, further reducing the divide.

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