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I Wanna Go Fast!

Breaking Down the Business of Formula One
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I Wanna Go Fast!

Breaking Down the Business of Formula One

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F1 drivers lose about 3 litres of water from their body per race. Roughly equivalent to the amount of sweat a TikTok day trader perspires at each market open.

The drivers also experience anywhere from 4 to 6 G forces when cornering, which is the same amount of pressure that hedge fund managers are under after underperforming the market in 2021.

Last week, we had one of the most exciting finales to an F1 season in recent memory as the top two contenders were exactly tied going into the final race. Winner takes all. The stuff of legends.

The story was a compelling one too. In one corner – the seasoned veteran, Lewis Hamilton was looking for his 8th championship to lock him in as the all-time leader (Michael Schumacher has 7). In the other corner – the hungry and aggressive up-and-comer, Max Verstappen who was chasing his first trophy.

After a controversial call on the safety car method used near the end of the race, Verstappen on fresh hard tires snatched victory from the jaws of defeat in the final lap of the race in epic fashion.

Cue the “we are the champions” victory video and Max showering his team in champagne.

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But before the fans, the champagne, the yachts, and the model girlfriends, F1 had to start somewhere and it needed a champion of its own. That champion was Bernie Ecclestone, who created one of the most widely watched entertainment properties in the world.

This week, in <5 minutes, we’ll cover the business of Formula 1:

  • The History of Formula 1 👉An Origin Story

  • Recipe for Success 👉Characteristics of the Sport Allowing for Rapid Adoption

  • Structure of the League 👉 Formula One Group, Teams, Promoters

Let’s get started!

1. The History of Formula 1 👉 An Origin Story

F1 is the pinnacle of motorsport, and the history is a long and winding one. Throughout many innovation lifecycles, two aspects are the primary drivers: technical and design. By technical I mean the car getting faster and faster and by design, I mean how the structure of the teams, organization, safety procedures, and races would evolve.

These two aspects take turns pulling each other forward, which has led F1 to be one of the best R&D centers for transportation.

When each team is pushing to be the fastest, they have to develop new technology to do so. Active suspension, traction control, carbon fibre construction, advanced aerodynamics and semi-automatic paddle gearboxes all began in the technology race that is Formula 1.

The name “Formula” comes from the set of rules that the participating cars and drivers must follow. For instance, F2 cars are backed by a 500 horsepower engine, which is about half of the F1 cars.

Keeping in mind the “technical” and “design” aspects I mentioned, you can roughly break down the history of F1 as follows:

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However, the ownership structure and monetization in the early days was murky at best. F1’s future would forever change when in 1972, British Businessman Bernie Ecclestone bought a team called Brabham after he built the county’s largest used car dealership.

According to Forbes (source below), F1 races ran essentially as amateur events. Each team made separate deals with each event promoter and TV coverage was patchy as races could be canceled at the last moment if there weren’t enough cars to fill the grid.

Mr. Ecclestone seized the opportunity to change this and in 1981 he convinced the teams to sign a contract, called the Concorde Agreement, committing them to race. He took this to TV companies who could then guarantee coverage.

Originally, the teams controlled F1’s commercial rights but Mr. Ecclestone’s company Formula One Promotions and Administration (FOPA) negotiated the deals for them and took a share of the proceeds. The remainder went to the teams and F1’s governing body the Fédération Internationale de l’Automobile (FIA).

In 1988 Mr. Ecclestone sold Brabham in order to concentrate on running FOPA. The top drivers soon commanded salaries of between $10 million and $12 million, five or six times what they received a decade earlier, and sponsors were spending hundreds of millions of dollars a season.

Since F1’s commercial rights were controlled by the teams, they were owned by the FIA and when its agreement with them came up for renewal, Mr Ecclestone made an offer to take direct control through his personal investment vehicle F.O.C.A. Administration.

On 19 December 1995 the FIA declared that F.O.C.A. Administration had won the bid for the commercial rights to F1 for 14 years beginning on 1 January 1997. Mr Ecclestone owned 100% of F.O.C.A. Administration, which is now known as Formula One Management (FOM), so this gave him complete control of F1’s rights for the first time in the sport’s history.

In return for the F1 rights. the FIA was paid $10 million annually by F.O.C.A. Administration giving the company an 800% return on investment on its $90.7 million net profit in 1997 alone. Buying the F1 rights was the best business move of Mr. Ecclestone’s career and handed him the keys to the billionaire’s club. F1 itself was an even bigger beneficiary as Mr. Ecclestone drove commercial success forward.

Ultimately, F1 would change ownership hands leading to Liberty Media buying controlling interest for $4.4B in late 2016. The Formula One Group now trades on the NASDAQ under the ticker FWONK.

All this has led to where they are today – with over 400M unique fans globally, and (thanks to Netflix), the fastest-growing major sports media property.

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Under the Radar

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2. Recipe for Success 👉 Characteristics of the Sport Allowing for Rapid Adoption

If you break down the composition of the sport you can see how and why it’s so extremely popular to watch: Easy to follow but difficult to master, large install base (top of funnel), truly global, and Hero based.

Easy to Follow but Difficult to Master

To optimize a sporting property, you need to find a balance between easy to follow and difficult to master.

Easy to follow means that the sport can be understood right off the bat which will drive up initial interest. If I only have a certain amount of leisure time in the day, I want to allocate this time to entertainment that has lower barriers to entry (learning the rules of engagement) and shallow learning curves. Fast cars go around a course – first guy to cross the finish line wins. Got it.

Difficult to master means exactly what it sounds like. Driving a Formula 1 car is one of the most difficult and technical sports in the world. There has to be a perfect marriage between the braking system, chassis, accelerator, tires, steering wheel, gearbox, and the driver. Mix this together with the fear of death at any moment and you’ve got yourself a “difficult” task to say the least. When you see someone doing something extraordinary at a differentiated skill level – you watch.

Large Install Base (Top of Funnel)

When thinking about a spectator sport, some people make the argument that you have to play it (or had played at one point) to watch it. While I agree that those who play the sport are more likely to adopt it as a fan, I don’t think that tells the whole story.

For instance – there are an estimated 250M soccer players in the world, but an estimated 3.5B soccer fans.

I would argue that in order to become a fan of the sport, you simply have to have an affinity for connection and excitement. The connection could be that you have a local team to cheer for or that your son plays soccer so you watch it with him. The excitement is the sense that it awakens something in you.

There are roughly 1.5B vehicles on the road. Those vehicle owners have first-hand experiences of pushing one pedal to go and the other one to stop.

The connection for F1 is that nearly everyone has been in a motorized vehicle and the excitement is the sense of crossing the line first – being the best and fastest. I usually hate broad generalizations of TAM, but this is one I absolutely believe that the target market can be more broadly defined when looking at the casual viewer.

Truly Global

In F1 there are 20-23 races that each takes place in a different country across the world. When you look at the driver's nationality, there are 20 drivers from 14 different countries.

Carrying on from our soccer example, if you think of the Premier League as one of the most “global” leagues in the world, they have roughly 300M unique viewers vs. Formula 1 with 400M.

While motorsport may not be even close to the top when it comes to participation in the sport, F1 really is the world’s most global spectator league.

Hero Based

The best way to popularize a sport on a global basis is to create a hero. If you caught the Michael Jordan documentary on Netflix, you know that the NBA spearheaded expansion into China through the profile and clout of Michael Jordan.

When you can put a face to the sport, it’s easier to form a connection.

This hero for F1 has been Lewis Hamilton. Hamilton is from humble beginnings with a dad that once held four jobs at one time to support his racing career. With a father of Grenadian descent, Lewis battled racism to overcome the odds and rightfully dominate the racing scene. His attachments to high-fashion, music and social activism have made him a cultural icon. Oh… and he also got knighted a couple days ago so that SIR Lewis Hamilton to you!

But every hero needs a villain. The villain de jour is Max Verstappen. He is seen as brash, brazen, and a ruthless (sometimes wreckless) competitor. He filled this most recent season with drama by frequently touching wheels with Lewis, finally challenging his dominance. Max’s raw focus and hunger to be the best are unrivaled.

Has the torch been passed? Or are we in for another head-to-head? Find out next season…

But first, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!

3. Structure of the League 👉 Formula One Group, Teams, Promoters

Formula One Group

Formula One is quite a fantastic business model. They do not pay to host the races, the promoters pay all these costs. They pay out the teams based on a percentage of revenue generated, so the cost structure there is variable instead of fixed. They own the most valuable and durable assets which are the digital content and brand. The Formula One Group did roughly $2B in revenue last year.

Main Revenue Drivers:

  • Broadcasting Rights. As the popularity of the sport accelerates, so do the broadcasting fees. Rights are sold in a specific geography for specific time frames. Your alarms should be going haywire right now. Because the sport is so global in reach, it allows them to monetize extremely effectively.

  • Promoter Fees. These are the fees that the promoters of the race pay directly to the Formula One Group to host the event. More on this below.

  • Sponsorships. During the broadcast, to have your name displayed track-side you have to shell out the big bucks to F1. Huge opportunity upside here to bring in more big-brand names.

  • Other. The Formula One Group reserves the rights to a specific VIP area at each race called the Paddock club, from which they generate revenue. They also have revenue streams through minor leagues (F2,F3) and transportation.

Main Costs:

  • Payments made to teams. This is the prize fund that is paid out to teams in order of placement as well as certain other heritage payments.

  • Broadcasting costs. In order to completely control the content that they are distributing, F1 pays production.

  • SG&A. Just like any other publicly-traded company, they need people to run the business.

Teams

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In Formula 1, one man crosses the finish line, but an entire army of people get him there. The largest teams can have upwards of 1,200 people and the smaller teams have around 200. Positions on the team include team principal, managers, assistants, race engineers, R&D engineers, designers, aerodynamicists, other engineers, race mechanics, and production. Owning a team is usually not a great business, operating around breakeven.

Main Revenue Drivers:

  • Payment from F1 through the Concorde Agreement. At the end of a season, each team gets an equal share of the F1 earnings percentage for participating in the previous two seasons. On top of this, F1 pays each team depending on how they place in the season.

  • Sponsorship agreements. Pay to slap your name on the car. Red Bull paid $83M in 2018 for their exposure.

  • Special clauses. Ferrari is the longest-standing team and earns a “Heritage” bonus because of the marketing influence it holds and its tenure in the sport.

  • Contribution from parent companies. A team like Mercedes or Ferrari will receive a contribution from the parent company that can largely be seen as a marketing cost to get the brand name out there.

  • Billionaires buying their kid a seat in the race. Independent teams that do not have a big auto manufacturer behind them frequently have to have a wealthy individual foot the bill. This usually comes at the cost of one of the seats for the sponsor’s son. See: Lance Stroll, Nicholas Latifi

Main Costs:

  • Everyone in the picture above. Salaries for the team are extensive.

  • Car cost. Each F1 car typically costs around $12-15M.

  • Travel, maintenance, repair. These cars are not cheap to fix and neither is moving your entire paddock to a new country every week.

Promoters

Promoters actually run the race itself. They provide everything from the track, the entertainment, and the concessions. The promoter can be anyone from a racing enthusiast club that owns a track, the government, a local bussiness person, or an event corporation.

Main Revenue Drivers:

  • Ticket Sales and Concessions. This is the entire revenue stream for promoters. Tickets are usually tiered in terms of where the seats are and access to special events or facilities. A 3-day General Admission ticket at Silverstone can be around $350 while the top tiers can be close to $2,500.

Main Costs:

  • Fee to host paid to Formula One Group. On average, this is about $30M although it varies widely.

  • Track cost and maintenace. The FIA has exacting standards to what shape the track has to be in.

  • Entertainment. The events usually have high paid performance as well.

There is also an absolutely fantastic podcast episode on business breakdowns that digs into the weeds of all the revenue splits that you can find here.

Wrapping Up…

Formula 1 looks like it’s getting a breath of fresh air right now. It’s not about cars going around lap after lap anymore. It’s about telling a story. Netflix has given behind-the-scenes access so we can see what it’s like to run a team. What it’s really like to scream through hairpin turns before accelerating to 350km/hr on a straight in a 1,600lb aerodynamically designed piece of perfection.

The inclusion of the casual fan opens up a massive market for increased fan engagement across plenty of new digital channels which can be optimized far more effectively than they are now.

Time to rev your engines.

Until next time. Always Yours. Incessantly Chasing ROI,

-Genevieve Roch-Decter, CFA

P.S Metaverse is going to be a +$1 trillion dollar industry. Are you buying your tickets to the show? #bitcoin #ethereum

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Sources:

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Disclaimer:The publisher does not guarantee the accuracy or completeness of the information provided in this page.  All statements and expressions herein are the sole opinion of the author or paid advertiser.

Grit Capital Corporation is a publisher of financial information, not an investment advisor.  We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient.  

THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME.  THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION.  INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.  

Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable.  They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.  Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein.  The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the publisher undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.

The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities).  To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.

By using the Site or any affiliated social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.

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