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You are here: Home > Current Topics > Mind your Business > 08 March 2004 |
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Over the next nine months, in excess of 6 billion people will watch the Formula 1 Grand Prix season unfold on circuits throughout the world. The average viewing figures for each grand prix is over 354 million worldwide (Source of figures: Renault - Motor Sport and Leisure Report). Last season witnessed a movement in interest back towards the sport following the 2002 season when Michael Schumacher won the championship with ease. Criticisms were levelled against the sport at the end of the 2002 season suggesting that it had become boring and predictable. New rules, which were brought in, did make a difference; last year the championship was only decided at the final race but still went to Schumacher and Ferrari. The sport however is not without its problems. There are arguments over tobacco advertising, demands by countries to be included in the Formula 1 programme, existing circuits jealously guarding their precious slot, criticisms of venues, accusations of monopoly power and discussions about exactly where the sport is going given the vast sums of money involved. Of the teams that lined up on the grid this Sunday in Melbourne, Australia, very few will have any chance of winning or getting a place in the winning line up. It could be argued that other top sports such as soccer and rugby also have elite teams and that the majority will not be able to win anything, but the cars at the back of the grid will not be able to qualify for a motor racing equivalent of a UEFA cup place or win a league or FA cup! The gap in financing between the teams is massive. Ferrari has a budget of (depending on the source) between $300 and $400 million (£163 million and £217 million) whilst Minardi, owned by Paul Stoddart are attempting to compete with a budget of $40 million (£21 million). When such differences are prevalent, the economies of scale are of greater significance. Some of the larger teams, Williams, McLaren and BAR (British American Racing) have partners who supply them with the engines for the cars. The technical and financial muscle of the likes of BMW, Mercedes and Honda can clearly make a big difference. 
Keeping the World Champion at the top requires huge sums of money, skill, expertise and labour. Footballers are accused of earning 'obscene' sums of money. Ruud Van Nistelrooy and Roy Keane at Manchester United are reputed to be earning £90,000 per week. Michael Schumacher, 6 times World Champion, is reported to be earning $49 million per year, which works out at £511,538 per week! His brother Ralf will only earn around $13 million - around £7 million, the same as David Coulthard, only a paltry £134,615 per week. At the lower end of the scale, drivers such as Nick Heidfeld at Jordan are reported to be earning around $1.5 million (£815,000) (£15,673 per week). However, it may be argued that drivers merit such salaries by risking serious injury or even death for the sport - Brazilian race legend Ayrton Senna was killed in a race in 1994. The cost of maintaining the teams is also mind-boggling. Teams use around 900 tyres in a year's racing, each around £1,500 a time; a gearbox costs £65,000 and around 16 of these will be used - last year, they used one gearbox per race. Steering Wheels cost £30,000 each and engines £180,000 per race but with 170 used throughout the race calendar, the bulk of the money is spent on this technology (Source of figures: Sport Telegraph). At the head of the Formula 1 empire is Bernie Ecclestone. Ecclestone owns the commercial and marketing rights for the sport and as such wields a huge amount of power. His withering comments on the Silverstone track in the UK two years ago sent warning signs to the organisers that they had better do something to improve the facilities and access to the track pretty quickly or they would risk losing the race. Ecclestone's plans for F1 include floating F1 on the stock exchange. This led to an investigation by the European Competition Commission into the extent of the monopoly power held by Ecclestone's group of companies. In the meantime, Ecclestone decided to raise funds through selling $1.4 billion (£760 million) of bonds - effectively interest bearing loans. As the EU investigation dragged on, Ecclestone eventually re-arranged the financing so that he retained overall control of the rights although other investors had put up money. The financial machinations and the EU investigation centre on the rights to use the F1 brand, the granting of races at new circuits, the awarding of broadcasting rights, the involvement of Ecclestone in other motor sports and the potential conflicts of interest that may arise with Ecclestone's involvement and with the sports governing body the FIA (the International Automobile Federation). Added onto this is the threat of a number of teams to move away from Europe to avoid the problems being caused by the bans on tobacco sponsorship and the potential threat of prosecution under new EU rules in the event of a serious accident on the race circuit such as that which killed Ayrton Senna. 
Ayrton Senna is attended to by medics after crashing in the San Marino Grand Prix in 1994. The sport therefore, despite its massive popularity, does face a number of key business challenges not least of which how it develops and grows in the future and how it retains the interest of those who follow its twists and turns both on and off the race track. |
There are so many business and economic issues related to Formula 1 it would not be possible to do them all justice in the space of this article. We will, however, focus on three key areas:
Economies of scale:
Economies of scale are the advantages of large-scale production that result in lower average (unit costs) per unit produced. Economies of scale arise in five key areas; technical, commercial, managerial, financial and risk bearing. In Formula 1, the larger teams are able to benefit from a number of these economies of scale, notably, technical. The costs of the Ferrari team, for example, are much higher than that of the Minardi team but those costs are effectively spread over a greater range of output and as such the unit costs tend to be lower. The cost of developing engines therefore represents the major investment of any team. The technical resources available to the likes of BMW, Mercedes and Ferrari give them a major advantage. The two percent difference in performance as a result of this technical expertise may mean the difference between winning regularly and conking out on the first corner or being lapped fairly early on in the race! In addition, the opportunities to be able to raise finance, sponsorship, have experts employed in different areas of the team and the ability to spread risks (by having a larger stock of engines and bodies for example) means further advantages can be gained.
Monopoly Power:
The power wielded by just two people in the sport is awesome. Ecclestone and the President of the FIA, Max Mosley, effectively control the sport. The investigation by the EU into the actions of Ecclestone began in 1998. The investigation seemed to centre on the potential conflict of interests between the FIA and Ecclestone's group of companies, given that the latter was also the vice-president of the FIA with responsibility for promotion. The FIA was meant to be the governing body of the sport and having the governing body, who set the rules for fair play, also being directly involved through its vice president with the commercial exploitation was a potential breach of anti-trust laws. The EU also looked into complaints that the FIA prevented competition in the sport. This is particularly relevant to countries who wish to stage a grand prix and to television companies who wish to broadcast the events as well as rival motor sports that wish to use tracks, etc. for other motor sport activities.
Image: Bernie Ecclestone (left) and Max Mosley - the big two in Formula 1.
Title: Australian GP. Copyright: Getty Images, available from Education Image Gallery (http://edina.ac.uk/eig)
In October 2001, the EU ended its investigation after Ecclestone agreed to give up his post and the FIA agreed to become 'a regulatory body' only. The fact that the two key people at the top of the respective branches of the sport did not change was not lost on everyone!
Advertising:
Vodafone have sponsored the Ferrari team to the tune of $45 million (£24.6 million). Marlboro, the cigarette brand, is also heavily involved in sponsoring Ferrari. The former is not a major problem, the latter is. Tobacco firms have traditionally been involved heavily with sponsorship of sporting events and Formula 1 has been a popular target. Philip Morris, Gallaher, British American Tobacco, and the makers of Gauloises and Gitanes, Seita, have all invested heavily in Formula 1. The irony of tobacco companies being involved in sport, which emphasises fitness and health, is clear. Moves by the EU to ban tobacco advertising began in 1990. The current plans are for a complete ban on tobacco advertising in the EU from July 2005. In the UK a bill to abolish tobacco advertising was passed in April 2002. The outcry from the F1 community led to the sport being given until 2006 to comply with UK law. The fact that Ecclestone was a financial contributor to the Labour Party raised a number of concerns about the decision!
The problem arose that if, for example, a UK based team have 'Marlboro' emblazoned on their car at a Grand Prix in Australia and the event is screened by ITV in the UK, technically, that team are breaking the law. There have been concerns therefore that teams will leave the UK, taking jobs and expertise with them, that Europe will lose its grand prix status - there are plenty of countries who seem to have a more liberal attitude to tobacco advertising queuing up to stage the event - and that we will not see Formula 1 on our TV screens.
Those in favour of the ban point to the huge sums of money committed to Formula 1 and argue that such firms would not plough these sums into the sport if it did not have some payback in terms of increased revenues. Those opposed to the ban suggest that people do not watch Formula 1 and think of taking up smoking and the companies themselves claim that they are advertising their brand to existing smokers rather than trying to entice new smokers.
The whole picture is rather confused and the problem it raises both in terms of teams raising sponsorship and the future development of the sport has yet to be fully resolved.
1. Present an argument on why Formula 1 should be exempt from the EU and UK bans on tobacco advertising.
The question here is asking you to put yourself in the position of one of the teams in Formula 1 presented with the difficulties of coping with the legislation in the EU and the UK on tobacco advertising. The suggested sites for further research will help you to flesh out the points for and against the tobacco ban. The fact that you are being asked to present an argument in favour of being exempt from the ban does not mean that you ignore the reasons for the ban. Rather, you would be expected to use these to your advantage, for example, you might decide to argue the validity of the argument that Formula 1 is nothing more than a "non-stop commercial for cigarettes". In such a case you will have to present arguments that seek to reduce the importance of the points put forward by those in favour of the ban. Such a skill is important in developing your higher order skills in analysis and evaluation.
Some of the arguments you might use to support your case will be the impact on employment and the loss of revenue if the sport does move away from Europe. Getting some facts about the amount of revenue generated by the sport in Europe and especially in Britain as a result of holding the grand prix at Silverstone will be important in supporting your argument in this respect.
Ensure that you provide clear judgements supported by evidence you have collected and that you structure the answer appropriately. Begin with an introduction summarising the problem then provide a paragraph on each point in your argument and finally, finish with a conclusion that draws your argument together.
2. Discuss the possible impact on Formula 1 of a decision to quit Europe as a base for operations.
This question is throwing open the discussion about the future of Formula 1. Given the restrictions facing teams with regard to tobacco advertising and the legislation on liability for accidents as well as the desire by Ecclestone to expand the F1 'family', there may well be very sound business reasons for the existing teams to move from their European bases and set up in emerging economies around the world. The business reasons may be to avoid the possibility of prosecution, lower costs, greater revenues as a result of the potential for sponsorship and greater opportunities for growth. The example of how Bahrain has developed an impressive circuit in fairly quick time may be an example of the way in which F1 will develop.
Your answer will need to consider these issues and also look at how Europe might suffer as a result of losing the teams and also the staging of key grand prix events. Where possible, support your arguments with appropriate evidence drawn from the links given above.
