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It is a common misconception that the teams take 50% of the revenues of Formula One as prize money with the remaining 50% going to CVC, the private equity firm which controls the sport.
Unsurprisingly, this flaw has been propagated by those who may be skilled in commenting on events on track but are far from adept at analysing financial statements. There is no problem with this so long as the error is self-contained however that changes the moment that conclusions are drawn from it and one has to go right back to the start to weed out the flaw. This is necessary in light of reports recently published in an Indian newspaper the Hindustan Times. The audience in the country is just getting used to F1 after its first home Grand Prix last year so now is the time to set the record straight.
The case in point concerns two articles printed earlier this month about the dispute over F1's future regulations which is raging between the teams, the governing FIA, and F1's boss Bernie Ecclestone. All three parties are signatories to the Concorde Agreement, the contract which commits the teams to race and expires at the end of this year.
The piece points out that Ecclestone has been against switching from the current V8 engines to smaller V6 units in 2014. This is no surprise since, as Pitpass revealed last year, Ecclestone even threatened to sue the FIA over the change. He has criticised the engines because it is believed they will be more expensive than the current V8s and they are not expected to share their distinct sound. The Indian report claims engineers confirm that "the noise will be fine" and adds that "as for cost, one cannot really take seriously such complaints from a man who organises that more than 50% of the revenues of F1 leave the sport." This is simply not accurate which would not be a major problem if it was left it there but it isn't.
A follow up piece in the same paper picks up the theme and says "the fastest way for F1 teams to improve their balance sheets would be by working together and telling the Formula One group (led by Bernie Ecclestone) that 15 percent is a much more sensible share for a promoter. The current lot do no real promotion AND take more than 50 percent of the money generated. That only makes sense for Ecclestone and the private equity people behind him, who take the money instead. It is hard to be sympathetic for the teams because they are incapable of getting together and stopping that happening."
Again, it is not accurate to say that CVC takes more than 50% of the money generated by F1 so the teams need to group together to get a better deal. It is ironic that the paper is talking about this at a time when Luca di Montezemolo, president of Ferrari which is one of F1's biggest spending teams, is no longer demanding that the teams need more money from the sport. Instead, earlier this month he said "we need to tackle urgently, and with determination, the question of costs... Ferrari is in agreement with the FIA's position that drastic intervention is required." Ironically, despite what appears to be a change of strategy on behalf of the team, the Indian paper claimed that "Ferrari has negotiated itself a nice extra slice of the action and does not give a stuff about the teams."
In fact, contrary to the idea that the teams need to gang up to get a better deal, their take from F1 is more than double that of CVC but you won't find that mentioned in the article. Instead, it goes on to say that since the Concorde Agreement has not yet been extended to run from 2013, the FIA "can do whatever it likes with the rules and the teams will either have to agree to that or get lost." It adds that this puts pressure on Ecclestone to offer the FIA "a more suitable financial arrangement, in order to stop it imposing rules that it would like to see. One idea that would really throw the cat among the pigeons is a regulatory budget cap, written into the F1 rules."
The conclusion is that "a regulatory budget cap would make F1 a much more profitable businesses and the sport would be more attractive to newcomers, but it would also mean that the teams could get over their disunity and work together to force the Formula One group... to do some promotion and/or give the teams a bigger share of the revenues. In most sports the promoter not only does promotional work, but also accepts between 10-15 percent of the revenues as its reward. In F1 it is all messed up."
Whilst this conclusion about the budget cap may be the one which the author wanted to reach, it follows the flawed premises that due to Ecclestone, more than 50% of the revenues of F1 leave the sport and its owners take more than 50% of the money generated. The reality is quite different.
According to company data (see below), last year F1's revenue came to £973m ($1.5bn) comprising around £325m ($510m) from race promoter fees, £313m ($490m) from TV rights, £145m ($225m) from trackside advertising and sponsorship, £50m ($80m) from corporate hospitality, £35m ($55m) from GP2 and GP3 and £105m ($165m) from other sources. Before paying the teams, F1 had total costs of £223m ($350m) in 2011 leaving it with £750m ($1.17m) of underlying profit which is known as earnings before interest, taxes, depreciation and amortisation (EBITDA). The teams took £438m ($686m) of this in prize money which came to around 58% of the EBITDA. Here is how it broke down.
The top ten teams shared 47.5% of the EBITDA which came to £356m ($557m). As Ferrari is F1's longest-standing team it got an additional £19m ($29m) which is a 2.5% share of the profit. Then £6m ($10m) was paid to both HRT and Marussia as they finished outside the top ten. Finally, there was £51m ($80.6m) in prize money back-payments for the period of 2004 to 2007.
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