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The real reason F1 will never get a budget cap

NEWS STORY
05/07/2009

Over a recent dinner in London Tony Purnell, the FIA's technical consultant, told Pitpass' business editor Chris Sylt that personnel in the FIA had scratched their heads long and hard over why the FOTA teams had been so opposed to a budget cap in F1. According to Purnell, the FIA brainstormed all manner of weird and wonderful possible reasons but in the end none seemed to stand out as being likely. After the dinner Sylt gave it some thought and soon figured out what it appears the FIA had failed to do: as ever, follow the money.

According to F1's industry report Formula Money, the average F1 team budget is currently $302.8m with the team owners putting in $160.5m and sponsorship providing $88.1m - 29% of a team's resources. The bulk of the remainder comes from prize money. A budget cap would of course completely change the dynamics of this landscape and it would in fact put the teams in a lose-lose position. They would have two options regarding sponsorship and both are equally catastrophic.

The first option is that the teams could reduce their sponsorship rates according to the decrease in budget required to run the team. Clearly it would seem strange for a sponsor, such as Marlboro, which still pays Ferrari an estimated $100m annually to continue to do so when around 60% of this amount (under the €40m cap) would fund the entire team.

The sponsors seem to expect that if a cap is ever introduced, the rates will be reduced. One prominent F1 sponsor (which is also known to believe that current F1 sponsorship rates are too high) has indicated to Sylt that it is strongly in favour of a budget cap. Indeed, apparently one of the first calls that the FIA had after announcing the cap came from sponsorship agent Zak Brown who congratulated the governing body for a move which he believed should bring sponsorship rates down to a level more accessible to sponsors. This may not be the case.

There are two severe down-sides if teams decrease their sponsorship rates. The first is that the teams would experience a huge perceived loss in brand value. Sponsors are the teams' customers - they buy its services (such as space on the car) so, for the sake of comparison, imagine what would happen to the reputation of a grand hotel, such as the Savoy or the Dorchester, if it slashed its room rates from 400 per night to 40 per night.

Currently, the average price of sponsorship on Ferrari is estimated at $13.4m per year and this high barrier to entry is part of the attraction and the mystique of partnering with the team. Only the wealthiest of brands can afford it and they requires little vetting - the rate alone does that. However, if the teams' sponsorship rates were slashed then so too would be the cachet of an F1 partnership. It has taken the top teams decades to build up, and justify these rates so they are not likely to slash them in the blink of an eye. Which brings us to the second severe down-side.

If the teams slashed their sponsorship rates under the budget cap then it would take them decades to increase them again once the cap is lifted (as it inevitably will be) when the economy improves. Sponsors would be quite happy to pay a fraction of the current going rate but they would not be so keen on returning to the previous fees once the cap was lifted. This in itself could lead to a mass exodus of sponsors and could see teams hamstrung with small business budgets (down from their current status as economic powerhouses) for decades to come.

The alternative under the budget cap would be for the teams to retain their current sponsorship rates. What a fine way to reward years of trust and support from sponsors! The cost of providing the service decreases five fold but the cost of the service to customers stays the same. If anyone wants an indication of the sponsors' reaction if this were to happen then consider the uproar from customers when the price of oil decreased dramatically over the past year but the home energy rates of some providers didn't immediately decrease. Many F1 sponsors also have wider partnerships with the teams' parent companies so the last thing they would want to do is create bad will towards them.

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