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The Tower of Fable - Part II

FEATURE BY MAX NOBLE
16/05/2019

Breathe quiet dear reader! We are crouching, Sir David Attenborough-like, on the edge of an unlikely swamp, hiding in the reeds watching in fascination as the local turtles build a towering turtle tower under the fearsome gaze of King Chase Turtle.

King Chase, like King Yurtle before him, wants to be King of all he can see, so the logical path to a bigger kingdom is to see more, hence the dire need for a bigger fabled Tower of Turtles.

In part one, we discussed the many obedient, but increasingly gum-grinding, turtles already in our Turtle Tower. Fan-Base turtle has the toughest job of all, for he is at the base of the turtle stack with all the others piled on his back. And not even a turtle shell massage, neck rub, or free beer to keep him strong! No! Poor Fan Base Turtle is being asked to pay, yes pay, for the privilege of being the foundation of King Chase's turtle tower. How would that make you feel dear reader?

So with Fan Base Turtle's knees quaking and his shell shaking, sending tremors all the way to the top of Turtle Tower, let us peek once more into the twilight zone miasma of the dark world of accounting, and see if we can crunch the numbers at which turtles start to crack, and turtle towers fall, tumbling King Chase from the heavens into the mud and broken reeds.

Draw a few deep, clean breaths, poor a fresh coffee, G&T, or Kombucha tea, and with strong spirit dear reader follow me down this darkened path into a realm of phantoms where the eye can never really be trusted...

Having established that barter no longer works and money greases the wheels of all modern business let us make some assumptions, and see if we can build a model that tells us roughly how much Fan Base Turtle is going to have to pay to keep the Turtle Tower strong.

First, some idea of the actual cost of the sport... Public figures in the region of $2bn as the income for F1, with a shade under $1bn going to the teams, will form the basis for our assumptions and calculations going forward. Bernie had his own delightful income streams, but now Liberty has a growing number of high level staff… and travel costs, and buildings, and all those trappings of not running a business out of the back of Bernie's Maybach with only a top quality laptop and a good telephone link. Let's call it $50m a year to run Liberty HQ.

Then global travel for all the teams, let's call that another $50m to not under cook anything.

So rounding up to give a bit of a margin for error, lets settle on $2.5bn as the amount of money that needs to run through the sport to keep it functional over a season.

Sponsor intake is wildly variable team to team. Liberty is already talking, as has previously been suggested by Pitpass, about generating series level sponsors, but once again the teams dislike sharing, so this is a work in progress. For this discussion I'll leave the entire circuit owners and race day income and fees alone, as they are not of direct relevance to this framing of the story...

Which brings us to the sleeping dragon curled around the entire Turtle Tower, pay-per-view (PPV) viewers, compared to free-to-Air (FTA) viewers. What does this mystic beast look like?

At this point my thanks to Chris Sylt (publisher of F1's industry monitor Formula Money) for sharing some insight.

Chris' summary of Liberty's position is as follows: "For F1 itself (i.e. Liberty) it's simple. It all comes down to which network pays more, regardless of whether they are PPV or FTA. I can safely say there is no way the sponsorship boost F1 would get from signing an FTA channel would compensate for the lower fee."

So in summary, Liberty is chasing the greatest immediate income, no surprise there, but how short-term is this view of keeping the Turtle Tower upright?

As previously noted, running a punch bag, fresh towel and water bottle is far cheaper for Floyd Mayweather than running a competitive Formula One team. So when he makes $200m every few years that's just fine. He's well covered. Yet after years of PPV, boxing is now struggling to find ways to generate general awareness coverage and attract new followers. The lack of FTA coverage means the boxing pond now has very few turtles floating around with which to build a Turtle Tower.

The Mayweather-Pacquiao fight had a record viewing of 4.6 million PPV customers, generating $400m in revenue. That was it! The millions generated all came from those few. That's an average spend of $86.95US per PPV sign-in. Would you, dear reader, be a good Turtle and pay $86US dollars per race to view F1...? Thought not.

Looking at the current Channel 4 collapse in viewing figures in the UK, let's apply that reduction in viewing to historic FTA viewing figures.

A recent Pitpass article about Channel4 highlight viewing stated the following:

Broadcast Audience Research Board (BARB) figures state that 1,410,100 viewers watched the broadcast on their TVs, while 19,959 tuned in on a PC or laptop, 5,236 watched it on a tablet and 4,086 used a smartphone.

This gives a total of 1,439,381 which is a drop of 13.2% on the 1,658,137 who watched the Bahrain race and 30.1% down on viewer numbers for the 2018 event in Shanghai.

In an age when series like Game of Thrones are broadcast simultaneously globally, and others are released as box sets so that fans can binge, the days when fans tune into a highlights show hours after an event were already numbered.

And the Bahrain event was 44% down on the same race last year... Global viewing figures (based on 2017 and 2018) have been quoted as around 1.3 billion viewers after 15 races. Liberty has a stated aim to attract 500 million PPV subscribers. So clearly the real world and Liberty are aligned on around a 50% drop-off when one goes to paid viewing. Except nowhere near that 500 million have parted with hard earned cash for their F1 TV subscription.

If, and this is a massive if, 1.3 billion viewers paid $86US then Liberty would see $111.8bn roll into its coffers. That's rather a positive number, and I'm using a one-off payment (i.e. a season pass) at $86, not a single race (which I'm sure Liberty would love to do...!). Halve the 1.3 billion viewers and one still has a healthy $55.9bn rolling in. Halve viewers again, 250 million, and at $86 for a season pass one is still welcoming $27.95bn into the vaults!

As Liberty took in a little less than $2bn in 2018, and made an increased loss of nearly $70m on that income, while giving just under $1bn to the teams, one can see that income of $27.95bn from a 75% reduced audience to a mere 250 million PPV viewers (at $86 per season pass) has seen a tenfold increase in revenue! Remarkable! Indeed to simply match the existing $2bn business, one only needs 23.3 million PPV viewers at $86 per year... Gosh. One can afford to show 1.276 billion existing FTA viewers the door, and still have a profitable business... Put another way 98% of existing FTA viewers can follow Elvis out the building and Liberty still has a PPV model that works.

How valued are you feeling right now Fan Base Turtle...?

Because I like round figures, let's say 130 million (10% of existing) of us stick around for our $86 per year season pass (note for esteemed editor Balfe - the timing app is still extra :-) ) that would give us a revenue stream of $11.18bn per year. Or five times the current revenue.

On that basis we can drop hosting fees to $1, and drop $5bn on the teams, i.e. $500m per team! Good-bye budget woes, budget cuts, and cost caps! If one can get to this revenue stream why are we wasting pixels discussing budget problems!? Oh, because all that extra money is going directly to Liberty's bottom line as profit, and they do not want to send such towering piles of golden turtles waddling into the ponds of team owners! Really... A modest 130 million PPV subscribers and every team can run on a Mercedes budget! Wow... Really what is the budget cap "Crisis" other than Liberty protecting a future massive bottom line profit...?

How long such a profitable model can function is another story. If Liberty refine hosting fees, and attract more than 25 million viewers in the first year then the model is operational. But Fan Base Turtle is well known for changing ponds on a regular basis, so Liberty need to ensure a continued flow of fresh Fan Base Turtles into its pond, which is where the need for a feeder audience and FTA viewers comes in. No wonder Liberty states that "...free to air is vital for us..." they recognize the need for a continued supply of fresh fit turtles to keep King Chase at his lofty heights.

If we take the thirty-year pay-TV journey of Boxing as an example, we can expect PPV subscriber numbers to drift gracelessly downward to the region of 5 million (using the record 4.6 million that tuned into the Mayweather fight as a marker). Now 5 million multiplied by $86 is a humble $430m. Great for a boxer maintaining his water bottle and clean towel, no good for feeding ten hungry F1 teams.

And that is Liberty's true problem. Attaining more than 25 million PPV subscribers in the first instance, and then continuing to grow that, recalling its lofty goal is 500 million subscribers, while strangling FTA coverage, and with it the supply of fresh Fan Base Turtles.

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READERS COMMENTS

 

1. Posted by Editor, 20/05/2019 13:34

"@ Uffen

Re: "the circuit owners will sniff the financial winds and ask for a greater share"

A "greater" share, at present the circuit owners don't get any share. They don't get any of the trackside advertising revenue at their own circuit and even much of the corporate income goes straight to F1.

Basically all they do get is the income from ticket sales... which is why so many of them are finally seeing the light."

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2. Posted by English Tony, 20/05/2019 10:57

"86$ is beyond most of the planet - it's a month's income (& more) for millions of people

So if we assume that Africa, South America & Asia can't afford to watch F1 via PPV that leaves North America which has little interest in F1 & Europe

Are there 25 million people in Europe prepared to cough up 86$ per annum for races held predominantly outside Europe?

How many sponsors would be willing to spend on a global series that only gets watched in Europe?

Finally, because statistics, that 1 billion viewers figure - is that the season total or the per race figure?

I think I know the answer to that...

Are there 25 million people in Europe prepared to cough up 86$ for an annual subscription to F1 streaming?
"

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3. Posted by imejl99, 20/05/2019 8:31

"@cricketpo

you wrote: that by and large free to air is no longer a viable model for a commercial enteprise to really coin in the bucks

NFL makes app $5BN yearly from broadcast TV. FTA, embarrassing grandparent, is doing just fine with the 21 week schedule. PPV, stream, platforms are coming, but FTA is far from dead.

As Brian Rolapp, the NFL league’s head of media, says “The fundamental rule in media is money always follows consumption. If you have the consumption, figuring out how to make money off it is not the hard part.”

The hard part for King Yurtle is that the money he makes comes in big part from promoters instead of consumption. Those empty grandstands are taller than his Tower, apparently."

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4. Posted by cricketpo, 19/05/2019 12:55

"Prepare for change!
If Liberty wants to grow its PPV audience it may have to do all manner of things to F1 that you all find unbearable. Boxing is not, in my opinion, a rock solid comparison as many viewers find boxing physically repugnant as opposed to merely dull (F1). Premier League Soccer has benefited wildly from being behind a pay curtain (although not strictly PPV). Streaming and/or broadcasters may well pay over the odds to ensure they have a saleable product so Liberty may not need to seek individual PPV customers in the style of a Netflix. Whatever happens F1 will have to find a way to pay for itself. The quote is from The Right Stuff, Fred Ward as astronaut Gus Grissom points out "No bucks, no Buck Rogers"
It sounds to me though that chasing PPV viewers would result in a much smaller, and therefore manageable, mound of turtles.

The advertising advantage to streaming is that the source company can direct advertising directly at the people that will buy. Thanks to all our little cookie files people such as Google collect data and will be able to see what advertising YOU individually will take notice of. Marketing types love this because they dont have to waste money an all this TV and billboards blunt instrument type advertising. The internet tells them what they all buy and where they live. The point I am making is that by and large free to air is no longer a viable model for a commercial enteprise to really coin in the bucks. So leave it be, free to air is the embarrasing grandparent that is placed in a care home so it can mutter "in my day....."

Streaming has enlivened the music market by making bands concentrate on the quality of their concerts - a definite improvement. Maybe it will have the same effect on F1 where it will become an event worth turning up to. I have followed F1 for many many years but strangely never felt the need to actually go to one."

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5. Posted by Uffen, 18/05/2019 19:26

"Another excellent article, Max. Teams will spend what ever they have available. Also, if the PPV audience grows and Liberty reaps huge gains that may not last. Why? Because the teams will see that profit and demand more, the circuit owners will sniff the financial winds and ask for a greater share. Some governments will ask themselves (perhaps via the voters) why they are subsidizing a bunch of billionaires, and some sort of new "crisis" will be upon them.
Autopsies on those Fan Turtles will find that they died of a marketing overdose. "

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6. Posted by Max Noble, 18/05/2019 7:33

"@Canuck - yes live audiences azure an interesting thing. Music is seeing a revival of big concerts as the artists are making more from touring than streaming... Similar on a smaller scale with Boxing. Tickets for Mayweather McGregor ranged from $500 (ouch) to $10,000 ring side (dang silly...) - total attendance was just short of 20,000 people.

@4-Wheel Drifter - the “they” is Liberty, and no I am not saying we are all like GoT fans... I’m just talking about “Digitally-based viewers” in general. As to the “Grass roots” racing you are talking about.... it is happening each weekend all around the globe already! Friends of mine are taking part in Hill climbs this weekend for the sheer joy of it. I’ve previously raced go-karts with no one but the other drivers at the track... This is grass roots for the joy of racing and the thrill of the win excitement. F1 just happens to be the massive global business of making the Big Time.

@FQITW - If (...!) Liberty can get a good revenue stream and elect to share a fair slice of it with the teams they will all survive well... It will be fascinating to see how they go between now and 2021 sorting it all out!"

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7. Posted by FQITW, 17/05/2019 10:22

"Sadly I think it won't matter what state F1 will be in in 5+ years as Liberty will be gone as they realise their subscriber numbers have peaked and they will do a 'CVC' and off load the whole deal. (Maybe at a loss)
All that will be left is the wreckage to be swept up and placed in the bin.

I agree with '4 wheel drifter' when he says he looks forward to the demise of F1 and it is entirely plausible that a new series could start (preferably not led by the FIA) and we could start again on a more reasonable technical level.

Everyone goes on about the DNA of F1 and I truly welcome innovation but the tech in place now is only available to six cars due to costs. F1 will burn itself out without Liberty's help.

I pity all the other teams who increasingly will become subservient to Liberty as their paymaster because it won't last when the subscriber carousel stops.

Another question we should ask ourselves is after Baku & Barcelona etc. and all the tyre/fuel/brakes management,the constant build up to GPs which lead to an afternoon snooze and dis-satisfaction at a wasted two hours after a dull race - do we now actually care any more?

I mean really, honestly,truthfully, do we care?

I know that two years ago this question would be heresy and I would be appalled by such a notion but with all that has gone before with the dilution of the sport,the money grabbing teams,a 'leadership' who blithely carries on regardless and the TV subscriber figures which admittedly do make sensible compelling (short term) financial sense along with the point & squirt street circuit in 'destination' cities what is there to care about?

We can't afford even for one day, to attend a GP week end, we can't get near the cars, we can't take decent photos, you can't watch on TV any more and the worst part is:
We can do SWEET FA about it."

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8. Posted by 4-Wheel Drifter, 17/05/2019 1:16

"Most of Mr. Noble's examination of Liberty's plans for F1 suggests that they (who ever "they" are) believe that the Fan base for F1 is similar to the Fan base for Game of Thrones. In a word, they are like the fossils running American Baseball into the ground while the National Basketball Association is marketing to the world and will, in fairly short order, have an audience more like the one for the World Cup than the, so-called "Super Bowl." I grew up reading about F1 in Road and Track magazine. There was no radio coverage of the races where I lived and the races were rather few and remote. But the stories! It was all about the drivers and the teams and every race was like an epic poem. There were 'factory' teams and privateers. There were drivers racing to the end on nearly completely shredded tyres! I can't remember anything like "safety cars." Now and again they red-flagged races. There was a real risk of death or disaster and there were, so far as I could tell, no lawyers anywhere in sight. Racing was for gearheads and the posh folk had NOTHING to do with it. I. for one, look forward to the demise of F1 as it now exists. Some racers will get together, probably mostly in Europe, and begin racing again, not for points or 'podiums' but for wins. I suggest that it not have the word "Formula" in its name and that it race on the cheapest circuits available and that the field be open to everyone who wants to bring a racing machine to the event. And I don't care if it is televised or 'streamed'; indeed, I hope they refuse to allow the races to be photographed, Stories will begin to be told again. And people will be excited to read them and dream of buying a cheap ticket and camping in their cars or carts to watch the race, not from some unearthly 'grand stand' but from the roof of their own campers. Indeed, the cars they are driving today might as well be driven by Artificially Intelligent computers for all the excitement they generate."

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9. Posted by Canuck, 16/05/2019 23:53

"@Max - in your comparison to Boxing - how many actually attend a boxing match and what is the price of a ticket? Using this same analogy I think with a reduced fan base that are willing to pay to view on a screen (regardless the size), that will also reduce the the fan base interested in track side attendance. So who will pay to host a race if they can only attract 10% of the previous model. And how much will they have to charge- same price as boxing? So only the elite can attend?"

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10. Posted by Max Noble, 16/05/2019 23:42

"@Canuck - Yes going to a far smaller PPV audience creates a whole world of different problems. It will be interesting to see what manufacturer boards think of letting 250M subscribers know about your company... I think the off-set is that the teams can be paid a large sum under this model, race, and make a profit. So again it becomes a money making business, not a sport or a passion... Ah... F1-TV..≥ funny you should raise that topic... :-)

@Rock Doc - Quite! That’s when I had my lightbulb moment. You do the maths and the money flow is staggering. A viable model at 25M subscribers and rivers of gold from 250M and up! The numbers for their 500M subscriber goal are mind numbing. So yes, they only want to talk to those of us willing to pay. Which is my point about that working fine for the first few years... but then you will have a fan-base turtle supply problem in ten years or so (like Boxing now). So as noted in the article well over 90% of fans can quit the sport, and as long as the subscriber model is in placed it is all good... for a few wobbling seasons of turtle tower...
Another PitPass article quoted Bracks (I think) as saying they had “...only 8% monetised F1...” which is business presentation speak for “We are not correctly juicing this lemon.” And if one takes a $2B income as 8% of the possible you can see they are anticipating those rivers of gold... I’d love to see that spreadsheet.. :-) "

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11. Posted by Rock Doc, 16/05/2019 17:19

"Am I alone or do others find the numbers in your great article Max truly shocking.

So Liberty can still work with a PPV model and a decimated fan base to make their money as long as they can get enough to subscribe. $86 per year is I think achievable, but I guess getting 10% of existing fans to pay for something they are used to getting for free (or almost free) is the catch.

I have been worried since Liberty took over that even though they talk about a fan base they do not seem to understand the fan base. I guess the reasoning in the article helps to explain why. They are only talking to the fan base that will pay."

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12. Posted by Canuck, 16/05/2019 16:18

"Again a fine article Max. But in your analysis I would add another caution. If the viewership in reduce to only sustain the profits of Liberty as you mention, will there be many sponsors interested in providing moneys to have their product advertised on a reducing viewer base? At 1.3 billion it is worth a lot of money. At 250 million it is worth much less. Will be big auto makers such as Mercedes and Renault be interested in this F1 series if the fan base is diluted? Will Ferrari still use this as their primary advertising vehicle?
Also is the ever problematic F1TV and F1timing apps, should they ever solve their problems, become direct competitors to PPV TV and therefore reduce the value of the PPV contract?"

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