Analysis: The rise of the circuits

27/06/2011
NEWS STORY

They may not have created a fancy name for their unification but all of the most important Formula One circuits have finally grouped together. The straw which broke the camel's back was the teams' proposal to downsize the current V8 18,000rpm engines from 2014. The circuits say that this would affect engine sound and performance so much that it could drive away their customers - the spectators. It has galvanised the circuits and then some.

Unlike the Formula One Teams' Association (FOTA), the circuits have placed their authority in the hands of one man, Australian Grand Prix Corporation chairman Ron Walker. It immediately gives the circuits a voice and confirms their status as an F1 powerhouse. As Walker told Pitpass' business editor Christian Sylt, it is "the first time that the promoters have ever got together and opposed in 50 years."

Given that FOTA claims to have the fans' interests at heart, you would have thought that the teams would have showed extreme concern at the circuits' claim that their new engine would sound so bad that it could drive away fans. However, instead, one team source told Pitpass that "no-one in the paddock is taking what [Walker] said even remotely seriously." One has to wonder whether this statement in itself is serious, since the source presumably did not question literally everyone in the paddock, but it nevertheless reflects the teams' view of the circuits' concerns. It may not pay off in the long run.

According to Sylt's F1 trade guide Formula Money, the circuits pay a total of 356m ($568m) in race hosting fees to the sport's rights holder the F1 Group. It is the F1 Group's biggest source of revenue and represents around a third of all the money it receives annually. In return, the circuits get no share of the F1 Group's profit, nor any share of its revenue from broadcasting, trackside advertising or corporate hospitality. A few circuits are allowed to sell their own trackside advertising and corporate hospitality and pay a fee to the F1 Group for the privilege.

In contrast, the teams directly provide none of the F1 Group's major sources of revenue yet in return receive 50% of the company's profits.

On a business level it seems a little unbalanced to say the least and it is an issue which Sylt has raised before with F1 Group chief executive Bernie Ecclestone. The circuits could approach Ecclestone about getting a cut of the F1 Group's profits or they could approach the teams and demand a portion of their profit share. The latter move may be the most logical. Once you accept that the profit share paid to F1's stakeholders is 50%, which it is, then it is simply a question of who receives that money. At the moment the 50% only flows to the teams but is this really fair?

For years it has been said that the teams, not Ecclestone, are the ones who really put on the F1 show. Whilst it is true that with no teams, there is no F1 racing, it is also true that with no circuits, there is no F1 racing. Over the past five years F1 has lost numerous teams and gained several to replace them. It is a sad, but true, fact that the majority of teams on the grid can be replaced and the events of the past few years have demonstrated this. Big names BMW, Honda and Toyota exited F1 in 2009 yet few would argue that the spectacle has suffered - indeed 2010 was heralded by many as one of the most exciting in the sport's history.

However, whilst many teams can be replaced, there is literally only one Silverstone, only one Spa, only one Monaco, only one Monza. The list goes on. It is literally true that the circuits put on the F1 show and several are irreplaceable in many ways.

If the circuits approached the teams and threatened to leave F1 for a rival such as IndyCar unless they get a percentage of their profit share, it could leave the teams with a few problems.

According to the following document, there aren't enough F1 standard Grade 1 homologated circuits available to host F1 if 1 of the current tracks pull out. In fact, F1 would be restricting to running at Fuji, Imola, Korea, Magny Cours, Mugello, Paul Ricard, the Red Bull Ring and Shanghai. No disrespect to any of these circuits but the line-up sounds more suited to GT racing than F1.

There are alternative circuits in some countries such as Japan, where Fuji could step in if Suzuka left. However Fuji would know that Suzuka had rebuffed F1 and this would give it a very strong hand in the negotiations. In short, it would know that if F1 wanted a race in Japan it would have to take place there. Bearing this in mind it isn't likely that Fuji would pay top dollar which would reduce the teams' revenues through their F1 Group profit share.

An equally significant problem would be caused if flagship races such as Monaco, Singapore and Silverstone switched from F1 to IndyCar. There are no alternatives to replace them and each event is a huge money spinner for the teams both in terms of entertaining existing sponsors and getting new ones. In the almost unimaginable event that IndyCar ran at these venues instead of F1 one would imagine that many of the top sponsors would gravitate to the US series.

For the circuits, the economics are simple. According to Walker, hosting "an IndyCar race costs about three and a half million [US dollars]," which is around ten times less than the fee Australia pays to host F1. So even if only 75% or 50% of the current spectator numbers turned up, it could lead to loss-making races turning a profit.

The question of whether the circuits could just leave F1 is also an interesting one. As Pitpass has already reported, there seems to be a suggestion that if F1 no longer becomes the pinnacle of motorsport the circuits could claim breach of contract and simply leave the sport. This reason may not be necessary. They could of course all decide to leave F1 at the end of their current contracts and if they left before it could be tough for the F1 Group to do much about it.

Most of the F1 race promoters are either private companies or government divisions. The private companies could be put into administration so if they breached their contracts it would be tough for the F1 Group to pursue them for damages. It may be no coincidence that over the course of the three races in Canada from 2006 to 2008 the promoter left the F1 Group $22m (13.8m) short and there was nothing that could be done about it except eventually drop the race.

You may think that it would be much easier to get damages from the government owned promoters but this isn't necessarily the case. Speaking about this in 2009 Ecclestone told Sylt that taking legal action against governments would be far from simple.

"Sue the governments? I wish I thought I could live that long" he said adding that "most of the government guarantees are guarantees with banks. When you don't pay, I don't want to have to go to you the government and say 'what about this' and they put it on the agenda the next whenever. I want to go to the banks." So even if a race is promoted by a state-owned company this doesn't mean to say that the government is responsible for picking up the tab - it is yet another private company with the risk that it could be closed down.

In summary, the circuits are now in a position to use against the teams' their very own age-old threat of a rival series. Of course it may never come to anything but, as the teams know very well from their own experience, it could still lead to the circuits getting an increase in their share of F1's spoils. It wouldn't be worth the teams running the risk of not caving into the teams' demands and, given how serious Walker has been over the matter of the engines, this risk is very real.

Article from Pitpass (http://www.pitpass.com):

Published: 27/06/2011
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