Cracking the Formula For One Win – The Economics Behind F1 

By Diva Sheth | Edited by Ikshita Jain

The world in the 21st century is rapid and fast-paced. The human love for speed along with technology has created what we now call the massive billion dollar industry- the F1 race, a large employer of  thousands of people where teams act as individual businesses that keep the sport in its life, just like Apple and Google which dominate the tech industry. Money surely makes the world go round. Looking at the balance sheets of F1, there are numerous zeros which also confer that teams pay to play or compete in the first place unlike other sports where teams play to win. 

How do Formula 1 teams make money? What is the economic perspective of it? The economics behind the sport is as interesting as the craze for the sport itself. For freshers, Formula One is a car racing sport born in the pre-World War II era and Bernie Ecclestone founded the first official F1 championship in 1950 at Silverstone in the United Kingdom. This area is also known as Silicon Fen (Silicon Valley of England), and more specifically with reference to F1, the Motosports Valley. It is one of the biggest hubs of motor racing, supplying cutting-edge technology to Formula One and several other motosport sectors. 

Most of the F1 teams are based in England including McLaren, Williams, Mercedes AMG. The reason being- during the World War, England manufactured a lot of aircrafts for their industry and post war, many aerospace engineers were left unemployed. Concurrently, the Grand Prix Racing was on its rise and most of the engineers transitioned into motorsport racing. Thus the racing fad was never dead and this sport came to be dearly close to people’s hearts even after the bloodshed. 

One season runs from March to October and consists of 22 races, all in different regions. There are 10 teams in total and the driver with the maximum number of points at the end of 22 races wins the title. The teams compete too by garnering all the points scored by their respective drivers. 

We cannot talk about business and its profits without talking about its costs and revenues. It is patent that for a business to be profitable, its earnings have to be greater than its expenses. Being such a sophisticated and a premium sport, F1 cannot survive without its major source of revenue- the sponsorship deals. At the time of its inception, sponsorships did not even exist. Instead, the cars were painted as per the origin of their country, as supposed Italian companies- Ferrari and Alfa Tauri were in red. Back in the good old days of the sport, the hegemony of cigarette brands such as Marlborough stood undefeated in the industry. Tobacco manufacturers constituted much of the sponsors for the race and it was only until 2006 that the FIA – Fédération Internationale de l’Automobile, the governing body of motorsports banned the marketing and advertising of tobacco. 

Presently, F1 thrives on its new technology driven business model wherein Formula One teams sell technology, goods and services to various other sectors as a way of generating revenue. R&D is an excellent source of revenue streams for F1, as the advertising budgets decrease. Each team in the Formula One can hold upto 25 sponsors who pay the fee for sponsoring the event ie. for having their logos displayed on the car, with the title sponsor reaching the highest mark. It is imperative that best-performing teams like Mercedes are able to sign juicy deals with the likes of Petronas (paying $57 million to Mercedes) and Bose because they get more airtime on TV and are more marketable but even struggling teams like Williams are able to get on board well-known names like Lavazza and Sofina. One major question arising would be as to who would pay for these races apart from the motorsport buffs? The other not so obvious categories would include the Government of that region who pays the tax to hold the race. Private firms, too partner up with the event to fund the remaining investment which is inclusive of the sponsors. 

The next question that arises is why would the Government pay to host such an event? If you put your analytical and economic mindset to race, there are plenty of positive effects to this. Inorder to promote tourism, the government receives a lot of cash inflows from the tourists who are visiting the country as spectators for the race. There is also an upsurge in employment as one needs to hire locals to carry on the process and procedures involved in the industry. Lastly, for such a dynamic event to take place, the integration of  various industries involved in the setting up of the race such as construction, lodging, automobiles of course and catering becomes extremely essential. Sponsors make up about 38% of Mercedes’ total income at $160 million, Ferrari- 44% at $190 million. Hence if these sponsors left Formula One abruptly, the teams would be making a loss of almost $200 million per season. 

The second big fat source of revenue is the Price Money. The team with the maximum points at the end of the season also known as the ‘Winning Constructor’ is awarded about $60 million, with second place earning $50 million. The third place lags behind with only about $15 million—a pitiful sum for an F1 squad. Heritage payments (Williams $10 Million, Ferrari $35 Million, Red Bull $35 Million) , were also made to teams that had won the most championships and experience, but they were eliminated for the 2021 season due to their glaring favouritism of more seasoned and established squads. Additionally, teams receive funding from their owners and parent firms. All of this also constitutes the Formula One Management (FOM) Payments. $36 million is paid to every team for two consecutive seasons. Next comes the sale of Merchandise which refers to the official signature products of the teams. 

All these cash inflows are met with cash outflows in the form of Research and Development ( R&D ) which ensures that cars are working efficiently and nothing goes south during the race. Costs reach the roof by $55 MN every year on an average. The most underlying expense for any business is salaries, not just the drivers, but the race engineers, car designers and the marketing staff.  A money minting business, for sure which reports that Lewis Hamilton made over $40 MN this year. Mediocre teams spend about $55 MN on salaries alone whereby Mercedes and Ferrari probably spend double that amount at $110 MN or more. What makes the car a Supercar? Manufacturing the car or production. Without considering spare parts and repairs, the cost to construct the cars is about $15 million. New regulations are being implemented to lower  salary and car expenses to a combined ceiling of $175 million, but that is still a huge sum. Around $50 million is added by logistics and other minor expenses. The icing on the cake is that the owner of F1- Liberty Media rakes in from the 433 million viewers on TV with Sky Sports pouring in $255 Million in exchange for broadcasting rights. These hefty amounts mean that most teams are losing revenue or coming to a break-even. 

A great thing about sports is that there is constant need for innovation, not only for better performance of the game, but also to jack up the safety protocols. The level of precision or the margin between the cars means nothing but perfection in performance and as they say, what drives you from within is what makes you a class apart!

References-

> The Economics of F1. (2022, April 12). Student Economist. Retrieved September 5, 2022, from https://www.thestudenteconomist.com/post/the-economics-of-f1#:%7E:text=F1%20teams%20make%20a%20substantial,such%20as%20 Lavazza%20and%20Sofina.

> Ainbinder, R. (2020, May 22). The Economics of Formula 1. The Economics of Formula 1 – by Ronen Ainbinder. Retrieved September 5, 2022, from https://www.sportstechbiz.com/p/the-economics-of-formula-1

 > Toni Cowan-Brown. (2021, February 25). The economics of Formula One. – Toni Cowan. Brown. Retrieved September 5, 2022, from https://www.tonicowanbrown.com/opinions/the-economics-and-technology-of-formula-one

 > StartupTalky. 2022. F1 Revenue Model – How Do F1 Teams Make Money?. [online] Available at: <https://startuptalky.com/formula-one-revenue-model/>

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