In this week’s Calling the Shots, student blogger Evan Planchon takes a look at life in the fast lane, with an analysis of the current state of the world of Formula One.
A few weeks ago marked the end of the 2014-2015 Formula One season, with British driver and reigning champion Lewis Hamilton taking home his third World Championship. Fans and drivers will now enjoy a few weeks away from the loud and nail-biting races, but the teams will not rest. After all, the sport of Formula One is dominated by money.
The major difference between front-grid and trailing Formula One teams is not the drivers, but rather the engines. Without a large source of funding, teams are unable to develop an engine that is both powerful and consistent throughout the 19-race-long seasons. Only the PETRONAS Mercedes Team achieved this with champion Lewis Hamilton and runner-up Nico Rosberg.
A Multi-Billion Business
The sport of Formula One is a $3.8 billion business orchestrated by CEO Bernie Ecclestone. However, Formula One has no shortage of controversies. Bernie Ecclestone appeared in a German court in 2014 for bribery allegations within Formula One but was not charged on a criminal level after German prosecutors accepted his court settlement of over $100 million. What is most worrying about the sport today is the fact that Formula One is suffering from a deep financial crisis, as the racing sport is burdened by a debt of over $4.1 billion.
Last season, the Marussia Team, owned by Virgin CEO Richard Branson, and the Caterham Team both filed for bankruptcy, making hundreds of staff members redundant and selling assets to fans and investors to cover debts. Both teams launched extraordinary and surreal bids to raise millions of dollars to keep racing through fan donations, but it wasn’t enough.
Why is it that we, as fans, must make sacrifices to save Formula One teams from drowning in a sea of financial debt when CEO Bernie Ecclestone’s net worth is $4.2 billion?
In Formula One, too many things overshadow the racing. There is too much politics.
– Ferrari driver, Kimi Raikkonen
A Flaw in the System
Since the Formula One championships started in 1950, over 153 teams have left the sport; a casualty rate of over two teams per year. Last season, these two teams were Marussia and Caterham. The two teams financially collapsed and left the sport for good in the same week. At that moment in time, experts and fans understood that Formula One is all about the survival of the fittest.
With commercial rights at over $2 billion and team sponsorships reaching $1.8 billion, it is hard to understand how teams are disappearing from the tracks every year. The Marussia Team greatly suffered last season, not only from their financial situation, but also due to the fatal accident at the Japanese GP that claimed the life of French driver Jules Bianchi.
Looking at the financial valuations and figures of teams, it is clear that only the top teams, Ferrari, Mercedes and Red Bull, are making money out of Formula One. Teams at the back of grid, such as Marussia and Caterham, are making huge losses.
The financial system established by the FIA (Formula One’s governing body) is to blame. Teams like Marussia and Caterham are dependent on Ferrari and Mercedes engines. Due to a lack of operating income, some teams are forced to purchase engines manufactured by dominant teams. Marussia filed for bankruptcy when the team owed $18 million to Ferrari after their cars malfunctioned numerous times, requiring replacement engines. There’s no doubt that there is a lack of support for these struggling teams who are on the verge of disappearing every time a new engine is required.
On the other hand, the teams providing engines to smaller teams are making a lot of money. Ferrari is valued at $1.4 billion as a result of multiple engine deals and large sponsorship deals with corporations like Santander and Shell. Ferrari’s sponsorship revenue is higher than the total operating income of teams at the back of the grid. As a result, multiple teams threatened the FIA with boycotting races if the revenue distribution did not change.
Furthermore, dominant teams are constantly signing side deals with Bernie Ecclestone in order to guarantee future promising sponsorship deals; resulting in serious bribery allegations. Financial experts state that Ecclestone received over $3.5 billion worth of dividends since 2007, but borrowed large sums of capital from investors and sponsors; resulting in a $4.1 million debt.
The Future of the Sport
Although the sport of Formula One is facing a challenging financial crisis, with teams complaining of an unfair revenue-sharing scheme, the racing sport is still extremely popular on a global scale for the excitement it brings and the drama that unfolds in every race.
Financial experts are anticipating seeing Formula One go public at a value of $8 billion, which would ultimately enable hostile teams to survive in this competitive industry.
After all, we as fans are asking for the politics of the sport to give way to the true nature of the sport, which is the racing – and a lot of it!