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File Photo: AFP
File Photo: AFP

What Formula 1 can salvage this year and what it can’t

If Formula 1 runs the season, it stands to preserve upwards of its three-fourths of its $2 billion revenues. So would teams. But for racetracks, it’s another story.

It was a landmark in a post-covid world. On Sunday, as the chequered flag came down in Hungary, Formula 1 became the first sporting tourney to be staged in more than one country, albeit without spectators. Sterner tests await it. The next two stops of the premier motor-racing series are in England. Another five races in four other European countries follow, including Spain and Italy, once epicenters of the virus outbreak.

F1 is looking to piece together a season that is at least 75% the length of a usual season, if not more. How is it doing this? By creating and funding a medical bubble for about 1,000 personnel. Why is it doing this? F1 is a $2 billion-revenue business owned by a company, Liberty Media Corporation, and listed on stock exchanges. That has its own imperative. If F1 runs the season, Liberty stands to preserve upwards of three-fourths of those $2 billion annual revenues. As do the 10 F1 teams. But for racetracks, the third axis of F1, it’s another story.

For Liberty and the teams, the stock movement of the F1 business traces the swings of the past six months. On January 22, it closed at an all-time high of $46 on Nasdaq. On March 18, three days after F1 canceled its season opener, the stock was trading 60% lower at $18. As racing resumed safely, as more races were added, the stock recovered. On July 17, it was trading at $34, giving it a market capitalization of $8.26 billion.

The stock market is signaling preservation of a significant part of F1’s revenue pool, which was $2.02 billion in 2019. This revenue pool has four components: sale of broadcasting rights to television channels and digital platforms, sale of rights to racetracks to stage F1 races, central sponsors like Rolex, DHL and Emirates, and other revenues. A full season even in a covid world augurs well for three of the four revenue components, the exception being the deal with racetracks.

The main revenue head is broadcasting (33% of total revenues in 2018, according to Liberty filings). In 2019, according to F1 numbers, the sport was broadcast in about 200 countries. It drew a total TV audience of 1.92 billion, of which 471 million were unique viewers. It’s a number F1 has been struggling to pull up, and is a focus area of Liberty since its $8 billion acquisition of F1 in January 2017.

By resuming racing behind closed doors, Liberty is targeting these 471 million TV viewers. The F1 broadcasting deal is reportedly structured such that broadcasters have to make full payment to F1 if it holds 16 races. Even below that, there’s a sliding scale in place, favoring F1. Thus, the cutback for one race lost is lower than, say, for the fourth race lost. Against the original plan to stage 22 races, the current F1 plan is to stage 15-18 races this season.

This number could even increase if covid is contained and countries continue on the return path to normalcy. Conversely, it could decrease if F1 sees a virus outbreak. Till July 17, F1 said it had conducted 4,997 covid-19 tests. Two returned positive, though neither was a team member or in a frontline role.

If F1 manages 16 races, it will go a long way in preserving its revenues and ensuring continuity. F1 shares about half of the $2 billion revenues with the 10 teams.

For these teams, this is a big revenue component for them, the other being the sponsors and commercial activities they do on their own.

The third part of this axis is racetracks. It costs a promoter about $90 million to host a street race, according to Formula Money, which tracks F1. Of this, racetracks pay an average of $30 million a year to F1 for the rights to host a race.

For F1, that’s about $600 million of revenues in a year. This is compromised this year because racetracks can’t host spectators. In 2019, F1 says it drew 4 million spectators, or an average of about 198,000 per race. According to a Forbes report, in the two years to 2017, each paid an average of $477. At 4 million spectators, that’s a sizeable revenue foregone of about $1.9 billion.

Naturally, racetracks have sought concessions on the cost side. For those hosting closed-door races this year, F1 has reportedly reduced the rights fee of such racetracks for this year and extended their contract duration by a year. Because of this, F1 is staring at a big shortfall in this revenue stream. Then again, in these times, a $600 million hole is better than a $2 billion hole that also leaves 10 teams in the lurch.

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