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F1 Teams Are Disappearing, What Else is New?

catJust days before this year’s United States Grand Prix began its first practice session , the financially troubled Caterham F1 team, who had recently gone in to administration (the U.S. equivalent would be bankruptcy, though it is different in how it works), announced it would not be able to make the journey to Texas. Hours later, the similarly maligned Marussia F1 Team would announce the same.

Thus, the controversy begins…

With two teams officially closing their doors and a number of midfield teams in very serious jeopardy, the controversy of F1 being “too expensive” is at the forefront of the conversation…. again.

The heart of the controversy lies at the distribution of F1 income. The business of Formula One, despite its challenges, is incredibly profitable. Since 2004, the various managing properties have earned over $1 billion in total revenue, and then moving the bar above $1.5 billion since 2011. This is the revenue directly related to the commercial management of the series, run by the Formula One Group, which is technically owned by a consortium of investing and holding companies, the largest of which is CVC Capital. At the helm of this is the legendary Bernie Ecclestone, who has run the commercial rights of Formula One since 1980, spending four decades in to building the most successful form of motorsport in the world.

 

 

bernie-ecclestone-formel-1Cutting to the crux of the issue, the series generates over $1.5 billion in television rights, race fees, sponsorship and merchandising, yet the distribution of this income back to the race teams themselves, who ultimately are the core of the product at hand, is around half of that. Even that is fairly recent, as over a decade ago teams weren’t even re-distributed that amount, but that is not the issue at hand.

The issue at hand is simply how this “half” is distributed among teams. Simply put, the redistribution of television and licensing money, aka “prize money” is built in two tiers.

To explain this, we’ll use the example of 2013 payouts. In 2013, the $1.5 billion in earnings was re-distributed to $700 million in prize money. From there, things get a little more complicated.

First off, Ferrari, the longest-running team in F1, negotiated themselves an “automatic” 2.5% of this, which in 2013 came to $17.5 million. That’s before the distribution process even begins. From there, the pot is then divided in two columns, “Column One” which is an even distribution for all teams who’ve averaged to take top-10 championship finishes in the last three years, and then “Column Two” which is a performance-based distribution on that season’s championship.

So in 2013, 10 teams were evenly handed the Column One payment ($350 million), all receiving $35 million each. What’s tricky is, in the case of 2013, Caterham actually finished 11th in the Championship, but having finished in the top-10 the previous two seasons they still averaged higher than Marussia, who had finished 10th in 2013 but averaged lower. Thus, Caterham still received $35 million at the end of 2013, despite finishing 11th, and Marussia received ZERO payments from “Column One,” as the money is held exclusive to top-10 only.

The Marussia F1 TeamColumn Two, the other half of the pot, is a performance-based payment on that year’s championship. Effectively, the system staggers the money so that the top finisher receives a very large amount of “Column Two” payments, whereas 10th place receives far less. Anything after 10th receives zero. In the case of 2013, the champion Red Bull team took away $66.5 million in Column Two payments, whereas Marussia took home only $14 million, and Caterham took home zero.

To put this in perspective, Red Bull received $35 million in Column One payments, and another $66.5 in Column Two, totaling $101.5 million in prize money. Caterham F1 meanwhile, took home $35 million total ($35million for Column One, $0 for Column Two) and Marussia only $14 million total ($0 for Column One and $14 million for Column Two).

It’s confusing, but the basic note to take away is the top teams can net up to $100 million in prize money when it’s all said and done, and the struggling teams come away with barely over 10% of that… and can potentially earn ZERO.

25510933The argument, therefore, is two-sided. Teams like Caterham, Marussia, and many of the other lower-ranked teams argue that this system puts them in a position to fail, and that with current budgets the prize money makes the sport unsustainable for back marker teams. Their hope is for a more evenly (and wider) distributed payment system.

Top teams and series chief Bernie Ecclestone take a more indignant stand that they shouldn’t have to “pay” for slower teams who are ill performing, or simply can’t stay within their own budgets.

It’s not the place of World Stage Racing to make an argument one way or the other, but merely to point out that Formula One has a long, long history of teams folding or bowing out due to the increasing costs.

Motorsport is an incredibly alluring, and highly risky financial venture, with Formula One sitting at the peak of this. Much like any other sport, the ill-financed teams will always complain of an unfair system that favors the wealthier, and despite their own knowledge of the challenges they still venture through it in the hopes it will change.

Formula One has undergone a significant rise in popularity over the last 20 years, so let’s take a quick look at the teams that have either folded, sold off, or disappeared.

jordan-2001-09-02-trulli and alesi-spaBased on this list alone, it’s tough to plead ignorance on just how tough it is to survive and succeed in the sport, but it certainly has never prevented newcomers from trying.

FOLDED TEAMS SINCE 1994:

Pacific: Began in 1994, folded after insufficient finance in 1995.

Simtek: Began in 1994, folded halfway through1995 for insufficient finance.

Lotus: Not the same Lotus as today, the “original” Lotus folded after being forced in to liquidation at the end of 1994

Larrouse: Folded after 1994 season due to financing

Minardi: Long-heralded backmarker who eventually yielded to pressure and sold the team to Red Bull in 2005, now known as Toro Rosso.

Arrows (Footwork): Long running midfield team went between owners for several years, eventually folding under Tom Walkinshaw (TWR Arrows) in 2002 due to insurmountable debts.

Tyrrell: One of the most storied teams in all of F1 eventually succumbed to the financial pressures in 1997, selling to British American Tobacco (BAR) which has changed ownerships twice to what is now Mercedes F1.

Ligier: A proud French racing team, Ligier celebrated 20 years of racing in 1996 by winning the Monaco Grand Prix, but still sold the team to Alain Prost by season’s end.

Jordan: Run by one of the sport’s more dynamic and outgoing team owners, Jordan F1 was on the brink of financial ruin for years but managed to avoid shutting its doors, eventually selling the team in 2005, changing hands several times in to what is now Force India.

95ger 007Benetton: A World Championship-caliber team in 1994, the team owned by the prolific clothing company eventually gave way to the financial realities of the sport, selling the team to Renault, which has since become the revamped Lotus F1.

Forti: Debuted in 1995, lasted halfway in to 1996.

Lola: The return of a supposed racing legend ended in 1997 after one race, where it was miserably off the pace and financed by an over complicated fan model.

Prost: The Prost team bought out Ligier for the 1997 season, and despite the prowess of being run by a Four-Time World Champion the team went bankrupt in 2002.

Stewart: An all-new team, with heavy investment from Ford, started by the legendary Jackie Stewart and son. The team was actually known for running efficiently and without major debt, eventually being bought out by Ford outright for the 2000 season.

BAR: British American Racing, owned by tobacco giant British American Tobacco, purchased the struggling Tyrrell organization in 1997 and ran the team under its own brand in 1999. Rules against tobacco advertising would eventually drive the team out, selling to Honda outright for 2006 and beyond.

Jaguar: With Ford buying out the Stewart F1 team outright, the team was renamed Jaguar in the efforts to re-generate the brand. Failing to generate results, pressure from Ford’s board would force the sale of the team in 2004 to Red Bull.

Toyota: A brand-new team funded entirely by Toyota in 2002, the team abruptly folded at the end of 2009 amidst the recession and zero victories.

Renault: Buying out the Benetton F1 team in 2000, the team eventually ran as “Renault F1” beginning in 2002. Despite back-to-back championships in 2005 and 2006, rising costs forced the team to be sold off to Genii Capital in 2009, now running as Group Lotus.

volkswagen-honda-and-hyundai-tipped-for-f1-entry-33484 1Honda: Taking over the BAR team, Honda competed as a full-fledged effort from 2005-2008. Unfortunately poor results coupled with economic crisis abruptly shut the doors of the team at the end of the 2008 season. Ironically, Ross Brawn would take over the team for the 2009 season, where they dominated and were eventually sold to Mercedes.

Super Aguri: Buying out the assets from the former Arrows team, the team was in many ways the “B” team for Honda’s primary effort, eventually giving way to financial woes midway through 2008.

Midland/Spyker: The former Jordan team went through a series of ownership changes before finding a home with Vijay Mallya and his Force India brand.

Hispania/HRT: Beginning as Hispania and then HRT, this Spanish-based team never went beyond the back of the grid, with financial woes finally shutting down the team in 2012.


So.. F1 teams closing down on the basis of uncontained costs… what else is new?

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