56 replies to this topic

[chunder27]

I ahve to admit I know for a fact that Silverstone hasnt made money on the F1 race for the last few years. 

 

As I have mentioned in several posts about tickets, races, if people are happy to pay what I as a punter believe to be overmy odds, then noone can really complain to be honest.

 

L

[pdac]

Not sure I can take anymore of these business studies for dummies lectures by wannabe Krugmans.

TV makes Bernie more dosh! End of.

 

Take heed. All those talking about how F1 is failing the fans - not offering alternatives to subscription TV, not marketing itself, causing tracks to charge high prices - can I just say once more that the F1 commercial side is  FOM and they sell to businesses, not the publiic. They are doing fantastically well.

[jonpollak]

Glad you added those few sents there blub !!!

[MP422]

And it took insanely long for us to have widescreen and HD. If we extrapolate how late F1 was to that, to internet streaming, I reckon we'll be able to legaly watch a race online by 2025.

 

I wouldn't buy an HD tv till F1 was HD. I remember waiting so long....  TBT

[blub]

pdac, you can say that all you want, but if you took away the entire TV audience and all the ticket buyers, poof, there goes F1. Yes F1 is part a BtoB thing, but it’s completely dependent on a public audience.

If you had to make your money from large corporations or the public you would probably do it a lot like FOM, a mix of both. But if you only had one to pick it would be an easy choose. What business is better to be in when both make $60 billion at the end of the year, one makes $10 million per item sold the other makes 10 cents per item sold? I’d sell coke to billions of people, not planes to corporations. The money is with the crowed not the select company. Yes there is money in selling to  both but the lower risk greater potential is selling to the individual there is also much more upside. Planes are extremely expensive to design and build, high risk, high liability and each one is different, the other is cheep and always the same. The burden of technical complexity is on the shoulders of the teams, all you do is sell time and tickets.

It has been recently reported that FOM makes half its money from TV rights and the other half from all the income they gather from each race track, sponsors are a small slice of the FOM pie.

[Guizotia]

The underlying reasons for this are quite clear when you understand the business logic (I'm simplifying greatly in the below):

 

People generally want exciting lives, they want new-ness.  People who run businesses are no different.  And exciting for someone who runs a business means innovation and growth.

 

There is a difference between young and old industries.  In a young industry (e.g. wearable smart devices) there are lots of opportunities and growth is possible.  In an old industry (e.g. desktop PCs) opportunities are very limited and growth is very difficult.

 

If someone is running a private business then they can do what they like.  If someone is running a public business i.e. with shareholders, then they are employed to make money for the shareholders.

 

Companies have proved over the years that they just can't give up on sexy innovation and growth.  But in a mature industry pursuing growth is more often than not the same as throwing money down the toilet.  Shareholders pockets and toilets are two different places.  This makes shareholders unhappy.

 

Even if they keep away from the innovation money-pit, successful companies in mature industries aren't likely to have the fierce competition of the young industry.  This means that the pressure to be efficient, and ensure day-to-day costs are minimised, is low.  This again makes shareholders unhappy.

 

So what's a shareholder to do?  Well luckily for them someone in the 1980s had a think about this problem, and the leveraged buyout was born.  

 

A leveraged buyout is a purchase of a company using debt.  It works like this - imagine you are an investor and you want to buy a company.  Instead of paying for the company with cash, you (and other investors you gather together) loan yourself money. You use this loan money to pay for the company but (the key point is) you then make the company liable for the loan repayments.

 

This is a very neat trick.  What you have done in effect is get the company to buy itself, out of it's own future earnings.

 

And why would we want to do this?  Because now the company is lumped with big, unavoidable debt repayments.  What that does is force the transfer of cash out of the company to be the highest priority for the people running it.  If they don't make those payments, the company goes under.

 

That's basically what CVC did with Formula One a few years ago.  I've added comments below in red.

 

 

When you understand this you can see why there is a big mismatch between the money that F1 makes, and the amount of effort that it puts into innovating.

 

The mentality of the management is basically like the mafia - to extract as money as you can without killing the patient.  If the business truly is in a mature industry with low growth prospects, makes sounds business sense.  If the business isn't in this situation, then this approach is a short-term gain at a longer-term loss. 

 

Leveraged buyout is basically a cash-extraction tool.

 

For those who are interested in the above (bold highlights mine):

 

How CVC Has Made $8.2 Billion From Formula One Auto Racing

 

 

CVC took a gamble when it bought F1 for $2 billion in 2006 in a leveraged buyout financed with two loans. The Royal Bank of Scotland (RBS) provided $1.1 billion whilst a further $965.6 million came from CVC’s $7.3 billion investment Fund IV. It came to 13.3% of the total amount available in Fund IV and was particularly risky since F1’s teams were threatening to start a new series due to a pay dispute.

 

...

 

F1 is now understood to be valued at around $12 billion and CVC has got $8.2 billion of cash out and remaining value. It gives the private equity firm a return of 751.3% which is one of the highest it has made since it was founded

 

...

 

So since 2006 CVC have taken $4 billion out of F1.  That's $500 million per year  Without the leveraged buyout at least a portion of that money could have been spent on "innovation" and "growth".

[pdac]

pdac, you can say that all you want, but if you took away the entire TV audience and all the ticket buyers, poof, there goes F1. Yes F1 is part a BtoB thing, but it’s completely dependent on a public audience.
 

 

Why do you say this? It clearly is not. It is only dependent to the extent that if TV companies and circuits don't feel they can justify the fees then they won't want to buy. However, that's not the case. TV companies are still paying up and circuits still sign new contracts.

 

The crisis will come when there is a contract up for renewal and the no one wants to take it. But there seems to be a lot of places around the world where governments and authorities are willing to put up money to stage races and the TV contracts don't seem to be a problem to shift.

 

Once there is a tiny belief in Bernie's mind that he might not be able to shift contracts, then I'm sure you'll see some change happening to the business model. But there are still many contracts that continue for a good few years yet.