F1 Business: a Sport as Sophisticated as Racing itself

Formula One is one of the three major international sporting events in the world. Just like these spectacular racing machineries, the business operations of the races are just as sophisticated. 

The governing body of the Formula One is the Fédération Internationale de l'Automobile (FIA). In addition to Formula One racing, FIA is responsible for managing other international racing events such as rallies, endurance races, and karting competitions. FIA delegates the commercial and operational rights of the Formula One World Championship to Formula One Management (FOM). In other word, FOM is responsible for the event and commercial operations of the Formula One World Championship, while FIA oversees event management and arbitration.

FOM early on identified that many cities were willing to invest substantial costs in hosting the events to gain significant exposure. FOM then sells the hosting rights to cities, demanding top-notch racing circuits in addition to substantial hosting fees. Cities are also required to provide various resources and services for event support. FOM, on the other hand, still retains the broadcast rights for the events and produces live broadcast feed worldwide. FOM also retains commercial rights for the Formula One World Championship, providing exposure for sponsors on billboards around the racetracks.

The prominence of Formula One as a premier racing event can partially be attributed to the participation of top-tier racing teams. Some teams, e.g. Ferrari, have been longstanding participants since the inception of F1, while others have come and gone.

FIA: The Guardian of Formula One Racing

Established in 1904, 46 years before the birth of the Formula One World Championship, FIA is the organization overseeing the automotive industry and racing sports. With representation from 227 racing associations and automotive organizations in 132 countries, including the American Automobile Association (AAA), FIA wields significant influence.

FIA plays a crucial role in governing both the automotive industry and racing sports, setting it apart from other racing management bodies. The organization's impact extends to consumers and automotive manufacturers, exemplified by initiatives like the EU's new car safety assessment system, a benchmark for passenger vehicle safety. In the realm of racing events, FIA collaborates with member units in each country, ensuring governance and rating of racing events. FIA also partners with event organizers to safeguard competition standards.

Despite the Formula One World Championship generating billions of dollars in revenue annually, FIA's income is relatively modest. With two subsidiaries – FIA France and FIA Switzerland – handling related income and personnel costs, FIA's total annual income is approximately $65 million, and its largest expense is around $25 million, covering personnel costs, travel, and hospitality.

FIA's revenue comes from membership fees and registration fees from racing events. The Formula One World Championship, though the most prominent event under FIA's governance, contributes only a fraction of its income. From 1995 to 2001, FIA received $10 million worth of license fees annually from FOM, and an additional $15.5 million worth of registration, management, and super license fees from teams and racers. In contrast, FOM's revenue reached $1.6 billion each year during the same period. In 2001, FIA agreed to award the operational and business rights of the Formula One World Championship to FOM for the next 100 years.

Formula One Racing: A Touring Event

Formula One races, like any racing events, fundamentally operate similar to circuses. The promoters set up temporary structures and arrange staff at a specific racetrack to present an event to the audience. The "performers" – the racing teams – arrive at the designated location at the specified time according to the promoter's schedule to participate in a specific event. This is in stark contrast to another type of sporting event – league sports, characterized by a home and away team in each event.

Another significant characteristic of racing events is the non-exclusivity of races. Traditionally, a team can participate in different racing events in a year, and a race can have different teams in different years. This led to varying quality in the early years of Formula One, with some years witnessing cancellations due to insufficient participating teams. If promoters have already signed broadcasting contracts with TV stations or sponsorship deals with brands, this may trigger breach-of-contract clauses, causing significant damage to promoters. Bernie Ecclestone, the founder of FOM, saw an opportunity to solve this problem by implementing a series of changes to the business operations of the race. The advent of FOM resulted in a manifold increase in the commercial value of Formula One.

Who owns Formula One?

Bernie Ecclestone, the founder of Formula One Management (FOM), was once a racer and team owner. His exceptional business acumen led him to realize that binding teams through contracts to participate in F1 races could significantly enhance the event's appeal to television stations and sponsors.

Bernie Ecclestone - The Business Wizard of Racing

Born in 1930 in the United Kingdom, Bernie Ecclestone entered the automotive field after World War II, transitioning from managing a motorcycle parts business to activities related to car mechanics. From 1949 to 1951, he participated in multiple local races, only achieving mediocre results. After several racing accidents and injuries, Bernie decided to retire as a racer and focus on his business endeavors.

After a successful business career, Bernie re-entered the racing domain in 1957, becoming a team manager by investing in a few cars to participate in F1 races. In 1972, Bernie acquired the F1 team Brabham for $120,000, officially becoming a team owner.

During his tenure as manager of F1 teams, Bernie played a pivotal role in establishing the Formula One Constructors Association (FOCA) in 1978. FOCA represented the interests of all non-automaker teams, including Williams and McLaren. In contrast, automakers like Ferrari and Sauber were represented as Manufacturers. In 1978, Bernie became the head of FOCA, advocating for the interests of non-manufacturer teams in the world of racing.From its inception, FOCA had disagreements with FIA regarding the management of F1 events, leading to several events being affected or even canceled. In 1981, a major crisis occurred when the tire sponsor, Goodyear, threatened to completely withdraw from F1 racing, posing a potentially devastating blow to F1's commercial value. Bernie, representing FOCA, convened all teams and FIA representatives to negotiate at the FIA office in Place de la Concorde, Paris. After 13 hours of negotiations, an agreement was reached and signed, known as the First Concorde Agreement.

Since the beginning of Formula One racing, there has been a distinction between manufacturer teams and non-manufacturer teams. Manufacturer teams could invest more resources in developing new cars and technologies as well as marketing and promotion. Therefore, factory teams also have larger fan bases; the importance of the Ferrari team to F1 is undeniable. FIA heavily favored manufacturer teams in profit distribution, which was a major dissatisfaction for FOCA, representing non-manufacturer teams.

The First Concorde Agreement in 1981 marked a historical shift in power from FIA to the teams. From that point onward, FOCA became responsible for the largest revenue source of F1 events - the sale and distribution of television broadcasting rights. FOCA then delegated this right to FOM (then known as Formula One Promotions and Administration), a company founded by Bernie himself. The Concorde Agreement also tied the income distribution of each team to their participation in F1 events, providing stable broadcast products for television networks.

Since 1980, Bernie gradually reduced his involvement in team management and focused more on FOM's operations. In 1988, Bernie sold the Brabham team for over $5 million and devoted himself full-time to the commercial development of FOM and the Formula One World Championship.

Ownership of the Formula One World Championship - Still Unsettled?

The ownership of F1 has always been a major dispute and to a certain extent, remains unresolved among teams, FIA, and FOM till this day. The intellectual property of F1 is essentially the collectivity of a series of legal contracts, primarily the Concorde Agreement, stipulating the rights, responsibilities, benefits, and decision-making authority of all parties. The signatories of the Concorde Agreement are FIA and individual teams, with each team signing as a separate entity. Through this agreement, all teams transferred ownership of all rights related to the presentation of F1 events on and off the track to FIA. FIA, through its FIA Business Agreement with FOM regarding F1 events, authorizes FOM to operate events and exploit commercial rights of F1, making it the commercial rights holder. Subsequently, FOM signs the Team Commercial Agreement with each team, outlining the income distribution mechanism for each team in F1 events. By signing the Concorde Agreement, FOM (rather than FIA) becomes the center of F1 events, gaining rights for television broadcasting, sponsorship development, event promotion, event operations, and the responsibility of balancing the interests of all teams.

Decision-Making Authority in the Formula One World Championship

F1 events involve numerous stakeholders, their interests often in direct conflict with each other, posing significant challenges for organizational structure and decision-making mechanisms. Any minor change request from any party has the potential to trigger opposition from multiple sides, escalating into a political struggle that affects the operation and commercial development of F1 events.

The Concorde Agreement clearly defines two important decision-making bodies for F1 events:

1. Formula One Commission (F1 Commission) and
2. Formula One Technical Working Group (F1 Technical Working Group).

The F1 Commission is the decision-making organization for all rule formulations in the F1 World Championship, encompassing almost all matters related to F1 events, except for the F1 event safety section governed by the FIA World Motor Sport Council. The members of the F1 Commission include:

1. One official representative from each team
2. Representatives from the organizers of European F1 Grand Prix races
3. Representatives from the organizers of non-European F1 Grand Prix races
4. Sponsor representatives
5. The FIA President or their official representative
6. The Chairman of the F1 Commission

The executive entity of the F1 Commission is responsible for the day-to-day decisions of the F1 World Championship. This small group of people include:

1. FIA President
2. 2 team representatives
3. Chairman of the F1 Commission (Bernie Ecclestone himself)

The F1 Technical Working Group is responsible for drafting and modifying any technical specifications related to the F1 World Championship. The F1 Technical Working Group consists of 7 members, including 6 representatives from F1 teams and 1 representative from the FIA technical team. Only the F1 Commission has the ultimate decision-making power to approve or reject the proposed technical specification modifications by the F1 Technical Working Group.

Although FOM's official role is the commercial rights holder of F1 events, its president - Bernie - embedded his power into every aspect of the event, far beyond what "business" typically entails. During his 40 years or so as the president of FOM, Bernie had a profound impact on Formula One, for beyond its business and operations aspects, laying the foundation to the sports' modern-day business.

Understanding Formula One Management and its business model

In 2017, the American media conglomerate Liberty Media acquired F1 Management, and the company's assets were subsequently listed on NASDAQ, allowing financial data to be presented to the public.

FOM functions as the de facto "league office" of the Formula One World Championship. The company collects certain aspects of commercial development rights, i.e. broadcasting rights, etc., from all teams for central development, and the remaining rights are developed independently by the teams. The portions developed by FOM will then be distributed to each team through a profit-sharing mechanism. FOM is also responsible for the event presentation aspect of the F1 World Championship, including showcasing the events to both live and TV audiences. Through event technical support, global broadcast production, and worldwide transportation, FOM ensures that the F1 World Championship is perfectly presented across the world. Additionally, FOM exclusively handles the promotion and commercial development of the F2 and F3 races.

FOM's primary sources of income are threefold: promotion rights sales, broadcast rights sales, and advertising and sponsorship sales.

Promotion Rights

Hosting an F1 race can bring global attention to a city, similar to how the World Cup or the Olympics does every four years. Promotion rights contributed to 30% of FOM's total revenue in 2019. FOM signs contracts with hosting cities for 3 to 7 years, and the local promoters are typically circuit owners, local or national automobile associations, professional event organizers, or cities. Promoters, after paying the fees, gain rights to ticket revenue from F1 Grand Prix races, and some promoters also acquire income rights from catering, hospitality suites, or local sponsorship sales.

Broadcast Rights

Broadcast rights income constituted 38% of FOM's total revenue in 2019. FOM sells these rights to television or other media platforms and collects licensing fees.

Advertising and Sponsorship Sales

Advertising and sponsorship income accounted for 15% of FOM's total revenue in 2019. FOM holds the rights of sales for trackside advertising spaces and title sponsorship rights for all F1 Grand Prix. Advertisers and sponsors can also sign broader sponsorship contracts with FOM, such as global partnerships or official partnerships, gaining recognition all year long.

Other Revenue Streams

The above three major sources of income make up 83% of the total revenue. FOM generates the remaining 17% of income through the development of the following rights:

1. Paddock Club memberships (Paddock Club is a high-end corporate hospitality suite during events)
2. Event logistics and transportation
3. Promotion and commercial development of F2 and F3 events
4. Television broadcasting or post-production
5. Digital and social media
6. F1TV streaming platform

In 2019, FOM generated over $2 billion in revenue through the aforementioned income sources. Even though the sport encountered extreme challenges during the pandemic, it has since recovered and gone on to break historical viewership and attendance records.

How Does FOM Transport All Teams from One F1 Grand Prix to Another?

The successful organization of each F1 Grand Prix relies on the sophisticated collaboration between FOM and the hosting city. In general, FOM is responsible for managing the circuit, the surroundings and the transportation of all teams, broadcasting equipment, and other related equipment to the host city. To accomplish such a massive transportation feat across 22 cities in 9 months on 5 continents, meticulous planning is required.

FOM transports all teams and the necessary equipment for event presentation between different Grand Prix cities through land, air, and sea. All team headquarters are located in Europe, and Grand Prix races in continental Europe are typically transported by road. The equipment of the teams is categorized into two types based on their importance, with the most crucial equipment including the car chassis, tires, engines, wings, computing equipment, and servers. The second-level equipment primarily consists of various tools.

All tool-related equipment is packed into five identical sets, with the same set sent to each station for the first four Grand Prix races. Later, three sets of equipment will be sent back to the team headquarters in Europe. The equipment dispatched from the Malaysian Grand Prix (now discontinued) goes directly to the Brazilian Grand Prix, and the equipment from Japan goes to Abu Dhabi. The equipment for Russia, Austria, and Canada is directly shipped from the European headquarters. All equipment is transported by sea.

Each season, FOM airships over 660 tons and ships over 500 tons of equipment, covering a total flying distance of over 130,000 kilometers. Each team carries 30-50 tons of equipment to each Grand Prix race. Additionally, all meals for team members and FOM staff are prepared in advance, with even service personnel traveling together. Their comprehensive logistics and service coordination capabilities are considered the best in global sporting events. FOM does not bear all logistics costs alone but uses its top-tier global exposure to sign sponsorship contracts with DHL, which provides some logistic services as part of its sponsorship investment, further showcasing FOM's astute business strategies.