25 March 2019

An important day for Formula 1

As the F1 circus sets up shop in Bahrain, the big players will meet tomorrow (Tuesday) in London, with a meeting of the F1 Strategy Group, followed by an F1 Commission. If all goes well, we should by then have the basics of Formula 1's plans for 2021 and beyond, including new regulations, commercial structures and changes to the governance.

The whole package may not be fully finalized at the meeting, but it is being billed as a key event, although there is still time to sort out problems as the deals do not need to be completed until the end of June, after which changes for the 2021 season will require unanimous agreement of the signatories to the commercial agreements. Of course, we may not be told the results of the deliberations tomorrow as it all needs to go in front of the FIA World Motor Sport Council, which meets on June 14, and which is required to sign off any changes, but it is likely that news will leak out - given the number of people involved.

What seems to be fairly clear is that the planned budget cap will go ahead with a glide path towards a cap of $135 million in 2023 and onwards. This will start with a limit of $220 million in 2020, reduce to $185 million in 2021, then $160 million in 2021 and finally $135 million in 2023. There are going to be some major exclusions from the budget cap, such as driver and top executive salaries, marketing and hospitality costs, but the principle seems to have been accepted and the aim now is for the Formula One group to raise revenues so that the teams will all get $135 million or more a year from the prize funds, which will mean that they will be covering their costs and all additional revenues will become profits. This will allow teams to invest in other activities if they wish to grow their businesses, or to sell or float their businesses, as their "franchises" will have value, something which teams had never really managed in the past. In order to reach the level of revenues required, the Formula 1 group will need to find something in the region of $500 million more revenue each year. That may sound like a lot of money but Liberty Media has invested in a whole range of new revenue streams and believes that these will pay off as they mature. If the F1 TV over-the-top direct-to-consumer service is picked up by a modest five million fans, which is about 10 percent of the hard core F1 fans in the world, the target will be exceeded, so it is obviously attainable, particularly given that other revenue streams will simply add to the value of the business.

There is still room for cost-cutting and the word is that there will be an increased number of common parts that all the teams will use, as these are deemed not to be key in performance terms. The biggest such item will probably be the gearbox internals, which have been put out to tender. It is fair to say that all the F1 gearboxes are now so advanced that there is little or no advantage to be found from them and so it is pointless for teams to waste money on them and much simpler to get a common supplier capable of producing reliable machinery at a decent price. The gearbox casings, which are important in terms of aerodynamics, will remain free with the internals being fitted in "cassette" form. There are expected to be other areas where there will be stricter rules notably with regard to using parts made by other teams. The aim of this is to reduce the B team concept and make the teams build their own machinery so that F1 retains its unique position of being a competition between teams that build their own cars, rather than having everyone using the same, as happens in all the other major championships. The key areas which need to remain free are engine development and aerodynamics, as these are the major performance elements in the sport. Keeping the same engine formula is the best choice for the future as the current competitors are beginning to get to a point where they are struggling more to find additional horsepower and that means that not only will the fields close up but also the sport will become more attractive to newcomers as they will be able to see a way to become competitive quickly.

From a commercial point of view, the word is that the payment structures will be pretty much as proposed by Liberty Media, with special deals that previously existed being axed and the money being redistributed in a fairer way. There will still be a special deal for Ferrari, but it will be $40 million, as opposed to the previous five percent off the top (which was about $70 million), and teams that are also engine suppliers will also get a $10 million bonus each year. They will still have to supply engines to teams that want them and will have a limit on the price, but it should help them to balance the books.

There is not much word at the moment on changes to the sporting regulations, which could change the format of race weekends nor have we heard anything much about how the governance will change, although it would be wise for all the teams included equally in the decision-making process.

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