Now Is The Best Time To Invest In An F1 Team
Will Liberty Media’s changes to the business of Formula 1 make the teams an interesting investment option in the time to come?
In this day and age of technology start-ups, I have often wondered how and why have Formula 1 teams not been able to attract investments as successfully, especially the new ones. After all, they are competing in one of the world’s most competitive technology arenas – why would this not interest investment bankers? While teams may be high on technology, it is publicly known that they aren’t as high on their actual business model, especially the teams that aren’t ‘blessed’ by Formula 1 with a higher share of the prize money.
Team Earnings = Prize Money From Formula 1 + Sponsorships + Others
In the above equation, Others is related to earnings from licensing, driver trade, etc. So unless you are Ferrari or the other top teams (Red Bull Racing, Mercedes and maybe even Mclaren), your earnings from this variable could be low. Unless of course you have a driver who you trade-off to a bigger team (e.g. Bottas to Mercedes earned Williams some bucks). But this doesn’t happen too often for a team to rely on for stable revenue.
As for sponsorships, the ride has seldom been easy for Formula 1 teams to attract sponsorships. A successful team sponsorship is a complex function that relies on Formula 1’s appeal and reach along with the team’s form, drivers, cost and other opportunities with team’s sponsors. Apart from this, there are situations beyond the team’s control such as recession in key markets that could impact this revenue source and of course other sports leagues. This is also why you will time and again read reports from Liberty Media on comparisons with other sports leagues. In the recent past, teams like Force India have done well to sell sponsorships, whereas powerhouse teams like Mclaren haven’t. During my days at Force India, the general consensus among sponsors was that ‘Formula 1 was too expensive’ for sponsors. Of the three sources listed above, sponsorships isn’t the most stable source either; I would include pay-driver influenced sponsorships under this variable too.
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The importance of prize money from Formula 1 has been stressed upon by several team bosses in the recent past. In fact, Liberty Media has acknowledged that the currently skewed model needs to become more fair so as to allow the mid-field and financially struggling teams to stabilise their businesses. It doesn’t help the overall business and sport of Formula 1 if any team shuts shop; and in the last decade several big ticket teams have.
For 2021, Liberty Media seems interested in fixing this flawed model. If they are able to do so, while also bringing in cost control, the business of owning a Formula 1 team might finally make sense, especially for the privateer teams. This would be a welcome change from their current hand-to-mouth days of operations and hopefully a better and more stable operation will help them attract investments in the long term. But with 2021 discussions already underway, would the current be the best time to invest in a team? I would certainly think so.
Additionally, Liberty Media’s approach to grow the sport and its viewership would add to the compelling option of owning shares in a Formula 1 team’s business. But of course, if all of this flows well, a team’s reliance on pay drivers would also reduce, thereby creating a positive impact on the talent quotient on the grid too. It may be a long shot, but it is good to see Liberty Media attempting changes to the business of the sport and its eco system.
There’s more in this week’s episode of the Inside Line F1 Podcast.