• Praneeth Udathu

The Economics of F1

As with many new fans of F1, I discovered my passion for the sport by watching the series that everyone involved in the sport absolutely hates - Drive to Survive. While the racing and the drama was enthralling, it was impossible to ignore the massive banners across the racetracks and the cars littered with sponsors from their tires to engine covers to front wings. F1 had estimated revenues of over $1.3 billion in 2021 and this led me to wonder, what is the scale of marketing, advertising and manufacturing in F1?

F1 teams make a substantial amount of money from sponsorship deals. Predictably, the teams who perform the best such as Mercedes are able to sign lucrative deals with the likes of Petronas and Bose but even struggling teams such as Williams are able to sign deals with well known companies such as Lavazza and Sofina. Sponsorship is an essential part of the sport with the top teams getting over $40 million through these sponsorships. However, prize money does play a very important part in income - for the winning constructor (the team with the most points at the end of the season), they are awarded around $60 million with 2nd place making $50 million and last place struggling with only around $15 million - an unsustainable amount for an F1 team. There are also heritage payments given to teams with the most experience and titles in the past, however, they have been scrapped from the 2021 season due to their obvious favouring of older and more established teams. Teams also get investment infusion from their parent companies and owners as well as from ‘pay drivers’ - generally occurring in lower performing cars who accept large sums of money in exchange for a certain driver getting a seat in that F1 team.

All in all, this may seem to be a very profitable business for the teams involved in F1, but these cash inflows are quickly drained by a multitude of payments for the car and many other things. This includes Research and Development to ensure the car is working as fast as possible whilst also being in the regulations. This includes track testing, wind tunnels and many more and costs over $55 million each year on average. Another major aspect that many, including me, easily forget is the salary, not just for the drivers but for the race engineers, car designers and many more. Drivers earn multiple millions per year with reports that Lewis Hamilton made over $50 million just this year and the grid overall making a combined $190 million between the 20 drivers. This is also not including salaries for Team Principals who make around $10 million a year. Adding on salaries for the numerous engineers etc, average teams spend around $55 million on salaries alone with Mercedes and Ferrari possibly spending double that number at $110 million or maybe even more. The cars themselves cost massive amounts to produce; the carbon fibre chassis and the gearbox both cost around $1 million, the front and rear wing costing over $500,000 but the big hitter is the engine, costing over $7 million to produce. Everytime you see a small scrape across the wall by a driver, the financial damage to the teams could still amount to $1 million - the cars themselves cost around $15 million to produce not even including spare parts and repairs. New rules are being brought in to reduce salaries and costs of cars to an overall cap of $175 million but that is still a massive number. Adding on logistics and other small costs adds around $50 million. This massive cost and not much revenue means that most teams are either losing revenue or barely breaking even - F1 is not the most profitable sport for companies but the market exposure they gain is incredibly high - Red Bull for example have spent billions in the sport but they are gaining much more exposure than paying for other sources of marketing - from 2009 to 2014 when Red Bull won the championship 3 times in a row (from 2010 to 2013), it was estimated that they spent $1.2 billion but would’ve had to spend $1.6 billion for an equivalent amount of advertising.

This is all without accounting for Liberty Media’s (the owner of F1) revenues; Liberty media make most of their revenue from the 433 million viewers watching on TV every year, with a massive deal with Sky for $255 million in exchange for broadcasting rights. They have also signed deals with DHL, Heiniken and Rolex with Rolex having spent $300 million for having their timings on the pitlane of every Grand Prix. On top of that, each circuit has to pay a massive fee to Liberty in order to host a race - some races such as Saudi Arabia and Russia are government sponsored but others such as Silverstone end up losing money for the hosts even though they have regular attendance of 150,000 fans and tickets selling for hundreds of pounds. All of this together make Liberty $2 billion in revenue - half of which is spent on the teams themselves and much of which is also spent on employees, logistics and many more tasks that the FIA and Liberty are in charge of leading to fairly low margins and even a loss in 2020 due to a lack of fan attendance.

F1 is a massive, international sport with an outreach to millions across the world, and the money for the sport is in the billions of dollars - spent on keeping the travelling circus we know and enjoy functioning every year. Even with the new agreements signed and a push to decrease the amounts spent by teams in F1, it will always be a price to pay to be part of F1.

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