To Understand The Future Of F1 In The 21st Century, Follow The Money

Is F1 a one percent(er) sport? A ‘niche’ sport? Admittedly, the drivers’ spacesuits tickle the imagination; the cockpit view immerses the TV viewer; beautiful people at the circuit tantalize; the precision, technological sophistication and coordination of it all make no mistake, is the stuff of dreams.

Sounds all elitist doesn’t it? In redefining this narrative, formula one prides in being the most watched annual sport series in the world: at 500 million of viewers per year, formula one is consumed by a critical mass. 

But it doesn’t feel that way. Mass consumption you say? Somehow that number doesn’t sit well some sixty seven years into existence of auto sports’ bespoke piece.

The Formula One Identity Crisis
 

In many ways, more so after the £6.4bn (US$8.5bn) John Malone’s Liberty Media corporation takeover, F1 in the 21^st century is caught between nostalgia and futurism. By wallowing in this dilemma, formula one is like one of the bible’s foremost women. Akhmatova reveals the psyche of this woman in the poem Lot’s wife:

And the just man trailed God’s shining agent,

Over a black mountain, in his giant track,

While a restless voice kept harrying his woman:

“It’s not too late, you can still look back

For the just man, we have new F1 commercial rights holder Liberty Media Corporation. Billionaire John Malone and team promise to lead the sport over the black mountain that Bernie Ecclestone era threatened to morph into. In doing so, they will have to contend with the restless voice harrying up the woman: formula one. For the voice: the skeptics, the thriving parade within the current F1 setup; it all could go horrendously wrong. 

F 1 Black mountain era	The Danger to F 1
Secrecy in the contracts that the teams have with the F1 commercial rights holder whereby each team has its own contract with the CRH.	Econ 101: Information asymmetry is recipe for dysfunctional market. While the long tenure of the contracts (2020) serves stability, the secrecy makes renegotiation at complex endeavor.
The profits for the owner are in contrast to the financial struggles of some of the teams and the tracks. Silverstone, for example, struggles to make a profit despite attracting 150,000 fans for the British Grand Prix.	F1 needs to learn from the success of American football contract renegotiations, the NBA owners-player pay dispute, to the simmering talk of a breakaway European league: poorly designed revenue sharing model in sport is counterproductive as it creates a few super teams which in turn decrease the entertainment value leading to loss of fans not just to other sports, but out of sports altogether.
The shareholders of formula one commercial right holders reads as follows: estate of Lehman Brothers- the bank whose collapse sparked the financial crisis in 2008; American private equity fund BlackRock and the Norwegian sovereign fund.	Corporate governance 101: It is always a sign of vitality when the owners of an enterprise have skin in the game. Formula one team have been restricted to an affiliate role within the current setup. Though the trend is for the super rich to own sporting enterprises e.g. PSG, Chelsea & Manchester United; the fan revolt that threatened the future of Manchester United cannot be ignored neither can the feeling among stakeholders that the F1 set up exists to serve only the interests of the owners be understated.

There is hope though. Martin Whitmarsh, former McLaren CEO agrees:

"There comes a time in any enterprising sport where it's time for fresh ideas and fresh views and I think Formula 1 has probably come to that point.”

Fair enough. The 21^st century points towards a different future. In what has been termed as the fourth industrial revolution, enterprise has become fluid and less reliant on laws articulated in business school rule books. The people, processes and products to be managed have undergone a paradigm shift thanks to the advent of the fourth industrial age. 

How can Formula One Embrace the Future?

Technology:

The 21^st century is the fourth industrial age where innovation is driven by ubiquitous interconnections; voluminous production and consumption of data; and a dalliance between disciplines that are progressively getting solid. Technology, which F1 remains first in the family of sports in embracing, goes beyond digital interaction to Artificial Intelligence/ Intelligence augmentation.Impressive progress has been made in AI in recent years, driven by exponential increases in computing power in spite of concerns about constraints presented by Moore’s Law. Formula one is at risk of going off track as it is yet to fully embrace the digital information age that precedes the now.

Commercial:

First, we flesh out where the money comes from in formula one. The teams make money from prize money paid out by commercial rights holders:

Commercial rights holders in turn make money from sponsorship deals, television rights, and fees charged to venues for hosting the grand prix.

“Customers” who are they	“Engagement” value creation proposition	“Delivery” value chain	“Monetization” value capture
Sponsors &teams' partners. Sponsors pay to place their logo on the team’s car or garments, or engage with co-branding initiatives with F1 teams.	Sponsorship &co-branding royalties are based on the teams’ individual offerings and the type of visibility the customers want to achieve. It is a taxi business model	F1 teams offers advertising space on the car chassis, the team members’ clothes, marketing materials, use of co-branding, or production and sale of branded merchandise.	F1 Teams set up bespoke contracts with their individual sponsors. They enjoy visibility and in some cases they can advance requests such as selecting one of the team's drivers. Organizations pay in proportion for the visibility obtained (from $1 to $100 million).

In Bratches, Liberty Media Corporation the commercial rights holders have marketing executive who is sure to grow both viewership and value of transactions. While there remains significant headroom for growth, digital media needs to be embraced to realize F1 full potential. However, even with the expected aggressive approach, it is important for the CRH to realize that being a sport, F1 operates and competes in the same plane with other entertainment e.g. other sports, gambling, Hollywood and adventure sports.

Moreover, a European football quickly realized with the enforcement of financial fair play rules, real sustainable growth cannot be found in baking a bigger cake. Real growth in money for F1, like in any other enterprise in the 21^st century, comes by discounting the technology dividend in both the supply and demand sides of the equation. Whichever way formula one goes about this, by consuming technology or by producing technology, real gains can be made in research, development, communication, logistics and by streamlining supply chains.

To achieve this in the complex dealings of F1, thought leaders need to infuse 21^st century thinking whereby customers, be it B2B or B2C, are king more than ever. Relationships will need to be redefined in the search of the elixir that ensures customer expectations; responsively enhances products, nee mutually satisfying collaborative innovation and improved governance.

Visibility:

The last cycle of formula one growth was concentrated in the homes of new money following the commodity boom the last few decades of the 21^st century: Azerbaijan, Russia, China, Bahrain, Abu Dhabi, India, Malaysia, South Korea, Turkey and Singapore. In the wake of their takeover of formula one commercial rights holder, Liberty Media Corporation intimated that for future circuits, fans should look to a major event in the US, at a destination city i.e New York, Los Angeles, Miami and Las Vegas. The new owners need to consider the speed and ease of growth presented by digital media. In a Foreign policy article The Fourth Industrial Revolution: what it means, how to respond  Klaus Schwab estimates that more than 30 percent of the global population now uses social media platforms to connect, learn, and share information.

Governance

Taking over from Ecclestone, new formula one chief executive Carey set out a vision characterized by: effectiveness and efficiency in decision making with a long term view (three to four years) on the sports’ desired direction. Carey’s vision, the kind we have come to expect from anyone who takes over anything is pretty safe as it encapsulates what we have come to define as good leadership- which when institutionalized becomes good governance.

Nonetheless, Carey’s formula is fossil. Not that we expect him to naively reveal his position ahead of what will surely involve mad deal making, but because even if we gave him the benefit of the doubt the task remains arduous. Why? The one thing we have learn from the election of Donald Trump is that new technologies blur the lines of the physical, digital and biological worlds allowing for misinformation to permeate and third parties to infiltrate a process.

The end product of all this is a graying of the lines between war and peace, cooperation and defection as the sanctity of the contract comes under threat. Even governments at times can’t tell an enemy from a friend. Nonetheless, however tasking, for formula one to march on to the 21^st century, agility should replace the rigidity of top-down approach to regulation.

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