Why F1 has to put business first

Formula 1 is often beaten with a stick wielded by those who believe it has forsaken sport for business. The argument goes that those involved have become so rich and greedy that they care more about making money than delivering healthy and close competition on track.

The reality is that Formula 1 cannot hope to be a global, professional sport without putting business first.

"All global sports have become global sports because they are able to deploy the investment necessary to reach audiences," says Mercedes team boss Toto Wolff.

"It will not stay a global sport if you don't get a TV and media presence globally.

"In order to do that you need to have considerable revenue, you need to have profits to finance that, so automatically the business grows and the business becomes an important side.

"Not only for the sake of a shareholder, who might take money out of it, or teams that generate revenue to keep the cars going, but also in order to invest in various formats to make the sport more attractive for the public in order to reach audiences.

"This is why the two are interlinked. There is no global sport out there which isn't at the same time a considerable business."

But that doesn't mean F1's current business model is perfect, or even tailored to best meet the needs of the sporting contest that makes it a marketable prospect in the first place.

"Formula 1 is a sport - for two hours on a Sunday afternoon, 20-21 times a year," says Red Bull boss Christian Horner.

"The rest of the time it's a business, fraught with politics and all the other commercial pressures that exist with high-profile sport.

"Of course any sports team has to be run like a business, that's part of the challenge of Formula 1, but sometimes the teams need saving from themselves.

"There will always be teams that have more budget than others, but if it's diminishing returns then why should 'profit' be a dirty word?

"Manchester United makes a very healthy profit, but they didn't win the Premier League this year.

"It's great to see a team like Leicester achieve through being a great team and having a great spirit. That should be achievable, and that's where technology plays too much of a factor in F1 at the moment.

"If you gave all the teams double the amount of revenue they'd still be outspending what they have available to them.

"The biggest driver of cost is the technical and sporting regulations, and therefore if you really want to aggressively address costs you've got to focus there.

"One extreme is the GP2 model; we're at the other end of the spectrum currently.

"Perhaps there's a place somewhere towards the middle ground that doesn't need around 850 employees within a grand prix team in order to compete.

"The problem is it's not a sustainable model for an independent team, because at the moment costs far outweigh income, and you are getting all of this diversification going on from teams like Williams, which has an advanced technology business now to prop up the grand prix team."

Lopsided financial structuring is not unique to Formula 1. English football grapples constantly with inequality within the Premier League, and between teams in the Premier League and those outside it.

In tennis it is extraordinarily difficult to make a decent living without being extremely well placed in the world rankings.

But Formula 1 is a megabucks sport, so surely should be capable of properly financing 11 teams of 22 cars and drivers?

"It's only sustainable if you are winning and therein lies some of the issues about the business model in Formula 1," argues McLaren acting CEO Jonathan Neale.

"If you are running a winning proposition, that is a sustainable business model. If you are in the back third of the grid, I don't think that is sustainable, because the cost of operation is twice what you can get out of prize money.

"So then you are left finding sponsorship to fill the gap, or some kind of trophy investment.

"That's a tough sell in a sports marketing world at the moment."

This means less-successful independent teams, without the financial might of major car manufacturers or billionaire entrepreneurs behind them, are under enormous financial strain.

Principally this is because the way F1 distributes its revenue is uneven.

The prize money structure is fairly well defined - and of course the more successful outfits are always going to earn more than the less successful ones - but the participants have also struck individual agreements with the commercial rights holder, which allow certain teams to extract way more extra revenue from F1 than others.

The teams are not innocent parties in this - they signed their own deals after all - but some have complained they were effectively forced to accept unequal terms or be forced out of F1, and Force India and Sauber have lodged an official complaint with the EU concerning the fairness of F1's governance and financial arrangements.

The counter argument is that F1 is not democracy, and those who cannot stand the heat should simply leave the kitchen.

But all told this is a sorry state of affairs. As one paddock insider puts it: "this is a billion-dollar sport, so it should be sustainable".

Forget quiet engines, aerodynamics, or high-degradation tyres, French manufacturer Renault reckons inequitable revenue distribution in Formula 1 is its most damaging aspect.

"The difficulty starts to kick in when we talk about the economics, because all the issues we have are driven by cost," Renault F1 managing director Cyril Abiteboul tells Autosport.

"It kicks in the necessity of very high revenue, and those [revenues] are obviously coming from TV and sponsors.

"The difficulty is most of the sponsors who invest big money in Formula 1 will want the stories that suit them, and everybody actually wants a bit of a different story - that will be the justification for the very high spend that Formula 1 commands.

"We all understand why every person wants to have a say in the technological story, but when you add up all the technology stories: the tyre, the fuel, the electronics, the car makers, the problem is you get to a cost structure that is so high that only a very high revenue can balance the cost.

"What I believe has hurt Formula 1 the most is the money distribution. How on earth can there be a level playing field when the money distribution is like that?

"The second element that has hurt Formula 1 is the level of complexity introduced by the new engine regulations, which is also impacted by the money distribution, because not all manufacturers get the same revenue from the prize fund, and that impacts on their capabilities to spend towards development.

"We are a small team but we have almost 1000 heads - both from the engine and the chassis - that's huge cost.

"There is no way that F1 cannot have a product that is also from the business perspective, otherwise the exposure for the car maker is just too high. I have a commitment to the board of Renault for the bottom line of the cost and we need to balance that.

"People criticise Bernie making decisions that look like they are short-term minded, in order to maximise the profits, but it's not [just] Bernie it's also the team principal who wants more money, the technical people, the director who wants more budget, and so on.

"Bernie is only doing what the system is imposing him to do."

F1's TV audience is shrinking, which is putting additional pressure on F1's financial model. But, as Pirelli motorsport boss Paul Hembery points out, F1 is still finding new places to race, which means elements of the business remain seriously attractive.

"You've got FOM and Bernie Ecclestone still able to pull some really good television deals out of the hat," he argues. "OK it's moving to pay TV, which will reduce the audience, but the income is there.

"And we still find locations that want to invest in new races. We've got Azerbaijan this year, we've gone to Russia recently, back to Mexico, so from that point of view there are still people wanting to buy into the Formula 1 model."

That's true on the competitor side of the equation too. Interestingly, the newest player in the Formula 1 game - Gene Haas - actually thinks the current financial structure of F1 works fine.

"We've looked at all the numbers and we could actually make money in this sport five years down the road if we do it right," Haas tells Autosport.

"Formula 1 has very defined prize money equations, and the money is actually very good.

"The question is how much you spend to get that revenue, and obviously our way of doing it has raised a few eyebrows. But except for a couple of teams almost every other team effectively buys a major portion of its car from another supplier.

"We're putting a lot of money and effort into it, and it's actually brought more attention to my company than anything I've ever done.

"It's expensive, but boy, sometimes you just can't spend enough money to get the kind of publicity that Formula 1 will deliver.

"Every single year has controversy, screaming and yelling about this, or we don't like this or that, or we don't like the engine packages, or this is unfair, or that guy is dominating.

"All the stuff they've been doing today is exactly the same crap they've been doing for years. It really hasn't changed.

"So as much as they make it sound like a crisis, I think we've been in crisis forever."

But that doesn't mean the crisis should be ignored.

Haas says F1 is happy with 11 teams and doesn't need more, but McLaren chairman Ron Dennis predicts that F1 will potentially lose two of those before the end of this year - with four more seasons to run before F1's current commercial terms expire.

If that happens those who remain will greedily snaffle the carcasses of their fallen rivals, the grid will shrink unless new rich dreamers can be found to step in, and F1's business model will be thrust into the negative spotlight once again.

The calls for action will be loud and widespread. But if history is anything to go by those calls will probably fall on deaf ears.