Why Ferrari's quit threat should be taken seriously

It was once said, "When General Motors sneezes, the New York Stock Exchange catches a cold". Could the same analogy be drawn about Ferrari and Formula One Management, now a subsidiary of Liberty Media, after the luxury car manufacturer's threat to exit Formula 1 unless the post-2021 regulations are to its liking?

True, GM was in its pomp back then, but, make no mistake, Ferrari is currently flying high, delivering more ornately expensive red cars than ever before and boasting its highest market capitalisation and profit since its listing in October 2015. Ferrari is listed not on the NYSE but NASDAQ, but so, too, is F1 under the Liberty Media umbrella - potentially creating a case of double jeopardy.

So Ferrari president and CEO Sergio Marchionne's recent threats, uttered after FOM unveiled its post-2021 vision, should be taken seriously, not least by F1's management, which acquired control of the championship's commercial rights in January.

Marchionne thrives on hard-hitting, macho even, statements, and his history proves that he is not afraid to hit the metaphorical red button. Unlike the Italo-Canadian's predecessor Luca di Montezemolo, Marchionne does not love F1 in the 'la passionate' sense, only what it can do for the bottom line. In a nutshell: Ferrari's current taskmaster hates red ink more than he loves red cars.

At the heart of the current dispute lie three critical issues: a revamped governance procedure under which Ferrari would lose certain privileges; technical - in the form of F1's post-2020 regulations; and, finally, commercial, crudely described as 'cost saving' or 'budget capping' as Liberty attempts to cut costs in order to justify reduced payouts to teams in order to bolster its own bottom line.

It is no secret that Ferrari enjoys a historic veto over regulations changes, a benefit recently analysed here, and it is also a member by right of F1's Strategy Group, a benefit originally extended only to Ferrari, Red Bull Racing and McLaren, as these complied with Constructors Championship Bonus (CCB) requirements devised by ex-F1 tsar Bernie Ecclestone and CVC Capital Partners, then-holder of F1's commercial rights.

For the record, the other Strategy Group teams are Mercedes (originally an invitee until its double championship status in 2015), Williams (on a heritage basis) and Force India (as the highest-placed non-SG team), plus, of course, motorsport's governing body, the FIA, and Liberty subsidiary FOM. Each team holds a single vote and the FIA and FOM hold six each, with a simple majority deciding which motions are accepted.

Ferrari is desperate that the Strategy Group (and its veto) be retained - despite an official EU complaint filed by Force India and Sauber over anti-trust issues. Ditto Ferrari's seat by right - albeit dressed up as teams' representative - on the FIA World Motor Sport Council, motorsport's ultimate regulating body that ratifies all rule changes. Again, why would Ferrari relinquish that without a fight?

Then, Ferrari benefits inequitably from F1's prize fund, this year receiving 19% of a pot split 10 ways despite only finishing third in the 2016 classification (monies are paid on previous performance). Champion Mercedes received 18%, and Force India, fourth in the classification, under 8%. Any wonder Ferrari, particularly as a listed entity, refuses to accept reduced slices of F1's revenues?

When Marchionne issued his threat, the anticipated reaction among folk who really should know better was "Same old, same old"...

Having pulled out all stops to create an engine the near-equal of Mercedes' standard-setting power unit, Ferrari faces having to start from scratch to comply with Liberty's post-2020 vision - while racing the current engine.

Mercedes and Renault objected that this not only escalates costs, but provides newcomers with an advantage given they can develop post-2020 units without the distractions of racing simultaneously. The crucial difference is that they do not hold a veto of any kind, nor is Renault represented on the Strategy Group. Ferrari does and is, while Mercedes is said to be expendable in the greater scheme of F1.

Ferrari competes in F1 in order to gloss its reputation as maker (and/or licensee) of utterly desirable luxury objects - thereby justifying its premium pricing - with its high-tech, luxury image enabling the company to attract premium partners. It does not advertise in the traditional sense: F1 is the brand's marketing platform for cars, licenced products and memorabilia.

Dumbed down technology, budget caps and equal status with teams such as Sauber simply do not fit that business model, nor do they create that element of mystique upon which Ferrari thrives. Ferrari needs to rule the roost, and if does not succeed on track, it needs to be seen to hold the upper hand among teams.

There is absolutely no doubt that Ferrari occupies a very special place in F1 history, so much so that the two are essentially symbiotic, and have been since Ferrari contested the first F1 world championship season back in 1950. Indeed, it is said that Ferrari is F1 and vice-versa, and while that arguably stretches the point and does F1's standing a disservice, the fate, and success, of both brands are indisputably intertwined.

Example: when did Ferrari withdraw from sportscars to fully concentrate on F1? Mid-seventies. When did F1's popularity first take off? Ditto. Recall the Ferrari versus Ford Le Mans wars? Would they have been the same had Porsche been pitted against the Blue Oval? Unlikely. When did F1's appeal start to ebb? Mid-nineties. When were Ferrari's fortunes most recently at a painful low? Ditto.

When did F1's TV ratings peak? Not coincidentally during Ferrari's 2000-04 hegemony. Ratings have risen and dropped in parallel with Ferrari's form. The one constant has been those blood red cars, their scarlet hue variously representing triumph and tragedy, victory and defeat, death and despair - and virtually every human emotion in between. That is why folk tune in on Sundays, not to see mobile drinks cans.

Notwithstanding four-time champion Lewis Hamilton's social media activities, the predominant colour in the grandstands across the globe is scarlet, not Mercedes silver, while Ferrari's merchandising areas are generally triple the size of its nearest competitor. Wander around airports, and check out the show cars. When last did you see a Force India or Williams on display? Toro Rosso or Sauber?

Of course, various dynamics have influenced F1's popularity over the years, but the foregoing illustrates trends that simply cannot be ignored. Talk to hedge funds about F1 share pricing, and inevitably their first question is: "What is Ferrari's future?" Do they check Mercedes, Red Bull or McLaren? Mercedes, as a globally-recognised marque with premium associations, peripherally concerns them; the rest, not a jot.

When Marchionne issued his threat, the (anticipated) reaction among folk who really should know better was 'Same old, same old', for Ferrari is no stranger to pulling this trick. In 1986 Old Man Enzo went as far as building an Indycar in protest against impending F1 regulations that mandated V8 engines, causing the FIA to lift its restrictions.

Incidentally, Renault's glorious V10s and wailing Ferrari V12s (and later V10s) were the result of the Scuderia's forceful lobbying, for Ferrari won that battle. And the Indycar? It became a mule for Alfa Romeo's Indy programme.

To many Marchionne's threat is tantamount to crying wolf in time-honoured fashion, with fans and websites across the world leaping onto gung-ho platforms, suggesting in unison that Liberty should call Maranello's bluff; and the sooner the better. After all, went the arguments, the Prancing Horse is wagging FOM, and should therefore be called to order, or sent packing.

This, though, overlooks one essential factor: the folk calling for such actions are not Ferrari shareholders, nor do they understand commercial realities. Plus, such folk clearly based their calls on the Ferrari they thought they knew under the flamboyant, political and patrician Montezemolo, not one presided over by the battle-hardened bruiser that is Marchionne, the son of a policeman.

Both FOM and Ferrari are now listed companies, and therefore at the mercy of shareholders. Their successes are not measured in eyeball ratings or championships won - or even annual balance sheet audits as in the recent past - but via stock market indices. Liberty knows full well its share price will tank if Ferrari walks - and so, too, does Marchionne know that.

Ultimately it comes down to which is the greater commercial force, Ferrari or F1?

Equally, Ferrari's market capitalisation could rise or fall, depending upon how crucial the markets view its F1 participation. Such has been the impact of Liberty's October 31 announcement on both valuations that already Liberty shed 10% over the past week, while Ferrari's share price rose marginally, then dropped before rebounding to pre-announcement levels.

As Marchionne pointed out in a call to investors, Liberty may have factored a possible Ferrari exit into its scenario planning - failure to do so would constitute serious breaches of fiduciary responsibility - while Ferrari would have made the same (but opposite) calculation. Forget not that when Marchionne threatened to invoke Ferrari's veto over regulation changes in 2015, the FIA and FOM backed off.

Ultimately it comes down to which is the greater commercial force, Ferrari or F1; who plays the harder game, Ferrari president/CEO Marchionne or Liberty chairman/CEO Chase Carey; about garnering the greater paddock support. It is also about the strategies of ex-Ferrari team boss/managing director Jean Todt, now FIA president, and Ross Brawn, Todt's former lieutenant-turned Liberty's sporting managing director.

Some extremely powerful forces are in stand-off, their positions dictated primarily by their respective share prices, but their actions determined by their characters. F1's very future is at stake.