The deal that could turn F1 inside out

Has Formula 1 opened a Pandora's Box by pursuing a special 'free' deal for the Miami Grand Prix? Will other race promoters now be pushing to replicate it, and has Hockenheim already become the first to ask? And what do the Formula 1 teams think about the possibility of their future income being compromised by a shift in the way race contracts operate?

Those are just a handful of the questions that have arisen since it became clear that Miami is being treated by F1 as a special case. The details have yet to be disclosed, but a proposal document for the 2019 Miami race indicates that "an atypical commercial model is being developed to enable the race to take place."

That means there will be no traditional up front sanction fee, and instead there will be some form of revenue and risk sharing involving the F1 organisation, billionaire promoter Stephen M Ross and, presumably, the City of Miami.

In essence F1's income will be derived from a share of the gate and VIP hospitality, with much hope resting on the latter.

That is not the way things were done under Bernie Ecclestone, the acknowledged master of the race deal. He realised decades ago that he didn't want to gamble on ticket sales, and insisted on a guaranteed income.

Over the decades he refined the art of finding promoters, be they governments or private organisations, who were willing to put up the money to fund a grand prix, and would commit to multi-year deals with a fee that escalated annually.

The one exception was Monaco, the jewel in the crown of F1, which has always had a free deal. Given its importance to the championship as a whole, it was treated as a loss leader.

If Ecclestone announced a 20-race calendar, allowing for the Monaco freebie and a representative average fee of $30million for everyone else, he knew the coming season would produce 19 x $30m, or $570m, in race promotion fees.

He would also know how much the races would generate the following year and the year after that, because deals were usually long - and any that were not extended or fell by the wayside were likely to be replaced by something more lucrative.

With equally secure earnings from broadcasting and sponsorship deals, Bernie always had an accurate picture of what the overall income of the F1 business would be a year or two down the line. Indeed, when Liberty bought the series it made much of the value of those ongoing contracts, and the guaranteed future income.

If you are a promoter pushing hard for a new F1 race, you would probably be asking why Miami is getting such a good deal

Crucially, the F1 teams also had a good idea of what they would earn for a given world championship position, and that would be factored into their budget planning. The overall income of the teams only ever went one way, which was up.

But last year F1's profits, and hence team income, fell for the first time. That was in part due to the cost of establishing a new London base and expanding the staff, plus the expenditure of initiatives such as the F1 Live event in London. In addition deals with two key sponsors, UBS and Allianz, came to an end.

In Liberty's annual report there was also an intriguing reference to a reduction in the sanction fee received from one particular race.

"Race promotion revenue decreased in the fourth quarter," it read. "Primarily due to legacy contractual terms of one grand prix event, which provided for a one time material step down in the promotion fee effective after the 2016 season and carrying through the remaining term of the contract through 2020."

It added: "This agreement was entered into by previous management and is atypical and not reflective of terms carried in F1's other promotion agreements."

The race concerned was Brazil, and the money F1 earned from Interlagos did indeed go down in 2017. That's because, under a deal agreed by Ecclestone, the basic sanction fee was for many years topped up by funds channelled via broadcaster TV Globo. That particular arrangement ran out after the '16 race.

The fact Liberty pointed out this anomaly when justifying F1's 2017 financial figures showed that in the grand scheme of things every race fee matters. And that's what makes the unusual Miami plans so significant, because there is risk involved.

We don't know to what extent F1 will dent its potential profits through extra spending to help make the race happen, given that the city will take care of some expenditure (its contractual commitment to pay for "civic works" covers a lot when it comes to building a street track), while there is also some outside third party investment. In other words, F1 is sharing the risks.

Let's just assume its share of any profits is $10m - that would be lot less than the current $30m average sanction fee. If Miami is the 22nd race of 2019 one could argue that it will be a 'bonus' event, and that any money generated by going there is extra icing on the F1 cake.

But should it replace an event on the current 21-race schedule - for example Germany - then the Miami numbers take on extra significance.

Liberty would argue there is a bigger picture than the income generated from one race. It sees Miami as a stepping off point to grow F1 in the United States of America, the market that it regards as the most significant, and that it knows best.

The theory is Miami will boost interest in the USA, add to TV viewership, and help to tempt new sponsors in, and so everyone will benefit. In other words, we should view Miami as a giant marketing exercise for F1, a turbocharged version of last year's London demonstration event.

There is some logic to that, and you could look to Monaco's free deal as a case study. But Monaco is a unique and globally known event with a history that stretches back 89 years. A cynic might point out that the Miami GP will be taking place on streets previously tried and abandoned by IMSA (pictured above in 1993), CART/Champ Car and Formula E, and so its status as something truly special is open to question.

The real significance of the Miami deal is the precedent it sets. If you are a promoter pushing hard for a new F1 race - Copenhagen, Hanoi and Buenos Aires are among the serious prospects - you would probably be asking why Miami is getting such a good deal. It's an even more pertinent question for any further potential US venues. If Miami, why not New York, or Las Vegas?

Existing promoters around the world are also no doubt watching developments with interest, especially those whose current contracts run out in the next couple of years, and who now may be keen to renegotiate.

For the big payers, places such as Azerbaijan, Bahrain and Abu Dhabi, a grand prix is never going to make financial sense, and the losses are written off as a PR exercise for the country. You could argue their governments will write a cheque for whatever it takes to bring the F1 show.

Yet even they have their limits, and probably won't want to feel they are being taken for granted next time they're asked for more money. They will want to know what the Miami deal means for them longer term.

Then there are the subsidised races in places where there is rather more scrutiny of public expenditure, such as Melbourne, Montreal and especially Austin, where since its inception the race fee has been underwritten by the Texas State Major Events Trust Fund. If pressure groups or opposition politicians get wind of the 'free' Miami deal they might start asking why their cities don't have similar arrangements.

And finally there are the independent promoters, such as Silverstone, currently in the middle of negotiations for 2020 and beyond, and Hockenheim, which is about to hold the final race of the 'alternate-year' deal agreed with Ecclestone. Both have reached the limits of the traditional model.

While there's massive prestige associated with hosting a grand prix, these venues have to operate as successful businesses for the rest of the year. It has to make sense for them. Hockenheim's alternating deal with the Nurburgring was agreed because neither venue was willing to risk losing money every year, but could just about cope with doing it every other year.

Hockenheim has become the first promoter to make a public plea for a better deal, one that in effect resembles Miami's.

"We don't want to be a play ball between promoters and the commercial rights holder. It's their business" Toto Wolff

"The contract will expire this year," the venue's marketing director Jorn Teske said at Barcelona. "We're aiming to host a grand prix in the future, and we'd like to have it in the future, but the key point is we cannot prolong under current conditions.

"So we would like to have a contract which will take the risk from us, this is the basic point. So we are not speaking about the fee, we are speaking about a new contract where we definitely have no risk anymore.

"We have a circuit which does not receive any financial support from anybody, neither from the state nor from the region nor from economic companies, so we have to make and manage everything for ourselves.

"There are many models which could work without risk. No fee, or a basic fee, just earning the costs, and then sharing the ticket income. As soon as we're speaking is it worth to pay whatever, $10m, $20m, $30m? This is not our approach now."

Chase Carey has often said he wants to protect traditional races, but if he is unable to conclude a deal with Hockenheim, or the Nurburgring, then a street race in Berlin - coincidentally the birthplace of F1 commercial director Sean Bratches - is lurking in the background. The city has shown it can host an FE event, and Carey paid a visit last Friday.

It will be fascinating to see how the Hockenheim negotiations play out, and if others - publicly or behind closed doors - start asking for risk-sharing deals that will mean F1's future income, and therefore the teams' share of it, is not 100% guaranteed.

Team bosses meanwhile are watching with interest. They trust the Liberty guys to get on with it, just as they trusted Ecclestone in the past.

"We don't want to be a play ball between promoters and the commercial rights holder," Toto Wolff says. "It's their business. We're interested in having a German GP, our home grand prix, but we don't want to get involved in any negotiations.

"Liberty will choose signature grands prix, that they deem to be important, to unlock a market. And that's a different story.

"We'd love to go to Miami, it's a fantastic place, and we should be having a grand prix in Miami, and making it a grand race together with Austin will possibly unlock the American market. There are very diverse audiences in Miami."

But Wolff also acknowledges the income side is important: "I don't want to meddle too much in their business - they will know what they are doing," he adds. "For us, the bottom line is obviously important, because the prize fund is determined by the earnings, and the prize fund determines what the teams get.

"In the past it was always very simple, there were four revenue streams: sanction fees, sponsorship, TV revenue and hospitality fees. Maybe you can have another one by investing in a grand prix and sharing in eventual revenues and profit.

"I'm running a race team and trying to understand our own profit and loss, which is complicated enough. They have to take the right choices."

Renault boss Cyril Abiteboul, who perhaps has an even harder time than Wolff in convincing his board that the F1 programme makes financial sense, is also watching closely.

"Let's be clear, there is a change of business model," he says. "And that's a fact, that it involves an element of risk.

"I'm not in a good position to be able to assess the risk. It's very easy to comment, to criticise deals from outside, because I've done deals myself which have been criticised by people. That's why I'm always very careful not to do that.

"But if it was to multiply itself amongst promoters we would have clearly some different agreement with Liberty."

Yet another sign, potentially, of a bumpy road ahead as F1's new ownership regime looks to sever ties with the past, implement a new vision for the future and somehow bring its key stakeholders with it.