Why F1 must avoid its latest red herring

With control of Formula 1's commercial rights gradually transferring from their current majority owner CVC Capital Partners to US-based media powerhouse Liberty Media - to much rejoicing in and out of the F1 paddock - and the deal due to be completed during the first half of 2017, there was much speculation at the Singapore Grand Prix that Liberty would impose US business philosophies on F1.

Most folk ventured the deal would result in two major developments in the short-term: Liberty would direct effort into increasing the number of grands prix in the US, possibly to three (or even more) rounds, up from one (Austin) - with each of the country's two coasts gaining an event, plus possibly another event in the Midwest - and that a variation of the NFL franchise system would be introduced.

Franchising is a US concept that gradually spread across the globe, having first been applied internationally by Joseph Singer of sewing machine fame; although, when one thinks franchising, the first images are of fast food - think golden arches or daft-looking, goateed colonels.

There is little doubt that without franchising McDonald's would still be a single burger bar in San Bernardino rather than having more than 36,000 outlets globally, or that breaded, fried chicken would be confined to Kentucky. In fact, Henry Ford introduced structured franchising to the motor industry (a model only now being broken by Tesla with mixed results) which in turn made the car more accessible to the masses.

However, the NFL franchise model required an act of US Congress to exempt the league from antitrust laws after a merger with the AFL to form a single US national football championship. Liberty must surely be aware that F1 is currently under the EU Commission spotlight for the European equivalent of antitrust, namely monopolistic practice, so it will want to tread carefully with any such plans.

Given the success of franchising in other spaces, could it gainfully be applied to F1, and, if so, in which fashion?

First the concept needs to be defined, and the most appropriate overall definition of franchising is provided here, although the definitions of key words are:

Franchise - A privilege or right officially granted to offer specific products or services under explicit guidelines at a certain location for a declared period of time.

Franchisee - A person or entity to whom the right to conduct a business is granted by the franchisor or licensor.

Franchisor - The company owning/controlling the rights to grant franchises to potential franchisees.

In F1's instance the franchise would be the right granted by the Franchisor (Formula One Management) to a group of Franchisees (team owners) to operate a number of Formula 1 team in terms of the prevailing technical and sporting regulations, and any commercial agreements in place.

However, that is precisely F1's current business model, with the only deviation being that the right to operate the business is granted by the owner of F1's commercial rights, namely the FIA, which originally leased those rights to Bernie Ecclestone's family trust, which in turn sold the rights - with CVC becoming the eventual majority owner and leading to Liberty Media's recent takeover.

The right to enter the championship is granted by the FIA, not FOM (or even CVC/Liberty), as became clear when Haas entered the fray: the governing body granted an entry to F1's latest team, with FOM's only consideration being whether to extend a share of F1's revenues to the newcomer (or not).

So in real terms, the franchise model described previously operates at a superior level to the FOM/teams relationship, with, if anything, the FIA being the franchisor (as owner of the F1 championship) and Formula One Management (as operator) being the franchisee. The FOM relationship is, at most, a secondary franchise.

Let us assume that Liberty does, though, have NFL-type plans for F1 - what could these be? The strength of the NFL system lies in its revenue model, in which all teams share the league's annual TV revenues equally (after the NFL itself has taken its slice) with the teams earning additional income through promoting their home games, in stadia they generally own, and through the sale of merchandising and sponsorship.

Spot the major differences.

F1's revenues are inequitably distributed by FOM, the root cause of the EU complaint filed by Force India and Sauber.

F1's venues are not owned by teams individually or on a syndicated basis or the races promoted by them, but variously by motor clubs, provincial and/or national governments, or local councils.

The promoters take the profits (if any), while FOM receives hosting fees. True, a share of hosting fee income is distributed to teams (inequitably), but the fact is individual NFL teams directly benefit from partisan fan support.

British teams don't, for example, benefit any more from the popularity of Lewis Hamilton than do non-UK-based outfits. If anything, so skewed is F1's financial structure that Ferrari benefits more from the British Grand Prix ticket sales than Williams.

Clearly, then, F1's revenue structure requires a total revamp - but that is simply common sense and it should not require the introduction of a totally new business model.

In addition to the above, 'franchise' has yet another meaning: the right to vote. While voting forms a pillar of the democratic values enshrined in European law, if not in many countries to which F1 now travels, it is a peculiarity of 2016-style F1 that only half the teams have input into F1's primary governance process via the exclusive Strategy Group. By definition, the balance is disenfranchised.

This is, though, yet another function of CVC's greed, and the second flashpoint for the EU's investigation, rather than an inherent flaw in a process that could only be corrected by the franchising model. Yes, F1 must change in this regard, but there are other methods less extreme than imposing a US-formulated fast-food business model on a European activity.

Much has been made of the NFL's draft, which permits the team with the lowest number of wins during a season to have first choice of the newly eligible players for the following season, or trade that right for a fee.

That concept, too, could be introduced to F1 - although just how Max Verstappen or Carlos Sainz Jr would have reacted had they been drafted into Caterhams or HRTs, or sold to Marussia against their will poses intriguing questions - but a franchise model is not required to introduce such regulations, only a 70% majority vote by the F1 Commission after approval by the Strategy Group.

Clearly, then, a franchise model cannot simply be imposed on F1, and hopefully Liberty will soon realise the long-term implications as and when it investigates F1's commercial potential - if, that is, franchising is at all on the radar. If so, Liberty chairman Chase Carey could do well to study the fate of the only international championship to have embraced a full-on franchise model - A1GP.

This self-styled 'World Cup of Motorsport' had, as a Nations Cup, essentially drawn on all the ingredients for a successful motorsport franchise model: teams acquired the right to represent the series in a specific country for a fee. They were enfranchised to enter a national car/driver, negotiate media rights for that territory and were granted the option of promoting a round in their region - effectively NFL's model adapted for motorsport.

This was franchising in its purest form; total representation of the franchisor's entire product spectrum by a franchisee holding specific territorial rights for a period (in that case five years).

Guess what? The entire championship was history even before the initial franchise period expired; due, in the main, to naivety and inexperience on the parts of both franchisor and franchisees.

The teams were ill-prepared to organise events - staging full-on race weekends is hardly akin to organising football matches or flipping burgers - while negotiating broadcast rights for a multi-national sport broadcast from across the world differs substantially from flighting KFC adverts in your local area, and, as such, requires specialist support expertise that the franchisor was unable to provide.

Essentially a franchise is a chain only as strong as its weakest link. If patrons experience sullied bedding in, say, one branded hotel, then the negative perceptions rub off on all such establishments, and as the teams, whose primary mission was to win races not stage events, came under increasing financial pressures, so they collapsed. When they did, so too did A1GP.

Clearly Liberty intends to restructure F1, for without a substantial increase in bottom-line revenues the current stated valuation of $8.04billion represents a multiplier of 17 times annual earnings before tax/depreciation/amortisation, and as such represents a singularly bad deal by most standards.

Based on the foregoing the solution is, though, clearly not the imposition of an NFL-type franchise model. Mr Carey has his work cut out in formulating a cohesive and sustainable strategy to grow F1's revenues.

For the sake of F1 one can only hope he is up to it. And soon.