The Weekly Grapevine

Business and charity in Formula One

Last week's installment of the Weekly Grapevine hit the nail squarely on the head when suggesting that Ferrari's self-inflicted demotion to garagiste status had ulterior motives that would shortly be surfacing. But, as is the case with 'soft' news, the instrument used was not a sledgehammer, but a nutcracker of a size suited to opening shells without destroying the contents.

As was fully expected, popular news outlets took the ball and ran with it, with quotes from an interview with FIA President Max Mosley substantiating virtually verbatim what our original source indicated immediately after Luca di Montezemolo asserted that "Ferrari must not be seen as an integral part of a car manufacturing team but must be viewed as a private entity; we are today in competition against Toyota, the biggest carmaker in the world, and against manufacturing giants like Mercedes, BMW, Honda and Renault."

Of course, debates are raging as to whether:

a) Mosley is justified, or even correct, in believing that "it would be entirely reasonable to offer the manufacturers that join the Formula One world championship no income (at all)" on the basis that it is "quite logical to give the money they would have got to the smaller, independent teams to raise the whole standard of the competition"; and

b) He is entitled to publicly voice such opinion, for, in terms of an October 2001 agreement struck between the sport's ruling body, Bernie Ecclestone's SLEC/FOM group of companies and Mario Monti, then the European Union's competition commissioner, the FIA agreed not to involve itself in the sport's commercial affairs; and

c) His statement would further drive the wedge presently splitting FIA and GPMA, or serve as a unifying wake-up call for the 'rebel' body; and

d) The comments were made to deflect attention away from the then-imminent release of FOM's rather healthy financial results for 2004 (US$450m gross on US$700m turnover); and

e) The comments were made to deflect attention away from the imminent investigation by the EU into the change of control of SLEC from Ecclestone and the three-shareholding banks to capital venture group CVC Partners in conjunction with Ecclestone and one or two bankers.

The juries are out on all scenarios listed above, and likely to stay there for a long time to come. Suffice to say, though, that Formula One's thoroughly deserved reputation as pinnacle of all motorsports came about not through benevolence, but through a self-imposed 'survival-of-the-fittest' meritocracy, which has forced an average of two teams out of the sport per year since the world championship's inception in 1950.

And, if it sounds rather harsh to support their disappearance, consider that Mosley's life support proposal, if applied to the immediate past, would have ensured survival of the likes of Andrea Moda, Pacific, Simtek and similarly motley teams. And, more recently, such handouts would have camouflaged the mismanagement of Arrows and Prost...

If, though, it is perfectly logical to Mosley that the smaller independent teams be given the money to raise the whole level of the competition, would it not be equally logical to question why struggling circuits - of which there are presently more than few - aren't blessed with similar charity?

After all, if it were acceptable to the EU that Mosley publicly suggests how Ecclestone should distribute revenues amongst teams, it would be surely equally acceptable to the EU for Mosley to suggest that circuits, too, benefit from generosity that contributes to the whole level of the competition.

Given that last year there were 18 races in 2004 under scrutiny, quick perusal of FOM's results shows that each event contributed a rather robust $25m to gross profits, which are, in simple terms, total turnover ($705) less any costs of sales. And, what were these costs of sales, which ran at $255m, or 36% of turnover?

In this instance, FOM's cost of sales are basically sums disbursed to teams - which McLaren boss Ron Dennis once allowed was 47% of television income or 23% of total income, which includes promoters' fees, circuit signage and Paddock Club - plus capital item contributions, rentals, variable expenses and salaries. With cost of sales amounting to 36%, and team revenues allegedly totaling 23% ($162m), 'other' costs amounted to 13% ($92m).

Of course, the arithmetic is not as simple as that, nor is it implied that only races generate profits (licensing contracts more than do their bit, too, as do other media deals), but it remains a fact that zero races mean zero grosses, and, by extension, the larger the calendar, the greater FOM's profits.

Yet, circuits are struggling. Hockenheim is said to have dug itself a hole no less than $42m deep since 2002, while Spa - which was dropped from the 2006 calendar this week - lost $22m in just two years (as predicted and detailed here). Two years ago - the exact period in which FOM posted these record annual profits, which, rather saliently, amount to 150% of the sum paid by FOM to the FIA for the 100-year rights to the sport's commercial rights - Magny-Cours reneged on its promoters' fees and was as close to being liquidated as can be any local government initiative in France.

It could, of course, be argued that the first-named two circuits have had their activities mismanaged - and rather spectacular cases could be made for both - but the fact remains that no amount of executive botching, save for agreeing to astronomical staging fees, could lose those sums in such short periods.

And, while a criminal investigation into Hockenheim's activities is underway, autosport.com understands that these revolve around the awarding of construction contracts and not the circuit's day-to-day (lack of) profitability.

Silverstone's travails are sufficiently well-documented to require little or no amplification, but, rather perchance the circuit's owners, the British Racing Drivers' Club, this week advised members that promoting the British Grand Prix placed the club at risk.

"The inescapable reality is that present day circuit operations, heavily dependent as they are on one high-profile event, involve substantial commercial risk and extensive continuing capital expenditure," BRDC chairman Stuart Rolt said.

Melbourne's Grand Prix allegedly loses $11m per annum while Malaysia's airports company - owner of Sepang International Circuit - is desperately trying to offload the facility but has so far had efforts stymied by a clause which demands that Grand Prix guarantees be given by prospective owners. So far none have been forthcoming.

Interlagos, which more than merely co-incidentally has yet to agree commercial terms with FOM for a 2006 Brazilian Grand Prix, recently appealed to Sao Paulo's local government for support, while Imola, too, begged $13m from the Italian Infrastructure Ministry to cover the costs of a new paddock. This week news broke that the Turkish government is keen to dispose of the Istanbul Park Formula One circuit, for which massive losses are projected on its plus $100m build cost.

While Bahrain and Shanghai have not released their losses, some rather basic analysis of ticket income versus estimated promoters' costs indicate that their circuits, too, will be hard-pressed to turn sustainable profits.

The common thread running through this narrative is that circuits, in the main, are staging their Grands Prix at very real losses, which are in turn picked up by local or national governments, while FOM and associated companies turn record profits.

Can it be purely coincidental that, in some instances, FOM's average profit per race pans out at almost precisely the amount lost by circuits?

There obviously exists an imbalance somewhere, all of which trickles down to lower formulae, for if circuit income is exported to FOM, there remains little irrigation for the sport's green shoots.

While it may be noble for Mosley to care sufficiently for the 'independents' to campaign for a greater share of revenues on their behalf - whether such suggestions are in breach of EU agreement or not - would it not be equally noble for the FIA president to campaign for reduced promoters' fees on behalf of circuits?

Not only would that be good for the whole of the competition, but would also be good for the whole of motorsport - which is, after all, the FIA's, and by extension, Mosley's primary remit.

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- The Autosport.com Team

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