The Weekly Grapevine

If a single five-letter word epitomised the 2008 Formula One season it was not, contrary to popular belief, 'Lewis', but rather the term 'money'.

The word got off to a flying start in January when news broke that McLaren had settled its headline-grabbing $100m fine through an almost equal mixture of 2007 television revenues and cash reserves.

That the company at all had such a sum available speaks volumes for the profitability of the McLaren Group, and, given that its core business is F1, the overall business potential of the sport.

Factor in that less than 12 months later McLaren was able to win its first drivers' championship in a decade (narrowly missing out on the constructors') despite being deprived of a sum roughly equal to Force India's entire budget, or, expressed differently, approximately the amount owed by Super Aguri when they were wound-up in June, and it is clear that money, and lots of it, greases F1's wheels.

Yet, 12 months later the company which managed to shell out $50m with little more than a sweaty brow was examining a proposal that would see its engine partner Mercedes subsidise annual power unit supply contracts costing roughly the same amount for one-tenth the value, simply to keep the likes of Force India on the grid.

The McLaren Technology Centre © McLaren

Is there an obvious difference between Force India and McLaren-Mercedes? Yes: the former team is headed by the flamboyant Indian billionaire Vijay Mallya; McLaren's Ron Dennis may be wealthy, but is hardly flashy or in the same financial league...

There is, of course, a case to be made for cost-cutting in the sport - as there is in any walk of life - but it is all too easy to overlook that much of the money 'saved' is simply being moved from one pocket to another.

Take engines: yes, increasing life from one to two to three races has unarguably saved a bomb; but enforcing annual engine supply contracts capped at $5m or even $10m will merely serve to move revenue from suppliers (engine manufacturers) to consumers (independent teams).

However, the FIA was clearly prohibited from involving itself in commercial matters by the European Commission as part of the latter's approval of the 113-year commercial rights' lease deal entered into between the governing body and Bernie Ecclestone's companies, and the proposed engine supply regulation is arguably a commercial matter.

The FIA can, though, argue that it is merely attempting to ensure the survival of motorsport's strongest category by ensuring the survival of its weakest teams, and is not in any way involving itself in Formula One's commercial dealings. The car manufacturers are, after all, free to leave, and teams were offered the option of no-name specification engines...

So much for 'savings' on the engine front, but what about simply increasing the teams' cut of the revenue in order to ensure their survival? Even before the spec-engine rumours reared their heads in October, the Formula One Teams Association (FOTA) had been talking of pushing for increases in both F1's annual turnover (±$1bn) and their share of the 'pie' - presently 50% of total income, yet more than double their miserly share between 1997 and last year.

Ironically FIA president Max Mosley initiated the matter at the mid-point of the season by suggesting an increase to 75% - precisely when relations between the former barrister and Ecclestone, his friend and confidant of 40 years appeared to be at their most strained in the wake of revelations about the former's private life.

FOTA was formed shortly thereafter - as a direct result of another of Mosley's initiatives, namely swingeing cost cuts - and one of the first items on their agenda was to work towards increased revenues per team. Whether they will succeed is another question entirely, for, as pointed out in this column last week, the disbursements, operational costs and a heavy interest burden of the Formula One Group ensure that the revenue pot is regularly raided.

The FOTA meeting in Lake Como, Italy © LAT

So, despite both championships going down to the wire this year, discussions about F1's finances and the sport's commercial debt level, said to be no less than $2bn (approximately 20 times the record fine handed to McLaren!) and its estimated $220m annual interest fee, have mostly hogged the headlines.

It is this indebtedness that lays behind the shrinking calendar, down to 17 races despite rumours last year that the fixtures list would grow to 20 races within two years and to 25 by 2012. Korea, India, Mexico and, now, South Africa, are all said to be well advanced with their plans to join the 'Max and Bernie Show', with the first-named hoping to begin hosting the first of its seven races in 2010.

With FOM yielding approximately $55m - predominantly made up of race hosting fees, global TV revenues and Paddock Club/signage income per grand prix staged, it follows that each additional race adds that sum to turnover. Just four additional races would clear the CRH's annual interest bill...

However, according to sources, no substantial progress has been made at the proposed site in Yeongam, South Chollo (250 miles south of Seoul), whilst Mexico has already experienced at least one still-birth. India has been deferred to 2011 - something which took Indian Grand Prix mover and shaker Mallya by surprise when confronted with the news in Singapore - whilst South Africa seems to be betwixt and between two circuits and a changing political landscape.

On the one hand the country has Kyalami, recently the subject of yet another ownership wrangle, whilst on the other newly-elected Gauteng Province Premier Paul Mashatile is said to have given approval for a disused quarry in close proximity to the classic race track to be converted into a Herman Tilke-designed F1 facility.

The main stumbling block, though, appears to be that the province, which incorporates the country's two main cities, namely Johannesburg and Pretoria, is labouring under a mountain of debt as it ramps up its infrastructure ahead of the 2010 FIFA World Cup.

Compounding the situation is that the South African Rand recently slid 50% against major currencies, with no end to the rout in sight, certainly not until the political situation - which recently saw President Mbeki 'recalled' and replaced, and numerous new parties formed in the run up to national and provincial in May next year - has sorted itself out. Which will probably not be for some time now.

F1 has lost France and Canada, with one of Germany's two venues plus Shanghai said to be considering opting out. This complicates Ecclestone's negotiations with new circuits - for said venues are patently dissatisfied with the returns (if any) on their investments. Add in that Fuji is believed not to be pushing for a return (Japan's round returns to Suzuka, ostensibly for two years), with Australia and Malaysia freely admitting to large annual losses.

Spectators at the Spanish Grand Prix © LAT

In fact, just how satisfied can Ecclestone be with Turkey after having bailed the venue out with private funds? Why was no extension struck with Indianapolis? Why was Silverstone unable to accede to Ecclestone's demands?

On the one hand an ING-sponsored survey purports to show that certain countries are receiving over 1500% ROI on their race subsidies, but closer scrutiny raises questions.

Monaco, which effectively gets its race free, enjoys enormous benefits, thus skewing the tables, whilst Bahrain, which has never packed more than 40,000 punters into its circuit environs is said to have benefited to the tune of $395m from its race - or close on $10,000 per grandstand seat with a face value of $200... Where did each fan spend the other $9,800?

The fact that at least nine venues - over 50% of the 2008 calendar - are assessing their situation or are known to want out, and all within an 18 month period, indicates there is something seriously awry with the sport's hosting fee structure.

An inherent component of each promoter contract is a clause prohibiting disclosure of its terms and conditions, making it impossible to obtain accurate fees and figures, but these are believed to vary between $15m and $55m - depending upon the tradition behind the event, the prosperity of its catchment area and (political) sponsors and the eagerness of the signatory.

Given that Ecclestone and Co generally retain the signage and hospitality rights, a promoter's primary income stream is from ticket sales.

Taking an average promoters fee of $25m, with a typical annual escalator of 10%, plus promoter and staging costs of about the same, and an average circuit capacity of 100,000, and it is clear ticket prices simply cannot be south of $500 per seat if the promoter wishes to break even. And, at the top-end of the fee structure, that per ticket cost is more than doubled...

The present CRH, an off-shoot of venture capitalist CVC Partners, needs to add races to clear its debts, but the task of Ecclestone, as CEO, is not being simplified by the number of refugee events, many of whom are now waking up to the fact that the their races are not delivering hoped-for ROIs and expressing precisely that in easy-to-understand language. For proof hereof, access this.

Sebastian Vettel passes trackside advertising during the European Grand Prix © LAT

Thus the calendar is shrinking, and with it FOM's income. The teams are, in turn, being squeezed as they are receiving 50% of diminishing income, yet their engine partners are being asked to cut their annual lease costs simply to ensure the survival of those independents who, frankly, should be able to survive on equitable slices of the sport's annual revenues.

The fans and sponsors, too, are being short-changed, for not only is the number of races on television being gradually reduced, but so are events in their base countries - think France, the US, China and Germany (both sooner rather than later) and, possibly, the United Kingdom. Not too long ago the US had three grands prix in a single year and Germany two...

Whilst the FIA cannot involve itself in commercial matters, as we know, should it not at least examine the make-up and viability of the calendar? After all, if F1's survival hinges on the price of engines, surely it hinges equally on the price of grandstand tickets?