Price of the Prix

Price of the Prix

With the beginning of the 20201 Formula One season and the immaculate release of the Netflix series on the same, piqued my interest enough to dig into it. Specifically the incentives that keep it going.

Formula 1, from what looks like a harmless way to challenge others in a motor race, it has now become a behemoth of its own kind. It is an expensive sport. Relative to most other sports that I can think of, the monetary barrier to entry is high. This begs the question..

How it started and why is it still going?

As a sport, it has to have started with a group of passionate drivers/car manufacturers wanting to compete amongst themselves. As per the F1 history on ESPN F1 it started among a group of car manufacturers and individual entrants wanting to race. However a lot of the individual entrants later had to back out due to lack of funds to continue further.

Entertainment: Formula One as a mode of entertainment is no different from other sports. Entertainment is not merely amusement, it elicits certain emotions and provides us with an emotional, cognitive experience when watching an event such as F1.

Business: Teams in F1 exist as a coalition of advertisers, drivers, wealthy team owners and viewers like us. Organizations and individuals enthusiastic about competing against others and demonstrating their driving skills, would certainly provide a good entertainment value to watchers. At the same time the sport is equally dangerous. Driving those cars at speeds over 180 km/hr is no easy feat. Hence the drivers hav That’s where the business part of it comes in. Drivers need good cars and good cars need monies, hence sponsors come into the picture. Sponsorships is what makes up for about 60% of the annual revenue for a team. The rest is from off-site fan spending on tickets, merchandise, television and streaming rights and the annual monies received from the FIA body itself.

Stakeholders

There are five primary stakeholders in Formula 1.

Hosts - These are the countries/cities hosting the racing event. How they stand to benefit from an event of this scale is in forms of increased tourism of race attendees, consequently increased spending on the local economy. Accommodation for guests, travel, shopping and all activities encourage spending in the host city during the event. Secondly effects of tourism are not just short lived, since the event is broadcast to viewers all around the world, it creates an awareness about the place. Tax revenue generated from the event supports the host nation since these amounts are substantial. Hence there is an incentive for nations to support organizing such events. This also spurs local development in terms of constructing the race venue and people involved in organizing the entire event, thereby provides employment to locals. From a relevant motor sport event NASCAR report from the state of North Carolina, a racing event and all the relevant operations including manufacturing of equipment created over 24000 jobs (in 2003), giving the state economy a five billion dollar stimulus. To the extent that the sport has become a significant employer and contributor to the state’s economy.

Team Owners - Team owners are wealthy businessmen or businesses passionate about the sport or having financial interests to invest in such a sport. Given the high upfront costs to start a team, this cannot be considered just as a another means of making money. A lot of the teams are owned by wealthy businessmen passionate for the sport or auto manufacturers themselves. An auto manufacturer benefits by having the their brand promoted, while generating significant revenues.

Team - The team itself would be a group of people possessing skills who believe in the team and providing their services. The technicians and team principals are experts in their own ways to maintain and lead a F1 team.

Sponsors - Sponsors are like the bread and butter of Formula 1. In the current context, sponsors are firms that are willing to pay for the team, event or to the FIA in general with the intention of promoting brand recognition and advertisement. However the sponsorship deals don’t come cheap, these run into millions of dollars. Concerned brands must be willing to be associated with the event and possible losses that may occur in events of the team not performing well, going bankrupt or not receiving sufficient coverage as a result. As long as advertisement as a business model continues to exist, brands will continue to promote themselves in every way possible, including plastering their names on cars.

Drivers - Win win for them? It’s not that easy. I recently heard some of the driver & team chatter during the race and had a team report that “You’re in a good pace, your average speed is 200 km/hr. This brings about two important points:

1. Driver skills

2. Quality of the car itself