Slow steamrollers and F1

It is now six months since Sauber and Force India complained to the European Competition directorate about the way Formula 1 revenues are divided and how the regulations are written. They no doubt pointed out that while a team like Ferrari is paid around $200 million a year, despite winning very little, the smaller teams get as little as $50 million apiece and much of that has to be sent buying an engine. Some argue that the engines are too expensive and should be got rid of, others say that if the commercial rights holders were not so greedy, the sport could have a better split of revenues and all theism would then be able to afford the engines, which would make sure that F1 remains at the pinnacle of automotive technology, at least until electric and autonomous cars start making more of an impression.

So what is happening? Is the Commission doing nothing, or are the wheels turning slowly? The problem with the European Union is that nothing moves very fast, and there is a lot that needs to be done. The Competition Directorate, which would deal with this is issue, is headed by Denmark’s Margrethe Vestager, and her administration, known as the Competition Directorate, is based in Brussels. This is headed by a German Eurocrat called Johannes Laitenberger, who was new to the Director-General role in June last year, although he has been with the Commission for more than 20 years. It is such a big department that there are a number of Deputy Director-Generals who deal with specific areas of competition law; and these each have a range of departments which look at more detailed problems. The Spanish lawyer Cecilio Madero Villarejo, who has been with the directorate since 1989, is in charge of anti-trust activities and he has various departments which look into potential cartels. It is one of these that will be investigating the claims made in F1. One of the problems is that it takes a long time to gather information and the Commission staff are not experts in the Formula 1 world, which is complex and confusing. They need to understand how it works, who to trust, and then they need to start asking questions about how things happened and whether the structures are justified. Thus, the investigators have, it seems, already written to the major players, asking them to explain their arrangements. Once these have been collated and understood, they will be referred to the small teams for comments and after that step has been made, the Commission will draw up a Statement of Objections (SO), if there is something that they object to. The party who are deemed to be at fault in the SO will then respond to the complaints and negotiations will begin. The Commission can force companies to behave, but they have tended to try to get those involved to change their systems, rather than forcing change. If they meet resistance they can issue fines and make changes, but usually solutions are found before that happens.

The areas where there are likely to be questions are over Ferrari’s very specific situation, with a veto on the rules and five percent off the top of the sport’s revenues, before any prize money calculations. There are likely to be questions about the special fund, known as the Constructors’ Championship Bonus Fund, which is around 7.5 percent of the revenues, (which means around $100 million). This is divided up amongst the three most successful teams in the previous few seasons, with the team that has won the most getting a minimum of $37 million, the second team getting $33 million and the third $30 million. Because this based on performance, it is less controversial than the Ferrari payment. Beyond that there are a number of special deals with teams such as Williams and McLaren, which have been around a long time, but have had few results in recent years. These justifications are controversial because they reward longevity and past success, rather than current success and yet Sauber, the four oldest team in legal terms, is not a part of it. There are then two other funds; one which pays equal money (about $40 million each) to the top 10 teams for turning up; and the other which pays out based on a team’s position in the Constructors’ Championship, ranging from around $80 million for the Champions, to around $17 million to the 10th placed team). The justification for paying Ferrari more is that the firm provides F1 with star power. However, this is a fairly nebulous concept because, in most activities, star power is dictated by results and a film star, for example, who has been in a run of flops does not expect to be paid the same as he used to be paid because he was once famous. This is an equally good argument that because of the passion that exists for Ferrari, it already has an advantage because it makes a great deal more money from F1 in merchandising and sponsorships than the other teams and so it should not be given bonus payments as well. in the overall scheme of things Ferrari gets more than 11 percent of the revenues, while the small teams get about only around 3.5 percent apiece. The fact that the company that owns the commercial rights takes about 40 percent and gives very little back, and borrows against future earnings to load the sport with debt, is galling for all concerned. This may not be something that Commission can do anything about, except that there is also a political element involved.

The other question that the Commission will want answered is whether the Strategy Group is the right form of governance. The last settlement with the EU was 15 years ago and in that the EU said that the FIA should act as the regulatory body only and not to be involved in any commercial activity, and that the Formula One group should involve itself only in commercial matters. This is clearly not the case now. The FIA cannot now regulate anything apart from safety, having sold that right in exchange for annual payments and for a share in the Formula One holding company. This means that the federation is entirely dependent on money from Formula 1 and thus is not performing the role that is expected of it.

Formula 1 is very odd in the way it operates compared to other big sports. They generally have mutualised ownership and thus profit-sharing with only a small percentage being paid to a promoter or in the costs of running a commercial operation. This is a much healthier model because the money stays in the sport and there can be important things, such as trickle-down funding for junior leagues, to help keep sports healthy. The FIA’s decision to lease the commercial rights for a 100-year period to the Formula One group, rather than developing the commercial side of the business itself, as other sports have done is the root of most of the real problems in F1. The only way this structure can be broken is if the teams unite and refuse to accept the financial arrangements on offer to them: the current contracts run out at the end of 2020. If the teams will not agree to the terms on offer, then the Formula One group would be unable to fulfil its commitments to the FIA and the 100-year deal could be cancelled and a new structure created. Obviously, the Formula One group does not want that to happen, but as the manufacturers and big teams are currently working together, there is now a log-jam that the Formula One group hopes the EU will break up. However, the Commission is not stupid and may look at the structure as a whole.