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The Business of Formula One

Jan 25, 2022
Business
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25
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Formula One is one of the fastest-growing sports in the world, with over 400 million fans.

In this episode, we take a look at the rise of Formula One, the legendary businessman behind it, and lift the lid on how the business of Formula One actually works.

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[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English. 

[00:00:12] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.

[00:00:22] I'm Alastair Budge, and today we are going to be talking about The Business of Formula 1.

[00:00:29] It is a sport that has gone from being only followed by a handful of amateur fans to one followed by 400 million people globally, and it is one of the fastest growing sports in the world. 

[00:00:44] So, in this episode we are going to look at the business of Formula 1.

[00:00:49] We’ll start by looking at the history of the sport, how it went from amateur to professional, and who got fabulously wealthy along the way.

[00:00:59] We’ll then go on to look at who actually makes money from Formula 1, how this all works, and why car manufacturers and advertisers pay tens of millions of dollars to be associated with the brand.

[00:01:14] And we’ll finish with some thoughts about what comes next for Formula 1.

[00:01:19] We have got a lot to get through today, so let’s fire the starting gun and get this episode on the road.

[00:01:28] Let’s start with a few numbers, just to remind ourselves of quite how big Formula 1 actually is. For the Formula 1 fans out there, you might be thinking “duh”, but here’s a quick reminder of the scale of this sport.

[00:01:45] Every year there is a Formula One Championship. 

[00:01:49] Over the course of around 6 months, drivers from 10 different teams compete in races, called Grand Prixs, all over the world. 

[00:01:59] Last year there were meant to be 23 races, but only 22 actually took place, because of the pandemic.

[00:02:07] And it is a huge business. Globally there are 433 million people who watch Formula 1, and Formula 1 “the company” makes about $2 billion a year.

[00:02:22] And until relatively recently, until 2005 to be precise, total control lay with one man, an Englishman called Bernard Charles Ecclestone, known to everyone as Bernie Ecclestone.

[00:02:39] The story of the business of Formula One is inseparable from this man. For many, he was Formula One, so he is an important part of our story. 

[00:02:52] He was born in 1930, in a county in South East England called Suffolk. His father was a fisherman, and his mother a housewife. 

[00:03:04] Money was always tight at the Ecclestones, they weren’t a wealthy family, and a keen eye on reducing all possible costs seems to have been a characteristic that was to stay with Ecclestone in all his business dealings.

[00:03:19] From a young age he showed a talent for business, always engaging in little schemes and money-making activities. He wasn’t much interested in school, and as soon as he could leave school, he did, at the age of 16. 

[00:03:38] This was just at the end of the Second World War. Britain was in recovery mode, and Bernie Ecclestone was in money-making mode, a mode he hasn’t turned off to this day.

[00:03:51] He had developed a keen interest in motorbikes, and soon started scouring, or looking closely at the classifieds pages in newspapers to find parts of motorbikes that he could buy, and later sell at a profit.

[00:04:08] This led to him getting a job selling motorbikes, then owning a motorbike showroom, a place where people would buy motorbikes. He was developing a reputation as a shrewd businessman, and by the mid 1950s he owned a series of car and motorbike showrooms across the south of England.

[00:04:30] He was also a racing fanatic - he raced motorbikes and cars - but decided to focus on his business interests instead after some bad accidents.

[00:04:43] Then in 1972 he bought a small Formula One team called Brabham, and set about to change motorsport forever.

[00:04:55] Motorsport, or car racing, had existed since the 1920s, shortly after the invention of the car, but Formula One only came into existence in 1946. 

[00:05:08] The “formula” in Formula One, by the way, refers to the regulations of engine capacity, of how large a motor a car could have in it.

[00:05:19] For the first 35 years or so of Formula One’s existence, it was run really as quite an amateur organisation, it was far from the professional, billion-dollar outfit that it is today. 

[00:05:34] Teams would compete for prize money, but each racing team would negotiate its own agreements with the race providers and there was no requirement for a team to actually come to a race. 

[00:05:49] What this meant was that the number of teams in each Formula One championship was inconsistent, and sometimes the championships wouldn’t even be shown on television, as the TV networks didn’t know for sure how many cars would be racing, or even if the race would happen.

[00:06:10] In short, it was more of a hobby, an amateur sport than anything resembling a business.

[00:06:18] Bernie Ecclestone’s genius was to convince all of the teams in Formula One to sign an agreement, called The Concorde Agreement, that required them to take part in the race for the upcoming season.

[00:06:32] He could then go to TV networks all over the world and say “look, we know that this race is taking place and all of these teams will be competing. Would you like to pay to show it on your channel?”

[00:06:47] If the TV networks knew that a race was happening, that allowed them to plan ahead, it meant that advertisers were happier to pay for it, the number of television viewers started to increase, as did the amounts of money involved.

[00:07:04] Of course, Bernie Ecclestone didn’t do this out of the goodness of his own heart, he didn’t do it for free.

[00:07:11] His company, called Formula One Promotions and Administration, otherwise known as FOPA, took a percentage of the money that the TV networks paid, and the rest was distributed to the teams and an organisation called the Fédération Internationale de l’Automobile, the FIA, which was the governing body of the sport.

[00:07:35] This Concorde Agreement was signed in 1981, and over the course of the next 13 years Bernie Ecclestone became an even more powerful force in the world of Formula One.

[00:07:50] Then, in 1994, he seized the opportunity and bought the commercial rights for all of Formula One in exchange for paying the FIA $10 million a year.

[00:08:04] $10 million might sound like a lot of money, but for this Bernie Ecclestone received complete control of all of the commercial rights of Formula One. It was the best deal of his life.

[00:08:20] He negotiated agreements with TV companies all over the world, taking Formula One away from its historical base in Western Europe and opening it up in new markets in China and the Middle East.

[00:08:35] It grew and grew, and with it grew Mr Ecclestone’s bank balance

[00:08:41] By 1996, Bernie Ecclestone was the world’s best paid businessman, with a salary of a whopping $83.7 million. 

[00:08:54] Although he has now sold his Formula One shareholding, and is no longer in control of the company, his fortune is estimated at around $3.5 billion.

[00:09:06] So, that was the man behind it, or the man who got it all going, let’s move on to the actual business of it. 

[00:09:14] How does it work, who makes all the money [apart from Bernie Ecclestone], and how do they do it?

[00:09:21] Well, Formula One, the company, essentially makes money in three main ways.

[00:09:27] Firstly, there are what’s called “race fees”, or “promotor fees”. 

[00:09:33] See, Formula One doesn’t actually own the race tracks or have anything to do with them. Race tracks are typically built, owned and operated by people in the countries where the race takes place. 

[00:09:47] You might think that Formula One pays to use the race track, but it’s actually the other way around. The owner of the race track pays Formula One an average of around $30 million just to be able to hold a Grand Prix at their race track.

[00:10:07] The local partner obviously hopes to make their money back, through ticket sales and so on, but they need to invest a lot of money to pay the fee to Formula One.

[00:10:20] This makes up about 30% of the money that Formula One makes, by the way.

[00:10:26] Then there’s the money they get from broadcast rights, from selling the rights to TV companies to show the race on their channel. Formula One pays for the creation of the content - the cameras, cameramen and so on, but it then packages this up and sells it to TV channels around the world.

[00:10:48] This makes up around a third of the money it makes.

[00:10:53] Then another 15% is sponsorship and advertising. With over 400 million Formula One fans around the world, there are a lot of eyeballs on races, and so Formula One can command high prices to advertisers to sponsor it.

[00:11:12] And there’s another final category, a fourth category, of other miscellaneous revenue. Formula One has exclusive clubs and areas at each Grand Prix, it makes money from transporting cars and teams around the world, and all sorts of smaller things that don’t contribute much.

[00:11:33] Of course, Formula One [the company] doesn’t keep all of this money for itself. 

[00:11:38] It is essentially one giant competition, so it does need to pay out to the teams for taking part. The amount of money it pays to each team depends on factors such as their final position in the tournament, and how long the team has been part of the tournament.

[00:12:00] And as far as the teams go, the best performing teams can receive payments of hundreds of millions of dollars directly from Formula One. 

[00:12:11] Alongside the direct payments from Formula One, teams are often given money by car manufacturers. The Mercedes Formula One team, for example, gets around $80 million per season from the parent company of Mercedes, Daimler.

[00:12:28] On top of this the main other source of revenue for the teams is advertising and sponsorship. 

[00:12:35] Cigarette companies used to be the main sponsors for Formula One, but since they were banned from advertising in the sport in 2006, plenty of other companies have stepped up to the mark.

[00:12:48] Add this all up and some of the best Formula One teams can generate hundreds of millions of dollars per year, but this certainly doesn’t mean that they are making hundreds of millions, or even tens of millions of dollars in profit.

[00:13:05] Competing in a Formula One season is an incredibly expensive thing to do.

[00:13:10] Yes, there might only be one person in the car, but that person has a sky-high salary.

[00:13:17] The drivers, the people behind the wheel, are some of the best paid sportspeople on the planet. 

[00:13:25] Lewis Hamilton, the driver of the Mercedes-AMG Petronas F1 Team has an annual salary of 55 million dollars, and that’s before you start to take into account money he gets from sponsorships. That’s money that he is directly paid by his team. 

[00:13:43] Even the lowest paid Formula One driver, the 21-year-old Japanese driver Yuki Tsunoda, has an annual salary of $500,000. 

[00:13:54] Of course, the drivers are only a small part of a Formula One team, albeit the most visible part.

[00:14:02] Formula One teams can have one and a half thousand people on them, everything from engineers to mechanics.

[00:14:09] And of course there’s the car itself. A Formula One car costs around $15 million to produce, and transporting a car and a small army of team members around the world every week for half the year is an expensive thing to do.

[00:14:27] The reality is that Formula One teams, such as Mercedes, Ferrari, Red Bull and so on, don't typically make much money in profit, and are often loss-making

[00:14:40] They might make anywhere from $100 million to $400 million in revenue, but they almost all spend as much, meaning that actually owning a Formula One team is not normally a very profitable activity.

[00:14:56] Indeed, there’s a conventional view that if a Formula One team has ended up making a lot of money one year, they have been particularly profitable, then this isn’t a good sign, as it shows that they should have invested more money into the car itself, thereby giving it a better chance at victory the following year.

[00:15:18] So, why own a team then? Why do companies like Mercedes, Ferrari and Red Bull invest so much money into the sport every year if they aren’t seeing a financial return?

[00:15:32] Well, they clearly do believe that they are making a sizeable return on their investment, although it is an indirect one.

[00:15:41] For car companies like Mercedes and Ferrari, they believe that having a successful Formula One team helps them sell more road cars to consumers, to people like me and you. 

[00:15:54] If you or I see a Mercedes winning a Grand Prix, when it comes to choosing what car to buy next, we might just choose that car over another. 

[00:16:06] Indeed, Mercedes stated in 2020 that it believes it generates over $5 billion just in advertising value through having a Formula One team, so it certainly makes smart financial sense for them to do it.

[00:16:24] What’s more, there is a huge amount of money invested in research and development in Formula One, and this can be used by car manufacturers to improve their own road cars.

[00:16:36] And as for a company like Red Bull, it clearly believes that spending hundreds of millions of dollars a year on its Formula One team is a good investment, as its brand is associated with the fastest sport in the world. 

[00:16:53] Ultimately, it believes that by being associated with a successful Formula One team it will be able to sell more energy drinks. It’s really that simple.

[00:17:05] Coming to our final section of this episode, what does the future hold for the business of Formula One?

[00:17:13] Firstly, on a practical basis, the start of 2021 saw an update to the Concorde Agreement, the agreement outlining the rules of how teams compete, how money is distributed, and how Formula One works. The most important part of this was the introduction of a budget cap, meaning that no Formula One team can spend more than $145 million per year.

[00:17:43] That might sound like a lot of money, but big teams such as Mercedes, Ferrari and Red Bull can have budgets three times this.

[00:17:54] The idea behind the budget cap is to level the playing field, to make it more equal and harder for the bigger teams that are backed by car manufacturers to simply outspend all of the others, to spend more money than the other teams.

[00:18:12] This is effective now, and will last for five years, so it will certainly require a period of adjustment for the teams - they’ll simply have to get used to doing more with less.

[00:18:26] Now, looking further afield, there is another potential long term threat, or at least factor, that isn’t much talked about. One of the reasons that it’s thought to be so appealing as a sport to so many people is that billions of people around the world can drive a car, and do so every day.

[00:18:48] We know what it feels like to drive, and so we have an inherent understanding of, or perhaps we just think we understand, what it might feel like to drive incredibly fast, like a Formula 1 driver.

[00:19:03] For most other sports - whether that’s football, basketball, or rugby - there are significantly fewer people that play these sports frequently, and so it's harder to empathise with what the stars on the pitch are going through. That’s the theory anyway.

[00:19:22] So, how is this relevant to the future of the business of Formula One?

[00:19:27] Well, in a future of self-driving cars, where fewer people actually know how to drive a car and do it on a daily basis, how will this affect the appeal of motor sport?

[00:19:41] Will it make it less appealing, will it make it more so, or will it simply not have any effect?

[00:19:48] There seems to be little argument that Formula One cars will ever go driverless, that the cars will ever completely drive themselves, because one of the main attractions of the sport is the people in the driving seat, the human beings with their hands on the steering wheel

[00:20:07] A Grand Prix with 10 driverless cars racing around the track, and the fastest computer wins, is unlikely to be attractive in the near future.

[00:20:18] But it is an interesting question to think about the extent to which the appeal of Formula One comes from the shared experience of driving, and how this might change in a future where cars drive themselves.

[00:20:34] One area that suggests that this isn’t a threat at all is the rise of ESports, of racing computer games.

[00:20:44] Formula One is investing heavily in this area, and promoting the idea of “virtual” Formula One as an alternative, or at least companion to the original Formula One. 

[00:20:57] In 2017 Formula One launched the official Formula One esports tournament, and it is already followed by tens of millions of esports fans around the world.

[00:21:10] The idea here is that Formula One already has this very strong brand, and that allowing people to also participate through ESport is yet another way to monetise it, to make money from it. It also has the benefit that it can act as an excellent way to introduce people to the real, physical world Formula One - people who might never have become Formula One fans had they not first become hooked by the esports version. 

[00:21:43] If you have never watched Formula One ESports by the way, it actually looks incredibly realistic - you could certainly be forgiven for thinking it is real, the quality of the graphics and design is so good that it is hard to distinguish it from reality.

[00:22:01] So, Formula One, with all of its different arms and divisions, is a massive, massive business, worth just over thirty billion dollars. 

[00:22:12] But if you listen to any interviews with senior executives at Formula One, it’s clear that they believe there is a lot of room to grow.

[00:22:22] Formula One makes around $2 billion dollars per year from 400 million fans, so that’s about $5 per fan per year. 

[00:22:32] Contrast this to the NFL, the American Football league, this makes about $16 billion dollars from 100 million fans, so that’s $160 per fan. And the English Premier League makes $6 billion dollars from around 300 million fans, so that’s about $20 per fan.

[00:22:54] So, Formula One is a sport that anyone who has ever been in a car can empathise with, or at least understand. 

[00:23:03] It’s currently a sport with only ten teams, not much more than 20 races per year, and one without complicated rules, because it’s just a question of who passes the finish line first.

[00:23:16] When you think about all this, and if you read the Formula One Strategic Plan you’ll discover that the boss wants to - and I'm quoting directly here - “unleash the greatest racing spectacle on the planet” - then it’s not so hard to believe that Formula One is only just getting started.

[00:23:38] OK then, that is it for today's episode on The Business of Formula One.

[00:23:44] I hope it's been an interesting one, and that you've learnt something new.

[00:23:49] As always, I would love to know what you thought of this episode. 

[00:23:52] If you are one of the 400 or so million Formula One fans around the world, I would particularly like to know what you thought of this episode. What is so appealing about the sport for you?

[00:24:05] Is it the cars? The drivers? The actual race itself? How did you get into Formula One, and what keeps you glued to the screen during a Grand Prix?

[00:24:16] Let’s get this discussion started - you can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.

[00:24:27] You've been listening to English Learning for Curious Minds, by Leonardo English.

[00:24:33] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.

Continue learning

Get immediate access to a more interesting way of improving your English
Become a member
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[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English. 

[00:00:12] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.

[00:00:22] I'm Alastair Budge, and today we are going to be talking about The Business of Formula 1.

[00:00:29] It is a sport that has gone from being only followed by a handful of amateur fans to one followed by 400 million people globally, and it is one of the fastest growing sports in the world. 

[00:00:44] So, in this episode we are going to look at the business of Formula 1.

[00:00:49] We’ll start by looking at the history of the sport, how it went from amateur to professional, and who got fabulously wealthy along the way.

[00:00:59] We’ll then go on to look at who actually makes money from Formula 1, how this all works, and why car manufacturers and advertisers pay tens of millions of dollars to be associated with the brand.

[00:01:14] And we’ll finish with some thoughts about what comes next for Formula 1.

[00:01:19] We have got a lot to get through today, so let’s fire the starting gun and get this episode on the road.

[00:01:28] Let’s start with a few numbers, just to remind ourselves of quite how big Formula 1 actually is. For the Formula 1 fans out there, you might be thinking “duh”, but here’s a quick reminder of the scale of this sport.

[00:01:45] Every year there is a Formula One Championship. 

[00:01:49] Over the course of around 6 months, drivers from 10 different teams compete in races, called Grand Prixs, all over the world. 

[00:01:59] Last year there were meant to be 23 races, but only 22 actually took place, because of the pandemic.

[00:02:07] And it is a huge business. Globally there are 433 million people who watch Formula 1, and Formula 1 “the company” makes about $2 billion a year.

[00:02:22] And until relatively recently, until 2005 to be precise, total control lay with one man, an Englishman called Bernard Charles Ecclestone, known to everyone as Bernie Ecclestone.

[00:02:39] The story of the business of Formula One is inseparable from this man. For many, he was Formula One, so he is an important part of our story. 

[00:02:52] He was born in 1930, in a county in South East England called Suffolk. His father was a fisherman, and his mother a housewife. 

[00:03:04] Money was always tight at the Ecclestones, they weren’t a wealthy family, and a keen eye on reducing all possible costs seems to have been a characteristic that was to stay with Ecclestone in all his business dealings.

[00:03:19] From a young age he showed a talent for business, always engaging in little schemes and money-making activities. He wasn’t much interested in school, and as soon as he could leave school, he did, at the age of 16. 

[00:03:38] This was just at the end of the Second World War. Britain was in recovery mode, and Bernie Ecclestone was in money-making mode, a mode he hasn’t turned off to this day.

[00:03:51] He had developed a keen interest in motorbikes, and soon started scouring, or looking closely at the classifieds pages in newspapers to find parts of motorbikes that he could buy, and later sell at a profit.

[00:04:08] This led to him getting a job selling motorbikes, then owning a motorbike showroom, a place where people would buy motorbikes. He was developing a reputation as a shrewd businessman, and by the mid 1950s he owned a series of car and motorbike showrooms across the south of England.

[00:04:30] He was also a racing fanatic - he raced motorbikes and cars - but decided to focus on his business interests instead after some bad accidents.

[00:04:43] Then in 1972 he bought a small Formula One team called Brabham, and set about to change motorsport forever.

[00:04:55] Motorsport, or car racing, had existed since the 1920s, shortly after the invention of the car, but Formula One only came into existence in 1946. 

[00:05:08] The “formula” in Formula One, by the way, refers to the regulations of engine capacity, of how large a motor a car could have in it.

[00:05:19] For the first 35 years or so of Formula One’s existence, it was run really as quite an amateur organisation, it was far from the professional, billion-dollar outfit that it is today. 

[00:05:34] Teams would compete for prize money, but each racing team would negotiate its own agreements with the race providers and there was no requirement for a team to actually come to a race. 

[00:05:49] What this meant was that the number of teams in each Formula One championship was inconsistent, and sometimes the championships wouldn’t even be shown on television, as the TV networks didn’t know for sure how many cars would be racing, or even if the race would happen.

[00:06:10] In short, it was more of a hobby, an amateur sport than anything resembling a business.

[00:06:18] Bernie Ecclestone’s genius was to convince all of the teams in Formula One to sign an agreement, called The Concorde Agreement, that required them to take part in the race for the upcoming season.

[00:06:32] He could then go to TV networks all over the world and say “look, we know that this race is taking place and all of these teams will be competing. Would you like to pay to show it on your channel?”

[00:06:47] If the TV networks knew that a race was happening, that allowed them to plan ahead, it meant that advertisers were happier to pay for it, the number of television viewers started to increase, as did the amounts of money involved.

[00:07:04] Of course, Bernie Ecclestone didn’t do this out of the goodness of his own heart, he didn’t do it for free.

[00:07:11] His company, called Formula One Promotions and Administration, otherwise known as FOPA, took a percentage of the money that the TV networks paid, and the rest was distributed to the teams and an organisation called the Fédération Internationale de l’Automobile, the FIA, which was the governing body of the sport.

[00:07:35] This Concorde Agreement was signed in 1981, and over the course of the next 13 years Bernie Ecclestone became an even more powerful force in the world of Formula One.

[00:07:50] Then, in 1994, he seized the opportunity and bought the commercial rights for all of Formula One in exchange for paying the FIA $10 million a year.

[00:08:04] $10 million might sound like a lot of money, but for this Bernie Ecclestone received complete control of all of the commercial rights of Formula One. It was the best deal of his life.

[00:08:20] He negotiated agreements with TV companies all over the world, taking Formula One away from its historical base in Western Europe and opening it up in new markets in China and the Middle East.

[00:08:35] It grew and grew, and with it grew Mr Ecclestone’s bank balance

[00:08:41] By 1996, Bernie Ecclestone was the world’s best paid businessman, with a salary of a whopping $83.7 million. 

[00:08:54] Although he has now sold his Formula One shareholding, and is no longer in control of the company, his fortune is estimated at around $3.5 billion.

[00:09:06] So, that was the man behind it, or the man who got it all going, let’s move on to the actual business of it. 

[00:09:14] How does it work, who makes all the money [apart from Bernie Ecclestone], and how do they do it?

[00:09:21] Well, Formula One, the company, essentially makes money in three main ways.

[00:09:27] Firstly, there are what’s called “race fees”, or “promotor fees”. 

[00:09:33] See, Formula One doesn’t actually own the race tracks or have anything to do with them. Race tracks are typically built, owned and operated by people in the countries where the race takes place. 

[00:09:47] You might think that Formula One pays to use the race track, but it’s actually the other way around. The owner of the race track pays Formula One an average of around $30 million just to be able to hold a Grand Prix at their race track.

[00:10:07] The local partner obviously hopes to make their money back, through ticket sales and so on, but they need to invest a lot of money to pay the fee to Formula One.

[00:10:20] This makes up about 30% of the money that Formula One makes, by the way.

[00:10:26] Then there’s the money they get from broadcast rights, from selling the rights to TV companies to show the race on their channel. Formula One pays for the creation of the content - the cameras, cameramen and so on, but it then packages this up and sells it to TV channels around the world.

[00:10:48] This makes up around a third of the money it makes.

[00:10:53] Then another 15% is sponsorship and advertising. With over 400 million Formula One fans around the world, there are a lot of eyeballs on races, and so Formula One can command high prices to advertisers to sponsor it.

[00:11:12] And there’s another final category, a fourth category, of other miscellaneous revenue. Formula One has exclusive clubs and areas at each Grand Prix, it makes money from transporting cars and teams around the world, and all sorts of smaller things that don’t contribute much.

[00:11:33] Of course, Formula One [the company] doesn’t keep all of this money for itself. 

[00:11:38] It is essentially one giant competition, so it does need to pay out to the teams for taking part. The amount of money it pays to each team depends on factors such as their final position in the tournament, and how long the team has been part of the tournament.

[00:12:00] And as far as the teams go, the best performing teams can receive payments of hundreds of millions of dollars directly from Formula One. 

[00:12:11] Alongside the direct payments from Formula One, teams are often given money by car manufacturers. The Mercedes Formula One team, for example, gets around $80 million per season from the parent company of Mercedes, Daimler.

[00:12:28] On top of this the main other source of revenue for the teams is advertising and sponsorship. 

[00:12:35] Cigarette companies used to be the main sponsors for Formula One, but since they were banned from advertising in the sport in 2006, plenty of other companies have stepped up to the mark.

[00:12:48] Add this all up and some of the best Formula One teams can generate hundreds of millions of dollars per year, but this certainly doesn’t mean that they are making hundreds of millions, or even tens of millions of dollars in profit.

[00:13:05] Competing in a Formula One season is an incredibly expensive thing to do.

[00:13:10] Yes, there might only be one person in the car, but that person has a sky-high salary.

[00:13:17] The drivers, the people behind the wheel, are some of the best paid sportspeople on the planet. 

[00:13:25] Lewis Hamilton, the driver of the Mercedes-AMG Petronas F1 Team has an annual salary of 55 million dollars, and that’s before you start to take into account money he gets from sponsorships. That’s money that he is directly paid by his team. 

[00:13:43] Even the lowest paid Formula One driver, the 21-year-old Japanese driver Yuki Tsunoda, has an annual salary of $500,000. 

[00:13:54] Of course, the drivers are only a small part of a Formula One team, albeit the most visible part.

[00:14:02] Formula One teams can have one and a half thousand people on them, everything from engineers to mechanics.

[00:14:09] And of course there’s the car itself. A Formula One car costs around $15 million to produce, and transporting a car and a small army of team members around the world every week for half the year is an expensive thing to do.

[00:14:27] The reality is that Formula One teams, such as Mercedes, Ferrari, Red Bull and so on, don't typically make much money in profit, and are often loss-making

[00:14:40] They might make anywhere from $100 million to $400 million in revenue, but they almost all spend as much, meaning that actually owning a Formula One team is not normally a very profitable activity.

[00:14:56] Indeed, there’s a conventional view that if a Formula One team has ended up making a lot of money one year, they have been particularly profitable, then this isn’t a good sign, as it shows that they should have invested more money into the car itself, thereby giving it a better chance at victory the following year.

[00:15:18] So, why own a team then? Why do companies like Mercedes, Ferrari and Red Bull invest so much money into the sport every year if they aren’t seeing a financial return?

[00:15:32] Well, they clearly do believe that they are making a sizeable return on their investment, although it is an indirect one.

[00:15:41] For car companies like Mercedes and Ferrari, they believe that having a successful Formula One team helps them sell more road cars to consumers, to people like me and you. 

[00:15:54] If you or I see a Mercedes winning a Grand Prix, when it comes to choosing what car to buy next, we might just choose that car over another. 

[00:16:06] Indeed, Mercedes stated in 2020 that it believes it generates over $5 billion just in advertising value through having a Formula One team, so it certainly makes smart financial sense for them to do it.

[00:16:24] What’s more, there is a huge amount of money invested in research and development in Formula One, and this can be used by car manufacturers to improve their own road cars.

[00:16:36] And as for a company like Red Bull, it clearly believes that spending hundreds of millions of dollars a year on its Formula One team is a good investment, as its brand is associated with the fastest sport in the world. 

[00:16:53] Ultimately, it believes that by being associated with a successful Formula One team it will be able to sell more energy drinks. It’s really that simple.

[00:17:05] Coming to our final section of this episode, what does the future hold for the business of Formula One?

[00:17:13] Firstly, on a practical basis, the start of 2021 saw an update to the Concorde Agreement, the agreement outlining the rules of how teams compete, how money is distributed, and how Formula One works. The most important part of this was the introduction of a budget cap, meaning that no Formula One team can spend more than $145 million per year.

[00:17:43] That might sound like a lot of money, but big teams such as Mercedes, Ferrari and Red Bull can have budgets three times this.

[00:17:54] The idea behind the budget cap is to level the playing field, to make it more equal and harder for the bigger teams that are backed by car manufacturers to simply outspend all of the others, to spend more money than the other teams.

[00:18:12] This is effective now, and will last for five years, so it will certainly require a period of adjustment for the teams - they’ll simply have to get used to doing more with less.

[00:18:26] Now, looking further afield, there is another potential long term threat, or at least factor, that isn’t much talked about. One of the reasons that it’s thought to be so appealing as a sport to so many people is that billions of people around the world can drive a car, and do so every day.

[00:18:48] We know what it feels like to drive, and so we have an inherent understanding of, or perhaps we just think we understand, what it might feel like to drive incredibly fast, like a Formula 1 driver.

[00:19:03] For most other sports - whether that’s football, basketball, or rugby - there are significantly fewer people that play these sports frequently, and so it's harder to empathise with what the stars on the pitch are going through. That’s the theory anyway.

[00:19:22] So, how is this relevant to the future of the business of Formula One?

[00:19:27] Well, in a future of self-driving cars, where fewer people actually know how to drive a car and do it on a daily basis, how will this affect the appeal of motor sport?

[00:19:41] Will it make it less appealing, will it make it more so, or will it simply not have any effect?

[00:19:48] There seems to be little argument that Formula One cars will ever go driverless, that the cars will ever completely drive themselves, because one of the main attractions of the sport is the people in the driving seat, the human beings with their hands on the steering wheel

[00:20:07] A Grand Prix with 10 driverless cars racing around the track, and the fastest computer wins, is unlikely to be attractive in the near future.

[00:20:18] But it is an interesting question to think about the extent to which the appeal of Formula One comes from the shared experience of driving, and how this might change in a future where cars drive themselves.

[00:20:34] One area that suggests that this isn’t a threat at all is the rise of ESports, of racing computer games.

[00:20:44] Formula One is investing heavily in this area, and promoting the idea of “virtual” Formula One as an alternative, or at least companion to the original Formula One. 

[00:20:57] In 2017 Formula One launched the official Formula One esports tournament, and it is already followed by tens of millions of esports fans around the world.

[00:21:10] The idea here is that Formula One already has this very strong brand, and that allowing people to also participate through ESport is yet another way to monetise it, to make money from it. It also has the benefit that it can act as an excellent way to introduce people to the real, physical world Formula One - people who might never have become Formula One fans had they not first become hooked by the esports version. 

[00:21:43] If you have never watched Formula One ESports by the way, it actually looks incredibly realistic - you could certainly be forgiven for thinking it is real, the quality of the graphics and design is so good that it is hard to distinguish it from reality.

[00:22:01] So, Formula One, with all of its different arms and divisions, is a massive, massive business, worth just over thirty billion dollars. 

[00:22:12] But if you listen to any interviews with senior executives at Formula One, it’s clear that they believe there is a lot of room to grow.

[00:22:22] Formula One makes around $2 billion dollars per year from 400 million fans, so that’s about $5 per fan per year. 

[00:22:32] Contrast this to the NFL, the American Football league, this makes about $16 billion dollars from 100 million fans, so that’s $160 per fan. And the English Premier League makes $6 billion dollars from around 300 million fans, so that’s about $20 per fan.

[00:22:54] So, Formula One is a sport that anyone who has ever been in a car can empathise with, or at least understand. 

[00:23:03] It’s currently a sport with only ten teams, not much more than 20 races per year, and one without complicated rules, because it’s just a question of who passes the finish line first.

[00:23:16] When you think about all this, and if you read the Formula One Strategic Plan you’ll discover that the boss wants to - and I'm quoting directly here - “unleash the greatest racing spectacle on the planet” - then it’s not so hard to believe that Formula One is only just getting started.

[00:23:38] OK then, that is it for today's episode on The Business of Formula One.

[00:23:44] I hope it's been an interesting one, and that you've learnt something new.

[00:23:49] As always, I would love to know what you thought of this episode. 

[00:23:52] If you are one of the 400 or so million Formula One fans around the world, I would particularly like to know what you thought of this episode. What is so appealing about the sport for you?

[00:24:05] Is it the cars? The drivers? The actual race itself? How did you get into Formula One, and what keeps you glued to the screen during a Grand Prix?

[00:24:16] Let’s get this discussion started - you can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.

[00:24:27] You've been listening to English Learning for Curious Minds, by Leonardo English.

[00:24:33] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.

[00:00:00] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English. 

[00:00:12] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.

[00:00:22] I'm Alastair Budge, and today we are going to be talking about The Business of Formula 1.

[00:00:29] It is a sport that has gone from being only followed by a handful of amateur fans to one followed by 400 million people globally, and it is one of the fastest growing sports in the world. 

[00:00:44] So, in this episode we are going to look at the business of Formula 1.

[00:00:49] We’ll start by looking at the history of the sport, how it went from amateur to professional, and who got fabulously wealthy along the way.

[00:00:59] We’ll then go on to look at who actually makes money from Formula 1, how this all works, and why car manufacturers and advertisers pay tens of millions of dollars to be associated with the brand.

[00:01:14] And we’ll finish with some thoughts about what comes next for Formula 1.

[00:01:19] We have got a lot to get through today, so let’s fire the starting gun and get this episode on the road.

[00:01:28] Let’s start with a few numbers, just to remind ourselves of quite how big Formula 1 actually is. For the Formula 1 fans out there, you might be thinking “duh”, but here’s a quick reminder of the scale of this sport.

[00:01:45] Every year there is a Formula One Championship. 

[00:01:49] Over the course of around 6 months, drivers from 10 different teams compete in races, called Grand Prixs, all over the world. 

[00:01:59] Last year there were meant to be 23 races, but only 22 actually took place, because of the pandemic.

[00:02:07] And it is a huge business. Globally there are 433 million people who watch Formula 1, and Formula 1 “the company” makes about $2 billion a year.

[00:02:22] And until relatively recently, until 2005 to be precise, total control lay with one man, an Englishman called Bernard Charles Ecclestone, known to everyone as Bernie Ecclestone.

[00:02:39] The story of the business of Formula One is inseparable from this man. For many, he was Formula One, so he is an important part of our story. 

[00:02:52] He was born in 1930, in a county in South East England called Suffolk. His father was a fisherman, and his mother a housewife. 

[00:03:04] Money was always tight at the Ecclestones, they weren’t a wealthy family, and a keen eye on reducing all possible costs seems to have been a characteristic that was to stay with Ecclestone in all his business dealings.

[00:03:19] From a young age he showed a talent for business, always engaging in little schemes and money-making activities. He wasn’t much interested in school, and as soon as he could leave school, he did, at the age of 16. 

[00:03:38] This was just at the end of the Second World War. Britain was in recovery mode, and Bernie Ecclestone was in money-making mode, a mode he hasn’t turned off to this day.

[00:03:51] He had developed a keen interest in motorbikes, and soon started scouring, or looking closely at the classifieds pages in newspapers to find parts of motorbikes that he could buy, and later sell at a profit.

[00:04:08] This led to him getting a job selling motorbikes, then owning a motorbike showroom, a place where people would buy motorbikes. He was developing a reputation as a shrewd businessman, and by the mid 1950s he owned a series of car and motorbike showrooms across the south of England.

[00:04:30] He was also a racing fanatic - he raced motorbikes and cars - but decided to focus on his business interests instead after some bad accidents.

[00:04:43] Then in 1972 he bought a small Formula One team called Brabham, and set about to change motorsport forever.

[00:04:55] Motorsport, or car racing, had existed since the 1920s, shortly after the invention of the car, but Formula One only came into existence in 1946. 

[00:05:08] The “formula” in Formula One, by the way, refers to the regulations of engine capacity, of how large a motor a car could have in it.

[00:05:19] For the first 35 years or so of Formula One’s existence, it was run really as quite an amateur organisation, it was far from the professional, billion-dollar outfit that it is today. 

[00:05:34] Teams would compete for prize money, but each racing team would negotiate its own agreements with the race providers and there was no requirement for a team to actually come to a race. 

[00:05:49] What this meant was that the number of teams in each Formula One championship was inconsistent, and sometimes the championships wouldn’t even be shown on television, as the TV networks didn’t know for sure how many cars would be racing, or even if the race would happen.

[00:06:10] In short, it was more of a hobby, an amateur sport than anything resembling a business.

[00:06:18] Bernie Ecclestone’s genius was to convince all of the teams in Formula One to sign an agreement, called The Concorde Agreement, that required them to take part in the race for the upcoming season.

[00:06:32] He could then go to TV networks all over the world and say “look, we know that this race is taking place and all of these teams will be competing. Would you like to pay to show it on your channel?”

[00:06:47] If the TV networks knew that a race was happening, that allowed them to plan ahead, it meant that advertisers were happier to pay for it, the number of television viewers started to increase, as did the amounts of money involved.

[00:07:04] Of course, Bernie Ecclestone didn’t do this out of the goodness of his own heart, he didn’t do it for free.

[00:07:11] His company, called Formula One Promotions and Administration, otherwise known as FOPA, took a percentage of the money that the TV networks paid, and the rest was distributed to the teams and an organisation called the Fédération Internationale de l’Automobile, the FIA, which was the governing body of the sport.

[00:07:35] This Concorde Agreement was signed in 1981, and over the course of the next 13 years Bernie Ecclestone became an even more powerful force in the world of Formula One.

[00:07:50] Then, in 1994, he seized the opportunity and bought the commercial rights for all of Formula One in exchange for paying the FIA $10 million a year.

[00:08:04] $10 million might sound like a lot of money, but for this Bernie Ecclestone received complete control of all of the commercial rights of Formula One. It was the best deal of his life.

[00:08:20] He negotiated agreements with TV companies all over the world, taking Formula One away from its historical base in Western Europe and opening it up in new markets in China and the Middle East.

[00:08:35] It grew and grew, and with it grew Mr Ecclestone’s bank balance

[00:08:41] By 1996, Bernie Ecclestone was the world’s best paid businessman, with a salary of a whopping $83.7 million. 

[00:08:54] Although he has now sold his Formula One shareholding, and is no longer in control of the company, his fortune is estimated at around $3.5 billion.

[00:09:06] So, that was the man behind it, or the man who got it all going, let’s move on to the actual business of it. 

[00:09:14] How does it work, who makes all the money [apart from Bernie Ecclestone], and how do they do it?

[00:09:21] Well, Formula One, the company, essentially makes money in three main ways.

[00:09:27] Firstly, there are what’s called “race fees”, or “promotor fees”. 

[00:09:33] See, Formula One doesn’t actually own the race tracks or have anything to do with them. Race tracks are typically built, owned and operated by people in the countries where the race takes place. 

[00:09:47] You might think that Formula One pays to use the race track, but it’s actually the other way around. The owner of the race track pays Formula One an average of around $30 million just to be able to hold a Grand Prix at their race track.

[00:10:07] The local partner obviously hopes to make their money back, through ticket sales and so on, but they need to invest a lot of money to pay the fee to Formula One.

[00:10:20] This makes up about 30% of the money that Formula One makes, by the way.

[00:10:26] Then there’s the money they get from broadcast rights, from selling the rights to TV companies to show the race on their channel. Formula One pays for the creation of the content - the cameras, cameramen and so on, but it then packages this up and sells it to TV channels around the world.

[00:10:48] This makes up around a third of the money it makes.

[00:10:53] Then another 15% is sponsorship and advertising. With over 400 million Formula One fans around the world, there are a lot of eyeballs on races, and so Formula One can command high prices to advertisers to sponsor it.

[00:11:12] And there’s another final category, a fourth category, of other miscellaneous revenue. Formula One has exclusive clubs and areas at each Grand Prix, it makes money from transporting cars and teams around the world, and all sorts of smaller things that don’t contribute much.

[00:11:33] Of course, Formula One [the company] doesn’t keep all of this money for itself. 

[00:11:38] It is essentially one giant competition, so it does need to pay out to the teams for taking part. The amount of money it pays to each team depends on factors such as their final position in the tournament, and how long the team has been part of the tournament.

[00:12:00] And as far as the teams go, the best performing teams can receive payments of hundreds of millions of dollars directly from Formula One. 

[00:12:11] Alongside the direct payments from Formula One, teams are often given money by car manufacturers. The Mercedes Formula One team, for example, gets around $80 million per season from the parent company of Mercedes, Daimler.

[00:12:28] On top of this the main other source of revenue for the teams is advertising and sponsorship. 

[00:12:35] Cigarette companies used to be the main sponsors for Formula One, but since they were banned from advertising in the sport in 2006, plenty of other companies have stepped up to the mark.

[00:12:48] Add this all up and some of the best Formula One teams can generate hundreds of millions of dollars per year, but this certainly doesn’t mean that they are making hundreds of millions, or even tens of millions of dollars in profit.

[00:13:05] Competing in a Formula One season is an incredibly expensive thing to do.

[00:13:10] Yes, there might only be one person in the car, but that person has a sky-high salary.

[00:13:17] The drivers, the people behind the wheel, are some of the best paid sportspeople on the planet. 

[00:13:25] Lewis Hamilton, the driver of the Mercedes-AMG Petronas F1 Team has an annual salary of 55 million dollars, and that’s before you start to take into account money he gets from sponsorships. That’s money that he is directly paid by his team. 

[00:13:43] Even the lowest paid Formula One driver, the 21-year-old Japanese driver Yuki Tsunoda, has an annual salary of $500,000. 

[00:13:54] Of course, the drivers are only a small part of a Formula One team, albeit the most visible part.

[00:14:02] Formula One teams can have one and a half thousand people on them, everything from engineers to mechanics.

[00:14:09] And of course there’s the car itself. A Formula One car costs around $15 million to produce, and transporting a car and a small army of team members around the world every week for half the year is an expensive thing to do.

[00:14:27] The reality is that Formula One teams, such as Mercedes, Ferrari, Red Bull and so on, don't typically make much money in profit, and are often loss-making

[00:14:40] They might make anywhere from $100 million to $400 million in revenue, but they almost all spend as much, meaning that actually owning a Formula One team is not normally a very profitable activity.

[00:14:56] Indeed, there’s a conventional view that if a Formula One team has ended up making a lot of money one year, they have been particularly profitable, then this isn’t a good sign, as it shows that they should have invested more money into the car itself, thereby giving it a better chance at victory the following year.

[00:15:18] So, why own a team then? Why do companies like Mercedes, Ferrari and Red Bull invest so much money into the sport every year if they aren’t seeing a financial return?

[00:15:32] Well, they clearly do believe that they are making a sizeable return on their investment, although it is an indirect one.

[00:15:41] For car companies like Mercedes and Ferrari, they believe that having a successful Formula One team helps them sell more road cars to consumers, to people like me and you. 

[00:15:54] If you or I see a Mercedes winning a Grand Prix, when it comes to choosing what car to buy next, we might just choose that car over another. 

[00:16:06] Indeed, Mercedes stated in 2020 that it believes it generates over $5 billion just in advertising value through having a Formula One team, so it certainly makes smart financial sense for them to do it.

[00:16:24] What’s more, there is a huge amount of money invested in research and development in Formula One, and this can be used by car manufacturers to improve their own road cars.

[00:16:36] And as for a company like Red Bull, it clearly believes that spending hundreds of millions of dollars a year on its Formula One team is a good investment, as its brand is associated with the fastest sport in the world. 

[00:16:53] Ultimately, it believes that by being associated with a successful Formula One team it will be able to sell more energy drinks. It’s really that simple.

[00:17:05] Coming to our final section of this episode, what does the future hold for the business of Formula One?

[00:17:13] Firstly, on a practical basis, the start of 2021 saw an update to the Concorde Agreement, the agreement outlining the rules of how teams compete, how money is distributed, and how Formula One works. The most important part of this was the introduction of a budget cap, meaning that no Formula One team can spend more than $145 million per year.

[00:17:43] That might sound like a lot of money, but big teams such as Mercedes, Ferrari and Red Bull can have budgets three times this.

[00:17:54] The idea behind the budget cap is to level the playing field, to make it more equal and harder for the bigger teams that are backed by car manufacturers to simply outspend all of the others, to spend more money than the other teams.

[00:18:12] This is effective now, and will last for five years, so it will certainly require a period of adjustment for the teams - they’ll simply have to get used to doing more with less.

[00:18:26] Now, looking further afield, there is another potential long term threat, or at least factor, that isn’t much talked about. One of the reasons that it’s thought to be so appealing as a sport to so many people is that billions of people around the world can drive a car, and do so every day.

[00:18:48] We know what it feels like to drive, and so we have an inherent understanding of, or perhaps we just think we understand, what it might feel like to drive incredibly fast, like a Formula 1 driver.

[00:19:03] For most other sports - whether that’s football, basketball, or rugby - there are significantly fewer people that play these sports frequently, and so it's harder to empathise with what the stars on the pitch are going through. That’s the theory anyway.

[00:19:22] So, how is this relevant to the future of the business of Formula One?

[00:19:27] Well, in a future of self-driving cars, where fewer people actually know how to drive a car and do it on a daily basis, how will this affect the appeal of motor sport?

[00:19:41] Will it make it less appealing, will it make it more so, or will it simply not have any effect?

[00:19:48] There seems to be little argument that Formula One cars will ever go driverless, that the cars will ever completely drive themselves, because one of the main attractions of the sport is the people in the driving seat, the human beings with their hands on the steering wheel

[00:20:07] A Grand Prix with 10 driverless cars racing around the track, and the fastest computer wins, is unlikely to be attractive in the near future.

[00:20:18] But it is an interesting question to think about the extent to which the appeal of Formula One comes from the shared experience of driving, and how this might change in a future where cars drive themselves.

[00:20:34] One area that suggests that this isn’t a threat at all is the rise of ESports, of racing computer games.

[00:20:44] Formula One is investing heavily in this area, and promoting the idea of “virtual” Formula One as an alternative, or at least companion to the original Formula One. 

[00:20:57] In 2017 Formula One launched the official Formula One esports tournament, and it is already followed by tens of millions of esports fans around the world.

[00:21:10] The idea here is that Formula One already has this very strong brand, and that allowing people to also participate through ESport is yet another way to monetise it, to make money from it. It also has the benefit that it can act as an excellent way to introduce people to the real, physical world Formula One - people who might never have become Formula One fans had they not first become hooked by the esports version. 

[00:21:43] If you have never watched Formula One ESports by the way, it actually looks incredibly realistic - you could certainly be forgiven for thinking it is real, the quality of the graphics and design is so good that it is hard to distinguish it from reality.

[00:22:01] So, Formula One, with all of its different arms and divisions, is a massive, massive business, worth just over thirty billion dollars. 

[00:22:12] But if you listen to any interviews with senior executives at Formula One, it’s clear that they believe there is a lot of room to grow.

[00:22:22] Formula One makes around $2 billion dollars per year from 400 million fans, so that’s about $5 per fan per year. 

[00:22:32] Contrast this to the NFL, the American Football league, this makes about $16 billion dollars from 100 million fans, so that’s $160 per fan. And the English Premier League makes $6 billion dollars from around 300 million fans, so that’s about $20 per fan.

[00:22:54] So, Formula One is a sport that anyone who has ever been in a car can empathise with, or at least understand. 

[00:23:03] It’s currently a sport with only ten teams, not much more than 20 races per year, and one without complicated rules, because it’s just a question of who passes the finish line first.

[00:23:16] When you think about all this, and if you read the Formula One Strategic Plan you’ll discover that the boss wants to - and I'm quoting directly here - “unleash the greatest racing spectacle on the planet” - then it’s not so hard to believe that Formula One is only just getting started.

[00:23:38] OK then, that is it for today's episode on The Business of Formula One.

[00:23:44] I hope it's been an interesting one, and that you've learnt something new.

[00:23:49] As always, I would love to know what you thought of this episode. 

[00:23:52] If you are one of the 400 or so million Formula One fans around the world, I would particularly like to know what you thought of this episode. What is so appealing about the sport for you?

[00:24:05] Is it the cars? The drivers? The actual race itself? How did you get into Formula One, and what keeps you glued to the screen during a Grand Prix?

[00:24:16] Let’s get this discussion started - you can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.

[00:24:27] You've been listening to English Learning for Curious Minds, by Leonardo English.

[00:24:33] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.