• Formula Money

Formula One's road map for the future

April 26, 2011

There aren't many aspects of Formula One which haven't changed since the early 1980s but one crucial part of its governance has remained the same. It is known as the Concorde Agreement - a lengthy contract which commits the teams to race in the sport and covers all aspects of how it is run from the location of races to the amount of prize money paid to the teams. The current version of the Concorde expires at the end of next year so negotiations over the next one will shift into top gear this season. These discussions have been public bitter affairs in the past but there is good reason why things will be different this time.

Modern day F1 literally wouldn't exist if it wasn't for the Concorde Agreement. Prior to it being signed F1 races ran as ad hoc, almost amateur, events. Each team made separate deals with each event promoter and television coverage was sporadic since races could be cancelled at the last moment if there were not enough cars to fill the grid. F1's boss Bernie Ecclestone saw that the big money would come from TV so he convinced the teams to sign a contract committing them to race. This was known as the Concorde Agreement since it was signed in the headquarters of F1's governing body the Fédération Internationale de l'Automobile (FIA) on the Place de la Concorde in Paris.

Ecclestone took the contract to TV companies who could then guarantee coverage. His company Formula One Promotions and Administration (FOPA) negotiated the deals on behalf of the teams and took a share of the proceeds with the remainder going to the teams and the FIA. This split has changed several times since 1981 and it is always at the heart of the negotiations over a new version of the contract.

For years the teams' sole share of F1's spoils was 47% of the revenue from television rights which were worth $450m last year according to F1's trade guide Formula Money. The teams' 47% share translated to around 25% of F1's overall profit. All the revenue from other sources, such as trackside advertising, race hosting fees and corporate hospitality, went directly to F1's rights holding company, now called Delta Topco and owned by finance firm CVC.

For well over a decade the teams used the threat of setting up a rival series to exert pressure on Ecclestone and increase their share of its profits. In 2001 they even set up a company in the Netherlands called GPWC Holdings to run a proposed Grand Prix World Championship series. However, it never came to be since Ecclestone tempted Ferrari away from the organisation in 2005 by paying the team $100m to stay in F1. The other teams had to wait a bit longer to get what they wanted.

In 2006 Ecclestone finally agreed to give them 50% of F1's profits from its entire revenue stream but the commercial terms did not come into full effect until last year. The deal doubled the teams' take and, according to the accounts of Delta Topco's subsidiaries, the prize money increased from $342m in 2007 to $658m last year. It was a huge boost but the teams' threats didn't stop.

After months of disputes with the FIA over its plan to introduce a £40m budget cap in 2010, the teams made the surprising announcement in June 2009 that they would set up a rival series the following year. Their press release trumpeted that "the major drivers, stars, brands, sponsors, promoters and companies historically associated with the highest level of motorsport will all feature in this new series." However, it was never to be.

Just six days after their announcement the teams put an end to their plans and agreed to race in F1 from 2010 instead. Two months later they signed an extension to the Concorde Agreement and although there was peace in our time it was only brief.

In January Ferrari president Luca di Montezemolo suggested that there could still be a rival series if the amount paid to the teams does not increase. "Theoretically-speaking, we can have one of three alternatives," he said explaining that "one is that we renew with CVC, but only with better financial conditions. For how many years, we have to discuss, but I am in favour of many years because I don't want to be back every three or four years. So, assume five-to-eight years...The next option is that we find a different [rights promotion] company and start discussions. Third, we can establish our own company."

Ecclestone's response to the threat was brutal: "it's all nonsense," he said adding that "they're not going to break away. They've tried it all before. Luca's a lovely guy but he likes to say these things and then he forgets what he is saying." However, other teams seem to have followed Ferrari's lead.

Documents recently filed by Mercedes Grand Prix make specific reference to the Formula One Teams Association (FOTA) running its own rival series to F1. The definitions of the terms used in the documents state that: "Constructors' Championship" means the Fédération Internationale de l'Automobile Formula One World Constructors' Championship (or any alternative or Formula One Teams Association substitute championship of the same or similar calibre).

Clearly there would be no point in Mercedes including this in the definitions if it didn't think this was a possibility in future. It makes sense that Mercedes hasn't given up hope of a rival series since it was one of the leading lights of the GPWC. However, there is very little chance that the public will find out more about it beyond the details in company documents.

The teams' previous short-lived attempt at a rival series left the public a little jaded with the supposed conviction behind their proposals. So, in the unlikely event that the teams once again try to publicly use the threat of a rival series to increase their share of the spoils, it would make sense for them to wait until they are certain it will go ahead. At least that way they won't leave their supporters disappointed. Given the number of manufacturers which have left F1 over the past few years it is, however, hard to see how the teams could raise enough financial support to launch a new series. That is just the first problem they would face.

The teams are also bound by clause 4.5 of the Concorde which prevents them from making any public statement or statements in any medium, whether orally or in writing, or in any country, promoting an equivalent championship or series to the FIA F1 championship until after completion of the last race in 2012. Accordingly, the comments made so far by di Montezemolo are about as far as the teams can go.

The contract is also understood to prevent teams from making preparations for a rival series, or soliciting broadcasters or circuits for it, until January 1, 2012. This in itself is made all the more difficult by the fact that since the GPWC began to collapse with Ferrari's departure in 2005, Ecclestone's company has been applying for trademarks to potential names for rival series to stop others from using them. Epsilon, Delta Topco's intellectual property division, now owns trademarks to names including Formula Grand Prix, Premier Formula, GP1 and Formula GP.

There is however a trade off in that Ecclestone's divide and conquer strategy is now prohibited by the Concorde. Under clause 4.6 Delta Topco is not allowed to "confer on any team any material preferential right, benefit or privilege or discriminate against any other team or subject it to more onerous material obligations than any other team." So that would rule out another $100m payment to Ferrari. Likewise, the Concorde states that if an offer is made to any single team before the end of this year it has to be made to all other teams with exactly the same terms.

So with the teams seemingly straight jacketed by the difficulty of threatening a rival series, how can they hope to increase their share of the spoils? There is a way.

CVC bought F1 to make a return and Ecclestone says it gets this through its annual dividend so a top priority is increasing the sport's revenues and thereby its profit. According to Formula Money, roughly a third of Delta Topco's revenues come from TV rights and these are hard to increase since F1 is already widely broadcast. Another third comes from trackside advertising and corporate hospitality which are proportionate to the number of races on the calendar. The remaining third comes from race hosting fees and these can easily be increased as a number of countries are queuing up to pay huge fees to host F1. Poland, South Africa and the Ukraine immediately spring to mind with Thailand, the Philippines and Croatia also likely to be on the horizon.

Clause 10.5 of the Concorde limits the number of races to 20 and requires consent from the teams if over 50% of the races are held outside Europe. Accordingly, Ecclestone may need to keep the teams sweet if he wants to take F1 to more developing countries which are prepared to pay big bucks to make a name for themselves with a race.

So the teams can still direct F1's future direction but the keys to it are, as ever, in Ecclestone's hands.

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