Saturday, December 6, 2008

The Future of Forumula 1

So let's review how the business of Formula 1 looks for the next year, shall we?

  • Formula 1 lost its last foot hold in the highly desirable North American market when Canada was priced out of the running.

  • Formula 1 lost one of its originating countries when France decided they could not afford to host an event.

  • There may, or may not, be a change to replace drivers points with a "medals" system.

  • China may, or may not, be renewing their contract when it is up after 2010.

  • Honda, a major world manufacturer, is (most likely) out. The world economic slowdown being what it is, the prospects of finding a well-financed buyer is rather diminished.

  • Torro Rosso's future is in doubt.

  • The FIA has announced that Cosworth, Xtrac, and Ricardo Transmissions will provide complete powertrains (engines and transmissions) for Formula 1 starting from 2010.

(Leaving aside the issue that the new aero package makes the cars look ugly.)

The future, bluntly, does not look bright. Formula 1 is turning its back on traditional tracks and markets, fleeing to areas where governments and organizations are willing to pay top dollar to host an event. Nothing wrong with that in the short term, economics and capitalism being what they are, but by doing so Formula 1 runs the risk of alienating traditional western fans. These fans are used to following the racing around the world partly on the premise that the tour comes to their country (or, in Europe, a country close enough to make a trip to see the event an affordable prospect).

Removing the incentives of visits to desirable markets, plus removing the ability to showcase their engineering talents by mandating a "stock" powertrain unit, leaves one to wonder how long the manufacturers will continue to be involved. Why would Mercedes, BMW, Toyota, Renault, and Ferrari want to put their logo over someone else's work?

There is also the problem with the show, wanting this "medals" system to determine the driver's championship. Looking at the recent past, such a system historically would have only changed one year's champion out of the past twenty or so -- the last one, where Massa would have had more victories to Hamilton's. The proposal will also return the sport to the situation where the driver's championship is wrapped up by August, diminishing international interest in the ending races.

All these together represent a diminishing in sponsor value. If people are not watching, then the sponsor gets a lower return on their sponsorship -- unless the amounts of money involved in sponsorship drop similarly. If this happens, there will initially be a "flight to quality", where the top performing teams have the benefit of the available funding, and this will only put further pressure on the rear of the field, squeezing out some the under-performing teams.

If a manufacturer wants to put their sporting efforts into a formula where engineering skills are permitted to be applied in a more interesting area, they very well might leave for other formulas -- perhaps back to sports cars.

Regarding finance, I have always said that the problem with Formula 1 isn't that (say) Ferrari spends (say) $200 million a year -- the problem is that Ferrari has $200 million a year to spend, and shows a profit (both on the track and financially) by doing so. Mandating that teams can not spend money in certain areas does nothing to remove the fact that Ferrari has the financial resources, and if it can spend money in an area even for only a marginal advantage over teams which cannot afford to spend money, they will continue to do so.

Putting this all together, Formula 1 is risking becoming a "spec" racing series, where teams go an purchase the components off the shelf and put together a package. The problem with this is that it might become "yet another" spec series, one with high participation costs for low returns.

It would be mildly ironic if the FIA achieves their goal of reducing spending in Formula 1 by basically strangling the life out of it.