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GP Week : Issue 165
This is a cheaper alternative to having logos on the cars and can be bought for a few million dollars even with a top team. Although they don’t offer TV exposure, these deals do provide many of the perks which come with on-car sponsorships such as passes into F1’s exclusive paddock, use of the team logo in advertising and sometimes even driver appearances at company functions. In the vast majority of cases, the teams’ marketing department secures the sponsorship but occasionally it is handed to them on a plate by the driver. Lower ranking teams sometimes take drivers purely on the understanding that companies they have got connections with will provide sponsorship. These are pay-drivers and even if they lack driving talent, the money they bring to the team can often make up for it since it can be used to improve development of the car itself. Typically pay-drivers are paired with a more experienced partner in a team to further balance out performance. In 2010 there were five drivers who paid to drive or who got to drive by bringing sponsors to the team. Income from all of them averaged at around £2.5m. The others were paid to drive and this cost to the teams averaged at £3.1m per driver rising to an estimated £25m for Fernando Alonso. After manufacturing and research and development costs, staff pay is the second biggest expense for F1 teams and it came to £21.8m on average per team in 2010. Payments to teams from drivers are a drop in the ocean compared to payments from team owners and there is good reason for this. Teams which are owned by brands essentially act as mobile advertising bill- boards for their parents and are paid for this accordingly. Performance is crucial because if a team owned by a car manufacturer wins races and championships it gives its products a positive impression and vice versa if it does badly. Teams which are owned by wealthy individuals rather than brands tend to have lower direct financial assistance from their parents. This is because the owners do not have products for the teams to promote in return for money. Instead, their owners try to find other ways to increase revenue such as selling licenses to technology the team has developed. The third key revenue source for teams is prize money and this came to a total of £414.5m ($647m) in 2010. The formula for distributing it is complex to say the least. The top 10 teams share 47.5% of the profits made by F1 itself with its two biggest sources of money being selling the rights to host races and the rights to broadcast the sport. Even the method of splitting the 47.5% amongst the top 10 teams is not straightfor ward as half of it is divided equally amongst them whilst the other half is divided by their position in the standings for that year. As Ferrari is F1’s longest-standing team it gets a 2.5% share of F1’s profit all to itself and this came to £17.7m ($27.7m) in 2010. HRT and Marussia got just £6.3m ($10m) each for finishing outside the top 10 whereas Red Bull Racing got around £55m ($87m) for winning the title in 2010. This went straight back into its budget for the following year rather than being paid out as a profit. So why do the teams have such high valuations? It was once thought that the lack of other slots on the F1 grid was a factor in this because it meant that buyers had to pay whatever the owner wanted as it was the only way to get their hands on a team. However for several years there has been a free grid slot as the maximum number of teams allowed is 13 so the exclusivity of being an owner cannot be a factor which influences valuation. Nevertheless, if setting up a team from scratch costs more than buying an existing one then that is likely to affect the valuation. Setting up and running Marussia, one of F1’s newest teams, for its first year had a net cost of £35.3m which is far less than the valuations of Force India and Williams. However, Marussia has finished last since it joined F1 and has failed to score a single point so far. Both Force India and Williams have a far better track record and this undoubtedly impacts their valuation since it affects prize money and sponsorship. This is the bottom line in F1. In a nutshell, teams try to ensure they have enough money to keep improving in their quest to score points whilst their owners take a salary or get marketing exposure for their products. Once they have scored points the goal becomes winning races and then winning championships. They don’t necessarily make a profit whilst doing this but getting the track record is the key to ultimately making money from an F1 team because once it has one it can be sold for a high valuation. It is results not revenue or profit which is the driving force behind their value. F1 >>> BUSINESS 20 GPWEEK.com // PARTNERS: