As mentioned several times within this blog, Formula 1 -but the same goes for other major motorsport series such as MotoGP and Formula E– represents an extraordinary mobile marketing platform for all sponsor companies and brands connected to them.
Not so often, however, have we emphasized another, crucial role of the world’s top four-wheeled championship, namely that of serving as an exceptional R&D laboratory for the manufacturers, i.e., the car manufacturers and OEMs that go on to materially make up the Circus grid.
These two themes, marketing and research and development, constitute the “reason why” for which the big brands in the automotive industry take to the track on alternate Sundays and decide to engage in titanic competitive efforts to take part in the Championship. Formula 1, even for already excellent brands such as Mercedes, Pirelli, Aston Martin, and Brembo, is not only the way to be seen to be winning and exciting, but also the test bed on which to develop the technologies of tomorrow. Brakes, tires, hybrid engines and thousands of other components designed for racing will, in the years to come, be fitted to our everyday cars to make them better performing, safer, smarter.
This exceptional effort-ranging from design to implementation, management to car development and logistics-has equally mammoth costs. In 2019, before the introduction of the budget cap, the World Champion Mercedes team spent a total of $484 Million to take part in the season [1] , a figure higher-albeit by a small amount-than Ferrari ‘s 463 Million and Red Bull Racing‘s 445 Million.
For this very reason, from the season 2021, the FIA introduced the budget cap, an operating economic ceiling (pilot and top management salaries, for example, remain excluded) set at $145 M for all and set to drop by $5 M per year for at least the next 4 seasons[2].Despite this important financial instrument, desired by the governing bodies to increase competitiveness and offer opportunities for growth to all the other teams at the bottom of the grid, staggering figures remain.
How, then, does a Formula 1 team earn the money it needs to get on the track? And where do F1 teams make, in essence, money?
How do F1 teams make money
It is necessary to begin by saying that “gain” is not the correct term and that perhaps “derive” might be a more correct word. Said an old adage, which never fails to crack a few smiles but makes the point well, that “F1 is a sport for billionaires who want to be millionaires.”. All jokes aside, how do F1 teams make money? Because while it’s pretty clear where all the money goes, with state-of-the-art cars, superstar drivers and extensive teams of elite engineers working on car development, it’s sometimes less clear how a Formula One team gets the cash.
The revenues of a Formula one team, wanting to generalize, can be divided into 4 building blocks:
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Sponsorships
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FOM dividends (or prize money)
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The investments of manufacturers and OEMs
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The “pay to play” drivers (or pay drivers)
Sponsorships in Formula 1
In these pages, the topic of sponsorship in Formula 1 has already been abundantly covered. The world’s biggest companies, which are banking on the incredible visibility and the mighty value juxtaposition of the top four-wheel series, are continuously investing in the circus. This is where the sponsorship money comes into play.
The figures, which vary widely, start from one million euros to large contracts such as the title sponsor Petronas – Mercedes contract worth 42 Million euros per season, or the one between Oracle and Red Bull estimated at 300 Million over the next five years[3]..
The latest big trend, in this sense, is sponsorships in cryptocurrencies, exchanges, NFTs and the digital economy in general and everything that underlies it.
FOM dividends – (or prize money)
FOM, Formula One Management, divides among the participating teams part of the proceeds from TV rights and other revenues. The division of these monies is complex and has created quite a few discussions in the years since, especially between the Cavallino and other stables. Let’s try to simplify.
For starters, each team that has been ranked for the past two seasons receives $36 MILLION [4] as a participation token to field two cars on the grid. This figure is the same for all and is the base of operations for many of the smaller teams.
A second tranche of the prize money is divided among the teams according to the previous year’s performance, with larger shares awarded to the winners and declining according to ranking. In 2019 Mercedes has, according to this rule, received $61 Million for winning the World Constructors Championship. Only 13 came to last-place Williams.
So any point gained in the constructors championship is very important. This is especially true for the small teams that cannot always count on the lucrative sponsorship deals that the bigger teams manage to close with corporations willing to become title sponsors of top teams.
Other, more debated quotas are awarded to the Long Standing Team, i.e., Ferrari,which is the only team that has participated in all world championships to date, and to the CCDs, i.e., a few teams that have won the most world championships (Ferrari, McLaren, Mercedes, Red Bull). This area of funding, which as mentioned is a more gray area and has been long debated, has deep roots in the so-called concord agreement , named after the Place de La Concorde in Paris where the International Automobile Federation is headquartered.
Manufacturers’ investments
Large manufacturers such as Mercedes, Ferrari and Aston Martin just to name a few, are often the primary financiers of their own racing teams, which are not coincidentally called “factories” precisely because they are on-track extensions of road car manufacturers.
In 2019, the AMG Mercedes F1 Team received from Daimler, the parent company of the German giant,the sum of 80 Million Euros to design and perfect the car that would take part in the championship [5]. For the same reason, 25 Million was invested by Aston Martin, at the time engaged in a return to the top series and in need of capital injections to develop the car.
These kinds of investments, as mentioned at the outset, are actually marketing and R&D investments for the manufacturers, who have every advantage in fielding performance and winning cars in the most prestigious automobile competition. Ingenious, for example, has been the return Mercedes itself has had in terms of road car sales since it began its success in the hybrid era of Formula 1 that ended in 2022.
The “pay drivers”
It is no longer a secret that many drivers bring with them an important dowry of millions of dollars to offer to the team that will put them behind the wheel.
This practice, which has raised more than one eyebrow in the past, has actually been cleared through customs in recent years, when the advent of the Mazepins, Latifis, and Strolls put the importance of family economies in the choice of this or that pay driver into the limelight.
Lando Norris himself has received extensive financial support from his father, founder of the brokerage firm Hargreaves Landsdown, which has invested in the young Briton and the McLaren stable through its subsidiary Horatio Investments to the tune of £12 M per year from 2017 to 2019[6].
It is important to understand here an issue that is crucial to the sporting significance of such operations. These boys, often from wealthy families, are nevertheless and above all extraordinary driving talents, among the best racing drivers in the world. No team, no matter how needy of money, would have any advantage in entrusting such cars to the hands of the latest, albeit very rich, arrival.
Consider, for example, Checo Perez, one of the fastest driver born in South America in the last decade, who has always been well financed by the Mexican TelCel that has followed him throughout his career and the excellent results he has brought to the track even quite recently for Red Bull and before that for Racing Point and others.
Corollary: why is Formula One so expensive?
Formula 1 racing is quite possibly the most expensive sports in the world for several reasons:
- Car Development and Manufacturing: Formula 1 cars are among the most technologically advanced machines in the world. Developing a competitive car involves significant research, design, engineering, and testing, which requires a team of highly skilled professionals. Manufacturing a car involves high costs as well, with each part built to the highest standards using expensive materials like carbon fiber, titanium, and more. Furthermore, teams build not just one but several cars for the season.
- Engine Costs: Formula 1 engines are sophisticated pieces of technology, developed over years with substantial resources. Hybrid power units combining internal combustion engines with energy recovery systems are particularly complex and expensive.
- Salaries: Formula 1 teams hire some of the best engineers, designers, and drivers in the world. The salaries for these professionals are very high, especially for the top drivers, which can reach tens of millions of dollars a year.
- Logistics: F1 is a global sport with races taking place all around the world. Moving cars, equipment, and personnel from country to country throughout the year involves significant logistics costs. This includes transport (often by air), accommodation, food, and other expenses.
- Running Costs: On top of the above, there are many day-to-day costs involved in running a Formula 1 team. These include maintaining and upgrading the cars, paying for tires (which are bespoke and not cheap), fuel costs, and myriad other expenses from hospitality to insurance.
- Research and Development: Formula 1 is as much a battle of technology and innovation as it is a race on the track. Teams spend heavily on research and development to gain competitive advantages. This includes everything from wind tunnel testing and CFD simulations to data analysis tools and more.
- Marketing and Hospitality: Teams invest a lot in marketing and hospitality to maintain their brand image and cater to sponsors and VIP guests during races. This includes everything from creating merchandise to setting up hospitality suites at races.
- Fees: There are also significant fees involved in Formula 1. Teams need to pay a registration fee each year to the FIA (Federation Internationale de l’Automobile), and drivers need to purchase a super license. The fees vary based on performance, with better-performing teams paying more.
The overall expense of competing in Formula 1, therefore, is due to the cumulative effect of these numerous, large costs. And while there have been efforts to limit spending to ensure the sport’s sustainability – such as the introduction of a budget cap – it remains a costly endeavor
Bottom line: the costs of Formula 1 and the meaning of the exercise
F1 is an extremely complex and profound sport in every aspect. The“pinnacle of motorsport” is a patchwork of technology, research, talent, production effort, logistical commitment and organizational resources. Teams, often numerous in number, put prototypes that are engineering masterpieces on the track and compete for 10 months on five continents. The economic commitment such an exercise requires is equally impressive.
To cope, each team has multiple sources of income, from sponsorships to FOM dividends to support from manufacturers and private investors. Keeping such diverse and multifaceted economies at bay is an arduous task based on subtle and nuanced balances. Money has always meant development capacity, investment opportunities and, ultimately, performance.
Finding democratic and just ways, but ones that do not clip the wings of the sport’s and entertainment’s possibilities for growth, is a topic of discussion these months not only for Formula 1 but for all top sports leagues and series. The solution to this puzzle will, necessarily, shape the face of the sport in the years to come.
[2]
https://www.motorsport.com/f1/news/alonso-questions-driver-salary-cap-when-f1-is-asking-more-from-us/10317358/#:~:text=F120introduced20a20budget20cap,inflation20and20increased20freight20costs.
[3]
https://f1chronicle.com/do-f1-teams-make-money/#:~:text=The20most20lucrative20way20for,Lance20Stroll20of20Nicholas20Latifi
[4]
https://onestopracing.com/how-do-f1-teams-earn-money/
[5]
https://onestopracing.com/how-do-f1-teams-earn-money/
[6]
https://f1chronicle.com/lando-norris-bucks-the-pay-driver-trend/
