(R)evolution?

Are we entering a new era of Formula 1? With Liberty Media making the first of two transactions to acquire Formula 1 – subject to regulatory approval – could we be on the brink of a revolution, or just an evolution?

Liberty Media Chairman, Chase Carey and Chief Executive, Greg Maffei were obviously pleased to have secured a deal that all shareholders are comfortable with.

It is worth noting that following the 2nd transaction in early 2017, all of Formula 1’s current shareholders including CVC et al will still be involved; owning roughly two thirds the stake they owned previously, but this stake will be the newly structured and listed business to be known as Formula One Group. “We are excited to become part of Formula 1”, Maffei said, “we think our long-term perspective and expertise will allow us to be good stewards of Formula 1 and benefit fans, teams and our shareholders.”

As focus quickly shifts into delivering a strategy to grow both the sport’s popularity and revenue, the question becomes; what can we expect from Formula 1 under Liberty Media’s ownership?

It won’t be a revolution, that’s for sure – not at first anyway. For two reasons; first, as we all know, this is Bernie’s show, and will be until he either decides he doesn’t want it anymore, or can’t physically do it. Secondly, Formula 1 doesn’t need a revolution; whatever metric you use Formula 1 is one of the largest sports in the world. It is solidifying and building on this position that the new owners should first concern themselves with.

Ultimately if Formula 1 can drive increased viewership and fan engagement, then revenue will follow. With more fans, the sport can attract larger broadcast agreements, more investment from race hosts, and justify greater sponsorship fees.

To successfully achieve their objectives Carey and Maffei will have to get up to speed on the business and politics of Formula 1. I’ve no doubt Liberty will use the next couple of years to learn the intricacies of Formula 1 – and the sport’s deals – by observing Bernie, whilst utilising their own expertise and experience to add value in a number of key areas. So what might the commercials of Formula 1 look like three years from now?

Races

Formula 1 currently makes approximately 30-35% of its revenue from race host/promotor fees. Whilst talk of reducing ticket prices to make the sport accessible should be applauded, how can the economics be made to work? Promotors already struggle to generate enough income, and limiting ticket prices harms their ability to break-even.

If ticket price reductions were implemented, race promotor fees would need to be lowered, which could drastically impact Formula One Group’s revenues. One solution may be to evolve the current Formula 1 race calendar to a 25-race season. Carey has commented, “we do want to continue to take advantage of the global footprint of this sport, and think there are growth opportunities”.

The sport has over 400 million viewers, with an audience that size, the audience is going to be fairly diverse, no? Formula 1 has in fact more millennial and female viewers than many realise.

From a fan’s perspective, more events sound like a great idea, but the teams and media may not be as receptive. Employee burn-out is already being seen, and it is an issue to be addressed.

Should the calendar increase to as many as 25 races, then Formula 1 may generate an additional $180 million in annual revenue. So where are Liberty Media looking to take the sport? “Those markets in the US and Asia are ones for us to develop”, [but] “I want to be clear that the established markets that have been the home and foundation of Formula 1, Europe in particular, are of critical importance”, Carey explained.

What will Liberty Media value more; the sport’s growth potential, or cash in the bank? Will they select strategically important markets based on where the sport wants to grow, like America? Or markets willing to pay high fees – like Azerbaijan?

Growth in America has been a big topic. “This is a long-term play,” Maffei said, “building up in the US is not going to get solved in two years”. Personally, I don’t think we‘ll reach anything like a tipping point until Formula 1 has at least 7 races on their time zone and a better content platform. With Austin, Montreal, Mexico City and to an extent Brazil, on a workable time zone, that’s three new races to find in the US – Vegas and Watkins Glen have been mentioned previously.

Media, broadcast and digital

Bernie noted about Chase Carey: “He knows television. I’m sure that’s going to help a lot”. Formula 1’s broadcast deals don’t compare well to other sports, for example, the UK-only rights to the English Premier League are worth more than all of Formula 1’s broadcast deals combined. There are of course major differences in these two sports, but it’s certainly television – contributing 30-35% of Formula 1’s total income – and digital content where Liberty Media can add most value immediately.

Liberty’s first major broadcast opportunity will come in their home market, the USA, where the current broadcast contract has one year to run. Let’s see if they take of advantage of the positive hype around their take-over; securing slightly higher fee on a long-term deal, or opt for a short-term agreement; which would give them time to initiate a US growth strategy, and may increase the fee in two-three years by a multiple of the current agreement.

Carey also believes that “there are multiple dimensions to developing the digital opportunities in Formula 1”. He continues: “There is no question the digital platforms are essentially becoming a part of the larger video market place. It’s creating new competition for these rights, new opportunities to exploit these rights in different ways, to take advantage of what each of the platforms has to offer”.

I want to be clear that the established markets that have been the home and foundation of Formula 1, Europe in particular, are of critical importance.

There are two schools of thought here. One is to develop rights packages for the likes of Netflix, Amazon Prime, Apple and Google/YouTube. The second is to build a direct-to-consumer subscription-based online content platform – F1TV. “We believe a global content business, with portable content that can be shared across so many countries and venues, has enormous appeal”, said Maffei.

Other fast moving sports have done this with great effect. UFC’s (Ultimate Fighting Championship) FightPass – where UFC create and curate video content from behind the scenes of the sport – is a tremendous example. FightPass was a key factor in WME-IMG’s acquisition of the sport for $4bn recently. The platform has around half a million subscribers paying $9.99 per month. Of course, opportunities exist to further commercialise the platform beyond subscription fees – for instance the IOC’s new Olympic Channel expects to generate upwards of €133m over the next six years from incremental sponsorship and broadcast rights. Within a few years Formula 1 might generate in the region $100m per annum from an F1TV platform.

What content would be on F1TV? Well, not necessarily the races – this eats into the current broadcast deals. F1TV should focus more on off-the-track content, in telling the stories around Formula 1, the drivers, the teams, and the technology.

F1TV could also be a hub for other new technologies like virtual reality. From the radio, to television, to smartphones. Virtual reality is seen as the next big step change in media consumption technology. Carey believes Formula 1 “is so ideally suited to any of these new technologies”.

Delivering truly great virtual reality experiences requires access, proximity and an exciting story. As the owner, with unrivalled access to one of the most visually exciting global sports, Liberty Media are now ideally placed to deliver some the world’s best sports broadcast experiences.

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