In the takeover of a business or change in political leadership the perceived success or failure can be defined by the strategy presented and actions taken in the first 100 days. What’s the situation in Formula 1?
With the sale of Formula 1 to Liberty Media complete and Chase Carey appointed as group CEO the group head into the next period with a number of key focus areas. These focus points and factors to consider are laid out below.
In Chase Carey’s relationship with Formula 1 teams the most fundamental point to address is going to be prize funds. The first point will be to reopen discussions around when changes can be made, but under current contracts payment structure is locked down until 2020. Liberty Media can’t wait that long. In order to reopen these talks, Liberty needs to entice the teams benefiting most from the current structure, with the opportunity for greater benefits under a new structure.
This could be achieved through offering teams shares in the championship as an alternative to “status payments” i.e. Ferrari receive 2% ownership in Formula 1 but no longer receive additional payments outside of prize funds. In appeasing the top teams Liberty will set out to level the playing field through introducing budget caps and normalising prize fund structures. Carey and his team will seek to appeal to the business minds of Formula 1 teams through demonstrating a model in which all teams can be profitable and competitive by operating under spend restrictions.
The on-track success of Force India over the past two seasons demonstrates what can be achieved with budget limitations. They will be the example for independent teams moving forward. It will be interesting to understand if Chase and his team have been involved in negotiations to keep Manor Racing on the grid for 2017. Whilst the trading company under which the team operates has now ceased trading, the Formula 1 licence remains under ownership of the team itself. As such, a recovery if not for 2017, then for the future remains possible. Under Liberty Ownership the value of a team “Franchise” / team entry has potentially increased dramatically.
In summary, Chase Cary will seek to achieve the following with Formula 1 teams:
- Equity shareholding in the Formula One Group;
- Normalisation of prize funds – ensuring all teams receive payments;
- Budget caps.
Next on Chase Carey’s to-do list will be relationships with circuits. Similar to the teams, most circuits on the current Formula 1 calendar are bound to Formula One Management agreements for a number of years and within these agreements hosting fees are already defined. Silverstone and other circuits have already made it clear these fees are not sustainable and as such they may seek to break current agreements.
A key frustration to circuits’ current relationship with FOM has been their ability or inability to profit from hosting Formula 1 events. A disproportionally high percentage of any profits from circuit vendors, merchandising, or support events (such as concerts) goes to FOM, leaving the circuit with little inclination to build their event. Chase Carey has described an ambition for the Formula 1 season to feel like 21 Superbowls. This will require circuits to invest. If Chase and his team allow a freedom for circuits to profit from their events, there can be no question they will do this. Ultimately circuits may find themselves paying a higher hosting fee than they have in the past, but it should be under a profit-based model, i.e. if the circuit is making more money the Formula One Group will also.
The key points for Chase Carey with the circuits will be:
- Deregulation of profit-making opportunities surrounding an event;
- Moving to a profit-based hosting fees model; creating shared interest between the circuit and Formula 1 in an event being a success.
Over the past decade, Formula 1 as every other major sporting series with a global footprint has taken a route of live broadcasting under pay TV agreements. This strategy injects additional fixed revenue into a championship. Whilst many would like to see Formula 1 return to a free-to-air broadcast model, this is unrealistic. Liberty Media must see a return on investment from the acquisition of Formula 1. Pay TV broadcast agreements are the key to this return.
The challenge Chase Carey must overcome is making the Formula 1 product more desirable and therefore more appealing to broadcasters in future negotiations. In the past, FOM has taken an approach of restriction to achieve this with the broadcast of any Formula 1-related material outside of a media agreement strictly prohibited. In a world of social media this model is no longer fit for purpose. The ability for Formula 1 to be part of “the conversation” online is limited.
Carey must overcome this; in freeing up Formula 1 content availability online, sharing of Formula 1 material through social media will become more common. It will become part of more people’s lives. It will become unavoidable. If this can be achieved, the value of broadcast rights becomes greater, resulting in a stronger position for increasing broadcasting rights fees in future.
Sponsorship of Formula 1 is in decline. The vast majority of new partnerships in the sport are business-to-business focused. They are not made with a view to selling product to consumers. This is because the commercial product of Formula 1 has become so heavily regulated. Liberty Media must open up commercial restrictions placed upon Formula 1 products. In doing this, the sport will become more appealing to the fast-moving consumer goods businesses such as Coca-Cola or Mondelez.
The barriers to entry as a partner to Formula 1 must be removed. Marketers need to be able to see the value of the sport for them. It is no longer acceptable for Formula 1 sponsors to throw money at a black hole and hope for the best. Liberty Media can use the vast database of consumers collected over the years and use this data to entice new partners to the sport.
Formula 1 is complex. Too complex. In appointing Ross Brawn as his head of motorsport, Chase Carey has demonstrated an intention to address this issue using the skills of experts within the field. Ross Brawn has spoken of plans to complete studies to address some of the challenges facing current racing in Formula 1. This is a step in the right direction.
It should be noted that the role of president of the FIA, a role currently held by Jean Todt, is set for re-election in 2017. The President of the FIA will play a key role in modifying Formula 1 regulations for whatever Chase Carey and his team deem to be the correct way forward for the sport. They will be seeking an ally in this role. That ally could still be Jean Todt. Whoever it is, it will be a priority of Chase Casey to ensure this person is well-positioned ahead of sporting bodies voting later this year.
For years passionate Formula 1 fans have felt hard done by, paying increasingly large sums of money for a product which hasn’t evolved. Chase Carey needs to address the passionate Formula 1 fan. These fans must feel appreciated by the sport they dedicate their free time to.
Beyond that dedicated fan, Formula 1 must broaden its appeal. The sport needs to become event TV. To achieve this, Formula 1 must be accessible and simple to comprehend. The Formula One Group have to seek to achieve this without dumbing down the sport and without alienating the mentioned diehard fan. For Liberty Media’s purchase of Formula 1 to succeed, all of these points need to be addressed in an extremely short period of time.
The rationale behind Liberty Media’s decision to make changes in the management structure of Formula 1 is a key indicator of a focus on revenue and audience growth, more specifically the lack of growth in these areas in recent years. Under Liberty Media, Formula 1, or the Formula One Group as it will now be known, will be a publicly traded entity. As such the success or failure of any strategy implemented by Chase Carey and his team will be available for all to see. As a publicly traded entity, the Formula One Group will be answerable to its shareholders who will be expecting a return on investment. Chase and his team will not have the luxury of time or privacy. The Formula One Group must show immediate and sustained growth for Chase to expect any form of prolonged tenure in their leadership positions.