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Revolution?

revolution liberty_media

revolution liberty_media

Are we entering a revolution 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?

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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 of 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 revolution 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 advantage of the positive hype around their take-over; securing a 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 of the world’s best sports broadcast experiences.

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Sponsorship

Sponsorship contributes approximately 15% of the sport’s revenues, and Formula 1’s new owners will certainly look to establish a broader range of commercial partners. There is no doubt that the recent Heineken partnership marked a change in the approach and rights on offer to partners. The greater level of access and content rights secured by Heineken was a positive step forward and one that will help the sport attract more consumer-orientated brands to the sport.

In some respect Formula 1’s potential to generate massively increased sponsorship revenue is limited. Most Global Partners will want the vast branding that provides global stature and brand association with Formula 1 and its values. But circuits are only so big, meaning only so much branding inventory can exist. Realistically, Formula 1 has the potential for three additional global partners.

Building up in the US is not going to get solved in two years.

With the availability of content and social media rights having been addressed, two more challenges exist. First is the perception of the Formula 1 brand among business leaders – it’s not entirely positive for a variety of reasons. Second is the understanding of the sport’s audience – many brands strongly perceive Formula 1’s audience as high-income and old. 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.

Addressing these issues may help Formula 1 attract three new sponsors of Heineken’s like – brands like Nestle, P&G or PepsiCo – and benefit from over $100 million in additional annual sponsorship revenue. Not to mention partners that commit sizeable budget to promote their partnerships – and thus, the sport. A win all around.

Liberty Media might also drive sponsorship revenue by addressing the fact a sizable portion of Formula 1’s calendar is without title sponsorship. In some cases, the promotor has secured sponsorship rights as part of the host agreement.

The Grand Prix is often one of, if not the, largest annual sporting event in a country, providing a great opportunity for a large national or multinational brand to engage the Formula 1 audience. Title partnership commands $3-6m per race, and that adds up – particularly over a 25-race season!

Another option may be to follow the models of Man Utd and FIFA who recently adopted a regional partnership structure. Manchester Utd football club now generates £160m per annum in sponsorship and has more regional or national partnerships than global partnerships.

Other

For Liberty Media, the Formula 1 acquisition also provides some synergistic opportunities and efficiencies. Liberty Media also own Live Nation and Ticketmaster. Live Nation organises and promotes live events for the world’s largest music and entertainment stars. Therefore, might we see live music and entertainment becoming a bigger part of Formula 1 events in the coming years? Very Possibly. Chase Carey said he believes that “there is an enormous opportunity to really make these events much bigger than today. It’s about building the live experience at these races… much bigger, broader, and appeal to a much larger audience, and to have related things throughout the week”.

Formula 1’s previous attempts to incorporate music had varied success. Today, music activities are normally organised and paid for by individual race promotors rather than Formula 1 – as was the case when Sir Elton John performed at COTA. So do Liberty have a profitable business model for incorporating music at the sport’s events? They certainly have the experience and know-how, so in time, I’d expect so.

And Ticketmaster – Formula 1’s new ticket sales and distribution partner? I wouldn’t be surprised!

Finally, what about something “out of the box” – a new concept to drive Formula 1’s popularity and Formula One Group’s revenue?

The Grandstand Finale

Addressing many of fans issues, and “the big question” in Formula 1 (who’s the best?) perhaps the new owners might consider creating an annual or quadrennial non-championship event where all drivers compete in a special car run by their team. A kind of Super Bowl of motorsport.

The event location could be different each year – going to the city or track that offers the best combination of money, location and promotional activities. The world’s greatest and richest nations would compete to host the event. The event would be box office, and because the broadcast would sit outside the official championship, Formula 1 could sell these additional rights to their global partners, show it exclusively on F1TV or with other pay-TV broadcasters. This event would showcase which driver is truly the best, draw global attention and drastically increase Formula One Group’s revenue! Not to mention that it would be hugely entertaining, to say the least.

What might this race event contribute in revenue terms? Hard to say, but with a one-off event host fees, a global audience attracting broadcasters, it could bring a big number indeed!

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