Why the F1 is a Sinkhole for Money

INTRODUCTION

Formula One is the highest class of international racing for open-wheel single-seater formula racing cars. Just like any sport, F1 teams receive money from the governing body, which in the case of Formula 1 is the FIA – Fédération Internationale de l’Automobile.

Teams also receive money in the form of sponsorships and driver-linked payments. Usually, teams receive about 36 million dollars for just competing in the season. Since a majority of the teams are set up for reasons like marketing, F1 teams do not end up making a considerable profit. The majority of the teams break even, and some incur losses. Teams are not competing in formula one for the money, they are competing for advertising their brand. In 2019, the Mercedes AMG Petronas F1 team incurred a loss of 5 million dollars. Yet, they continue to participate in the sport.

REVENUE FROM FIA

Payments to teams are categorized into columns. Each team who finished in the top ten of the constructor’s championship 2 of the past 3 seasons is entitled to column 1 payments which equals about 36 million dollars. Thus, this means that every team qualifies for the column 1 payment regardless of their standing on the Constructor’s board. Since Haas was a new addition to F1, it did not receive the column 1 payment until 2019. But every law has a loophole and Racing Point the successor of Force India received Column 1 payments. Since ownership and the name were changed Haas contested Column 1 payments to them.

Next are the Column 2 payments which consist of performance-based payments. These payments range from 60 million dollars to 13 million dollars. Winning the constructor’s championship will enable a team to receive the highest share of the column 2 payments. Payments decrease as we go down the list.

Things start to become interesting after these two payments. Mercedes, Ferrari, Red Bull and McLaren receive a payment of 35 million dollars called the Constructors Championship Bonus since they agreed to have long-term commitments. Another 35 million dollars is given to Red Bull since they signed the long-term deal first. Mercedes also receives a payment of 35 million for fulfilling the promise of winning two constructor’s championships back-to-back. Ferrari receives an additional 68 million dollars since it is the longest-standing team. This payment is higher than the payment received by the team first in the constructor’s championship. Another 10 million dollars is given to Williams as a heritage fund.

Thus, it is visible that there are numerous payments given to the top teams. Even though Ferrari has not won a championship since 2008, it still receives the most money from FIA.
We can conclude that Ferrari takes 1/5th of the total F1 payouts and the smallest team takes about 25% of Ferrari’s payments. This in contrast to the English Football League can be deemed unfair. In sports like football, the smallest team takes 60% of what the winning team makes.

These are the distributions for the 2018 season.
From the information given above it is visible that all teams receive the column 1 payments and Column 2 payments differ as per performance.

Along with this, the table below shows profits for team Toro Rosso, now known as Alpha Tauri for 2019. It can be seen that profits are minimal, but the team continues to participate in F1.

SPONSORSHIPS

Sponsorships amount to a huge amount of a team’s revenue. Since the top teams receive a maximum of screen time, they get the most in sponsorships. Red Bull in 2022 signed a deal with Oracle for 300 million dollars spanning 5 years for the title sponsorship. In 2019, Mercedes received 80 million dollars for sponsorships while Racing Point, now Aston Martin received around 25 million dollars. Raybans, a Ferrari is a well-known brand, thus the objective for sponsorship might not be to create awareness, instead, it must be to create a synergy between the Ferrari brand and Raybans. On the other hand, ROKiT, a relatively newer company must have used their sponsorship with Williams to increase awareness.

The following image shows previous sponsors of Red Bull in 2020 with a total of around 80 million euros.

DRIVER LINKED PAYMENTS

Numerous drivers in Formula One bring in revenue for the teams instead of getting paid. Lance Stroll reportedly paid 30 million in 2017 to Williams for a seat. Similarly, in 2011, Williams driver Pastor Maldonado brought Venezuela oil sponsorship in turn for a seat. Sergio Perez, second driver for the defending Champion Red Bull got a seat in F1 through a deal between his sponsor Telmex, a telecommunications company and Sauber. Uralkali, a Russian Company owned by Nikita Mazepin’s father, Dmitry Mazepin was the Title sponsor for Haas.

THE 2021 REGULATIONS – COST CAP

The cost cap according to the 2021 regulations was 145 million dollars with alterations according to the number of races per year. Even though the cap has many exceptions such as driver and team principal salaries it hit the performance of many top teams. Since teams like Mercedes, Ferrari and Red Bull do not care about the profits the cost cap for them was unnecessary and was brought about to help the smaller teams with performances and the growing competition. After these regulations, Mercedes reported an increase in profits from 30 million in 2022 from 2021 due to the cost cap. Due to the extra payments received by Mercedes, Ferrari and Red Bull, they profit off of F1 as a result of the 2021 regulations. Even though other teams do not profit as much and even if they do it is minimal but still have an F1 team since indirectly it helps the brands in millions due to advertising.

SOURCES

Mehr Minhas Vice President