By Rowland Goddard, Director of Finance
The start of a Formula One race consists of 20 professional race car drivers lined up on a grid facing a blinking traffic light. Red lights illuminate, counting to five and then all lights are out and the race is on. Drivers accelerate their spaceship-like cars to speeds to over 250 km/h and it’s a race to the first corner. It is in these moments that mayhem can occur and the race for a driver and their 12 million dollar car can be over, often to no fault of their own.
Formula One is a very expensive sport that has high stakes and is ruthless to teams and drivers that make any sort of error on or off the track. Millions of dollars every year goes into developing ways to make a supercar go a tenth of a second faster on a racecourse. So it must be asked, where does all this money come from?
Although F1 is a money hungry league, margins for teams are slim and to stay afloat their finances must be carefully calculated and optimized. A team’s budget is split between four groups of costs: research and development, salaries, production, and operations. The problem is it’s not a level playing field for all teams with some spending significantly more than others. This has led to seeing the teams that spend the most money at the top year after year. This anti-competitive nature makes it less enjoyable for fans and is a problem for F1.
There are ten teams (each with two drivers) in the paddock and most have an annual budget of $150 million – $250 million. Then there are Mercedes, Ferrari and Redbull who spend roughly $400 million a year. This means better technology/parts, more extensive RnD, and bigger crews. The results speak for themselves, Mercedes now having won a record 7 straight championships in a row.
The root problem lies with how money is distributed by F1. Richer teams which are already developed are given the most money to spend and newer teams with smaller budgets simply can’t catch up. To put this into context, $70+ million is given out to Mercedes, Ferrari and Redbull every year based on winning titles in the past. Additionally the teams that place best in the championship, often the ones that spend the most, are handed more prize money.
Team based revenues continue to differentiate based on advertisement and private investment. Bigger teams with recognizable brands and often more popular drivers can attract more lucrative advertising contracts. As well, a team like Mercedes will always have a stable investment backing as being a contender in F1 is now part of their bigger brand image.
This has created a discouraging environment for new teams and their investors. And there are no rewards, like draft picks, for doing poorly, only less money for the next year. It is a storyline if a team with a smaller budget does well at a Grand Prix.
After decades, finally in 2021 Formula One’s hand has been forced into creating a new $145 million budget cap. The timing of this move can be partly attributed to the pandemic forcing teams to slash personnel and budgets anyways. Along with the budget cap, the new ConCorde agreement stipulates that F1’s central revenue will be disbursed more evenly across the championship standings.
Although this budget cap appears significantly smaller than what current lead teams are spending, it does not include drivers salaries, engines, or marketing, all which are significant costs for a F1 team. As well, it is inevitable that the big teams will look for loopholes in the agreement to exploit.Although F1 appears to be moving in the right direction, the finances behind high-stakes, competitive motorsports are ruthless, even more so than in any other mainstream sport. The Netflix show Drive to Survive has it bang on that if you want a spot on the grid you need to show up on the track.