If you are unfamiliar with F1, here is a primer with all the full forms you need that will help you! Note that all $ values are in USD. (Cover Image Credits: Mercedes-AMG)
The FIA Formula One World Championship has been a temple to technology, speed, and most importantly, money, since its inception in 1950. It has been badly hit by the Covid-19 pandemic with the turnover from the WCC falling from $2.02 billion in 2019 to $1.14 billion in 2020 However, the sport’s problems with money cannot be attributed solely to the pandemic. F1 has lost 129 million viewers since 2008, resulting in sponsors losing their incentive to use F1 as a way to advertise. What is it about the sport that has led to this loss – and what implications does it hold for its future?
Sponsorships are one of the primary sources of revenue teams and the FOG, which makes viewership incredibly important. Constructors like Mercedes rarely realise a profit, instead using the sport to advertise their road cars. Due to the public nature of the sport, F1 has a very high level of technological transparency and it is difficult to hide and patent innovation in the field. The cars tend to co-evolve according to specifications described by the FIA (English: International Automobile Federation) as the diffusion of knowledge occurs through observation. To prevent the stagnation of the sport in old technology, the FIA signs the Concorde Agreement with the FOG and the constructors every 6 years or so to lay the foundation for technical development. The agreement creates a cycle in which some teams are able to develop better technologies in years subsequent to signing the agreement while other teams catch up before the next agreement. However, a crucial flaw was exposed in 2013 which (re)introduced the era of the 1.6-litre V6 turbocharged hybrid engines put in place in an effort to be sustainable (Motor racing! Sustainable! Ha!). Mercedes developed a ‘monster’ of an engine that was so powerful that it left the other cars unable to offer any competition.
Many fans have emphasized that one of the worst problems F1 faces is the lack of competitiveness on the track. The uncertainty of outcome (UoO) theory was put forth by Rottenberg in 1956, and it propounds that, ceteris paribus, the demand to watch a sport is directly proportional to the uncertainty of the outcome of the sport. Other academics have related this principle to F1 citing that a balance between the level of performance or a ‘competitive balance’ must be maintained between teams to maintain the uncertainty of outcome.
Several empirical studies have concluded the significance of technical specifications of each car, funding from sponsors and investors, the drivers, the crews, and the suppliers as some factors that contribute to the outcome of the championship. When these factors interact to create a balance in the performance of cars across the grid, a competitive balance is achieved. A lack of competitive balance tends to make races boring and predictable and discourages viewers from buying tickets, watching races, or doing anything that generates revenue for F1. The teams earn revenue from sponsors, investors, and Formula One Management (FOM) payments, and the FOM in turn, earns from GP ticket sales, hosting fees, broadcasting fees and more sponsors. Consequently, Budzinski and Feddersen outline three kinds of competitive balance that I find relevant to these revenue streams.
The first of these is the competition within each GP as it is important for the sale of tickets and track sponsorships. As fan surveys show, tracks like Sochi are unpopular with audiences due to the high predictability of the races. As per UoO, this negatively affects the sale of tickets and per race viewership. The second involves competition within a season, which can affect the average viewership and cause sponsors to drop out due to reasons cited before. This impacts sponsorship payments to the FOM and subsequently, the payout teams receive from the FOM at the end of the season. The third kind of competition, that which exists over seasons, largely influences the number of viewers of the sport, as a new viewer is only enticed to begin watching a sport when it is entertaining, and it is entertaining only when there is an uncertainty of outcome. For example, a viewer that has seen or heard of Mercedes dominate F1 for six years is unlikely to expect something different to happen in the seventh, discouraging them from watching the season at all.
The question remains, what exactly is causing the gap in performance? Many attribute it to the gap in budgets as some teams receive bonuses from the FOM that are not directly related to their performance in the championship, making their funding considerably bigger. To address the same, budget caps of $175 million and $145 million have been placed on the development of technology in 2021 and 2022 respectively.
Considering the budget cap and assuming a utopian clean slate, we can say that the factors influencing the championship would be driver ability and any differences caused by technological innovation. However, a clean slate is an assumption one cannot afford to make. In 2013, Mercedes started with the best car on the grid, a good crew, good drivers, and good suppliers, which gave them good results. Before the next season started, they were able to build on their already dominant car while other teams struggled to catch up. Their good results attracted sponsors and investors who funded R&D and allowed them to hire better crew and better suppliers who were more willing to associate with a successful team. This propelled them forward and helped them produce even better results.
Conversely Williams Racing and Haas F1 had a string of bad seasons due to poor cost management and developmental barriers, which caused a struggle to find good drivers and sponsors. This is clear with Haas making a bizarre move by employing Nikita Mazepin, an arguably average F2 driver. The struggle to find a good sponsor is evident when one learns that Uralkali, Haas’ new title sponsor, just happens to be owned by parent company Uralchem in which Dmitry Mazepin, Nikita’s father, has a majority stake.
Positive feedback loops keep old and rich teams dominant while causing poorer and newer teams to toe the line of bankruptcy as the benefits of good results and the damage of bad results accrue over time. So the task at hand for the FIA is not to ensure the equal distribution of opportunities to develop new technologies – regulations and policy already do that – but to ensure that the gap between the teams does not get wider.
The Mercedes dominance has revealed shortcomings of F1 regulations that threaten to topple the sports’ promise of being the frontline of innovation as well as the financial foundation that it is built on. As the competitive balance between teams reduces and the uncertainty of outcome decreases, F1 stands to lose its major sources of revenue and audience, which is already steadily decreasing. By placing budget caps and testing restrictions (see picture) on teams, measures have been undertaken to ensure that this does not happen, but only the upcoming seasons will tell whether or not it has been effective.
Kavya Satish is a second-year Economics and Finance student at Ashoka University.
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