How Ecclestone turned Formula One into the world's most watched series

March 27, 2013

How Ecclestone turned Formula One into the world's most watched series

Bernie Ecclestone changed the face of modern day racing with his Formula One series. Photo by LAT PHOTOGRAPHIC

When the Australian Grand Prix weekend arrived, fans were hard-pressed to spot the difference between the new cars on the grid and those on track in 2012. For years, there have only been slight annual changes to the looks of Formula One cars, as the sport's rule-maker, the Federation Internationale de l'Automobile (FIA), struck a balance between speed and safety. Today it is difficult to imagine F1 racing at circuits with little more than fences to protect the crowd, and little more than warm beer and bags of potato chips for hospitality. But that's exactly how the sport looked 30 years ago.

The first world championship Grand Prix was held at England's Silverstone

circuit on May 13, 1950. There were seven races in total, including the Indianapolis 500, the only race held outside Europe. Glamorous Italian manufacturers Ferrari, Alfa Romeo and Maserati dominated the early years; the likes of Prince Bira of Siam, Count Carel Godin de Beaufort and Marquis Alfonso de Portago were among the drivers. They were generally wealthy people with a passion for motor racing: F1 was a hobby.

Cars competed in their national racing colors: green for Britain, silver for Germany (originally white until, unconfirmed legend says, Mercedes-Benz in the '30s stripped the paint from its race cars to save weight), blue for France and red for Italy. The FIA did not allow sponsorship, so national colors were prevalent.

However, in 1968, oil companies BP and Shell withdrew from F1, and Firestone decided it would start charging for tires. To boost the teams' income and get back its technical partners, the FIA decided to permit sponsorship for the first time. It marked a huge change in the sport's finances.


Bernie Ecclestone Photo by LAT PHOTOGRAPHIC

Lotus was one of the first teams to take advantage, signing a deal with Imperial Tobacco that led to paintwork reminiscent of cigarette packets, replacing the team's British racing-green livery. The deal opened the floodgates for today's ubiquitous corporately branded liveries.

However, by the early 1970s, F1's sponsorship rates were still around 25 percent lower than those in NASCAR—Richard Petty signed oil company STP as a sponsor for an estimated annual total of $200,000. One man saw the potential for F1 to become more valuable than NASCAR. His arrival as a team owner forever changed the sport's trajectory.

Following two failed attempts to qualify as a driver in F1 races, Bernie Ecclestone bought the Brabham team in 1972; his driver, Nelson Piquet, would win the world championship twice. However, Ecclestone had his eye on a bigger prize. At the time, F1 races were still run as ad-hoc, almost amateur, events. Each team made separate deals with each event organizer, and TV coverage was spotty, since races could be canceled at the last moment if there were not enough cars to fill the grid.

Ecclestone seized the opportunity to change this; in 1981, he convinced the teams to sign a contract, called the Concorde Agreement, committing them to race. He took this to TV companies who could then guarantee coverage. Though the teams at one point controlled F1's commercial rights—the FIA owned the rights but gave the teams access to them in order to make money from them, which they failed to do sufficiently—Ecclestone's company, Formula One Promotions and Administration (FOPA), came along to negotiate the deals for teams, taking a share of the proceeds. The remainder went to the teams and the FIA. In 1982, Ecclestone signed a three-year deal with the European Broadcasting Union to ensure consistent coverage in Europe, F1's traditional heartland.

All the puzzle pieces were in place. With guaranteed TV exposure, sponsorship rates increased, and this gave the teams more money to spend on cutting-edge technology. In turn, this attracted the best drivers, making the sport even more appealing to broadcasters—so TV stations paid more to broadcast Grands Prix.

This all put F1 on track for success, and Ecclestone in 1988 sold Brabham in order to concentrate on running FOPA. By the early 1990s, top drivers were commanding $10 million to $12 million salaries, five or six times what they received a decade earlier, and sponsors spent an estimated $400 million a season. Big-name car manufacturers such as Honda, Renault, Porsche and Lamborghini became involved, supplying engines.

Ecclestone's contracts forced race organizers to hand over the rights to income from trackside advertising and corporate hospitality to F1-owned companies. The only income race organizers generally get from F1 is via ticket sales—and this barely covers the hosting fee he charges, now averaging $27 million per race annually. Further, this fee has a sting: There are escalator clauses in most contracts that increase the hosting fee up to 10 percent annually. This has insulated F1 from economic downturns, and, according to the sport's industry monitor Formula Money, from 2003 to 2011 the sport's revenue accelerated 9.6 percent annually on average.

Naturally, organizers have to raise ticket prices every year just to keep up with the escalating expenses. In order to have enough money in the bank to cover the fee and their race's running costs, organizers also need to make sure they have as close to a capacity crowd as possible. To stand even a chance of making that happen, the organizers promote and advertize their races aggressively—so Ecclestone does not need to spend money marketing F1. It is one of the secrets to F1's commercial success (see box at right).

The sport also got an unexpected boost when tragedy struck in 1994. Three-time world champion Ayrton Senna—its biggest, brightest star—was killed at the San Marino Grand Prix in Italy and instead of turning fans off, his death drew even more attention to F1.

Television audiences soared during the next few years, particularly in Germany, which got its first world champion with Michael Schumacher in 1994. Indeed, it was Schumacher who emerged as Senna's successor in the wake of the Brazilian's death. Thus, when Schumacher joined Ferrari in 1996, interest grew even more—and he received a previously unheard-of $20 million annual salary. But he was far from being F1's biggest winner.

By 1995, FOPA had revenues of $140 million, and Ecclestone's $90 million salary made him the world's highest-paid executive. The FIA at the end of the year transferred the F1 rights for 14 years to Formula One Management (FOM), another of Ecclestone's companies. This time it handed him the keys to the billionaire's club.



The FIA's maneuver bypassed entirely the teams' “control” of the rights for the first time in history, and Ecclestone in 1999 secured a $1.4 billion bond on the sport's future revenues. He then raised $2.5 billion from selling stakes in FOM four times, most recently when current owner, private equity firm CVC, took over the majority of the business in 2006. Ecclestone now owns just 5.3 percent of FOM, but has managed to remain in the driver's seat, staying at the center of all the deals shaping the sport.

As the on-track action has intensified in recent seasons, F1 has become even more attractive to sponsors, and TV viewers have soared. It is now the world's most-watched annual sports series and in 2011 income from TV rights hit $488.9 million.

Countries are lining up to host a Grand Prix, but Ecclestone cannot simply add more races to grow F1's revenues. The teams' commercial agreements with Ecclestone cap races at 20 per season. Teams refuse to compete at any more due to increased travel costs and time away from home. However, this certainly has not stopped Ecclestone from making even more money.

He has moved F1 races to emerging markets in Asia and the Middle East, places such as Abu Dhabi, India, Singapore and South Korea. These countries use their Grand Prix to drive tourism and get on the global sporting map alongside developed nations. With this as the aim, governments are willing to directly fund the race-hosting fee; this has created an arms race between them as newer inclusions to the calendar are forced to pay a higher price than their predecessors.

In contrast, most European countries already get enough tourists and do not need to rely on F1 for promotion. This has led to races being dropped from countries with close F1 connections, such as France and Austria, while nations with little racing heritage are added. Grands Prix in wealthy new markets have also driven the growth of F1's corporate hospitality and trackside advertising outfits, and lined CVC's coffers as it also bought these businesses in 2006. The firm has been positively far from a passive investor. CVC has complete control over F1 and has thrown its full support behind Ecclestone; As a result, he is indeed as powerful as ever, despite being a minority shareholder.

Since CVC took over, Ecclestone's biggest masterstroke has been giving the teams a cut of F1's profits. For decades, they threatened to leave the sport because they were not getting enough prize money. Until 2006, their only share of the spoils was 47 percent of the income from TV rights, but after CVC bought F1's advertising and hospitality divisions, Ecclestone offered the teams a 50 percent share of profits from all the sport's revenue streams. It immediately doubled the teams' prize money to $698.5 million in 2011. Though the profit share is F1's biggest cost, the payouts decrease if the business runs into trouble—another mechanism that is meant to insulate it from economic downturns.

Unlike most major U.S. sports leagues where teams with poor results get first choice in a postseason draft, F1 cements the strength of its best-performers. Red Bull Racing received around $87 million in prize money for winning the championship last year, while the defunct HRT team received nearly nine times less for finishing last.

The strongest teams are favored even more in F1's latest commercial agreements, which run from this year until the end of 2020. A dedicated prize fund of 7.5 percent of F1's profits or $100 million—whichever is greater—will now be split between the top three teams based on races won in the four seasons prior to 2012. They are Ferrari, McLaren and Red Bull. It might seem biased, but, in fact, the move secures F1's future.

Ferrari is the only team that has competed in every F1 season since 1950, and it is undoubtedly the most renowned name. It has also won more championships than any other team, with McLaren in second place. Red Bull is the one to beat at the moment, as it has won the last three titles.

Most other teams have changed names multiple times over the past five years alone, so they have understandably not built up anywhere near as much goodwill with the fans. But their changing identities have not damaged F1, thanks largely to the performance of its most well-known names.

Ecclestone, now 82, has been responsible for the most important commercial developments in F1 history, but there is little doubt that Ferrari, McLaren and Red Bull will outlast him.

F1's Vital Revenue Statistics in 2011 (most recent data):

Freight and travel: $71.4 million (F1 charters planes, and teams pay it to transport their equipment outside of Europe. The rate is reduced from what they would have to pay an outside commercial airline.

GP2 and GP3 Series (F1's junior series): $44.8 million

Race-hosting fees: $512.1 million

Advertising and sponsorship: $223.6 million

Paddock club (corporate hospitality): $78.7 million

TV rights: $488.9 million

TV and production services for local TV affiliates around the world: $41.1 million

Other miscellaneous: $51.7 million

Total revenue: $1.5 billion

Editor’s note: All season long, Autoweek will detail the ins and outs of the F1 business. Formula Money editor Christian Sylt is an expert on the finances and politics behind the richest, most glamorous and expensive form of all motorsports.

By Christian Sylt