Formula One is suffering from a long list of ailments - high costs, lower income, spectators turning away, TV viewers switching channels and divisions in the ranks. Plus, the manufacturers involved in the world's costliest sport are determined to start a breakaway series.
With the 2005 series under way as of last weekend, the future of Formula One is uncertain. The battle is between Bernie Ecclestone's Slavica Ecclestone Corp (SLEC) and the manufacturer's proposed Grand Prix World Championship (GPWC) and revolves around the sharing of commercial revenues with the manufacturers. The GPWC is determined to launch a rival series in 2008 when existing contracts expire. Ecclestone, and right-hand-man Max Mosley, president of the Formula One governing body, Federation Internationale de'l Automobile (FIA), have waged a pitched battle to ensure it doesn't happen.
Their first coup was to secure champions Ferrari in their own camp until 2012. They also offered the other teams 50% of the commercial revenues from 2008. Mosley says this amounts to US$500m, to be spread over the five years of the new agreement and includes a series of backdated payments for the years 2004-2007. In addition, Ecclestone's company, Formula One Management (FOM), charged with running Formula One, has long-term contracts with all the promoters and television companies until 2012, worth about $2bn.
Mosley and Ecclestone were convinced the teams could not refuse the deal. But they were wrong. The rest of the teams, including BMW-Williams, McLaren-Mercedes, BAR-Honda, Renault, Toyota, Red Bull, Midland and Sauber, remain committed to the GPWC.
It's the latest in a long-running battle. The proposal of a 50% share of revenue was tabled in December 2003. It meant FOM would pay $414m to the teams - 70% of its revenue last year, according to the magazine BusinessF1. But it came with a catch - the carmakers would have to agree not to pursue plans for a rival series for 10 years. They refused in April last year.
Other players in the battle are the banks, Lehman Brothers, JP Morgan and Munich-based Bayerische Landesbank, which together own 75% of SLEC, raising the possibility that Ecclestone and Mosley could be sidestepped if the banks and carmakers got together. The banks are keen to protect their investments, but the manufacturers are not keen to dish out the $100m/year to get the rival series running for the first five years. No-one has admitted that the banks and manufacturers have spoken, but the possibility is obvious.
In April, Ecclestone will face a series of court challenges from the shareholder banks over the rights to Formula One. Ecclestone claims to own the branding and trademarks, conveniently restricting the banks' interest to the operating companies. The court case will decide just how much power Ecclestone has.
The battles are vicious because of the money involved. According to some estimates, Formula One now generates more than $1bn/year from broadcast rights, merchandising and track revenue. The 74-year-old tycoon and his wife Slavica are worth $4,2bn, according to the British Sunday Times.
His friend Paddy McNally, who looks after the hospitality and entertainment side of Formula One, is worth $402m, McLaren boss Ron Dennis is worth about $82m and Frank Williams $76m.
Ecclestone got his hands on Formula One rights nearly 25 years ago after a similar battle.
The commercial era of Formula One started in 1968 when Colin Chapman emblazoned his Lotus 49s in Imperial Tobacco's Gold Leaf colours.
The potential for more revenue was obvious. It took almost 13 years and a drawn-out struggle for control of Formula One between the Formula One Constructors' Association (Foca) and the Federation Internationale du Sport Automobile (Fisa), the world motor sport governing body under the leadership of Jean-Marie Balestre, before Ecclestone acquired the commercial rights, and won the battle.
Through Foca, the British garagistas (as Enzo Ferrari used to call the British-based privateer teams such as Brabham, Lotus, Williams, March and McLaren) came of age, and with the Concorde Agreement in 1981 an exclusive club was formed - the Piranha Club, as it soon was called by some journalists.
Over the next two decades Ecclestone built up the Formula One empire, and in the process made his friends, colleagues and acquaintances multimillionaires, but he kept it exclusive - $42m is required to enter the realm of the Piranha Club, and there is room for only 12 members.
According to BusinessF1, TV figures changed dramatically in 2003 due to new methodology being used by the FOM to increase the accuracy of its annual Broadcast Statistics Report.
The global TV audience suddenly fell from 1999's average of 291,5m viewers per race to only 161,9m on average (and only just more than 122m viewers of live coverage). Grands prix are broadcast to more than 200 countries in the world. These kinds of statistics are equalled by only the Olympic Games and the soccer World Cup, but, with 19 grands prix a year (up from 17 last year), sponsors get more because the Olympics and World Cup take place only once every four years.
"For any sponsor this kind of exposure is obviously attractive," says Dave McGregor, MD of the motor sport promotion company Pole Position and erstwhile promoter of the SA grand prix.
"They want their brand to be associated with the advanced technology of Formula One and also like the excitement, glitz and glamour that is part of the show - though viewing figures have dwindled. But many find the price too steep - a small decal on the end plate of a Formula One car can cost a company up to $20m/season."
Formula One has become the victim of its own success. With everyone wanting a slice of the action, spiralling development costs have made it almost unaffordable.
In a survey, the international Formula One magazine F1 Racing found a top team's costs had increased from about $75 500 in 1969 to $800 000 just a decade later, and to $350m in 2004.
Though accurate figures are hard to come by (the teams do not divulge their budgets), the F1 Racing investigation and BusinessF1 survey peg the cost of modern Formula One at between $2,2bn/year and $2,45bn/year.
Driver salaries eat away about $145m (R860m) of the total, with Michael Schumacher, at a rumoured $40m, taking most and brother Ralf now the second-highest earner at about $18m.
Team salaries are close to the $200m-mark, with highly qualified technical directors and chief designers such as Rory Byrne and Ross Brawn from Ferrari and Adrian Newey from McLaren earning six-figure salaries. (See table for other costs.)
More than $2,3bn is split between the teams (see table on this page). The budget figures for the new Red Bull and Midland teams are not known.
Big sponsors such as Vodafone, Marlboro, Shell, HP, West, Siemens, Benson & Hedges, Mild Seven and Lucky Strike do not readily divulge the value of their contributions towards the teams' coffers, but according to Formula One insiders, HP now spends about $100m-$120m/year with BMW-Williams and Marlboro's contribution to Scuderia Ferrari is about $80m. West forks out about $50m/year for its name on the McLaren-Mercedes cars and Lucky Strike about $45m for the same honour at BAR-Honda.
Ferrari's dominance last year secured it a huge 28,5% share of worldwide television coverage and its total fan base has grown to 460m, according to a recent report from the image recognition company Margaux Matrix. Renault scored 18,1% and BAR-Honda managed only 13,5%, despite finishing second in the championship, due to its lack of race wins.
With all the dark clouds gathering over Formula One there is still a silver lining, as Mosley points out. For the first time in nearly 14 years the 10 teams which lined up in Melbourne on March 6 did not go into the new season wondering if they would see it out.
This is in stark contrast with a year ago when there was a possibility that three of the teams would fold. The Jaguar team has since been acquired by the Austrian billionaire Dietrich Mateschitz and is now called Red Bull and Jordan has been taken over by Russian-born Canadian businessman Alex Schnaider and is now called Midland.
Formula One is at a crossroads. The long-term future of the sport hangs in the balance and the power-wielders are not getting younger (Mosley is 72) and there are no apparent successors in sight. The membership of the Piranha Club is dwindling. The entrepreneurs are moving out, the corporates, with a vested interest in the sport, are moving in. The time of exclusiveness is over, and a new era of accessibility must be ushered in.
