The Economics Of Formula 1

Author

Callum Booker
March 28, 2023

GM! It's Tuesday, March 28th - Today we're covering the high-octane world of Formula One, where top drivers like Lewis Hamilton and Max Verstappen can earn upwards of $50M/yr.

But did you know the F1 empire has increased in value by $15.6B in the last 6 years? Let's unpack its new owner - Liberty Media Corporation.

- Callum

FEATURE

The Wild Economics Of Formula One

Picture this: 25-year-old Max Verstappen inks a staggering $55m/yr deal with Red Bull Racing.

This sent me down the rabbit hole, into the world of Formula 1 and I was surprised by what I discovered.

Enter Liberty Media - possibly the most valuable sports empire in the world. They acquired F1 for $4.4B in 2017. Under its guidance, F1's valuation has reportedly soared to $20B.

Let's explore how Liberty Media masterfully transformed F1 from a niche racing organization into an immensely popular international sport.

So, What’s the Business?

F1 has plenty of lucrative revenue streams, such as ticket sales, merch sales, and hospitality through its Paddock Club, but here are the top 3:

1) Race Promotion: F1 attracts countries eager to host races. In 2022, F1 secured 23 annual circuit contracts, with each event contributing substantially to local tourism and economies.

  • China $50M

  • Qatar $55M

  • Australia $35M

2) Media Rights: Television broadcasters are eager to get into exclusive partnership deals with F1.

    • Sky Sports paid £1B to extend its exclusive broadcast contract with F1 from 2019-2024 to viewers in the UK and Ireland.

    • Disney-owned ESPN pays $90M a year for its US TV rights.

    3) Sponsorships: The sponsorship stickers you see on F1 race cars bring in income individually for each of the 10 F1 teams. F1 itself makes sponsorship money from various advertisements you’ll see around the circuit tracks.

      • Advertisers like Rolex, DHL, Heineken, and Crypto.com paid F1 a total of $650M in 2022.

      Liberty Media’s Innovative Playbook

      Now we know F1’s primary revenue streams but still haven’t solved the mystery of how Liberty Media acquired the business for $4.5B in 2017 and grew its value to at least $17.1B.

      So, let’s look at what changes Liberty Media made to bring popularity to the sport.

      A) Budget Caps – Make the Sport Competitive

      Prior to Liberty Media’s takeover, F1 was dominated by the teams that could afford to spend the most cash developing the fastest car possible. In 2019, Mercedes spent a whopping $443M on its F1 team while Williams, the bottom-ranked team, only spent $132M.

      • Top teams like Mercedes and Red Bull can have 15-20 sponsorships, and each of these sponsorships brings in tens of millions of dollars.

      • These top teams are incentivized by their owners to spend all acquired revenue to increase chances of winning because they use F1 Racing to drive indirect sales back to Ferrari, McLaren, Mercedes, Red Bull, etc.

      • Liberty media destroyed this pay-to-win model by implementing a $140M budget cap.

      • This budget cap applies to just about everything except the salaries for the top three highest-paid staff members and the F1 driver salary – this is why drivers like Max Verstappen earn an eye-popping $55M a year.

      B) Transparency

      Prior to 2017 when F1 was owned by private investment groups, much of how the sport operated was kept behind closed doors. While this added some mysterious intrigue to the sport, the general public didn’t understand F1 and was disinterested.

      • Liberty Media has broken this secrecy through the wildly successful Netflix show Formula 1 Drive to Survive, which attracted 16M viewers.

      • Since the launch of the series, viewership per race in the U.S. went from 537k in 2018 to 1.4M in 2022.

      C) Expansion

      F1 has always been popular in European countries like the Netherlands, Great Britain, and Belgium, but Liberty Media is working hard to popularize it among U.S. audiences.

      • There are 3 new race circuits opening up in the U.S. in Las Vegas, Miami, and Austin.

      • Liberty Media believes that the best way to expand a fan base is to bring races to its viewers.

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      Thanks all! See you on Thursday.

      Callum