FORMULA1 has moved into four new countries in the last 5 years and India will be the fifth new country this year. While there is much excitement about the new markets that the sport enters into, there is also much skepticism about its growth and expansion. I have mentioned in my previous columns that F1’s trend is moving out of Europe and into newer markets, most notably the B-R-I-C countries.
The growth of Formula1 in these newer markets is not always due to ‘motorsport’ reasons. There are countries with little or almost negligible motorsport history that continue to host annual F1 GPs (eg: Turkey). So why does Formula1 (via the FOM) explore these new territories?
Before I go about answering that question, there is one more trend that I would like to share with my readers. Traditional F1 markets (France, Belgium, etc.) have been on and off the F1 calendar. Their primary reason to not host F1 GPs is that it is inaffordability; not that there is sudden lack of interest in the sport. Locals in these countries swear by the sport and still are its primary TV viewing audience, but hosting the GP is something the circuit owners / local governments just can’t afford any longer.
Last week Australian GP organizers raised concerns about hosting the ‘Australian GP’ post expiry of their contract in 2015. Their concerns were the ever increasing ‘hosting fees’ that the organizers would need to pay Formula One Management – the commercial rights holder of the sport of Formula1.
Melbourne’s Mayor (the city that hosts the GP) shared that the Victorian tax payers subsidized the race by more than $40 million and the figure has only been rising. The circuit still needed an underwriting of nearly $2 million and that by 2015 the tax payer’s involvement in the Australian GP would only increase to a mammoth $70 million!
The question again is – who is this money paid to? What are the costs of hosting an F1 GP in your country / city?
The ‘hosting fees’ are paid to Formula One Management (FOM) and by Formula Money’s estimates, the total amount received in 2010 by FOM towards ‘hosting fees’ was $561 million (over 19 races) at an average of $29 million per GP venue (note: the fees are not standard for all venues). These fees are the single biggest source of FOM’s profits since there are very few costs associated with it. FOM simply grants the rights to host the GP and receives money for doing so. (eg: FOM sold the rights to host the FIA 2011 Indian Grand Prix to the JPSI Group).
So after the organizer buys the ‘rights’ to host the GP, the cost of building an F1 spec race track costs anywhere between $250-300 million. Due to the high nature of costs involved, the local / national governments usually fund the cost to build the necessary infrastructure. Of the 19 GP venues on the 2010 calendar, only Silverstone and Suzuka received no funding from the government. (The Indianapolis Motor Speedway too was not funded by the government). This is why Silverstone was unable to upgrade its facilities to host modern day Formula1 and talks were on to shift the ‘British Grand Prix’ to Donnington Park.
One is valid to question the source of income for the GP track organizer / government considering the huge payout to host a GP. Track revenue is mostly from ticket sales and in modern circuits a certain percentage of on-track advertising and hospitality is also involved. The organizers are permitted to sell sponsorship for the GP, but a GP sponsorship is usually priced between $6 million to $8 million. However, the sums are not enough to cover up the initial investments in building the circuit. Case in point about the Australian GP: Melbourne benefited from millions of dollars of advertising value and tens of millions of dollars of local revenue (via increase in tourism), but it is difficult to justify if the cost for the GP is an annual $50 million.
This takes me back to my first question – why would Formula1 (via the FOM) explore new territories? The answer can be assumed in many parts: a) the ability to pay those huge sums of money for the ‘hosting fees’ and the infrastructure. The growing economies are the easiest to convince; b) increase in TV reach (by taking the sport to the most populous nations, B-R-I-C).
FOM’s expansion formula does seem to be working with North Korea and many other Asian countries showing their interest in hosting an F1 GP. My question is, with the ever increasing costs for how long will this formula work?
