The Australian grand prix roars into action at Albert Park in Melbourne this weekend, sixty years since the same venue hosted its first Formula One contest.
To mark this milestone, the race, sponsored by Rolex, has been renamed Heritage Day and free entry was granted to thousands of F1 fans (referred to as ‘patrons’) on Thursday in possession of a general admission ticket for Sunday’s opening grand prix.
With just a few days remaining before the chequered flag gets the 2013 F1 season under way, ticket demand is considerably well ahead of last year, prompting organisers to build an additional grandstand to accommodate the enormous crowds.
Corporate demand for tickets is similarly buoyant. Melbourne’s Paddock Club facilities have been expanded and sold out for the third consecutive year several weeks ago.
From today, corporations such as Vodafone, Mercedes and Qantas will host more than 3,000 guests a day in ‘executive’ areas immediately above the team garages, an indication that economic recession continues to give the Lucky Country an especially wide berth.
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The same cannot necessarily be said of Formula One, for despite its ready association with glamour, jean-clad film stars and oodles of money, the next two years promise to be exceptionally tight for the sport.
“The majority of Formula One teams aim to do no more than break even,” says Christian Sylt, editor of the sport’s definitive business guide, Formula Money, before adding, “but this is probably the best they can achieve because most spend all of the money they generate attempting to win races rather than make a profit.
“Good race performances, not exceptional balance sheets, makes a team attractive to prospective sponsors, all of whom remain pivotal to the sport’s finances. Why? Because money generated from sponsorship accounts for almost 50% of the revenue going into the sport.”
And not surprisingly, a steady flow of large amounts of cash remains the sport’s lifeblood. F1 research and development (R&D) costs in particular have risen steadily over the past decade.
It has reached the stage where teams such as Williams, the only stock exchange-listed organisation in the series, spend almost half (£48.1 million) of their annual budget of almost £100 million in this area of their business.
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Meanwhile, the privately-owned Red Bull team spent almost £70 million on R&D last year, though it’s annual budget exceeded £200 million.
Given that Red Bull have romped to three consecutive constructor titles, does this suggest that, like so many other sports nowadays, Formula One success is a direct function of the amount of money thrown at its participants?
“Well, it’s not like, say football, where clubs such as Manchester City or Chelsea link up with a well-heeled sugar daddy and are suddenly successful. In most other sports, the aim is to be successful on the field of play and generate profits, but Formula One is a different ball game altogether,” explains Mr Sylt.
To a degree, the financial management at teams such as Red Bull typifies the sport’s sometimes bizarre accounting arrangements.
Many people continue to believe that Red Bull is just another F1 sponsor – in fact, it owns the team – and it so happens that the people who own the ubiquitous drinks brand are also massive Formula One fans.
When one considers how much money they invest in the sport, that comes as no surprise, but where do they see a return on investment?
“For organisations such as Red Bull, Mercedes and Ferrari who sell other products, the returns manifest themselves in terms of advertising exposure,” says Mr Sylt.
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“There is a recognised measure of this, known as advertising value equivalent (AVE). Over the past few years, as Red Bull have dominated the sport, they have received more AVE from Formula One than any other.”
In 2010, Red Bull’s AVE was estimated at £232 million, a figure it has surpassed in each of the last two seasons; in 2012, the total is understood to have reached almost £300 million.
“Whereas teams such as Brawn or Williams were built and nurtured over time and eventually provided their founders with a lucrative exit route (Brawn to Daimler and the Abu Dhabi wealth fund, Williams via a stock market float), teams like Red Bull do appreciate – and gauge – the massive exposure Formula One gives them,” continues the Formula Money editor.
“They’re not involved in the sport because they’re in search of short-term profits or an exit route, but to market their product to a colossal television audience.”
Red Bull’s business model could rightly be described as unique. Founded in 1987, the billionaires at the company’s helm have carved out a sporting niche populated with daredevils and outlandish sporting contests; indeed, Formula One is possibly the most conventional sport with which the company is associated.
“They could easily afford to buy several hundred million pounds-worth of international advertising,” observes Mr Sylt, “but as they’re huge F1 fans who clearly enjoy the thrill of dangerous sports, Formula One offers them the same level of exposure and they can enjoy the sport too.”
As the new F1 season will kick off with two empty slots on the grid, is this the way forward for the sport, ie introduce more billionaire private company owners and grands prix lovers intent of having their product promoted to a global television audience?
“There are not many such folk knocking around,” muses Mr Sylt, “in fact, I’d say the Red Bull guys are the only ones.”
It seems unlikely that F1 will ever see another Frank Williams-style character barge his way into the sport, not when annual team budgets average around $200 million.
“It’s certainly a less entrepreneurial sport than it was,” agrees Mr Sylt, “one which has become considerably more corporate, although as we know, corporations don’t necessarily always get their business strategies right.”
“It’s incredible how many companies think that being a sponsor is not much more than slapping their logo on the side of a car. Frankly, this only leads to an unhappy experience.
"They must activate their sponsorship by buying TV and billboard advertising in countries where races are held, by inviting buyers to F1 events and generally glad-handing people on the F1 circuit.”
Mr Sylt maintains that an F1 sponsor must allocate at least an additional 50% of their sponsorship costs on activating the sponsorship, but acknowledges too that some companies will fail to do so and ultimately leave the sport with unhappy memories and a depleted bank balance.
Perhaps this is the maximum any team owner can expect to receive too, although that prospect is unlikely to dampen proceedings at Albert Park on Sunday.
For a few hours at least, concentrating on any long-term financial problems Formula One must address will be suspended as the cars thunder past Melbourne’s six-figure crowd and a global TV audience approaching one billion.