Why business is the real engine which powers F1

The only aspect of Formula One which most fans get to see is the cars going round the track - but behind the scenes a complex network of relationships and agreements is in place to literally get the show on the road.

The first race of the World Championship took place in 1950, but it shared few similarities with the present day spectacle which is F1. Almost all the differences are down to the commercialisation of the sport: it has affected the teams’ facilities, the calibre of the drivers, the style of the cars, circuit facilities, television exposure and the number of brands involved with the sport.

The catalyst for such rampant commercialisation was the signing in 1981 of the first Concorde Agreement, the contract which binds the teams, F1’s rights-holders and its governing body the FIA. It commits the teams to race and F1 has been commercialised around them.

According to Formula Money, sponsorship brings in around 48 per cent of teams’ revenue with prize money providing the bulk of the remainder. Both are dependent on television exposure. Since the signing of the first Concorde Agreement, F1’s rights-holders have committed to keeping grands prix on free-to-air television: this has been a master-stroke, driving the sport's average TV audience up to 515 million - making it the most-watched sporting event in the world over the course of a year.

Coming full circle, F1 has established such a dominant position that it is now doing deals with subscription channels such as Sky Sports in the UK and Sky Italia in Italy. Despite having a seemingly unconquerable position, F1 has retained some degree of free-to-air coverage in these markets.

There is good reason for this: the high TV audience allows teams to charge top dollar for sponsorship. Generally speaking, the rear wing, air intake box and side-pods of the car are prime logo positions and a sponsorship deal with a top team involving any one of these locations is likely to cost around £13 million annually. At the lower end of the spectrum small logos are often found on the bottom of the sidepods or on the nose and these can generally be bought for under £3 million per year with a high-ranking team.

Having 515 million viewers makes F1 extremely attractive for broadcasters so they too pay top dollar to broadcast the sport. In turn those TV stations which take advertising get money back from the companies which want to promote their products to F1’s captive audience during the commercial breaks - with the exception of the BBC.

How business powers F1 - Formula 1

The fees from TV stations are one of the three biggest sources of revenue for the F1 Group which runs the sport. TV rights payments came to £313 million last year and were second only to race hosting fees. Although they are F1’s biggest revenue source, contributing a total of £325 million last year, it is not possible simply to add more grands prix since the Concorde Agreement caps the number at 20 annually and it has hit the ceiling this year with the return of the United States Grand Prix.

Instead of increasing the limit on the number of races, F1 supremos Bernie Ecclestone has implemented a savvy strategy of marketing the sport to emerging nations who want to put themselves on the global map. Hosting an F1 race puts a country on a calendar containing exotic and well-developed nations such as Australia, Malaysia, Japan and Monaco. It also gives promotion to the sport’s massive TV audience.