“They say Formula One is a market, which it can’t be, obviously. Our market is independent – it’s a sport.” – Bernie Ecclestone

Overview

With over 75 million people tuning in to watch each riveting race, Formula One (F1) is by far the most popular racing league worldwide. The season usually runs from March to November, with races occurring on a bi-weekly basis. Formula One hosts twenty-two annual races in twenty countries spanning five continents, thus outlining its global prevalence. The competition has gained even more prominence in the post-pandemic era, with a total attendance of 5.7 million for the 2022 season (marking a 36% increase from before the pandemic). 

Team Financing

Formula One teams are financed through three main streams: Formula One Management payments (also known as FOM payments), sponsorship funding and investment. FOM payments encompass the Column One (C1) payment, prize money, heritage payments and Constructors Championship Bonuses (CCB).

The C1 payment is a basic source of income for teams, as it is a guaranteed $36 million payment given to teams that have competed in the championship for the previous two years. This is why the latest addition to the roster, Haas, only received their first C1 payment in 2018 as they joined the competition in 2016. 

Another type of FOM payment is prize money which is allocated based on how a team performs in a season. For instance, Mercedes received $61 million for winning the title whereas Williams took home $13 million as they finished last (2019 season). 

The third type of FOM payment is heritage money, also known as the “Ferrari budget”, as this is a $68 million fee only given to Ferrari as a reward for being a long-standing team. 

The final form of FOM payment is the Constructors Championship Bonus (CCB), which is a $35 million bonus received by Mercedes, Ferrari, RedBull and McLaren for being the most successful teams on the grid. 

Another main stream of income for teams comes in the form of sponsorships. On average, a team has 15-25 sponsors who all pay a sum of money to place their logo on a team’s car. The less popular and successful teams, such as Williams and Hass, receive much less in sponsorship funding as these teams usually have less air time during races and poorer reputations. This explains why Mercedes’ title sponsorship deal (i.e the main sponsor) with Petronas is worth $75 million per year, while Haas’ title sponsorship deal with MoneyGram is only worth $20 million per year.

The third stream of income for F1 teams is investment. Teams receive a sizable portion of revenue through investment from parent companies’ shareholders. For most teams, investment comprises approximately a quarter of yearly revenue. Like sponsorship funding and FOM payments, total investment into each team varies greatly. For example, Mercedes received $80 million through investment in 2018 whereas Racing Point secured a total of just $25 million in investment. 

On the other hand, the costs of F1 teams can be split into four main categories: research and development (R & D), salaries (such as Lewis Hamilton’s annual $40 million paycheck!), production and operations. Research and development expenditure for a team consists of wind tunnel testing, track testing, and other types of component-testing in order to ensure the readiness of a car for the upcoming season. Production costs for a team entails manufacturing expenses, engine building, and the purchasing of other key components of a car. Lastly, operational costs include logistics, fuel, production management, and services (e.g. marketing). Despite the massive amounts of revenue generated by teams, most of them actually fail to consistently return a profit per season. For example, Mercedes made a loss of $5 million in 2019 despite winning the championship that season. 

This begs the question: why do teams keep racing every season without making money? In reality, Formula One serves as a huge marketing platform for car companies’ (e.g. Mercedes, Ferrari and Renault) to demonstrate that their road cars are the best. Hence, the league indirectly leads to massive profits for these manufacturers because supporters of a team are more likely to buy their cars, and therefore the drought of profits does not wholly affect teams.

The Netflix Effect

Since Liberty Media Corporation’s acquisition of Formula One for $4.4 billion in 2017, the valuation of the league has doubled. This is largely due to the huge success of the Netflix original docuseries “Formula 1: Drive to Survive” which gives viewers a behind-the-scenes look into their favourite teams. The docuseries has undoubtedly revived interest in a previously dying sport through the creation of dramatic narratives and a condensation of season-long themes into half-hour episodes. When the show was originally released on Netflix in 2019, it was met with accusations from within the F1 community about unnecessarily glorifying race events and not accurately depicting the sport. Nevertheless, despite these initial criticisms, the show quickly gained traction and its ability to humanise the sport’s drivers and wealthy owners in a unique way has garnered much praise. 

The docuseries has been arguably the biggest reason why viewership of races expanded by 30% between 2017 and 2021, and has continued to grow since. In 2021, the number of unique users across both Formula One’s website and app skyrocketed to 113 million, which was a staggering 63% increase from 2020. As a result of this surge in popularity, the league was able to make a profit of $563 million and generated a substantial revenue of $2.5 billion in 2022 (an increase of 17% from 2021) at a time when most other sporting competitions were still financially recovering from the effects of the pandemic.

Local Economic Stimulation

Formula One races also lead to enormous economic benefits for host countries. For example, it is estimated that Monaco’s GDP expands by $110 million during race week. In addition, the race also leads to a considerable increase in the local population, with the population multiplying by five times in the build up to the weekend of the race, which in turn benefits local businesses greatly. Due to COVID-19, the Monaco Grand Prix was cancelled in 2020. As a result, Monaco’s GDP contracted to a much greater degree than neighbouring nations, thereby demonstrating the reliance of Monaco’s economy on Formula One.

A similar narrative can be found in Bahrain; the Bahrain Grand Prix has considerably contributed to the economic prosperity of the country. It is estimated that the direct economic benefits from the race amount to an average of $100 million annually. The race has also boosted the country’s tourism sector, with hotel occupancy rates increasing by 70% to 100% during race weeks. Furthermore, this has also led to greater investment into sports infrastructure (e.g. the Bahrain Sports City project), which is forecasted to also stimulate enormous economic growth.

Looking Ahead

Formula One has truly turned into an economic giant and is showing no sign of slowing down. By providing a prime marketing platform for automobile manufacturers through the sport, the league has been able to spur economic development in nations around the world. Having exploded in popularity over the last five years through their hit Netflix docuseries, it will be fascinating to see whether this growth in viewership and expansion of interest can be sustained. Recent data from the 2023 season has demonstrated that viewership figures for most races have not increased much since the previous season. This, however, could be due to the nature of how the season panned out – RedBull secured the title with six races still to go in what was arguably the most one-sided season in a generation. Only time will tell whether interest has peaked in the league, but one thing is evident: economically speaking, Formula One is in the fast lane.