Friday, 15 May 2009

F1 Grand Prix - My Recipe for Success

I have been meaning to apply some simple economics to the financial problems of F1, in the sense that I do not think it has any.
There is much talk among the rulers of F1, basically Max Mosely and Bernie Ecclestone, that F1 is 'too expensive' and costs 'must be capped'. My contention, as I hope to show below is that the costs of fielding a team in F1 is not the problem at all and is no threat to its success.
A teams costs cap is nothing more than a price control. A study of economic history will show you very quickly that price controls do not work, ever. Price is a signal. If that signal is confused by political interference it will lead to malinvestment. Usually a price control is introduced to mask other problems. For example the minimum wage is set by reference to an arbitrary measure of poverty, not for the value that can be added if the worker is employed, hence jobs are destroyed and employment opportunity is reduced.
The problem with F1's costs lies in its governance and ownership. In essence the absolute ruler of the F1 country, Max Moseley has given a monopoly patent to his favourite oligarch Bernie Ecclestone. This is simple mercantilism and protectionism.
Max rules the FIA. He loves that. It is what he does best. He builds up its power and works hard to ensure its world domination as rule setter (analogous to the creation of law). He outsources the commercial management of his series (analogous to say, the Navy in Pepys time) to Bernie. Bernie is an oligarch. He takes his monopoly power and controls the circuit operators and the teams. He makes them do what he says and shares with them just enough money to keep them onside and makes sure that they fight amongst themselves (rather analogous to pre 1914 UK foreign policy towards Europe that is was best for us to keep it divided). Bernie is then able to grow his franchise and then sell it for a huge amount of money to a foreign power (a private equity group) but still maintain day to day control, because he is indispensable. By this arrangement Max and Bernie can keep their show on the road and hawk it around to more and more rich snobs who want the kudos of holding a Grand Prix. This pushes the traditional hosts in Europe into offering more and more money and so on as the whole scheme perpetuates itself. As an oligarch employed by a dictator Bernie can do this endlessly.
Meanwhile this monopoly induced price inflation works down to the competing teams. And the ever more restrictive rules drive out innovation, which again drives up costs. Creativity and original thinking are an anathema to a regulator as each change makes challenges their rules and their authority. It's a culture clash.
So there you have it. A dictator, working through an oligarch and a captive and restrictive regulatory bureaucracy. No democracy, no free market and too much regulation by an entrenched bureaucracy. Freedom and markets and the absence of regulation create real wealth for all. The opposite does the opposite, destroys wealth.
Now, I think that there has be only one F1, or preferably Grand Prix, championship and series. But I also think that other organisers should be able to offer competing championships. This will keep F1/Grand Prix honest. So what structure would work to lower costs in F1?
I have a four point plan.
1. Democracy. The FIA has to be reconfigured to give a bigger say to the interested parties. It needs more democracy. National MSA's, GP Teams, circuits need a say. Not sponsors as they are represented by those they sponsor. The FIA should not make a profit or surplus on its sporting activities.
2. Ownership. Max has to repossess the commercial rights from Bernie. The PE group behind Bernie sucks out too much cash that should go back into the sport. Bernie and F1 Admin are toast.
3. Freeing up the Market. Any circuit anywhere in the world should be able to bid for a grand prix. The fee to the FIA should be modest. Just enough to fund the FIA to make all the necessary checks for safety standards, general quality, financial resources and to assure themselves that the FIA's F1 franchise brand and sporting values are being properly upheld. Teams should either form a collective to negotiate for a share of the circuits income or better, should negotiate individually for start money. The FIA's rules will require a minimum number of bone fide Grand Prix teams as starters for the race to qualify as part of the F1 championship. This will ensure that teams of all standards of success are invited. TV rights should be let locally, and the income distributed among the teams. The FIA should also offer to the pen market a TV franchise on, say, a five year renewal basis. It will be in their deal with the circuit that this must be permitted and the feed could be sold to broadcasters in countries that wish to show the race. That income should be shared with the circuits and teams. Global motor manufacturers should have no special say in F1. It is a sporting challenge, admittedly technical and expensive, but not a commercial one.
4. Reducing Regulation. The regulations under which cars are designed should be hugely relaxed and simplified. This will encourage innovation and that, contrary to what you might think, will reduce costs. If one team spends millions and wins all the time, the gate receipts will go down, F1 will wither and the team will leave. It will be self correcting. For example, Ilmor's rotary valve concept would not have been banned. It was cheaper to make than poppet valves as there are less moving parts, but non - rotary valve engine makers would have had development costs. As nothing is truly secret the only extra costs would have been the higher salaries available to the engineers who had learned how it was done. In a couple of years everyone would have had rotary valve engines and the consequent mass development would have driven down the unit costs. Creative destruction works.
A simple plan, I think. And logical. But, it means that Max and Bernie lose income and power. Are they likely to do that voluntarily?
Update 16/05/09
Just been reading Mark Hughes column in Autosport. The revelation that Ferrari have a rules veto since 1998 simply reinforces my arguments. Now we have a dictatorship, in league with an oligarch countenancing a cartel. My arguments are even more valid. To cut costs in F1 weneed more deocracy, more freedom, less rules and more free market.


Mark Wadsworth said...

First define 'success'.

F1 is a fine entertainment for those who like to watch it, read about it etc (most viewers don't care about how it's financed), and is funded by advertisers (who pay for logos on cars or for TV commercials in the ad breaks).

In the middle of all this are people who enjoy mucking about with cars (about whom neither the spectator nor the advertiser gives a chuff).

So if viewers enjoy watching, if banks and tobacco companies or whoever can generate extra income by paying for advertising and people who enjoy mucking about with cars get paid for doing so, then I consider that a resounding success.

I'm with Clarkson on this one, who pointed out in The Sun today that Ross Brawn and Adrian Newey between them are responsible for about 90% of the last twenty years of F1 overall championship wins. Ferrari without Brawn (or without Brawn and M Schumacher) are just rubbish, however much money they spend.

Lola said...

Generally agree that its a sponsor-fest, which is why I prefer to race myself than go to ANY GP, ever. Unless it's as a sponsor or team guest!

But, in the end unless it is a 'sport' it will fail. And the reason for the all the current problems (if you think they are problems, and you may not) are down to bad dictatorial and financially greedy government, an oligarch, and too much regulation. Heard all that somewhere before have we?

They, the powerful in F1, are doing the same wrong things as Obama, Brown and the rest of them.

J Bonington Jagworth said...

I wonder how Max would react if his spending on dominatrices were capped?

Bearer of Light said...

You have great insight to the sport !

Please do leave comments on my blog too.. Greatly appreciate it !!