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Paddock to Profits: The Economics of Formula-1

Writer- Om Bharadwaj | Editor- Gokul

Formula 1, also called the pinnacle of motorsport, allows only 10 teams, each deploying 2 drivers, making it extremely difficult for enthusiasts and even seasoned drivers to make it to the top. This blog aims to uncover the financial side of Formula 1 to shed light on the eye-watering sums that are needed, not only to host and sustain but also to compete in the sport. To give you a brief snippet, it took approximately 1 billion US dollars to just build the Yas Marina Circuit in Abu Dhabi. To earn money, we can see several types of price discrimination in the sale of tickets, catering to the “experience-hungry audience”. Sponsorship deals for drivers and teams, and the enthusiasm and anticipation of viewers from all around the world, make F1 one of the most glamorous sports telecasted.  

Costs of hosting an F1 race

Formula 1 races are hosted across the globe with 2024’s calendar consisting of 24 races in 21 countries. The costs of hosting an F1 race in a country vary across the globe. The circuits that have been there on the F1 Calendar for longer are subject to paying lower amounts as compared to newer ones getting added to the calendar. For instance, Monaco, one of the oldest tracks on the F1 calendar had to pay approximately 15 million per year while circuits such as Jeddah, in Saudi Arabia had to pay around 55 million per year to stay on the calendar. 

Apart from the hosting fee,  This cost is accompanied by several others such as certifications and clearances, service costs and temporary construction costs such as building grandstands for a street circuit. Las Vegas which was the latest addition to the F1 Calendar and organized by F1’s owner Liberty Media Corp. spent roughly 435 million US dollars and while there were no hosting fees, costs such as “safety, security and traffic planning”, something that is paramount in a street circuit like that of Vegas along with consultancy charges were incurred (among others) to successfully host the 3 day sporting event.

While these costs may seem absurd at first glance, these races have been anticipated to bring in the required revenue to recuperate these costs and be profitable. Hosting a Grand Prix brings along with it an economic boom around the area, with each race attracting 53% of its audience from abroad (on average). This massive influx of tourists and fans causes an increase in the revenue of local small businesses, such as hotels, restaurants and tourist agencies. While this has proven to be true in many countries, some can be put forth as examples of the obstacles that these sky high costs bring. Beloved tracks such as the Kyalami in South Africa and the Buddha Circuit in India have fallen out of the calendar due to the prohibitive costs of hosting the races. 

How do teams and hosts earn? 

While we have established that it takes an enormous amount of money to host these races, weekend after weekend, one might ask, how do these teams earn money after spending hundreds of millions of dollars to develop their car each year? What about the organizers? The teams primarily earn through sponsorships, which amount to millions of dollars. Brands ranging from Food and Beverages to even Tech companies pay millions of dollars to display themselves on these formula one cars. 

source :RN365

Another channel of income is through the prize money paid by F1 i.e the better a team performs, the more they earn. Red Bull Racing, the champions of 2023 have been estimated to take home 140 million USD, while Haas which placed 10th and last, was expected to receive 60 million USD, which makes each position and each point earned by the team matter all the more, making the sport even more interesting to watch. Teams also take drivers which bring in additional sponsorship to aid the team financially, for instance Lance Stroll in Aston Martin and Nicholas Latifi, the ex-Williams driver who brought Lavazza and Sofina on board with him. 

As for the organizers, F1 has slowly transitioned into making its race weekends into a spectacle and is selling the experience of attending this high-adrenaline event by a clever use of second degree price discrimination. F1 has segmented its tickets on the basis of location within the circuit, amenities offered and access to different events and other enriching experiences throughout the weekend. Its Paddock club tickets are now selling in tens of thousands of dollars, months before the races begin for 2024, with prices only increasing as the events approach (if they do not get sold out first). On the other hand, tickets are also sold as cheap as 45 dollars for certain tracks with the least amount of comfort and amenities to cater to new enthusiasts or the audience with lower willingness or ability to pay. F1 grand prix hosts also earn money through the events they host, which is being seen in unprecedented volumes as experienced in circuits such as Miami and Las Vegas in 2023. 

F1- A pay-to-win sport? The off-track race and the era of cost caps 

With a wide variety of constructors (teams) on the grid, some have enormous budgets to spend on research, development and even hiring/poaching top talent to compete for wins and championships. Reports suggest that Mercedes, the constructors’ world champion in 2020, spent over $450 million while Haas, the most struggling F1 team, had, in comparison, a measly budget of approximately $80 million. 

The team standings vs their spendings were highly correlated, pointing towards the fact that F1 was becoming a pay-to-win sport. A paradigm shift in the form of a cost cap, which essentially sets a ceiling up to which teams can spend money on developing their car, was introduced in 2021 in a bid to level the playing field. It is important to note here that driver salaries and marketing costs are not included under the cost cap. Top drivers such as Max Verstappen and Lewis Hamilton have been reported to have drawn salaries of 70 million (including bonuses) and 55 million USD respectively. 

In the face of these high salaries it is also becoming increasingly difficult, financially for people to make it to F1. One has to go through several steps before having a shot at the top rung of this sport which starts from racing karts as early as before one’s hitting the double digits. Racing veterans such as Ralf Schumacher have suggested that it would take around 15 million dollars just to get to Formula 1. This raises its own sets of issues of talent vs financial ability. With teams racing against each other, even off the track to out-develop and in turn out perform the other, the cost cap has forced teams with large budgets to come up with even more optimized, out-of-the-box solutions to keep themselves competitive, which is vital, with millions of dollars on the line. 

The grandeur of Formula 1 also comes with serious questions on the path to sustainability especially due to the extensive travel of hundreds of stakeholders (barring viewers) and transportation of all equipment across continents. Each season, which now has 23-24 races across continents, leaves behind approximately 256,000 tons of Carbon Dioxide. Click here to see what it means in tangible terms.The cost caps along with a more regionalised calendar along with the goal of net zero carbon footprint from factory to flag as promoted by F1 are some of the responses to a critical issue. With the new regulations charted out for 2026 and beyond, F1 aims to cut back the fuel consumption of each car - from 160 kg/race in 2013 to 70 kg/race in 2026. The organizers aim to keep F1 as fast and exciting as ever while not compromising on the much required steps towards sustainability.

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