Finance

F1 Ready to Rev Up Its Engines

Racing circuit, in decline, now poised for profit with Liberty, Bratches at wheel 1/30/2017 8:00 AM Eastern
TakeAway

A new management team has big plans for Formula One as Liberty Media closes its acquisition of the auto-racing circuit.

With the $4.4 billion purchase of motor racing icon Formula One in the rear-view mirror, Liberty Media seems poised to reinvigorate what has been a sagging brand over the past few years, including beefing up the U.S. presence for the sport.

 

Liberty closed on the Formula One acquisition on Jan. 24, ending what had been a four-month approval process. As part of the deal, former 21st Century Fox vice chairman and media veteran Chase Carey as chairman and CEO. Formula One’s former CEO, racing legend Bernie Ecclestone, will be chairman emeritus of the company, offering counsel to Carey but having little control of operations.

 

Carey, who has admitted in some reports that he’s not a huge racing fan, nevertheless has some big plans for Formula One, including expanding the number of events from 20 to 25 and including some top American cities on the circuit.

 

Last week, he hired former ESPN executive vice president of sales and marketing Sean Bratches as managing director, commercial services. Bratches, who helped turn ESPN into a powerhouse of affiliate fees, licensing revenue and advertising growth, is expected to do the same for Formula One.

 

LAGGING AUDIENCE

 

It won’t be easy. Formula One, noted for its sleek cars, high speeds and exotic settings, has been on the decline since its heyday from 2005 to 2008. While it is still the third-most-watched sport in the world behind the World Cup and the Olympics, viewership has dropped from 600 million in 2008 to about 400 million in 2016.

 

Some critics have pointed to the high fees for holding races — Formula 1 licensing fees can reach $50 million in some cases, making it nearly impossible to stage an event without state involvement. That has led to events being held in oil-rich areas such as Bahrain, Abu Dhabi, Azerbaijan and Russia, at the expense of Western European venues. For example, Germany, which has several drivers on the F1 circuit and counts Mercedes-Benz as a major sponsor, isn’t on the schedule for 2017.

 

“I think when you look at the last four or five years, the sport has really not grown to its potential, and we have an opportunity to really grow this sport in a new and exciting way,” Carey told CNBC last Tuesday (Jan. 24).

 

Liberty is making a big commitment: Formula One will be its largest asset and it was expected to formally rename itself the Formula One Group late last week, changing its NASDAQ ticker symbol from “LMC” to “FWON.”

 

Formula One splits its revenue between race promotions — it holds the FIA F1 World Championship, among other races — broadcasting, advertising and sponsorship, and other businesses including TV production, hospitality and licensing, according to Liberty. With revenue of about $1.8 billion in the past 12 months, Formula One said back when the deal was first announced that it has $9.3 billion in revenue under long-term contracts through 2026.

 

Widening the scope of Formula One could mean adding races in U.S. cities, Carey said according to several reports. Already, Formula One holds one regularly scheduled event in Austin, Texas, but races in New York, Los Angeles, Las Vegas and Miami could be on the agenda.

 

The Formula One chief has said in the past that promoting American drivers could help boost the popularity of the sport. Carey’s television experience also could play a major role.

 

Carey told CNBC that he eventually sees F1 events hyped as heavily as the Super Bowl.

 

LONGER-TERM FOCUS

 

Critics have said in the past Formula One was managed with a short-term, narrow focus aimed at keeping the car makers happy. Ferrari, for example, received a $100 million stipend from Formula One to keep its cars in the circuit instead of rival racing groups like the Indy-Car Series. But with Liberty, that is expected to change.

 

“This is a global sport with [about] 400 million viewers that has little social-media presence, large opportunities to grow advertising, sponsorship and video-on-demand revenue, continuing to take advantage of distributor/ SVOD/Internet competition to drive broadcast rights fees materially higher, opportunities to get teams on same page to benefit everyone in the series,” Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said. “In the end I see many opportunities in this sport and I expect the smartest guys in the room — Liberty and Chase Carey — to much more fully exploit the opportunities for the sport.”

 

That could also include an over-the top component. Liberty Media CEO Greg Maffei said in November that an OTT component was being considered, although issues related to rights with regard to the circuit’s various racing teams still had to be worked out.

 

On Liberty’s third quarter earnings conference call in November, Maffei said those issues weren’t “insurmountable,” adding that “there is a lot of potential,” in an OTT offering.

 

Wlodarczak agreed.

 

“You don’t have to get a very large penetration of their user base to drive very healthy jumps in their revenue,” Wlodarczak said. “I think they will need to nurture rivalries and bring in drivers from key markets, such as the U.S. and China.”

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