Sports is one of the most popular industries in the world today, with billions of fans
worldwide.
There are millions of sports games played around the world, but only a few are extravagant
enough to be classified as one of the world's most luxurious sports.
Equestrian, Formula One, Sailing, Tennis, and Polo are among the most expensive sports.
And if we talk about Formula one specifically, Formula 1 cars are among the most expensive
— and not to mention, the fastest — automobiles on the planet.
Powerful hybrid power units, Weightless carbon-fiber chassis, Sophisticated aerodynamics, as well
as the research and development process, all contribute immensely in making Formula 1 the
most expensive and luxurious sport.
Join us today to know more about Formula One.
What is the economic perspective of this sport?
What makes it so fiercely competitive?
And why do some people go completely crazy about it?
So…
Let’s jump right in…
Formula One (also referred as Formula 1 or F1) is the highest level of international
racing for open-wheel single-seater formula racing cars sanctioned by the Fédération
International de l'Automobile (FIA).
The word "formula" in the name refers to a set of rules that must be followed by all
participants' vehicles.
If we talk about its history…
Car racing as a sport began before WWII, and Bernie Ecclestone established the official
Formula 1 championship in 1950 in England.
These racing cars were quite similar to road cars back then, and for many years, the Formula
1 cars' technical evolution was limited to the improvement of combustion engines.
Later, in the mid 90’s, engineers used computer simulations and analytics to optimize performance
and increase pilot safety, which accelerated Formula 1 sports car innovation.
These cars are now the world's fastest regulated road-course racing cars.
The Formula 1 racing championship season is from March to October, every year.
There are 22 races in total, each hosted in a different location and region.
Each race awards points to the various positions, and at the end of the 22 tracks, the driver
with the most points wins the championship.
There are ten teams in total, and they compete by adding up the points earned by their drivers.
Talking about its popularity….
It has seen exponential growth in recent years, with an increasing number of fans around the
world becoming addicted to the high-octane sport.
The total television audience in 2021 was 1.55 million, a 4% increase over the previous
season.
Likewise, in 2021, it experienced a massive increase in followers across all social media
platforms, with a 40% increase in total followers, bringing the total number to 49.1 million.
In fact, the number of video views increased by 50% to 7 billion, and the number of visits
to the official F1 website increased by 44% to over 7 billion.
The Formula 1 business is enormous, and the fact that it benefits numerous regional economies
and communities makes it very appealing.
Similarly, the F1's competitive nature is another fascinating aspect, which is one of
the main reasons people go crazy over it.
Now, let’s take a look at the economics of Formula 1…
Formula 1 is not only a worldwide passion sport with over 425 million fans, but also
a massive industry employing over 50,000 people in 30 countries.
You must have heard of "Money makes the world go round," the situation is no different in
the world of Formula One.
Most sports like Football, Rugby, or Basketball are much easier to succeed in without needing
lots of money, but Formula One and motorsport are entirely the opposite.
The F1 championship has high operating costs.
The average season's spending budget per team is around $300 million.
And to be profitable, revenues must be greater than 3 billion dollars per year.
Formula One's revenues rose from $1.78 billion in 2017 to $2.022 billion in 2019, but due
to the pandemic, they fell to $1.145 billion in 2020.
However, it had a remarkable year in 2021.
Formula 1's total revenue for 2021 increased by nearly 87 percent to US$2.14 billion and
the operating income was $40 million, versus a loss of $444 million in 2020.
Formula One, like any other business, necessitates sound financial decisions.
These decisions include increasing F1 revenue and reducing overspending.
This year, Formula One introduced a series of rule changes, including budget limits that
are designed to make the competition closer.
And with more people watching Formula One, there's a greater incentive for better racing,
better regulations for better racing, and more innovation.
Now you must be thinking…
If the operating costs are much higher, where does the money come from?
Or How does Formula 1 make a lot of money?
Formula 1 is big business, and it makes money from a variety of different courses.
The money generated is crucial because it helps to fund the sport's operations.
Formula One generates revenue in the following ways:
1.
FOM Payments Let's start with the most important: FOM Payments.
FOM stands for Formula One Management, in case you didn't know.
The FOM pays the Formula One teams in five different ways.
• C1 Payments The C1 payment is the first level of guaranteed
payments.
All F1 teams that have competed in the championship for the past two years receive a payment of
$36 million.
• Prize Money The second one is prizes for the constructor's
championship, which is distributed based on the team standings at the end of the competition.
Mercedes finished first in 2019 and received $ 61 million as a result.
Ferrari finished second and was awarded $ 52 million, while Red-bull was awarded $ 41 million.
Because Williams Racing finished last, they were awarded only $ 13 million .
• Ferrari Budget The next payment is the Long-Standing Team
or Ferrari Budget, which includes a whopping 68 million dollars for the oldest F1 team,
Ferrari.
Williams Racing is the second-oldest team in Formula One, but they only receive $ 10
million per year.
• Constructors Championship Bonus (CCB) It's a $5 million payment to Ferrari, Mercedes,
Red Bull, and McLaren for winning a slew of championships.
Bonuses are not always distributed evenly, with the top performing/winning teams receiving
slightly more than the other teams.
• Other Payments Finally, there are some other payments that
are contingent on the signing of separate contracts.
For example, Mercedes received $ 35 million for fulfilling their promise of winning two
championships, and Red-bull received $ 35 million for being the first to sign the "Concorde"
agreement.
2.
Sponsorship and Partnership Sponsorships are the next major source of
revenue for Formula One teams.
F1 competitions are heavily influenced by sponsors.
On average, a team has 15 to 25 sponsors, each of whom pays a fee to have their logo
placed on the car.
Because they get more TV time and are more marketable, the better-performing teams will
attract more sponsors.
It's especially true in the opposite direction: if a team or driver has a bad reputation,
sponsors will avoid them.
The top four teams typically earn more than $ 40 million in sponsorships, according to
a rough estimate.
Sponsorship contracts are typically negotiated for a minimum of two years and a maximum of
five, with the majority falling somewhere in the middle (3 years).
F1 sponsors include ROLEX, DHL, Aramco, Pirelli, Emirates, Heineken, AWS, Liqui Moly, Expo
2020, AMG, 188Bet, Hotels for Hope, Fanatec, Ferrari Trento, Zoom, Herjavec Groupe, and
Drive Coffee.
3.
Investments The next way for teams to make money is through
investment from a parent company or shareholders.
The majority of teams accept this money from their owners because they want their teams
to improve season after season.
In 2019, Mercedes received 80 million dollars per year, while Racing Point (Aston Martin)
received only 25 million.
4.
Advertisement and Promotion The other way Formula One makes money is from
broadcasting fees, television commercial rights, and advertising.
The sale of television rights, which in 2017 was worth $4 million in the United States
alone, is F1's most lucrative revenue stream and by the end of the 2020 season, it had
further increased.
5.
Driver-linked Incomes The other source is income from drivers.
This occurs in two ways: first, Formula One drivers are permitted to pursue personal endorsements
with other companies, though a portion of the proceeds must be shared with the team.
Secondly, sometimes what happens is that the lower-earning teams are often in desperate
need of cash, so they may hire "untalented" drivers who are willing to pay the teams a
large sum of money to drive their cars in the competition.
Take an example of Lance Stroll, who paid Williams $30 million to drive the car in 2017.
Fans, on the other hand, despise this because it allows many deserving drivers to join the
team while also allowing many talented drivers to leave.
6.
Tickets and Merchandise The "race-sanctioning fees" make up another
of Formula One's largest revenue streams.
This is the amount charged to host a Formula One race.
To be added to the calendar, every F1 venue in the world, from a classic like Monaco to
a newcomer like Baku, must pay a hefty fee to F1.
In addition to the already hefty sanction fee, venues must pay the racing organisation
a percentage of ticket sales, which is usually accounted for in the initial contract.
So…
This is a quick look at how a Formula One team makes money and runs a business, and
we expect Formula One to continue to make money as it will be interesting to see if
the revenues generated by F1 continue to rise in the coming seasons or not.
So, what are your thoughts about this sport?
Are you a fan or not?
Please share your reviews in the comment section below.
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Thank you for watching.