2022 Singapore F1 Grand Prix. 2022.
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Take an elite group of world-class racing experts. Ask them to spend less money to beat their bitter rivals. It turns out the result is a list of newly investable assets.
That’s how Formula 1 executives see things, crediting the league-wide budget cap with making team businesses more sustainable and increasing valuations.
“When we got involved, literally the bottom teams were being traded for zero. Today, I don’t think you can buy a team for less than $750 million, and the top teams are valued at (around ) $3 billion,” Liberty Media CEO said. Greg Maffei told CNBC’s Sara Eisen in the documentary “The Inside Track: The Business of Formula 1“.
The budget cap – set at $135 million per team in 2023 – limits the amount teams can spend to develop and build their race cars. Before its introduction in 2021, the league’s top teams could spend it multiple times in a given year.
It’s a model similar to that of American sports leagues, several of which limit team spending on player salaries (although F1 driver salaries are excluded) – and it’s the work of the owner of F1, Liberty Media, which bought the league in 2017.
“We realized that some of the things that the NFL, for example, has done to create more revenue parity, create a cost cap, allows for a much more competitive and more compelling sport,” Maffei said.
F1’s 10 teams each receive a share of the league’s revenue, from sponsorships and media deals. They also collect individual revenue through team-specific partnerships, hospitality and engineering efforts.
Better track performance makes it easier to make money, but it requires significant spending to achieve it.
“Before, someone who invested in a racing team didn’t know whether you would spend $200 million a year or half a billion a year. It was everything in between,” said Guenther Steiner, director of the Haas F1 Team.
Haas has witnessed a particularly aggressive revolving door of investors in recent years, plagued by poor network performance and poor luck: in March 2021, the team announced a title partnership with the company Russian fertilizer company Uralkali, only to abandon the investment a year later after Russia invaded Ukraine.
Haas now has MoneyGram and Chipotle among its sponsors. The budget cap, Steiner said, made the team’s bottom line more predictable and made it easier to onboard new partners.
“Due to testing restrictions, it is now difficult to get a driver out of America who may not have driven on these circuits,” said McLaren CEO Zak Brown.
Dan Mullan | Getty Images Sports | Getty Images
F1 teams spend huge amounts of money throughout the racing season to troubleshoot, repair and improve cars. Major in-season upgrades can be costly, but essential to a team’s success.
“It’s an R&D game,” McLaren Racing CEO Zak Brown told CNBC in June on the sidelines of the Canadian Grand Prix weekend in Montreal. “We’re in the prototype business. We have some new stuff on our car this weekend, we’ll have some new stuff on our car next weekend, and depending on your challenges with the car, that’s where you choose where to invest your money.”
Before Brown took over as McLaren boss in 2018, the team was losing money on an annual basis – up to “nine figures”, he told CNBC.
“Now we are a profitable sports team,” he said. “A lot of that is performance-based, and a lot of it is thanks to Liberty that when they came in, they established a cost cap.”
Find rebroadcast times “The Inside Track: The Business of Formula 1” on CNBC.
Disclosure: CNBC is a sponsor of McLaren Racing.