Sector

Sports

Background

Stefano Domenicali is the CEO of Formula 1 and Arman Gokgol-Kline is an investor from Ruane, Cunniff & Goldfarb. We cover how Formula 1 operates and generates revenue, Stefano’s own story growing up with Formula 1 and running Ferrari, and the white space opportunities for F1.

Cover

Date

June 22, 2021

Episode Number

14

Formula One Business Breakdown

Background / Overview

Formula One (F1) is the pinnacle of global motorsport, operating as a unique blend of sport, entertainment, and technology. Founded as a loosely organized racing series in the mid-20th century, it was transformed into a commercial juggernaut by Bernie Ecclestone, who secured broadcast and commercial rights in the 1970s. Under his leadership, F1 grew from a niche European pastime into a global spectacle, with races spanning 21–23 countries annually. In 2017, Liberty Media acquired F1 for $4.6 billion, professionalizing its operations and unlocking new monetization opportunities. Headquartered in London, F1 employs a lean workforce at the league level, with most operational and technical expertise residing within the 10 competing teams, each employing hundreds to over 1,500 people. F1 operates as an asset-light business, licensing its brand and content while outsourcing race production to local promoters and team operations to independent entities, many tied to OEMs like Ferrari and Mercedes.

F1’s business model is distinct due to its global reach, technical complexity, and passionate fan base of approximately 400 million unique fans, surpassing the NFL (100 million) and nearing the Premier League (300 million). Its appeal stems from its blend of high-stakes racing, cutting-edge technology, and glamorous events, amplified by media like Netflix’s Drive to Survive, which has broadened its audience to include casual fans. The sport’s ecosystem—comprising the league, teams, drivers, promoters, broadcasters, and sponsors—requires careful alignment, governed by the Concorde Agreement, which dictates revenue sharing and cost controls.

Ownership / Fundraising / Recent Valuation

Liberty Media’s 2017 acquisition marked a turning point, shifting F1 from Ecclestone’s idiosyncratic, low-investment model to a professionalized operation. The transaction valued F1 at $4.6 billion, with Liberty focusing on fan engagement, digital expansion, and sponsorship growth. While specific enterprise value multiples from the deal are not disclosed in the transcript, the acquisition reflected confidence in F1’s untapped potential, particularly in under-monetized markets like the U.S. Since then, F1’s valuation has likely appreciated, driven by revenue growth and the 2021 Concorde Agreement, which introduced cost caps and revenue transparency, attracting financial interest in teams. For instance, teams have received acquisition inquiries, signaling a perception of F1 as a sustainable investment. However, no recent valuation figures or multiples are provided in the transcript, and public data on F1’s current enterprise value is limited.

Key Products / Services / Value Proposition

F1’s core product is its global racing series, delivering high-speed, technologically advanced competitions across 23 races annually. The value proposition lies in its exclusivity, glamour, and technical prowess, appealing to fans, sponsors, and OEMs. Key services include:

1. Race Events: F1 licenses races to local promoters, who pay fees to host events. These events attract millions of spectators and generate tourism, with promoters monetizing via ticket sales, hospitality, and ancillary events (e.g., concerts).
2. Broadcast Content: F1 produces high-quality race broadcasts, sold to global broadcasters and streamed via its OTT platform, F1 TV Pro, catering to avid fans with customizable viewing options.
3. Sponsorship and Advertising: F1 offers branding opportunities, from trackside placards to global partnerships, leveraging its premium audience and global reach.
4. Paddock Club and Ancillary Services: The Paddock Club provides VIP experiences, while F1 also earns from Formula 2/3, logistics, and e-sports.

The value proposition is multifaceted:

• For Fans: A thrilling, accessible sport with deep technical engagement (e.g., 1 terabyte of race data per car) and glamorous events.
• For Sponsors: Access to a wealthy, engaged audience (average fan wealth exceeds NFL/Premier League fans).
• For OEMs/Teams: A platform for brand building, technological innovation, and marketing (e.g., Mercedes estimates $1 billion in advertising value).

Segments and Revenue Model

F1 operates as a single-segment business at the league level, with revenue streams tied to its racing series. However, economically separable units include:

1. Race Operations: Licensing races to promoters.
2. Media and Broadcasting: Producing and selling content.
3. Sponsorship and Partnerships: Monetizing brand equity.
4. Ancillary Services: VIP hospitality, e-sports, and minor leagues.

The revenue model is a royalty-like licensing structure, leveraging F1’s intellectual property (brand, content, and ecosystem). Revenue is generated via:

• Promoter Fees: Fixed fees from promoters, ranging from near-zero (e.g., Monaco) to $30M+ for flyaway races in emerging markets. Fees are negotiated individually, with core European races paying $10–20M.
• Broadcast Contracts: Multi-year deals with broadcasters (e.g., Sky Sports, ESPN), with a mix of pay-TV and free-to-air, plus OTT via F1 TV Pro. Contracts include escalators and vary by market (e.g., UK commands high fees).
• Sponsorship Deals: Global, regional, and local partnerships, historically under-monetized but growing under Liberty’s professionalized approach.
• Other: Paddock Club tickets, Formula 2/3, and logistics (e.g., 747 fleet for team transport).

Splits and Mix

Revenue Mix

• Race Promoter Fees: ~33% ($660M of $2B total revenue).
• Broadcast Revenue: ~35% ($700M).
• Sponsorship/Advertising: ~15% ($300M).
• Other (Paddock Club, etc.): ~15% ($300M).

Channel Mix

• Direct (Paddock Club, F1 TV Pro): Small but growing, with F1 TV Pro targeting superfans.
• Indirect (Promoters, Broadcasters): Dominant, as F1 outsources race production and content distribution.

Geographic Mix

• Core markets: Western Europe (historic races like Monaco, Silverstone).
• Growth markets: U.S. (Miami, Austin), Middle East, Asia (flyaway races with high fees).
• 21–23 countries annually, with expansion into new markets like Miami in 2022.

Customer Mix

• Fans: 400M globally, with wealthier, more engaged demographics than NFL/Premier League.
• Promoters: Local governments, racing clubs, or businesspeople.
• Broadcasters: Linear TV (Sky, ESPN), pay-TV, and streaming platforms.
• Sponsors: Luxury brands, tech firms, and logistics companies (e.g., DHL).

End-Market Mix

• Motorsport enthusiasts dominate, but Drive to Survive has attracted casual fans, shifting the mix toward broader demographics.

Mix Shifts

• Historical: Heavy reliance on Western European broadcast contracts and core races.
• Current/Forecasted: Growth in flyaway races, U.S. market penetration, and sponsorships. OTT and e-sports are emerging channels, with F1 TV Pro and e-sports leagues targeting younger fans.

EBITDA Mix

Specific EBITDA splits are not provided, but promoter fees and broadcast revenue are high-margin, while sponsorship and other revenues (e.g., logistics) have lower margins due to higher associated costs.

KPIs

• Fan Base: 400M unique fans, with growth driven by Drive to Survive and social media.
• Race Count: 23 races in 2022, up from 19 pre-Liberty, with a cap at 25 to avoid oversaturation.
• Revenue per Fan: ~$5, significantly lower than NFL ($150) and Premier League ($20), indicating monetization potential.
• Broadcast Engagement: Over 1 billion hours annually, with growth in OTT and social media.
• Team Competitiveness: Concorde Agreement’s cost cap aims to narrow performance gaps, increasing fan engagement.

Trends suggest acceleration in fan growth, U.S. market penetration, and sponsorship revenue, with potential deceleration in race count due to logistical constraints.

Headline Financials

Financial Trends

• Revenue: Steady growth from 19 races (pre-Liberty) to 23 (2022), with potential for higher promoter fees and sponsorship deals.
• EBITDA: High margins due to low COGS (content production) and flexible opex. Team share (~65%) is the largest cost.
• FCF: Strong cash generation, with minimal capex (no track ownership) and low NWC requirements. COVID demonstrated cost flexibility.

Value Chain Position

F1 sits at the apex of the motorsport value chain, acting as a content creator and brand licensor. The value chain includes:

• Upstream: Teams (designing/building cars), OEMs (supplying engines), and suppliers (components, tires).
• Midstream: F1 (content production, brand management), promoters (race execution), and broadcasters (content distribution).
• Downstream: Fans (consuming content/events), sponsors (leveraging brand), and ancillary services (hospitality, e-sports).

F1’s value-add lies in its brand, global reach, and content production, which command premium pricing. Its go-to-market (GTM) strategy involves:

• Licensing: Selling rights to promoters and broadcasters.
• Direct Engagement: F1 TV Pro and social media to reach fans.
• Partnerships: Collaborating with sponsors and OEMs to enhance brand value.

F1’s asset-light model avoids upstream (manufacturing) or downstream (event execution) responsibilities, maximizing margins but limiting control over race execution.

Customers and Suppliers

Customers

• Fans: 400M globally, with high engagement (1B+ hours) and wealthier demographics.
• Promoters: Governments, racing clubs, or entrepreneurs paying fees to host races.
• Broadcasters: Sky, ESPN, and streaming platforms, with multi-year contracts.
• Sponsors: Luxury, tech, and logistics firms seeking brand association.

Suppliers

• Teams: 10 teams supply the sport’s core product (racing cars), with OEMs like Ferrari and Mercedes providing engines.
• FIA: Regulatory body setting technical standards.
• Logistics Providers: DHL and others manage global transport (e.g., 747 fleet).

F1’s supplier power is moderate, as teams and OEMs depend on F1’s platform for brand exposure, but F1 relies on their technical expertise.

Pricing

Pricing varies by revenue stream:

• Promoter Fees: $0 (Monaco) to $30M+ (flyaway races), driven by market demand, tourism goals, and historical relationships. Contracts are multi-year with escalators.
• Broadcast Contracts: High fees in core markets (e.g., UK), lower in emerging markets. OTT pricing (F1 TV Pro) targets superfans with premium subscriptions.
• Sponsorships: Historically simplistic (e.g., trackside placards), now shifting to nuanced global/regional deals. Pricing depends on brand exposure and partnership scope.
• Paddock Club: High-ticket VIP packages, with pricing reflecting exclusivity.

Pricing drivers include:

• Demand Elasticity: High for premium markets (e.g., Monaco, UK), lower for emerging markets.
• Brand Value: F1’s luxury appeal commands premium rates.
• Competition: Emerging streaming competition may boost broadcast fees.

Bottoms-Up Drivers

Revenue Model & Drivers

F1 generates $1 of revenue through:

1. Promoter Fees ($0.33): Local promoters pay fixed fees to host races, monetizing via tickets, hospitality, and events. Volume (23 races) and price ($10–30M) drive growth, with flyaway races commanding higher fees. Stickiness is high due to F1’s prestige, but promoter profitability varies.
2. Broadcast Revenue ($0.35): F1 sells broadcast rights to linear TV, pay-TV, and OTT platforms. Volume (global contracts) and price (market-specific fees) are driven by fan engagement and streaming competition. Contracts are multi-year with escalators, ensuring predictability.
3. Sponsorship/Advertising ($0.15): F1 sells branding opportunities, with growth potential in global/regional partnerships. Pricing is driven by brand value and fan wealth, with volume increasing as Liberty professionalizes sales.
4. Other ($0.15): Paddock Club, Formula 2/3, and logistics. Paddock Club is high-margin but limited to select races.

Revenue Drivers

• Pricing: Driven by F1’s premium brand, fan wealth, and market demand. Flyaway races and streaming competition boost fees.
• Volume: Limited by race count (capped at 25) and broadcast contract renewals. Sponsorship volume is underutilized.
• Mix: Shifting toward flyaway races, OTT, and sponsorships, with U.S. expansion (Miami) as a key growth driver.
• Organic Growth: Fan growth (Drive to Survive), new markets, and e-sports. Inorganic growth is limited, as F1 avoids M&A.

Cost Structure & Drivers

F1’s cost structure is lean, with high operating leverage due to its asset-light model.

Variable Costs

• Content Production: Costs to produce race broadcasts (e.g., cameras, technical crew). Low relative to revenue, as promoters bear race execution costs.
• Logistics: Partial costs for transporting teams (747 fleet), though teams absorb most expenses.
• % of Revenue: Likely <10%, as most costs are passed to promoters/teams.

Fixed Costs

• Team Share: ~65% of pre-team share EBITDA, the largest cost. Paid to teams via Concorde Agreement, ensuring ecosystem alignment.
• Sales and Marketing: Sponsorship salesforce and promotional activities, growing under Liberty’s professionalization.
• Technical Team: Regulatory and innovation support (e.g., hybrid engine development).
• Overhead: Minimal, with lean headquarters operations.
• % of Revenue: Team share dominates, with other fixed costs likely <20%.

Contribution Margin

• High for promoter fees and broadcast revenue, as COGS is minimal.
• Lower for sponsorships and other revenues due to sales/logistics costs.

Gross Profit Margin

• Likely >80% pre-team share, as COGS is low.
• Post-team share, margins remain strong due to high revenue and flexible opex.

EBITDA Margin

• Not specified but likely robust, driven by operating leverage and high-margin revenue streams.

Cost Drivers

• Team Share: Scales with revenue, ensuring team sustainability but capping league profits.
• Inflation: Minimal impact, as most costs are fixed or passed to promoters/teams.
• Operating Leverage: High fixed costs (team share, overhead) mean revenue growth drives margin expansion.

FCF Drivers

• Net Income: High EBITDA margins flow to net income, with minimal interest/tax expenses (not specified).
• Capex: Negligible, as F1 owns no tracks or major assets. Maintenance capex is minimal.
• NWC: Low, with short cash conversion cycles due to upfront promoter fees and broadcast contracts.
• FCF Conversion: Likely >80% of EBITDA, as seen during COVID cost adjustments.

Capital Deployment

• M&A: None at the league level, as F1 focuses on organic growth.
• Organic Investment: Investments in F1 TV Pro, e-sports, and U.S. market expansion (Miami race).
• Returns: High, given low capex and strong cash flows.

Market, Competitive Landscape, Strategy

Market Size and Growth

• Size: $2B revenue, 400M fans, with potential to grow to $6–10B (Premier League/NFL levels).
• Growth: Driven by fan growth (casual fans via Drive to Survive), new markets (U.S., Asia), and sponsorships.
• Volume: Capped at 25 races, with growth in broadcast hours and e-sports.
• Price: Rising promoter fees and broadcast fees due to streaming competition.

Market Structure

• Competitors: No direct competitors, as F1 is the pinnacle of motorsport. NASCAR and IndyCar are regional and less glamorous.
• Consolidation: Monopoly-like, with high barriers to entry (brand, fan base, OEM partnerships).
• MES: High, requiring global scale and technical expertise, limiting new entrants.
• Cycle: Growth phase, with professionalization and U.S. expansion.

Competitive Positioning

• Position: Premium, global, and technically advanced, appealing to wealthy fans and sponsors.
• Risk: Minimal disintermediation, as F1’s ecosystem is unique. Streaming platforms may disrupt broadcast revenue.

Market Share & Growth

• Share: Dominant in motorsport, with no significant rivals.
• Growth: Outpacing market (motorsport growth is flat), driven by fan engagement and new markets.

Hamilton’s 7 Powers Analysis

1. Economies of Scale: High MES, with global operations and fixed costs (team share, content production) spread over 23 races and 400M fans.
2. Network Effects: Fan engagement grows with competitive races, amplified by social media and e-sports.
3. Branding: F1’s luxury appeal commands premium pricing, with strong affective valence (glamour, exclusivity).
4. Counter-Positioning: Asset-light model avoids promoter/team risks, while Liberty’s professionalization outpaces rivals.
5. Cornered Resource: Exclusive broadcast rights and team partnerships (Ferrari, Mercedes) are hard to replicate.
6. Process Power: Technical innovation (e.g., hybrid engines) and data-driven fan engagement (1TB per race) enhance competitiveness.
7. Switching Costs: High for fans (no comparable motorsport), promoters (F1’s prestige), and OEMs (brand value).

Strategic Logic

• Capex: Minimal, with investments in OTT and e-sports for fan engagement.
• Vertical Integration: Limited, as F1 avoids race execution and team ownership.
• Horizontal Expansion: New markets (U.S., Asia) and products (e-sports, F1 TV Pro).
• M&A: None, as organic growth suffices.
• MES: Achieved, with potential diseconomies if race count exceeds 25, risking oversaturation.

Unique Dynamics of the Business Model

F1’s business model is unique due to:

1. Asset-Light Licensing: F1 generates $2B with minimal assets, outsourcing race execution to promoters and car development to teams. This maximizes margins but requires ecosystem alignment via the Concorde Agreement.
2. Global Reach with Local Engagement: 23 races across 21–23 countries create local fan bases, unlike regional sports (e.g., NFL). Flyaway races in emerging markets command high fees, balancing low-fee historic races (e.g., Monaco).
3. Fan Engagement Depth: F1’s technical complexity (1TB data per race) and glamour appeal to both avid and casual fans, amplified by Drive to Survive and social media. Revenue per fan ($5) is low, indicating monetization potential.
4. Concorde Agreement: The 2021 agreement caps team spending, ensuring sustainability and competitiveness. Revenue sharing (~65%) aligns teams with league goals, attracting financial interest in teams.
5. OEM Synergies: Teams like Ferrari and Mercedes derive $1B in advertising value, integrating F1 into their core businesses. This creates a unique dynamic where team spending fuels brand value, not just league revenue.
6. Sponsorship White Space: Under-monetized historically (15% of revenue), sponsorships offer growth potential via global/regional partnerships, leveraging F1’s wealthy fan base.
7. Broadcast Evolution: Multi-year contracts provide stability, but streaming competition (e.g., Amazon, Netflix) could drive fees higher, with F1 TV Pro targeting superfans directly.

Key Interviewee Insights

• Stefano Domenicali’s Passion: His lifelong connection to F1 (born in Imola, led Ferrari) underscores the sport’s cultural significance, driving fan-centric strategies like Drive to Survive and social media openness.
• Concorde Agreement Impact: Domenicali highlights its “earthquake” effect, making team finances transparent and attracting investment. Cost caps level the playing field, fostering competitiveness.
• Sustainability Leadership: F1’s hybrid engines and sustainable fuel plans position it as a tech innovator, appealing to OEMs and environmentally conscious fans.
• Fan-Centric Vision: Domenicali emphasizes interactive engagement (e-sports, live events), aiming to make fans “protagonists” and sustain growth.

Critical Analysis

While F1’s model is robust, risks include:

• Race Count Limits: Logistical constraints and oversaturation risks cap growth at 25 races, limiting promoter fee upside.
• Broadcast Contract Inertia: Multi-year deals delay OTT monetization, though streaming competition could accelerate growth.
• Team Dependency: F1 relies on teams for technical innovation and competitiveness, with cost caps potentially stifling innovation if too restrictive.
• Promoter Profitability: High fees for flyaway races raise sustainability concerns, though top promoters prove profitability is achievable.

F1’s low revenue per fan ($5 vs. $150 for NFL) suggests significant upside, but execution risks (e.g., balancing avid vs. casual fans) remain. Liberty’s professionalization is a clear strength, but over-monetization could dilute the brand’s exclusivity.

Conclusion

F1’s business model is a masterclass in leveraging a premium brand and global fan base through an asset-light, licensing-driven structure. Its $2B revenue, high margins, and strong FCF reflect operating leverage, while the Concorde Agreement ensures ecosystem sustainability. Growth opportunities in sponsorships, OTT, and new markets (U.S.) are tempered by logistical and cultural challenges. The model’s uniqueness lies in its global-local balance, technical depth, and OEM synergies, making it a compelling case for investors and entrepreneurs seeking to unlock value in premium ecosystems.