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Sunday, 21 June 2009

Ecclestone and Mosley overtaken

If ever there was a business model that was eady to be squeezed on both sides, it was Formula One, or more specifically Bernie Ecclestone's operation that was going to be squeezed. Ecclestone is a tough operator and he built a business with magnificent profit margins, but experience shows that it wasn't going to last. More fool then those investors who believed in the securitisation of F1 income or those investors who thought they were onto a perpetual cash flow (a rare error by CVC) and bought shares in the company.

The structure of the F1 industry is quite simple. The teams fund their own development and running costs partly with their own equity and partly with money from sponsors. The FIA regulate the sport and Ecclestone's company operates all of the commercial aspects, booking the tracks and selling the TV and other rights. The FIA gets an annual fee for endorsing F1, and the competing teams take about 50% of the revenues, but the remainder and indeed a very large amount considering the invested capital, goes to F1 and its shareholders.

The profits were so large that Ecclestone was able to raise $1.4 billion through securitisation about 10 years ago, secured on TV revenues, but with other sources of revenue available F1 could earn fantastic profits. Each year the established European venues would be told that their position in the F1 calendar was under threat from Middle Eastern and new Asian venues such as Singapore and Bahrain who were willing to drop $50m apiece into the F1 coffers for the prestige of hosting an F1 event. Meanwhile, revenue from TV and internet rights increased every year.

The trouble for Mr Ecclestone and Mr Mosley is that like all middlemen, in the long term they hold very few of the cards. They don't own the tracks and they don't own the racing teams and they don't own the technology that goes into the cars. When the current round of contracts expires they are nothing more than a sports offical and a deal broker, and the shrewd financial minds in the car companies that back the F1 teams have the sussed.

FOTA would like a bigger share of the revenue to ay for some of their investment. The prestige, marketing clout and technology that comes from F1 is not enough. F1 and the FIA, anxious to keep their share of the pie suggest a £40m cap on spending. The teams disagree. They are happy to keep the budgets uncapped, but they want to pay for it out of a bigger share of the revenues.

The easiest solution say FOTA is to put on their own races. After all, how hard can that be? The tracks are vying to provide a venue for Ecclestone's races and the TV companies have reviously struck lucrative deals, but there is no reason to think they have any greater obligation to the Ecclestone's F1 than they have to any other group.

Mosley blustered that there is a breach of contract, but nobody will take him seriously because all of the annual team contracts will expire, and none of them were with the FIA in any event. Mosely then muttered darkly that there were "EU competition issues". Dream on, pal. Or more precisely, stick to your nazi orgies. The EU has no cmpetition when another group sets up a new busines in competition with an incumbent.

In short, the manufacturers hold all the aces, and Ecclestone and Mosley are holding 2's and 3's. But then Ecclestone should have realised that from the time that he got out of running the Brabham team and started the Formula One Constructors Associaction, which became the F1 business.

What goes around comes around.

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