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Sun 8 Apr 2007 12:00 AM

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Running on empty?

On the eve of Bahrain's Formula One, we examine how the sport is sexy, but skint.

It was a strange scene. In front of the BAR-Honda motor home at the Monaco Grand Prix, superstar P Diddy and supermodel Naomi Campbell were posing for the paparazzi. Moments later they were joined by Robert De Niro. It was typical of Formula One - fast cars, fast cash and first class celebrities, a cocktail that always ensures the sport is at the pinnacle of the glamour world.

But behind the motor home, things were getting a little heated, as team owner Craig Pollock did some more sums on the back of a packet of Lucky Stripe cigarettes. "It still doesn't add up. We need some money fast, very fast," he said.

That was six years ago. Pollock has since lost control of the team he built from scratch, and seen none of the US$20m he invested in the sport come back to him. Like almost all the 11 teams preparing to line up on the starting grid at the Bahrain International Circuit next Sunday, sponsors have changed, budgets have rocketed and profits have disappeared. It may be the sport every single company and individual desperately wants to be associated with, but the burning question remains: Can you actually make a single dollar out of Formula One?

That depends who you are in the sport. Earlier this year,
Forbes

magazine placed the sport's supremo Bernie Ecclestone on their billionaires list, with a personal fortune of US$3.6bn. Most experts would put him closer to the US$5bn mark. Either way, no one disagrees that the man who single-handedly changed the shape of the sport has done extremely well for himself. Last year he sold off the remaining 25% stake he held in Formula One Management (FOM, the company that controls the sport) to CVC Capital Partners, but still remains in managerial control.

But while Ecclestone carries on counting his cash, the rewards don't seem quite as lucrative for the teams. In 1995, Ecclestone wrestled control of the sports television rights in a 15-year deal that effectively gave him all the income - and it was then up to FOM to distribute different shares of that cash to F1 teams.

So just how do teams make any money? Currently, they each pick up around US$20m a year from television rights and prize money. The biggest income is by far sponsorship cash, which averages at around US$120m a year. Last year the 11 teams on the starting grid between them raked in US$664m in sponsorship. Throw in another US$5m from merchandising, and up to US$25m from trade supplies and engine sales, and middle ranking teams can expect to pull in US$170m a year.

Sounds good? It should be, were it not for the astronomical costs of running a team. The biggest costs are often salaries associated with a 400-strong workforce, which can often include over US$10m a year on drivers. Most teams budget to spend US$55m on salaries alone - with a further US$25m going on travel, catering and hospitality.

"We are talking big money before you even build your first car," says McLaren Racing's managing director, Jonathan Neale.

He adds: "At McLaren, if you take into account just the number of flights and hotels we book each year, all around the world for a very large number of people, we are talking about millions and millions of dollars."


If US$55m sounds high, it's still less than the figures splashed out on research and development, and testing cars throughout the season. Teams such as McLaren have built their own wind tunnels for around US$30m, but most teams spend at least US$60m a year on research, development and testing. Throw in US$10m for the manufacture of cars, and close to US$30m for race operations, and every team on the grid is suddenly running at losses of at least US$5m a year. Those at the back of the grid can expect to see US$20m a year disappear.

"If you look at Formula One as a very simple business proposition, in terms of costs and revenues, then not only does it not work, it doesn't make sense," says F1 sports consultant Nigel Woe. "You end up losing money, but what keeps it going is the branding, the glamour and everything else that goes with it. I don't think for example that when Ferrari won the first race of this season in Melbourne, a load of people went out and bought themselves Ferraris. I suspect they didn't sell one more Ferrari. But what F1 does do is enhance your brand and image."

Teams and sponsors are no doubt lured by the sport's global appeal. Six years ago it was estimated that a cumulative total audience of 54 million tuned in to the season's 16 races. The figure is likely to be considerably higher today. It is the reason why last season, Ferrari made an estimated US$182m through sponsorship - including US$80m from Marlboro, US$40m from Vodafone and US$30m from Shell. 10 other sponsors between them gave the team another US$32m.

The Mild Seven F1 team, which won the 2006 championship, saw its sponsorship value reach US$156m, led by US$65m from Mild Seven and US$25m from Telefonica.

"But even when you look at those figures, and then you look at Renault's yearly profits, you find that in 2005 it lost over US$13m. And this is a team that was considered in 2005 and 2006 to be among the top three. If the top three are losing US$13m a year, then imagine what the bottom three are doing?" says Woe.

Not very much is probably the answer, with many of the lower ranking teams forced to sell everything they can just to survive. And no matter how deep your pockets are, it still may not be enough.


This may explain the Dubai government's brief flirtation with the idea of owning a team. Two years ago came the launch of Team Dubai, a stand-alone F1 team backed by McLaren engines, that was expected to be on last year's starting grid. But development costs, despite no shortage of sponsors, were said to be running to over US$200m. A source close to the project says: "When we came up with the plan, we estimated having to spend over US$200m before seeing any return. But the real problem in F1 is that there is no way of forecasting your revenues beyond year one, because that very much depends on your results. And as we know it can change in a second. You may be about to win a race and then your tyre bursts on the final lap, so you end up coming last."

He adds: "That can cost you a lot more than first place, because your negotiating power with key sponsors also disappears without trace."

The variation in prices paid by sponsors for different teams is huge. Trade link-ups, usually from hi-tech suppliers not seeking great exposure, can bring in just US$500,000 for teams such as Spyker, while the likes of Ferrari received US$5m from AMD last year. Co-sponsors, usually large engineering or technology firms, again pay as little as US$2m for smaller teams, and close to US$20m for Renault and McLaren. Even title sponsors - whereby teams change their names to suit the sponsor - vary greatly. Marlboro paid Ferrari US$80m last year, whereas UAE national airline Etihad - which now has its name associated with the Spyker team, is thought to have parted with no more than US$8m.

Emirates Airline meanwhile is believed to have handed the McLaren team nearly US$12m for just one year last season. The company appeared ready to do a longer term deal, but suddenly changed its mind. Sources suggest that it felt the sport was already too crowded, one explaining: "The problem is even if you pay several million dollars a year, you don't get exclusivity."

The difference in sponsorship income has led to a tier system in F1, with teams at the bottom end often surviving on a race-by-race basis. Two years ago the Jordan team had its cars impounded at the Monaco Grand Prix by bailiffs over unpaid bills. Jordan eventually withdrew altogether from the sport.

Could the same happen again? 22 cars will start the race in Bahrain at 2pm on Sunday April 15. Probability wise, around half will either crash out or suffer mechanical failure before the race is over.

But how many of the same teams will still be around come the final race of this season, in Sao Paolo on October 21, remains to be seen.

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