The F1 Grand Prix of Singapore in 2022. 2022.
Bryn Lennon – Formula 1 | Formula 1 | Getty Images
Take on an elite field of world-class racing experts. Ask them to spend fewer dollars beating their bitter rivals. The result, it turns out, is a range of newly investable assets.
That’s how Formula 1 racing chiefs see it, attributing a competition-wide budget cap to making team businesses more sustainable and boosting valuations.
“When we got involved, the bottom teams were literally traded for zero. Today, I don’t think you can buy a team for less than $750 million, and the top teams are valued [around] $3 billion,” Liberty Media CEO Greg Maffei told CNBC’s Sara Eisen in the documentary “The Inside Track: The Business of Formula 1,” which debuted Thursday at 8 p.m. ET.
The budget cap – set at $135 million per team in 2023 – limits how much teams can spend on developing and building their race cars. Before it was introduced in 2021, the top teams in the league could spend multiples of that in a given year.
It’s a model similar to US sports leagues, several of which have limits on what teams can spend on player salaries (although F1 driver salaries are excluded) – and it’s the work of F1 owner Liberty Media, which owns the competition Bought in 2017.
“We understood that some of the things that, for example, the NFL, have done to create more equal revenue and create a cost cap allows for a much more competitive and engaging sport,” Maffei said.
F1’s ten teams each receive a share of competition revenue, raised through sponsorship and media deals. They also collect individual revenue through team-specific partnerships, hospitality and technical efforts.
Better performance on the track makes it easier to make money, but it takes significant expenditure to achieve that.
“It used to be that someone investing in a racing team didn’t know whether you were going to spend $200 million a year or half a billion a year. There was everything in between,” says Guenther Steiner, team principal at Haas F1 Team.
Haas has seen a particularly aggressive revolving door of investors in recent years, plagued by poor grid performance and some bad luck: in March 2021, the team announced a title partnership with Russian fertilizer company Uralkali, only to drop the investment a year later . Russia invaded Ukraine.
Haas now counts MoneyGram and Chipotle among its sponsors. According to Steiner, the budget cap has made the team’s balance sheet more predictable and made it easier to bring new partners on board.
“Because of the testing restrictions it is now difficult to bring a driver from America who may not have been to these circuits before,” said McLaren CEO Zak Brown.
Dan Mullan | Getty Images Sports | Getty Images
F1 teams spend huge amounts of capital during the racing season to fix, repair and improve problems with the cars. Major mid-season upgrades can be expensive, but are crucial to a team’s success.
“It’s an R&D game,” McLaren Racing CEO Zak Brown told CNBC in June from the sidelines of the Canadian Grand Prix weekend in Montreal. “We’re in the prototype business. We’ve got new stuff on our car this weekend, we’ll have new stuff on our car next weekend, and depending on what your challenges are with the car, you choose where you’re going to invest your money.”
Before Brown took over at McLaren in 2018, the team was losing money on an annual basis – as much as “nine figures,” he told CNBC.
“Now we are a profitable sports team,” he said. “A lot of that is based on performance, and it’s a great compliment to Liberty that when they came in they had a cost cap in place.”
Tune in to CNBC on Thursday at 8pm ET for the premiere of “The Inside Track: The Business of Formula 1.”
Disclosure: CNBC is a sponsor of McLaren Racing.