F1 is one of the sports which have seen a huge transformation over the past few years and have transformed their business model in their efforts to stay relevant and attractive in the ever-changing world of sports.
With the development of technology and social media, F1 has made sure to stay at the forefront of all these advancements and to try and appeal to the new generation whilst maintaining strong revenue streams and high levels of competition. With all these variables in play, they may have lost their grip and need to rethink their strategy to achieve their desired objectives, which I will discuss below.
F1: Core Business
F1’s core business has always been focused on TV broadcasting rights, race hosting fees, sponsorship and naming rights, and merchandise sales. Even after the sale of F1 in 2016, they still have these pillars at the centre of how they generate revenue. Although what they sell to the fans is a race, there is much more behind how F1 is sustainable so I wouldn’t consider the “race” as the core business, but the license sold to countries as the main core driver of F1.
Given that F1 sells the rights to tracks to host the race, they make huge amounts of money. For example, the Azerbaijan Grand Prix costs the country around 60 million dollars which in turn is revenue generated by the F1 organization. Without being able to host races around the world on the different tracks, F1 would not exist hence why I consider it to be the core business pillar which drives all other revenue sources which I mentioned above.
The New Era of F1 Following their Acquisition
After the acquisition of F1 by Liberty Media, a Fortune 500 company, the core business expanded beyond the traditional revenue streams and went into commercializing the sport further and expanding into new markets to host races in addition to developing a new digital strategy. They now expanded broadcasting into streaming services launching F1 TV, and increased their digital presence on social media therefore increasing fan engagement.
Also, one of the biggest moves in the new era was signing a contract with Netflix to host the famous “Drive to Survive” documentary which now has 6 seasons showcasing behind-the-scenes of the different constructors and drivers in F1.
I believe that this expansion has been extremely useful and successful for F1 in terms of globalizing the sport and attracting new fans. The numbers show, according to Salesforce, that the sport now has around 500 million fans around the world, of which 1/3 became fans after the Netflix agreement and the increased digital presence. This is because the new generation is more into digital and spends most of their time on TikTok, Instagram, and watching Netflix series so the move was very smart and took F1 to the next level in terms of visibility and reach.
Acquisition by Liberty Media
As mentioned above, F1 was acquired in 2016 by Liberty Media to transform the sport so they created a new business model focused on 4 main pillars. The 4 pillars are the technical side, financial side, sporting side, and governance side. For this report, I will just focus on the financial and sporting aspects of the new model.
Financially, the main move by the new ownership was to try and make F1 an attractive business for any constructor regardless of their financial position. They have done that by introducing a budget cap to limit the amount teams can spend on car performance and development and adjusting the revenue distribution model to ensure smaller teams receive a fairer share of the revenues.
The impact of the new ownership on the sport
From a sporting perspective, they have identified new formats for the races that can engage a wider demographic. This included implementing a sprint race in several races per season and expanding their reach into new areas around the world such as Las Vegas and Miami. The Miami Grand Prix has generated huge amounts of revenue and sold more VIP tickets than normal tickets. They also started supporting the design and upgrade of circuits to improve the racing spectacle and ensure a top fan experience around the world. They have also tapped into esports which is a high-growth area in sports and has generated huge traction in recent years.
Looking at the above, I believe that their new business model and strategies are a double-edged sword but in my opinion, are more likely to succeed long-term from a financial/revenue-generating perspective but might struggle a bit from the sporting perspective. From a financial perspective, the diversification of revenue streams, enhancement of fan engagement, and their global market expansion have all contributed positively and will continue to do so in the future allowing F1 to remain financially sustainable in the long term.
Revenue Diversification
From a revenue diversification perspective, their expansion into digital and streaming services in addition to the race promotion and hosting fees, and the sponsorship deals will all contribute to revenue in the future. They now not only generate money from typical broadcasters but also from subscriptions to F1 TV and from their long-term deal with Netflix. They are also attracting new sponsors with lucrative deals and promoting races such as the Las Vegas Grand Prix. This diversification has led F1 to generate $3.2 billion in 2023.
Also, the new business model’s focus on fan engagement by being active on social media and creating content has significantly grown the sport’s fan base which has translated to higher merchandise sales, more viewers, and greater sponsorship appeal. The introduction of the F1 eSports Series taps into the rapidly growing gaming market. This not only brings in direct revenue but also attracts a younger demographic that traditional sports often struggle to reach.
Moreover, expanding the calendar to include races in key markets like the United States, the Middle East, and Asia diversifies geographical revenue sources and taps into new fan bases. The success of events like the Las Vegas Grand Prix and races in Saudi Arabia showcases the potential for high returns from these markets. They have also increased the race calendar to 24 races in 2024 which maximizes revenue opportunities. These strategies not only boost current revenues but also build a resilient foundation for future growth and adaptability in a rapidly changing entertainment landscape.
Main concerns
But, my main concern is the sporting aspect of F1 if it wants to remain considered a sport. In the past 3 seasons, Verstappen and Redbull have dominated and even with the introduction of the budget caps and equal sharing of revenue, we still didn’t see a redistribution in power and a more competitive balance.
I think that the budget cap might cause a reverse effect than what it intended to do as F1 is purely dependent on the innovation of teams to create the best car and with the cap, innovation might be hindered which will stop the sport from progressing further. This can lead to homogeneity across the teams which can make the races less interesting. Also, richer teams still find ways to leverage their resources within the cap allowing them to maintain an edge over less financially stable teams. This might lead to lower engagement from fans.
Consequently, the main danger from a sporting perspective is the over-commercialization that is happening to F1. As mentioned above, the financial position is very strong and I still believe it will remain strong given the diversification of revenue streams and the expansion of the sport but might be threatened eventually as this is happening at the expense of the sport itself. The new business model’s heavy emphasis on revenue generation can lead to decisions that prioritize financial gain over sporting integrity. The introduction of new races in financially lucrative but less historically significant locations might dilute the sport’s heritage and alienate long-time fans.
Also, expanding the race calendar to include more events risks oversaturating the market. This can lead to “event fatigue” among fans and teams, diminishing the excitement and prestige of individual races. The increased burden on teams and drivers can also impact performance and health.
Conclusion
So, considering all the above points, F1 needs to continue with its commercialization as this is attracting huge amounts of revenue but they need to be careful to what extent they continue to do so in order not to risk the attractiveness of F1 as a sport.
Overdoing it is dangerous, so a clear strategy on how they will balance both sides of the equation is essential at this point as they are now at an inflexion point where they need to preserve the sporting aspect for the financial position to keep growing as it is now.
Image Credit: Deposit Photos
