Written by Siddharth Mehta
Formula One: it is the pinnacle of motorsport, the highest and fastest form of it. The wealthiest individuals pay exorbitant amounts to watch it, the largest corporations vie for limited spots to sponsor it and team owners take on huge premiums to put their drivers behind the wheel. Despite all this, it still is a huge financial burden on the local governments and private track owners who team up to fund and host Formula One Grand Prix (Balla, 2023). Profits are not guaranteed and sometimes breaking even is considered lucky. So how is this even possible? How is success so hard in an industry pulling in so much money?
To answer that question, it is important to start at the beginning of the business operation track owners embark on in hosting. And from the beginning they are already losing money. If they do not already have one, they must design and build a track typically costing upwards of $270 million, with yearly maintenance fees averaging $18.5 million (Balla, 2023). Moreover, these costs do not even include the necessary track additions for races such as grandstands (~$14 million), safety barriers and fencing (~$8 million), race pits, offices, parking lots etc., (Sylt, 2017). But if miraculously, owners already have all this, they do not avoid paying up. After a track is in place and Liberty Media, the owner of Formula One, has completed its necessary track inspections, track hosts must pay a hosting/race promotion fee to Liberty Media. This fee must be paid for every single race hosted and is estimated to be between $15-50 million and upwards for prime time races like the Qatar Grand Prix towards the end of the season (Bodsworth, 2023).
So at this point everything should be finalized and Liberty Media should have its full profit, right? Unfortunately, no. Liberty Media continues to take more. All revenue from track sponsors and broadcasting rights for races goes to Liberty Media. And for the 2023 season, sponsorship revenue came out to $445 million (Cronin, 2023) while for the 2022 season (2023 results not in yet) broadcasting revenue came out to be $936 million (Agini, 2023; Cronin, 2023). So as unfortunate as it is, track owners are left with very little revenues from Grand Prix. Ticket revenues end up being their sole source of income, which in most cases is just not enough to be profitable.
The Indian and Korean Grand Prix are two of many historic examples which show how hard it is for track owners to gain profits with tickets being their sole revenue source. The two countries hosted only a few Grand Prix and had to cancel future ones for multiple reasons, but large financial losses appeared as one of the main ones. The Indian Grand Prix in 2013, its last year of operation, lost $24 million while the Korean Grand Prix lost $37 million in 2012, just one year before ending operation (Bhardwaj, 2019; Reuters, 2013). And although other tracks typically do not lose this much, they still typically do not even break even.
If hosting Formula One is not lucrative for investing, why do governments and private track owners actually take up these projects? Why not devote the money to another area of the economy that will actually see more direct benefits? Well, there is much evidence to show that money brought in by tourism and travel due to Grand Prix actually stimulates local economies to the point where there may be a positive return.
For example, it is estimated that although Las Vegas spent around $500 million on its 2023 Grand Prix, the benefit due to tourism from the race was an estimated $1.2 billion coming in the form of expenditures at hotels, restaurants and other local businesses (Pavlović, 2023). Furthermore, the Singapore Grand Prix from 2008 to 2018 benefited local economies by bringing in 450,000 additional visitors who spent around $1.4 billion in the local economy (Avison, 2018). And finally, the Mexican Grand Prix hosted in Mexico City continues to bring in a 12% annual increase in stays at luxury hotels on race day weekend. Mexico City also continues to see visitor spendings averaging about $1730 per person for the Grand Prix weekend on goods and services unrelated to Formula One.
One last point, however, to close on and consider regarding these tourism revenues is that although they are large as outlined above––is that revenue actually going back into the local economy which is where the Grand Prix funding initially came from? Or, is that money just going to a large hotel or fast food corporation based elsewhere and maybe even in a different country? This idea of revenue leakage does in fact contradict the recent conclusion that due to tourism uptakes, Formula One may benefit its local economy, but it still is an important idea to raise as the answer is unclear. Hopefully this idea about revenue leakage will serve as “food for thought” and a guide for debate on whether F1 is good for an economy.
References
Agini, S. (2023, May 27). How F1 found a secret fuel to accelerate media rights growth. Financial Times. https://www.ft.com/content/0c762af6-81c4-4c86-9258-33fea8d474dc
Avison, B. (2018, October 18). The benefits of hosting Formula 1. Host City. https://www.hostcity.com/news/event-bidding/benefits-hosting-formula-1
Balla, E. (2023, November 13). The process of designing a Formula 1 track: Behind-the-scenes and engineering insights. F1 Chronicle. https://f1chronicle.com/the-process-of-designing-a-formula-1-track/
Bhardwaj, A. (2019, August 17). Will the Indian Grand Prix ever return?. LinkedIn. https://www.linkedin.com/pulse/indian-grand-prix-ever-return-aman-bhardwaj/
Bodsworth, A. (2023, April 17). How did F1 generate $2.5bn of revenue in 2022?. LinkedIn. https://www.linkedin.com/pulse/how-did-f1-generate-25bn-revenue-2022-adam-bodsworth/
Cronin, B. (2023, November 17). Formula 1 delivers 15.8-per-cent increase in central sponsorship income. SportBusiness. https://www.sportbusiness.com/news/formula-1-delivers-15-8-per-cent-increase-in-central-sponsorship-income/#:~:text=Formula%201%20will%20generate%20%24411,m%20it%20generated%20in%202022.