1 Introduction
Formula 1 is the biggest and most famous racing series. Hosting 25 races around
the globe. There are a few races on street circuits like Azerbaijan, this means the
race is held on the streets in the hosting city which are usually used like normal
roads, but most races are held on traditional race circuits like Spielberg in
Austria. This combination of traditional circuits and street circuits gives formula 1
an exciting race series. Through the implementation of street circuits and
traditional circuits, a challenging environment for the competing teams is
created, because both types of tracks have different challenges. For example
traditionnel circuits are fast and cars need good aerodynamics and a fast car, for
street races these factors are also relevant but not as much as for the other
races, but for a street circuit cars need to be fast in sharp corners. Drivers also
need to adjust driving, because of the narrower streets. Formula one is different
from race to race making it a very interesting sport and exciting to watch. It
hosts very historic races like Monaco or races on modern circuits like Abu Dhabi.
It is a sport with a rich history with the first race hosted in 1950. The sport is
known for prestige and exclusivity. Having a f1 team or being a sponsor from a
F1 team is great marketing, making it very attractive for companies to have a f1
team. But with all of the marketing also comes a huge cost to operate a f1 team.
Teams need sponsors, prize money and also a company behind them to be able
to compete. Top teams spend up to €600 Million annually. Covering costs such as
car development teams, drivers salaries, travel costs, which can add up fast if
you have to ship 2 cars around the world for the 25 races spread out over the
whole world and much more. But Teams also earn a lot of money from the prize
pool, in 2024 the prize pool was €1.266 billion this was distributed amongst the
teams. This money is not split evenly, the constructor champion gets the most
and it decreases when you go down the ranks. This creates a structure where the
top performing teams get more money than the bottom ones, through this some
teams lose money and are dependent on the company or private individual who
owns the team.
This research paper will review financial statements of F1 teams and various
other financial data from formula One, to break down what teams spend annually
to compete in formula one, their various income streams and how they differ
from each teams for example top teams have more funding than those
performing worse, so they need to rely more on the prize money.
2 Background on Formula 1 Economics
2.1 History and Evolution of Formula 1 Financing
The financials of F1 teams have changed a lot over time and especially over the
last decade, through the steep rise in popularity. Back in the 1950s-1970s teams
often relied on wealthy individual sponsors and sometimes automotive
companies, but there were no big corporations involved in the sport like
nowadays, due to the little attention the sport had back then. This meant teams
had a limited budget and most teams were in a similar budget range. In the
1980s F1 became more popular due to it being broadcasted on television, in the
early days tobacco companies started to sponsor F1 teams, a famous example of
this is Malboro at Ferrari's team. This did not only start the corporate sponsorship
but also changed how sponsors are presented. Tobacco companies were one of
the first to be printed onto the [Link] 1981 the Concorde Agreement was
introduced, in this agreement many things were agreed on between the FIA and
F1 teams one of the agreements was the revenue split. This meant a more
equally distributed revenue for the teams.
Though raising popularity, more money became involved in the sport. Big
corporations often back teams financially, but a big part of the money also comes
from the media rights. This money oftentimes doesn't go directly to the teams
but is used for the prize money which is given to each team at the end of the
season, it is distributed after constructor championship standings but each team
gets a substantial amount of money at the end of each season. Many smaller
teams rely more on this prize money, making it an important revenue stream for
some teams.
Through the growing audience these media rights are becoming a more
significant part of the teams budgets. These changes were the reason for the
implementation of the prize pool and budget cap were introduced to lower the
growing gap between teams. This helps to reduce the financial difference
between a team with a lot of money and teams with less so both can stay
compatible.
2.2 Structure of Formula 1 Teams
F1 teams are very big and complex, in some aspects they are even working like
companies. Teams have many employees ranging from 300 employees up to
1200 employees. In a F1 team there are usually 3 head positions. The technical
director is responsible for the development of the car overseeing the engineers
and mechanics. The commercial director oversees the teams partnerships and
sponsorship agreements. The 3rd is the team principal which is like the CEO of a
company. Deciding the overall direction of the team, he decides the strategic and
financial direction for the team, making him the most important person of a team
besides the drivers. There are two types of teams, the first category are the
teams which are backed by car manufacturers, this means teams have not just
financial help but also access to company resources like engines or research
facilities. This helps these teams to save a lot of money. The second category are
teams backed by different companies like Stake, these teams are the minority.
They have to rely on external sources for car parts and research, making it more
expensive to run the teams. For example, most automotive teams supply their
own engines while the other teams have to find a supplier for the engines. For
example, Hass a team without access to an inhouse car production has to rely on
Ferraris supplied engines. Teams also have to comply with the fast-changing
rules of the FIA making it challenging for developing new cars. But the FIA also
regulates the budget, making a close relationship with the FIA important to follow
all the rules while staying competitive.
2.3 Economic Context of the Sport
F1 doesn’t only generate a lot of revenue for itself but also for the host cities of
the races. Through the high number of people attending a race it is a great
economic boost for the cities. Due to a race consisting of 3 separate days fans
tend to spend way more on F1 races than on other events due to the longer stay.
This boosts local economies and makes it attractive for cities to host races. F1 is
also an appealing partner for luxury brands due to its reputation. The exclusive
and expensive impression makes it a perfect fit for luxury companies. For
example Rolex is a long-time sponsor to F1 races. Many teams also have luxury
sponsors or are owned by luxury car brands like Ferrari or McLaren.
F1 had a significant growth over the last few years, a reason for this is the
acquisition of F1 by Liberty Media in 2017. They brought F1 to a new visibility
level and also added a digital platform for F1 to present itself like F1 Tv or the
Netflix series Drive to survive, all of this helped F1 to gain a massive audience in
the last few years.