The GPWC and Formula One

Formula One is the pinnacle of motor sports and arguably the most popular TV sport in the world with 5 billion aggregate viewers worldwide tuning into the 17 races held annually.²¹⁶ The sport is governed by FIA , the International Federation of Automobiles, a federation that governs all forms of motor sport involving land vehicles with four or more wheels from Formula One to rallying or truck racing.

In the early 1970s Formula One was chaotic, rarely did all teams compete in every Grand Prix, prize money ranged substantially and quality of the tracks was poor. Bernie Ecclestone, the then head of the Brabham team, concluding that the F1 teams were being exploited by the race organisers convinced other team owners to stop doing individual “appearance money” deals with race organisers.

It was the birth of FOCA (Formula One Constructors Association). With Ecclestone as its head, FOCA guaranteed the race organisers that a field of 22 or more cars would show up for every race in

215 HELAL Ronaldo, Passes e Impasses , Vozes, 1997

216 Grand Prix, Grand Prizes, The Economist, 13 July 2000

exchange for increased prize money and improved facilities. The member teams of FOCA would receive subsidies for travel expenses and a cut in the TV money.²¹⁷. The idea was a huge success and by the early 1980s, FOCA was beginning to take over the promotion of some of the races as circuit owners refused to pay the prices asked. It was a similar story with TV rights. With a united group of teams behind him, Ecclestone took on FIA, which owned the TV rights of Formula One, in a war arguing that those rights should be exploited directly by the teams. A compromise was reached in 1980 with the split of Formula One’s revenues between FIA and FOCA. It was agreed that FIA would handle the rules and the sanctioning of the races while FOCA would run the business and the commercial responsibilities. This arrangement was the basis for the first Concorde Agreement, the secret agreement that governs Formula One until today and dictates a wide range of things, from the distribution of TV money to the process of enacting rules into law. The practical outcome of the Concorde Agreement was to make the whole sport more professional. For instance, the teams who signed them guaranteed to turn up to each race. This in turn meant that broadcasters could rely on a proper spectacle. Bernie Ecclestone, spotting the potential to bring more money into the sport, signed a deal with the European Broadcasting Union (EBU) in 1982.²¹⁸ Under the new deal European broadcasters agreed to show every grand prix instead of the previous ad hoc coverage. This was a turning-point for the teams’ finances.

As TV deals grew bigger during the 1980s, team owners became less willing to take the risk promoting races and so Ecclestone established a company called Formula One Administration (FOA) to do it on their behalf. By the early 1990s, with the increase in the popularity of the sport, FOA had grown into a hugely profitable business, with stakes in diverse aspects of the business of Formula One. In 1995 Ecclestone, made a deal with FIA where FOA would secure the promotional rights of F1 for 15 years in exchange for an agreed annual income for the governing body. The practical effect of this deal was to replace FOCA by FOA in the grant of the commercial rights of the sport. It was the first step towards the flotation of Ecclestone’s empire on the stock exchange. In 1996, in preparation for a flotation, Ecclestone streamlined the various companies involved in Formula One and created a holding called Formula One Holding Ltd. (FOH) to manage different aspects of the sport. Under this holding there were companies looking after TV and new technology deals (F1 Communications), transportation of the F1 circus (F1 World Travel and F1 Freight), a number of local companies which run individual races,²¹⁹ a trading company (Formula One Management) and FOA. As part of the restructuring process, the ownership of FOH was transferred to SLEC Holdings, a company controlled by offshore trusts belonging to Ecclestone’s wife. Soon, the F1 team owners, which, unwilling to deal with the bureaucratic aspects of contracts negotiation, had practically given control of the sport to Ecclestone’s empire, begun to realise that they had lost control of “their” sport. McLaren boss, Ron Denis for instance, complained in 1997 that “there was too much money going out of the sport.”²²⁰

217 The payout remains to this day : how teams place in the championship determines the cut.

218 The EBU is an umbrella organisation for public-service broadcasters in Europe.

219 Notably the Belgian, German and Hungarian Grand Prix.

220 How Bernie built his F1 fortune, Sportbusiness International, Issue 16, 01 December 1997

Under the conditions of the last Concorde agreement signed in 1997 with a duration of 10 years, the teams were set to receive 47% of Formula One’s gross TV revenues, FIA would receive 30%, and the last 23% would stay with SLEC. SLEC was also entitled to keep all the highly profitable fees paid by promoters to stage grand prix and the income from trackside advertisement.

The conflict

In 2001, the German media group Kirch, secured US$ 1.6 billion²²¹ in bank loans to acquire a 75% of SLEC.²²² Right after the purchase of the control in SLEC, Kirch Media announced plans of airing Formula One races exclusively on its pay-TV system.²²³ Worried that the potential move would restrict audiences,²²⁴ and dissatisfied with the current income distribution system set up by the latest Concorde Agreement, a group of five carmakers – BMW, Fiat (Ferrari), Ford, Mercedes Benz and Renault, major suppliers of engines to the main Formula One teams, joined forces and created a new company: the GPWC (Grand Prix World Championship), with the aim of launching a breakaway series to rival against Formula One starting in 2008. By then, Formula One Teams would be released of the current contractual obligations undertaken by the signature of the last Concorde Agreement, and would be free to form the new Grand Prix series. Luca di Montezemolo, president of the Formula One team Ferrari explained the complaint of the manufacturers:

‘In no other sport are the teams deprived of a share of two of the three main revenue streams – trackside advertisement and ticket sales – while having to share just 47 % of the gross income from TV rights. We would like to reach a solution with Ecclestone. If not it will be bad but it won’t be a tragedy.’’²²⁵

Since then, the GPWC has been approaching the Formula One Teams with the intention to allure their participation in the breakaway series. The GPWC is understood to be offering an increase in the share of TV revenue paid to the teams from 47% to 75%, and to additionally share 50% of the pre-tax profits from the championship among competing teams. The breakaway group has also controversially offered a one-off payment of US$ 50 million to the Ferrari team to join the GPWC series, as the participation of the Italian marque is considered crucial to its chances of success, given the large allegiance of fans and admirers of that team. ²²⁶ Sponsors would be bound to follow the winning teams if they switched to a new series, and that would probably mean the end of Formula One.

The solution

Up to now, the case has not reached a final solution. By early April 2003, principals of the ten Formula One teams met with GPWC to sign a memorandum agreeing to develop a commercial structure for the new championship, scheduled to start in 2008. Aware of its vulnerability, SLEC retreated and offered to open negotiations with manufacturers to update the terms of the Concorde Agreement to favour the

221 Formula One : So far no checkered flag, Business Week, 3 June 2002

222 This majority shareholding was subsequently transferred to three creditor banks – Bayern LB, JP Morgan and Lehman Brothers – following Kirch Media’s bankruptcy in 2002.

223 Formula One : So far no checkered flag, Business Week, 3 June 2002

224 Formula One’s main selling point to the car makers is the size of its global free-to-air audience.

225 Formula One’s Ferrari sets deadline for Ecclestone Negotiations, Sportcal, 14 May 2003

226 Ibid

teams and address the demands of the carmakers. According to Patrick Fauré, head of the Renault Sport Motor Racing Team, the future of Formula One and the proposed breakaway series should be settled by the end of August 2003. Fauré told news agency AFP:

‘I think we are in the last stage of our discussions or negotiations between us and the banks and the trust. I really think by the end of August either we will have an agreement or we will have the end of the negotiations.’²²⁷

The GPWC in its latest pres release also affirms that it continues serious discussions with SLEC to achieve its objectives in a short-term time frame. In the words of Richard Parry-Jones, director of GPWC:

‘It’s our intention to find a solution that benefits all parties. Therefore, GPWC is willing to continue the discussions in 2003. If we do not come to an agreement at the end of this year, we will focus all efforts in setting up the New Series. Experience has shown that if an agreement is not reached within a certain timeframe it is better to focus on the alternative.’²²⁸

Meanwhile, Max Mosley, president of FIA, has warned GPWC not to attempt to operate a rival series without the governing body’s sanction. The FIA announced that it is prepared to authorise the new series but if it follows the original proposal of being governed by a new independent federation, manufacturers, drivers, and racetracks involved in the championship outside FIA jurisdiction would be banned by the governing body from all other international motor sports.²²⁹

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