Formula 1 is not just a passion of more than 425 million fans worldwide but also a huge industry employing over 50,000 people in 30 countries. We all know the saying “money makes the world go round.” Well, in Formula One, the story is no different. Most sports like Football, Rugby, or Basketball are much easier to succeed in without needing lots of money, but Formula One and motorsport are entirely the opposite.
While other sports could be seen as pay to win, Formula One is instead paid to play or compete in the first place. This means when looking at the balance sheets of Formula One teams, there are a lot of zeros in it.
In 2019 F1 made revenue of 2.02 billion dollars while the highest-paid driver’s cash in up to 40 million pounds a year, putting them up there with some of the highest-paid athletes in the world, and this trend is not slowing down with karting now costing six figures. So, where does this money come from?
F1 teams earn money from prize money, arranged funds from Formula One management, sponsors and partnerships, investment from parent manufacturers, and other financial arrangements. There may be few different sources, but these are the primary sources of a Formula One team making money.
So Formula One isn’t just a business. It is a massive billion-dollar industry that employs tens of thousands of people. The teams are the businesses within the industry that keep the sport going. Much like google and apple are to the tech industry, and so like any business, the aim is to profit apart from charities and other non-profits. Before we dive into the revenue streams of the F1 team, we need to take a look at the cost incurred by an F1 team.
What Do Formula One Teams Spend Their Money On?
The costs of running a Formula One Team can be split into four main categories:
- Research and Development
- Salaries
- Production
- Operations
Research and Development:
R&D consists of things like wind tunnel testing, track testing, and other forms of testing components to ensure they perform their function.
Salaries:
Salaries are pretty self-explanatory as they consist of paying the team staff like the marketing, engineering teams, etc. An example can be paying the drivers, so you know Lewis Hamilton’s 40 million Dollar paycheck and paying team directors like Toto Wolff, Christian Horner, etc.
Production Costs:
Production costs for the team involve all the manufacturing or purchasing of new components, including the building or buying of an engine that can cost upwards of 10 million pounds by itself.
Operations Costs:
Operations costs are those which concerns with things like logistics, travel entertainment for clients, moving everything by freight to long-distance races like Singapore or Brazil, IT and tech costs of running the factory, professional services like marketing or things like that and even the cost of fuel surprisingly add up over a season or two.
So if you add various figures to these areas, we can start to see how much the average team spends over a season. In this hypothetical example, let’s say the team spends 195 million pounds over the length of a season. Now remember that number because it’s kind of important.
What About Revenues? Where Do They Come From?
Well, just like the costs, the revenue can be split into three or four categories depending on the team. These are:
- FOM payments
- Sponsors
- Investment and
- Driver Linked Income
FOM Payments
Let’s begin with the most significant one, FOM Payments. FOM stands for Formula One Management. To explain how FOM pays F1 teams, We have split it into 5 divisions.
- In the First division is 36 million dollars paid to every team that has been classified for over two seasons. This is known as the division one payment, and every single team receives this.
- Then in the second division is the prize money based on where the team finished the season before. For example, Mercedes received 61 million dollars for winning the title while Williams received just 13 million dollars for coming last. Everything up till now seems pretty fair, right. Well, we aren’t done yet.
- The third division is the LST or Long-Standing Team, also known as the Ferrari Budget because it’s only given to them, and it’s a whopping 68 million dollars.
- On top of there is the CCD or Constructors Championship Bonus which is a 35 million dollar payment to Ferrari, Mercedes, Red Bull, and McLaren for basically winning a load of titles.
- Finally, there are a couple of other payments such as 10 million to Williams as a heritage payment, 35 million Ferrari, 35 million to Red Bull for signing the Concord Agreement first, and 35 million to Mercedes for living up to their promise of winning two titles. Pretty complicated system, right. But this is only one piece of the puzzle when it comes to earnings.
Sponsors:
The next is sponsors. I’m sure most people understand how they work but basically, what happens is that a company like Petronas goes to a team like Mercedes and says, we want to be on your car so we can advertise ourselves and Mercedes say, okay great, that’ll be 70 million dollars job done.
On average, a team has maybe 15 to 25 sponsors who all pay a sum of money to place their logo on the car. The better-performing teams will have more sponsors because they get more airtime on TV and are more marketable. It’s especially true the other way around if a team or driver has a terrible reputation, sponsors won’t go near them.
Investment:
The next form of earning for teams comes as investment from either a parent company or shareholders where let’s say, Daimler (parent company of Mercedes) wants Mercedes to do better in F1.
So they give them 80 million dollars per season. This is similar for every team, but obviously, some can afford to invest more than others, so while in 2019 Mercedes got 80 Million Dollars a year, Racing Point (Aston Martin) only got 25 million. For many teams, this takes up at least a quarter of all revenue the teams earn. So it’s easy to see why a team like Williams is bound to struggle.
Driver-Linked Income:
Finally, the last form is driver-linked income which is basically when a driver pays the team a sum of money to drive the car, such as lance stroll, who paid Williams 30 million in 2017 to drive the car. This only really takes place in teams lower down the grid that is desperate to get more revenue.
This is something that the fans hate as it gives many undeserving drivers a spot in the team, and many talented drivers are let out.
