I have become an ardent fan and supporter for formula one racing. It is an exciting sport and enjoyable especially if you love speed, and the science behind the F1 racing cars. As an entrepreneur, you might wonder, how does formula one make money?
To say that formula one is big business is an understatement.
Formula one is an industry in itself, with very many facets. To understand how F1 makes money today, you should understand the business of F1 racing.
It is a business model that allows formula one to generate multiple streams of income.
As you might be aware, a business exists to create value and make money in the process. F1 makes money from creating value through the biggest sport spectacle in the globe.
If you look at the balance sheet of formula one management and the F1 teams in 2021, you will notice millions of dollars in revenues generated. This comes from a number of sources and you will learn about them below.
To help you understand or learn how formula 1 makes money today, I have created this resource.
You will learn how F1 generates money, how teams and drivers make money for the sport.
How Does Formula One Make Money?
As mentioned, formula 1 is big business and it generates income or revenues from a number of courses.
Formula 1 makes money in the following ways;
- Championship prize money.
- Sponsorship and partnerships.
- Investments
- Sale of tickets and merchandise.
- Hosting and race fees.
- Advertising and promotion fees.
- Anti-Dilution Fund
In simple terms, Formula One makes money from broadcasting fees or TV commercial rights, advertising, race promotion fees or fees for hosting races, investments and merchandising. These are the primary sources of F1 revenues and how formula one makes money.
The money that is generated by formula one is important as it helps to fund the operation of the sport.
With all the Formula 1 logistics, car development, driver salaries and part replacements, this revenue becomes very critical to the success of the F1 sport.
There is a lot more to how formula one makes money that just the prize money at the end of a season.
You need to understand that, every team that is classified for the past two seasons receives about $35 million. Also, teams are paid based on the position they finished the previous year.
After that, teams qualifying for a “long-standing team” bonus were given $68 million. Ferrari was the only team to qualify.
Teams also get cash as a part of the constructor’s championship bonus; Ferrari, McLaren, Mercedes, and Red Bull received $143 million in total.
Lastly, there are a collection of other bonuses, like a $10 million heritage prize awarded to Williams, and a $36 million bonus given to Red Bull for being the first team to sign the Concord agreement.
How Does Formula One Generate Revenues?
It is said that if you want to make a small fortune in auto racing, you should start with a huge fortune.
This is an old saying which is more relevant today than ever. The finances behind high-stakes, competitive F1 motorsport are ruthless, even more so than in any other mainstream sport.
The variables behind how teams, drivers, and sanctioning bodies like F1 make their money are not only wildly complex, but they can also change frequently, depending on evolving business needs, market conditions, and any number of other factors.
Plus, the principals are deeply secretive, with most members of the racing fraternity unwilling to discuss contracts, salaries, or sponsorship deals.
In order to pay the bills, racing teams and their respective drivers need multiple sources of revenue, and these will vary depending on popularity, rank, and driver marketability.
Related: Is Mercedes F1 Team a Money Making Business?
These streams of revenue begin with sponsors, and include drivers, purse monies, services rendered, such engine building and supporting customer teams and lastly, merchandise revenue.
Formula one is oldest and most prestigious championship in the world. It has a neatly organized revenue system, but its inner workings are a rat’s nest of politics and 50-year-old handshake deals.
The “Formula One Group” as a business enterprise is currently owned by Liberty Media, and is listed on the NASDAQ as FWONK.
The following is a breakdown of how Formula 1 as a sanctioning body makes its money, how F1 teams make their money, and lastly, how F1 drivers earn a living.
How Formula 1 Makes Money Today
F1’s biggest revenue stream comes from the sale of television rights, which in the United States alone was worth $4 million a season back 2017. This has since increased by the end of 2020 season.
Globally, television contracts added a staggering $587 million to Liberty Media’s balance sheet.
Unlike most sports or racing series, Formula 1 handles all TV logistics at all of the venues and provide what’s called a “global feed” to hundreds of TV networks, each of whom pay a hefty price of admission.
These networks add their own commentary and onscreen graphics.
F1 Second-Biggest Revenue Stream
Formula One’s second-biggest revenue stream is made up what is called “race-sanctioning fees.” This is basically the fee for hosting a formula one race.
Every F1 venue in the world, from a classic like Monaco to a newbie like Baku has to pay a massive fee to F1 to be added to the calendar.
Per Bernie Ecclestone, the former F1 supremo, all contracts have built-in confidentiality clauses that keep promoters from publicizing the fees and terms.
However, SEC filings show that F1 made $654 million in sanctioning fees for the 2016 season, which featured 21 races. This means that the average fee F1 charges is roughly $31 million. It’s public knowledge that Monaco pays considerably less than that, most likely because, arguably, F1 needs Monaco more than Monaco needs F1.
F1’s third-biggest revenue stream is a combination of ticket sales and other paid partnerships with companies or products. On top of the already hefty sanction fee, venues must pony up a percentage of the ticket sales to the racing organization, although this is typically accounted for in the initial contract.
Newer venues with higher fees typically pay less in admissions revenue, and established tracks with lower-than-average fees pay more from admissions.
How do Formula 1 teams make their money?
F1 teams are lean, mean, cash-making machines, regardless of whether they’re at the top or the bottom of the points standings.
Sure, the smaller teams may have a harder road to travel, but that doesn’t mean they are broke. A “small” team like Sauber outspends a top IndyCar team many times over, and the cash they bring in from wealthy aspiring racers or heavily sponsored future stars is measured in the tens of millions of Euros.
How Does Formula 1 Make Money from Sponsorships?
For F1 teams, revenue begins with one word: sponsorships. Without sponsors paying big bucks to apply their decals to the race cars, teams would not have enough money to show up at the tracks.
On average, sponsorship contracts are negotiated for a minimum of two years and a maximum of five, although most hover around the three-year mark.
This allows teams to focus on getting the job done with relative peace of mind that the funds will be there next season—or next week.
However, an organization like Ferrari can command five- and ten-year contracts from companies like UPS, Ray-Ban, and its most important sponsor of all, Phillip Morris International, whose Marlboro brand pays over $150 million dollars per year to be squeezed into the team’s formal name: Scuderia Ferrari Marlboro.
The second revenue stream is the most important for the smaller F1 teams, who do not bring in as much cash from sponsors as the big boys: Formula One Group (FOG) money.
Formula One New Concorde Agreement
At the end of every year, the Formula One Group ends up with a billionaire’s sum from the year’s business dealings. This lockbox is then doled out to the teams according to the terms of the last Concorde Agreement, a document signed by every F1 team in 2013.
As of 2017, each team was awarded $36 million for simply living to see another day. However, new teams won’t receive this bonus until their third consecutive season.
As part of the new Concorde agreement, the FIA and the F1 governing body have put a $175 million budget cap from 2021. All the 10 formula one teams have signed up on this deal, which commits them to the F1 series until 2025.
However Mercedes and other high-spending rivals led by arch-rival Ferrari face new rules aimed at curbing their financial advantage over other F1 teams.
Teams will be restricted to spending $145m in 2021, a figure that will fall to $140m in 2022 and $135m from 2023 onwards.
Teams also receive bonuses for winning the constructors’ championship, and for other competitive measures.
Long Standing Team Payments
Ferrari is the only team to receive an “LST” bonus, which stands for Long Standing Team, of $68 million for being with F1 since the get-go.
The third revenue stream for F1 teams comes from the drivers themselves. How? Aspiring racers need one of two things to get behind the wheel of an F1 car: cash or cash-rich sponsors.
Talent is a distant third, maybe fourth. Young racers from wealthy families can offer millions of dollars to support the team for the duration of the season, while others can use their sponsorship money to basically do the same.
In the end, paid or sponsored drivers represent serious income for racing teams. This must the case for Lance Stroll whose father is a billionaire.
Other considerable streams of cash for F1 teams come in the form of services rendered and licensing.
Let’s use Ferrari as an example: The Italian team not only applies its logo to teddy bears, carbon fiber cigar humidors, and a wide variety of souvenirs, but it also sells engines and technical support to other teams, such as Sauber and HaasF1.
Mercedes-AMG Petronas, Sahara Force India, and Williams F1 are engaged in similar, profitable partnerships.
Mercedes-Benz Grand Prix generated pre-tax profit of £17.1m on revenues of £363.6m in 2019, up from £15.5m and £338.4m the prior year, driven by higher sponsorship and marketing revenue as the F1 team secured its sixth consecutive constructors’ championship in a row.
By winning in 2020, they have now secured the seventh consecutive constructors’ championship.
How F1 Drivers Earn their Income
Unlike drivers in other racing series, F1 drivers have very simple income models. All drivers earn a salary from the team, even those who pay to drive.
Formula One drivers are also allowed to pursue personal endorsements with other companies, although a percentage of these earnings must be shared with the team.
F1 drivers do not receive purse money from racing venues or from Formula 1 itself.
The Alonsos, Vettels, and Hamiltons of the world also enjoy hefty bonuses from their teams for scoring race wins, pole positions, fastest laps, and winning world championships.
Related: Do all F1 Drivers Come from Rich Families (No.5 Will Shock You)
And although these bonuses and salaries are kept under wraps, it’s rumoured that Lewis Hamilton’s salary is over $41 million per year.
Lewis Hamilton’s contract negotiations always generate a great deal of interest. It should be the case after he secured his seventh driver’s championship title at the Turkish Grand Prix in 2020.
Sources with ties to Sebastian Vettel claim that the German’s bonus for delivering the fastest lap of the race was approximately $25,000 during his time at Red Bull and $500,000 for winning a Grand Prix.
Do Formula 1 Teams Make Profit?
The goal or objective of any business operation is to make a profit and create wealth for the shareholders.
Formula 1 team is the same. It is a business and must work towards profitability.
As business entities, they run their operations with an aim of avoiding losses and making profit.
In a nutshell, formula one teams broke even in 2021 with Mercedes and Red Bull turning a profit of between $10 – $20 million.
This has not always been the case. Some F1 teams have been in the red with others even going bankrupt.
A recent case is the sale of Williams F1 Racing to Dorilton Capital. It is estimated the deal was worth $200 million.
This happened because Williams was running into financial problems.
Williams Racing had recorded losses amounting to $13.25 million in 2019. In 2018, the F1 team had made a profit of $21 million.
As you can see, an F1 team can make a profit. It is not a bad business after all.
However, Williams had forecasted making more losses into 2020 due to global pandemic. They also terminated the partnership with ROKiT Telecommunications Company.
“They were the final nails in our coffin. When corona hit there was the bigger picture to think about, how we were going to go racing again and keep our business afloat during lockdown. – Claire Williams, Deputy Team Principal,
It is an indication of how ruthless F1 business can be to the owners or team principals.
All F1 Teams on Verge of Becoming Profitable in 2022
While there has been cases of F1 teams making loses, there is great optimism in Formula 1 today.
One of the people on the paddock who feels this way is Mercedes’ team principal, Toto Wolff.
He believes that all the 10 formula one teams are going to be profitable.
This is because of a combination of things including cost-saving initiatives. Others including ideas to boost income or how much F1 generates per season.
Another idea that could lead to F1 teams making profits is the introduction of the budget caps. This has cut spending of the F1’s biggest teams like Mercedes, Red Bull and Ferrari.
The revised agreement also provides for fairer distribution of the prize money. It has also increased the share of F1’s revenues that smaller teams are entitled to.
Anti-Dilution Fund in Formula 1
At the same time, there are new technical rules introduced in 2022.
They are designed to simplify the cars and make the constructors’ and drivers’ championships more competitive.
The intended effect is for F1 to become a more equal championship from a financial and sporting perspective. As a result, this puts a rough price on fighting for wins and titles.
F1 has sought to strengthen the value of the 10 teams by making a spot on the grid more exclusive.
They have done this by incporating an anti-dilution fund. In simple terms, a new team would have to pay $200 million to be shared across the existing teams. This was added into the new Concorde Agreement.
These various changes have courted fresh investment across the grid. For example, INEOS bought one third of the Mercedes F1 team and Wolff increased his own share. Daimler’s shareholding in Mercedes F1 team was reduced.
McLaren also sold a significant minority stake to a US consortium. As mentioned, Williams was bought by US investment firm Dorilton Capital.
How Much Money Does F1 Generate?
As you might have noticed by now, F1 is big business. It is a business that has a global reach and makes lots of money.
But how much exactly does formula 1 generate per year?
For 2021, the amount of revenues that F1 generated increased by nearly 87% to US$2.14 Billion.
The operating income was US$40 million, compared to a US$444 million loss in 2020.
Considering the operating environment in 2020, this is clearly a remarkable financial recovery. In 2020, global pandemic affected the formula one races and also denied the sport ticket sales.
Over the coming seasons, it will be interesting to see if the revenues generated by F1 will continue to grow.
Increase in audience through promotion will lead to higher revenues. Addition of new races like Las Vegas to the F1 calendar in 2023 means more revenues for the formula one.
Conclusion
In conclusion, you have now established that F1 is a big business.
As a business, there are several ways that F1 makes money for the investors, teams and other stakeholders.
Primarily, F1 makes money from investments, hosting fees, advertising and marketing, sponsorship and partnerships, selling tickets and merchandise. There is a new revenue stream that has been created called an anti-dilution fund.
It is a $200 payment shared equally among all the teams when a new team joins Formula 1.
Like every other business, running formula one requires sound financial decision-making. These includes decision to increase F1 revenues and to cut over-spending.
Introduction of budget cuts is a good move. Fair distribution of prize money is helping in making the sport better and fairer.
Over the coming seasons, I would expect formula 1 to continue making money. F1 teams should also be able to make a profit from racing in each season.
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