Disclosure: We’re investors in Formula 1.1
Content is king. We’ve seen evidence of this in the spending spree of video game publishers and streaming platforms as they race to acquire and develop their own content. Unique, authentic, and engaging content is hard to come by. That’s what’s exciting about Formula 1.
Formula 1 is the pinnacle of motorsport. The racing league is owned by Liberty Media Corporation, a technology holding company that maintains ownership stakes in Formula 1, SiriusXM, and the Atlanta Braves. Formula 1 is a cult business. It has a massive fan base, with over 400m unique fans globally.
Formula 1 announced this week that Las Vegas would be the latest city to host a Grand Prix, with the first race being held in November of the 2023 season. Even more exciting, the race will be held on a Saturday night, a rarity in Formula 1. The proposed track will be a street circuit that cuts directly down the Strip. It’s hard to overstate the importance of a race in Las Vegas. It’s the entertainment capital of the world. When Formula 1 raced in Las Vegas 40 years ago, it was largely seen as a disappointment. The track was put together in the Caesars Palace parking lot and drew a relatively small crowd. The race lasted two years and Formula 1 moved on. The sport’s return next year couldn’t come at a better time.
While many like to point to Netflix’s Drive to Survive series as the leading driver of the sport’s growth in the US (which has undoubtedly played some role), Liberty Media’s leadership behind the scenes deserves the bulk of the credit. Since Liberty Media took control of Formula 1, it’s greatly expanded the sport’s reach by embracing social media and emphasizing free-to-air broadcasting agreements. Not only has this grown the audience, but it’s made it younger, something traditional sports have struggled to replicate. Liberty has also brought new leadership to Formula 1 which has led to a cost cap for teams and new technical regulations, both with the goal of improving the viewership of the sport.
Formula 1 Primer
To put the impact of the Las Vegas Grand Prix in context, it helps to start with a brief overview of how Formula 1 generates revenue. Formula 1 operates under a unique model that essentially renders the company a content business. Formula 1 generates revenue from three main sources: race promotion, media rights, and sponsorships.
Race Promotion – Formula 1 grants race promoters the rights to host, stage, and promote each event. Contracts are typically three to seven years and include annual escalators. Race promoters incur all costs associated with putting on a race but receive all revenue from ticket sales, concessions, hospitality, and on-site activation (outside of the Formula 1 Paddock Club). Race promotion accounted for 31% of revenue in 2021.
Media Rights – Formula 1 licenses rights to broadcast events on television and other media platforms in specified countries or regions. This includes both “free-to-air” and “pay television” agreements. In total, Formula 1 had 55 different broadcast agreements in 2021. Media rights accounted for 40% of revenue in 2021.
Sponsorships – Formula 1 sells event-based sponsorship in the form of trackside advertising and race title sponsorship packages. Sponsors can also acquire status as a Global Partner of Formula 1 or an Official Supplier of Formula 1. Sponsorships accounted for 16% of revenue in 2021.
Since Formula 1 doesn’t have many of the logistical costs that one might assume, notably the cost to put on every race, it more closely resembles a content business. Formula 1’s largest cost is what it pays out to teams as part of its revenue share agreement. Outside of this, the league incurs the cost of hosting the Paddock Club and setting up the broadcast of each race. This model leaves Formula 1 with mostly contracted revenue, its largest expense (team payouts) tied to revenue, and its other expenses minimal.
On top of the appealing business model Formula 1 has built, its unique and growing audience carries considerable value. Formula 1 has found a way to capture a large audience that skews younger, while also attracting some of the wealthiest fans in the world. It’s a difficult balance to strike, but they’ve been able to do so.
Back to Vegas
So what does the Las Vegas announcement mean for Formula 1? The most immediate impact will be a lift in race promotion revenue. For Las Vegas, Formula 1 is undertaking promotion by itself. This is the second time that Formula 1 is stepping outside of its traditional race promotion model. The Miami Grand Prix, set to take place in May, features a lower race promotion fee but a revenue share model with the promoter. In the US, Formula 1 is exploring new race promotion models as Liberty Media feels it can execute on the event and capture a larger share of value per race. If Liberty/Formula 1 can execute, the Las Vegas Grand Prix should generate more for Formula 1 than the average race promotion fee.
That said, the addition will have a small impact to overall revenue and ultimate cash flow in 2023. The race calendar is largely fixed. The inclusion of Las Vegas in 2023 will mean that one of the races on the 2022 calendar won’t be renewed, which will likely be one of the core European races. So the real change to revenue is the delta between the previous race promotion fee and whatever the Las Vegas Grand Prix can generate.
The real value of adding a race in Las Vegas is not in the race promotion fee, but as a major stake in US expansion. Las Vegas marks the third race on the calendar in the United States for 2023. Miami, which is a new addition for 2022, saw tickets sell out almost immediately. The United States Grand Prix in Austin, TX drew 400,000 unique fans in 2021, 70% of which were attending their first Formula 1 race. 2022 has seen an incredibly strong start for TV ratings in the US, with an average of 1.4m viewers of each race, up 47% from the prior year. The opening race held in Bahrain was the most viewed Formula 1 race on cable television since the 1995 Brazilian Grand Prix.
US interest in Formula 1 is sure to add a significant lift to media rights fees in the country and further build sponsorship demand. This is where the leverage exists in Formula 1’s business model. In addition to the clear value for traditional broadcast, we’re also seeing the value for live sports continue to increase. We’re seeing OTT platforms bid on live sports. Amazon shares rights to Thursday Night Football, Peacock has begun showing Sunday Night Football, the WWE, and Premier League matches. Apple has recently signed an agreement with Major League Baseball to show Friday night games on its platform. Formula 1 may be the only true global sport. It has over 400m fans and hosts races in over 20 countries across the world. It would be a highly appealing media property for an OTT platform that wants to expand internationally. A stronger presence in the US only increases this value.
Ultimately, Formula 1 has to walk a fine line. On one end, there is an incentive to host races in countries that are willing to pay the most, or in places that Formula 1 has targeted for growth. On the other end, the league must respect the heritage of the sport and give fans races that they want to see. Las Vegas is a perfect balance of a new race. It will continue to drive interest in the US, give fans a phenomenal viewing experience, and most importantly, increase the value of Formula 1 for its shareholders.
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