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Immediately after last year’s Italian Grand Prix in Monza a senior Formula 1 figure smiled broadly when I asked how he was coping under Covid-19 restrictions. “Great,” he grinned, “Today’s race marks the second of three milestones, and now we can tick it off.”

He went to explain that the key points were the first, eighth and 16th races of the season. F1’s return to racing under the pandemic was an obvious milestone, but what were the other two?

“In terms of FIA regulations, we need a minimum of eight races to be recognised as an official world championship, and we’ve hit that today. There are no arguments about the legitimacy of this championship.

“Then, most TV contracts have a minimum of 16 rounds specified; once we hit that we’re clear on all fronts.”

History records that last year F1’s commercial rights holder Liberty Media successfully staged 17 rounds, against the odds, so the vital contractual clauses were fulfilled by the second Bahrain race, with Abu Dhabi still to go. Thus, F1 over-delivered in the face of Covid.

Start, Bahrain International Circuit, 2020
Sakhir GP fulfilled F1’s TV rights obligations in 2020

But 17 races is well down on the 22 originally scheduled. Worse, the banning of spectators at most events caused race hosting contracts to be renegotiated as F1 could hardly expect promoters to pay full price while taking little or no income from their events. Revised terms varied from Liberty covering the actual costs of events through reduced fees (or even waived fees) to cost-sharing and profit-sharing models. Each race had a different deal.

Thus Liberty’s 2020 revenues took a substantial knock despite staging almost 80% of the original 22 races. F1’s financial results published last Friday revealing that the year’s revenues plunged from $2.02 billion from 21 races in 2019 to $1.14bn from 17 last year. This pans out at an average income of $96.2m per 2019 race versus $67.3m last year.

F1’s business model is built around four main streams: TV broadcasting, race hosting, ‘bridge and board’ signage and high-end hospitality, with the first two contributors ‘normally’ providing approximately 35% each; trackside hoardings another 20% and hospitality, and minor deals the balance. In 2020 this mix changed, with TV and advertising being the main contributors, with hosting fees reduced and nil hospitality.

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In 2019 television fees and race hosting contributed approximately $770m each, advertising $440m and hospitality and ‘other’ around $220m. Assuming similar TV and advertising streams during 2020’s truncated season, the combined income amounts to $1.21bn, or marginally over the reported $1.14bn – suggesting hosting income incurred a modest loss due to waiving or reducing fees for selected events and covering the costs of others.

Sky began broadcasting F1 races in the UK in 2012

Clearly broadcast fees are Liberty’s most vital stream under Covid, for without them F1 would have recorded nil income. Races can be paid for, hospitality is small beer (excuse the pun) and advertisers book hoardings primarily to be seen not by live spectators, but television audiences. Therein lies Liberty’s future challenge: to maximise TV income in the face of disruption created by streaming, social media channels and ‘ripping’ of paid feeds.

Our records show that one television contract expires this year – that of Dutch broadcaster Ziggo, controlled by a Liberty associate company – but that no fewer than six contracts expire at the end of the 2022 F1 season. These include several major markets: Latin America (excluding Brazil), France and Asia. Then 2023 sees the end of the Saudi-held MENA contract, while F1’s lucrative Sky deals in the UK, Germany and Italy expire the year thereafter.

The original Sky UK contract was one of the last cut by Bernie Ecclestone, and ranks as the single most lucrative contract agreed by the legendary deal-maker. It was, though, probably the easiest: the UK market was flush and a host of broadcasters chased F1’s British TV rights. There are no suggestions Liberty will be unable to equal or better it, but it will be tough – as Liberty CEO and president Greg Maffei admitted during a call to investors last week.

“Probably the most important component is how much competition there is among potential bidders, distributors of your product,” Maffei explained on Friday. “Candidly, the best deal we have probably is our UK deal, largely because there were several bidders highly interested in getting our product.

“[We’ve] seen declines in some of the other higher-cost European alternatives. But if you look on any kind of basis about what cost per eyeball, cost per hour, et cetera, F1 looks like a relative value.”

Maffei believes that as the costs of ‘scripted TV’ – series and movies – rise, sports rights are becoming more attractive. “With the rising cost of alternatives like scripted content, as that gets more expensive in some ways it provides a floor on what the value of some of the live sports can be,” he said. “Historically, live sports look expensive, [but] maybe not quite as much when scripted continues to rise.”

Sky is the “best deal we have, probably”, admits Maffei

When Maffei referred to the Sky UK contract as the “best deal we have probably”, he could have saved himself the closing word in that phrase, for there is absolutely no doubt that it was and still is F1’s best deal, and as such is an absolutely crucial contributor to F1’s revenue streams.

Exactly how crucial was revealed in February 2020 by Scott Young, then head of Sky F1 UK, during a presentation attended by RaceFans. Young’s presentation indicated that Sky’s hosting fees run to an eye-watering £1.18 billion ($1.53bn) for 2019-2024 – the six-year contractual period – averaging $255m per year, one-third of F1’s annual television income.

Factor in that Sky Germany and Italy combined add almost $100m – these also expire in 2024 – and Liberty could lose a third of TV income should Sky choose to drop F1. That’s a sixth of F1’s global income sitting in one bucket!

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That said, Sky F1 UK is clearly doing something right as an analysis by Motorsport Broadcasting shows: On average, an audience of at least 1.22 million viewers watched each of the 17 races on Sky (excluding wrap-around content) last year, an increase of 19.1% over 2019’s average of 1.02 million viewers. Thus, Sky avoided a slump in the second year of exclusivity – a rarity in the industry.

Max Verstappen, Red Bull, Silverstone, 2021
Verstappen has kept Dutch fans watching

To put Sky’s fees in context, consider that during last week’s Q4 call new F1 president and CEO Stefano Domenicali reported an average of 88m viewers per 2020 grand prix – giving Sky UK an audience share of 1.4% in return for covering 25% of F1’s TV income!

Although F1’s global TV rating dropped by an average of 4.5% during 2020, audience ratings show that Sky UK grew its audiences by 2.6%, a swing of 7%. Consider, though, that China and Russia saw growths of 43% and 71% respectively, whilst Max Verstappen’s successes caused Dutch audiences to rise by 28%.

Calendar disruption due to the pandemic – most races were in Europe, affecting viewers in eastern and western time zones – and fewer races overall obviously impacted on the global footprint, so there are no doubts that on a global basis F1’s entertainment value remains robustly healthy.

“We saw only a marginal reduction in TV audiences, caused by multiple reasons but clearly driven but a shortened and limited geographical calendar compared to 2019, but something every major sport experienced in 2020,” said Domenicali last week.

So far so good, but the key question is not so much whether Sky will extend its F1 deals in all three territories, but at what price?

Maffei believes that F1’s various off-track initiatives such as the Netflix series Drive to Survive – season three of which arrives in just over two weeks – fan festivals and e-sports will build and maintain fan interest. He predicts a bidding war over future F1 television rights due to “some of the new digital players [potentially] entering.”

Netflix Drive to Survive season two
Netflix’s Drive to Survive brought new viewers to Formula 1

“They have sniffed [our product],” he said, referring to the likes of Netflix, Amazon and emerging streamers such as Disney and Apple. “We’ll see if we can get them excited. I do believe ultimately they will be become bidders, and that will be to our benefit.”

All this, though, points to the large Technicolor elephant in the room: F1’s streaming offering, known in the entertainment industry as Over The Top (OTT). F1 TV was launched to great fanfare in 2018 – a year after Liberty acquired F1’s rights – and has been constantly tweaked since to address a raft of technical and quality issues.

Yet problems with the feed have persisted, and as of the last race the experience still lacked polish. Its reliance on ‘outside’ voices grates: Australian or English-speaking Canadians watching the Sky UK-sourced commentary may rather hear more about their local drivers such as Daniel Ricciardo or Lance Stroll than, say, Lewis Hamilton or George Russell.

Breakaways, too, are jarring: All too often the voice provider cuts to grid, paddock or interview cameras, treating F1 TV audiences to commentaries about visuals that are visible only to the host’s viewers. Pre-race build-up – save for anodyne studio stuff, broadcast only in English – is conspicuous by its absence.

(The language gripe, incidentally, also applies to the F1 website, which is seemingly on a mission to actively compete with all independent English outlets while ignoring other language groups. Are they not worthy of news in their own languages, or are English-language sites simply easy pickings for Liberty?)

Start, Nurburgring, 2020
Eifel GP was shown on YouTube in some territories

F1’s Head of Digital Frank Arthofer left F1 earlier this year – his contract is said to have ended – but even before his departure Liberty seems to have admitted (semi-) defeat by offering F1 TV as a package through existing broadcasters or, crucially, streaming on social media.

In mid-November last year Domenicali’s predecessor Chase Carey talked up a new collaboration with a giant of internet video for the Eifel Grand Prix. “At this race, for the first time in our history, we partner with YouTube to stream the entire weekend for fans across selected European markets,” he said. “We look forward to continuing our unique partnership with YouTube as another way to engage our fans.”

In response to a subsequent question from an investor, Carey elaborated: “These digital players are going to be a bigger and bigger part of our future as you get an increasingly mature broadcast world and a maturing pay world, and trillion-dollar digital companies that are getting deeper and deeper into content. They’re an incredibly important part of our future. So, we’re looking to continue to try and expand these relationships.”

F1 stands at a crossroads: Does it continue down its traditional contracted broadcaster route, lucrative as it has been thus far, or turn down almost a billion bucks per year to a embrace what is clearly the future, albeit one that may not yet have fully arrived?

What is that future? Ultimately it entails entering into revenue-sharing deals with a variety of platforms such as YouTube by making F1’s product available through them rather than sticking to cable or satellite broadcasters.

Ex-CEO Carey saw streaming services as “incredibly important”

This avenue opens up a host of global options: sophisticated ad-free pay-views, potentially offering a variety of feeds; or a basic free-to-view single channel experience, funded purely by a share of advertising revenue. The language issue would remain until dedicated commentary teams are installed, but at least fans would have free options while still generating income for F1.

The tricky call however, is the exact timing of the cross-over. F1’s future broadcast strategy presents arguably the biggest and toughest challenge the sport faces in the short-to-medium term, larger even than the broiling sustainability issue: getting the equation wrong could put the entire sport out of business.

There is a parallel from another industry: the conundrum currently faced by automakers in the face of electrification: Switch too early, and income from current product is sacrificed; adopt a hybrid solution, which is an uncomfortable compromise by being betwixt and between; leave it too late and the brand trails the market before facing extinction.

And all the while broadcasters such as Sky are cagily playing waiting games of their own, hoping for better deals from Liberty, which will in time affect revenues.

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