Vroom, Vroom, F1’s Off Track Excitement

Michael Hedges August 2, 2011 Follow on Twitter

Content may still be king but with platforms galore slicing up rights deals is the new business reality. The arithmetic has become so complex it’s starting to look like counterparty exchange swaps. Yep, that’s language of high finance.

The BBC has entered into an agreement, announced last week (July 29), with pay-TV provider BSkyB to divide up Formula 1 (F1) auto racing coverage in the UK. The deal allows the BBC to keeps its hand in F1 coverage while shaving about GBP 20 million a year from the rights fee budget. BSkyB’s Sky Sport gets a firm entrée into another marquee television event.

F1 supremo Bernie Ecclestone put the deal together, which runs from next season through 2018, when the BBC looked ready to walk altogether and no other UK free-to-air broadcaster seemed ready to stump up for the whole package plus production costs. The BBC will cut its rights fee to Formula One Management (FOM) from GBP 40 million per year by half while BSkyB will pay GBP 45 million a year. The calculator app shows a gain for Mr. Ecclestone and FOM of GBP 150 million for the six-year package. This is the age of austerity only for some.

Sporting events have been a television mainstay for two generations. Fans flock to their screens for every turn and twist, waiting for the exciting moments. Die-hard fans can’t get enough of their favorites. Television programmers know this. And so do advertisers and sponsors.

For television broadcasters sports programming can be a significant brand association. Traditionally that’s meant a big production and promotional investment, not to forget rights fees. For public television broadcasters, like the BBC, attaching to major sporting events has been virtually mandated. It’s expected. Commercial broadcasters, likewise, see an often long-term ad revenue stream for programming outside of primetime with a built-in fan base.

Sports marketing agents, like FOM, want what’s best for their sport, meaning money and exposure. Mr. Ecclestone, one of the most astute, understands that as rights fee revenue from broadcasters has a natural limit a sports brand needs exposure. Sponsors, their other arguably larger revenue stream, want free TV coverage that includes all those logos. But, again, revenues from pay-TV might make up for it.

“There will be a lot more people viewing and a lot more opportunities for people to view,” he told UK media when the deal was announced. “If the BBC had stayed alone they would not have had the money to continue. It would have been like the old days. No build-up, and when the cars finish, the program ends. They spend a lot of money on F1 and do a super job, but they have to cut a lot of money. But this was not just about money, it was about what is best for F1.”

A deal with BSkyB was not Mr. Ecclestone’s first choice when faced with the BBC’s likely exit from F1. UK F1 fans would howl in anguish, as they have, at paying for the Sky Sports package. Uncertainty over a new television deal would cause even more unrest among team owners.

“It isn't possible that F1 could go on to pay-TV,” said Mr. Ecclestone to the Sunday Telegraph (July 24) less than a week before the new deal was announced. “We wouldn't want to do that.  Let's wait and see about the BBC, because at the moment they want to make a noise. We have got no problem with the Beeb. I can't see how the BBC could cancel. We could probably sue them.”

Ah, things change. Pay-TV operators have long coveted marquee sports events. Sports marketing agents are losing their resistance, noting the rise in all-sports digital channels, some offering HD quality. While general interest free-to-air television broadcasters, public and private, must spread their programming and promotion budgets across a broad spectrum, an all-sports channel targets fans.

F1 enjoys broad fan, sponsor and broadcaster support across Europe. That support rises and falls on the strength of local venues and prowess of big name drivers and teams. UK interest in F1 currently rides high with well-known teams (Vodafone McLaren Mercedes, Lotus Renault GP, AT&T Williams and Red Bull) and winning drivers (Jensen Button and Lewis Hamilton). 

Broadcasters like to negotiate rights fees from a position of strength. In France TF1 CEO Nonce Paolini seems ready to dump F1 altogether. “We'll see if we renew the contract,” he said to shareholders (April 14). “The numbers for Formula 1 have been declining steadily for several years. We must recognize that the Grand Prix are less and less exciting. The figures are not up to our expectations.”

Ratings in France for this year’s Monaco Grand Prix hit 29% audience share for TF1, reported Médiamétrie, and the French Grand Prix scored 31.1% audience share. This past weekend’s Hungarian Grand Prix posted 25% audience share. TF1’s contract with FOM ends after the 2012 season. Several rights sharing deals have been touted, including with pay-TV Canal+.

RTL renewed its two decades German rights deal with F1 in May, extending the contract for free-to-air broadcasting another four years through the 2015 season. RTL has rights to everything; warm-up, qualifications, main race and more. Pay-TV rights in Germany are separate, held by Sky Deutschland through the current season. RTL’s free-to-air channel in Hungary – RTL Klub – holds Hungarian rights for F1.

F1 is wildly popular in both Spain and Italy with a long history of top venues, teams and drivers. Spain’s La Sexta outbid Telecinco in 2008 for an exclusive five-year television rights package. A minority shareholder in La Sexta is Mexican broadcasting giant Televisa. Italian public broadcaster RAI has broadcast F1 races, like, forever. When Ferrari threatened to withdraw from F1 in a 2009 spat with FIA president Max Mosley RAI made it clear they’d leave F1 without Ferrari’s continuing presence.

The mix of public and private free-to-air television broadcasters carrying main F1 events and off-loading practice sessions, qualifying and all the gear-head arcania is changing. Pay-TV operators have money, space and wherewithal. And they’ve long coveted F1’s loyal fans.

Legendary media entrepreneur the late Leo Kirch knew this two decades ago when he bought a majority in F1 with borrowed money. His plan was to put F1 exclusively on the German pay-TV channel Premiere. He was a visionary but two decades too early. Mr. Kirch lost the stake in F1 to Mr. Ecclestone, who eventually refinanced the deal with private equity CVC Capital Partners. He lost Premiere to News Corporation, which eventually renamed the channel Sky Deutschland.

Floated widely in April was a possible bid for F1 from News Corporation, Mexican billionaire Carlos Slim and, allegedly, Ferrari. The number kicking around is GBP 4 billion. News Corporation owns 39% of BSkyB, which it tried to buy entirely until a scandal with its UK newspapers caused regulators to wave a black flag. In addition to sky Deutschland it owns Sky Italia.

Carlos Slim, the world’s richest man, has an interest in the Sauber racing team. He’s expressed interest in reviving the Mexico Grand Prix. And, well, Ferrari is Ferrari.

Mr. Ecclestone dismissed the idea as “rubbish” at the time. He’s also dismissed the idea of moving F1 from free-to-air TV. CVC Capital Partners investment in FOM has hit the five year mark, typically the exit point for private equity firms.

See also in ftm Knowledge

The Games People Watch

Media and sports are a powerful combination. Together they capture huge audiences and considerable money. This ftm Knowledge file looks at the competition from football rights battles and cycling coverage with new media to the Olympic Games. 60 pages PDF (September 2009)

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