Business of Sport and Entertainment: Formula 1 - Case Study Example

Formula One Table of Contents Introduction 3 The Future of Formula One 3 Scenario Cross 4 Uncertainty Map 5 The Best and Worst Scenarios 6 Recommendation 7 Conclusion 7 Reference List 8 Introduction Formula one is one of the most popular auto-racing sports in the world. This sport is held by most of the developed countries and a few developing countries. The races are known as Grand Prix, termed after the French for ‘grand prize’ (FIA, 2014). The formula one sports industry has been evaluated to be worth $ 4 billion and it attracts almost 600 million audiences. The formula one is synonymous with racing stars like Schumacher, Hamilton, etc. The race events are managed by the Formula One Group, which is overseen by the CEO Bernie Ecclestone (EconomyWatch, 2010). The group controls the rules and regulations and also its commercial rights. The recent financial failing of F1 and the future issues along with the best and worst scenarios have been discussed in this paper. The Future of Formula One The fall out of Marussia and Caterham has resulted in the financial crisis of Formula one (F1) business. Ecclestone has admitted that this financial crisis is due his own misjudgment of situation and improper capital distribution. As a result the major teams will have compromise to improve the financial situation (GPUpdate, 2014). This suggests that in the next few years the Formula One Group will be more focused in developing the financial structure and modifying the operation standards. According to the reports of Walker (2014) the CVC capital is likely to withdraw itself from the business by 2018. CVC capital, a private equity firm which bought $ 2 billion worth of shares in 2006, has eventually made a substantial amount as the revenue of F1 took a hike. As of 2014, CVC has gained almost $8.2 billion in cash (Sylt, 2014). The sellout of the stakes will eventually hamper the financial stability of the group. The sell out also indicates that the Formula One Group is no longer an attractive investment option. Ecclestone’s hint of retirement has also started a chain reaction of turmoil in the business. The teams are worried if his next replacement will be able to solve the financial issue of the group. Walker (2014) further reported that Ecclestone’s replacement is most likely to be a committee formed by members of Prince’s Gate and Delta Topco, rather than a single individual. Shift from an autocratic management to a more corporatist one will possibly change a few revenue generation processes. This shift will likely to change the global broadcasting scenarios. The close relationship with Tata Communications and the Formula One Management will eventually result in shift to paid online viewing. It can be predicted that the management governed by a committee will eventually attract more sponsors, as they most likely to focus on long term benefits rather than short term ones. The Formula Group can improve its financial status and its team portfolio, only if the approach in management is changed (EconomyWatch, 2010). Scenario Cross indraft Uncertainty Map Risk Factor Sub-risks Risk Impact Continuously Changing Technology Technology gap between countries Continuous change in design Requirements for investments in continuous development of technology High Medium Medium Increasing Accidents Poor Conditions of the Circuit Poor Weather conditions Unavailability of highest standard of safety Scarcity of Trained Professional and adequate medical staff High High High Medium Cost Involved The sport requires huge amount of investment Additional costs are required to incur for emergencies Return on investment is comparatively low High Medium High Scarcity of Investors Although there are some large companies sponsoring the events, but is only limited to few. Investors are reluctant owing to its popularity only limited to developed countries. Medium Medium The Best and Worst Scenarios Best Scenario The popularity of Formula One race never seems to decline. It holds current viewer base of 600 million audiences (EconomyWatch, 2010). The thrill of speed and racing spirit among the audiences has kept this sport alive. The large viewer base also attracts a lot of sponsoring companies which result is proper revenue generation for the formula one group. The celebrity position of racers like Schumacher, Alonsoa and Vettel is also responsible for the popularity of the sport. The hosting countries also earn a substantial amount of capital which eventually helps to improve the GDP. Owing to the race events host countries like England, Brazil, Australia, Singapore has attracted a significant number of tourists across the world. Thus the F1 events are responsible for the development of the tourism industry as well (Aravindan, A. 2014). Worst Scenario The financial downturn of the Formula one group has caused an outrage among the teams. Ecclestone refuses to help the three smallest teams, Force India, Sauber and Lotus, due to financial crisis. Furthermore, two more teams, Marussia and Caterham have been struck out of the event due to financial crisis. Ecclestone justified his action by stating that the group is not in sufficient financial stability to help out the teams. This drastic measure to stabilize the financial situation has alarmed the major stakeholders like CVC capital, who started to sell out their stakes. The fall out of the teams has eventually reduced the number of cars in the track, which has upset a lot of viewers (Spurgeon, B. 2014). Furthermore, the improper distribution of the prize money is also a vital factor for the financial turmoil. According to the contract, popular teams like Ferrari may get paid as high as $90 million just for their presence in the event, whereas less popular teams like Caterham may only get $20 million with the prize amount. Recommendation The Formula One Group must attract more sponsors so that it can take its events to more developing countries. This will not only help to increase the fan base, but also it will improve the economy of the host country. The risks involved with accidents can be reduced by leveraging the technological advancement in automobile technology. By ensuring safer cars, the cars companies will attract more sponsors, which in turn will improve the entire management and increase the prize amount. The broadcast should be done in multiple television channels to penetrate in to a wider viewer base. The financial crisis can be handled by changing the management system of the group. The prize money should be distributed among the teams in a justified manner, and the teams which are at the bottom of the list should be treated with proper financial support and respect. The new management system will help to attract new sponsors which will improve the financial status of the group. Although Eccelstone has admitted to his fault of improper judgment, but this is not enough to ease off the investors. The management must give a more promising prospect of revenue generation to attract more potential investors. This can be achieved by adding more teams to the events and moving the race to different countries apart for the traditional ones. Conclusion The Formula one race events have great prospect as an auto sport. However, it needs proper management to improve its vigor and viewer base. The current financial scenario needs to be improved on an urgent basis or else the sport might lose its popularity. The participating teams needs to be supported financially in order to avoid their fallout from the event. Ecclestone’s autocratic approach needs to be replaced so that the management can act in a symbiotic manner with the sponsors and the teams can also feel financially safe. Reference List Aravindan, A. 2014. For Singapore, F1 race gets tourism back on track. [online] Available at: < http://in.reuters.com/article/2014/09/18/singapore-formula1-tourism-idINKBN0HD2K720140918 > [Accessed 6 December 2014] EconomyWatch. 2010. Formula One industry. [online] Available at: < http://www.economywatch.com/world-industries/formula-one > [Accessed 6 December 2014] FIA. 2014. Fédération Internationale de lAutomobile. [online] Available at: < http://www.fia.com/sport/championships/news/formula-1-world-championship > [Accessed 6 December 2014] GPUpdate. 2014. Ecclestone admits fault for Formula 1 issues. [online] Available at: < http://www.gpupdate.net/en/f1-news/318370/ > [Accessed 6 December 2014] Johnson, D. 2014. Bernie Ecclestone refuses handouts for F1s smallest teams, pushing Force India, Lotus and Sauber to the brink. [online] Available at: < http://www.telegraph.co.uk/sport/motorsport/formulaone/11219341/Bernie-Ecclestone-refuses-handouts-for-F1s-smallest-teams-pushing-Force-India-Lotus-and-Sauber-to-the-brink.html >[Accessed 6 December 2014] Spurgeon, B. 2014. Formula One in Crisis Mode. [online] Available at: < http://www.nytimes.com/2014/11/07/sports/autoracing/brazilian-grand-prix-formula-one-in-crisis-mode.html?_r=0 > [Accessed 6 December 2014] Sylt , C. 2014. How CVC Has Made $8.2 Billion From Formula One Auto Racing. [online] Available at: < http://www.forbes.com/sites/csylt/2014/04/15/how-cvc-has-made-8-2-billion-from-formula-one-auto-racing/ > [Accessed 6 December 2014] Walker, K. 2014. The future of Formula One. [online] Available at: < http://en.espnf1.com/blogs/motorsport/story/147933.html > [Accessed 6 December 2014] Read More