Although widely anticipated for almost three years now, the news last week that two teams had registered an official complaint with the office of the EU Commissioner for Competition over Formula 1's business practices certainly still sent frissons of fear through F1.
The complaint is rooted in the dying days of the 2010-12 Concorde Agreement, when Bernie Ecclestone, then as now CEO of F1's commercial rights holding entity, Formula One Management, picked off the major teams with promises of seats on a streamlined Formula 1 Commission and premium payments in return for commitments to compete in F1 through to 2020.
The scheme formed part of a grand plan by FOM's majority shareholder CVC Capital Partners to list F1 on the Singapore Stock Exchange and effectively cash out of the sport.
Ecclestone negotiated individual terms with the big teams in F1 © LAT |
Thus three teams - Ferrari, Red Bull Racing and McLaren - were offered premiums known as Constructors Championship Bonuses, with Mercedes being promised, after protests, annuities subject to certain performance criteria. With one constructors' championship already in the bag and the next all but a dead cert for the three-pointed star, the pigeons are certainly coming home to roost for FOM.
In addition, Ferrari receives substantial Long Standing Team payments, with Williams/Red Bull pocketing bonuses of vastly differing amounts. Clearly F1's commercial structure is riddled with inequities, and it is no secret that in F1 money equals performance.
Saliently, these amounts accrue in addition to the usual revenues as laid down in Schedule 10 of the now-expired Concorde Agreement, which are calculated on the basis of aggregate recent past performance over three years and the most recent championship standings. The income streams are known as Column 1/Column 2 respectively.
To put this inequality into proportion, consider the 2015 earnings of Williams and Ferrari, third and fourth in last year's classification respectively: with an estimated ￡60m, the British team took home half the amount paid to the team it beat hands down. Force India's plight is worse: after placing fifth to McLaren's fourth, the former earned just ￡2m less in Column 1/2 income, yet banked a whopping ￡25m less after CCB payments.
In addition, five privileged teams partake in the Strategy Group, an executive body in all but name that takes decisions - such as its vote against the adoption of regulatory budget controls - that have the potential to severely disadvantage disenfranchised teams, who collectively have one vote: via the non-CCB team that placed highest in the previous year's classification.
Any wonder Force India and Sauber - last-named headed by jurist Monisha Kaltenborn - made their ways to Brussels during F1's summer break after two fraught years of lobbying intensivelyfor change?
Originally Lotus formed part of this group, but is believed to have withdrawn after the gravity of its troubles hit home; clearly direct involvement in the matter would - for reasons outlined below - impact on the team's planned sale to Renault.
Manor, too, is said to have dipped in and out, but, again, its future is far from certain after plunging into administration last year (as Marussia), from which it emerged only after massive downsizing and restructuring a year ago. Toro Rosso? Aligned with Red Bull, and is thus tolerant of the situation.
The complaint could not come at a worst time for F1, or for Ferrari, Red Bull and McLaren. Faced with dwindling live and TV audiences, recalcitrant sponsors and a raft of financially unstable teams, the last thing FOM needs is anti-trust investigation, while CVC is said to be planning on exiting after cashing in for 10 years.
In June CVC's owners stated they were in F1 for the long haul, yet this week during the Camp Beckenbauer sports summit Ecclestone said "F1 will soon have a new owner".
Given that the owner of the FIA Formula 1 world championship is undisputedly the sport's governing body, the soon-to-be-85-year-old likely meant majority control of F1's commercial rights will find a new home, i.e. CVC will exit.
Marchionne played down concerns over an EU investigation earlier this year © XPB |
The prospects of a sale, including the current share structure and some of the potential purchasers was detailed here, and, if what Ecclestone said this week has legs, the sale is expected to be on the terms as outlined.
However, when news of the EU complaint brokeEcclestone told Autosport: "They [the teams] must give it a go, and if they're successful it's good, and, if not, then it costs nothing...
"The bottom line is, what they [the teams] are saying is we're giving too much money to some people and not enough to the others. But all this was done whereby everybody knew what they would be getting and what would happen, and they all signed contracts which were very clear."
Ferrari aims to raise a desperately needed ￡3bn for parent FIAT via the New York Stock Exchange, with the Scuderia's sporting prowess acting as totem; while Red Bull faces a crossroads after dumping engine partner Renault following two years of underperformance that hit the team's coffers and Red Bull's image.
FIAT CEO Sergio Marchionne seemed not worried about the EU threat when the question was posed to him in June, telling this writer: "These [contracts] are incredibly clear deals, they are evident and they have been publicised. I'm a lawyer by training and I really see very limited scope for Commission intervention.
"If it happens, we'll deal with it but I doubt very much that it will go very far."
Red Bull owner Dietrich Mateschitz, faced with plunging FOM income - plus likely higher engine bills if, that is, he is able to secure an alternate supplier - and damage to the image of his drinks brand, will hardly take kindly to threats of losing his team's CCB income. As it is his team's mission is to become "revenue neutral" over time, an objective that now seems further away than ever.
McLaren, too, is suffering commercially after Honda failed to deliver, while Mercedes is banking on the promised windfall, said to total at least ￡60m over the next two years, to fund shareholder options. And Renault's purchase of Lotus appears to be predicated on some form of "historic payment" and a seat on the Strategy Group.
Ultimately the question is: where to now? First, Competition Commissioner Margrethe Vestager needs to be satisfied about the veracity of the allegations; only then can an official investigation commence. The two criteria that will ascertain whether to investigate are whether any parties to F1's covenants are guilty of abuse of a dominant position(s), and whether competition for European end-users has been stifled.
Renault is on the verge of returning to team ownership with Lotus takeover © XPB |
For comprehensive insights into the EU competition law as it pertains to F1, read this column written three years ago in conjunction with anti-trust specialist Rohan Shah, and the exclusive comments given to this column by Ms Vestager's office and British MEP Anneliese Dodds, who visited Force India in May.
However, before turning to the possible alternatives facing F1, consider Ms Vestager's comments made this week when her office announced an investigation into the governance of the International Skating Union, a sport with far lower profile than F1, after two Dutch skaters registered official complaints:
"For many, sport is a passion - but it can also be a business. We recognise and respect the role of international sports federations to set the rules of the game and to ensure proper governance of sport, notably in terms of the health and safety of the athletes and the integrity of competitions. However, in the case of the International Skating Union we will investigate if such rules are being abused to enforce a monopoly over the organisation of sporting events or otherwise restrict competition."
Should her office decide to investigate F1, there are three possible outcomes:
1) All is hunky-dory in the land of F1, with there being no abuse of dominant position by FOM and others; that premium payments to half the field contesting a world championship are indeed legit. This seems highly unlikely in view of the ISU investigation.
2) Breaches of EU monopolistic law are unearthed, with the Commissioner urging a settlement, probably by dismantling the existing structures and instituting equitable revenue distribution - which would hit the CCB teams hardest.
However, the enfranchised teams face losing a collective ￡100m in premiums, which would likely flow back into Columns 1/2 and be distributed according to performance. As things stand now the biggest losers would be Red Bull and McLaren. In addition, the majors would likely lose political clout via the likely restructuring of F1's governance process - i.e. a dismantling of the Strategy Group.
3) Any breaches are of such gravity that fines (of up to 10 per cent of turnover of the relevant parties) are levied, in addition to remedial steps outlined above.
Vestager's various predecessors threw not only the books but their entire libraries at such as Microsoft, Google and Intel when they found the companies to be acting in breach of EU competition law, with fines in each instance running to hundreds of millions in any currency. However, the Microsoft investigation ran for almost 20 years under various guises, while the Google process remains on-going after five years.
In conclusion: no final outcome can be expected for (at least) the next three years unless FOM and the majors cave and admit culpability or the complaints made by the two teams are found at the first instance to be heavily flawed.
Thus there is every chance that F1 will hang in limbo during the worst crisis in its 65-year history. And, that is bound to impact heavily on crucial decisions F1's various players - from CVC through prospective purchasers and Ecclestone to the major teams and Red Bull, Mercedes, FIAT and Renault - need to take in the short and medium terms.
Ecclestone has spoken of possible solutions to F1's travails by November - but that timeframe now seems highly unlikely. A purchase of F1's rights seems even more remote in the short term.
Although widely anticipated for almost three years now, the news last week that two teams had registered an official complaint with the office of the EU Commissioner for Competition over Formula 1's business practices certainly still sent frissons of fear through F1.
The complaint is rooted in the dying days of the 2010-12 Concorde Agreement, when Bernie Ecclestone, then as now CEO of F1's commercial rights holding entity, Formula One Management, picked off the major teams with promises of seats on a streamlined Formula 1 Commission and premium payments in return for commitments to compete in F1 through to 2020.
The scheme formed part of a grand plan by FOM's majority shareholder CVC Capital Partners to list F1 on the Singapore Stock Exchange and effectively cash out of the sport.
Ecclestone negotiated individual terms with the big teams in F1 © LAT |
Thus three teams - Ferrari, Red Bull Racing and McLaren - were offered premiums known as Constructors Championship Bonuses, with Mercedes being promised, after protests, annuities subject to certain performance criteria. With one constructors' championship already in the bag and the next all but a dead cert for the three-pointed star, the pigeons are certainly coming home to roost for FOM.
In addition, Ferrari receives substantial Long Standing Team payments, with Williams/Red Bull pocketing bonuses of vastly differing amounts. Clearly F1's commercial structure is riddled with inequities, and it is no secret that in F1 money equals performance.
Saliently, these amounts accrue in addition to the usual revenues as laid down in Schedule 10 of the now-expired Concorde Agreement, which are calculated on the basis of aggregate recent past performance over three years and the most recent championship standings. The income streams are known as Column 1/Column 2 respectively.
To put this inequality into proportion, consider the 2015 earnings of Williams and Ferrari, third and fourth in last year's classification respectively: with an estimated ￡60m, the British team took home half the amount paid to the team it beat hands down. Force India's plight is worse: after placing fifth to McLaren's fourth, the former earned just ￡2m less in Column 1/2 income, yet banked a whopping ￡25m less after CCB payments.
In addition, five privileged teams partake in the Strategy Group, an executive body in all but name that takes decisions - such as its vote against the adoption of regulatory budget controls - that have the potential to severely disadvantage disenfranchised teams, who collectively have one vote: via the non-CCB team that placed highest in the previous year's classification.
Any wonder Force India and Sauber - last-named headed by jurist Monisha Kaltenborn - made their ways to Brussels during F1's summer break after two fraught years of lobbying intensivelyfor change?
Originally Lotus formed part of this group, but is believed to have withdrawn after the gravity of its troubles hit home; clearly direct involvement in the matter would - for reasons outlined below - impact on the team's planned sale to Renault.
Manor, too, is said to have dipped in and out, but, again, its future is far from certain after plunging into administration last year (as Marussia), from which it emerged only after massive downsizing and restructuring a year ago. Toro Rosso? Aligned with Red Bull, and is thus tolerant of the situation.
The complaint could not come at a worst time for F1, or for Ferrari, Red Bull and McLaren. Faced with dwindling live and TV audiences, recalcitrant sponsors and a raft of financially unstable teams, the last thing FOM needs is anti-trust investigation, while CVC is said to be planning on exiting after cashing in for 10 years.
In June CVC's owners stated they were in F1 for the long haul, yet this week during the Camp Beckenbauer sports summit Ecclestone said "F1 will soon have a new owner".
Given that the owner of the FIA Formula 1 world championship is undisputedly the sport's governing body, the soon-to-be-85-year-old likely meant majority control of F1's commercial rights will find a new home, i.e. CVC will exit.
Marchionne played down concerns over an EU investigation earlier this year © XPB |
The prospects of a sale, including the current share structure and some of the potential purchasers was detailed here, and, if what Ecclestone said this week has legs, the sale is expected to be on the terms as outlined.
However, when news of the EU complaint brokeEcclestone told Autosport: "They [the teams] must give it a go, and if they're successful it's good, and, if not, then it costs nothing...
"The bottom line is, what they [the teams] are saying is we're giving too much money to some people and not enough to the others. But all this was done whereby everybody knew what they would be getting and what would happen, and they all signed contracts which were very clear."
Ferrari aims to raise a desperately needed ￡3bn for parent FIAT via the New York Stock Exchange, with the Scuderia's sporting prowess acting as totem; while Red Bull faces a crossroads after dumping engine partner Renault following two years of underperformance that hit the team's coffers and Red Bull's image.
FIAT CEO Sergio Marchionne seemed not worried about the EU threat when the question was posed to him in June, telling this writer: "These [contracts] are incredibly clear deals, they are evident and they have been publicised. I'm a lawyer by training and I really see very limited scope for Commission intervention.
"If it happens, we'll deal with it but I doubt very much that it will go very far."
Red Bull owner Dietrich Mateschitz, faced with plunging FOM income - plus likely higher engine bills if, that is, he is able to secure an alternate supplier - and damage to the image of his drinks brand, will hardly take kindly to threats of losing his team's CCB income. As it is his team's mission is to become "revenue neutral" over time, an objective that now seems further away than ever.
McLaren, too, is suffering commercially after Honda failed to deliver, while Mercedes is banking on the promised windfall, said to total at least ￡60m over the next two years, to fund shareholder options. And Renault's purchase of Lotus appears to be predicated on some form of "historic payment" and a seat on the Strategy Group.
Ultimately the question is: where to now? First, Competition Commissioner Margrethe Vestager needs to be satisfied about the veracity of the allegations; only then can an official investigation commence. The two criteria that will ascertain whether to investigate are whether any parties to F1's covenants are guilty of abuse of a dominant position(s), and whether competition for European end-users has been stifled.
Renault is on the verge of returning to team ownership with Lotus takeover © XPB |
For comprehensive insights into the EU competition law as it pertains to F1, read this column written three years ago in conjunction with anti-trust specialist Rohan Shah, and the exclusive comments given to this column by Ms Vestager's office and British MEP Anneliese Dodds, who visited Force India in May.
However, before turning to the possible alternatives facing F1, consider Ms Vestager's comments made this week when her office announced an investigation into the governance of the International Skating Union, a sport with far lower profile than F1, after two Dutch skaters registered official complaints:
"For many, sport is a passion - but it can also be a business. We recognise and respect the role of international sports federations to set the rules of the game and to ensure proper governance of sport, notably in terms of the health and safety of the athletes and the integrity of competitions. However, in the case of the International Skating Union we will investigate if such rules are being abused to enforce a monopoly over the organisation of sporting events or otherwise restrict competition."
Should her office decide to investigate F1, there are three possible outcomes:
1) All is hunky-dory in the land of F1, with there being no abuse of dominant position by FOM and others; that premium payments to half the field contesting a world championship are indeed legit. This seems highly unlikely in view of the ISU investigation.
2) Breaches of EU monopolistic law are unearthed, with the Commissioner urging a settlement, probably by dismantling the existing structures and instituting equitable revenue distribution - which would hit the CCB teams hardest.
However, the enfranchised teams face losing a collective ￡100m in premiums, which would likely flow back into Columns 1/2 and be distributed according to performance. As things stand now the biggest losers would be Red Bull and McLaren. In addition, the majors would likely lose political clout via the likely restructuring of F1's governance process - i.e. a dismantling of the Strategy Group.
3) Any breaches are of such gravity that fines (of up to 10 per cent of turnover of the relevant parties) are levied, in addition to remedial steps outlined above.
Vestager's various predecessors threw not only the books but their entire libraries at such as Microsoft, Google and Intel when they found the companies to be acting in breach of EU competition law, with fines in each instance running to hundreds of millions in any currency. However, the Microsoft investigation ran for almost 20 years under various guises, while the Google process remains on-going after five years.
In conclusion: no final outcome can be expected for (at least) the next three years unless FOM and the majors cave and admit culpability or the complaints made by the two teams are found at the first instance to be heavily flawed.
Thus there is every chance that F1 will hang in limbo during the worst crisis in its 65-year history. And, that is bound to impact heavily on crucial decisions F1's various players - from CVC through prospective purchasers and Ecclestone to the major teams and Red Bull, Mercedes, FIAT and Renault - need to take in the short and medium terms.
Ecclestone has spoken of possible solutions to F1's travails by November - but that timeframe now seems highly unlikely. A purchase of F1's rights seems even more remote in the short term.
