Lightning McQueen is that you? In this week’s episode –Josh and Austin are diving into the economics behind Formula 1! Join the guys as they discuss everything you need to know about the highest level of motor racing… listen now!
Main Talking Points
[2:08] – What is Formula 1?
[7:41] – Series Background Information
[8:42] – Dad Joke of the Week
[9:00] – The Economics of F1
[10:43] – Revenue
[15:37] – Expenses
[22:34] – How Do You Make Money?
[24:30] – Mercedes Dominance
[26:01] – Drive to Survive
[27:22] – What’s Next for Formula 1?
[29:09] – How to Invest in Formula 1?
[30:11] – Should You Invest in Formula 1?
Links & Resources
How Drive to Survive Saved Formula 1 – Max Parkin
Who Were the Highest Paid Athletes in 2021? – Visual Capitalist
The Insane Logistics of Formula 1 – Wendover Productions
Building the Greatest Racing Spectacle on the Planet – DHL & F1
Economics of a Formula 1 Team –The Financial Pandora
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast. Simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts. Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey. Welcome back to The Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. I am Austin Wilson, Research Analyst at Hixon Zuercher Capital Management.
Josh Robb:
And I am Josh Robb, the Director of Financial Planning at Hixon Zuercher Capital Management. So, Austin, how can people help us with this podcast?
Austin Wilson:
Yeah, we would love it if you would subscribe if you’re not subscribed. That way you get a new episode every single Thursday. Over two years, we’ve not missed one yet. So, subscribe and get those episodes dropped every Thursday. We would love it if you’d leave us a review on Apple Podcast or Spotify or wherever you’re listening, and if you have any ideas about new podcast topics or questions for us, we would love it if you would email them to us at hello@theinvesteddads.com. And if you know one who’s asking about what we’re going to be talking about today, which I’ll tell you in just a second what that is-
Josh Robb:
That’s going to be a surprise.
Austin Wilson:
Please share this episode with your friends and family.
Josh Robb:
Yes.
Austin Wilson:
So, in light of today’s recent news or recent… It hasn’t really been today.
Josh Robb:
No.
Austin Wilson:
But within the end of March.
Josh Robb:
Yes.
Austin Wilson:
The recent news that the United States is getting the third United States Grand Prix in Las Vegas next fall of 2023/ we’re going to be talking about something that I’m extremely passionate about and Josh has no interest or knowledge in whatsoever.
Josh Robb:
Yep.
Austin Wilson:
And that is the economics and business behind Formula 1.
Josh Robb:
Yeah. So I was confused because I thought this was the Grand Prix. I don’t know.
Austin Wilson:
Ah, like Twix?
Josh Robb:
Yes. So I was like, “Oh, good, cereal. I’m excited.”
Austin Wilson:
Yeah. It’s a French word.
Josh Robb:
Yeah. So Formula 1.
Austin Wilson:
Yeah.
Josh Robb:
That is the cars that have… You see them in the streets, right? They do street racing.
Austin Wilson:
A lot of street circuits.
Josh Robb:
Right? Because NASCAR, they go in their circle and this one has turns-
Austin Wilson:
Lots of turns.
Josh Robb:
Different directions.
Austin Wilson:
Oh, yeah.
Josh Robb:
Not just left. They can go right and left and open-wheels.
Austin Wilson:
Yep.
Josh Robb:
Open-wheels, that’s important. And…
Austin Wilson:
Single-seater.
Josh Robb:
Single seat, no friends.
Austin Wilson:
No friends in the car.
Josh Robb:
And pretty powerful engines.
Austin Wilson:
1000 horsepower plus.
Josh Robb:
Okay. Wow.
[2:08] – What is Formula 1?
Austin Wilson:
So, here, let’s just break down what F1 is.
Josh Robb:
Okay. F1 is on the keyboard that’s right by escape.
Austin Wilson:
So Formula 1, also known as F1. So Wikipedia has actually a really lengthy description of all this, so I have a couple highlights that I thought are good to explain.
Josh Robb:
Were you the author of that one?
Austin Wilson:
Yeah, I am. I’ll link this in the show notes, but here are some highlights. Formula 1 or known as F1. It’s the highest class of international racing for open-wheel single-seater formula racing cars sanctioned by the Fédération Internationale de l’Automobile, the FIA. It’s a French group.
Josh Robb:
Ah, yeah.
Austin Wilson:
So it’s the French.
Josh Robb:
The French.
Austin Wilson:
So The World Driver’s Championship, which became the FIA Formula 1 World Championship in 1981, has been one of the premier forms of racing around the world since its inaugural season in 1950.
Josh Robb:
In ’50?
Austin Wilson:
The word, “Formula,” so in Formula 1, the name refers to the set of rules which all participants’ cars must conform. So a Formula 1 season consists of a series of races known as Grand Prix.
Josh Robb:
Prix.
Austin Wilson:
Grand Prix for Josh. Which take place worldwide on both purpose-built circuits and closed public roads and that’s the street circuits you were talking about.
Josh Robb:
Ah, yes. Closed public roads.
Austin Wilson:
That’s the closed public roads and that’s where the Vegas track will take place.
Josh Robb:
Yes, right down in the strip by all the-
Austin Wilson:
It’ll be the strip.
Josh Robb:
Yeah.
Austin Wilson:
And actually in Miami, this year, they’re doing the first Miami Grand Prix and it is also a street circuit.
Josh Robb:
Wow.
Austin Wilson:
There’s a lot of street circuits around the world, the most famous one being in Monaco.
Josh Robb:
Monaco.
Austin Wilson:
Or Monte Carlo. And then there are also purpose-built race tracks where they have a lot of races as well.
Josh Robb:
So a purpose-built race track, the Indianapolis 500?
Austin Wilson:
Yeah. Indianapolis Motor Speedway is a purpose-built race track, and actually Formula 1 used to race there.
Josh Robb:
That’s what I thought.
Austin Wilson:
Not around in the quad oval, but they actually used part of that and then had a road course in the middle.
Josh Robb:
Oh, interesting.
Austin Wilson:
That’s a soft spot for me because I grew up going to Formula 1 as a kid.
Josh Robb:
You grew up on Formula?
Austin Wilson:
I did. I grew up on Formula. At Indianapolis Motor Speedway and it was incredible. So I hope they come back there one day because the speedway is legally qualified. They could race there now, they just are working out the money I’m sure at this point. So let’s dig into a little bit more about-
Josh Robb:
Did they pour milk all over themselves?
Austin Wilson:
Formula, milk, all over. Yeah, it’s all over.
Josh Robb:
I see that.
Austin Wilson:
That’s the Indy 500.
Josh Robb:
That’s just the Indy 500, okay.
Austin Wilson:
Indy 500. Yeah.
Josh Robb:
All right, because I will always see that. Well that’s why they call it Formula 1, it’s that formula milk.
Austin Wilson:
It’s formula. So a point system is used at Grand Prix to determine two annual world championships, one for the driver and one for the constructor and each driver must hold a valid, what they call a super license, which is the highest class of racing license issued by the FIA.
Josh Robb:
You go to your local DMV to get that.
Austin Wilson:
Yep. Get your super license. All tracks must be graded one, which used to be known as A. It’s the highest safety rating by the FIA. That’s why not just run of the mill tracks can be raced on. They have to be safety graded and the highest.
Josh Robb:
So you said.
Austin Wilson:
This is the fastest cars, so they have to have the most safety.
Josh Robb:
You have a winner that’s a driver and a winner that’s the constructor
Austin Wilson:
Correct.
Josh Robb:
Explain that to me. Is that the…?
Austin Wilson:
That goes by points.
Josh Robb:
Ford or Honda? Or is that what you mean by construct like the car manufacturer?
Austin Wilson:
Exactly.
Josh Robb:
Okay.
Austin Wilson:
Generally speaking, there are currently 10 teams.
Josh Robb:
Okay.
Austin Wilson:
And those 10 teams will then be a constructor. Then each of those 10 teams also has an engine supplier and we’ll get to that later. But yes, the number of points scored for… Usually two drivers, each team.
Josh Robb:
Okay.
Austin Wilson:
When everyone’s healthy. You get two drivers for each team has two drivers and the total points scored for the driver will go towards the driver championship. And for both drivers goes towards the constructor championship.
Josh Robb:
Okay. You want your friend to do well, but just not as well as you?
Austin Wilson:
Pretty much.
Josh Robb:
You want him second right behind you?
Austin Wilson:
Yeah. That’s right.
Josh Robb:
Gotcha.
Austin Wilson:
Formula 1 cars are the fastest regulated road course racing cars in the world.
Josh Robb:
Yeah, they haven’t seen my car.
Austin Wilson:
This is because they allow very high corner speeds because of large amounts of aerodynamic down force. These big wings you see on them right now.
Josh Robb:
Fins.
Austin Wilson:
They had major changes in 2017, which made them even faster. They also add major changes now, which we’ll talk about later in 2022. Making them actually a little slower, but a little bit better at racing each other closely. Which is pretty cool. These cars are capable of over 200 miles an hour, which is pretty fast.
Josh Robb:
Seems quick.
Austin Wilson:
Especially considering they go around corners at 150 sometimes.
Josh Robb:
That’s quick.
Austin Wilson:
Yeah, absolutely.
Josh Robb:
That’s a lot of sliding in your seat. That’s why they don’t have a passenger because they would bump into them when they turn.
Austin Wilson:
They are strapped in really closely.
Josh Robb:
Pretty tight.
Austin Wilson:
Then electronics are a huge technological factor of these. Not even going to get into that, but they are crazy. However, notably, they do not have driver’s aids like traction control, launch control, automatic shifting. Those are banned. If you have a thousand horsepower at your right foot, which they do, you’re controlling that with your right foot and no traction control. Which is crazy. And no anti-lock brakes.
Josh Robb:
They don’t have any tread on those tires.
Austin Wilson:
That’s counterintuitive. Typically, when it’s dry, these cars run on slicks. Which are no grooves, no grooves whatsoever.
Josh Robb:
They’re just smooth tires.
Austin Wilson:
And that is actually more traction than you have with…
Josh Robb:
Because they get all sticky or what?
Austin Wilson:
Because there’s more rubber on the road.
Josh Robb:
Oh.
Austin Wilson:
That is why motorcycle racing tires are slicks traditionally in the dry as well. Only when you introduce water do you need grooves. In fact, all tires would be more grippy if they did not have grooves in the dry.
Josh Robb:
Oh, interesting.
Austin Wilson:
Now in the wet, that’s when the grooves are made for. Or the snow. What that does is it gets the water out of the way. Little fun fact there.
Josh Robb:
Interesting.
[7:41] – Series Background Information
Austin Wilson:
Slicks are actually better. The series started as the European Championship of Grand Prix Motor Racing in the twenties and thirties and in 1946 after a new…
Josh Robb:
Wait, wait 1920s?
Austin Wilson:
Oh yeah.
Josh Robb:
Because we’re in the 2020s.
Austin Wilson:
I know. This is a hundred years old.
Josh Robb:
Yeah. Okay.
Austin Wilson:
In 19…
Josh Robb:
They had cars back then?
Austin Wilson:
Barely.
Josh Robb:
Okay.
Austin Wilson:
Model T’s. No, they had cars. In 1946 after a new formula, Formula 1, was agreed upon by the teams for car rules, the championship was born. Then the series, as we know it, started in 1950 and Ferrari is actually the only team to have raced each season since 1950. They actually get a huge bonus because of that.
Josh Robb:
Oh yeah. Point wise?
Austin Wilson:
No dollar wise.
Josh Robb:
Oh, dollar wise.
Austin Wilson:
Yeah. So we’ll get to all of that.
Josh Robb:
Oh man.
Austin Wilson:
So Josh, that is a high level…
Josh Robb:
I learned a lot.
Austin Wilson:
Very high level.
Josh Robb:
Yes.
Austin Wilson:
Admittedly, I’m a huge fan of Formula 1 and I’m actually a big fan of Max Verstappen which is the reigning World Champion. I’m just going to throw that out there. Lewis Hamilton lovers will not be happy about that.
Josh Robb:
They can comment and send in messages.
Austin Wilson:
They can comment and send us questions.
[8:42] – Dad Joke of the Week
Josh Robb:
If they want to. All right. You talked about these cars and they had those fins on them. Those wings. Do you actually know what has four wheels and flies?
Austin Wilson:
Oh man. I do not.
Josh Robb:
A garbage truck.
Austin Wilson:
It flies? Ah.
Josh Robb:
It has flies. Yes.
Austin Wilson:
You’re funny.
Josh Robb:
Yes.
[9:00] – The Economics of F1
Austin Wilson:
You’re funny. So really where the nuts and bolts of this episode is going to occur is the economics in Formula 1. This is actually really fascinating. First of all…
Josh Robb:
People pay to watch this.
Austin Wilson:
People pay to watch this. I pay to watch this. It’s a subscription service now, actually. It used to not be. It used to be pretty much through TV. Now it’s a subscription service like everything. Streaming.
Josh Robb:
MAAS, media as a service.
Austin Wilson:
Media as… Could be MAAS.
Josh Robb:
Coined it. Trademark Josh.
Austin Wilson:
In 2017 on January 23rd, Liberty Media completed the acquisition of Formula 1 Group from a private equity firm for $8 billion. That was what it took to buy the rights to the series.
Josh Robb:
Eight… Billion with a B?
Austin Wilson:
Billion with a B. Now Formula 1, owned by Liberty Media, is a publicly traded company.
Josh Robb:
Oh wow. So you can own it.
Austin Wilson:
You can. And at one point I did, it was fun because I was invested in something I knew…
Josh Robb:
You were invested in what you’re invested in.
Austin Wilson:
Yeah, exactly. So that was kind of fun. The average cost of running a team includes designing, building, maintaining cars, paying people, drivers, transporting them. It’s approximately a quarter billion dollars for a year.
Josh Robb:
Per year?
Austin Wilson:
Per year. So it’s been pretty dramatic about the financial and political battles around all this money. It’s a big money business. Last year, there was a blog on the economics of Formula 1 on thefinancialpandora.com and I’ll link that in the show notes. There were some staggering figures. Firstly, the articles focusing on how team economic works, not necessarily how Liberty Media earns their money, but this is how the team economics work here. But in general, keep in mind, each team operates like a business. It is a business. Bring in revenue, you pay expenses and you make profit if there’s anything left over. Right? Profit’s good. That is exactly what we are going to look into. Let’s look at revenue.
[10:43] – Revenue
Josh Robb:
So again, this is not the F1 owner?
Austin Wilson:
This is the teams. This is just the teams and their revenue, profits and expenses.
Josh Robb:
Okay. I’m excited.
Austin Wilson:
Yes. Let’s talk about revenue first. The money coming in first. First of all, each team gets money. Gets revenue from F1 corporate. So from Liberty Media and those are in the forms of a handful of different things we’re going to talk about. Number one, C1 payments which is the first guaranteed payment known as a C1 payment. These are paid to all F1 teams, which have competed in the championship for the past two years.
Josh Robb:
Okay.
Austin Wilson:
So really there’s only been…
Josh Robb:
So me getting into this right now…
Austin Wilson:
You would have to wait a couple years.
Josh Robb:
I have to wait a couple years. Before I get into it.
Austin Wilson:
That is $36 million that F1 gives each team to be in the championship, if they’ve been there for more than two years. And as of right now, all companies or all teams have been in for more than two years.
Josh Robb:
Nobody knew.
Austin Wilson:
Then there could be prize money. Level two. Prize money is pretty substantial. And that is Constructor’s Championship prize money, which is distributed according to the team standings at the end of competition. Back in 2019, Mercedes finished first and as a result, they took home $61 million.
Josh Robb:
Wow.
Austin Wilson:
Ferrari was second. They got $52 million. And Red Bull was third at $41 million. Williams, which is a British team, a long storied British team. They stood last and therefore only took home $13 million dollars. Not enough to run an F1 racing team.
Josh Robb:
They get 36 plus the 13. Okay. 49.
Austin Wilson:
Yep. Then you got heritage payments, which is what I alluded to. Heritage payments are about long standing teams in Formula 1. Ferrari, specifically, because they’ve been in Formula 1 the entire time. They make the largest heritage team and that was $68 million in 2019.
Josh Robb:
Wow.
Austin Wilson:
That is a lot. Williams also gets one, but they’d get a much lower sum at about $10 million per year. Because they’ve been in it for a long time, but not near as long as Ferrari.
Josh Robb:
Is that something that if these… So you mentioned Mercedes.
Austin Wilson:
Yeah.
Josh Robb:
If they stay long enough, they’ll qualify for a heritage payment?
Austin Wilson:
That’s a good question. They just got back in within the last 15 years.
Josh Robb:
Okay. So they have a while to go?
Austin Wilson:
They have a while to go, I would imagine, on that. Next up you have the CCB bonus, which four teams receive and that’s the Construction’s Championship Bonus. Recently those have been Red Bull, Mercedes, Ferrari and McLaren. They’re not always equal with the top performing and winning teams receiving a bit more than other teams. But this has been given because these teams have won the most championships in the most recent history of years. And then there’s some other payments that go out as well. That is really talking about independent contracts that are signed. If they do what they say they’re going to do, they will often do that. A couple other things. Red bull received some big money from that. Mercedes received some big money for that. And those are some of the bigger teams right now. That’s level one and that’s money that’s coming all from F1 corporate to the teams and that can add up.
Josh Robb:
Just being in the league, doing well. That’s what you get. Okay.
Austin Wilson:
So then there’s sponsorships. If you look at these race cars, they’re plastered with names of companies.
Josh Robb:
Can’t be aerodynamic.
Austin Wilson:
Well actually…
Josh Robb:
The stickers.
Austin Wilson:
The stickers, they add weight.
Josh Robb:
Oh, that’s a good thing.
Austin Wilson:
A lot of teams this year, because specifically in 2022, the car weight limits… You want to be as close to the weight limit as… You want a low of weight as possible, but it’s really hard to make these cars down to that limit. These teams are often running bare-looking cars in certain areas with not a lot of color on them because it saves weight.
Josh Robb:
Oh wow. That’s very interesting.
Austin Wilson:
So sponsorships. The big earnings where F1 teams are… They, make a lot of money for these. These cars don’t have a lot of space on them, it takes a lot of money to get the little bit of space covered with a name. If you want your name on the car, you’re going to be willing to pay up. But that often takes millions and millions and millions of dollars. The top teams usually earn more than $40 million through these sponsorships. That’s another 40 on top of everything we just talked about.
Josh Robb:
Wow.
Austin Wilson:
Then there’s other sources.
Josh Robb:
Yeah.
Austin Wilson:
But this is really talking about working capital infusions from buy in investors into the team or we’ve got things that are called driver linked income which is kind of a touchy subject in Formula 1, where essentially, if you’re rich and you have some big corporate backing and a little bit of skill, it doesn’t take a lot, you can essentially pay the team to become a Formula 1 driver. One of the most recent examples is Nikita Mazepin. He’s Russian. His dad is the CEO of Uralkali, which is a Russian oil company. It’s tightly tied with Vladimir Putin and that’s for an American Formula 1 team. They had that driver and that sponsor.
Josh Robb:
Interesting.
Austin Wilson:
Going into 2022, however, once the Russia/Ukraine thing took off…
Josh Robb:
They kind of lost it.
Austin Wilson:
They ditched the sponsor and the driver.
Josh Robb:
He went with the sponsorship.
Austin Wilson:
Exactly.
Josh Robb:
Okay.
Austin Wilson:
Because there was no more money.
Josh Robb:
Yes.
[15:37] – Expenses
Austin Wilson:
Very interesting timing. Those are really the sources of income. So obviously revenue minus expenses equals profit. Let’s talk about the expenses, and they’re large. Number one, research and development. This is huge. This includes wind tunnel testing, track testing, other R&D to make the car go as fast as possible, while staying within the design and component usage boundaries set by the technical regulations.
Josh Robb:
Are there issues sometimes where they get out with that?
Austin Wilson:
Absolutely. And sometimes people get away with it. Sometimes because some things are just really hard to test for and sometimes they get caught and have to fix it or pay fines or take penalties or something like that.
Josh Robb:
Interesting.
Austin Wilson:
So this is about $58 to $60 million dollars a year for R&D. Then you’ve got salaries. Salaries include driver salaries, which are huge for the top performing teams. Couple examples, two out of the top 50 paid athletes in the world were F1 drivers.
Josh Robb:
Oh wow.
Austin Wilson:
According to the Great Visual Capitalist article, which I’ll link in the show notes. Number eight globally in the world.
Josh Robb:
50?
Austin Wilson:
Athlete pay. Number eight in 2021 was seven time World Champion Sir Lewis Hamilton at a total…
Josh Robb:
Sir? He’s been knighted?
Austin Wilson:
He’s a sir. He’s been knighted.
Josh Robb:
Awesome.
Austin Wilson:
Yep. A total of $82 million, including salary and endorsements.
Josh Robb:
Not bad.
Austin Wilson:
That was 21 and number 27 was reigning World Champion Max Verstappen.
Josh Robb:
That’s your guy.
Austin Wilson:
That’s my guy. $42.5 million, including salary and endorsements. Both drivers have since resigned for more $40 million contracts going forward. Per year.
Josh Robb:
Wow.
Austin Wilson:
That’s a lot of money.
Josh Robb:
Yes. That’s just their contract. So then endorsements are done on top of that?
Austin Wilson:
And probably bonuses.
Josh Robb:
Oh man.
Austin Wilson:
Yeah. Endorsements are definitely big. Bonuses can be huge if you win a championship or whatever. So then you’ve got salaries for engineers, for factory shop executives, car designers, pit crew. They’re paid very well because the better they’re paid, the better they’re going to perform. And it takes good performing team members to have the team do well. Then you’ve got things like directors, CEOs, team principals. Those can be huge, huge, huge money. For example, according to one, Essentially Sports article, Toto Wolff, the Mercedes team principal, makes a little short of $10 million dollars a year. Just as the team principal running the company or running… It’s essentially a company, but running the team. He has a background in finance anyway, so he already had a lot of money. He actually is a huge owner in the company, the team and Mercedes itself. Very interesting there. But on average, not including Mercedes, maybe Ferrari, maybe even Red Bull, the bigger teams, but on the normal side of things, $55 to $58 million on salaries. Because it’s a lot of people.
Josh Robb:
Yes. To run those machines. Yeah.
Austin Wilson:
So then you have production and manufacturing and that is really where you are trying to build the fastest cars in the world.
Josh Robb:
Yeah.
Austin Wilson:
So it’s very expensive to do that. And this is the most focused expense of any one F1 team, because this is the core parts of racing here. S you have to make cars that are going to run at 200 mile an hour and be reliable. That’s really the key there. There are a lot of things, but engines are one big component of the cost.
Josh Robb:
Yep.
Austin Wilson:
They cost millions of dollars and there’s four engine suppliers in the 2022 season. That being Mercedes, which gives engines to Mercedes themselves, McLaren, Aston Martin, and Williams. Then you have Ferrari and Ferrari, Haas and Alfa Romeo use that. And then Red Bull Powertrains, used to be Honda, they provide engines to their own team, Red Bull Racing and AlphaTauri. And you have Renault, French car manufacturer. They provide teams to their own. Alpine, which is their luxury sports car brand, which is what their Formula 1 team is described as. Now these are turbocharged V6 engines, 1.6 liters in capacity. So it’s not big at all. Turbocharged 1.6 liter hybrid. So they are hybrid powered with battery generation and stuff like that on them. These total 1.6 liter, V6 turbo hybrids make well over a thousand horsepower.
Josh Robb:
Wow.
Austin Wilson:
Which is crazy. And-
Josh Robb:
Now they’re hybrid?
Austin Wilson:
They are hybrid.
Josh Robb:
What’s the reason for that?
Austin Wilson:
It’s well…
Josh Robb:
Is that required?
Austin Wilson:
It is required by the rules as of maybe 2017. And what happened is, first of all, there’s this huge push towards green energy. Towards efficiency. Moving away from fossil fuels. Well a gas engine is essential to the essence of what Formula 1 is. It’s part of the sound and the feel and the vibes. But Formula 1, they wanted to make it so that they have the most advanced and efficient internal combustion engines in the world and they are. And in fact, they just went to a new fuel type, which is way more ethanol component than you have in normal road fuel. And they’re still getting a thousand horsepower out of these cars with that.
Josh Robb:
Crazy.
Austin Wilson:
So it’s pretty cool that you’re able to continue to use internal combustion engines and have crazy performance on top of it and try and be relevant in 2022. And then the supplier, if you’re giving your engine to these other teams. So for example, Mercedes, McLaren…
Josh Robb:
The scrap that you have in the back of the shed.
Austin Wilson:
They all get the same exact ones.
Josh Robb:
Oh, okay. Well that’s nice.
Austin Wilson:
They all get the same exact engine modes. They all get the same treatment and everything on that. Part of the rules here. And then you get paid as the provider for that. That’s another way to bring in revenue. So for Mercedes, they get revenue from McLaren, Aston Martin, and Williams for supplying engines. Which is crazy. So that is insane. So then you think about things like repairs. Repairs are huge. These cars cost multiple, multiple, multiple million dollars each. The engines are like $5 million each alone.
Josh Robb:
Oh, wow.
Austin Wilson:
So if you crash and ruin your car your team is out millions of dollars. Couple that with the fact that there are new cost caps being enacted and tapered into reality over the next handful of years and you run into a tight budget in general.
Josh Robb:
Drive that clunker around.
Austin Wilson:
That is certainly something there. And then on top of all of that, you have operating expenses. Operating expenses are logistics and there are some crazy videos on that. I would just say look it up on YouTube. I’ll link a couple in the show notes as well, but crazy statistics on the logistics of what it takes to get Formula 1 cars around the world. Because these cars race in North America and South America and Europe and Middle East, Asia, Southeast Asia, Australia. They’re everywhere.
Josh Robb:
They go so fast they go right across the water to get there.
Austin Wilson:
They don’t even touch down.
Josh Robb:
It’s crazy.
Austin Wilson:
I mean, they’re going by boat, they’re going by plane, they’re going by bus. They’re going by whatever. And it is just an amazing feat that happens. So paying for logistics and freight technology and professional services fuel. They use a lot of fuel every single year. And then, obviously, there’s things like T&E. Travel and entertainment expenses for each team. On average, an F1 team spends another $50 million each season to keep their operations running.
[22:34] – How Do You Make Money?
Josh Robb:
Wow. The mass seems to think that you’re losing money without knowing exactly where sponsorships are.
Austin Wilson:
It’s hard to make a lot of money. Now bigger teams…
Josh Robb:
So it’s not like it’s huge.
Austin Wilson:
The bigger teams often make decent money and the smaller teams really just try and pretty much break even.
Josh Robb:
Yeah.
Austin Wilson:
That’s kind of where we’re at.
Josh Robb:
If you think of football and baseball, you have the same thing. You have those large teams who pull in a lot of revenue and you’ll have those small teams who struggle to get by. Then it’s harder for them to compete year after year with that discrepancy between the two.
Austin Wilson:
Right.
Josh Robb:
You look at like the New York Yankees for baseball or the Cowboys for football. Those franchises that are large and have the cash flow. They have the big stadiums, they have the owners who spend the money to buy in the players and all that stuff that gives you an advantage. And it’s probably the same here in Formula 1. You have the ability.
Austin Wilson:
It is exactly and that is why F1 broke a little bit.
Josh Robb:
Yeah?
Austin Wilson:
The best teams continued to get better because they had more profits and more resources. There really weren’t such things as tight cost caps and stuff like that. They could just get better and better and then the gap group more and more and more. In fact, F1 viewership… So according to a great blog from Max Park and I’ll link in the show notes as well. F1 viewership had been declining for many years as the narrative of the sport had become boring and predictable. Before 2021. So Max Verstappen won with Red Bull in 2021. Lewis Hamilton and his team Mercedes had won four world titles in a row.
Josh Robb:
Oh, wow.
Austin Wilson:
And that is kind of boring to watch.
Josh Robb:
That’s probably why he got knighted right there.
[24:30] – Mercedes Dominance
Austin Wilson:
Exactly. So one of the main reasons why Formula 1 viewership has declined was due to the lack of competition. On and off the track. The battle between the top three drivers at Mercedes, Ferrari, Red Bull, it’s exciting, but at that point it wasn’t enough to attract new fans because Mercedes was pretty much running away with it. So the more statistics on this Mercedes dominance. In the five years since Formula 1 introduced its hybrid engine formula, Mercedes has won every championship.
Josh Robb:
Oh, wow.
Austin Wilson:
All of them.
Josh Robb:
All of them?
Austin Wilson:
So Lewis Hamilton dominated this era winning 81 races between 2014 and 2021. 81. Given that 160 races took place during that time, the Mercedes driver had won a total of 50.6% of races. One driver, one team and that’s not even including his teammate because his teammate wants some too. One driver on one team won over half of the races and that’s kind of…
Josh Robb:
He’s pretty good.
Austin Wilson:
He’s really great.
Josh Robb:
Yeah?
Austin Wilson:
Absolutely.
Josh Robb:
Does he have like a really fast reaction time?
Austin Wilson:
Oh, yeah.
Josh Robb:
I feel like Formula 1 drivers are known for their quick reflexes.
Austin Wilson:
Yes. Absolutely. Absolutely one of the reasons. He’s just a great driver. One of the best of all time for sure.
Josh Robb:
How old is he?
Austin Wilson:
In his mid thirties.
Josh Robb:
Really?
Austin Wilson:
Yeah.
Josh Robb:
Okay. Wow. If you look at his career and-
Austin Wilson:
He’s like 36.
Josh Robb:
Wow.
Austin Wilson:
Yep. That is where that is. A Mercedes dominance is such that even when other teams such as Ferrari and Red Bull produce competitive cars, like in 2019 with Ferrari, 2021 with Red Bull. Both Hamilton and his former teammate, Valtteri Bottas, they continued to outscore the competition by over a hundred points. Which meant that the team championship was in theirs and they got more bonus money as a team because of it. So against this backdrop, it really wasn’t surprising that viewership was steadily declining. In 2014, there was about 470 million viewers and in 2019 that went down to 400. That’s a loss about 20%. That’s a lot of revenue.
Josh Robb:
That is. Yes.
[26:01] – Drive to Survive
Austin Wilson:
Let’s talk about the Drive to Survive impact.
Josh Robb:
I had not heard of this.
Austin Wilson:
This is…
Josh Robb:
I’m going to be honest with you.
Austin Wilson:
There’s a Netflix documentary. It’s been out now for four seasons, I believe, talking about Formula 1.
Josh Robb:
This documentary had the slicks on because it got some traction.
Austin Wilson:
It got some tract… Good move, Josh.
Josh Robb:
See what I did there?
Austin Wilson:
Yeah, I see what you did there. So Netflix and the Drive to Survive documentary has single handedly saved Formula 1. Nobody could have imagined that a Netflix documentary series, which showcases the blood and guts behind a team managing their drivers, sponsors and relationships between teams, often bordering on sabotage.
Josh Robb:
Oh, that’s loud.
Austin Wilson:
It’s very dramatic. Would be such a hit. It becomes a little overly dramatized as a real fan. Like I can watch it and be like, “That was a little bit pushed on how they made it look.” But it made it for a good entertaining spectacle that caused a lot of new fans. So more than anything else, it’s the drama and the human side that is the biggest push of people that liked it. Especially here in the US. In fact, this documentary also helped bring back viewers to Formula 1.
Josh Robb:
Oh, there you go.
Austin Wilson:
So viewership numbers are up by approximately 15% per race weekend, according to Liberty Media CEO Chase Carey there.
Josh Robb:
He would say that because he owns it.
Austin Wilson:
Well, yeah. You know.
Josh Robb:
But yeah, I’m sure you’re right.
Austin Wilson:
But it’s a public company. You have to put real numbers out there, right?
Josh Robb:
That’s right. You have to be honest.
[27:22] – What’s Next for Formula 1?
Austin Wilson:
The real question is, what’s next? There’s new cars, new rules this year. They’re designed to be able to race closer than ever and it’s already provided some fantastic early season racing in the form of defending champ, Max Verstappen, and his Red Bull battling Charles Leclerc and his Ferrari. Constantly. Fantastic racing.
Josh Robb:
They’re side by side.
Austin Wilson:
They’re going at it every single race. And there are new team budget caps that really exclude driver’s salary. So don’t…
Josh Robb:
You’re paying whatever you want.
Austin Wilson:
You’re paying whatever you want for the drivers. And then the team budget caps are having to tier their way down to over the next handful of years.
Josh Robb:
Does that include paying all the other people though?
Austin Wilson:
Yes.
Josh Robb:
All your guys that do all the hard work before you drive…
Austin Wilson:
They’re capped.
Josh Robb:
They’re capped. But the driver, do whatever you want.
Austin Wilson:
Exactly. But this is really an effort to make all the teams on a more of a level playing field over time. Now you couldn’t just do it overnight. So they’re phasing some of the top teams down. But what this is going to do is it’s going to make F1 continue to grow and become more popular. Especially here in the US. And that is what made it evident by the US hosting two races this year in 2022, up from one for the last handful of years. So Miami was added this year and then three next year.
Josh Robb:
Where was the one? Usually?
Austin Wilson:
Austin, Texas.
Josh Robb:
It’s always in the same spot?
Austin Wilson:
Austin, Texas.
Josh Robb:
Austin, Texas.
Austin Wilson:
For the last… Since like 2017 or something like that.
Josh Robb:
Okay. Same spot?
Austin Wilson:
Then now we’ll have Miami in addition to Texas and then next year we get Vegas as well.
Josh Robb:
Oh, wow.
Austin Wilson:
Other countries don’t have multiple Grand Prixs.
Josh Robb:
We’re the best. Yeah.
Austin Wilson:
But we’re a lot bigger of a country.
Josh Robb:
And the best.
Austin Wilson:
Yeah. There’s more people.
Josh Robb:
And we’re the best.
Austin Wilson:
Yeah, of course. A lot more people, a lot more money. This is something that Liberty Media…
Josh Robb:
In a new market, I would say. Right?
Austin Wilson:
Yes.
Josh Robb:
So same as…
Austin Wilson:
Untapped.
Josh Robb:
When you look at football, they started playing a couple games over in Europe. It wasn’t for any other reason then it’s an untapped market that you could get people interested in. It makes sense. Good.
[29:09] – How to Invest in Formula 1?
Austin Wilson:
So because I’m a nerd, I want to talk about some ways you could invest in Formula 1. Because you can, surprisingly.
Josh Robb:
Yes.
Austin Wilson:
It’s not thought to be super American. However, an American company now owns it, but some ways that you could get pretty direct exposure to Formula 1 and its success are through… Well, Netflix stock because Drive to Survive has been huge for Netflix and Netflix Drive to Survive has been huge for Formula 1. That’s one way to play it. That’s ticker NFLX. Another one is Liberty Media Corp Formula 1, which is ticker FWONK.
Josh Robb:
Mr. Chance.
Austin Wilson:
Formula 1. Close enough. I mean they’re pretty close. Probably couldn’t get it the other way.
Josh Robb:
Vroom? Couldn’t get vroom? That’s what I would… If I was the…
Austin Wilson:
Here’s a good one for you, Josh.
Josh Robb:
I saw this one.
Austin Wilson:
You could invest in Ferrari.
Josh Robb:
Yes.
Austin Wilson:
Ticker RACE.
Josh Robb:
Ah, race. Nice job, Ferrari.
Austin Wilson:
You can also invest in an ADR for Aston Martin, which is a Formula 1 team. ARGGY. These are not recommendations. I’m not saying to invest in these.
Josh Robb:
Sell some options.
[30:11] – Should You Invest in Formula 1?
Austin Wilson:
These are ways to get some exposure if it’s something that you’re extremely passionate about. You certainly can. But Josh, the question, as it always is, is should you invest in Formula 1 adjacent companies?
Josh Robb:
Geez, that just depends. You know, Austin?
Austin Wilson:
Oh man. Shocker.
Josh Robb:
Yeah. Right. Does it fit with your plan? We always talk about… Because what you mentioned were all stocks. Those are all ownership and companies. We’ve talked about what stocks are and so do you have the risk tolerance to own that? Does having too much exposure to one industry… What if the viewership goes back down? What if the Netflix series wanes and people stop paying attention? So yes. Should you? I don’t know. You should ask your advisor and you should see if it fits in your plan. You know what, chances are again, if you have a diversified portfolio and you are in the stock market, you may own a little bit of this in some way or another. Netflix being one that is probably held in most of the diversified S&P type structures. And so if you’re globally diversified, you may have some exposure to this in one way or another.
Austin Wilson:
And as always, check out our free gift to you. It’s a brief list of eight principles of timeless investing. These are overarching investment themes meant to keep you on track, to meet your long term goals. Formula 1 racing, while super fun to watch, is not a part of our eight principles of timeless investing, so enjoy it at your leisure. It’s free on our website. And thank you for being here this week.
Josh Robb:
Super fun.
Austin Wilson:
Josh.
Josh Robb:
I learned a lot.
Austin Wilson:
Thank you for going along with me on this one.
Josh Robb:
I was excited.
Austin Wilson:
There’s a lot of numbers and stocks to it here.
Josh Robb:
And you didn’t once mention Lightning McQueen. So…
Austin Wilson:
Nope, no I did not. Until next Thursday, have a great week.
Josh Robb:
All right. Talk to you later.
Austin Wilson:
Bye.
Outro:
Thank you for listening to the Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe and don’t miss the next episode. Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guests are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecasts provided here in will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.
