How Do Formula 1 Teams Make Money?

Editorial credit: CHEN WS / Shutterstock.com

The F1 has boomed in popularity and has a growing fan base of over 425 million people worldwide, which is rapidly expanding. Formula One is a unique sport as it costs quite a bit of money just to compete, and drivers need money before they can even think about racing in one of the top motorsports.

F1 teams make money through sponsorships, Formula One Management, investments, and driver-linked income. Formula One Management payments are the most significant source for F1 teams and are distributed in multiple ways. However, F1 teams make money through various other ways as well these sources.

The F1 is a billion-dollar industry that is growing as quickly as its fanbase is. F1 drivers are some of the top paid sportsmen in the world. Each piece of merchandise you buy helps keep F1 teams in business and pushes the industry forward. Watching the races and sharing social media posts contribute to how F1 Teams make money.

How Does The F1 Make Money?

It’s essential to understand how Formula One brings in revenue before we can really know how they pay F1 teams. The F1’s revenue is divided into multiple payments towards each team, which makes up a portion of their income.

One of the primary ways F1 makes money is through tv licensing deals, broadcasting, and hosting events. Each ticket sold, each piece of merchandise bought, and each fan tunes in to watch the Formula creates income.

There are several income streams for Formula One, the most obvious being their broadcasting and licensing deals across the globe. Without these deals, the F1 couldn’t be televised to millions of fans. Due to its extreme popularity, broadcasting stations are willing to pay millions of dollars to ensure that they can meet F1’s fan’s demands.

Another revenue stream is through contracts with various racing circuits around the world. Circuits are required to pay the F1 to host their races, generating income for the F1.

The F1 further makes money from the sale of merchandise through their designated stores across the globe. F1 merchandise is incredibly popular, and F1 fans are willing to pay to show their support for their teams. Extreme fans have even bought pieces from F1 cars such as Lewis Hamiltons wing, retired F1 cars, and signed photographs from drivers.

All of this money is then distributed between the F1 teams to fund F1 races and ensure that the F1 can continue for years to come.

Formula One Management Payments

The money that the F1 generates is, in turn, used to fund Formula One teams – such as bonuses and prize money which is used to better the cars and pay driver salaries.

Teams are first paid if they have been classified for the past two seasons. Division one payments are about $36 million for teams that have placed for two seasons. Haas was the only F1 team that didn’t qualify this year.

The prize money is then divided into division two and is paid based on where the teams are in the season that has just finished. For example, Ferrari was paid $41 million for finishing third in 2021, while Mercedes won an additional $61 million for coming first in the season.

The third division of Formula One Payments begins to be a bit unfair, and it is paid to the team that has been a part of Formula One for the longest. Only Ferrari receives this payment. Due to this, it’s known as the “Ferrari Budget,” and Ferrari is paid $68 million as the Long-Standing Team bonus.

The next division is a payment of around $35 million called the Constructors Championship Bonus. This bonus is paid to Redbull, Mercedes, Ferrari, and McLaren for winning a load of titles over the years.

Finally, Formula One also pays additional bonuses to the teams – such as the $36 million bonus paid to Red Bull for being the first team to sign the concord bonus and a heritage bonus of $10 million that was paid to Williams.

Although Formula One Management payments are one of the most significant payments, it is only one piece of the puzzle. These payments don’t automatically mean the teams are making an exceptional profit, as most of the money earned goes straight back into improving the team overall and paying for the expenses that come with F1.

F1 teams further bring in an income through sponsorships to make a profit, although this sometimes doesn’t translate directly to profits either.

Sponsorships 

Sponsorships are relatively straightforward and easy to understand. Brands and companies will approach F1 teams and request that they advertise their products. This advertisement is often in the form of the company logo, which is placed on the team’s cars, race suits, and other racing gear.

F1 teams are selective about which brands they are willing to be associated with, and teams will only want to be partnered with brands that have a good reputation and will boost their image.

Similarly, top brands only want to be associated with the top teams. As a result, the bottom teams are again prejudiced as they receive fewer sponsorship offers and have less capital to improve their cars and hire better drivers.

Sponsorships effectively broadcast these brands to the F1’s millions of viewers and often develop brand loyalty between the F1 team’s fans and the brands they are sponsored by. For example, a Redbull fan will see the Puma logo on the Redbull car and will be more inclined to purchase Puma clothing.

For these brands to gain a sponsorship sport on the F1 teams, they pay millions of dollars. Sponsorships for the top teams are highly competitive and need to be approved by the F1 teams before they will be placed onto any cars or racing gear, even with the offer of millions of dollars.

In 2022, 8 out of 10 teams have accepted sponsorships from cryptocurrencies and NFTs, which is completely revolutionary in the financial world. One of the highest-profile deals in the $150 million Bybit sponsorship with Redbull. It was utterly uncommon to see sponsorships from cryptocurrencies even five years ago.

Sponsorship deals with F1 teams will absolutely boost your business in ways you couldn’t even imagine, but you need to have hundreds of millions of dollars to be able to do this. Some sponsors pay over $250 million to be a part of the F1 team’s sponsorships. Your business also needs to have a high standing and already be profitable.

These sponsorship deals create revenue for F1 teams, pay the drivers and go towards the manufacturing and maintenance of the cars. Most teams have between 15 to 25 sponsorships, and the more titles the team has won, the more likely they are to receive higher-end sponsorship deals.

Sponsorship deals vary from one season to multiple seasons, depending on how much the brands are willing to pay and the terms of the contract the F1 team and brand enter into together. The majority of contracts span multiple years, and partnerships need to be solid before an agreement is entered into.

It takes a lot of work to solidify sponsorship deals, but they are an essential part of how F1 teams make money. Still, sponsorships and Formula One payments aren’t the only ways F1 teams bring in income.

Driver Linked Income

Driver-linked income is one of the more unpopular ways F1 teams make money, and it is usually only teams who are lower down on the rankings which make money through this avenue. Essentially, drivers can pay to have a spot on the team, but it is by no means cheap.

For example, Nikita Mazepin’s father has paid millions of dollars to Haas for Mazepin to race for the team. However, Haas has since ended the deal between Mazepin’s father and themselves following the Ukrainian invasion and has turned down millions of dollars of funding for their team, which is a remarkable stance of integrity. Especially for a team that is already underfunded.

It is nearly impossible to pay to drive for the top teams, and it would cost hundreds of millions of dollars. In addition, pay drivers still need to have experience and skill to succeed further than one race in the F1.

Their results are the most significant difference between a pay driver and a driver backed with income.

A driver such as Lance Stroll, whose father reportedly paid $80 million to get him into the racing seat, has shown skill and talent to deserve his spot in the F1. Stroll has three podium finishes and one pole position finish despite being a pay driver. Stroll has a promising career and has a well-deserving spot within the F1.

As mentioned, it is unlikely for teams with higher rankings to accept pay drivers, whereas underfunded teams will gladly accept the additional funding from pay drivers. Unfortunately, pay drivers are less respected as it is viewed that they did not earn their position within their team but instead bought it.

Unless a pay driver backs their position with results, it can do more damage to a team as better drivers do not get the opportunity to race. On the other hand, money talks and pay drivers can boost teams funding to elevate their standing in the F1.

The money pay drivers spend to drive for their team is used to benefit the team. This funding goes towards manufacturing costs, salaries, and bettering the team. However, just because a driver paid for their seat in the F1 does not mean that they don’t have the talent to be a good F1 driver.

Pay Drivers are an income avenue that benefits teams who do not earn as much through the F1 directly, such as Haas, who lost out on $35 million as they did not place within the F1’s previous two seasons. Still, F1 teams need even more money to be successful.

Investments

F1 teams have investors, parent companies, and shareholders who put money into the teams to propel them forward and provide them with funding to better the team. Depending on how much money the shareholders have and how much they want to benefit, the team will determine how much money they can contribute towards investments.

Some investments include INEOS, who bought a third of Mercedes, and Williams, which Dorlinton Capital bought. Parent companies want to invest in F1 teams as it will enable the teams to develop their cars, products and hire better drivers.

Big corporations will invest more into teams they believe in or teams they see have potential. Who is the head of the team and how the team is run will have an impact on which corporations are willing to invest in them as they don’t want their money to be mismanaged.

The bigger and better a team performs, the more likely it is that big corporations and investors are to put money into them. This makes it difficult for smaller teams to obtain bigger investors, as they need money to make money.

Editorial credit: PatrickLauzon photographe / Shutterstock.com

How Do These Income Streams Translate For F1 Teams?

Ultimately there are millions upon millions of dollars coming into each F1 team’s accounts, which are made up of a variety of income streams. When you add up the amounts from each source, it’s astronomical and money most of us will only ever read about.

The F1 reported a whopping $92 million profit in 2021, following a loss in 2020. This profit comes after money was divided between the F1 teams and Formula One’s own expenses. Working out the basis of how much each team earned last season is a matter of simple mathematics.

Each team that has qualified for the previous two seasons automatically is awarded $35 million. Teams are further awarded based on where they finished in the previous season; Mercedes, for example, was awarded $61 million for winning the Constructors Championship in 2021.

That means that Mercedes has won $96 million in the 2021 season so far. Mercedes then earned an additional bonus of around $35 million for participating in the Constructor Championship, increasing their total earnings to $131 million, not including their sponsorship and investment earnings.

Each team then divides their earnings among their driver salaries and their mechanics, paying for expenses such as transportation and marketing costs throughout the season.

The top F1 drivers make serious amounts of money, amounts most people could only ever dream of. Lewis Hamilton earned an incredible $62 million, while Max Verstappen brought home $42 million in 2021.

Conclusion

F1 earns an exceptional amount of money through several different streams. The most significant stream of earnings comes from Formula One Management payments, where Formula One makes various payments based on where the teams placed if they qualified for more than two seasons, their history with the F1, and other bonuses at the F1s discretion.

To say it costs a lot to keep F1 teams running is an understatement. To accelerate from one season to the next, F1 teams need to keep succeeding in their races and improving their cars. Formula One is a complex industry that sees millions of dollars flowing every day.

References

https://startuptalky.com/formula-one-revenue-model/

https://www.linkedin.com/pulse/formula-1-business-models-how-f1-teams-make-money-stay-del-bello

https://bleacherreport.com/articles/41459-formula-one-information-guide-part-2-money-money-money-making-a-profit

https://onestopracing.com/how-do-f1-teams-earn-money/

https://www.essentiallysports.com/f1-news-how-much-do-f1-teams-earn-in-bonus-for-winning-a-constructors-championship/

https://www.motorsport.com/f1/news/f1-reports-92m-profit-2021-income-covid/8489737/

https://www.fool.com/investing/2021/10/15/fan-of-f1-heres-how-you-can-invest-in-your-favorit/

https://the-race.com/formula-1/f1-teams-will-be-worth-billions-in-five-years-mclaren/

https://artofgears.com/2021/05/26/nikita-mazepin-and-the-worst-pay-drivers-in-f1-history/

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