F1’s Cost Cap: Game Changer or Empty Promise?

By: Harshit Bhalla

Aashna Belur

Introduction

Since its inaugural season in 1950, Formula One established itself as the highest class of international racing for open-wheel single-seater cars, sanctioned by the Fédération Internationale de l’Automobile (FIA). It has gained notoriety as one of the most lavish and controversially elitist sports, with teams willing to invest ~$500 million per season. This prompts viewers to wonder where exactly this exorbitant amount of money goes. 

The majority of these funds are allocated by teams to drive technological advancements. While other racing sports like NASCAR or IndyCar are about the drivers’ ability to race similar cars, in F1, each team builds their own cars, giving them the opportunity to constantly improve and optimize their performance. Drivers rely on extensive teams comprising hundreds of individuals who collaborate to design and manufacture highly advanced cars, with the science behind F1 being compared to spaceships. As a result, the competition in Formula One, instead of racing techniques, primarily revolves around building the car itself, earning it the title of “the sport of technology” rather than “the sport of sportsmen.” 

The Importance of F1 

The necessity for such substantial spending in Formula One lies in the fact that the technological advancements made in the sport have real-world applications and push the boundaries of engineering, serving as a platform to showcase latest innovations in automotive technology. The underlying idea is that the technology developed in Formula One eventually trickles down to benefit non-race car drivers as well. 

An Air of Controversy 

For a long time, F1 budgets have been rising and those with bigger budgets could hire the best in the business and keep developing their cars throughout the season. In response, Formula One joined sports leagues such as the NBA and NFL by introducing a cost cap of $175 million per season per team in 2020 to ensure fair play. Eventually the budget cap was brought down to $135 in 2023. However, many intricacies that are not evident at the surface-level could render this cost cap ineffective. 

Objective of this study

The basic aim of the research piece is to assess the impact that the Cost Cap has had on F1. We divide this into two key stakeholders: 

With respect to the participants: 

  1. What are the barriers to entry into F1?
  2. Has the cost cap solved financial barriers to F1?

With respect to the sport: 

  1. Has the cost cap driven in more viewership?
  2. Analysis of the current market structure of F1: a perfect competition, oligopoly or monopoly? 

An Overview of Data Selection and Sources


Our points and spending data specifically, is divided into two time frames: Before the introduction of cost cap (2015-2020), and post implementation, till 2022 (as the 2023 season is ongoing and not yet completed).

For the purpose of this article, both the pre and post cost cap points data are sourced directly from Formula 1’s constructor standings.
The reason we selected only data till 2015 is so that data is more recent and spending can be compared on an equal footing. Lower spending in pre-2015 F1 may not necessarily translate to low willingness to spend.
The history of teams and their rebranding data is also taken directly from the F1 website archives, however, we date back this analysis to before 2015 as well, as it is unrelated to spending trends.

The Analysis

  1. A look at the Historic Championship Points Data (By Constructor Teams)
    We start by gathering the points data for 2015-2022, with the 2023 season ongoing. 

Table 1: F1 Constructor Points Data, Source: F1 Constructor Standings

2. Spending Data (By Constructor Teams) 

Regardless of outcome, one thing common to all teams is the unusually high spending, especially for engine development. Historically, teams spend their financial resources in the following pattern:

Figure 1: Estimated Budget Split, Source: Budget Constraints F1

Under the cost cap was introduced, the team spending is to be capped only in certain areas related to car development, and not every aspect of spending, as below: 

Table 2: Cost Cap Coverage, Source: F1 Cost Cap Expenditures

Pre-2020 there was no record of the budget on the basis of what is included and excluded from the cost cap. The data taken here is therefore, cumulative of all spending.

Table 3: F1 Constructor Spending Data, Source(s): F1 Constructor Spending, and other sources

To analyze the direct effect of the cost cap, we only want to consider the percentage of expenses owing to cost cap related activities. Looking at the pie chart above, we assume an estimated 75% of spending to fall within the cost cap. This includes:

Figure 2: Cost Cap Budget Split

We thus derive the historical spending of each team within areas that would now fall under the cost cap, by reducing the spending to 75% of the original budget.

3. Forecasting Budget for 2022
Since the budget data for 2022 is not available, due to breaches of cost cap and other legal proceedings, we forecasted the approximate budget for 2022 as follows:

1. Based on 75% of the past budget figures
2. In case the forecasted value went over the cost cap, we restricted the budget to $145 million, which was the 2022 cost cap
3. Since RedBull is known to have breached the cost cap by 2.6 million USD, we used actual budget figures for RedBull

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Table 4: F1 Constructor Historical Spending Data and Forecasted Data for 2022

Key Observations: We note that despite its winning streak from 2015 to 2021 in Table 1, Mercedes lost to RedBull in 2022. This was the same year that RedBull breached the cost cap, even though Mercedes did not.

4. Spending Per Point
To make the comparison easier, we divide the spending data with the points per season per team. This spending per point becomes a key metric to compare the teams on ground of both; points and budgets.

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Table 5: F1 Constructor Spending Per Point, corrected for outliers

Key Observations: Teams with high scores have a high budget and spend less per point while teams with lower scores have a comparatively lower budget but a higher spend per point.

Introduction of the Cost Cap

F1 had announced that they expected to see “more teams capable of shaking up the order,” and ”greater competition between teams and better racing for F1 fans.”
This was under the assumption that a lower budget constraint would force rich constructor teams to race at similar performance levels as the teams with low budgets.
To understand the effect of the cost cap and for the purpose of comparison, we look at the correlation between budget and points earned (As taken from Table 1 and 4).
The scatter plots for each year’s budget-point correlation (refer to appendix), show that such correlations have dropped significantly since the cost cap. Looking at the correlation coefficients, it has now dropped to below 2016 levels.

Figure 3: Drop of Correlation between Points and Total Spending from 2015 to 2022

We then derive from Table 5, the difference between the median and the highest spend per point each year. 

Figure 4: Drop of Spending Per Point Disparity

Key Observations: After 2020, the difference in spending needed to earn one point went down so dramatically that it dropped below 2015 levels, just shy of a decade later.

Analyzing Seasonal Points Disparity

The above data alone would mean that reducing budget and implementing a cap has led to equity among teams. However, this equity should also then translate into a better chance of winning the constructors’ championship for F1 or for drivers to score more points.
Here, lies the metric that disrupts earlier assumptions.

Figure 5: Trend of Point Disparity

Key Observation: While the gap between the amount of money spent by each team is narrowing, the trend of disparity in points scored still shows huge gaps between maximum and median points, and in fact grew in the period when budget constraints were introduced. 

We come back to our original question: Has the cost cap solved financial barriers to F1?

The above figures show the rising trend of point disparity even with a declining spending per point disparity. This implies that while the gap in financial resources can be limited by setting a maximum, the real reason for the points being earned only by top players is not the finances, but something else that proves to be a barrier for others.

Non-Financial and Financial Barriers excluded from Cost Cap 

It is important to note, as in Figure 1, that budget restrictions are only confined to the car design, manufacture, construction, etc. It does not apply to marketing expenses, driver training, engineer recruitment, etc. This still impacts the less wealthy teams ability to perform better. Acknowledging that there are various representational barriers to entry for drivers, we shall focus on the non-financial barriers focused on constructor teams. 

  1. Regulatory Approvals: Formula One is regulated by the FIA which sets the rules and standards for participation. New teams must go through a rigorous application and approval process to gain entry by demonstrating technical capabilities and long-term commitment to the sport. New teams must invest significant time and resources to meet and understand these requirements. 
  2. Supplier Relationships: Upon entry, F1 teams rely on a network of suppliers for various components, such as engines, tires, and electronics. These supplier relationships are often long-standing and built over time. New teams may face challenges in establishing these relationships and securing reliable and competitive suppliers. 
  3. Talent Acquisition: Finding and attracting talented drivers, engineers, and technical staff is crucial for a successful F1 team. Developing a competitive F1 car requires a deep understanding of aerodynamics, engineering, and advanced technologies. Established teams often have strong connections and reputations that make it easier for them to recruit top talent. 
  4. Long Development Timeline, Lack of Infrastructure and Technical Expertise: Developing a competitive F1 car takes time, with established teams benefiting from years of experience, knowledge, and data and state-of-the-art factory facilities. Even with highly skilled engineers and designers new teams start from scratch and may require several years to catch up. 
  5. Sponsorship and Commercial Partnerships: Attracting sponsors and partners is challenging for new teams without a proven track record or fan base, as established teams enjoy long standing relationships with sponsors. Added to this, marketing expenses are not under the purview of the cost cap, so it becomes even more imbalanced when older teams spend millions on marketing and partnerships. 
  6. Limited Grid Slots: Formula One has a limited number of grid slots, typically supporting just 20 teams, making it highly competitive for new teams passing all barriers to even secure a place on the grid. 

The cost cap does not and can not solve barriers to entry that are non-financial or outside the purview of the cost cap. This then leaves us with the question: Can new teams even enter F1?

Structure of the F1 Economy: An Oligopoly, Monopoly or Perfect Competition?

We plotted a timeline of the history of rebranding and entry of F1 teams, using the Constructor data available on the F1 Archives. 

While there are new teams that have entered the F1 space, no new team that entered since 2010 has truly survived for more than 3 seasons. Over a 100 teams have participated in the Formula 1 World Championship since its inception in 1950. But in these 70 years, only 15 have actually won the Formula 1 Constructors’ Championship. 

Figure 6: History of Rebranding of Modern Teams in F1 (zoom to scale), Source: F1 Archives

Moreover, as in Figure 6, successful “new” teams like Mercedes and RedBull are also not entirely new. The team that is named Mercedes now first raced in 1958 under the name Tyrrell and Red Bull originates from Stewart which first raced in 1997. This means that they already have an established network of suppliers, engineers, designers, knowledge and data, as well as easier Regulatory Approval by the FIA. 

It is natural then, to draw a verdict on the nature of F1 being an oligopoly rather than a perfect competition. An oligopoly refers to a market structure in which a few large firms dominate the industry. In the case of F1, there are multiple teams that compete in the championship, but the sport is primarily controlled by a small number of key stakeholders, including the Fédération Internationale de l’Automobile (FIA) and Liberty Media Corporation, which owns the commercial rights to F1. 

While no single entity or team holds a monopoly over Formula 1, the sport is characterized by the dominance and influence of a small number of entities that control regulations, revenue distribution, and the commercial direction of the sport.

Even so, disregarding all non-financial barriers, if the cost cap itself is breached, there can be three types of penalties:

Table 6: F1 Cost Cap Breach Penalties, Source: FIA Budget Cap PDF

Cases of Breach Of Cost Cap 

A cost barrier implemented because a team has too many financial resources to spend, should obviously not be punished just by a fine, since the team will overspend and then pay the fine willingly, owing to their large bank of money. 

Many have thus condemned the cost cap to be “just a soft cap for the wealthy and a hard cap for the ordinary,” especially after its recent breach. 

In 2021, RedBull was found to be in a Minor Overspend Breach of $2.6 Million and both Aston Martin, and RedBull were found to be in a Procedural Breach. For this, RedBull faced a $ 7 million fine and 10% reduction in AeroDynamic Development time. Aston Martin was also fined $450,000 for the breach. It is unclear whether Formula One will exercise harsh penalties of non-monetary nature, with serious consequences to points performance. 

Major Loopholes used to avoid Breaching the Cost Cap

Aston Martin’s Chief Technical Officer, Andrew Green recently transitioned from his F1 role to the company’s technology division followed by an impressive performance by the British team at the Bahrain Grand Prix.

Alpine’s team principal, Otmar Szafnauer, has expressed concerns about a potential loophole in Formula 1’s cost cap regulations. Since the cost cap does not cover all expenditures, he believes that teams may exploit this loophole by engaging in non-F1 projects and using their personnel for these endeavors. By doing so, they can evade the constraints of the cost cap without disclosing the associated costs. 

Szafnauer emphasized the significant impact of corporate structures, where a large portion of personnel (around 900 individuals) exists outside the racing team (which can only have 68-70 people). This arrangement allows for cost allocation, raising concerns about the extent of manipulation teams may engage in. 

Through the Lens of the Sport Itself: Trends of Viewership 

If we have established that the cost cap has no obvious impact on the points data for constructors, we shall take a look at it from the perspective of the sports’ popularity through its viewership data. We will start by examining the transition from 2020 to 2021, followed by 2021 to 2022.

1. From 2020 to 2021 

After the introduction of the cost cap, it was anticipated that implementing financial restrictions would have a positive impact on the competitiveness of racing, leading to increased viewership and revenue. From 2020 to 2021, there was a slight decrease in average audience per race, although there was only minimal growth in unique viewership. In 2021, the average number of Formula One (F1) racing TV viewers worldwide per Grand Prix was 70.3 million, compared to 87.4 million viewers per Grand Prix in 2020.

Table 7 : F1 Unique Viewership Data, Source(s): 2015, 2016, 2017, 2018, 2019, 2020, 2021

Multiple surveys revealed a prevailing belief that new fans who tuned in to watch races often witnessed the same team winning every Grand Prix. The audience appreciated the technology and skills of the drivers but criticized F1 for lacking close competition and exciting overtaking within races. Moreover, the increasing cost and difficulty of accessing F1 coverage in many countries have contributed to a decline in viewership.

Table 8 : F1 Features Survey, Source: Global Fans Survey

2. From 2021 to 2022

Table 9 : F1 Viewership Statistics, Source: Viewership for F1

2022 saw a marginal decline in global figures, with an accompanying increase in the Social Media Audience and US figures. 

Note: Although the viewership statistics do not point a definitive direction of the outcome, it is safe to say that the viewership has not increased to an extent that could prove the cost cap to be effective in some regard.

Conclusion

The implementation of a cost cap has indeed addressed the issue of financial overspending within certain areas of Formula 1. However, it continues to leave unaddressed the questions of actual equity that extend beyond mere financial considerations. 

It is important to recognize the dynamic landscape of Formula 1, where teams rise and fall in competitiveness over time. When we look at the overarching structure and the influence of key stakeholders, it becomes evident that an oligopolistic nature persists, rather than a perfect competition. 

Unfortunately, the teams still find themselves on an uneven playing field, much like before, with new entrants struggling to survive beyond a few seasons. Factors such as budget disparities, technological advancements, and the ability to attract sponsors and top talent significantly impact the competitive landscape of Formula One. This often leads to a scenario where a select few teams consistently perform at a high level, while others still continue to struggle to compete due to resource limitations. 

Thus, it is clear that while the cost cap has addressed some aspects of financial overspending, it falls short in rectifying the overall lack of equity within the sport, both in financial and non-financial domains. Added to this, it also fails to have garnered a significant amount of audience support or hike in viewership to be deemed “effective.” 

While the cost cap is definitely a step in the right direction, it is not an end all be all solution to the financial disparities within F1, nor will it be able to solve them on its own. Only with accompanying measures to solve non-financial barriers can the issue of equity finally be resolved.

Appendix and Sources
Scatter Plots of Budgets and Points Data by Year:

References

  1. https://www.formula1.com/en/results.html/1984/team.html
  2. https://www.sportskeeda.com/f1/reasons-for-delay-in-f1-2021-regulations
  3. https://www.crash.net/f1/news/1014425/1/f1-cost-cap-how-red-bull-broke-it-their-puni shment-and-2023-budget
  4. https://www.essentiallysports.com/f1-news-what-are-the-budgets-for-f1-teams-includin g-mercedes-red-bull-ferrari/
  5. https://www.fia.com/sites/default/files/fia_formula_1_financial_regulations_iss.12.pdf
  6. https://www.si.com/fannation/racing/f1briefings/news/alpine-boss-identifies-cost-cap-l oophole-effectively-we-dont-have-a-cap#:~:text=Formula%201’s%20budget%20cap%20c ame,rules%20to%20increase%20their%20spending
  7. https://cdn-1.motorsportnetwork.com/survey/2021/2021-f1-global-fan-survey-motorsp ortnetwork.pdf
  8. https://motorsports.nbcsports.com/2015/02/14/as-f1-tv-viewing-figures-continue-to-fal l-globally-is-there-a-solution-to-the-problem/
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  10. https://www.formula1.com/en/latest/article.strong-growth-for-f1s-tv-and-digital-audien ces-in-2017.6Cted4V292gQ420AeoSO2e.html
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  12. https://www.formula1.com/en/latest/article.f1-broadcast-to-1-9-billion-fans-in-2019.4Ie YkWSoexxSIeJyuTrk22.html
  13. https://www.formula1.com/en/latest/article.formula-1-announces-tv-and-digital-audien ce-figures-for-2020.3sbRmZm4u5Jf8pagvPoPUQ.html
  14. https://corp.formula1.com/formula-1-announces-audience-and-fan-attendance-figures-f or-2021/
  15. https://www.autoracing1.com/pl/391481/f1-2022-tv-viewership-hits-1-54-billion/

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