#19. How Formula 1 Teams Make Money?

Well, the Formula 1 season just began this week with the 1st race in Bahrain ending with Max Verstappen winning again! New year, new season, & yet the same old champion is ruling the roost!

In this week’s newsletter, I’ll explain how Formula 1 teams make money and the expenses involved in running a team.

I’ll start off with the expenses & then jump to the revenue.

An F1 team’s expenses can be split into four main categories:

1. Research and Development

2. Salaries

3. Production

4. Operations & IT

Here’s what each of them entails:

• Research & Development consist of things that are being built for the future, and not just future tech & engineering, but also things like wind tunnel testing, track testing, and other forms of testing components to make sure the cars perform at their best.

• Salaries are pretty self-explanatory; they consist of paying people who work to get things done. These are not just the drivers, directors, and pit crew, but also a whole lot of other people in the marketing teams, engineering teams, partnerships, operations, etc.

• Production costs for the team involve all the manufacturing of parts for the car, the purchasing of new components, and either building or buying an engine, which can cost upwards of 12 million dollars by itself.

• Operations has expenses that arise from a bunch of things, including:

  • Travel & entertainment for the team & the sponsors.

  • Logistics & freight costs of moving all the cars & equipment all over the world for different races.

  • IT and tech costs that involve both hardware & software-related.

  • Cost of of running the factory

  • Professional services like legal, marketing, etc.

  • Tyres & Fuel— surprisingly, add upto many million dollars over the course of a season.

Here’s the gist of expenses in numbers: An F1 team typically spends about ~201 million dollars every season, & that’s broken down as follows:.

Now let’s look at revenue!

Before we get into the details, a quick disclaimer that this isn't a standard revenue model for all teams, meaning some teams make money in different ways than others.

Just like expenses, revenue can also be split into 4 categories:

1. FOM Payments

2. Sponsors

3. Investment

4. Driver-Linked Income

FOM Payments (FOM = Formula One Management)

The FOM payments are essentially payments that are paid by the F1 management to the teams for taking part in the season.

There is a lot of variability in the FOM payments that are made to the teams, and some of the details are not shared publicly & hence, numbers may vary every few years.

So there are about 5 different forms of FOM payments.

• C1 payments are basic guaranteed pay outs for each team (a.k.a. Column 1 payments). This was $36 million in 2023. Every team gets paid this amount evenly if they have been part of the F1 season for over 2 years.

• The C2 payments are the prize money (a.k.a., constructors championships), which is paid based on where the team finished on the table during the season. Here’s how much prize money each team made in 2023:

• Thirdly, there’s LST payments (a.k.a. Long Standing Team), which are given to teams that have been competing for a long time. Currently, this payment is only given out to Ferrari, which is a whopping $68 million each year.

• Fourth, there’s also an additional income or bonus that’s given out to the top-performing teams, like Ferrari, Mercedes, and Red Bull, for consistently finishing in the top 3 of the constructors’ championship. This bonus varies each year & is derived from the revenue of F1. i.e., 20% of the revenue F1 makes over $650 million will be split amongst the top 3. In 2021, the top 3 teams received a bonus of $35 million.

• Lastly, there are heritage payments & some team-specific payments, like $10 million paid to Team Williams each year, $35 million to Red Bull for signing the Concorde agreement first, and $35 million to Mercedes for living up to their promise of winning two titles.

Sponsorships

These include money from sponsors and endorsements. I'm sure most people understand how this works, but to make it clearer, a company like Petronas goes to a team like Mercedes and says, ”I want to be on your car so we can advertise ourselves," and Mercedes says, “Great, that'll be 70 million dollars.”

On average, most teams have about 15 to 25 sponsors who all pay a certain sum of money to the team to place their logo on the car, and obviously, the better-performing teams have more sponsors because they get more airtime on TV and are more marketable. It's also true the other way around, if a team or driver has a terrible reputation, sponsors will avoid them or might not be willing to spend as much $$$.

Investments

This form of revenue ("investment") comes mostly from car manufacturers who invest for the long term. For example, in 2019, Mercedes’ parent company, Daimler, put $80 million into the team to help them in the Constructors Championship.

Car manufacturers look at F1 as a marketing tool, hoping winning teams will make their cars more appealing to people & hence the investment.

Driver-Linked Income

This is basically when a driver pays the team a sum of money to drive the car for the season. For example, Lance Stroll (cough, cough…I mean, his dad, Lawrence Stroll) paid the Williams team $30 million in 2017 to drive the car.

But obviously, this only really takes place in teams lower down the grid who are desperate to get more revenue.

And, that’s how F1 teams make money, folks!

I hope you like this week’s newsletter. Do consider sharing it with your friends!

Next week, I plan to write about “How Much Does It Cost to Start a New Formula 1 Team?" If this sounds interesting, leave me a note so I can put in a little extra effort. :)