Early last month, Bernie Ecclestone, the Formula One Chief Executive, bought his way out of a lawsuit initiated against him regarding an alleged bribe to influence the sale of a stake in F1. Nevertheless, it may soon happen that Mr Ecclestone, aged 83, will not be able to do what in his opinion he does best - run F1. Whether he stays on himself or appoints a successor, F1 must properly address a number of issues it is currently facing. Dr Péter Rippel-Szabó, an Associate with Bird & Bird, provides an overview of the current challenges the highly popular race series must confront.
In April, Formula One (F1) supremo Bernie Ecclestone went on trial before a Munich district court in Germany over allegations that he bribed Gerhard Gribkowsky, a former German banker, as part of the sale of a major stake in the F1 business to CVC Capital Partners (CVC) in 2005. Mr Ecclestone’s lawyers settled with the prosecutors under paragraph 153a of the German Criminal Procedure Code and Mr Ecclestone agreed to pay €100 million (approx. £60 million) to end his trial. Nonetheless, according to media reports, Donald Mackenzie, co-founder and co-chairman of CVC, is considering removing Mr Ecclestone from his position. This is not only to do with the bribery cases adversely affecting Mr Ecclestone's public perception as an honest and reliable businessman, but with the commercial challenges F1 is struggling to address. So, irrespective of whether Mr Ecclestone leaves or remains in his position, F1 must fix some problems. This will also require the decision makers to take into account some important legal aspects.
Although F1, in addition to the Olympics and football, is the most-watched sport worldwide, it generates considerably less revenue from the exploitation of its television rights compared to the aforementioned sports. For example, F1's UK television rights fees are less than one tenth of those of the English Premier League. Additionally, international audience viewing figures have dropped by a staggering 30% over the last five years. This drop is coupled with declining figures in race day attendances, which could be the result of higher ticket prices. High ticket prices are the consequence of extremely high race fees that local F1 promoters must pay to host an event. Mr Ecclestone is also reluctant to reach broader audiences via new media. The development and sale of online and mobile rights, as well as marketing the sport in the modern world of social media, is definitely an area which F1 should look into in greater detail. Recently, Luca di Montezemolo, the president of Ferrari, expressed his worries to Mr Ecclestone and Mr Mackenzie that F1 was neglecting fans - particularly in attracting younger audiences and failing to maintain the interest of sponsors. Despite the trends, the most agonising fact from CVC's perspective is that, with the new Concorde Agreement in place boosting the F1 teams’ share from 59.6% to 63%, CVC's profits fell by US$137 million (£82 million) in 2013. At the same time, the teams’ prize money increased 6.1% in 2013 to a record $798 million, making it the single biggest cost for CVC. There is no doubt that these concerns need to be addressed as soon as possible. The below solutions, which consider some legal aspects, could help F1 move forward in the right direction.
First, the broadcasting rights to F1 should be sold in packages on a platform neutral basis - i.e. media companies have to exploit the rights across all media platforms including television, internet and mobile on a linear and on-demand basis. Obviously, due to the broadcasting agreements in place, such changes would not happen overnight. However, F1 should slowly move forward and negotiate more complex deals with media companies to make them interested in online and mobile broadcasting to avoid that such rights remain unused. The platform neutral approach would ensure maximum exposure, while also providing the broadcasters with programming flexibility. Adapting to the ever developing online world, F1 and the broadcasters could implement different pricing, lock step or revenue sharing mechanisms for on-demand content, live streaming, highlights etc. Geo-blocking would surely help to optimise the revenue of online streaming appropriately. Even if the initial income to be realised from online exploitation does not reach the significant amounts of money generated from television rights, the wider exposure of the sport, especially among younger fans addicted to the online world, should help drive sponsorship money upwards.
Second, lock step mechanisms could also be implemented in Grand Prix contracts to increase attendance at circuits. For example, the race fee to be paid by the local promoter could be lowered to a certain amount, if a given number of tickets are sold for the race. The reduced revenue from the Grand Prix contract could be offset by demanding higher fees from sponsors due to higher race day attendance and the resulting greater exposure of the sport.
Third, licensing F1 brands and content to video game firms may also lead to a wider exposure and generate further revenues. The longstanding cooperation of Electronic Arts and FIFA could serve as an example to follow. Under the terms of such a licensing agreement, the potential video game provider could maintain exclusive rights to release F1-branded action and management video games, and the parties could cooperate in further areas, e.g. the organisation of online race contests for users.
Finally, it is worth mentioning that when negotiating the above commercial agreements, the parties should comply with the requirements of European case law concerning F1. If the current Concorde Agreement was to be renegotiated, the parties would have to especially omit provisions which prevent F1 teams from participating in any other race, competition, exhibition or championship for open wheeler single seat cars. The Grand Prix contracts may not prohibit the organisation of open wheeled cars other than F1 races on the circuit. Concerning media rights, media companies may not be restricted to broadcast open wheeler races other than F1, the duration of broadcasting agreements should not exceed three or five years and the rights should be sold on a non-discriminatory basis.
Despite his truly admirable brilliance and astuteness in building F1, Mr Ecclestone should never lose sight of the fact that at the end of the day, CVC is here to make as much money as possible. The bribery cases, decreasing revenues and his advanced age may lead to his removal - unless, as he did in 2005, Mr Ecclestone procures third parties of his choice to buy CVC's stake in F1 to prevent his dismissal. Regardless of which scenarios happen, lawyers can look forward to the exciting challenge of adapting F1 commercial contracts to the needs of a renewed business model.
This article was originally published in World Sports Law Report Volume 12 Issue 9, September 2014. You can access the original at: http://e-comlaw.com/world-sports-law-report/article_template.asp?Contents=Yes&from=wslr&ID=1703
. Mr Ecclestone won a related damages case brought by Constantin Medien in the UK earlier this year. In addition, according to media reports, there are also criminal actions against Mr Ecclestone pending in Switzerland and the US.
. 'The rising cost of Formula 1’s UK television rights,’ The F1 Broadcasting Blog, 26 June 2014: http://f1broadcasting.wordpress.com/2014/03/01/the-rising-cost-of-formula-1s-uk-television-rights/
. Although local promoters mostly struggle to break even, demand from governments comfortably exceeds the number of racing slots available. 'Flagged down,’ The Economist online, 28 June 2012: www.economist.com/node/21559639
. 'Bernie Ecclestone pays his way out of court but F1 position remains in doubt,’ Giles Richards, The Guardian online, 5 August 2014: www.theguardian.com/sport/2014/aug/05/bernie-ecclestone-court-f1-position
. The Concorde Agreement is a contract between the Federation International de l’Automobile, the F1 teams and the Formula One Association setting out the basis on which the teams participate in the F1 and share in its commercial success. The current seventh Concorde Agreement is valid for the period 2013-2020.
. 'Formula One profits stuck in the slow lane', Christian Sylt, The Telegraph online, 21 April 2014: www.telegraph.co.uk/finance/newsbysector/banksandfinance/privateequity/10778528/Formula-One-profits-stuck-in-the-slow-lane.html
. According to some of Mr Ecclestone's statements, it seems that F1 gives rights to media companies to broadcast the races by whatever method they wish in their country, but they are not contractually obliged to actually broadcast on all platforms. For example, see the interview with Mr. Ecclestone on JAonF1, 9 June 2011.
. For the successful exploitation of the currently unexploited rights there are good examples aplenty, e.g. the German Bundesliga, the English Premier League and the Olympics.
. Case COMP/35.613) and case COMP/36.638.
. For more details see: Dr Péter Rippel-Szabó: Governance: Legal issues on the sale and running of Formula One, World Sports Law Report Volume 12, Issue 7, July 2014, available at: http://e-comlaw.com/world-sports-law-report/article_template.asp?Contents=Yes&from=wslr&ID=1681
. According to media reports, media mogul John Malone, fashion tycoon Lawrence Stroll and Rupert Murdoch of News Corp all expressed their interest in the race series.