Common Misnomers

With the Boston Consulting Group’s dossier having been leaked there’s been a lot of chitter-chatter going on around the internet. I’ve read a lot of uninformed opinions about a wide array of subjects touched upon in this document. The document in question was apparently one of several that’ve gone back and forth between Indycar (the corporation) and the BCG. So the relevance of the suggestions put forth by the BCG is up for debate. This could’ve been a first-pass and thus the suggestions not as refined as they would be with input from Indycar. We don’t know. We, as fans, have only seen what are essentially bullet-point headlines of a handful of topics discussed in the document. In addition to that, we’re seeing the bullet-points almost completely out of context, without any of the analysis, statistics, or logic behind each suggestion (that I presume a company of the BCGs caliber to include). I feel like the leaked information should be taken with a certain caginess, as we simply don’t have the full picture. For all we know, of the 115 pages, there could be 50 dedicated to improving the corporate structure, increasing revenue in non-traditional ways, increasing Indycars web presence, promoting and marketing the sport in non-traditional ways. Again, we just don’t know because we haven’t seen the document. To take Indycar and the BCG to task just yet – I feel – is a bit hasty.

That said, I wanted to write up a quick post about a specific topic touched upon in the Associated Press article. One suggestion made by the BCG was to reduce the TEAM payout to teams and increase the individual race purses. What this would do is going away from a level form of revenue sharing between the teams, from Indycar, and create a more merit-based means of rewarding teams for their participation.

As sport and the business of sport has evolved, so too has the way in which teams and franchises generate and share revenue. In the case of Indycar, the majority of revenue generated that goes toward the teams is through this TEAM payout system that rewards every full-time entrant with a little over $1m. And this goes to around 20 entrants, depending on the year we’re looking at. A much smaller amount of that revenue going to teams is paid through race purses – but again, this is a much smaller piece of the pie compared to TEAM payouts. A full-time entry can then count on at least $1m being there when they go to balance their books and prepare for each season.

If you ask me, this is a pretty reasonable means of distributing the money the teams are due. Some fans see this as Indycar’s own version of socialism; where everyone gets a trophy for participation. These fans see this as an unnecessary handout. They couldn’t be more wrong, as that’s the entirely wrong perspective to take on the subject. Every racing series in the world has a monetary flow: there’s a top where the big money begins, and it trickles down through the various levels of stakeholders involved in each respective series. I have no financial records or anything official from the series or stakeholders involved to substantiate what I believe to be the hierarchy within the Indycar series, but based on the information available to us, I think this is a fairly straightforward and reasonable view of how money flows through the series:

indycar_chart_01 I’ll explain. Again, this is somewhat simplified but I feel it does a good enough job showing the major players within the Indycar series and their place within the revenue stream. The way I see it, and the way I look at the interactions between each party, is that someone has to pay someone to play. I view television and tracks as the beginnings of the stream.

Tier 1
Television wishes to create and fill their programming schedules and thus pays the series to broadcast their product. Tracks wish to fill their race calendars with desirable racing product and thus pay the series to being their show to town. These are fairly straight forward, though we’ve recently learned that NASCAR gets a bit creative with their television revenue by having part of that go toward the track venues. The tracks pocket what they can and pay the rest toward purses for the teams and drivers. This allows the tracks to generate money through more than just box office and concessions. A byproduct of this system is that tracks are a bit more financially sound from event to event. In almost every case, the tracks are able to make a very healthy profit off NASCAR events, which of course makes everyone happy. NASCAR gets its piece of the pie, the track theirs, and byway of that, the teams and drivers get their respective pieces.

In Indycar, there hasn’t been any indication that a similar system is in place between the series, tracks, and television partners. As far as we know, tracks are on their own to find revenue to pay the Indycar series sanctioning fees, purses, and their own operating expenses. They see no part of the television revenue and thus it can be difficult for tracks to turn a significant profit on an Indycar race. This also limits the amount of money available to local tracks to promote the series’ event. Formula 1 faces a similar problem through use of a similar system to Indycar, except on a much more global scale. The dollar figures are multiple times larger, but fundamentally, they go about this business in similar ways.

Tier 2
The Indycar series generates a large portion of its revenue through television rights revenue and track sanctioning fees. To supplement that, the series also has partners and sponsors who make up a part of the revenue coming into the series. Indycar then uses that revenue to pay the teams to participate in their racing series. Think of the teams as vendors contracted by Indycar. This is where TEAM money comes into play and why it’s somewhat absurd to wish they’d do away with the payout. The series must pay the teams for their participation, otherwise the teams would have no incentive to participate and provide product for the series to then sell to tracks and broadcasters.

Looking at Formula 1, there’s a similar structure in place – in that every team gets a slice of the pie. The difference is in how that pie is sliced and distributed to the teams. A big talking point at the end of the F1 season was the battle for the 10th-place paying Constructors Championship spot (there were 12 teams for the 2012 season) as that spot paid roughly $10m. A championship winning team receives a much, much larger payout based on the amount of races won, and championships won (Drivers and/or Constructor Championships). There are also payouts made to teams based on legacy in the sport.

Tier 3
In addition to TEAM payout money, teams relay on partnerships and sponsorship deals to supplement their budget. That budget is then used to pay operational expenses and contract drivers and series equipment suppliers (tires, chassis, engines, etc.) Because the series has a spec technology platform, those suppliers and vendors are easy to identify in the form of Dallara (chassis), Firestone (tires), Chevrolet and Honda (engines). In the past, and in non-spec series’ like Formula 1, each team would have their own list of sub-contracted suppliers and vendors who provide services and parts that go into making their individual race car.

Again, this is somewhat simplistic in its breakdown, but I feel pretty strongly about it based on the information available to fans. I’m hoping to do more digging in the future and designing sexy little charts and graphs to visualize some of the more mundane Indycar-related information.



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