The Economics of Formula 1

By: Andrew Gluck  |  November 22, 2023

By Andrew Gluck, Staff Writer

Formula 1 (F1), is an internationally renowned sport and has become a very lucrative business with a market cap of $14.81 Billion. F1 has grown from a minor sport to a multibillion-dollar enterprise thanks to its high-speed thrills, technological innovations, and renowned drivers.

Formula 1 began in 1950 when the first Formula 1 World Drivers’ Championship was held at the Silverstone Circuit in England. The sport is famous for its incredibly fast Ferrari and Mercedes cars as well as famous drivers such as Ayrton Senna and Sebastian Vettel. Throughout most of its history though, F1 was only popular in Europe and Asia. However,  recently, there has been a notable uptick in the popularity of Formula 1, which has resulted in the attraction of a more varied and youthful audience, especially in the United States. What has contributed to this boom?

One of the catalysts for this surge is, the documentary series “Drive to Survive” on Netflix which offers viewers an exclusive glimpse into the inner workings of Formula 1, shedding light on the personal lives of drivers and teams while effectively capturing the intense emotions and thrilling moments that define the sport. Many attribute this Docu-series to be one of, if not the first thing that caught American’s eyes for the sport. The Netflix Show allowed people to foray into the world of F1 which led many to start learning about the sport and immediately many started becoming new fans with serious engagement in the races.

In terms of the actual sport, one of the many critiques about F1 throughout its history has been that the races were very predictable with the same few drivers winning many of the races. To address this critique fans saw the introduction of new rules, which caused an upsurge of unpredictability and excitement in the competition, resulting in races that feature greater competition, which in turn leads to much greater fan engagement. These new rules caused a “perfect storm” with new fans joining in on the sport and more people watching races than ever before. One of the most notable rule changes was that of implementing a Budget Cap. What this does, is it allows for more fair competition between larger and smaller teams. F1’s expansion into new areas, particularly in the United States, has extended the sport’s appeal and drawn new followers.

What has led to the rise in revenue? At its core, heightened fan engagement is the primary factor. Media rights and contracts hinge directly on fan demand. The greater the desire from fans to watch, the more substantial and profitable the media agreements become. Formula 1 sells broadcasting rights to global television and streaming platforms, and these arrangements generate substantial income. The recent surge in revenue is notably fueled by new American media deals, exemplified by the reported $225 million, three-year agreement between F1 and ESPN.

A direct benefit to these high media rights is its translation to prize money, which is awarded to Formula 1 teams based on their standings. The higher a team places, the more money they win. This also encourages teams to invest in their own performance and development. The old adage is true when it comes to F1, “you have to spend money to make money.”

F1 teams and the sport itself attract large sponsors from a variety of sectors, most notably the luxury consumer goods industry. Whenever one turns on a F1 race they are bound to see advertisements around the track for brands such as Rolex and Qatar Airways. These sponsors spend a lot of money to have their logos on cars, uniforms, and trackside signage, which in turn leads to high revenue growth for the league.

Ticket sales are another way the league generates money during race weekends as people pay high prices for tickets to gain access to watch F1 cars speeding around the track live. From merchandising of team gear and souvenirs to replica cars and memorabilia, F1 sells a wide range of items. This increases money for the sport as well.

Aside from direct revenue streams, Formula 1 has a substantial economic influence on the towns and regions that host races. The flood of spectators, media, and teams produces tourism income, and jobs, and stimulates local businesses. Furthermore, F1 promotes the host city or region on a global scale, increasing brand awareness and enticing potential investments. In the current news, Las Vegas has been preparing for their first-ever F1 Grand Prix and it is projected to bring significant money into the city.