Formula 1 teams economic situation

• Project name: Formula 1 teams economic situation
• Author: Jan Zaškolný
• Software used: Microsoft Excel
• Simulation type: Monte Carlo

Problem definition

At the moment there is serious trouble in the Formula 1 business as two out of eleven teams filed for bankruptcy recently during a single month. This might indicate bigger issues coming in future because the minimal number of teams to run the championship is eight (so that there are 16 cars), thus repeating the recent events could be the end of the most famous racing series. According to representatives of other smaller teams they are also on the verge of going bankrupt due to the model of budget distribution in the championship. Contribution of organizer of Championship to the budget of teams depends on results of teams but this is something that ignores system archetype called "success to successful" which is even stronger in this case because sponsors provide finance mostly to previously successful teams. What makes the situation even worse is the fact that costs to enter to championship are so high that entering of a new participants happens very rarely.

Is current model of budget distribution really a threat for Formula 1? What would happen if something gets changed? Is there a way how to save the series?

Method

Situation in Formula 1 is simulated in Excel using Monte Carlo.

Using a model with various parameters that can be set by user makes answering questions from previous chapter possible.

Model

Simulation is based on a model of the Formula 1 environment. This model consists of input parameters set by user, internal parameters and functions and predefined values like names of competing teams.

Model is based on an idea that there are some starting conditions and then situation develops accordingly to parameters. Ten seasons are simulated and then the result is evaluated with the number of teams going bankrupt as the main point.

Parameters and functions

The simulation works with a lot of parameters which effect the result of it. There is always pre-defined value that corresponds with the current situation in Formula 1. Some of them are more precisely known while others are partly shrouded by mystery and educated guess based on available information and past experience was inevitable. See references for the sources of information used.

Parameters set by user

Many parameters can be changed by user.

Competition budget

Competition budget is the total pool of money circulating in Formula One every year. It is distributed amongst teams and owners of the Formula One brand.

Default value: 1800

Share of budget for teams

Competition budget is distributed amongst teams and owners of the Formula One brand. This parameter specifies share for the teams.

Default value: 0,638889

(Budget for teams)

Budget for teams is the pool of money that is distributed to teams competing in the series.

This variable is calculated by multiplying competition budget and share of budget for teams.

Default value: 1150

(Budget for teams minus bonuses)

Part of budget for teams is redistributed in a special way every year (see Special annual team bonuses) so in fact pool of money that are being distributed to teams is a little bit smaller.

This variable is calculated as budget for teams minus sum of special annual team bonuses.

Default value: 1000

Share of budget split according to results

Part of the budget for teams minus bonuses is distributed evenly while the rest is bound to the results. This parameters sets how much is distributed according to results. Simulation tests various values of this parameter and shows how number of teams going bankrupt depends on it.

Default value: 0,88

(Budget split according to results)

Amount of money split according to results of teams.

This variable is calculated by multiplying budget for teams minus bonuses and share of budget split according to results.

Default value: 880

(Budget split evenly)

Amount of money split regardless results of teams.

This variable is calculated as one minus budget for teams minus bonuses times share of budget split according to results. It is the same as budget of teams minus bonuses minus budget split according to results.

Default value: 120

Extra share for top 10 teams

Top ten teams receive part of the budget split according to results. Each of these teams gets one tenth of extra share for top 10 teams.

Default value: 0,4

(Share of budget according to place)

This variable is calculated as one minus extra share for top 10 teams.

Default value: 0,6

Total advertising income

Money from advertising is a vital source of cash for Formula 1 teams. This variable specifies total budget of companies that are willing to spend their money to advertise in Formula 1 through the teams.

Default value: 1200

Special annual team bonuses

Part of budget for teams is taken away every year to give special bonuses to selected teams. Official reason for this is "a special contribution to the sport". In fact it is granted to teams with best negotiators.

Default values:

Mercedes 30

Red Bull Racing 0

Williams 30

Ferrari 90

McLaren 0

Force India 0

STR 0

Lotus 0

Marussia 0

Sauber 0

Caterham 0

Starting cash of teams

Every team starts the simulation with a specified sum of cash on their accounts. This varies as there are many factors influencing this value such as previous successes or having a strong sponsors (which lead to a high intake of money) or consecutive bad results in previous seasons (which lead to a drop in money reserves).

Default values:

Mercedes 1000

Red Bull Racing 2000

Williams 800

Ferrari 1500

McLaren 800

Force India 500

STR 1200

Lotus 500

Marussia 250

Sauber 300

Caterham 150

Distribution of budget by place

Part of budget split according to results is distributed amongst top 10 teams while the rest is given to teams according to the specific position on which they finished the season. The quotients how the money are split are set in parameters of distribution of budget by place.

Default values:

1st 0,24

2nd 0,15

3rd 0,12

4th 0,1

5th 0,09

6th 0,08

7th 0,07

8th 0,06

9th 0,05

10th 0,04

11th 0

Advertising attractivity by place

The more successful a team is, the more advertisers it gets and the higher proportion of the total advertising income it can grasp. Most advertisers want to be connected with successful teams while only a are willing to support those who just are present.

Default values:

1st 0,3

2nd 0,2

3rd 0,14

4th 0,08

5th 0,07

6th 0,06

7th 0,05

8th 0,04

9th 0,03

10th 0,02

11th 0,01

Internal functions

Amounts in millions USD.