Following a rather odd conversation on The Formula 1 Blog with Anonymous, it is becoming increasingly clear that a breakdown of what it would take for Sky to break even is necessary. This is, after all, the main reason why the attempt to transfer the UK rights from free-to-air to pay-TV is likely to have medium-term consequences on non-UK F1 fans. It's a bit rough-and-ready because of the timing, but I will happily tidy up anything that you think needs tidying later.

Wimbledon never fails to get full crowds even though few people in Britain follow tennis otherwise. Silverstone never failed to get full crowds even in years where British F1 figures fell like a stone due to Schumacher dominating. You'd be surprised at how low an audience conversion is needed to fill a stadium, so saying that test cricket grounds are still full doesn't say anything about what's going on with the TV side of things. Attending a cricket match is a special occasion. It does not mean that watching cricket is still bread-and-butter to people. The BARB statistics do not lie and they say that Sky struggles to get a seventh of the audience Radio 4 Longwave does for cricket matches, and that both combined are far lower than cricket got before Sky took over. The numbers end up working for the sport largely because Sky can afford more, but that is reliant on capping the level sports can charge it. That works financially for sports that seriously undervalued themselves (primarily by only considering the BBC pre-Sky, which of course can't run adverts to offset its expenses) but F1 hasn't done that since 1981...

I suppose if one calls 234,000 rugby viewers (2008 League World Cup) with Sky compared to over 2.6 million for the previous version* pre-Sky a success, then rugby might be considered a success. From Sky's perspective, it's a relatively successful sport because the low sanctioning fees means it can make quite a bit from the deal; from the perspective of a rational outsider surveying the effects on the sport's support base, it is a disaster.

The more one looks at the effects of Sky getting involved in sport, the worse it looks for sport. If a sport wants to go from being a majority sport to a minor one, going the pay route's a pretty effective way of doing it. That's been demonstrated time and again.


Advertising is of course part of Sky's arsenal when paying for things. However, Bernie fees are not the only costs it faces, and F1 isn't football. It costs £10 m per year to produce F1 the BBC 2011 way and to do all the extra features Sky has said it'll do, it will need to spend even more than that. ITV couldn't get that much from sponsorship when it had F1 in boom time, so given that Sky isn't having in-race advertising and is operating in a recession, it'll struggle to even meet its production costs through advertising, let alone start tackling marketing, satellite rearrangement fees (yes, making a new channel costs money) and the Bernie fee (which is now four times higher for Sky than the BBC's production fee was). 

Even so, my original calculation of a million new customers being needed assumed, optimistically, that the non-Bernie fees would be entirely covered by advertising. (Before the amount Sky paid was announced, I tended to say "between 0.5 and 0.88 million" when commenting on the internet; I was bargaining on Sky doing some sort of cost calculation prior to purchase). The £40 m from subscriptions prior to F1's arrival has to be ignored on the grounds that they'll have bought other contracts with them. These naturally must be maintained, with the possible exception of programs that directly clash with F1 programming. Other sports may not be as expensive as F1 but they do have acquisition and production fees. Instead, the calculation has to be done from base.

There are two ways of getting Sky F1 - one using the HD pack and the other using Sky Sports. The Entertainment pack cost (common to both routes) has to be ignored because the channels on the pack are funded by it, along with all their programming. Much like the BBC, each Sky channel is funded separately. Terra Nova, for example, is not a free show. Even through the HD route, the HD money is not free because all the programming on Sky has to be converted to HD. If Entertainment and Sports are priced in relation to their values to Sky, then only half the HD top-up can be assumed to be available for F1.

Let's assume that the only sport that the people are interested in is F1 and that HD buyers don't buy any other packages (if we don't, again, the figures look even worse for Sky, as that person's subscription fee would then need to be shared among however many additional contracts corresponded to that individual's customised viewing habits). The cost of Sky Sports 1 and 2 on top of that package is £20 and this is the maximum amount Sky can take in per customer per month with regard to F1. HD, once the half for Entertainment package upgrading is removed, only contributes £6.125 per customer. Only new-to-Sky customers can be assumed to be taking the package for the full 12 months, so only the 7 months where Sky has an exclusive race can be safely counted for Sky's revenue (let's assume for now that Bahrain goes ahead).

I am also going to assume that everyone who watches F1 is a singleton who never has the TV on when entertaining and doesn't have lodgers or other unrelated co-residents similar sneakily "borrowing" a chair during races. Otherwise, each viewer is only contributing part of the subscription payment. I'm also assuming none of these people are bar, pub or club owners because then every patron of the bar/pub/club is contributing towards the subscription.

Remember that the Bernie escalator ensures that prices go up at least 10% every year (that fee quoted for Sky's acquisition will be the first-year price; Bernie rules ensure it goes up and up after that). The £40 m initial annual price becomes £77.95 m by the end of the contract Sky has. If that sounds high, the fee the BBC paid went from £25 m to £40 m a year from one end of its contract to the other (projected but never reached due to renegotiation) end; if it hadn't it probably wouldn't have needed to let F1 go. That's compounding for you.

At the moment, 30% of Sky customers are on HD (therefore using the cheap route) and 70% on SD (therefore would need the expensive route). Being optimistic and assuming this proportion does not move any further towards HD despite more HD subscribers being in Sky's overall business plan, Sky needs 0.95 million new subscribers (rounds up to 1 million to the nearest 100,000 subscribers) that didn't care for any Sky-carried sport bar F1. To break even. Compounding means it doesn't have to get them all immediately - a 2012 figure of 0.53 million is enough for that specific year - but Sky's sales definitely aren't going up by the 10% per year needed simply to keep up with Bernie (they only increased by 3% per year for the last 2 years - it's pretty consistent at the moment). 

Even 0.53 million is over twice as many viewers than Sky gets for any part of its non-football programming. It is unlikely Sky will get the figures it needs because past and present data demonstrates it. This is before considering that every assumption I've just detailed here - advertising revenue, house occupancy, HD, caring about other Sky sports, Bahrain, the extent of Bernie escalator - is more likely to go against Sky than in its favour with regard to making F1 pay, and therefore require even more people to sign.

(For the curious, on the assumptions made in this item, it would take 2.08 m cumulative new customers for Sky to be able to justify taking all 20 races in the first year of the next broadcasting contract of 2018, assuming the minimum number of new customers were signed up as needed to let it break even in each previous year, that no additional fee was made for exclusivity and assuming Sky merely wished to break even with F1 due to its high profile).

Japan F1 is mostly free Fuji TV. There is a pay option (Next) but it gets 1/6 of the audience the free version does (helped by the fact the same provider on the same platform shows the free and pay options - not the case in the UK). Brazil is primarily covered by GloboTV, which is free-to-air and easily beats the pay option for popularity. Italy and Germany used to have pay TV options (through Sky) but they've folded due to lack of interest. Some other countries with smaller audiences have pay-only, and their audiences went through the floor. This has left some channels dropping F1 altogether and others putting it on progressively higher-cost options. That's what always happens with pay TV concerning sports that were previously shown just fine on free-to-air**. The audiences shrink and so the pay TV provider has to rely on cheap rates to keep the option alive. Here's a hint: Bernie will never, ever, provide cheap rates.

So why are the likes of rugby and cricket succeeding despite their TV mistakes? Because other avenues of revenue exploded in the last decade or two. Sponsorship, once quite rare for a series, has become huge money, especially for drinks companies who would struggle to advertise in certain international markets through the standard methods. Ticket prices skyrocketed, turning the weekly patronage of a favourite sport to an occasional treat for the poor without turning away the rich (in fact, with more focus on rich clients as seen in the past decade, the rich are pouring in as they spy networking and hob-nobbing opportunities). The sponsorship alone accounts for why there's more money in disability swimming than ever despite it having no media profile worthy of the name and free tickets to nearly all events. The latter is why the Paddock Club in F1 is worth over 10% of the total income of F1 despite serving a maximum of 5000 people per race.

After all is calculated, Sky's chances of making F1 break even are remote. The chances of Sky keeping a sport that doesn't break even is even remoter. The chances of Bernie finding anyone willing to pay more than Sky pay him now in those circumstances is nil. That means Britain's fees will drop. It's not clear who'd pick up the rights then - it depends who has most to spare at that moment out of the not-recently-"burned" parties. What is clear is that it would cause a domino effect. Other countries would see that pay TV does not work and be able to call Bernie's bluff by not engaging in bidding wars with such channels. It would mean the prices paid by channels would fall through the floor. So would F1's revenues.

F1 would have to either seriously tighten its belt (and hope it's no longer up to the neck in debt) or die.

Quite how not want F1 to kill itself counts as "not loving F1", as Anonymous alleged, remains a mystery.  

* - In case you're wondering, rugby union suffered even worse. The Heineken Cup final, for example went from 9 million in 2005 to below 185,000 in 2007. The only reason it's still on Sky is because the Heineken Cup charges much, much less for its tournament broadcast rights than Bernie does and the BBC is currently trying to sell sports rights rather than buy them.

** - Football, in case you're wondering, was not shown fine free-to-air before Sky got the rights; the BBC could typically only show one match a day - and hardly ever in primetime - due to broadcasting balance requirements, whereas Sky was able to show multiple ones, at any time of day, almost immediately. Being able to see twice as many matches means twice as many people are going to be interested, so it matters less if no single match gets much in the way of viewing figures compared to free-to-air - the sheer number of matches viewable through the multi-channel, more specialised pay TV system meant that many small parts became a bigger sum than the BBC could achieve. Also, people can't advertise on the BBC, so when Britain's favourite sport went to the advertisable platform, advertisers naturally paid top dollar to be associated with the sport. Football is, economically speaking, pay TV's one big sporting success.

This weekend, Viva F1 has organised the third Blogger's Swap Shop. It is a fantastic idea where 15 motorsports bloggers write for each other's blogs. An entry from me will appear at The Formula 1 & Motorsports Archive today. La Canta Magnifico Blog is honoured to host a guest entry by Maverick of Viva F1 (please ignore the entry by-line as I haven't figured out how to get it to change yet).

Formula One has more than its fair share of rules. There's not even a single rule book - please refer to the International Sporting code, F1 Sporting Regulations and F1 Technical Regulations as well as all the attached appendices while not forgetting the Rules of the FIA International Court of Appeal [and the Concorde Agreement - ed]. Undoubtedly the vaguest of all the rules, and quite deliberately so, is Article 151c which concerns "any fraudulent conduct or any act prejudicial to the interests of any competition or to the interests of motor sport generally." In other words, ‘bringing the sport into disrepute’.

The ‘disrepute clause’ gives rise to concerns not only about its ill-defined and wide-reaching nature but also about its potential for abuse. So vague is the clause, who is to define what is and what isn't against the interests of the sport? Furthermore, having lost the case, while there is scope to challenge the decision in the Court of Appeal how can you possibly argue that it didn't bring the sport into disrepute? It's an immeasurable concept. Taking a case even further, with notable exceptions, the courts are generally reluctant to intervene in the internal disputes of voluntary associations and not inclined to review the decisions of tribunals.

Last month, the FIA scrapped the team orders rule but with the caveat that "any actions liable to bring the sport into disrepute are dealt with under Article 151c of the International Sporting Code and any other relevant provisions". So are team orders banned? Ferrari's decision to manipulate Michael Schumacher past Rubens Barrichello on the last lap of the 2002 Austrian Grand Prix induced boos from the watching spectators and widespread condemnation from the media. It ultimately led to the banning of team orders, but how would it be dealt with today? It clearly sounds like a case of bringing the 'sport into into disrepute' but at the time, the WMSC "recognised the long-standing and traditional right of a team to decree the finishing order of its drivers in what it believes to be the best interest of its attempt to win both world championships" and hence took no action. Does tradition trump public opinion?

Moving onto 2010 and Hockenheim and this time it was Felipe Massa who was giving way for Fernando Alonso. The stewards acted by issuing the maximum fine allowed to them but the WMSC chose to not extend the penalty, instead going as far as recommending that the ban on team orders be abolished, which it subsequently was. However, what about bringing the sport into disrepute? There was uproar amongst groups of fans and the media, so was there a case for turning to Article 151c? The trouble is that while large parts of the media were unhappy (the Brazilian castigation of Massa being particularly venomous) it certainly wasn't the case everywhere. The Italian media sided with Ferrari, the Spanish media sided with Alonso and the German media, seemingly conditioned by the Schumacher-years, coolly seemed to think that it was business as usual - which in reality it probably was.

Another example from 2010, which might have resulted in Article 151c being brandished in anger, was Ferrari's and Alonso's claims that the European Grand Prix was fixed. If this was football there would have been repercussions - earlier this week, Liverpool's Ryan Babel picked up a £10,000 fine for retweeting a link to a mocked-up picture of referee Howard Webb in a Manchester United shirt after Liverpool lost 1-0 to their rivals. The stewards may have done a poor job that weekend but for drivers and teams at the centre of it all to suggest bias at the FIA could easily be seen as damaging to Formula One.

On the other hand, others may suggest that it was the actual stewarding that was damaging - which begs the question of whether the FIA themselves should be able to be found guilty of ‘bringing the sport into disrepute’? While many fans have been suggesting that for years, the nearest anyone on the inside has come to suggesting such a thing in recent years is in 2008, when Mark Webber accused Max Mosley of damaging the sport following allegations about his private life.

In the end, the Hockenheim result is forgotten largely thanks to a combination of a close-fought Championship and the fact that Alonso didn't take the title thanks to those points gained in Germany. How might the issue have rumbled on down the years if 'Alonso's title' had been questioned by some? Of course, one whole problem with the question of ‘bringing the sport into disrepute’ is that public exposure is central to the accusation and yet, by simply pursuing an issue, the FIA can generate even more publicity for a case, causing further damage. Yet, does it all really matter?

Formula One thrives on controversy, the politics is as much a part of the drama as the racing - an ongoing soap opera. Admittedly, the politics occasionally takes too much precedence over what is happening on the track (Max Mosley and FOTA's wranglings at the end of his reign being a prime example). Yet has any of it really damaged F1's reputation? Renault were found guilty of manipulating a race but fans never stayed away from the subsequent Singapore Grand Prix. McLaren were found guilty of stealing Ferrari information but Formula One is still seen as a glamorous sport. In short, the concept of the ‘disrepute clause’ seems like a misnomer as far as Formula One is concerned. Perhaps it comes down to that image of glamour - a bit of palace intrigue is expected to be part and parcel of the show?

But then maybe Bernie Ecclestone already knows that - a man who could probably earn himself three or four disrepute charges a year.

Date: October 26 2007

[ Mood: Sword Fight ]

[ Currently: Reading F1 Racing (August 2007 edition) ]