Formula One's Benign Despot

To fans imbued with the sacred traditions of baseball or football, Formula One motor racing is an exercise in organized high-speed chaos.

Each race car is custom-built under technical rules that change constantly.

The young, glamorous drivers are employed at fabulous salaries, yet are prone to switch allegiance at a pace matched only by the buying and selling of teams and shuffling of sponsors. At the end of an eight-month Grand Prix race season, the team with the most successful car wins the Constructor’s Title. Confusingly, the champion driver doesn’t necessarily represent the top team.

If casual spectators are stymied by the blur of names, alliances and prizes, they can clearly see and comprehend the opulent air of wealth and prestige that enshrouds Grand Prix races. But unlike most other sports that evolved through the accomplishments of many, the emergence of Formula One — commonly known as F1 — as one of the world’s most lucrative sports marketing platforms is traceable to the ideas, actions and leadership of a single mastermind.

Before Bernard Charles Ecclestone, known ubiquitously as Bernie, F1 was a weekend sport for well-to-do self-financed amateurs. Television hadn’t discovered it, and sponsorships were irrelevant. He was the first to recognize the sport’s commercial possibilities and, just as important, proved he could bring them to fruition. He realized that tobacco companies and automakers — and later Hugo Boss, Red Bull, Tag Heuer, Vodafone and others — could and would pay enormous sums to build increasingly sophisticated vehicles to carry and televise their logos and that they would compete in spectacular races in exotic locations like Monte Carlo and Shanghai.

A race team owner himself, Ecclestone was the first in his peer group to see that bargaining collectively would be far more lucrative than negotiating appearance fees separately with race promoters, the practice in the 1970s. Likewise, his instincts about how he could attain optimal value from large-scale television contracts, as opposed to multiple local deals, were prescient.

There has been buzz throughout the 2011 season about the possible sale of F1’s valuable commercial rights to a group led by the chief executive of the News Corporation, Rupert Murdoch, another renowned negotiator. But before anybody buys anything, Ecclestone’s opinion looms large. His family trust, which he amassed in part from fees that he earned by negotiating on behalf the teams, owns a valuable chunk of F1’s commercial rights. The majority owner of the rights is the private equity firm CVC Capital Management, which employs Ecclestone to run the sport as chief executive. Could Ecclestone and Murdoch, whose mutual enmity is barely disguised, coexist under the News Corporation’s ownership?

Since the late 1970s, Ecclestone’s strategies and operating style have become as critical to the sport’s financial success as technologies like turbocharging are to winning races. Now 80 years old, he began competing in minor-league racing while still a teenager. Before buying a team, he managed the F1 champion driver Jochen Rindt until Rindt died in a crash. But Ecclestone discovered early that the excitement of deals and high-stakes negotiations was every bit as alluring as the danger of passing on a high-speed curve — which is why a pastime of wealthy weekend enthusiasts, designers and mechanics has morphed into a business valued at billions, with a fan base similar to that of the Olympics or World Cup.

“Bernie has created a great, sustainable product; he understands the brand, continuously improves it and deals with all the adversity,’’ said Herb Fishel, retired head of General Motors’ motor sports programs. ``His actions require risk, and he has demonstrated frequently that he is not averse. He knows the selling power of the Formula One starting grid and uses it often.”

Susan Watkins, a Canadian journalist and friend of Eccle-stone who wrote a 2010 biography, described her subject as “absolutely fearless about taking risks, physically or financially.” She added, “If he hadn’t those qualities, Formula One mightn’t be where it is right now.”

To appreciate the difficulty of making money from motor sports, one only has to look at the United States, where open-wheel cars similar to those raced in F1 have struggled to find an audience beyond the once-a-year phenomenon of the Indianapolis 500. Squabbles among the owners of tracks and teams have led to the creation of rival leagues that split audiences, making commercial sponsorships less appealing. The Nascar stock-car racing circuit, by contrast, had been a grubby regional sport until the family of the current CEO, Brian France, elevated it from its rural Southern roots. Shrewd marketing by the Frances targeted a younger mainstream audience and, with help from Murdoch’s Fox Television network, turned Nascar into a profitable enterprise.

The lesson is inescapable: Benign despotism can be a decent business model — as long as the despot has the requisite smarts, moxie and feel for mass media.

As a despot, Ecclestone has few peers. Years of brokering squabbles that bubble below the surface of a Grand Prix season reflect his sixth sense for when to take a hard line and when to back off. He has lasted as the sport’s supreme ruler by hunkering down through scandals and media uproar that would flatten lesser individuals. Though he would never say so within earshot of the press, he evidently grasps that unflattering headlines aren’t meant to be taken personally. On the contrary, they serve as excellent promotion for the next week’s Grand Prix, part of the theater that infuses the sport.

“Bernie understands that if F1 were just about racing, it would be about half the size it is,” said Steve Madincea, who runs London-based PRISM, a sports marketing firm owned by WPP, a holding company for some of the world’s most prominent advertising, marketing and public relations concerns.

Last January, Ecclestone drew plenty of splashy headlines when a German prosecutor arrested the banker Gerhard Gribkowsky on a charge of receiving a $50 million bribe in connection with CVC’s purchase of its F1 stake. In 2006, Ecclestone had brokered the sale of a controlling stake in F1’s commercial rights to CVC from JP Morgan, Lehman Brothers, Bayerische Landesbank and his own family trust for $1.35 billion. German news reports implied that Ecclestone was under suspicion. He told British reporters that he had visited the prosecutor to “clear up” allegations. “I am confident when the full facts have been established,” he said, “I will be exonerated.”

Exoneration by the German courts would illustrate once again that those who disparage Ecclestone’s operating style as treacherous, disingenuous or deceptive have missed the point. He simply is one of the pre-eminent negotiators of his generation. An appetite for risk, coupled with an instinctive grasp of a deal’s legality, value, nuance — and publicity value — prove more than a match for most of those against whom he is pitted.

The stir caused by reports that Murdoch and the Agnelli family of Italy were possible buyers of F1 turned into a showcase for Ecclestone’s skill at orchestrating media attention to generate viewership and ticket sales. He never denied the stories describing Murdoch’s interest, but he did dismiss them for the record as “rubbish.” Later, he opined to reporters that the European Commission was unlikely to allow a sale in any event because it would violate agreements guaranteeing free-to-air broadcast of the sport. Ever so slyly, he was implying that the News Corporation and Murdoch were angling to offer pay-per-view coverage of races.

Whatever transpired behind the scenes, Ecclestone managed to play the affair for maximum exposure without saying much. Was he sending up a trial balloon to test the European Union’s regulatory inclination toward a sale? Maybe he was signaling to the motor sports’ ruling body, the FIA (Fédération Internationale de l’Automobile), that television coverage of races must eventually include a pay-per-view option on top of free broadcasting, a potential revenue opportunity for the News Corporation.

Next year, the Concorde Agreement, the pact between the teams and the FIA that spells out the sport’s governance, comes up for renewal. No one will be surprised if pay-per-view is an issue in the talks, since it might draw buyers and enhance the value of F1’s commercial rights.

“He has a superb brain,” said Dr. Sidney Watkins, who attended every F1 race from 1978 to 2004 as the sport’s chief physician. In collaboration with Ecclestone, Watkins has been responsible for safety improvements and better medical facilities at the tracks. When officials at the 1978 German Grand Prix refused to let doctors listen to the track’s communications channel for quick response to accidents, Ecclestone threatened to call off the race, never mind the 80,000 spectators in the stands. The Germans backed down.

With a fortune estimated at about $4 billion, Ecclestone is believed to be Britain’s wealthiest individual, a far cry from his roots as the son of a Suffolk fisherman, whose family survived the German blitz in 1939. At the age of 15, he dropped out of school to work as a £5-a-week assistant in a laboratory near London. In his spare time, he raced motorcycles. He also displayed an uncanny knack for trading them profitably. He asked a car dealer to give him space to do so in his showroom. The dealer refused, but the teenager persisted, offering a percentage of his profits as rent — his first real estate transaction. By the early 1950s, he had graduated from motorcycles and was driving Formula 3, a minor league to F1. He showed promise as a driver, though on certain corners he didn’t see well because he had been born with congenital atrophia, rendering him nearly blind in his right eye.

Despite the impairment, Ecclestone’s powers of visualization are keen. He can look at a shabby shopping center and see its potential. Utterly fastidious, appearances are very important to him. As a team owner he insisted on clean uniforms, spit-and-polish order in the garages and a parade gloss for the cars on race day. Standing 5 feet 3 inches tall and crowned with a white Beatle haircut, he still manages to stand out.

Ecclestone’s talent for trading cars and real estate stems in part from a lightning-quick ability to appraise value. He can glance at a few dozen vehicles, price each one and add the total in his head. Then, Ecclestone well might instantly bid for the lot, according to Susan Watkins, unnerving the seller. A hustler in his youth, he excelled at chemin-de-fer, blackjack, greyhounds, gin rummy — which provided capital to buy property and cars.

When Ecclestone was young, “everything was about making money,” Watkins said. “He sold pens, cakes, hundreds of things. He’s a property addict. If you look at his business interests, they’re like a bowl of chop suey. He’s always moving currencies around. I don’t think anybody really knows his net worth, not even Bernie.” Later, she said, “he found something he loved, racing, and a way to make money at it.”

Shortly after the death of his friend Rindt in 1970, Ecclestone wound down his used-car business. He and Rindt had discussed buying the Brabham team, Motor Racing Developments Ltd., together. Instead, Ecclestone alone offered to buy the team “for the value of the assets,” according to Watkins’s biography. Ron Tauranac, who owned the team, having bought it from the original owner, the champion racer Jack Brabham, thought that meant a price tag of £130,000, according to a valuation of the assets. But, Ecclestone told his biographer, “that was Ron’s valuation.”

Tauranac sent documents supporting his valuation, to which Ecclestone responded with a bid of £100,000. Tauranac reluctantly agreed. Before the deal closed, another buyer approached Tauranac with a higher offer — but he felt obligated to sell to Ecclestone, even though he had anticipated getting more. Shortly afterward, Tauranac, who had expected to remain in management of the factory and team, was let go.

A stickler for appearances, Ecclestone immediately ordered the factory to be made spotless and switched Brabham’s color to white from green. He kept salaries low and looked for ways to cut expenses, building a wind tunnel out of used industrial parts to save on the expense of leasing one. He spruced up operations, dressing his staff in spiffy new outfits, each day of the week its own color. For himself: razor-sharp pressed white shirts and dark slacks. Likewise, his moneymaking instincts were aroused.

“Bernie quickly realized his fellow team owners loved the sport as much as he did, but they weren’t businessmen,” said Nigel Roebuck, a longtime motor sports journalist based in London. “He was the first real businessman to own an F1 team.”

Until the 1970s, each team negotiated separate appearance fees with local Grand Prix race promoters. Teams could earn additional money depending on how they fared in the race. But promoters often ran short on payday, and big names like Ferrari routinely commanded outsized appearance fees. Egged on by Ecclestone, “there was a growing sense in those days among the teams that we have the cars and drivers, we put on the show and they get all the money from ticket sales,” Roebuck said. Ecclestone was only too pleased to bargain on their behalf in return for a cut.

Ecclestone’s first commissions in 1972 were relatively modest, according to Watkins — about 37,500 Swiss francs per race, roughly $9,500. Teams could add to their revenue by recruiting sponsors, which they did with varying success. Sponsor logos appeared on the cars, as well as the mechanics’ uniforms.

Under Ecclestone’s tutelage, teams used their leverage to gain a share of all fees generated by sales of clothing, posters, trinkets and trackside displays. The Paddock Club, started in 1982, was a high-end entertainment lounge where teams and sponsors could treat VIP clients to Champagne, caviar or a manicure while they waited for the race to begin. But the club, critical to Grand Prix’s luxury image, wasn’t making money in 1986, so Ecclestone announced to team owners that it was closing. Immediately, guest traffic increased, and the $1,500 per race fee was suddenly not so exorbitant. Tickets to the Paddock today sell for $4,000.

“What I learned from him is that everything he gains is by taking two steps forward and one back,’’ Madincea said. “He banned photographers from the pit lane in 1996 because they were getting in the way. The photographers themselves came up with accreditation and special bibs. Problem solved. Nothing would have happened if he had just demanded order.”

The potential gusher was — and remains — TV. He bought individual broadcast rights in separate markets when they didn’t cost much. It was a risk. By packaging smaller deals into omnibus TV contracts, he has been able to generate excellent returns on his original investment, Watkins says.
A bigger television package broadened F1’s global fan base, while drawing the attention of advertisers. Sponsorships overnight grew more valuable because TV could put sponsors’ names in front of more eyes.

As Ecclestone had foreseen, individual Grand Prix events were melding into a single potent F1 brand. Team names like Tyrell and drivers such as Jacky Ickx and James Hunt gained renown. Sylvester Stallone, George Harrison and Arnold Schwarzenegger showed up at races, as well as political figures like the German chancellor Helmut Kohl.

Celebrity naturally attracts controversy. In 1997, the British Labour Party solicited a £1 million contribution from Ecclestone. In his telling, he gave it as a way to show gratitude for the party not favoring higher taxes on the superwealthy. And he had good reason to be grateful. Ecclestone’s income the previous year — a far cry from the early days as a used-car salesman — was reported to be £54.9 million.

The young Labour politician Tony Blair and his family had visited Ecclestone at the British Grand Prix at Silverstone that year. Later, after Labour had won the election and Blair became prime minister, Ecclestone visited 10 Downing Street. He argued that tobacco shouldn’t be cut out of sports immediately, as the European Union wanted, but phased out gradually. F1 teams were collecting $200 million to $300 million annually from cigarette makers; some of them might be forced to leave Britain. In Ecclestone’s telling, he hated politics, but as the leader of a small industry, he needed access to explain his side of the story.

British newspapers connected the dots — albeit mis-leadingly. They implied that his £1 million contribution had bought the government’s eventual stance that F1 should be exempt from the European Union’s ban on tobacco advertising. Ecclestone, who hadn’t asked for an exemption, kept his mouth shut about the truth. Finally the Labour Party, panicked by the media uproar, returned his contribution — infuriating the F1 chief.

Subsequently, F1 teams phased out tobacco sponsorships, as Ecclestone had forecast they would. Grand Prix venues have been doing the same. “Tobacco’s void has been filled today with financial services companies such as RBS, Santander and ING, plus automotive suppliers and telecoms like Vodafone,” Madincea said.

No wonder Murdoch and the News Corporation are kicking tires, trying to figure out what F1 might be worth. The sport looks fit, flush with sponsorships, 12 teams strong, energized by a growing base of new and mostly younger fans in Asia. This year, for the first time, Formula One will race in New Delhi.

“One of Bernie’s biggest challenges is the aging of the average race fan,” about 55 years old in Europe,’’ Madincea said. But at the race this year in Shanghai, Infiniti, a new sponsor of the Red Bull team, drew a crowd of 1,100 to an Infiniti dealership to an autograph session with Sebastian Vettel, the 23-year-old reigning world champion. “The two countries with the youngest following are India and China, with an average fan age of 28.”

Formula One is set to negotiate a new Concorde Agreement next year with the FIA. As in the past, F1 teams are sure to demand a bigger cut of the sport’s revenue. It’s hard to imagine that Ecclestone won’t be in the middle of the fray.

--------------

Doron P. Levin is a Detroit-based journalist and author. He has covered the world auto industry for The Wall Street Journal, The New York Times, The Detroit Free Press, Fortune and Bloomberg.

Authors

  • Doron Levin

    Contributor, Korn Ferry Institute