GP2′s weaknesses in 2010 shining through

With just about 24 hours to the official start of the 2010 GP2 Main season, we are still waiting on any type of confirmation from the 5 teams with seat still up for sale this year.    At this time last year, teams pulled driver from the lists of “usual suspects” to fill up their seats, mainly Davide Rigon, Giacomo Ricci or James Jakes.

Though 2010 looked to potentially be a brighter year financially for these teams, there seems to still be a relevant hangover that is holding back drivers and their backers/sponsors from committing to GP2 this year.  Reasons?  Several come to mind:

First, drivers with any relevant budget (in March GP2-speak that means above €800k) are holding out for the best deal possible.  Though all drivers have a preference of which team they will race with, at the end they just want to be part of the show.  The difference between racing with Coloni, Rapax or Trident is a thin one… only that 2nd Arden seat stands out.

Second, competition is steep this year.  With F3 Euroseries practically dead in the water (what a pity) and Formula Master canceled,  you would think GP2 would emerge victorious.  But instead of re-aligning GP2 and strengthening it, the organization decided to push forward with the GP3 concept.  Today, the value proposition of racing alongside F1, one of GP2′s important selling points, has been diluted by its sister series.   I have already written on my opinion regarding this decision, where the concept is a bit off (too expensive) and the timing is just terrible.

Finally, GP2 has not done enough to bring down budgets to reality.  The world has changed, the economy has changed and the realities of most (not all) drivers and sponsors has changed.  Renault driver development still exists in some way through Gravity, but Honda is gone, Toyota is gone and Red Bull gave up on GP2 in 2009.   The happy spending of the 2005-2008 seasons may never return, and the organization cannot blindly ignore that fact.

GP2′s track record is second to none.  The relevance of the series in F1 is unquestionable.  But coming up with €1.2 million-plus is a daunting task… no matter what success rate the category has.  It’s time for some changes in the thinking and strategy of the organization.

The first test (for the organizers) will come when they decide what to do with the 2011-2016 contracts and the renovation of the current Dallara chassis.  If they want my input, they know where to find me.

TV revenues and GP2 – show me the money…

I see many keep reading my initial posts on GP2 budgets, how the different teams make money and how their different strategies and positioning over the years has taken them to where they are now.  After a series of comments back and forth with Fletcher in previous posts, I think we need to dig a bit deeper and understand not only the “whys” but also the “why nots” – especially in relation to TV revenues.

What there is:

GP2 revenues come from 2 sources – though in most cases its only the first one:

1. Drivers -  Those who wish to sit in a GP2 car have to put up anywhere between €1 million and €1.3 million per season, plus any damages to the car.  In 2009, many drivers have signed for less than that (see post), but it is an exception that will right itself once the economic situation improves.
2. Team sponsors – If I’m not mistaken, only ART, Racing Engineering, Arden and Barwa Addax have one of these, so we can say they are pretty scarce in GP2 – not only in 2009 but generally in the category’s 5-year history.

What there should be:

As of today, GP2 team are basically limited to these 2 revenue sources.  Yes, some teams make some additional money serving A1 or Superleague teams, but that is not GP2.  If we compare this to an F1 income statement, we are missing one key line:  TV revenues.

Should CVC share some TV revenues with GP2 teams?   Yes, and here is why and roughly how much:

So with this simple calculation, we have added about €1.3 million to the top line of GP2 teams.   This is not money they should/should not get, but money they have earned, just like F1 teams earn their TV money by putting on a good show and having people watch.   Next to F1, 150 million people may seem like little, but it is a lot of people watching a single event every month during one or two days per weekend.

So why are there no TV revenues in GP2?  A couple of answers from my point of view:

• There is no “GP2 FOTA”: GP2 teams are not organized in any way.  They are there to race, period, and until today have not worried about this issue.  If they made even the slightest effort, they could probably get half of the estimated TV revenues per team, and we all know €650k would go a long, long way to help GP2 teams.
• Legacy:  Most GP2 teams are evolutions from F3000 or F3.  They are used to running in series where they have no significant TV coverage and where they make money the old fashion way… “earning” it through hard work and rich drivers.
• Ignorance:  The most basic of answers, is because no one has asked or has asked the right people.
• Resistance: I don’t think it’s that CVC does not care for GP2, but that they need to squeeze the most out of it.  And given the previous 3 points, CVC has little incentive to alter the status quo.

In conclusion, GP2 has earned TV money and GP2 could really use these revenues – not to make higher profits, but as a possible way to reduce the cost of a seat for drivers.  In this way, the budget for a GP2 seat could fall below €1 million, making the category more appealing and increasing its competiveness in the top-tier racing market.  Teams need to organize themselves, understand the value they are adding to their organizers and owners and map out a revenue-sharing scheme that improves the competitiveness and longevity of their category.

David Price calls it quits

Last Thursday, Autosport reported that David Price sold his remaining 49% of DPR to André Herck (link).  My other solid source, Italiaracing, has not confirmed this, but I will trust it’s a valid story.

(c) www.davidpriceracing.com

Several comments from my side regarding this sale.

First, David Price is not walking away with a fistful of cash from this second sale.   Much like what happened to BCN Competicion, these “sales” have many angles and readings – some political, some financial.

The sale of the initial 51% to Herck last year was for a reported €1.8 million, reasonable figure for a GP2 team in early 2008 – at that time valued between €3.5 and €4.0 million.   But this time, as owner of 49% of DPR, Price also “owned” 49% of its troubles, translated into losses and debt stemming from the consistent lack of results on the track and its inability to attract well-paying drivers.

Herck, who is also believed to be doubting his future (and his son’s) in GP2, must have told Price he could “sell” his remaining stake for the value of the growing team debt.  Summarizing, Price walks away with his initial cash and basically values the team at the €1.8 million which he sold for initially, a price tag that DPR would never fetch on the open market today.  He renounces on a higher value but also on the risk from its debt obligations.  The valuation from Herck’s side is different, as he paid the €1.8 million and is now assuming all the debt, which could easily be in excess of €500k.  At a minimum value of €2.3 million, Herck must seriously trust he can either straighten out the team or he can hold out long enough to sell it once prices have gone up again.  Another (unlikely) alternative is that he has a buyer for all or part of DPR.

Second, the departure of David Price from DPR sinks the team further in the “image” standings.  Already one of the worst teams in terms of results and reputation, the fact that now it remains in the hands of a wealthy Monaco businessman who bought it for his son, does not help the team in the eyes of drivers and their managers.  Herck is a smart man, and he will have to quickly fill in this gap with a top-tier technical “brand name” that can elevate his team’s reputation.  A good number of ex-F1 race engineers are out there today, and Herck will probably scoop one up soon, both to fill in for Price’s departure as well as technical chief Andy Miller who also left the team.

Surely, a team with an empty seat in today’s racing market and whose only racing pedigree is no longer there, is not looking too good for survival.  André Herck must now pull a wealthy rabbit out of his magician’s hat to sustain a reasonably stable 2009 GP2 Main season, especially when considering DPR’s “paying” driver is his son Michael.

One race DPR is surely contesting in the leading pack is of the first GP2 team to run into life-threatening financial difficulties.  DPR and Trident are now neck to neck in this sad contest.

GP2 insider prediction: When & which GP2 teams will run out of money in ’09

Based on the earlier calculations of team incomes according to the drivers they had been able to sign, I have made a chart to illustrate at what point of the 2009 season will GP2 teams run out of cash.  To better explain I have made a couple of assumptions:

1- that the necessary budget for break-even is €1.8 million – spent linearly at €180k per race by every team

2- the 3 empty seats (as of April 24 – 2 at Trident and 1 at DPR) are filled by paid drivers with budgets of €500k

GP2 Asia … a lesson on how to destroy your clients

So we have reviewed the 2 wonderful GP2 Asia seasons, both for their irrelevance in the motor racing world in generating new talent or serious competition and for their destructive impact on team finances – for almost every team on the grid.

Some questions for the GP2 management (or GP2 Gods if you prefer):

• What is the objective of GP2 Asia?  The real one I mean, not the blah, blah, development, blah, blah, emerging markets, blah blah, off-season….. crap.  Are you trying to compete with anyone?  Does anyone ever, ever watch top-level racing during the F1 off-season?
• Does this GP2 “winter series” need to be in Asia?  If it’s of no interest for drivers in that region, doesn’t it make sense to race in Europe…  Even a Sudam GP2 would make more sense!
• Have you analyzed the impact of this category?  Impact in terms of media exposure (does anybody care, even the die-hard GP2 fans?), driver development and most importantly – team economics.
• Do you think GP2 Asia has enhanced or destroyed value for GP2 as a whole?   Trick question, but by any measurement, GP2 Asia has contributed to make a difficult 2009 season in Europe even more unstable and devastating for many teams.
• Do you listen to your “clients” (the GP2 teams)?  They are shouting for help and attention, but they are constantly ignored – powered by the arrogance of not admitting GP2 Asia should be terminated.
• The ultimate question…. Will GP2 Asia have a 2009-10 season?  Please say no…..

The devastating impact of GP2 Asia – part II

Though many questioned GP2 Asia for 2008-09 (current series), GP2 boss Bruno Michel and his team pushed on with what in hindsight reflects very little regard for the teams and their  survival.  Some (or maybe many) would venture to say that he wanted to see some teams go into financial difficulties, which they are suffering just as we get ready to start the 2009 GP2 Main season.

The economic turmoil was already upon us, and cancelling the season would have been a timely decision applauded by most and criticized by the ignorant few.  But…. the season started at the October Shanghai F1 GP with a ragtag lineup of new and old drivers – most of them paying little or no money to the bleeding GP2 teams that were contractually obligated to field 2 cars without exception or mercy.  Rumours had surfaced that Michel would allow teams to show up with 1 car at this exceptional time, but as many had suspected the short-term once again primed over the long-term.

The numbers and facts speak for themselves:

• Regarding driver rotation
• After 5 races, a total of 41 drivers have paraded through the GP2 Asia Series – representing a rotation of about 66%… not even club level karting sees these figures on a bad weekend.
• 11 drivers (27% of those that have paraded through here) have raced only 1 race!
• Only 15 drivers (37% of the total) have raced in every GP2 Asia race this season; this represents less than 60% of the 26 GP2 seats available… highly irregular for a serious racing category.
• Trident, a team in serious, serious difficulties has used an incredible 7 drivers and I would venture to say that several of them have raced for free:  Ricci, Rigon, Vallés.
• Even Arden has suffered the confusion of Dr. Marko at Red Bull’s objectives in GP2 Asia.  He has used 3 drivers in the Red Bull seat at Arden:  Mika Maki, Renger van der Zande and Edoardo Mortara.  Dr. Marko must be seriously wondering what the hell GP2 Asia is good for, a confusion that probably help cement his decision to leave GP2 in 2009 altogether.

The devastating impact of GP2 Asia – part I (the 2008 season)

GP2 Asia is probably one of the worst inventions in modern motorsport… well, maybe a distant second to Superleague.

Created in 2008 to reutilize the original GP2 cars and at the same time broaden the scope of the series, GP2 Asia was conceptually targeted at bringing out emerging talent from the “other side of the world”.   If you recall, originally all teams had to have at least 1 Asian driver.  This requirement was only met by 7 of the 13 teams, a generous statistic since Adam Khan lasted only 1 race with Arden and Chandhok (iSport), Kobayashi (DAMS) and Tung (Trident) were merely extensions of their GP2 Main Series relationships.   Also, Fauzy (Super Nova) and Yoshimoto (Meritus) were GP2 “veterans” brought in for a decent showing by these teams.

So basically, only DPR with Armaan Ebrahim of India followed through in the true spirit of GP2 Asia.

The evolution of GP2 teams – Average position

GP2 teams have enjoyed very diverse fortunes since the category was launched in 2005.  So, which are the “best” teams?   To avoid subjective discussions, and base the answer on hard data, here is the average position in the team championship since 2005, as well as their “label” according to the 3 groups we created in an earlier post (stars, survivors or backmarkers):

The chart shows what we expected at the top and at the bottom, with some surprises – such as Arden and Piquet, which are higher that expected.  Both still live off their best seasons when Kovalainen (Arden) and Nelsinho (Piquet) were fighting for the GP2 title.In terms of economics, the chart helps illustrate one of our basic points about GP2 success:  if you are consistently successful on track, you will be financially viable.  Today, as illustrated in previous posts, all the teams in red are GP2 backmarkers and facing serious financial troubles.  As simple as this chart and its interpretation may seem, how come some teams are at the top and some at the bottom when they all started out on equal ground in 2005?

Inside look at GP2 budgets

It is common knowledge that a full season budget for GP2 costs between €1.0 and €1.3 million per driver.  Consequently, revenues for a GP2 team should be about €2.2 million for a profitable and money-making season.  As few teams have a title or team sponsor, the budgets are generally covered fully by the drivers and their sponsors.

In 2009, most teams will be fighting for survival- barely making the €1.8 million breakeven point for the category (revenues, but no profits).  What is the general picture for this year? How do the different teams make their revenues this year? Who will make what?

In my opinion, and as has been proven true in the category, there are four different ways to survive in GP2.  These revenue models are a matrix sponsor revenues vs. driver budgets (and their sponsors).  To illustrate this point better, I have drawn up a grid showing the 13 teams and their position regarding income from sponsors and/or drivers (as of the end of March 2009) and the 4 revenue models that currently apply in GP2:

For further clarification, let’s take a closer look at these four models with examples.  Note that these revenues/budgets are estimates that apply only to the 2009 GP2 Main Series.

Revenue model 1:  Team with sponsor and full-budget drivers

Team:  ART Grand Prix

Driver 1:  Pastor Maldonado

• sponsor: PDVSA
• estimated budget:  €1.3 million

Driver 2: Nico Hulkenberg

• sponsor:  Dekra, Deutche Vermogensberatung, Wili Weber?
• estimated budget: €1 million
  

Team

• sponsor: Richard Mille (luxury watches)
• estimated deal size:  €300k
• Total team revenues 2009:  €2.6 million
  
• 2009 outlook:  Another solid and very profitable season for Vasseur, Todt and company, with a good shot at winning both the driver’s and team championship.

Revenue model 2:  Team with sponsor and partial-budget drivers

Team: Racing Engineering

Driver 1: Dani Clos

• sponsor: Majestic Hotel Group ( hotels in Barcelona and Paris), Mediapro Group
• estimated budget:  €1.2 million

Driver 2: Lucas DiGrassi

• sponsor:  Renault Development Driver program
• estimated budget: €400k

Team

• sponsor: Estonian energy drink brand Fat Burner
• estimated deal size:  €300k
• Total team revenues 2009:  €1.9 million – plus
• 2009 outlook:  Despite winning the 2008 driver’s championship, RE will make it a break even season in 2009, though with a very good shot at winning  the driver’s championship with DiGrassi.

Revenue model 3:  Team with no sponsor and full-budget drivers

Team: iSport

Driver 1: Giedo van der Garde

• sponsor: McGregor (Dutch fashion group)
• estimated budget:  €1.1 million

Driver 2: Diego Nunes

• sponsor: Nescafé, Garoto (Brazilian candy company)
• estimated budget: €1.25 million
  

Team

• No sponsor
• Total team revenues 2009: €2.35 million
• 2009 outlook:  iSport still commands top-dollar for its seats, still amortizing its 2007 driver and team championship; 2009 will be an average year in terms of on-track results, but profitable for Paul Jackson.  Unless van der Garde can put his iSport in the top spots, the team’s “caché” for 2010 may start to decrease.

Revenue model 4:  Team with no sponsor and partial-budget drivers

Team: Super Nova

Driver 1: Luca Filippi

• sponsor: NorDiesel
• estimated budget:  €800k

Driver 2: Javier Villa

• sponsor: Mapfre, Farho, Asturias, Feve
• estimated budget: €900k
• note: with strong cross-subsidization of GP2 Asia drive from Villa’s cash, estimated total of €1.2 million

Team

• No sponsor
• Total team revenues 2009: €1.6 million
• 2009 outlook:  Estimated to be under break-even by at least €200.000 for 2009.  Has 2 good drivers that can win races, and hopefyll Filippi will last the whole season on his budget, unless David Sears finds a replacement with deeper pockets.

After this snapshot of these teams, the question is: which is the winning model?  The short answer is there is no single winning model to earn money in GP2.  Teams with similar historical results make their revenues from different sources, as can be seen.

What is true for everyone is that breakeven for a GP2 team in 2009, after the category’s cost-cutting measures, should lie at about €900k per driver.  That said,  many drivers have signed for less than that, with teams surely banking on a “better than nothing” vision of the 2009 season.

I believe competitive drivers like  Alvaro Parente, Andreas Zuber and Davide Valsecchi all have budgets €300k to €500k under the team’s breakeven line.  Teams will bet on this approach for several reasons:

1. If I’m going to give up revenues, might as well do it with a race-winning driver that will raise the level and image of my team
2. There’s always time to bring in a well-funded driver, even if not a race winner from the start
3. 2009 is a recession year, and I need to lose as little money as possible – even if I have to dig into my reserves
4. I sign the driver now and work on raising more cash during the year, or in the worst case substituting for a better-funded one later in the season

So in summary 2009, is a year for surviving. Let’s see how large the debt of GP2 team gets and how many teams will face the wrath of Bruno Michel.