Formula One Spins Off the Track

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If many teams submit to the cap, it could dramatically curb investment in Formula One; in previous seasons, by comparison, the sport's top six teams spent a combined $1.3 billion—or an average of $217 million each—on running costs, according to Formula Money, a publication that tracks the business of F1.

Layoffs May Loom

According to figures compiled by Formula Money and consultancy Deloitte, the combined expenditures of F1 teams amount to 40% of the sport's $3.9 billion haul. But with average spending per team expected to be halved under the FIA's proposed cap, analysts figure many people working in the sport will soon join the ranks of the unemployed. "Everyone will look to cut costs, and that will eventually include teams' workforces," says Harbottle & Lewis' Mitchell.

For teams facing funding shortfalls, the hunt is on for new sponsors. Kevin Alavy, head of analytics at consultants Future Sports & Entertainment (IPG), says Formula One is undergoing a transition that occurs about once each decade. In the 1980s, he says, the sport relied heavily on tobacco companies for backing. When European advertising restrictions prohibited cigarette ads on TV in the 1990s, telecom and technology companies stepped in and became F1's top sponsors. Then, after the dot-com bust, financial services took the top spot in the early 2000s. "The challenge is to find the new sector," Alavy says.

What will be Formula One's next golden goose? Analysts predict that consumer products companies and airlines, especially from the Middle East, are the most likely bet. With sponsorship costs likely to fall by 30% or more in the short term, corporations such as Coca-Cola (KO) and Nestlé (NESR.BE) might see the sport as an affordable way to reach consumers. Formula One's 600 million-strong TV audience, made up mostly of affluent Europeans and customers in emerging markets, also is an alluring target.

"If the price point to enter Formula One continues to fall, it will create enticing opportunities for consumer goods brands," says Future Sports & Entertainment's Alavy.

A Sagging Gate

Even if new sponsors come aboard, Formula One faces yet another challenge from the weak economy: falling race-day receipts. Ticket sales and corporate entertainment constitute roughly 15% of the sport's annual revenues. Yet with both consumers and companies paring their spending, analysts project attendance for some of this season's Grand Prix could fall by 15% to 20%.

The decline in gate receipts will only worsen the economic plight of some venues that host Formula One races, especially in Europe. For the past few years the sport has forced through 10% annual increases in the fees that venues must pay to put on a Grand Prix—and some are already having trouble paying their bills. Formula Money estimates that average hosting fees now top $19 million, with some new venues in emerging markets paying in excess of $40 million to host a Grand Prix.

The triple whammy of increased fees, reduced sponsorship, and declining attendance looks to make Formula One's economics ugly in 2009. It may be a sport favored by business magnates and millionaires, but in the global downturn nobody is immune.

Scott is a reporter in BusinessWeek's London bureau .