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Will The Big Wheels Walk Away from Formula One?


May 30 was a balmy Sunday in the picturesque Eifel region of Western Germany -- perfect conditions to savor the smell of hot rubber and the ear-splitting whine of V-10 engines. Indeed, 106,000 people thronged to the N?rburgring to watch Ferrari driver Michael Schumacher humiliate his opponents in the European Grand Prix. So why was Walter Kafitz, the track managing director, unhappy? "We were not sold out," he says ruefully. The track can hold 150,000, so 44,000 tickets went begging.

How can that be? Formula One is the most-watched televised sporting event in Europe, and its popularity is growing in Asia and North America, making it one of the few ways multinational corporate sponsors can reach a rapt global audience. Kafitz blames the empty seats on a slow European economy and the dominance of the Ferrari team. But others in the sport blame something else: one Bernie Ecclestone, 73-year-old patriarch of Formula One. Ecclestone, a former used- car dealer, owns the commercial rights to the racing series. He and his wife Slavica are worth $4.2 billion, according to Britain's Sunday Times.

Mercedes, Gruppo Ferrari Maserati, Ford (F), and others who finance Formula One teams grumble that Ecclestone hogs too much revenue and power. That resentment is fueling a major effort to force Ecclestone off the track. GPWC (Grand Prix World Championship) Holdings, a shell organization in the Netherlands backed by carmakers and chaired by J?rgen Hubbert, Mercedes-Ben (DCX)z's chief, has begun writing a business plan for a new auto-racing series that would seek to usurp Formula One beginning in 2008, when current contractual agreements run out. The rebels are even screening sports-marketing agencies to help push the events.

Ecclestone is largely responsible for building up Formula One since he began acquiring control over TV and merchandising rights in the early 1980s. By one estimate, Formula One generates $1 billion from broadcast rights, merchandising, and track revenue. But only about a fifth of that goes to the teams, who also get money from sponsors such as Britain's Vodafone Group PLC or Munich conglomerate Siemens.

The tycoon's refusal to modify contracts, which give him a guaranteed sum and automatic annual increases regardless of ticket sales, has forced track owners to raise ticket prices and hurt attendance, critics say. Even more important, Formula One's TV audience has been eroding in core markets, especially in Germany (viewership has picked up a little in other places). "Now that Formula One isn't as popular, there should be countermeasures -- more investment, more promotion," says an insider at one auto maker. "Ecclestone is not doing those things." Ecclestone, for his part, blames the track owners. "They don't promote anything," he says.

The carmakers have threatened to leave Formula One before. Are they more serious this time? "In no other sports series are the participants made to live with so little as in F1," Luca di Montezemolo, president and CEO of Ferrari and chairman of Italian auto maker Fiat, says through a GPWC spokesman. Ecclestone ridicules the chances of a rival series. "The people they're talking to have no idea of Formula One," he says, speaking by phone from London. "It's like me starting up a rival car company."

Building a rival series would be a huge challenge. The car companies in GPWC, which also include BMW and Renault, would probably have to spend over $100 million a year for at least five years, estimates Jan Wendt, vice-president for motor sports at Hamburg sports-marketing consultant SPORTFIVE, which is no longer involved in Formula One. "It requires a huge up-front investment, and the risk is very high if there are two rival series," Wendt says. GPWC counters that startup costs would be more than offset by an increased share of the revenue.

Ecclestone will certainly try to torpedo the effort by exploiting competing interests. Toyota Motor Corp. and Honda Motor Co (HMC). are staying neutral for now. Any new series would be weaker without their support. Then there are the three banks that own a 75% stake in Slavica Ecclestone Corp. (SLEC), the holding company for Formula One. Lehman Brothers (LEH), J.P. Morgan (JPM), and Munich-based Bayerische Landesbank ended up with the stake after the bankruptcy of Munich media company Kirch Group. The last thing they want is to destroy the Formula One brand.

Last year it looked as though the carmakers, SLEC, and Ecclestone had reached an accord. In December, 2003, they signed a memorandum of understanding giving the car companies 50% of Formula One pretax profit and the right to appoint a chief financial officer. All seemed fine until Ecclestone demanded that the carmakers agree not to pursue plans for a rival series for 10 years. Ecclestone insists he needed the assurance in order to go forward with a planned initial public offering. GPWC balked and, in April, repudiated the memorandum.

Ecclestone isn't going quietly. He boasted recently that he was at his desk at 8 a.m. after returning the previous evening from the U.S. Grand Prix in Indianapolis. The dispute can be averted, he says, if the auto makers give him the long-term commitment he seeks: "We're happy to sign today." But it doesn't look as if this race is going to end so quickly.

By Jack Ewing in Frankfurt with John Rossant in Paris


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