Formula One’s digital and social media division made a $1.9 million net loss last year following the botched launch of its online streaming service according to financial statements filed today.
F1, which is listed on the Nasdaq with the ticker FWONK, was sold to the investment firm Liberty Media for $4.6 billion in 2017. Soon after Liberty got the keys to the auto racing series it began to invest heavily in promoting it digitally. It launched an Esports series and relaxed the stringent rules on posting content from the races on social media which boosted its followers on Facebook, Google, Instagram and Twitter by 53.7% last year to 18.5 million.
Liberty also gave the green light to the development of F1 TV Pro which streams races online directly to viewers for an annual fee of $100. F1 had high hopes for the service and when it launched in May last year the company’s global head of digital, media and licensing, Frank Arthofer, said he was “optimistic that the opportunity size is significant.”
He added that “we have by our estimates around 500 million fans in the world, which is quite a number. If even, conservatively, one percent of that customer base is a super avid hardcore fan, that’s a five million addressable audience to sell this product to.” There was a lot on the line.
As we revealed in motoring magazine Autoweek last year, American broadcaster NBC Sports Network withdrew a $40 million offer to screen F1 for seven years because it didn’t want to compete with the streaming service. This led to F1 signing a deal with sports broadcaster ESPN which agreed to allow Liberty to stream races but is not believed to be paying a fee.
It was a huge gamble as the investment bank Morgan Stanley forecast at the outset that F1 TV Pro would only attract 10,000 subscribers in the United States in 2018 and 94,000 outside the country. Those estimates soon seemed to skid off track.
Since its launch, the service has been beset with so many bugs that F1’s chief executive Chase Carey referred to it as “almost probably a beta project” and admitted that it would be re-launched this year. The chorus of criticism from fans all over the world was so loud that F1 was forced to issue refunds though the dent that this made in the company’s fortunes never came to light. Until now.
As F1 is listed on the Nasdaq it has to file quarterly and annual results but it doesn’t stop there. The company itself is based in Britain so each of its divisions have to file annual financial statements which give even more detail than can be found in its filings with the Securities & Exchange Commission (SEC).
The results for Formula One Digital Media show that despite all the investment in the division, and Liberty’s boasts about its prospects, it didn’t even make a single Cent of profit last year. In fact, it made a high-octane loss.
The financial statements confirm that the company’s principal activity is “the sale and exploitation of digital rights and services in connection with the events of the…Formula One World Championship”.
They add that last year revenue accelerated by 120% to $22 million “driven by the launch of new product offerings in 2018 including the F1 TV Pro service, updated mobile applications, and the purchase of digital advertising inventory by a fellow Formula 1 subsidiary.”
Revenue from subscription based services doubled to $6.1 million but still represents just 27.9% of the total with the remainder coming from other digital media rights.
The red ink was driven up by a 56.5% surge in costs to $24.1 million. That includes payment of a $1 million license fee to F1’s operating company Formula One World Championship for the digital rights but even without it, the division still wouldn’t have made a profit as its operating loss came to $2.1 million. It was fueled by the boost in costs which doesn’t even include any of the staff working on digital media as they are all employed by a separate F1 company Formula One Management.
Nevertheless, the financial statements say that “the directors consider the performance of the company during the year to be satisfactory and in line with expectations as the company continues to invest in the development of its digital and social media platforms and products, and believe the company to be in a sound position at the balance sheet date and, with the progress that is being made, well positioned for the future.”
The company’s net loss narrowed from $4.4 million in 2017 but it still came to $1.9 million last year giving a shareholders’ defecit of $14.7 million. Ominously, as recently as May, criticism of F1 TV Pro was still flooding in and three months later Carey described it as a “work in progress.” However, he added that it is “getting closer to our targets both in terms of content and reliability.”
The bigger-picture problem is whether the service is actually relevant to the majority of F1 fans. One senior US TV executive explained to Autoweek that “Formula One’s audience is older, it’s wealthier and it is very sophisticated but while they love technology in Formula One, they don’t want to watch it on their phones, or their iPads or their computers. They want to watch it on a big screen. The average age of a Formula One fan in the US is 59 years-old and that viewer is not going out and buying apps especially if he can watch it for free on ESPN.”
Surprisingly for a company based in Britain, the country’s imminent exit from the European Union could actually give F1 a boost. The financial statements say that “the Group has continued to monitor developments with Brexit, actively considering related risks and mitigation strategies as they emerge, and developing contingency plans as required to address any potentially adverse consequences that could arise. Whilst considerable uncertainty remains as to the final arrangements for Brexit, Formula 1’s business has certain characteristics that the directors believe should significantly mitigate risk.”
The financial statements explain that these characteristics “include the global nature of Formula 1, as a result of which the business has a globally diverse portfolio of contracts, customers and activities, and the fact that the majority of its business is transacted in US dollars. At this time Formula 1 does not anticipate that Brexit will have a material adverse effect on its business, albeit possible logistical challenges could arise in moving staff and equipment to and from European-based races which take place during the course of a Championship season.”
In summary, even though F1 is based in Britain, it is usually paid in US Dollars and has an account in US Dollars which insulates it from any weakening in the Pound due to Brexit. It actually benefits from this by getting more Pounds for its Dollars when it transfers them in order to pay bills in Britain like rent. Testimony to this, the financial statements show that the digital media division made a foreign exchange gain of $0.5 million.
It wasn’t the only boost. The results of Formula One Hospitality and Event Services (FOHES) show an 8% increase in hospitality sales to $91.5 million in 2018. This turbocharged performance was driven by F1’s Director of Hospitality and Experiences Kate Beavan, who is not just one of the most talented and experienced executives in the company but the sports hospitality sector in general.
In contrast, the FOHES financial statements reveal how little Liberty’s much-vaunted street demonstrations have revved up F1’s revenue. Known as Fan Festivals, they see F1 cars doing demonstration laps on city streets in order to boost exposure of the series. The first was held in central London in 2017 and was followed by events last year in Marseille, Miami, Milan and Shanghai.
The FOHES filings state that aside from hospitality sales, its “other revenues were $2 million higher at $20.2 million (2017 – $18.2 million) and were generated from other event-based activities including the delivery of advertising production services, programme sales, the sub-licencing of vending, display and concession rights, various fan engagement activities including Fan Festivals, and the new MIT Extreme Innovation Series business forums launched in 2018.”
Perhaps the most uncertain investment is in Formula One Research, Engineering and Development which was an F1 finance company until the start of last year. Liberty transformed it into one which provides research, engineering and development services in connection with the new regulations which will be introduced to F1 in 2021.
According to its financial statements, the company spent $4.1 million (£3.3 million) last year even though there is no guarantee that any of the teams will sign up to the new regulations when their F1 contracts expire at the end of next year. The financial statements say that F1 “is confident that through these discussions terms will be agreed for the teams to continue to participate beyond 2020.” Time will tell whether Liberty can get them all to the finish line.
It’s a game of inches – and dollars. Get the latest sports news and analysis of valuations, signings and hirings, once a week in your inbox, from the Forbes SportsMoney Playbook newsletter. Sign up .
Article by channel:
Everything you need to know about Digital Transformation
The best articles, news and events direct to your inbox
Read more articles tagged: