Replacing Bernie Ecclestone, chief executive of Formula One auto racing, is “the most difficult mission of any corporation in the world” according to Alejandro Agag, boss of the Formula E electric championship.
Formula E is not a direct competitor to F1 as it has around half as many races and lacks both its big-name drivers and marques such as Ferrari and Red Bull. However, it has captured attention for being the world’s first fully electric racing series and Mr Agag is its driving force.
“This is a micro version, it is no comparison to Formula One, but I keep thinking after being here, how does Bernie do it? He is a genius because I have the feeling when I watch Bernie that he does it all. I delegate like crazy, I have a huge team of people here doing a bunch of stuff but he does it all. The capacity of that man is just incredible so I think the most difficult mission of any corporation in the world is to replace Bernie. Nobody has a more difficult task than that.”
Mr Ecclestone turned 84 last year and is instantly recognisable with his poker face and Andy Warhol-style haircut. Despite his age, and numerous predictions of his departure, there is no sign that he is giving up the wheel or slowing down. He is almost synonymous with F1 and there is good reason for this. Over the past 40 years he has transformed it from an amateur past-time into a billion Dollar business and the world’s most-watched annual sports series with 425 million television viewers last year as the Wall Street Journal recently revealed.
Mr Ecclestone’s life story is a true rags to riches tale. Son of a trawlerman, he left school at 16 and went on to establish one of Britain’s biggest car dealerships whilst dabbling in driving. Mr Ecclestone made his first million in the used car business but the precise moment didn’t stick his his mind.
“It was just a few more zeroes in the bank account,” he told Britain’s Independent newspaper last year.
Instead of retiring he bought the Brabham team in 1972 and won the F1 championship twice with Nelson Piquet. At the time, F1 races ran as ad hoc events. Each team made separate deals with each Grand Prix promoter and television coverage was sporadic since races could be cancelled at the last moment if there weren’t enough cars to fill the grid. Mr Ecclestone seized the opportunity to change this.
In 1981 he convinced the teams to sign a contract, called the Concorde Agreement, committing them to race at every Grand Prix. It gave the broadcasters a guarantee that races would take place and in turn they committed to showing them. Mr Ecclestone took a cut of the proceeds and in 1995 his salary of $83 million made him the world’s highest-paid executive. At the end of the year F1’s governing body the Fédération Internationale de l’Automobile (FIA) handed the rights to the sport directly to Mr Ecclestone’s company Formula One Management (FOM). It gave him the keys to the billionaire’s club.
In 1999 he secured a $1.4 billion bond on the future revenues from F1’s rights and, since then, he has amassed a family fortune of more than $4 billion through the sale of stakes in FOM’s parent company.
Control has changed hands four times, most recently, in 2005 when the private equity firm CVC paid $2 billion for the company in a leveraged buyout. Although Mr Ecclestone now only holds a 5.3% stake, he has managed to remain in the driving seat. He has single-handedly boosted CVC’s fortunes more than any of the other executives at the 300 companies it has invested in since the private equity firm was founded in 1981.
As Forbes revealed last year, CVC has made $4.4 billion from F1 and it still holds a 35% stake worth around $4.2 billion according to a 2013 report in Britain’s Guardian newspaper which put a $12 billion valuation on the entire company. Last year the Daily Telegraph, another British newspaper, revealed that F1’s underlying profit raced past the half billion Dollar mark for the first time in 2013. Its revenues accelerated by 18.5% to $1.7 billion over the five years to 2013 with underlying profits coming to $530.7 million. It is thanks to a simple formula.
Unlike many other sports, F1 doesn’t have armies of decision-makers. There is no chief marketing officer, no chief operating officer and no deputy chief executive. All of the key commercial decisions in the sport are under Mr Ecclestone’s control and this has enabled F1 to act like a speedster rather than a juggernaut run by committee. If he wants to develop a new market, he has the power to sign up a new race. To boost the bottom line he signs up new sponsors.
In the early days, the Star pub near to Brabham’s headquarters was reportedly the setting for negotiations between John Bannon, the then premier of South Australia, and Mr Ecclestone for the first Australian Grand Prix in 1985.
He comes from the classic entrepreneur mould so post-it notes are used instead of a PDA and he still swears by fax. Emails come in the form of scanned fax page attachments. He doesn’t have a bodyguard and doesn’t live in a palatial home but instead has a modestly-sized penthouse flat on the top floor of F1’s ten-storey headquarters opposite London’s Hyde Park. He even gets bottles of milk delivered to his doorstep every day.
F1’s HQ is littered with artwork and sculptures and one sums Mr Ecclestone up better than the rest – a bronze-work of two disembodied hands gripping each other.
“I’ve done so many deals on a handshake,” he told GQ magazine in 2013 adding that “the biggest thing for me is people trust me so people rely on me.” It has been lost on no one.
“At the end of the day, Formula One is a closet of hundreds of contracts and Bernie knows them all. He has done them all. The teams trust him and it is difficult to get trust with teams,” says Mr Agag.
Echoing this, Mr Ecclestone told the Independent in 2012 that “one day, I’m not going to be there and one of the biggest problems is I’ve got really, really good relationships with the race promoters. A few of them said to me, ‘if you’re not there, we’re not there’. That’s what the danger is. They feel that they trust me and wouldn’t want to let me down. That’s probably a very important issue.”
Ron Walker, chairman of the Australian Grand Prix, concurs and revealed to motoring magazine Autoweek that “there will be a number of promoters who will retire when Bernie retires.” Mr Walker explained that “promoters have a very special relationship with Bernie. He is more of a friend than a business colleague, and they are reaching the same age group.”
Mr Walker himself will retire after this year’s Australian Grand Prix next month but Mr Ecclestone says he has no intention of following suit. In 2012 he told the Independent, “I think about retiring but I’m not going to do it. What would I do?”
The focus of his attention is running the company and given the results he delivers it is hard to argue with this strategy. Planning for his departure would be a distraction for Mr Ecclestone and hence he hasn’t even groomed a successor.
In recent years the closest that Mr Ecclestone has had to a deputy was David Campbell, the former European chief executive of entertainment group AEG. He was hired in 2011 to run F1’s corporate hospitality outfit but after just over a year the Independent revealed that he had left and had not been replaced.
Headhunters were engaged to find a successor to Mr Ecclestone as part of stalled plans to float F1 in 2012 but no one was appointed. Justin King, the former chief executive of British supermarket group Sainsbury’s was said to be a candidate but Mr Ecclestone put the brakes on that rumour when he told the Guardian that there is “no truth at all” to it.
Talk of a successor revved up again last year when it came to light that Peter Brabeck-Letmathe, chairman of F1 and food giant Nestlé, was in ill-health. In April Nestlé confirmed that he would undergo treatment for a curable illness but did not say what it was. By the end of the year he was still unwell so an F1 board meeting was held to discuss a replacement which fuelled yet more rumours that Mr Ecclestone would get a successor. Although Mr Brabeck-Letmathe’s health problems were a matter of public knowledge, some media outlets suggested that replacing him was part of a plan by CVC to install a successor to Mr Ecclestone. They were wrong yet again.
This time the subject of the speculation was Paul Walsh, former boss of drinks group Diageo. The Financial Times boldly claimed that “ex-Diageo chief executive Paul Walsh is being lined up to become chairman of the Formula One board.” As Forbes has reported, the Financial Times has a patchy track record when it comes to accurate reporting about the business of F1 and its claim about Mr Walsh was another which failed to come true.
In fact, the preferred candidate to replace Mr Brabeck-Letmathe was Luca di Montezemolo, the former chairman of Ferrari. He became a non-executive director of F1 along with Mr Walsh whilst Mr Brabeck-Letmathe remains its chairman.
Mr Ecclestone is well aware how difficult it would be to replace him and in 2012 told the Telegraph that “I wouldn’t appoint somebody to do my job because nobody would run the business the way I do. You might as well have asked Frank Sinatra who he would appoint to replace him. Somebody can sing but can they sing like Sinatra? No. Will somebody run the business the way I run it? No. They might run it better but they wouldn't run it the same.” It is no exaggeration.
Many observers have suggested that the difficulty with replacing Mr Ecclestone is that he is involved with all of F1’s key business areas. However, in fact the business has a team of seasoned executives who work alongside him behind the scenes. F1’s chief legal officer Sacha Woodward-Hill began working with Mr Ecclestone in 1996 whilst its chief financial officer Duncan Llowarch joined in 2002 which is when media rights manager Ian Holmes also started work for the company. Both Eddie Baker, F1’s chief technical consultant, and Alan Woollard, its freight operations manager, have been working with Mr Ecclestone for more than 30 years.
In order to understand why Mr Ecclestone really is irreplaceable one first has to understand what his job involves. At the heart of it is selling rights to host, broadcast or sponsor races. Crucially, these rights are intangible and there is no independent price for them. Some races pay annual fees of under $10 million whilst others pay more than $50 million. Mr Ecclestone’s duty, and his real skill, is extracting as much money as possible from the buyer and then ensuring that they are satisfied with the deal so stick around as long as possible. This is what keeps F1’s wheels turning.
In a nutshell, Mr Ecclestone is a professional deal-maker and there is no formal training for that job. Business schools and universities can give students grades in accountancy, economics and business. Likewise, chief executives, chairman and chief operating officers can be headhunted from other companies but no one comes with the qualification of being a professional deal-maker. Yet this is precisely what F1 needs to find if it wants to replace Mr Ecclestone.
The collapse of the Caterham team last year brought with it a stark example of the importance of having a deal-maker at the helm when selling intangible rights.
In October the team collapsed into administration, the British equivalent of Chapter 11 bankruptcy, with debts of $25.6 million. It missed two races and only made it to the season-ender in Abu Dhabi after raising $3.5 million through crowd-funding.
The items on offer to investors in the crowd-funding included logo spaces on the team’s two cars in Abu Dhabi. The administrators offered them for as little as $7,700 and the spaces were taken up by small businesses such as a British pub. They replaced blue-chip brands, which had been paying an average of $4.7 million in 2013 when the spaces were sold by the team’s original owner, Malaysian tycoon Tony Fernandes. It shows what can happen if a deal-maker isn’t in the driving seat of an F1 team and this doesn’t just apply to Caterham.
F1’s 11 teams had more than 150 sponsors in 2013 and they were paying an average of $6.4 million each. There is no uniform rate card and not only do they all offer intangible rights but the benefits are not always ones you would expect.
Contrary to popular belief, teams and their sponsors don’t automatically have the right to use race footage for promotional purposes. Far from it. In fact this is only on offer to the top performers. F1’s flotation prospectus revealed that whenever a team gets on the podium it has the right to put on its website, for seven days following the Grand Prix, a 15 second edit of its highlights from the race. Likewise, any team which has won a Grand Prix under its current chassis name has the right to put on its website for the seven days before the race a 30 second edit of its winning highlights.
Given that teams and sponsors don’t automatically have rights to use race footage it is pretty impressive that the average cost of their sponsorship deals comes to as much as $6.4 million. The best performing deals are of course those done by Mr Ecclestone. The priciest race hosting contracts come to more than $70 million annually with the top TV deals costing $100 million every year and official F1 partners paying up to $40 million. Selling deals like this is in Mr Ecclestone’s blood.
He was already doing deals in London’s famous Petticoat Lane market before all of his supposed successors had even been born. Last year he told the Independent “when I was a kid I used to work on Petticoat Lane buying and selling. I was a fountain pen specialist. In the war years I used to go into the bakery, buy the limited amount of cakes and take them to school in a case. In the break time I sold them.”
Indeed, Mr Ecclestone has been buying and selling for longer than almost any other senior executive of a global business. He has even been doing it for longer than Ike Perlmutter, the billionaire chief executive of Marvel Entertainment, who, as Forbes reported, famously sold toys in Manhattan from an early age.
It shows just how hard Mr Ecclestone would be to replace. Making the task even tougher is the fact that he is selling the rights to a show put on by clients who are all in competition with each other. There are few other leading companies in the world with a roster of key clients which are all in competition with each other. Part of Mr Ecclestone's job involves managing them. Coupled with the importance of maximising value from intangible rights, it makes his position unique. It certainly makes the task of replacing him far tougher than that of finding a successor to other ageing industry supremos such as Rupert Murdoch and Warren Buffet.
As if the odds were not already stacked against a successor to Mr Ecclestone, it would also be incredibly easy for them to trip up and bring the house down. Decisions which may seem sensible on the face of it could have disastrous consequences.
For example, an incoming boss could easily come to the conclusion that F1 needs a race in France as the first Grand Prix was held there in 1906. With dwindling government support on offer to races in Europe, organisers of a race in France would probably not be able to muster up more than the estimated $17.3 million which was being paid every year when its Grand Prix was last on the calendar in 2008. They would be inclined to pay even less if they knew that F1 was set on having a race there. In one fell swoop it would deprive F1 of around $20 million which is the difference between the amount a new race is usually prepared to pay to get on the calendar.
It may seem like the obvious solution is to simply increase the number of races and put France back along with a big-paying race but the teams would soon object if that happened a few times as they are already spending enough time away from home.
Another seemingly simple problem to solve is the high ticket prices which averaged at around $433 in 2014. They are directly proportional to the hosting fees as the races generally do not receive any money from F1’s corporate hospitality outfit, TV rights or trackside advertising. Instead, the ticket sales need to cover the hosting fee which barely brings the track to break even. The costs of hosting the Grand Prix are usually covered by the local government since the race drives tourism and promotion.
The race hosting contracts typically contain escalators which increase the cost by 10% annually so the tickets usually rise in price accordingly every year. The seemingly simple solution to this problem may be putting a cap on the hosting fees which came to an average of $27 million across the 19 races in 2011 according to the flotation prospectus. If it was limited to say $20 million, it would reduce ticket prices but the consequences would be disastrous.
It would immediately wipe out $133 million from F1’s revenue stream which in turn would reduce its underlying profit. This came to $1.17 billion in 2011 and the teams take home 63% of it as prize money. The teams’ contracts state that if the underlying profit falls below $715 million then Ferrari, McLaren and Red Bull Racing can pull out so putting a cap on the hosting fee could bring F1 perilously close to pushing out its best-known names.
Giving the teams equal rights may also seem logical but it is a sure-fire way of encouraging Ferrari to leave as it currently enjoys far more prize money and power than its rivals. If Ferrari left it could be a catalyst for F1’s collapse as it is the most renowned and longest-standing team in the series.
Other common complaints about F1 could also easily cause chaos if someone attempted to address them. Why not give the teams access to race footage and put it on streaming websites such as YouTube? Well, that would be a quick way of eroding the $488.9 million made from selling TV rights in 2011 as they would no longer be as exclusive. In turn, F1’s profits would drop and the door would begin to open for F1’s stars to exit. Putting race footage online may benefit fans but there is no direct financial benefit to the business from it.
To an 84 year-old the internet may seem like a fad so F1 has adopted a prudent strategy with it and not diluted its exclusivity to broadcasters. In turn the business has benefited from buoyant TV rights fees which are, after all, worth as much as someone is prepared to pay for them. It is this kind of visibility and prudence that comes with age. Some may see it as a limiting factor but Mr Ecclestone could well be around for a long time to come.
Stan Lee, the Marvel Entertainment producer who created characters such as Spiderman and the Hulk, is still going strong aged 92 and travels the world going to comics conventions and meetings. In comparison, Mr Ecclestone is a spring chicken.
