F1 is the world’s most valuable annual sport. At the start of this year’s season in March, a report we wrote with accountancy firm Deloitte revealed that F1 boasts the highest revenue-generating events of any annual sport, with each of its 18 grands prix last year netting an average of $217m. Its closest competitor is the National Football League (NFL), with per game values of $24m. Lagging behind are the UK Premier League with $8m a match and Major League Baseball (MLB) at $2m a game.

Because it hosts significantly fewer events than the other sports in the report, comparing total revenue levels paints a slightly different picture. Global revenues of $6.5bn give the NFL the world’s highest sports income, followed by the MLB’s total of $5.1bn. F1’s $4.3bn total revenues ahead of the Premier League’s $3bn.

Still, F1 has come a long way in the past 20 years – in 1988 it brought in only about $3m a race. The challenge is keeping it going.

The powerhouse behind F1’s finances is its carmakers. Six major car companies – Ferrari, BMW, Mercedes, Renault, Honda and Toyota – own an F1 team and spend between $60m and $300m annually on the sport. Together, their finance puts more fuel in F1’s tank than any other single source. The bulk of their contribution comes in the form of as many as 80 engines and technical support to their teams.

Few of the outfits backed by carmakers actually receive cash from their automotive backers, but with budgets for each of the 11 teams averaging $254m, they all need big benefactors. These come in the form of blue-chip businesses. Last year, 97 companies paid a total of $834m to get exposure on F1 cars.

Despite the ban on tobacco sponsorship, Marlboro still sits at the top of the sponsorship tree and paid Ferrari $100m last year alone. However, all other cigarette companies reversed out of the sport, leaving open many sponsorship slots that were taken by big-spending banks.

After Marlboro, the Dutch financial services company ING is F1’s second biggest spender, paying an estimated $65m annually to Renault.

Another financial company, Spain’s Santander, joined last year and could not have picked a better-fitting team. The company is the sport’s 10th biggest-spending sponsor, giving an estimated $20m annually to McLaren. The team’s Spanish superstar driver, Fernando Alonso, finished third in the World Championship and his renowned rivalry with team-mate Lewis Hamilton gave McLaren great coverage throughout the season. Likewise, having Hamilton as its face in the UK was invaluable to the company during the process of re-branding its Abbey subsidiary.

“A global sponsorship such as the McLaren team in F1 is a way to leverage the single brand in the 40 markets where Santander operates that wasn’t possible before,” says Juan Manuel Cendoya, Santander’s director of corporate communications. And the results showed. Awareness of Santander in the UK accelerated from 20 per cent to 70 per cent at the end of the year and the company milked its F1 involvement for all it was worth.

In addition to the deal itself, Santander spends tens of millions of dollars on further sponsorships such as trackside advertising at F1 races and partnering F1 events. Last year, for example, it installed life-sized cardboard cut-outs of Hamilton in each of its 705 branches in the UK. Such was their popularity that as many as half went missing.

“On the right team and in the right circumstances, a client’s brand registration may far outweigh (in terms of the number of seconds his logo is on-screen) any paid-for media,” says Williams’ head of marketing Scott Garrett. Team and driver sponsorship offers companies the closest emotional connection with F1 and the highest image transfer, although awareness can be erratic. If a car crashes out of a race, for example, it can be the worst-case scenario for sponsors since their logos disappear from the track for the rest of that day.

Unsurprisingly, the higher the cost, the greater the exposure. Generally speaking, the rear wing, airbox and sidepods are prime logo positions on a car and a sponsorship deal with a top team involving any one of these locations is likely to cost about $25m. At the lower end of the spectrum, small logos are often found on the bottom of the sidepods and these can be bought for as little as $3m, the amount that Swedish ball-bearing maker SKF pays Ferrari. But, bearing in mind that these are annual figures, the total deal cost can be much greater, since three years is considered the minimum timeframe to make sponsorship viable.

There is no doubt that the overall draw of an association with F1, and particularly a top team, is the sheer scale of the global audience. According to figures from the sport’s rights holder, the F1 Group, it is followed by 588m unique viewers, making F1 the world’s most-watched annual sporting event.

Some of the most savvy sponsors are involved for more than just the eyeballs watching the sport. Unlike many other sports, most F1 sponsors can have a real impact on the team’s success by providing products at the cutting edge of their fields. It is no coincidence that most of the teams refer to having “partners” rather than “sponsors”, because their involvement can extend way beyond slapping a sticker on a car. And, accordingly, the sectors that contribute the three largest sponsorship sums to the sport are telecoms and technology, financial services and oil – all of which are crucial to the running of an F1 team.

As Garrett explains, “F1 presents a great opportunity to test and develop new products in the ultimate torture-test environment.”

Watch company TAG Heuer, for example, which has been a partner of McLaren for more than 20 years, gives prototype watches to the team’s drivers to wear during races, thus submitting them to extreme G-forces, vibrations and shocks. It is a strategy that bears fruit.

The case of TAG’s Kirium models is made from grade-five titanium, which is much lighter than steel but more scratch-resistant, and shines like white gold. It is a material borrowed from F1 cars, where it is used in accelerator pedals, gearboxes and parts of the transmission. TAG’s chief executive Jean-Christophe Babin says that in return, TAG provides “timing systems for some private testings, and, obviously, watches and chronographs to all McLaren team members.”

Garrett explains that while industry fit may bring sponsors to F1, collaboration is the key to getting the best results once they are there. “At Williams, our commercial proposition is founded on the principle of community and the clear expectation that our partners will enjoy being with each other and working together for their mutual benefit, as well as ours. Partners that embrace these principles make the best partners because they are likely to be in it for the long haul and for the same or similar reasons.”

With some of the world’s most respected brands – such as Accenture, Allianz, RBS and Reuters – adorning the Williams car, it has a partnership portfolio to be envied. The team owes its survival to them.

But in spite of all the sponsorship, most F1 teams have seen their profits plummet. In 2006, Williams made a $55m after-tax loss, down from a $58m profit the year before, as turnover dropped 30.6 per cent to $115m. The team used its retained earnings

from previous years to support its expenditure, with its cash in the bank dwindling from $41m to just $60,000. It needed every last drop of sponsorship fuel.

Even F1 giants Renault and McLaren have made massive losses. A lack of title sponsor in 2006 contributed to McLaren’s turnover tumbling by $5.9m to $197m and leaving it with an after-tax loss of $6.7m. Renault’s after-tax loss of $3.9m in 2006 came despite winning back-to-back world championships. The team’s turnover in 2006 increased 10 per cent to $260m on the back of increased sponsorship, but its costs accelerated even faster.

Winning eight races is likely to have put a burden on Renault’s balance sheet, since the drivers are believed to get performance-related bonuses and Fernando Alonso alone was believed to be receiving a salary of $11.8m. In fact, the only UK-based F1 team to show a profit in its latest results is Red Bull Racing, which made just $1.5m on turnover of $211m.

There are two main reasons for the teams’ precarious finances. Until last year, their only share of F1’s spoils was 47 per cent of the previous year’s television revenues, split between them according to their success. This changed in 2006 when the car manufacturers participating in F1 signed a Memorandum of Understanding (MOU) with the sport’s majority owner, private equity firm CVC.

Under the MOU, the teams double their income from F1 through their share of an annual payment amounting to 50 per cent of the underlying profits from all revenues, including the annual estimated $140m from corporate hospitality, $164m from trackside advertising and $329m from race hosting fees. By cutting this new deal, CVC averted a potentially ruinous split in F1 – for the previous five years, the carmakers had threatened to quit the sport if their share of the spoils did not increase – and this immediately boosted the sport’s value.

CVC’s own profits were hit when it acquired F1’s rightsholder for $1.7bn in a leveraged buyout in 2005. Making annual debt repayments of $220m to service the loan it used to buy the business has sent F1’s profits crashing from $313m down to just $6m as well. New payments to the teams under the MOU only began at the end of last year, so they have yet to make a positive impact on their balance sheets.

Another reason that most teams are in the red is the colossal cost of being in F1. Even with engine expenses covered, a typical manufacturer-backed team spends about $215m. Expenditure on team operations, travel, entertainment and marketing is almost equal to staff costs, and together they total about $120m.

The remaining $95m is spent on producing the cars. Few of the 9,000 components that comprise an F1 car are off the shelf. The driver’s seat is anatomically crafted to suit the contours of the driver’s body and even the steering wheel is far from average, costing a cool $25,000. Costs spiralled so high that the sport’s governing body, the International Automobile Federation (FIA), froze the engine specification of 2.4 litre V8s until 2010 but it has not stopped the spending.

The car companies work so far in advance that they are already developing engines for after 2010 and are also diverting their vast resources into exploring other ways to make the car go quicker.

The last resort is a budget cap, which the FIA has discussed with the teams. But when the shareholders are happy to run their teams at a loss in the pursuit of success one wonders whether burning money may not have become inherent to F1.

THE NUMBERS

Total number of F1 sponsors: 310

Sponsorship values:

On-car sponsors by team

Ferrari $183m

McLaren $153m

Renault $102m

Williams $100m

BMW-Sauber $94m

Toyota $86m

Red Bull $15m

Honda $2.6m

Toro Rosso $0.8m

Off-car sponsors by team

Ferrari $17m

Honda $11m

McLaren $10.5m

Renault $10m

BMW-Sauber $8m

Williams$2.5m

Toyota $2m

Red Bull $2m

Toro Rosso $1m

Biggest spending team

Sponsors

Marlboro $100m Ferrari

Vodafone $65m McLaren

ING $65m Renault

Honda $60m Super Aguri**

Petronas $40m BMW-Sauber

Panasonic $55m Toyota

Shell $35m Ferrari

AT&T $25m Williams

Intel $25m BMW-Sauber

Elf $20m Renault

Sector split of on-car partners by value

Telecoms & technology $252m

Financial services $128m

Oil $125.2m

Automotive & engineering $116.35m

Tobacco $100m

Travel $25m

Beverages $24.5m

Fashion & grooming $20.6m

Other $41.6m

*All figures 2007

**No longer racing in F1

Data provided by www.formulamoney.com