Sponsorship drought sends F1 into a spin

From telecoms to tobacco, the sport's sources of finance are drying up, and not all teams will survive

The Formula One corporate hospitality machine cranks up into top gear this weekend for the Hungarian Grand Prix, where team sponsors will be plied with as much champagne and canapés as they can consume.

But behind the carefully erected displays depicting past F1 glories and photographs of cars brandishing the sponsors' logos, the team bosses are in a spin.

Sponsorship money, which makes up around 70 per cent of a team's multi-million pound budget, is running dry.

Mid-August is traditionally the time when the teams hit the phones to seek out fresh sponsors for next season. But many calls aren't being returned. Potential sponsors, hit by the slowdown in the economy, are cutting costs. While F1 sponsorship has been proven to be one of the most cost-effective forms of marketing, justifying upwards of £6m investment to the board – never mind shareholders – isn't easy.

"It's going to be a very tough winter," says Jim Wright, commercial director of Williams F1.

"Any sponsor that's not already signed up will be very difficult to hang on to."

The Oxfordshire-based team is itself searching for a replacement for WorldCom, the collapsed telecoms company. But Williams is a top-tier F1 team. Along with Ferrari and McLaren, it can command the highest rates, secure sponsors that will provide valuable resources – such as BMW engines and HP computers – and receive maximum television exposure.

Further down the field, the sponsorship drought could put some teams out of business.

"It will inevitably hit the weaker teams," says David Richards, team principal of BAR, owned by cigarette company British American Tobacco, its major sponsor. "The smaller teams that negotiate contracts on a yearly basis will really feel the brunt of it."

Jordan F1, owned by Irishman Eddie Jordan, is one team that may struggle. Although its sponsors are usually tied in for at least three years, the company's two main backers – Benson & Hedges and DHL – have options to end their relationship with the team next year.

"It's never easy – even in the buoyant times – to persuade people to part with large sums of money," says Ian Phillips, the team's commercial director. "But we wouldn't normally be in a situation where 65 per cent of our sponsorship budget is on options in the same year. Such is life."

Mr Phillips argues that despite the downturn in the market, the difference between 2002 and 2003 may not be that great because money was diverted from F1 this year as a result of the football World Cup.

Already, the economic downturn has claimed its first victim: Prost, the team founded by former world champion driver Alan Prost.

Now, Orange Arrows, fronted by Tom Walkinshaw, is facing extinction and won't compete this weekend for a second consecutive race.

The situation is exacerbated by the collapse of the Kirch media group, which owns the rights to the sport, and a threatened F1 breakaway led by DaimlerChrysler (backers of McLaren), BMW (Williams' partners), Fiat (which owns Ferrari), Renault and Ford (which owns Jaguar). Both events have destabilised what was once a rock-solid sport.

"Sponsors are using this as an excuse to defer decisions or reduce rates. This is not beneficial to the sport," says BAR's Mr Richards.

On top of this, the 2002 season has been one of the most one-sided competitions in years, with Ferrari driver Michael Schumacher securing the world championship in record time. This was aided by the Maranello-based company's "team orders" that forced its No 2 driver, Rubens Barracello, to move over in the Austrian Grand Prix to give Schumacher first place. The move was greeted by boos from fans and outrage from commentators.

Richard Gillis, editor of Sport Business International magazine, says: "There is a close link between the behaviour of the sponsors and the response from the fans. We are seeing a number of negative clouds on the Formula One horizon. If you are a potential sponsor then you have to make a medium-term commitment to the sport. But the future of the sport is far from certain."

While there is little that the people running the sport can do to about Ferrari's dominance, team bosses would like to see F1 supremo Bernie Ecclestone do more to fight their corner.

A growing issue is the relative failure of pay-per-view digital broadcasting. Sky's service, for example, which costs £12 for a weekend's programming, has attracted peak audiences of just 25,000. Mr Ecclestone, owner of the broadcasting rights, has given digital television the lion's share of in-car camera footage and live action from the pits. Most F1 fans, however, still tune into terrestrial television, such as ITV, which attracts an audience of around 3 million.

Williams's Mr Wright says: "F1 as an industry needs to say that digital hasn't worked. The audience is tiny. We need to get onboard cameras back on terrestrial television. F1 needs to be competitive. We're up against other sports for marketing spend.

"Ecclestone has done an outstanding job, but that doesn't mean to say that there's no room for improvement."

Further down the road, tobacco sponsorship could become a potential ticking time bomb for F1. At the end of the 2006 season there will be an EU-wide ban on F1 cigarette sponsorship.

According to FIA, the F1 governing body, tobacco sponsorship brings £350m-a-year into the sport.

Some teams, such as Williams, have weaned themselves off the weed. But nearly half the paddock is still hooked. Philip Morris (Marlboro) sponsors Ferrari; British American Tobacco (Lucky Strike) owns BAR; Gallaher (Benson & Hedges) is Jordan's sponsor; Reemtsma (West) sponsors McLaren; and Japan Tobacco (Mild Seven) is Renault's sponsor.

When the ban was first announced, the telecoms sector was hailed as its future replacement. Vodafone sponsored Ferrari, Orange signed up with Arrows, WorldCom became a Williams sponsor and Marconi sponsored the Benetton team, which was last year bought by Renault. Of these deals only the Vodafone name is certain to be plastered over a F1 car next season.

So, as each team's army of corporate guests enjoy today's action at the Hungaroring, many had better make the most of it, as it may be the last time they are able to watch the race from the executive sets.