JANUARY 23, 2006
The economics of grandstands
Making a Formula 1 Grand Prix into a financial success seems to be a bit of a problem for promoters around the world. Many of the races make a loss and promoters complain about the cost of hosting the event. The big problem seems to be the annual fees demanded by the Formula One group for the right to hold an event. This, coupled with the rights than must be signed away, means that in a lot of cases the only source of revenue left to the promoter is the sale of tickets to the general public. The problem is one of demand. If tickets cost too much money or access is difficult and facilities poor, people will not pay to attend the races. The Indianapolis Motor Speedway, the world's largest sports stadium, boasts around 250,000 seats. This means that ticket prices can be kept low. If ticket prices are kept to $100 and the seats are full the speedway can make a decent profit but the problem is that Formula 1 is not currently a big draw in the United States. The Indianapolis 500 and Brickyard 400 races attract big crowds (which can be as big as 400,000 when one includes the infield) and these generate considerable income for the circuit. Ticket prices stay low and fans do not not have to be passionate about F1 to be willing to afford to go to the races. In many respects, Indianapolis has it easy. The only other stadium in the same league in F1 terms is the new Shanghai International Circuit which boasts 200,000 seats. This cost the local government several hundred million dollars to build (in a country where labour is cheap) and it will be many years (if ever) before the circuit starts to generate profits.
Most of the European circuits can only dream of such facilities. According to www.worldstadiums.com, the biggest seating capacity of a European race track is currently the Nurburging. This has 150,000 seats. Hockenheim boasts 120,000. And yet both venues are struggling to make their Grands Prix financially viable. Smaller circuits such as Silverstone with seating capacity for only 60,000 are in a worse position because while they generate enough to pay for the race fees they do make enough money to be able to invest in new seating. What money there is must be used to keep the F1 authorities happy as circuits are regularly being told to upgrade the tracks for safety and to keep up with the big new government-funded tracks.
It is interesting to note that there are many more big speedways in the United States of America than there are in Europe. This is because the structure of race funding is very different and tracks do not have to worry so much about race fees. The result is that American circuits can invest in more comfortable facilities for the public. The NASCAR tracks at Daytona (168,000 seats), Lowe's Motor Speedway (167 000), Bristol Motor Speedway (160 000), Texas Motor Speedway (154,861), Talladega Superspeedway (143 000), Dover International Speedway (140 000), Las Vegas Motor Speedway (140 000) and Michigan International Speedway (136 373) have all managed to keep ticket prices to a level (around $100) so that the grandstands are always filled when the big races are on. An attempt to build a similar facility in England, the 130,000-seater stadium at Rockingham, has not been a great success as interest in oval racing in Britain is not sufficiently developed to attract big crowds. Profits are not directly linked to the number of seats available because you need people to fill the seats.
And this is the downside of the big speedways. Race tracks can be used almost every day to generate money from testing, launches and so on but during these the grandstands usually sit empty. There may be potential for multi-use activities such as exhibition centres and conventions but such facilities have not yet been developed on a widespread scale. That is now beginning to happen in the United States where some race tracks are building shopping malls to generate money at all times.
If they are not used on a regular basis, grandstands are not very productive. They cost money with local authorities demanding ground rents, taxes and of course there is the cost of the upkeep. The bigger the facility the more it costs.
This is why some racing circuits have worked out that the cheapest way thing to do is to erect temporary grandstands each year when the races are coming to town. This is time-consuming and expensive but still cheaper than building and maintaining permanent facilities.
Building grandstands is an expensive business depending on how plush the facility is going to be. Constructing luxury suites which can be rented out for other activities around the year is an obvious thing to do but that increases costs considerably compared to basic seats in the open air. Last year The Indianapolis Star newspaper did a very interesting article looking at what it would cost to replicate the Speedway. The conclusion was that the project would cost around $700m assuming one could find such a large tract of available land in an urban location. The newspaper worked out that building the grandstands and VIP suites alone would set one back $130m.
It was interesting to note that Speedway owner Tony George when asked about the costs said that it was simply a function of the number of seats one wanted to have and added that if he was building the Speedway from scratch he might not have as many seats as it has today.
When all is said and done, however, the big problem for Formula 1 is that too much money is going to the race fees and not enough is being spent on the facilities. And where there are already huge facilities it is in places where interest in F1 is either in its formative stages or not very strong at all. Perhaps one day the people of Malaysia, Bahrain and Indianapolis will fill the grandstands and bring down the costs but it still hard to see how the European circuits can expand their crowd capacity without a local hero getting people excited (as in Spain at the moment) or without government help.
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