Monday, August 10, 2009

IndyCar Price and Market Value

Budget estimates for running a championship caliber, one-car IndyCar team for the 2009 season range from $7 million to $8 million. But the Republic wonders, what should it cost? The question draws opinions from team owners, sponsors, fans and IRL officials. But opinions don't really matter. The only valuation that counts is the one dictated by the free market. And, believe it or not, the market provides some surprisingly consistent estimates.

In finance, the relative value of assets - firms, securities, real estate - is derived from the market prices of similar assets. Because NASCAR (sans-culottes!) Cup and IndyCar operate in the same industry, have similar sources (not values) of revenues and costs, and rely on nearly identical supply chains, we shall use data from Cup to benchmark the market value of a top IndyCar team.

Previously, Roggespierre wrote wistfully of the day when corporations might choose to sponsor IndyCar racing for its own sake. Adjusting the cost of participation to its market value is something that must occur if that day is to come.

WARNING: This requires some very simple math.

According to Jayski.com, the first 21 races of the 2009 NASCAR Cup season attracted a total of 148.17 million U.S. television viewers. Comparatively, the Indianapolis Business Journal and others report that the first twelve races of the 2009 IndyCar Series attracted 10.37 million U.S. TV viewers. Note that our comparison does not include qualifying, special programs, and other events because the ratios would not change materially.

For both series, we divide total viewership by the number of races thus far in 2009 and get the numbers below.



  • Average NASCAR Cup event = 7.055 million viewers


  • Average IndyCar event = 0.864 million viewers
Next, we divide the viewership total for the average Cup race by the viewership total for the average IndyCar race. We learn that the value of the average NASCAR Cup event is 8.16 times greater than the value of the average IndyCar event. This is a key data point for advertisers that purchase on a strict cost-per-thousand basis. Another way of demonstrating the difference in market value is to say that the average IndyCar race is worth 12.25 percent of the average NASCAR Cup race.

As Danton often jokes when washing down stewed tortoise with a rancid Burgundy while lunching at the Jacobins, just you wait. It can get worse.

And indeed it does, as we have not yet accounted for the fact that NASCAR Cup runs twice as many races as the Indy cars. This factor must be included because we are seeking the market value of running a one-car IndyCar team for an entire season.

NASCAR Cup: 7.055 million viewers * 34 events = 225.760 million viewers
IndyCar: 0.864 million viewers * 17 events = 14.688 million viewers*

*IndyCar is positively skewed by a favorable deviation due to the Indy 500. If we were to calculate the averages at season's end, then the IndyCar numbers would likely be worse.

We are now ready to calculate our relative valuation rate. We divide projected IndyCar season viewership by projected NASCAR Cup season viewership.

14.688 million IndyCar viewers / 225.760 million NASCAR Cup viewers = .06506

The market, as a function of U.S. television viewership, values a championship caliber, full-season IndyCar team at approximately 6.51% of the total value of a similar NASCAR Cup team. We rounded up.

Budgets for top NASCAR Cup teams are estimated to be between $18 million and $20 million per season. Having determined relative market value at 6.51%, we know that the correctly priced operating budget for a top IndyCar team for the season is approximately $1,302,000.

That is how much a championship-caliber IndyCar team should cost given its market value. In the present cost structure, $1.302 million is enough to cover the season engine lease and three front wing assemblies. You still need a chassis, tires, gearbox, crew, driver, race shop, travel & lodging, hauler and someone to drive it, components and replacement parts.

Available data regarding title sponsorship for the series suggest that our relative valuation is very much in the ballpark. NASCAR Cup's deal with Sprint Nextel is estimated to be worth $700 million over ten years, or approximately $70 million per season. Using our 6.51% relative valuation rate, we estimate that the market price for title sponsorship of the IndyCar Series is $4.557 million per season. Using this figure, we can say with some confidence that John Menard's offer of less than $4 million per year for title sponsorship is a bit low. Conversely, Terry Angstadt's asking price of $8 million to $9 million per year is too high.

Perhaps this explains why title sponsorship is so elusive. The IRL has no doubt turned down its share of low-ball offers. But the market value of the IndyCar product is considerably less than the asking price.

We might also better understand why so many corporations prefer to sponsor NASCAR Cup teams for three or four races rather than back an IndyCar team for the entire season. Given the cost per thousand calculations, a standard metric in the advertising industry, part-time sponsorship of a Cup car remains a significantly better value.

Finally, we can deduce some hints about the "technology vs. cost" argument that is beginning to perk and boil again as anticipation builds the for new IndyCar technical specifications. The Penske and Ganassi teams have every incentive to prevent market value from entering the equation that determines new specs. Teams that have sponsorship to support annual budgets of $7 million to $8 million per car gain nothing if teams with $1 million budgets are able to compete with them for sponsors and race wins.

Citizens are advised to keep this in mind the next time Target Ganassi Racing Managing Director Mike Hull proclaims that the future of IndyCar racing is best secured with high-tech race cars. Although it is true that Hull and his employer are well served by expensive technology - which, by the way, is not the same thing as innovation - it does not necessarily follow that all IndyCar stakeholders stand to gain from a high-tech approach.

Indexing the cost of entry to market value will not solve all of IndyCar racing's challenges. But it will address many of the bigger ones. The Republic hopes that IRL management has the necessary courage and discipline to make it happen.

Roggespierre

21 comments:

  1. The IRL needs to run, not walk, in the direction of maximum cost savings. There are 110 cars and drivers attempting to qualify for the Knoxville Nationals starting on Wednesday. This is what the IRL needs to shoot for. They need to develop a technical package where the purse covers the cost to show up... and the sponsorship is gravy.

    Mike Hull could not be more wrong. What is needed is a cheap, fast car... not an incredibly expensive too fast car.

    The technology on a current IRL is capable of allowing a 240 mph lap at Indy... when a 210 mph lap is all that is needed.

    This effects everything the IRL does. The sanctioning fees are too high, so the ticket prices are too high and the sponsorship costs are too high because the cars cost too much to buy and operate.

    My understanding is a Honda engine lease is $800K per 17 race season. THAT IS $47,000 per race! For 650HP! WHAT?!

    You could buy a 638 HP Corvette C6 ZR1, yank the engine out of it and put it in an Indycar. After the third race, you could THROW AWAY THE ENTIRE CAR and start over. If you did this for an entire Indycar season, you would end up SAVING OVER $100,000 vs. a current Honda lease!

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  2. The basic premise of your analysis is spot on. Since I sponsored an IndyCar program from 1996 through 2000, I was always surprised at the pitch of race teams. Typical pitch: a cookie-cutter "ladder" of various levels of signage, personal appearances, and show car usage based on the amount of sponsorship. The other component was a sheet of Joyce Julius numbers trying to convince me of the tremendous value my company received for our logo being visible during broadcasts - as if I couldn't just produce an ad and buy a better targeted time myself or pour the resource into a different medium entirely. Perhaps it has changed by now, but during that period I saw several pitches, and that's what I got. We did NOT use the program as a marketing platform - we used it as a sales platform. I kept wondering why the series and the teams did not sell it like this, other than most sports marketing types are fascinated with stamping their cookie cutters. Bottom line: the IRL, managed well, is a SALES platform, not a marketing platform. It is a great place to entertain clients and build brand imagery around offering associated with attributes such as speed and technology. And you know what? As a sales platform the IRL is VERY competitive with NASCAR.

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  3. Anonymous - what you say is true, and Roggespierre can think of some recent examples. Hewlett-Packard enjoyed some significant sales success due to its participation in the 2008 Indy 500 with Davey Hamilton and Vision Racing. In addition, the story of Her Energy increasing its distribution in the midwest due to its deal with Chip Ganassi, Sam Schmidt and Alex Lloyd at Indy this year should have been distributed by the IRL to every sales organization in the Rolodex.

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  4. Try posting this on the INDYCAR NATION website. People need to understand why you can't many competitors when the cost vs. return is considerably out of whack with other business. Well written!

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  5. Anonymous,

    Thanks for your comment. We shall check out the site you suggest.

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  6. Please refer to me as Oldwrench, as a former racing mechanic, who participates at the formentioned website suggested. Please read thru some of the threads I have posted pertaining to not only car setups, but the cost factor of racing. Like yourself, I know that back in the late 70's-early 80's you could make a Indy Car pay for itself. Many fail to understand that it is the cost of entry into any business that keeps small companies or individuals out. If one can not make a business pay for itself in relatively short order, it will exit as quickly as it entered. The real value of any business is providing "value" of a product or service at competitive price. It is why McDonalds is tough to beat. It keeps it costs under control and makes it diffcult for others to compete or enter the market. It simply provides product, service and quality at a price few can provide. If Indycar can do the same, it would effectively dismantle the NASCAR empire. I believe that we refer to that as " more bang for the buck." Lower the cost of entry and watch the cars come rolling to the qualifying line.

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  7. Oldwrench,

    I tried to sign up for the website you suggested. My application notice was never mailed to me.

    Your statements regarding cost and business are well conceived. You might be interested in some of my early posts - back when I had about five readers per day.

    The "Glory Days" series, in three parts, covers much of what you're talking about. The last innovative car at Indy was Jim Hall's Chaparral. George Bignotti turned Robin Herd's P.O.S F1 March into a race car, Herd figured out how to mass-produce it, and that was that. Since then, we have witnessed increasingly costly refinements and very little in the way of real innovation.

    Thanks for writing. And thank you for your personal contributions to the Greatest Race in the World.

    Roggespierre

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  8. Your math seems right, but the "team" numbers for Nascar are actually the budget cost per car. For example, Rick Hendrick's organization is made up of 4 "teams", each of which has a budget of $20-30 million dollars. The operating cost of the entire organization is well over $100 million dollars.

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  9. Also, Joyce Julius & Associates came up with a different valuation on ROI, based upon the amount of media coverage received by the sponsor.

    http://www.indy.com/posts/study-quantifies-return-on-indycar-series-sponsorship

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  10. Jeff,

    The numbers you provide from JJ are from 2008. Mine are projected 2009 ROI.

    In addition, most ad analysts I know are MBAs who do their own numbers. Stuff like "mentions" are fluff - something for the footnotes when they make their recommendations.

    I'm not saying that all are like that, just some that I have had occasion to work with.

    Recall, as well, that Paul Tracy told Robin Miller last year that Monster told him the IRL ratings were valued at $1.x million. I only recently learned of this.

    Therefore, I am comfortable with my valuations.

    As for the "team" numbers, remember that my numbers are for a single-car on a championship caliber team. I understand that there isn't such a thing in NASCAR anymore, but it's much easier to do the math using one-to-one comparisons. I pulled the $20 million figure from a USA Today article because I have no real inside sources in NASCAR.

    Thank you for reading and contributing!

    Best,

    Roggespierre

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  11. What are the current IRL teams telling their sponsors who are forking out 6M for a 1.3M sponsorship and only getting .24 rating on VS?

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