Saturday, August 15, 2009

IndyCar Arbitrage: The Emerging Strategy

Typically, if you pay $7 for something that is valued in the marketplace at $1.30, then you lose money and look pretty stupid in the process. But what if you could simultaneously sell the same product in another market for $10? Now you've made $3 risk-free and your friends think you're a genius. This is arbitrage, and it is the emerging strategy to finance the Indy Racing League and its suppliers of racing teams.

For those who are familiar with finance, we note that this is proximate, rather than pure, arbitrage. For everyone else, the technical difference does not matter.

We have established that the value generated by a championship-caliber, one-car IndyCar team over the course of a 17-race season is approximately $1.3 million. Published reports suggest that the actual price of such an effort is in the range of $7 million to $8 million. So, using these numbers we can assume that the Penske and Ganassi teams incur costs of $7 million per car each year so that they may operate racing teams that are in fact worth $1.3 million. The astute observer will argue - correctly - that Roger Penske and Chip Ganassi do not seem like men who would tolerate losing $5.7 million annually per car.

Team Penske - Abnormal Returns and Market Inefficiency

Roger Penske is not an arbitrageur with regard to his racing operation. Team Penske is financed primarily by sponsorship revenue from the Phillip Morris USA division of Altria Group, maker of Marlboro and other brands of cigarettes. Phillip Morris is subject to severe advertising restrictions enumerated in the Master Settlement Agreement between cigarette manufacturers and states attorneys general.

Unable to advertise anywhere else, Phillip Morris apparently discovered a loophole with Team Penske. The IndyCar Series therefore does not have to compete with more popular media for Phillip Morris's advertising dollars. Its relative value to Phillip Morris USA is significantly greater than it would be for any other sponsor. Penske is thus able to collect, we shall estimate here, $10 million annually per car from Phillip Morris.

Thus, the equation: Penske incurs costs of $7 million for a product that is worth $1.3 million. Then, for all intents and purposes, he sells the same product to Phillip Morris USA for $10 million. Penske can keep $3 million for himself or distribute it to loyal employees (our guess is the latter - he doesn't need the money, and there's a reason employees stay at Team Penske.)

Penske collects abnormal returns because Phillip Morris USA paid him $10 million for a product that costs him $7 million and would be worth $1.3 million to any other firm. This is not arbitrage, but rather a market inefficiency. Advertising via IndyCar racing truly is worth $10 million to Phillip Morris's Marlboro brand because its paint scheme (we don't say livery here) is iconic, and because its only other alternative is to not advertise at all.

Target Chip Ganassi Racing: Sponsorship by Arbitrage

Chip Ganassi, on the other hand, is fully engaged in arbitrage. Like Penske, he incurs costs of $7 million per car annually in order to operate a racing team that is worth $1.3 million. Chip Ganassi's sponsors do not believe that advertising via IndyCar racing is worth $7 million per car, per season. That is why the bulk of Ganassi's sponsors in fact pay for consideration that not only has nothing to do with consumer demand for IndyCar racing, but also is of far greater value than IndyCar racing in its present form could hope to be. Most of Ganassi's sponsors are, in effect, using his racing team to purchase a product in a different market altogether.

Associate sponsors such as Tom Tom, Polaroid, Vaseline and Energizer receive concessions from Target Stores in exchange for the money that finances operations at Target Chip Ganassi Racing. Retailers are prevented from receiving kick-backs in exchange for shelf space. The money that goes to Ganassi is more like a kick-aside, but we prefer to call it supply chain leverage. Having incurred costs of $7 million to produce a racing product that is worth $1.3 million, Ganassi then extracts $10 million from the supply chain leveraging activities of Target and its suppliers. Andretti Green Racing has a similar but less lucrative program in place with 7-Eleven, just as Sarah Fisher Racing does with Dollar General Stores. Newman Haas Lanigan leverages Newman's Own products to get funding from McDonald's. Except for Phillip Morris USA and Danica Patrick's backers, IndyCar teams owe virtually all of their financing to supply chain arbitrage.

Notice, however, that arbitrage is strictly a financial engineering activity. No real value has been added to the racing product. No additional fans bought tickets. Television ratings did not increase. In essence, this financial structure eliminates the need for market acceptance of the racing product. Multiply the Ganassi example many times over, and you will begin to understand why CART was unable to land a decent television package despite its armada of high-profile sponsors. That CART was exquisitely financed is undeniably true. That it was something more than a niche sport in the competitive marketplace is not. Many of CART's more lucrative "sponsorships" were generated via supply chain arbitrage. The respective companies signed on for reasons that had nothing to do with consumer demand for CART's racing product.

The Emerging Strategy

This is the path that the IRL is now following. This is the strategy. It won't make IndyCar racing competitive in the marketplace, but that is not the intent. Supply chain arbitrage is the easiest and fastest way for IRL management to generate risk-free returns that will look good to the IMS Board. Supply chain arbitrage will prevent additional heads from rolling across Gasoline Alley. Supply chain arbitrage will pacify teams that are feared by IRL management. Supply chain arbitrage will allow the participants to do the kind of racing they want to do, even if there is virtually no consumer demand for it.

Supply chain arbitrage is a scourge that could threaten the very existence of the Indianapolis 500 Mile Race.

Supply chain arbitrage robbed the Indy 500 of the Texaco Star. It felled Team Valvoline, priced Hardees' out of Indy car racing, and eliminated the Budweiser car at Indy. Supply chain arbitrage was and is faux sponsorship that enables team owners to spend beyond the value of the product they produce. The underlying assets happen to be Indy car teams and events, but they could be professional Parchesi and hot dog-eating contests, and it would not matter. It is the derivative - the leveraged supply chain - that counts.

Welcome to IndyCarbitrage**

We thought this royal scourge to be dead, but now the serpent is slithering back to the house that Carl Fisher built and Tony Hulman saved. Bonaparte's name is APEX Brasil, a behemoth that exists for one purpose: to extend Brazil's industrial supply chain in the United States. Is there any doubt that Terry Angstadt is now a double-agent, a salesman for both the IRL and APEX Brasil? His racing product has almost no value, but the teams will have his head if he doesn't give them high-tech, high-cost racing. He must construct an artifice, and the best tool in his toolkit is supply chain arbitrage, courtesy of Apex Brasil!

And, by God, it just might work. If you want an IndyCar Series that honors consumer demand, one that creates real value, then you had better hope for a severe devaluation of the dollar (likely, in time) or a flurry of hostile takeovers.

A devaluation would slay the behemoth APEX Brasil. Takeovers would handle the rest. Why? Because supply chain arbitrage has an Achilles' heel. It is laden with hidden costs! The marketing kids must be in the hospitality tent, drunk and hitting on pole-sitters, when they sign off on these stink bombs! Following hostile takeovers, the pros take charge, evaluate the contracts, and the entire artifice dissolves. Who knew that there is no such thing as a racing team that is paid for by nobody?

If allowed to reach its logical conclusion, supply chain arbitrage will turn the Indy 500 into a bad imitation of the US Grand Prix: half-filled grandstands, a minuscule television audience, drivers known to no one. But the IRL will be profitable. The teams will be sufficiently financed to do the kind of racing they like, consumers be damned.

Louis lost his head, that he be replaced by Bonaparte.

And, finally, the guillotine blade shall come down, bringing a once undeniably awesome institution to its merciful end.

Show them my head - it's worth it!

Roggespierre - (closing by Georges-Jacques Danton)

**Apologies to Dr. Jack Badofsky

Friday, August 14, 2009

IndyCar Scourge - The Leveraged Supply Chain

IndyCar is hip to the streets of Baltimore. Therefore, the Republic quotes a Charm City native son as we revisit the past so that we might anticipate the future.

"Same as it ever was." - David Byrne
  • 1990 - Indy loses the Texaco Star. Texaco enters a leveraged supply-chain agreement with Kmart, increasing funding to Newman Haas Racing but robbing Indy car racing of a long-time entry. Texaco continues its primary sponsorship of Robert Yates' #28 Ford in NASCAR.

  • 1994 - Hardees' goes south. Priced out of IndyCar racing by numerous leveraged supply chain deals, the quick-serve chain reallocates all of its racing budget to NASCAR.

  • 1994 - Team Valvoline is disbanded. Two years after winning at Indy as primary sponsor for Al Unser, Jr. and Galles Racing, Valvoline enters into a leveraged supply chain agreement with Cummins Diesel and Walker Racing. Valvoline continues primary sponsorship of Jack Roush's #6 Ford in NASCAR.

  • 1995 - Budweiser dethroned. The world's top sports advertising brand abandons Indy car primary sponsorship. It strikes a leveraged supply chain deal with Kmart, increasing funding to Newman Haas Racing while subtracting another entry from the series. Budweiser continues primary sponsorship of Rick Hendrick's #25 Chevrolet in NASCAR.
The emerging strategy is one that we have seen before. The Committee on Public Safety trusts that citizens know the difference between an enterprise that is well capitalized and one that possesses a product that consumers actually want. Leveraged supply chains funnel money to racing teams and promoters. Leveraged supply chains do not create demand for the racing product.

That is why certain IndyCar participants love them.

We witness our future in our past.


IRL IndyCar: To Compete or Not Compete?

We have established that the U.S. market for auto racing products that feature American drivers, low-tech cars, and almost exclusively oval tracks is far more attractive than its alternative. Managers at firms the world over routinely conduct similar analysis upon which they base strategic decisions. We'll use the U.S. market for energy drinks as an example before returning to the matter at hand.

Energy Drinks: Textbook Competition

Red Bull demonstrated that abundant demand exists among U.S. consumers for sweet, uniquely packaged, carbonated beverages that contain multiple stimulants, the names of which all apparently end with the "-ine" suffix. As any economist would have anticipated, shelves at U.S. convenience stores were subsequently inundated with similar, cheaper products from firms that hoped to capture market share from Red Bull. Brands such as Monster and Rockstar were successful.

The Case of NASCAR

Like Red Bull, NASCAR (sans-culottes!) is the dominant market leader in its industry. As such, NASCAR commands premium prices not only for itself, but also for its drivers, teams and promoters. Unlike Red Bull, NASCAR operates in an industry that is not particularly attractive to potential new competitors because entry requires substantial capital investment, as well as development of an intricate supply chain. Prospective new entrants are therefore kept out. There will be no Monster and no Rockstar to swipe market share from NASCAR.

The only existing firm possessing the resources to do that is IndyCar, a much less popular U.S. motorsports enterprise that would be insolvent if not for direct and indirect subsidies provided by the Indianapolis Motor Speedway, racing drivers, and, increasingly, governments. IndyCar could be the Monster, the Rockstar, that rips market share from the NASCAR leviathan. Based on television viewership averages, IndyCar would double the size of its TV audience if it were to capture just 6.51% of NASCAR's present market share. Better still, because IndyCar and NASCAR do not always compete head-to-head, as Red Bull and Monster do, it is entirely possible that IndyCar might increase viewership without having to take share directly from NASCAR. This need not be a zero-sum game.

How would IndyCar achieve this? It would have to begin by slashing its cost of production to the point at which IndyCar and NASCAR are of equal value. This would require that operating a championship-caliber IndyCar team for a 17-race season cost no more than $1.3 million - challenging, but entirely possible. NASCAR team valuations were certainly in that very range at one time, and those teams still managed to show up for far more than 17 races each year.

This is market discipline, something that NASCAR teams have honored and Indy car teams have worked feverishly to outrun for at least 30 years. The core problem of IndyCar racing is that many of its teams have no interest in participating if they must serve an audience and operate within their means; they wouldn't be able to do the kind of racing they like. So the ever self-entitled are now searching for new enablers.

To Be Continued


IRL IndyCar Competitive Strategy

Previously, we charged that the Indy Racing League lacks a competitive market strategy. The operative word here is "competitive," for it seems that IRL management is indeed following a sort of strategy, one that is not necessarily intended to increase IndyCar's competitiveness in the marketplace.

We remind you that two very strong forces are presently driving IRL management decisions.
  1. The league (needlessly, in our view) fears the bargaining power of some of its teams.

  2. The IMS Board of Directors wants immediate revenue growth from its IRL subsidiary.

That in mind, we commence with our strategic analysis.

Market Selection: NASCAR and the United States Grand Prix

NASCAR (sans-culottes!) has demonstrated that ample consumer demand exists for a racing product that features American drivers, low-tech cars, and almost exclusively oval tracks. Conversely, observable demand for a racing product that features alternatives to these attributes is considerably less.

How do we know this?

The inaugural United States Grand Prix at Indianapolis provides a valuable data point. Formula 1 is the undisputed industry leader in the international, high-tech, road racing market segment. Pent-up demand for the F1 product in the United States could not have been greater in 2000; Formula 1 was returning to the country following a nine-year absence. Tickets were reasonably priced. The IMS publicized the event sufficiently.

Spectator turnout was the rough equivalent of a typical NASCAR Cup event, of which there are 34 annually in the United States. Furthermore, NASCAR Cup nearly doubled F1 in attendance that same year at that very facility. The lone independent variable in this equation is the racing product - cars, drivers, teams and circuit. The rational economic actor has no difficulty determining that American drivers, limited technology, and oval tracks collectively constitute the much more promising market segment. This is not a difficult judgment. The very best of the alternative market segment was demonstrated to be roughly half of the segment in which NASCAR operates.

Furthermore, it appears as if our assumption regarding pent-up demand for F1 in the U.S. was accurate, as well. The inaugural U.S. Grand Prix at Indianapolis led all F1 races in attendance. Subsequent F1 events at Indianapolis produced smaller crowds, even before the tire debacle, pent-up demand having apparently been satiated. Attendance in Year 1 was at least the equal of CART's most popular events regardless of circuit type. Indy's inaugural Grand Prix was, by any measurable result, the best result that could have been anticipated given the product and its market segment.

Notice: We ask that individuals who do not like this outcome kindly keep their tertiary arguments and personal prejudices to themselves. Much like firms that actually compete in the marketplace, we deal here in observable data prior to making judgments and strategic decisions. Thank you.

Onward to the House of France

We have confirmed that NASCAR (sans-culottes!) operates in a very attractive market. How, then, might the Indy Racing League become competitive in that market? And what does this have to do with the emerging, non-competitive IRL strategy that we discussed at the outset of this article?

These questions are critical. We shall answer them with haste.


Thursday, August 13, 2009

Dismal IndyCar TV Ratings Continue

There is simply no other way to put it. If IndyCar racing hasn't already hit rock bottom, then we certainly can see it from here. Another race, another television audience of fewer than a quarter of a million viewers. Mid-Ohio was almost as bad as Kentucky. Anthony Schoettle of the Indianapolis Business Journal has the details.

Might we at least put the "teams and drivers need more exposure" argument to bed, once and for all? Versus promoted the IRL during the Tour de France more thoroughly than IndyCar racing has ever been promoted, anywhere. The spots, featuring Scott Dixon and Tony Kanaan, ran consistently during Lance Armstrong's return to the Republic.

Does anyone else see irony in the following real-life scenario? American television viewers tuned-in to a French bicycle race to see whether or not an American icon would win. Those same American television viewers have since demonstrated that they are not particularly interested in watching a Kiwi and a Brazilian race cars. Note that this is merely an observation and that the Republic is profoundly aware that markets can be unfair and ruthless.

Tough Tuberculosis!

Provided every opportunity to sample the IndyCar product, more than one half-million Lance fans declined the offer. The Tour de France and MMA have demonstrated that Versus is capable of drawing an audience of credible size. The problem is not the television partner. The problem is that the market has once again rejected the IndyCar product.

We do not blame IRL management for not wanting to believe that its present suppliers (drivers and teams) and partners (chassis and engines) are pushing the sport toward oblivion. But truth can no longer be concealed by comp tickets underwritten by Honda and Firestone.

Consumer interest in IndyCar racing was much, much greater when Scott Sharp, Greg Ray, Eddie Cheever and Billy Boat were battling under the lights at Texas Motor Speedway. If you revisit the attendance figures and TV ratings for those races, then you will have no choice but to concede the point. In spite of all the negativity that tarnished the IRL brand at that time, it nevertheless earned at least some measure of support in the consumer marketplace. We can not say the same for today's version.

IndyCar - "As If"

In his eulogy of the writer Alexander Solzhenitsyn, man of letters Christopher Hitchens wrote that the author of The Gulag Archipelago spent his career writing "as if."

...he carried on "as if" he were a free citizen, "as if" he had the right to study his own country's history, "as if" there were such a thing as human dignity.

We do not mean to compare ourselves with the heroic version of Solzhenitsyn (as opposed to the older, Putin-praising hyper-nationalist iteration.) But we do endeavor to follow his example in some very small way.

"As if" someone who is capable of taking meaningful action is reading The Indy Idea.

"As if" IRL leadership believes as we do that it can compete with NASCAR (sans-culottes!) and topple the House of France.

"As if" IndyCar management might courageously confront its core business problems, rather than chase temporary underwriters in increasingly remote and tertiary locations.

"As if" someone in power were committed to making the Indianapolis 500 and the Month of May in Indianapolis undeniably awesome again.

"As if" readers care about the long-term vitality of IndyCar racing.


IndyCar Glory Days - Part III

The total cost of IndyCar racing surpassed the market value of the product at some point during the mid-1990s. By then, sponsorship had essentially become a matter of underwriting what would otherwise have been losses, plus a little more to create the appearance of profit. For example, it is well documented that untenable variable costs make temporary circuits too costly to be profitable unless they are supported by either a government entity, a corporation, or both.

The operations of several CART teams were underwritten by automotive manufacturers Ford, Mercedes-Benz and Honda prior to 1996, when Toyota joined the series. Manufacturer participation provided a necessary infusion of cash, but even this was not enough.

The remaining CART sponsors tended to fit into one of three categories: tobacco, supply chain, and connections. Of these, only tobacco used racing for the sole purpose of marketing its product to consumers, primarily because it was not allowed to advertise anywhere else. This delivered a non-market cash windfall of incredible proportions to team owners and promoters that were fortunate enough to have tobacco company sponsors, some of which were not even publicized.

Teams supported by Marlboro, Player's, Kool, and Hollywood collected revenues that were in no way correlated with consumer demand for the racing product. Furthermore, these brands were not welcome in NASCAR because RJ Reynolds' Winston was title sponsor of the premiere NASCAR Cup Series. In technical terms, CART teams, promoters, and the sanctioning body itself collected economic rent - returns that exceed the cost of capital and are not subject to the discipline of an efficiently functioning market - via cigarettes. The IRL did not have significant tobacco sponsorship, but there is no reason to believe that it didn't want to get in on the action.

Thus, CART was subsidized by tobacco money. The IRL was subsidized by Indianapolis Motor Speedway money. Teams in both series were therefore able to incur costs that a normal, properly functioning market would not have permitted. Meanwhile, manufacturers and marketers of consumer products continued to migrate to NASCAR, where teams kept working - fabricating, molding, tooling, and now selling sponsorships at increasingly high valuations that were fully justified according to prevailing advertising industry metrics. NASCAR attendance and television ratings increased in a non-linear progression. The cost of raw materials remained relatively low. The cost of labor - salaries for the drivers and crews - increased dramatically, and for the right reason: those individuals added tangible value to the NASCAR racing product.

The IRL and CART - and now the IRL IndyCar Series - made use of supply chain leverage (Target, Kmart, 7-Eleven) and the personal connections of team owners and drivers (take your pick) to inflate budgets to levels that exceeded the market value of the racing product. The stories are well known and need not be repeated here. Team Penske is the last of the tobacco-supported U.S. racing teams, a scenario that is likely to end sooner than later. IndyCar teams are no more industrious now than they were 20 years ago. They manufacture almost nothing and remain focused on sales to corporate agents. But corporate marketing has become a research and data-driven econometric quasi-science in which personal selling is secondary to quantitative analysis. In the case of IndyCar racing, the analysis is not kind. Lone decision-makers like John Menard are too few to make up the difference.

The good news is that opportunity is at hand. Recession has left NASCAR participation overpriced. That does not, however, mean that the IRL is currently a good "value opportunity." It is not. It just costs less to run 17 races in the IRL than it costs to run 34 much more popular races in NASCAR Cup. We provide relative valuations of NASCAR and IndyCar teams, based on quantitative measures of consumer demand, here. NASCAR is overpriced because, given the recessionary economy, the market can no longer support the increased salaries of drivers and crews and the abnormal returns to team owners, race promoters, and NASCAR itself. If you're going to have problems, then those are good ones to have. Most IndyCar teams are insolvent - they could not survive without direct and indirect subsidies provided by drivers, governments, and the Indianapolis Motor Speedway. NASCAR's economic fundamentals remain strong - that's why the lousy economy turns lesser NASCAR teams into "start and park" deals, while marginal IndyCar teams are merely "parked".

NASCAR is a strategically focused, disciplined organization that ought to be admired. It started with nothing - jalopy racing, taxi cabs - and proceeded to clobber an industry leader than had become a bloated, rent-seeking, self-entitled bellicosity. This happens in business. IBM was snookered by Microsoft and Intel but eventually made it all the way back. There's no reason to think that IndyCar Racing can't do it, too. But the present course is not the way, not when revenue growth at your crown jewel requires that your product attract fans from Middle America over the course of a month. That's the market you're in by default, at least until the Indianapolis Motor Speedway is loaded on the back of a flatbed and moved to Brazil, Japan, or Foxboro.

The IRL needs strategy, discipline and courage. The teams will have to overhaul their operations in ways that might seem to them both unfathomable and unappealing. Some might exit the series altogether - we'll assume they'll have somewhere else to go - and that's okay. Having adjusted the cost of entry to market value with much, much less costly cars and engines, the IRL will welcome new teams that can legitimately afford to participate. Perhaps they might even consider building and selling things to augment their revenues.

In other words, every level of the IndyCar value chain must be guided by responsible adults who are held accountable by their customers and employers. IndyCar racing is fun and fascinating. If you've read this three-part treatise in its entirety, then you've probably loved the sport since you were a kid. That is why - practically in spite of ourselves - we're all still here. But the enablers are gone, heads are rolling, Revolution is upon us, and it's time we all grew up.

Ever Humble and Incorruptible


Wednesday, August 12, 2009

IndyCar News: Target Ganassi Racing Without a Fire Suit?

In the latest example of why a corporatist approach to motorsports is akin to racing without a fire suit, billionaire hedge fund manager William Ackman apparently will not leave well enough alone at Target Corp. Rebuffed in his previous attempt to remove four board members and replace them with independent directors, Ackman has decided to retain his Target shares in what analysts believe could be the beginning of another hostile takeover bid. What would an Ackman-led Target Corp mean for Chip Ganassi Racing?

Let's just say that Mike Hull might want to reconsider his position in favor of high-tech, high-cost racing.

Target Ganassi Racing generates sponsorship revenues that far exceed the value of the racing product that it supplies. That alone is likely of little concern to Ackman.

However, the mechanism that is used to lever Ganassi's returns would be a good candidate for reconsideration under an Ackman regime. Financial buyers, particularly those who grew up in Westchester County, New York, are not typically big fans of motorsports. More important, they are not even little fans of granting concessions to suppliers just because those suppliers assist in funding a racing team.

Let's use distributors of GPS systems as an example. Garmin is the clear market leader, a still-growing, profitable firm that commands premium prices for its products. Tom Tom had cut into Garmin's market share lead before reporting disappointing quarterly earnings in Q2. Tom Tom is a major associate sponsor of Target Ganassi Racing - that's why Dario Franchitti occasionally drives that pea-green Tom Tom car.

An investor such as Bill Ackman, or at least one of his surrogates, is likely to ask the question: "Why the hell are we stocking so much Tom Tom? Garmin is easier to sell and commands premium prices."

A legacy marketing rep from the previous regime replies: "Tom Tom is a partner in our race team."

Ackman Surrogate: "Our what?"

And that, as they say, is that. This exercise is repeated for all suppliers that are involved in Target Chip Ganassi Racing. The racing program is determined to have come at much greater cost than previously believed due to the carrying cost of unsold merchandise and the opportunity cost of not stocking brands that are easier to sell and at better prices.

Cue the press release. "We appreciate all of the hard work that Target Chip Ganassi Racing has done over the years, but we have determined that alternative marketing and promotion incentives will be more effective...."

Like all IndyCar teams, Target Chip Ganassi Racing is effectively racing without a fire suit. Its revenues are highly concentrated in payments it receives from its leveraged supply chain agreement with Target. There is almost no probability that Ganassi will be able to replace those revenues, again because the cost of the product he supplies is greater than the price at which it is sold. His team manufactures approximately nothing of value. Appearance money won't begin to cover the cost of participation. Without Target the future does not look good.

Of course, it's entirely possible that Ackman will strike out again. If so, then TCGR is likely preserved for some time to come. But know this: there will be another Ackman, and another after him. One of them will pull off the deal, and Ganassi will be out of luck and other people's money.

The same could be said of Roger Penske, who has to be hoping that the FDA doesn't regulate his sponsor out of existence once it commences oversight of the tobacco industry. It is distressing enough that The Captain's own company had to pony-up to allow Will Power to get five more starts in 2009.

We therefore reiterate: the low cost versus high-tech debate is a moot point. Low cost - and we mean really, really low cost - is the only viable strategic option. Choose it now, IRL management, and you might just be surprised to discover who comes around to agreeing with you.

IndyCar Glory Days Part II

The respective business models of NASCAR (sans-culottes!) and IndyCar began to diverge significantly in the early 1980s. NASCAR continued to pursue the typical strategy of a low-cost industry competitor. Specifically, the cost of entry for new teams remained relatively low because the necessary raw materials were cheap, southern labor markets provided an abundance of skilled workers, and conversion costs were low enough to allow teams to replace parts, even entire cars, that had been crashed or outmoded.

Conversely, IndyCar teams evolved into net consumers, rather than producers, of chassis, engines and racing-related components and supplies. Looking back now, one can argue convincingly that the watershed occurred in 1984, when Robin Herd won the coveted Louis Schwitzer Award for engineering excellence at Indianapolis. His creation was the March 84C, a mass-produced, off-the-shelf chassis that was piloted by 29 of the 33 starting drivers in the 1984 Indianapolis 500. For the first time in the sport's history, all cars were essentially the same. This was not determined via fiat, as it was in NASCAR, but rather by team owners independently choosing to purchase equipment that would allow them to compete and win.

NASCAR teams tended to divide the labor of race preparation among themselves, manufacturing chassis, engines, and components that they would then sell to each other, creating a cottage industry that exists to this day. IndyCar team owners, Roger Penske excepted, became consumers, almost entirely dependent on purchased equipment. As the 1990s approached, NASCAR teams sold sponsorships when and where they could, but they augmented their cash inflows selling, bartering and trading their own manufactures.

IndyCar teams built nothing, bought more and forfeited their own bargaining power with regard to the prices they would pay to suppliers. The natural result of such a massive outflow of capital was that IndyCar teams needed underwriters to subsidize their racing operations. While NASCAR teams were molding, fabricating and tooling, IndyCar teams focused almost exclusively on selling - not to consumers, mind you, but rather to corporate agents. With the stroke of a pen, these individuals could commit their firms to contracts that were in essence underwriting agreements for IndyCar events and teams.

This was a non-market solution that worked well enough, at least for awhile. Nevertheless, as we have all been reminded in recent years, increased financial underwriting does not in itself create value. Increasing consumer demand, however, does. NASCAR is all the proof we need. Traditional IndyCar sponsors were beginning to notice.

  • 1990 - No more Texaco Star at Indy. Texaco enters into a supply-chain agreement with Kmart and becomes co-primary sponsor of Newman Haas Racing. Texaco continues primary sponsorship of Robert Yates' #28 Ford in NASCAR.

  • 1994 - Hardees' goes south. The quick-serve chain discontinues its IndyCar sponsorship and reallocates all of its racing investment to NASCAR.

  • 1994 - Team Valvoline steps back. Two years after winning at Indy, Ashland's Valvoline enters into a supply-chain agreement with Cummins Diesel and becomes co-primary sponsor at Walker Racing. Valvoline continues primary sponsorship of Jack Roush's #6 Ford in NASCAR.

  • 1995 - Budweiser pulls back. The number one sports advertising brand in the world determines that it doesn't need to be primary sponsor of an Indy car. It strikes a co-primary sponsorship deal with Kmart and Newman Haas Racing. Budweiser continues primary sponsorship of Rick Hendrick's #25 Chevrolet in NASCAR.

Notice that the migration of these traditional, consumer-oriented racing sponsors was well underway prior to the formation of the Indy Racing League. Therefore, we must conclude that the split did not cause this particular problem. No, this troublesome trend was the result of 1) the increased cost of IndyCar participation, and 2) increased consumer demand for NASCAR's racing product.

The issue was therefore not one of either politics or personalities. The IndyCar problem was then -and remains now - a function of economics.


IndyCar Glory Days - Part I

That the business of IndyCar racing is struggling is not in dispute. Unfortunately, discussion of how the IRL might become competitive in the marketplace typically devolves to the level of mere disagreement, with personal preferences (ovals v road courses, tech v spec) dominating the discourse.

IndyCar must formulate and execute a practical, profitable business strategy. Paramount to the task is identifying where and when Indy racing took a wrong turn, as well as how NASCAR (sans-culottes!) had positioned itself to take advantage. This requires dispassionate analysis of the type we endeavor to present at The Indy Idea.

Roggespierre recalls listening to an Indianapolis radio show, co-hosted by Robin Miller, one night in the early 1990s. A local boxing promoter proudly informed Miller that the highest-rated IndyCar race in ESPN history had failed to match the audience of the lowest-rated installment of Friday Night Fights. Roggespierre was further surprised that Miller not only accepted the boxing man's facts, but also confirmed them.

IndyCar races in those days typically earned ratings in the mid-2s. As appealing as that might seem today, it was not and is not extraordinarily impressive given NASCAR's typical weekly television audience of between 6 and 8 million viewers.

The CART IndyCar Series of the early 1990s was by all appearances a profitable business that boasted an impressive roster of corporate sponsors. And yet, aside from the Indianapolis 500, IndyCar was not highly valued by television broadcasters. Why? Had consumer demand not warranted what appeared to be a significant level of investment by all of those sponsors?

In a word, no.

to be continued...


Tuesday, August 11, 2009

IndyCar: Life on the Street

This would be funny if it were not so depressing. Rather than price the IndyCar product at its market value, IRL Commercial Division head Terry Angstadt has written a letter to officials in Baltimore, effectively pleading with the city and the State of Maryland to subsidize a 2011 street race in Charm City.

"I am taking this opportunity," wrote Angstadt, "to convey to you, collectively, how interested the Indy Racing League is in the possibility that our organization would sanction an IndyCar Series event in Baltimore starting in 2011."

Roggespierre has, shall we say, contacts in and near Baltimore. They detect zero popular demand for this event. The IRL could have Barry Levinson direct the telecast, Tom Fontana and David Simon write the script, and Paul Attanasio serve as executive producer, and it would not matter. As we wrote previously, an all-city lacrosse tournament would achieve more.

Much of Baltimore still hates anything that has to do with "Indianapolis" and "horse power". Most Marylanders simply do not care about IndyCar racing. Baltimore is not desperate enough to get excited about hosting a downtown street race. The citizenry believes that Baltimore already is somewhere. The Ravens play there. The Orioles play there. The Wire was shot there.

But then, this isn't really about drawing fans, is it? It's about convincing the city and state to pay for a product that the market has rejected. Why change the IndyCar TEAM program to attract fans when you can get bailed out by local governments, at least for awhile?

The Republic understands - the teams want events like this. Anything to avoid market discipline, right?

Street races do not make money without government handouts. You don't believe us? Take a moment to peruse Case SPM-31A from the Stanford Graduate School of Business. You don't believe the pointy-headed types? We invite you to read what the Texas Comptroller of Public Accounts has to say.

Notice that Long Beach claimed to generate only $20 million to $30 million per year from the Toyota Grand Prix, by all accounts the most successful temporary circuit in North America. Yet Baltimore expects to attract $100 million? How?

The principals of Baltimore Racing Development, LLC are Steven Wehner, an "entrepreneur" about whom little is known except that he owned a gas station on Martha's Vineyard at one time - we're not kidding - and Baltimore attorney Jay Davidson. But all parties implicitly admit that government money is paramount to the cause. These guys are so committed to Baltimore that they're already eyeing other east coast cities - just in case.

May we suggest Bridgeport, Connecticut? It's perfect - blighted, politically corrupt, and economically bankrupt despite being nestled in the middle of the Hedge Fund Hills of Fairfield County. It's as close to Manhattan as you'll ever put a race car. The late Paul Newman lived nearby and remains fantastically popular. Currently the host of no spectator events of note, Bridgeport is appropriately desperate. Like we said, it's perfect.

Or you could redesign the IndyCar product so that it might attract an audience at actual race tracks...


Apologies to Theodoric of York


Tough Love for IndyCar

The Republic has again found cause to criticize actions taken by Indy Racing League Commercial Division President Terry Angstadt. We did not anticipate this becoming a recurring theme at the Indy Idea. Perhaps this is a good time to clarify our position regarding Citizen Angstadt.

First and foremost, we do not seek his head. Terry Angstadt appears to be a fine salesman. He has executed his primary responsibility ably, striking deals with new IRL clients such as Apex Brazil, Izod and Zoom Motorsports. Our criticism is not intended to diminish these accomplishments.

Second, we do not envy Citizen Angstadt. The cost of the product he sells is greater than the price at which it can be sold. Most firms would either redesign the product to increase its market value, cut the cost of production, or exit the sector entirely. Terry Angstadt is powerless in that regard. Who at the IRL has final authority to make strategic business decisions? We do not pretend to know.

Brian Barnhart manages day-to-day operations. Tony Cotman appears to be an inside representative of IndyCar's racing team suppliers. Terry Angstadt sells what he is given. Each answers to Jeff Belskus, who in turn has been charged with the workload of multiple executives.

We wish them success and prosperity. But, as Incorruptible citizens who love the Indianapolis 500 and Indy car racing generally, we must reserve our Natural Right to criticize their actions. And so we shall continue.


IndyCar: Bruton Giddy as Montagny joins AGR

According to Curt Cavin of the Indianapolis Star, the expatriate Franck Montagny will drive a fifth Andretti Green Racing entry in the IndyCar race at Sonoma. This extends AGR's existing partnership with Gary Peterson's AFS Racing.

Bruton Smith, CEO of Infineon Raceway parent Speedway Motorsports, will no doubt be unable to contain himself as he looks forward to the resulting bounce in ticket sales.

That is not to say that Montagny isn't talented. He is. But his presence does nothing to increase the value of IndyCar racing - unless, of course, plans are underway for a street race in the Loire Valley.

IRL IndyCar Management Situational Reversal

Successful firms use the following hierarchy to guide their activities.
  • Vision - what we want to be
  • Mission - what we must do to get there
  • Strategy - how we do what we must do to get there
  • Tactics (product development, sales, operations) - doing what we do
The Indy Racing League appears to use something more akin to the hierarchy below.
  • Product - what we have
  • Tactics - selling and operating what we have
  • Dreams - the best we can hope for given what we have

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, 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.


IndyCar & F1: Technology & Innovation

The Autoextremist is lambasting the FIA again, and with good reason. The worldwide motorsports governing body, based in the Republic, seems intent on killing Formula 1.

What does this have to do with IndyCar racing? Everything.

When Mike Hull and others talk about "technology" in IndyCar, they typically mean "aerodynamics". Unfortunately, this particular permutation of automotive technology is becoming increasingly irrelevant. And don't get us started on "innovation". Needless to say, if mass-produced computer software is available for it, then it is by definition not an innovation.

It is not IndyCar's job to preserve the employment of aerodynamicists. Rather, IndyCar exists to attract an audience. Conservation is on the minds of many, and the IRL should do whatever it can to capitalize. You want innovation and technology in IndyCar racing? Let's start by reducing the size of the fuel tanks to 10 gallons. That would lend significant competitive advantage to any manufacturer that increases fuel economy at a rate that is greater than that of the resulting decline in speed.

That's innovation. That's technology. That's not good news for the aerodynamicists who have dominated the developmental portion of racing for three decades.

We admit that this idea requires considerable development. More important, this is the type of idea that ought to be discussed frequently on West 16th Street.


Sunday, August 9, 2009

IBJ lacks Drill-Down on IndyCar and IMS

The Indianapolis Business Journal ran a story dated August 8 featuring new Indianapolis Motor Speedway CEO Jeff Belskus. The Republic has for some time considered the IBJ to be the best newspaper in Indianapolis, and the citizens always appreciate reporter Anthony Schoettle's contributions to the local motorsports literature.

That said, we must take issue with this article. It's fine as far as it goes. However, as the Wall Street analysts like to say, it needs more drill-down. Schoettle provides surface-grazing quotes from former IMS Senior Director of Marketing and Consumer Products Dave Moroknek, driver-turned-pundit-turned-racing dad Derek Daly, motorsports marketer and former Dreyer & Reinbold Racing partner Eric De Bord, and the increasingly ubiquitous Mike Hull, Team Managing Director of Target Chip Ganassi Racing.

Each in turn identifies a problem that needs to be solved, and Schoettle provides some proximate causes. "To Do" lists for the IMS and IRL - they could have been written by someone other than Schoettle - appear in the left margin. These are vacuous. We'll examine the IRL version here.

IBJ Speed Needs (IRL)
  1. Increase sponsorships, including finding a title sponsor.
  2. Add engine and chassis makers to the series.
  3. Expand series in the right national and global markets.
  4. Contain costs for the teams.
  5. Improve languishing television ratings of races as well as attendance.
  6. Improve exposure for teams, and help them gain more sponsors.
  7. Evaluate long-term viability of IRL under the Hulman-George family umbrella of companies or another owner.
That should solve the problem - a mere seven gargantuan tasks. And nowhere is it supposed that the product might in fact be central to the problem. Notice how each "problem" solves itself if we suppose that the IRL develops its product into something that a critical mass of customers actually wants.

  1. With lots of fans, finding a title sponsor and increasing sponsorship overall are matters of course.
  2. Packed stands and good TV ratings would likely attract new manufacturers of chassis and engines.
  3. See above. Replace "manufacturers of chassis and engines" with "race promoters".
  4. Pricing the product to its market value is a product development issue. (We shall investigate this in much more detail this week.)
  5. Ratings and attendance are how you measure demand for your product. Say it with us. The Product is the Problem!
  6. The claim that IRL teams need "exposure" is as old as it is erroneous. No amount of exposure is going to turn these cars driven by these drivers on these tracks into a pop culture hit. This product is hardly a product at all. It's an amalgamation of what the team owners 1) can afford and 2) are willing to provide. IRL teams are not going to attract sponsors that are remotely concerned about Return on Investment because the product is overpriced at every level of the value chain. Any new sponsor must originate with personal relationships, supply chain leveraging, phenomenal salesmanship, or some combination of these.
  7. This point concerns corporate structure and governance. Both topics are worthy of attention, but they shall have to wait.
The Republic is very excited about tomorrow's keynote entry here at The Indy Idea. We shall look at what the cost of running a top IndyCar team should be, given the market value of the overall product. Danton is geeked. Marat has his quill at the ready. We hope that you will join us and provide commentary of your own.


Dixon Dominates Mid-Ohio

Defending IndyCar Series champion Scott Dixon drove away from the field in Sunday's Honda Indy 200 at Mid-Ohio Sports Car Course. Dixon regained the series points lead by three points over second-place Ryan Briscoe, who took the checkers almost 30 seconds behind the winner.

Dixon's Target Chip Ganassi Racing teammate, Dario Franchitti, finished third, the same position he currently occupies in the season standings, 20 points behind Dixon.

The Republic was pleased to see Ryan Hunter-Reay finish fourth in A.J. Foyt's ABC Supply Co. entry. It was Hunter-Reay's best result since finishing second for Vision Racing at the season opener in St. Petersburg, Florida. Andretti Green Racing's Hideki Mutoh logged a credible fifth-place finish.

The crowd appeared to be solid if not quite as big as in recent years at Mid-Ohio. The Versus coverage was not up to its usual standard. In an event that featured few on-track passes for position, Versus seemed to switch away from the all too rare developing battle to show a car entering the pits or the leader running by himself. The announcers touted the "overtake assist option" as if it would make a difference in this race. That it did not rendered the discussion, as well as the technology itself, little more than a gimmick, if only for this particular event. We shall see.

Interesting moments came courtesy of Mike Conway, who punted Danica Patrick into the sand trap; Justin Wilson, who gallantly attacked first Briscoe and then Dixon until a poor fuel stop ruined his race; and Milka Duno, whose (slowly) moving pick, enabling Dixon to get by Wilson, would have made Bill Laimbeer proud, had he been in attendance.