Saturday, September 12, 2009

IndyCar: Little Hope for Tracy in 2010

KV Racing Technology owners Jimmy Vasser and Kevin Kalkhoven clearly would like to add a second car in 2010 with Paul Tracy behind the wheel. The problem, of course, is money. Adding Tracy to its roster of drivers would be good for the IndyCar Series. The Canadian veteran is talented, experienced, and candid. Unlike several of the league's drivers, Tracy also happens to be interesting.

Will in absence of Value

GEICO, a subsidiary of Warren Buffet's Berkshire Hathaway, has become a fan of Tracy and the KV team. According to Robin Miller, the auto insurance marketer will provide some sponsorship again in 2010, but only for the races that are broadcast on network television.

The IRL is unlikely to embrace the idea of canceling its Versus contract and incurring a net loss of at least $7.2 million. That's what it would take to move eight races to a network broadcaster and four more to a high-reach cable channel. The increase in promotional inventory capacity to Tracy and KV Racing Technology would be roughly $743,000. Add that to the roughly $1.3 million in existing promotional inventory capacity, and Tracy could expect to have half of the budget required to field a shoestring effort.

Such is the economic reality of IndyCar racing.

Tracy has few options, none of them particularly promising. They include:
  1. Work with Vasser and Kalkhoven to attract small sponsors that might collectively make-up the $2.0 to $2.7 million gap. This requires tremendous effort and offers a low probability of success.
  2. Find an idiot who is willing to pay double market value for sponsorship. It's been done before. But marketing is now a spreadsheet-driven, quantitative quasi-science. Finding fools is increasingly difficult.
  3. Hope that Terry Angstadt can line up a Brazilian widget maker that happens to sell something that GEICO has to buy. Supply chain arbitrage saves the day!
  4. Pay for the ride out of his own pocket. This is not only expensive, but also degrading. Paul Tracy is an accomplished talent. He has won races and a championship. He is not some kid with either rich parents or a Sugar Daddy Socialist in his corner, and he should not be required to behave like one. Tracy also happens to be a professional racing driver. That implies that he gets paid to drive, and not the other way around.
When will the IRL adjust its cost-to-value ratio so that real, professional racing drivers like Paul Tracy and Buddy Rice, as well as promising young talents like J.R. Hildebrand and Jonathan Summerton, can participate? The IndyCar Series needs drivers who can be sold to a very large audience. The present group of drivers has failed, Versus or no Versus.

The 2010 prospects for Tracy and KV Racing Technology are not good. Expect them to run Indy and a few additional races together, much like they did this season. Anything more would require either a minor miracle or compulsory consumption of Brazilian beef at the GEICO employee cafeteria.


Friday, September 11, 2009

IndyCar TV Switch: You Make the Call

We are now ready to revise our estimated sponsorship increase per team. Last time, we established that moving from Versus to a broadcast network would require that IndyCar find a cable partner for the four night races. This will reduce the $987,930 in additional sponsorship per team for the season.

Robin Miller reported that coverage on Versus in the 2009 season has achieved a .32 average rating. According to Miller, this equates to "less than" 240,000 viewers. We shall disregard the "less than" clause for simplicity's sake.

More Math!

Because we do not know the number of viewers that watched the races in Texas, Kentucky, Chicagoland and Motegi in 2008, we must estimate the number of viewers that is equal to a 1.0 cable rating. This shall establish a basis for our analysis and revision.

240,000 viewers / .32 rating = 750,000 viewers

Frankly, that doesn't seem right. I would think that it would be greater. Still, it's probably close enough.

Therefore, a 1.0 cable rating is the equivalent of 750,000 television viewers. The 2008 IndyCar race at Texas happened to get a 1.0 rating. Therefore:

750,000 * 1.0 = 750,000 viewers for Texas

The Kentucky event in 2008 earned a .43 cable rating. Therefore:

750,000 * .43 = 322,500 viewers for Kentucky

The Chicagoland race earned a .8 broadcast rating on ABC in 2008. This is not a helpful number because broadcast and cable tabulations are not the same and because the Chicagoland event was held during the day in 2008. However, because Chicagoland and Kentucky apparently underachieved at night on Versus in 2009, we'll assume that these two races shall attain similar audiences again in 2010. Therefore:

750,000 * .43 = 322,500 viewers for Chicagoland

Motegi was rained out, televised live and re-aired in 2008. Could this possibly be more difficult? The best rating, .33, was earned by the rebroadcast. That is the number we'll use.

750,000 * .33 = 247,500 viewers for Motegi

More Revision

Previously, we established that each race in 2010 would attract 914,750 more viewers on a broadcast network than on Versus. There are twelve such races. However, we then recalled that we would need a cable partner for the four races discussed above.

The question: how many of those additional viewers did we lose due to night races on cable?

914,750 * 4 races = 3,659,000 viewers if the events had been during the day on network

750,000 + 322,500 + 322,500 + 247,500 = 1,642,500 viewers for night races on cable

3,659,000 - 1,642,500 = 2,016,500 viewers lost from our original calculation

I enjoy the night races. Apparently, I am representative of nothing in particular. If I were an IRL manager, then I would want to identify the tangible benefits of racing at night that offset the loss of more than 2 million television viewers.
But I digress.

The Bottom Line

We know that each viewer is worth $0.09 in the market for racing team sponsorship. We can now calculate how much sponsorship value was lost due to night races on cable.

2,016,500 * 0.09 = $181,458

The bottom line is now in sight.

$987,930 - $181,458 = $806,472

Therefore, each team may anticipate selling $806,472 in additional sponsorship if the IRL elects to move twelve races from Versus to some combination of a broadcast network and a high-reach cable partner.

You don't think we're done yet, do you? Good.

Recall that all of these values assume a championship caliber entry. The Ganassi and Penske teams can anticipate $806,472 in additional sponsorship. Paul Tracy and KV Racing Technology are not likely to appear on screen nearly as often as the top two teams. We therefore must discount the value. Monster likely did this a couple years ago when it told Tracy that the IRL ratings were worth $1.2 million for the entire season on ABC and the ESPN family of networks.

We really have no choice but to guess what the correct discount rate might be. Let's say 5 percent.

$806,472 * .95 = $766,148 in additional sponsorship to Paul Tracy and KV Racing Technology

There is one more adjustment remaining. Because we benchmarked the value of a top NASCAR (sans-culottes!) Cup team, we must account for premium pricing that NASCAR teams can negotiate because they are the dominant market leader. IndyCar teams have little bargaining power and therefore must accept less. A 3-percent discount rate might not be enough, but that is what we'll use.

$766,148 * .97 = $743,164 additional sponsorship to Paul Tracy and KV Racing Technology

For What It's Worth

Should the IRL cancel its contract with Versus and purchase air time? Recall that the cost to the IRL will be $7.2 million. In exchange, Paul Tracy and KV Racing Technology can anticipate selling $743,164 in additional sponsorship to GEICO. The same opportunity would be available to all teams.

That's enough to cover 82.5% of Paul Tracy's Honda engine lease if the lease price is decreased, as expected, to $900,000 for the 2010 season.

We still haven't figured out 1) how the IRL and the teams would share the $7.2 million cost of buying time for twelve races, and 2) how many teams will be able to sell the additional inventory. If the latter number is fewer than ten, then the IRL and its teams will lose money outright.

If it were my decision, then I would stick with Versus. Paul Tracy would probably disagree. We will not speculate about Robin's opinion.

We do welcome yours.


IndyCar: Network TV worth It?

We have determined that moving from Versus to network television in 2010 would provide each IndyCar team an opportunity to acquire additional sponsorship in the amount of $987,930. Unfortunately, we also know that this valuation must be wrong.

The 2010 schedule includes night races at Texas, Chicagoland, Kentucky and, for all intents and purposes, Motegi. No network is going to air an IndyCar race in prime time at any price. Therefore, four of the twelve races in question must be carried on cable.

In addition, Texas is the lone night race that has consistently attracted a substantial audience. That event beat the Tour De France and Lance Armstrong on Versus in 2009.

Regrettably, other night races have not produced similar results. We would therefore argue that at least some of the ratings decline in recent years is likely due to the events at Kentucky and Chicagoland having been moved from Sunday afternoon to Saturday night. This is an interesting and important issue for later discussion.

The question that must be answered is this: how many additional viewers can the IRL reasonably expect to get if the four night races are aired on a cable channel that offers greater reach than Versus? Regardless of what that number might be, we should expect that the IRL will not get the 914,750 additional viewers that it can anticipate getting on network telecasts.

Thus, the expected value of additional sponsorship to each team must be something less than $987,930. We should also keep in mind that IndyCar races will be more difficult to find. It will have deals with ABC, perhaps another broadcast network, and at least one cable network.

There will be no on-air promotion for the events that do not air on ABC. This is a time-buy, after all. Networks are in the business of promoting properties in which they have invested.

And we still have not addressed the issue of probability. How many teams can we expect to actually sell additional sponsorship in an amount that is less than $987,930?

The IRL knows that it will get Paul Tracy and GEICO, so that's one. Six more must be certain before the league can even consider switching. Why? Because Versus is contractually obligated to pay the IRL $6 million for 12 races in 2010. If no more than six teams are able to acquire something less than $987,930 in additional sponsorship, then the IRL would do better by handing over checks in that amount to those six teams. And we haven't even begun to consider how the league and the teams might share the cost of switching.

It is likely that the teams want this to happen; Robin Miller probably would not have written about it if that were not true. Thus, Terry Angstadt, Tony Cotman, Brian Barnhardt and staff have a new and unforeseen issue that requires immediate resolution. As we are all aware, IRL management is dealing with more than a few ongoing difficulties. It now has another one.

We invite citizens to tell us what management should do.

Perhaps the guys in the IZOD shirts don't have it so easy.


IndyCar: Seeking a TV Solution

**Note: edited to include John's data in Comments below**

The Committee of Public Safety seeks help from the citizens.

Many are worried about the IndyCar television contract with Versus. Most, in our estimation, would prefer that the IRL purchase and re-sell time on a major network.

For the sake of argument, we shall assume that there is a network that is willing to enter into such an arrangement.

Robin Miller has reported that ChampCar purchased air time on NBC and CBS for $800,000 per race. He added that IndyCar would not need to spend as much because it has an in-house production company. Therefore, let's assume that each race would cost an additional $600,000.

Total cost also includes opportunity cost. In this case, that means adding $6,000,000 of unrealized revenue from Versus. Citizen John was kind enough to provide advertising revenue projections for this project. His number is $6,000,000. This is convenient because it offsets the opportunity cost.

Let's do the Math!

Total Cost (Revised): (600,000 * 12) + 6,000,000 - 6,000,00 ads = $7,200,000

How many additional viewers can the IndyCar Series expect to attract?

IRL Average on ABC 2009 (no Indy) = 1,154,750 viewers
IRL Average on Versus 2009 = 240,000 viewers

Additional Viewers per Race: 1,154,750 - 240,000 = 914,750

Total Additional Viewers: 914,750 * 12 races = 10,977,000 additional viewers

Therefore, the network arrangement would cost the league $7,200,000 and allow for 10,977,000 additional viewers.

Cost per Viewer: $7,200,000 / 10,977,000 = $0.66 per additional viewer

That's fairly expensive. Still, it might be worth it.

The Benchmark

Previously, we calculated that NASCAR (sans-culottes!) Cup earns an audience of 7.055 million viewers per event. That number has likely changed because NASCAR has completed additional races. Still, we'll use the number.

7.055 million viewers * 34 Cup Races = 225.760 million viewers for the season

We also cited published reports that a top NASCAR entry is valued in the marketplace at $20 million. Therefore, we divide that number by total viewers to get the cost per viewer that is paid by NASCAR team sponsors.

20,000,000 / 225,760,000 = $0.09 per viewer

Therefore, each viewer is worth $0.09 in the market for racing team sponsorship. Did we not say that $0.66 per additional viewer was fairly expensive?

Anyway, the IndyCar teams should therefore anticipate acquiring additional sponsorship in the amount of:

$0.09 per viewer * 10,977,000 additional viewers = $987, 930

The Results

The IRL spends an additional $7,200,000
The IRL loses $6,000,000 in revenue
The IRL recoups $6,000,000 in advertising
Total Cost to IRL = $7,200,000

Each team acquires sponsorship value of $987,930

Shall we say 22 teams will run each race next year?

22 teams * $987,930 = $21,734,460 total projected revenue to teams


This remains a very tough call.

21,734,460 team revenue - 7,200,000 IRL cost = 14,534,460 value to enterprise

The decision hinges on the probability that all 22 teams will in fact acquire $987,930 in additional sponsorship due to the move from Versus to a network broadcaster. Each team that fails to do so will cause the "team revenue" and "value to enterprise" to decrease. This is where an assumption must be made.

Also, there is no firm anywhere that would agree to incur $7.2 million in additional costs so that its suppliers might earn an additional $21,734,460 in revenue. However, it is also true that the IRL will benefit if it has teams that are better financed.

We ask the citizens: what would you do?

1. How should the IRL and its teams share the $7.2 million switching cost?
2. What is the probability that all 22 teams will reach the $987,930 threshold due to the switch?
3. How should the IRL and the teams spread the financial risk associated with teams that fail to acquire the additional sponsorship?
4. How much advertising do you think the IRL can sell? This number is important because it will offset a portion of the cost. Citizen John has answered this question for us. Thank you, Citizen John. All resulting changes are in green.
5. Is the switch worth it to the IRL and its teams, provided that they can agree to specific terms?

Obviously, we have had to make some assumptions. Otherwise, this is the way the decision would be made - a real, or at least plausible, IRL management decision. The answer might not be so obvious as it seemed in Robin's original column.

We invite you to help us fill in the blanks and tell us what should be done.


Thursday, September 10, 2009

More Reasons Robin is Wrong about Versus

We appreciate the data cited by Robin Miller in his recent column on Some numbers were new to us. Others confirmed our own.

In fairness to Versus, a television partner that has followed through on its commitments to the IndyCar Series, we believe that some additional numbers should be cited. Citizens will recognize a few, but new data are included.
  • 2008 Oregon vs. Oregon State football game on Versus drew 1.6 million viewers
  • 2008 Stanley Cup Game #2 on Versus drew 2.3 million viewers
So it would seem that Versus can draw an audience. However, it does require programming that U.S. television viewers actually want to see.

Incidentally, this information is the product of a cursory Google search. It is not difficult to find.
  • 2009 Tour De France increased 98% year-over-year to 527,000 viewers on Versus (daily 8:30-9:00AM)
The reason was the return of Lance Armstrong, riding near the front of the running order. United States television viewers have spoken clearly. The guy on the bike makes a difference.

So, too, we would think, do the drivers in the cars.

How many viewers do you think an IndyCar race would attract on a weekday at 8:30 in the morning?

We suspect that when the ratings are released for this weekend's Texas-Wyoming football game on Versus (sans DirecTV), IndyCar will have even more reason for embarrassment. But that is belaboring the point.

Although insiders might not want to admit it, IndyCar's problems, though difficult to resolve, are easy to identify. The television partner is not one of them.

There is a reason that Tim Cindric is practically begging NASCAR drivers to participate in the Indianapolis 500 next year. Could it be that ESPN and ABC might want to opt-out of their yearly 5-race schedule early? Might Phillip Morris USA be teetering? Will there be 33 starters next year without NASCAR money?

Quit blaming the television partner and give consumers what they want. This is the way business works; the IRL and its teams are not entitled to exemptions.

Some products simply can not be sold at a cost that is cheap enough and to a market that is large enough to justify their existence. The IndyCar Series in its present composition is one of them.


Wednesday, September 9, 2009

IndyCar: Why Robin is Wrong about Versus

We hate to say we told you so, but...

It was only a matter of time before IndyCar insiders began to blame Versus for their inability to draw a U.S. television audience. We are somewhat surprised that it happened so quickly. Otherwise, it was predictable enough to be certain.

Robin Miller devoted his column on to IndyCar's U.S. television partner. He added some data to make the case that he first wrote about in this week's mailbag.

"...IndyCar needs to get out of the Versus deal. It doesn't matter if the show is good, nobody's watching." - Robin Miller

We like Miller because he loves the Indianapolis 500 and IndyCar racing. We do, however, disagree with him at times. His views tend to mirror those of insiders, which is understandable. But insiders don't get to determine what the market will accept.

The ongoing DirecTV saga notwithstanding, Versus has demonstrated that it is perfectly capable of drawing a legitimate audience if it has a product that U.S. television viewers want to see. The problem is not Versus; it is that the present permutation of IndyCar racing is not designed to attract a U.S. audience.

This series has no legacy stars to lean on - no A.J. Foyt, Mario Andretti, Al and Bobby Unser, Gordon Johncock, and so on. It therefore should race at venues that will attract drivers that can be sold to American fans of motorsports. Instead, the IndyCar Series is moving in the opposite direction.

There is nothing wrong with road and street racing, per se. The problem is that, combined with formula cars and international events, road and street races have unintended consequences. They tend to attract international road racers for whom there is very limited demand in the U.S. market.

How, exectly, are events in Toronto, Edmonton, Japan and Brazil supposed to increase U.S. television ratings? A good portion of street racing's appeal is that it can draw attendees for reasons that are unrelated to the core racing product. Why, then, should the IRL be surprised when it fails to convert those event-goers into television viewers? There are other parties to attend, after all.

Versus has a right to be more frustrated with IndyCar than IndyCar is with Versus. Remembering who is the customer and who is the supplier is a frequent challenge for IndyCar insiders, so we shall remind them here that in this case the customer is Versus. It paid money for this - not much, but some.

Versus has promoted the IndyCar product during popular programming, only to discover that there is very little demand. Production quality has generally exceeded expectations. On-air talent, another frequent object of blame, has improved.

IndyCar is a market failure because the product is designed to please participants and insiders rather than auto racing consumers in the United States. The latter group has demonstrated that it will tune in consistently to watch a product that is designed for its benefit.

It's not 1995 Anymore

Television ratings are less important when market inefficiencies can be exploited and supply chains can be arbitraged. However, unlike CART, the IRL will not succeed in these pursuits because tobacco advertising inefficiencies have been corrected and nearly all U.S. industrial supply chains lead to NASCAR (sans-culottes!). That is why IndyCar is now attempting to arbitrage the Brazilian supply chain.

As we have written before, we like television ratings because they provide a reliable measurement of market acceptance. They can not be bought. They are not influenced by comp tickets and compulsory attendance at corporate outings. They can not be camouflaged by signage and majestic terrain. They are not perverted by four-day attendance figures. They tell the truth even when the truth hurts badly.

The IRL must manage its product. Doing so will require that it take actions that will not be liked by some of its suppliers of racing teams. Costs must be slashed. Many drivers must be replaced.

Unless and until customers are served to their satisfaction, the IndyCar Series will remain a market failure. To think that ABC and ESPN would accept a time buy is ridiculous. ESPN could not wait to get rid of this product. That is why it allowed the IRL to leave a year early.

The marketplace is competitive. ESPN has many, many more options than it did back when CART bought air time. IndyCar racing in its present form does not deserve a major U.S. television partner.

Versus is stuck with IndyCar.


Tuesday, September 8, 2009

IndyCar: Cindric Tips Hat to NASCAR Drivers

This is getting weird.

Team Penske President Tim Cindric is a smart, soft-spoken guy. The Committee of Public Safety is therefore beginning to wonder why he is speaking so frequently and so publicly about moving the 2010 Indy 500 start time back to its traditional 11:00AM slot.

Cindric initially raised the subject at a meeting of IndyCar team owners prior to the race at Chicagoland. He did not attempt to disguise his motive, namely to boost Indy's television ratings by allowing NASCAR Cup drivers to participate.

Again, Cindric is a smart man. Why would he so clearly imply that the present IndyCar "stars" are incapable of attracting a television audience that is sufficiently large? (He's right, by the way.)

He was at it again down south this past weekend. Amazingly, Cindric in effect told reporters that the Indianapolis 500 needs to include NASCAR drivers if it is to feature the world's best.
"I think the Indy 500 needs to have the best drivers in the world. They need to have access to that race. There are so many guys that are NASCAR drivers now that tell me that some day they want to drive in the Indy 500." - Tim Cindric
We do not disagree with Cindric's assessment of the driving talent in NASCAR. After all, most of the best IndyCar drivers are there. And, frankly, we're glad that the Indianapolis 500 still appeals to NASCAR stars. But we are still left to wonder why Cindric is so enthusiastic about bringing them to the May Classic.

Of course Indy needs better TV ratings. But why is Cindric the front man, and why now? Is sponsorship getting shaky at Team Penske? Is Phillip Morris USA beginning to think that not advertising at all might be a better course of action than advertising in IndyCar, the cigarette marketer's lone remaining alternative? Maybe.

It might also be that Cindric is speaking for the faction of IndyCar owners who fear that funding will not be found for 33 cars at Indianapolis next year. Are Cindric and others hoping that drivers who have earned market acceptance (Cup drivers) might become the latest enablers for a form of racing that U.S. consumers have repeatedly rejected?

Do we need more evidence to suggest that the present roster of IndyCar drivers is an accumulation of non-performing assets? Why have a series at all if that is the case?

These are not rhetorical questions.


Appeal to the Indianapolis Motor Speedway Board

Citizens, we must expose the entrenched interests that threaten the future of IndyCar Racing!

We know that the correct price of sponsorship for a top IndyCar team is $1.3 million. However, recent comments by Terry Angstadt make clear that the IRL hopes only to reduce costs from their present level of $7 to $8 million per season.

Not Good Enough
The cost of operating a top IndyCar team must be no more than $1.3 million. Otherwise, there will be no new sponsors for IndyCar Teams. Advertising decisions are made by MBAs who are trained to do what their spreadsheets tell them to do. The secondary market for NASCAR Cup sponsorship (think: Subway) will continue to be of greater value.

Robin Miller has floated a $3-$4 million dollar target. We believe that Robin has very good intentions, but his figure is still at least double the market value of the product. Furthermore, we believe that his valuation was likely provided by Target Chip Ganassi Racing, an organization that distributes abnormal economic returns to Chip Ganassi and Mike Hull precisely because TCGR competes in an overpriced series.

Unlike Team Penske, Target Chip Ganassi Racing is financed with a sponsorship artifice that is divisible. TCGR does not have to compete with other IndyCar teams for consumer products sponsors. Why? Because TCGR can offer something of much greater value than team sponsorship - namely, concessions from a large national retailer. Therefore, Ganassi and Hull would act irrationally if they were to accept a cost structure for IndyCar teams that is equal to the promotional market value of those teams. They do not have to lose sponsors outright in order for their individual returns to decline.

We are confident that TCGR has contacts protecting its interests inside the IRL and the IMS; it would be foolish not to because so much is at stake. Ganassi and Hull have every incentive to see that the IRL manager who dares to bring operating costs in line with market value loses his head.

To the IMS Board of Directors

Please consider the individual economic interests of your suppliers of racing teams, which vary greatly. The interests of Target Chip Ganassi Racing are not at all aligned with your own. Do your managers defer to them out of fear for their jobs? If not, then you have marvelously courageous managers.

We would not blame you for disregarding the pseudonymous writer of an obscure website. We therefore encourage you to hire a consultant to provide analysis and protect the Board of Directors - not management, not partners, not suppliers, not customers, and not family members who are not Board members.

This consultant should not be someone who knows racing, but rather someone who knows business. He or she should be a complete outsider who does not travel in racing circles. Contacts of "friends" should not be trusted because "friends" have interests that are not aligned with yours. We can provide the names of several candidates that are highly respected in industry and academia. They have no interest in auto racing. Therefore, they are free to look out for yours.

Our email address is provided.


Monday, September 7, 2009

IndyCar Doesn't Deserve Danica

With each passing hour, it appears increasingly likely that Danica Patrick will take our advice and transfer her various talents to the NASCAR Nationwide Series. Tony Stewart, once mocked as the poster boy of the Indy Racing League, appears to be involved in the deal. Needless to say that nobody is mocking Stewart anymore.

We really have very little to say about Danica's decision. We try to adhere to rational economic analysis. Therefore, we had no choice but to assume that Danica would go to NASCAR, where she will not be the only driver that satisfies consumer demand.


Sunday, September 6, 2009

IndyCar Economics: TCGR Deep Capture

IndyCar managers, competitors and fans have been sold a myth. Conventional wisdom posits that marketers of consumer products will not sponsor individual racing teams and events. Empirical evidence informs us that this is not true. We need only look at NASCAR's (sans-culottes!) various divisions to find consumer product logos prominently displayed on racing cars.

Deep Capture: Target Chip Ganassi Racing

In fact, IndyCar has many consumer product sponsors. The problem is that most of them contribute funding to only two cars. This is due to the supply chain arbitraging activities of Target Chip Ganassi Racing. Here is a partial list.
  • TomTom
  • Energizer
  • Vaseline
  • Polaroid
  • Gillette
  • Memorex
  • GLAD
  • Nicorette
  • amp Energy
  • SoBe
  • Brita Filter
  • GE Reveal
  • Lysol
  • Maxwell House
  • Dove
  • Oreo
  • Air Wick
  • Champion
  • Sherwin-Williams
  • Purina
  • Life Water
  • Lexar
  • Bosch
These are not Mom & Pop operations. They are large firms that spend hundreds of millions each year on sports advertising. Unfortunately, almost none of it goes to IndyCar racing. Yes, these companies have logos on the Target cars, but that is only because they have received much more valuable consideration in a completely separate market.

Protectionism through Technology

The most vocal proponent of high-tech racing among team managers is Target Chip Ganassi Racing's Mike Hull. This would not surprise an economist. Hull and TCGR's interests are completely misaligned with those of the IRL and the balance of IndyCar teams.

Target Ganassi Racing has every reason to want the cost of IndyCar racing to exceed the product's market value. We know that this is counter-intuitive but ask that you stick with us.

Given the cost of operating an IndyCar team, Ganassi possesses an insurmountable advantage when it comes to acquiring sponsorship from marketers of consumer goods. He can arrange for concessions at Target Stores, a very large and powerful national retailer. That is why new consumer products sponsors such as Vaseline and TomTom seem to show up only on the TCGR cars.

Robin Miller and others have reported that Chip Ganassi's deal with Target does not permit him to add another primary sponsor for an additional car unless that sponsor's total contribution per car is greater than Target's. This clause is extremely important. It is likely the foundation of Mike Hull's fondness for expensive technology.

Breaking Up TCGR's TomTom Club

TomTom has been Dario Franchitti's primary sponsor at three events this season. We do not know how much TomTom contributed to TCGR via Target's arbitraged supply chain, so we will assume that the value is $3 million; that's $1 million per race of primary sponsorship. Remember, however, that the amount has little if anything to do with TomTom wanting its name on a race car. The payments to Ganassi are the cost of consideration in another market - shelf space, in-store promotion kiosks, or some such for TomTom products at Target.

Now, let's assume that IRL management decides to get the cost of operating an IndyCar team aligned with the market value of the product that IndyCar teams produce. That, of course, would mean that a 17-race season would cost approximately $1.3 million per car for a championship caliber team.

Adjusting cost to value would provide TomTom - indeed, all of Ganassi's associate sponsors - a broader range of appealing options in the IndyCar Series. Primary sponsorship of an Indy car - a competitive Indy car that could win the Indy 500 and the season championship - would be a rationally justifiable marketing expense because its price would match its actual value, $1.3 million. However, Chip Ganassi is unable to add a TomTom entry to his stable; $1.3 million doesn't come close to the amount per car that he arbitrages from Target's supply chain.

It is entirely plausible that TomTom would choose to decrease its contribution to TCGR from $3 million to $1.7 million. It could then reallocate the $1.3 million to another IndyCar team that has no restrictions on the amount it can accept for primary sponsorship.

Target would not suffer a cash loss. It would continue to grant $1.7 million in non-cash consideration to TomTom. Chip Ganassi and Mike Hull would suffer greatly. The entire $1.3 million cash decrease would come from their operating budget.

Extrapolate this result across multiple TCGR associate sponsors - Energizer, Gillette, Nicorette, Lifelock, Polaroid, Vaseline, etc. - and you will discover that the financial risk accumulates rather quickly for Target Chip Ganassi Racing.

Good for IndyCar; Bad for TCGR

A redistribution of consumer products sponsors across multiple IndyCar teams would be very good for the IndyCar Series. It would be very bad for Target Chip Ganassi Racing. Mike Hull therefore has every incentive to prevent the IRL from adopting a rational cost structure for IndyCar team operations.

That is why Hull loves expensive technology. He has said on many occasions that technological solutions are the future of the IndyCar Series. He had better hope so, because a reasonably priced series won't just cost him on the race track. It could remove a considerable sum from his pocket, as well.

The Committee of Public Safety finds it both sad and hilarious that Hull has so many allies at lesser teams, including some that are dormant, who follow his lead on the tech issue. Hull is pantsing these guys on the track and at the deposit window, and they apparently can't get enough. Perhaps it makes them feel good to agree with a winner.

We hope that IRL management does not take Hull's comments at face value. Someone must recognize the economic interests and resulting behavior of IndyCar stakeholders. However, our previous Deep Capture analysis of Honda and IndyCar TEAM does not encourage optimism.
The IRL appears to be the type of organization where a cliche such as, "You can't put technology back in the bottle," passes for wisdom and ends all debate. In fact, you most certainly can put technology back in the bottle. That's why sanctioning bodies write and enforce technical rules. When all but two teams can't afford technology, you really have no choice but to put it back in the bottle. Who at the IRL is going to tell that to Mike Hull?
Target Chip Ganassi Racing has the most to lose - by far - in the event that IndyCar reinvents itself as a competitive product in the consumer marketplace. We hope that IRL management understands and moves forward with plans for new specs that cost no more than $1.3 million to operate for a 17-race season.