Friday, September 25, 2009

IndyCar Price & Market Value 2.0

The market value of everything is constantly changing. Racing teams are not exceptions.

Back in early August, I estimated that the promotional value of a championship caliber, one car IndyCar team was $1.3 million. However, I also noted that each additional race would likely reduce that number because the average television audience would decline.

I have since recognized a small but not insignificant error in one of my assumptions. Specifically, I benchmarked average television viewership for the NASCAR (sans-culottes!) Cup Series in 2009. That was a mistake. Budgets and team valuations for 2009 should have been benchmarked to the 2008 NASCAR Cup television ratings. Because Cup ratings have declined in 2009, we should assume that 2010 NASCAR team valuations shall also decrease.

Therefore, I shall undertake the exercise once again. This will not only improve accuracy, but also incorporate new data.


Various published reports indicate that a championship caliber, one car effort in NASCAR Cup generates approximately $20 million per year in sponsorship revenue. Therefore, we shall assume that a typical topflight Cup team brought in $20 million for the 2009 season.

The primary driver of value is television ratings. The 36 NASCAR Cup events in 2008 combined to attract 253,868,000 TV viewers in the United States.

$20,000,000 / 253,868,000 viewers = $0.078781098838767

Therefore, the sponsors of a given championship caliber NASCAR Cup team pay a little less than $0.08 per television viewer. That number (not rounded) shall provide the foundation of our analysis.

The Decline of Oh-Nine

The $20,000,000 valuation for 2009 was based on television ratings in 2008. Unfortunately, NASCAR Cup has seen ratings decline significantly this season. Through 27 of 36 events this year, Cup has drawn 177,540,000 U.S. television viewers. The per race average is therefore 6,575,556. We shall now project total viewers for the entire Cup season.

36 Races * 6,575,556 viewers per race = 236,720,000 projected viewers in 2009

Recall that each viewer is worth a bit less than $0.08.

236,720,000 viewers * $0.078781098838786 per viewer = $18,649,062

Therefore, the same NASCAR Cup team that should have earned $20 million in sponsorship revenue in 2009 can anticipate bringing in $18,649,062 in sponsorship revenue for the 2010 season. This, of course, will certainly not be the case. Most racing teams have multi-year sponsorship contracts with fixed prices. However, the continuing decline of NASCAR Cup ratings could very well explain why sponsors such as DeWalt Tools, Jack Daniel's, and Jim Beam have announced their intentions to exit the series following the 2009 season.

The cost of operating NASCAR Cup teams has likely not decreased in correlation with those teams' relative market values. Those that have long-term contracts in place will likely earn more sponsorship revenue than they deserve in 2010. Conversely, those whose contracts expire this year are likely out of luck. No sponsor is going to pay 2008 prices for an asset that decreased in value by 6.75% year-over-year.

One Million Dollars

We use the same equations to determine the value of a championship caliber, one car IndyCar team. Based on sources including the Indianapolis Business Journal and Robin Miller of, we can estimate that the 16 IndyCar races in 2009 have combined to attract 10,922,000 U.S. television viewers. The per race average is therefore 682,625. We shall now project total viewers for the entire IndyCar season.

17 Races * 682,625 viewers per race = 11,604,625 projected viewers in 2009

Again, each viewer is worth slightly less than $0.08.

11,604,625 viewers * $0.078781098838786 per viewer = $914,225

Therefore, a championship caliber IndyCar entry should anticipate earning total sponsorship revenue in the amount $914,225 for the 2010 season. That includes associate sponsors.

Don't Blame Versus

What would that same team be worth if all IndyCar races were on ABC and the ESPN Family of Networks? The average IndyCar race on ABC this season (not Indy) drew 955,500 U.S. television viewers. When that number is multiplied by 16 events and the Indy 500 audience is added, the projected audience for the 2009 IndyCar season is 19,888,000 viewers.

19,888,000 viewers * $0.078781098838786 per viewer = $1,566,798

That's better than $914,225, but it still isn't even half of a full season IndyCar team budget. Also, we need to make an adjustment. The night races can not be aired on a network. Previously, we discovered that slightly more than 2 million viewers are lost due to night races that must air on cable. Therefore, we adjust our total season viewership and team valuation.

19,888,000 viewers - 2,016,500 lost to night races = 17,871,500 viewers


17,871,500 viewers * $0.078781098838786 per viewer = $1,407,936

Thus, we can conclude that the Versus contract is costing a championship caliber team less than $500,000 in promotional value. That is not nothing. However, it is also not nearly enough to make IndyCar teams competitive in the market for auto racing sponsorship.

For now, a top IndyCar operation is worth $914,225 to prospective sponsors. A marginal IndyCar team incurs operating costs of at least $4 million per season.

It's sad, really.


Thursday, September 24, 2009

Danica a Done Deal

According to Curt Cavin of the Indianapolis Star, Danica Patrick will remain in the IndyCar Series for at least three more years. Cavin reports that the IRL poster girl has re-signed with Michael Andretti's team and will continue with "Motorola based" sponsorship.

Cavin also reported that Danica's future NASCAR plans remain unresolved.

This is a much needed shot of good news for IRL Commercial Division President Terry Angstadt, who also hopes to sign a series title sponsorship deal with Phillips-Van Heusen, parent company of current IndyCar sponsor IZOD.

Versus just short of 1 Million Viewers

No, not for Motegi.

Sports Media Watch is reporting that Versus pulled 972,000 viewers for Saturday's college football game between Florida State and Brigham Young. That's almost 1 million viewers... on Versus... without the benefit of 18 million DirecTV subscribers.

The game was no barnburner. The Seminoles crushed the Cougars, 54-28. And, much like last week's game between Texas and Wyoming, the FSU/BYU contest had ample competition from other college football match-ups throughout the United States.

Allow me to reiterate. Versus is perfectly capable of attracting an audience if it has a product that people want to watch. The present iteration of IndyCar racing does not qualify. At times it seems that IRL management is trying to make life difficult for its new cable television partner.

Quit blaming Versus and give U.S. customers what they want.


Surprise! IndyCar Barber Capacity Expands

Barber Motorsports Park and its government-backed promoter, ZOOM Motorsports, have learned a valuable lesson.

Never disclose seating capacity at a road course or street circuit.

The reason for this is simple enough. If everyone knows your capacity, then you can not fudge your attendance figures. If you can not fudge your attendance figures, then you risk losing your government subsidies.

Curt Cavin of the Indianapolis Star learned this week that Barber's previously announced capacity of 30,000 is apparently not the case. This would seem to imply that more fans will be permitted. How many more? Apparently, the BMP official did not say.

They're learning.


Wednesday, September 23, 2009

Four IndyCar Ovals & U.S. Driver Participation

Blue - Texas Motor Speedway (June event)
Red - Kentucky Speedway
Orange - Chicagoland Speedway
Green - Kansas Speedway

Declining attendance and television ratings are serious concerns for the Indy Racing League. Market acceptance of the events at Kentucky, Chicagoland and Kansas has waned by every possible measure. The race at Texas remains viable, but attendance has clearly decreased.

These facts are not in dispute, although there is room for debate with regard to degree.

What role, if any, has declining participation by U.S. drivers had to do with the decrease in consumer acceptance? We can not be certain. However, it does appear that some correlation exists.


Barnhart Serious about 3-wheeled IndyCar?

Few seemed to notice when Roger Penske said that IRL Operations Division President Brian Barnhart was considering adopting a three-wheeled machine as the new IndyCar spec for 2012. I have since heard from more than one credible source that Barnhart is in fact serious about the idea.

Barnhart told Dave Lewandowski of that one of two specs under consideration, " so radically different it will entail significantly more in terms of R&D, cost and time. It's kind of out there."

Apparently, three-wheeled racers are not a new idea. Who knew they race ovals (clockwise) in England? That might go a long way toward reinvigorating short track racing, but it hardly seems appropriate for the World's Greatest Race Course.

Something like a modified Volkswagen GX3 (photo at right) might be appropriately artful. Landing the resurgent German automaker would certainly be a feather in the caps of Barnhart and Terry Angstadt. Manufacturers do seem to be considering adding 3-wheelers to their product lines.

Frankly, I would prefer a 3-wheeler to this uninspired puffball that was served up by Honda.

So Crazy that it just might...

When I first heard that Barnhart was thinking about a 3-wheeler, I was appalled. But I must admit that the more I think about it, the more I warm to the idea. For the sake of argument, let's assume the following.
  1. Safety is comparable to that of the present cars
  2. Teams will be responsible for manufacturing a significant portion of the car
  3. The supply chain will be allowed to evolve from below rather than being dictated from above
  4. Manufacturers will not be granted concessions that add inefficiencies to the supply chain
  5. The 3-wheeler will cost less because fewer parts (and tires) must be replaced
  6. It will pose a greater challenge to IndyCar drivers
  7. A small team can run the entire season for $2.5 million or less
In my view, these objectives are fundamental and essential. If they are satisfied, then my concerns diminish considerably. We know that IndyCar teams do not generate $2.5 million in promotional value per season. But the present, uninteresting spec is central to the equation.

IndyCar Shock Therapy

A 3-wheeler would, at the very least, provide some shock therapy. Does it border on gimmickry? Probably, but even that might not be such a bad thing. The wow factor would likely increase television tune-in viewership for a period of time. Recall that each additional television viewer generates $0.09 of additional promotional inventory that each team can sell to sponsors. If IndyCar were to have its economics under control, then it might be able to convert the short-term bump into long-term vitality.

A 3-wheeler might also solve an additional problem. It is no secret that a large majority of racing drivers in the United States cut their teeth in series that feature front engine, tube frame cars that race primarily on oval tracks. Alternatively, racers from most other countries graduate from go-karts to lower level single-seaters that race almost exclusively on road courses.

I know of no country where drivers work their way through the ranks driving 3-wheeled cars on circuits of any type. Might this be the middle ground that IndyCar so desperately needs? Might it appeal to not only those who clamor for technology, but also those who want to tear off the wings? Is it possible that racing nirvana is within reach?

Approving of a 3-wheeled IndyCar is something that I normally would have expected to do on the same day that I purchase my first Bette Midler album. But these are not normal times for IndyCar racing. I am beginning to sense the wind beneath my wings.


Tuesday, September 22, 2009

IndyCar Barber Buzz

The truth is obvious to those who wish to see it.

The Indy Racing League will stage an event at Barber Motorsports Park in 2010 because the contracts include either explicit or implicit government guarantees that everyone - league, track, promoter and contractors - will be paid.

Daily attendance will be capped at 30,000. So it would seem that drawing a large audience is not a priority - although the crowd will likely be deemed "phenomenal." A writer to Curt Cavin's blog at the Indianapolis Star now suggests that selling tickets might not be too high on the list, either.

The IRL is a market failure. That is why it needs APEX Brasil. That is why it is seeking subsidies in Baltimore. That is why it will continue to lose events at facilities that are expected to turn a profit. And that is why it sold a race to ZOOM Motorsports, the Barber promoter that is backed by the governments of the City of Birmingham and the State of Alabama.

Those who sell products that are rejected in the marketplace have no choice but to seek non-market solutions.

Terry Angstadt is indeed a fine salesman. He is the architect of what could well be the first publicly underwritten IndyCar event at a permanent racing facility.



Indy Idea Enters the Ring

Contributions from readers of The Indy Idea are both welcomed and encouraged. In particular, I appreciate well-reasoned arguments that do not mirror my own.

The following example is from VirtualBalboa. My comments follow. I invite you to add yours.


"Can't agree that the IRL was ever a good idea. Should have taken a seat on the board and run a team with Americans in order to try and divert the direction instead of shooting the whole thing in the head to save it from itself. It's tough to say, after all, that he was a success in saving the 500 if there isn't one, or if it becomes a classics race. Road to hell paved in good intentions and all that."


You'll get no argument from me about the IRL failing to save the 500. However, I suspect that a seat on the board would not have mattered all that much. He wasn't going to stop the leveraging and rent-seeking that destroyed the economics of the sport. He wasn't going to have enough influence to change the direction.

Hindsight being what it is, I would suggest that he did not go far enough with the IRL. The product required greater differentiation. He probably focused too much on the tracks (the all-oval rigidity) and too little on the cars. He also failed to sufficiently address the underlying economic problems in the supply chain. Yes, a cottage industry began to take root, but it did not include the base chassis. The engine economics were pretty good initially, but he blew them up to attract Toyota and Honda.


"I've seen a couple arguments about trying to do redistribution of sponsorship. A lofty goal perhaps but I don't see this as being realistic. Nor do I necessarily see ridding Penske and Ganassi as being a way to solve the problem. Indy without Penske is like F1 without Ferrari at this stage. It was devastating to the legitimacy of the race when they weren't around, even if the US 500 itself was a failure..."


Allow me to clarify my position. Redistribution of sponsorship is not something that I support. And I do not want to get rid of the Penske and Ganassi teams. What I do want is more IndyCar teams that have legitimate, value-based financing that they sell in the competitive market for auto racing sponsorship. Penske will keep his sponsor because he operates in a non-competitive advertising market. That will change only with the law.

Ganassi is a different story. Recall the rumors about Lifelock sponsoring Buddy Rice in 2009. We don't know why, but we do know that Lifelock landed at Ganassi. Remember Robby McGehee's Energizer car? That went away when Ganassi came to the IRL. Ganassi's ability to land consumer products sponsors is limited only by the number of product categories in stock at Target. He can offer something that is of much greater value than sponsorship of an IndyCar team.

I want all IndyCar teams to have an opportunity to sell value that is correlated with their cost of operating. That requires slashing operating expenses. If that were to occur, then Ganassi would have to compete for sponsors. What might happen then? Who knows? Perhaps he would keep them all; good for him if he does. However, having observed the distribution of consumer products sponsors in NASCAR Cup, I suspect that Ganassi might have some difficulty.

My point is that Ganassi is fully incentivized to maintain a status quo in which the cost of operating an IndyCar team is greater than the promotional value that the team generates. For as long as that remains the case, Ganassi can continue to add Fortune 500 associate sponsors without having to compete with other teams.


"No one buys that the Americans in the IRL are the best US drivers. Americans don't care if they win because no one believes they're racing world class opposition anymore. No one thinks they're in the toughest series in the world, or that they are better than their peers. This is because they are right: Kyle Busch, Tony Stewart, Jeff Gordon, and Jimmie Johnson are likely the 4 best drivers currently birthed in this country, and none drives Indy cars. Fans recognize that and don't want to support a second rate series. Until they shake that (and is there any other way than to bring in NASCAR talent?), there's nothing they can do. It's an image problem that started with the media ridiculing the "stars of the short track" and only built steam when Juan Pablo Montoya denigrated the 500 en route to dominating it."


Again, I do not disagree. However - and this might raise some objections - I will argue that it does not matter whether or not Americans think that the IRL has the best American drivers. My position rests on the quantifiable demand that has been demonstrated for the NASCAR Grand National Series. It, too, does not include the best American drivers - not always, anyway. That said, is there anyone at the IRL offices who would not like to have Grand National's attendance and television ratings right about now? They look pretty attractive to me.

Furthermore, I admit that I do not care whether or not anyone believes that IndyCar attracts the best drivers in the world. The entire "best" argument, in my view, is one for the bar stool. I want an IndyCar Series that is a competitive product. A strong base of drivers from the United States is critical to establishing market competitiveness. We need only look at Indy Lights and Atlantics for evidence to suggest that the combination of spec formula cars and road courses is not likely to generate the desired product attributes for IndyCar.

In my view, VirtualBalboa is right about Montoya. But I would argue that it was the Indy 500 of the following year that led to IRL capitulation and economic ruin. Montoya might have been written off as a singular talent. But all credibility was lost in 2001, when Eliseo Salazar, the top IRL finisher, crossed the bricks a lap down in 7th place.


"One thing rarely discussed in lieu of all this is that open wheel dirt racing is in decline. There's far fewer cars than there were 5-10 years ago and dirt tracks are closing down rather than appearing. The World of Outlaws is trucking along with its sprints and late models, but one look at the number of available entries for midget, sprint, and Silver Crown in 2009 is well down. The entire ladder is broken, not just the top rung."


This is undeniably true. That is why I do not believe that dirt track drivers in large numbers are essential in order to achieve market acceptance. It is much more important that the IRL establish a strong base of competitive drivers from the United States. It would be nice if two or three were established dirt racers. There should be room enough in the IRL for both A.J. Foyt and Peter Revson.


Monday, September 21, 2009

IndyCar 2010: Whither Brazil?

Staging the 2010 season opening IndyCar race at an undisclosed Brazilian location seemed like a harebrained idea from the get-go. Nevertheless, IRL Commercial Division President Terry Angstadt dropped more than a few hints to suggest that it would happen.

Since then, silence.

Curt Cavin of the Indianapolis Star reports that the IRL brass returned to Brazil just prior to the annual IndyCar sabbatical in Japan. Apparently, the latest trip to South America followed another Brazilian junket in early September.

Is Angstadt's season opener - and more importantly, his 2010 financier - in jeopardy? We can only speculate, but it would seem that in this case no news is bad news, at least from Angstadt's perspective.

Perhaps APEX Brasil has come to its senses, recognizing that market penetration in the United States might be better achieved without dragging around the abysmal economic failure that is the IndyCar Series. Perhaps APEX Brasil fears that IndyCar racing is no more popular in Brazil than it is in Japan and the United States.

Is finding a suitable venue the real hold-up? It could be. But the true snag might also be something as ancillary as the volume of Brazilian tea that Super Target is willing to stock. Such is the perversion of financing a market failure on wheels.

Race day at Homestead-Miami would appear to be D-Day. APEX Brasil's U.S. headquarters are nearby. If this "race" is going to happen in 2010, then the 2009 season finale would seem to be both the time and place to announce it.

Here's hoping for more silence. Perhaps, then, somebody can begin shaping an IndyCar Series that might earn an audience.


Note to Readers and Guests

Thank you to those who visit the Indy Idea regularly. Your numbers have grown faster than I could have imagined. Your comments have given me reason to reconsider my opinions regarding many subjects. That is the type of forum that I envisioned creating here.

I am aware that my writings have been critiqued, once again, by the writer of another blog. Last week, I committed a great deal of time and effort to defending myself against such criticism. That was a mistake, one that I will not make again.

My goal here is to provide credible analysis. Whenever possible, I use empirical data. I have noticed an increased interest in hard numbers. This is likely a case of mere coincidence; it is a good one at that.

I have also attempted to utilize the writings of thought leaders in the fields of marketing, management, and corporate strategy. Anyone can write that "exposure" and "promotion" are needed in IndyCar racing. Everyone knows that costs must be reduced. Such comments are not insightful.
You can promote pickled herring and cut its price as much as you
want. The market for it will remain small. Sometimes, the product is the problem.
I want an economically competitive IndyCar Series, one that does not require subsidies from governments, arbitraged supply chains, drivers and the Indianapolis Motor Speedway. I am convinced that the present course shall lead to ruin. That is why I want it stopped.

Disagreement is welcome here. I am not always right. But I am done linking to those who seem interested only in taking pot shots.

Fool me once... you know?


Sunday, September 20, 2009

IndyCar Championship: Tight but no Tension

Three different drivers can win the 2009 IndyCar Series championship by winning and leading the most laps in the finale at Homestead-Miami Speedway. Needless to say that the battle between Scott Dixon, Dario Franchitti and Ryan Briscoe is tight. Unfortunately, it seems that the resulting tension among auto racing consumers in the United States is less than palpable.

Talented as they are, the championship contenders have failed to establish a fan base. Why?

Let's return to IndyCar Maxim #4. I quote renowned marketing and strategy professor Clayton Christensen.
"...the job, not the customer, is the fundamental unit of analysis for the marketer who hopes to develop a product that consumers will buy." - Prof. Clayton Christensen, Harvard Business School
Few consumers are buying the IndyCar racing product. I would suggest that the core problem is that the IRL has no clue about the "job" that prospective racing consumers want to get done.

Christensen continues:
"With few exceptions, every job people need or want to do has a social, functional, and emotional dimension."
This insight is extremely important. The IndyCar product is the brainchild of IRL Racing Operations Division President Brian Barnhart. The former racing mechanic possesses significant expertise with regard to the functional aspects of the product. One suspects that the social and emotional product dimensions might sound to Barnhart like so much gobbledygook.

If that is the case, then perhaps Barnhart should take a glance at the grandstands and the Nielsen numbers. This is why the IRL needs an IndyCar Series product manager. Sales and racing operations do not begin to cover the activities that are necessary if IndyCar is to ever succeed in the competitive marketplace.

Not just an Audience, a TV Audience

IndyCar's failure to attract an audience on television is attributable to multiple factors. Some are easily identified. For example, night races are consistently outperformed by daytime events. Viewership for at least three of the IRL's established oval events has declined as more road and street races - and therefore more international road racing drivers - have been added.

The IndyCar schedule is inconsistent, confused and arbitrary. Fans of NASCAR and Formula 1 know exactly what they can expect when they watch a race. IndyCar is hopelessly muddled - a predominantly road and street racing series that includes almost exclusively road racing drivers and that happens to include the world's most famous oval race. The schedule is a non-strategic amalgamation of events for which promoters will pay and teams will show up.

The cars and events are managed. The product is not.

NASCAR has mastered what sociologists call parasocial interaction: a relationship between two individuals in which only one is actively engaged. In the case of NASCAR, that individual is the fan. The object of the parasocial relationship is the driver. This is not the same as living vicariously through another. Parasocial interaction in NASCAR is about the fan perceiving that he or she and the driver share certain life experiences and values.

Interestingly, psychologists suggest that parasocial actors tend to be more solitary and detached than others. Watching racing on television is by definition a solitary activity. Yes, some watch in large gatherings, but most tend to view races either alone or in the company of immediate family. Therefore, those who tend to engage in parasocial relationships would seem to be outstanding candidates to watch racing - and they do watch NASCAR racing - week after week.

Conversely, fans who attend IndyCar street races are commonly believed to be seeking a vibrant and interactive social setting. They are therefore not interested in parasocial relations. Is it any wonder that few of them are willing to sit alone, watching an IndyCar race, when they are not actually attending the event?

NASCAR has a consistent culture that tends to attract natural television viewers. IndyCar has a variable and often contradictory culture that appeals to few who are likely to watch races on TV.

More Questions

Racing fans who like the kind of racing that produced Scott Dixon, Dario Franchitti and Ryan Briscoe are not likely to watch a lot of racing on television. In addition, fans who might want to have parasocial relationships with IndyCar drivers are not likely able to do so because the fans and the drivers lack the types of shared life experiences upon which parasocial involvement is established.

The IRL is fond of showing its drivers participating in other sporting activities that they enjoy. Unfortunately, this typically entails some type of soccer, rugby or Australian Rules event. This is a waste of time because it says to the parasocial prospect, "You're right. These guys really are nothing like you. They're interested only in things that you don't care about."

Parasocial relations are essential in sports for which the players do not wear jerseys that identify their home city or school. Fans who lack a home team are event-goers. In that, there is no inherent harm.

Just don't expect them to look for your product on television. And don't be surprised when a tight championship battle fails to induce tension.