The primary mission of The Indy Idea is to discuss how IndyCar might become a viable competitor in the motorsports entertainment marketplace. At present, it is not.
IndyCar is not economically competitive because it is grossly overpriced. I initially provided quantitative evidence in support of this argument here. I further revised my analysis here and here. I further explained the ramifications of IndyCar's non-competitive market position in the second half of this post.
The relevant microeconomic assumption is that demand exists for virtually any product at some price; however, demand does not necessarily exist at any price. For example, McDonald's sells millions of Big Macs each year at a price point of approximately $2.99 apiece. How many Big Macs do you think McDonald's would sell if the price were no less than $11.96 apiece?That is effectively the value proposition that IndyCar and its teams offer to sponsors.
If you are interested to know why sponsors such as Target and 7-Eleven are willing to take that deal, you will find answers here. Unfortunately, firms of that particular type are too few in number to sufficiently finance the IndyCar Series.
Incidentally, this is a marketing exercise. Think of it as having to do with the 2nd "P" of marketing - Price.
IndyCar "As If"
Let us assume that IndyCar might somehow price its product to correspond to its market value. That would necessarily mean that operating a competitive IndyCar team for the entire season must cost no more than $1 million.
Setting aside exactly how we might accomplish this objective, let us examine the potential benefits so that we might accurately judge whether or not the resulting pain would be worth it.
The following list is by no means comprehensive. The benefits are merely top of mind effects that would be the logical economic results of pricing IndyCar racing to match its market value.
- Teams attract sponsors because sponsorship is correctly priced
- IndyCar attracts sponsors at the series level because sponsorship is correctly priced
- TEAM subsidy payments can be cut because teams have fewer costs and more sponsors
- Some savings from reduced TEAM subsidies can be used to promote IndyCar
- Team and series sponsors can increase activation and promotion budgets because the cost of entry is reduced
- IndyCar can reduce its required sanction fee because it no longer must subsidize teams
- Profits to race promoters increase because the sanction fee is reduced
- Race promoters can reinvest some of those profits to increase promotion of IndyCar events
- Demand for IndyCar races increases among race promoters and tracks because IndyCar events are profitable
- IndyCar selects new events according to strategy rather than necessity because it has a broad selection of available venues
- Team owners can hire drivers based on talent and marketability because correctly priced sponsorship is available
- The ladder system begins to work because the top rung is available to drivers who demonstrate that they are talented and marketable
- Ride buyers continue to exist; the only difference is that there are more of them because rides are cheaper to buy
- Field sizes therefore increase
- Drivers who fail to qualify are not excluded for the remainder of the season because their sponsorship packages are correctly priced for a full season; financial risk to sponsors is reduced
- On-track competition is enhanced because the entry list grows
Pie in the Sky or Something to Try?
Those effects seem pretty desirable to me.
That said, we must consider how IndyCar might devise a product that allows teams to sell primary sponsorship at its true market value. The cost of entry would need to be no more than 25% of the current price.
It can be done, albeit painfully.
Therefore, I ask for your help. I am looking for ideas both big and small that will drastically cut operating costs.
I am not looking for reasons why it can not or should not be done. Don't tell me why I should pay $11.96 for a Big Mac. I don't care how much you like Big Macs. You'll never convince me that I should pay more than $2.99 for it.
Roggespierre
RP,
ReplyDeleteWe have had this discussion before, and the facts have not changed.
For an open wheel race car to compete at Indianapolis and other speedways, physics makes the rules. The chassis must be of suitable strength to withstand the loads from high G forces, and must be capable of dissapating and absorbing the forces from high speed impact.
The engines must be powerful enough to overcome aerodynamic drag and yield an acceptable top end speed.
What's acceptable? That depends on what you can sell to the public. Under a $1M budget cap, you could run Indy and the IICS series with F2000 cars and limit the top speed to the 150 MHP range. Perhaps the last generation of Formula Atlantic cars could fit the bill.
Downgrading the equipment still would not insure fiscal restraint, as today's teams demonstrate. A cap for staffing levels and R&D expenditures would be required to prevent wealthy teams from extracting superior performance.
The restrictions you suggest bring to mind the Atlantic Series, or A1GP, or F3. Spec cars, small teams without the ability or permission to develop the equipment. That gives you low budget racing at lower speeds.
If you wipe the slate clean of the current IndyCar Series, maybe you could sell that package to fans and sponsors. I still say that fans would show up for practice sessions and say "That's great...when do the big cars get here?"
McDonalds could knock 75% off their cost of goods sold too. They just have to convince customers that cellulose buns and soy meal instead of beef will still provide them with a healthy and delicious meal.
Who knows, maybe savings in gas would make that a popular plan. I don't buy it.
Andy
At some point a (team) cost / (fan) benefit analysis would need to be done, but off the top of my head:
ReplyDelete1. Shocks
Current: custom shock valving - $500K-$2MM per year.
Alternative: spec valving, 2, 3 or 4 way adjustable - $50K per year.
2. Engine
Current: purpose built race motor - $1MM/yr.
Alternative: production based block - $100K-$250K/yr.
3. Pit stops & Race format
Current: costs associated with personnel, equipment and extra tires used with pre-race testing - $1MM/yr.
Alternative: Heat and sprint race format - $500K/yr.
The chassis is a little more complicated. At $600K for the current car spread out over a 5-year chassis life cycle, that works out to $120K/yr, so that can be lowered somewhat. The challenge is to avoid the 'give em the razor and profit off the razor blades' model. It's the +$250K/yr. the teams are paying for replacement wings, sidepods, etc., that needs to be reduced either by removing those items from a new chassis or allowing the teams to fabricate their own pieces. Maybe a target of $250K for a chassis spread out over 5 years, for a chassis cost of $50K/yr. and $50K/yr. for damage and replacement costs.
-John
Like Andy up there, I'm not so sure that a $1 million per car target is realistic. Doing some simple math here, with a LOT of assumptions built in, for a 2-car team, running at basically a skeleton crew-level:
ReplyDelete1 Team Manager - $75,000 (probably low)
2 Race Engineers - $75,000 each (defintely low)
2 Chief Mechanics - $75,000 each (probably low)
2 Data Acq Geeks - $40,000 each (recent college grads work pretty cheap)
2 Chief Mechanics - $75,000 each (you want good guys here, and they're probably more expensive than that)
12 Mechanics (6 per car) - $40,000 each (is this about right? I don't know)
2 Truckies/Gofers - $40,000 each
All of those etimates are possibly low, and don't include health care, a 401k or anything else. We'll go with those for the sake of this argument.
Shop Rental - $3,000 per month
2 new chassis per year (assuming 2012 rules and assuming that you'll average two chassis per year to replace damaged ones or just to refresh equipment) - $300,000 each
Spares budget - $100,000 per car
Travel - $5,000 per person per year (includes all above personnel plus owner plus two drivers)
New equipment budget (shop equipment and race weekend equipment) - $50,000 per year
Right here, we're at $2,051,000, and I haven't touched truck leases, extra incidentals (crash damage), a hospitality tent, catering, or equipment depreciation or replacement. I also haven't touched engine lease or purchase prices, because that is entirely unclear at this point. For the sake of looking at a lowest possible estimate, I'm assuming that engines are supplied for free by the manufacturers, though that is obviously a big assumption. I've also left out tire costs, because I'm doing back-of-a-napkin stuff here, and that's more complicated.
Anyway, my point is that a 75%+ reduction in operating costs is just not doable at this level. I think that trying to make things meet in the middle by having operating costs come down to about $2 million per car (however that happens, and I have no answers there beyond engines that last even longer than the current ones do) and having sponsor value come up to $2 million per car per year is about the only way to do it at this point. Again, I don't have decent answers to either of those questions right now, I'm just offering input as to what a realistic target might be.
FWIW, here's a couple links to help distinguish the price-minus approach advocated by RP and the cost-plus approach IndyCar is currently operating with:
ReplyDelete6.Product Costing and Pricing
6.7 Pricing methods- cost plus
http://labspace.open.ac.uk/mod/resource/view.php?id=361249
6.8 Pricing- price minus
http://labspace.open.ac.uk/mod/resource/view.php?id=361251
Of course its WAY too expensive. Why else have we not had 40 cars at Indy since 2002? Why else are there so few actual SPONSORS in the series? Why else have there been so few new teams created in the past 5 years?
ReplyDeleteWhy does it continue to cost 5-10 million dollars a year, in a sport that generates no interest for sponsors, has fewer and fewer people interested in the product and a series with 7 year old cars and spec, crate engines?
Would the sport continue to slog along with crappy ratings and very few actual fans watching races in person, if the cars only cost $100,000? Could they still suck teat, if instead of having to pay a million dollar season lease, they had to pay $400,000 instead?
Indy Car should cost about what it takes to run a full-season NASCAR truck series team. That is about the level Indy Cars are on now. Why in the world, if I am a sponsor, would I fork over 4 or 5 million dollars a year, for a sport with the ratings and interest that Indy Car gets? When, for the same 4 or 5 million dollars, I can go to NASCAR's AAA series (Nationwide) and be on a car for more races, in front of MANY, MANY more fans on TV and on a network that almost everybody gets and watches?
Here's where loosing the great minds would do much more good than any we would attempt here. Let's accept the fact that Penske and Ganassi can make silk purses out of their sows ears at $10 mil apiece. Let's presume that Andretti can make ends meet with his program. Then things get tricky...
ReplyDeleteExactly who/what is this IICS? Is a "league" in the sense of the NFL, or a competition framework for independent teams?
If the former there are a number of things that can be done, from "spreading the wealth" by limiting financials, eliminating the traditional purse, rotating sponsors and drivers, imposing a "luxury tax", or run an equipment pool where teams draw chassis and engines by lot a week before each race.
If this is competition then why not allow competitors sort this series out? We keep thinking in terms of competing to win - forgetting that mid-pack or worse can be profitable with less operating and development expense and virtually no competition. Truly, showing up is 90 percent of success if mediocrity is all one seeks. Worse, the attitude seems to permeate its primary event, the 500, as Ed Carpenter's reticence in the Fast Nine proved.
"...for the same 4 or 5 million dollars, I can go to NASCAR's AAA series (Nationwide) and be on a car for more races, in front of MANY, MANY more fans on TV and on a network that almost everybody gets and watches."
Exactly!
Part of the problem is what Andrew and Speedgeek stated. Some of the "talent" is over priced. Speedgeeks analogy of team member cost is both over and under in pricing but overall an accurate view. How many of these overpaid workers has netted wins for their owners? The ones who do are paid accordingly. Owners need to re-evaluate what is being paid for lackluster results. Most Tech's who work in the dealership or open shops are paid flat rate. They are paid upon performance and that is it. Failure to perform the work correctly or in a timely manner results in the tech doing it again on his time. While I am not advocating this on these type cars, a flat salary and a bonus incentive may just help to A) lower overall cost B) those failing to produce predetermined results get escorted stage right.(fired) C. Replacement individuals will be mandated to not only meet current technological skills but add additional skills.(multi-skilled employee) Each adding to lowering the cost and improving the product delivered. A recent thesis I did brought about some interesting conversations but learned people stating that this type of philosophy could not only serve Indy Car but re-ignite our economy. Many talented people are never given opportunity simply because someone who is living on their past gets to determine the future. Something to consider gentlemen.
ReplyDeleteOldwrench,
ReplyDeleteI'm slightly concerned by your remarks there. For starts, what I outlined there was a budget of $500,000-600,000 per car for personnel alone. Which of those positions do you think are overpriced? I ask because I genuinely am curious. I do know that back in the CART days that good race engineers were pulling down $100k+, so I undershot that as a sign of the times and assuming that it's a lesser team who would be employing lesser talent (to get a baseline labor cost). For a Penske or Ganassi, I'm sure those race engineers make more like $100k. I sort of figure the same goes for chief mechanics and team managers. I'm certain that mechanics made at least mid-$30s back about 10 years ago, so I adjusted that up for inflation. I'd think that if you started offering good mechanics $35k or less that they'd do the reverse of what I think you're suggesting: go work at a dealership where the pressure is lower and less is expected of you (not many all-nighters for crash damage at the GM dealer). DAGs aren't going to work for less than $40k, because they'll all have student loans (been there). Anyway, I really don't see how you could shave much off of that $500-600k number, and I'm pretty certain that it could be an underestimate by as much as a couple hundred thousand per car (or far more than that, for a Roger or a Chip).
To your other point about "overpriced, underperforming" individuals being forced out of their jobs...isn't that kind of what the free market does of its own volition? People in racing generally don't make that much money in the first place (been there), so you're thinking that we could replace the existing ones with people who'd require being paid even less? Are we going with "non-union Mexican equavalents" now (to borrow a phrase from The Simpsons)? Did Gasoline Alley go union while I wasn't looking? I'm confused.
I think you missed the point. It is about redefining the value of the team in relation to the product's market value. If the cost of the equipment is going down due to revised technology then the wage package needs to adjust accordingly also. I don't see "gofers" doing carbon fiber work and I don't see DA people fixing gearboxes. It is far easier to retool current on new mechanics to new technologies than to add more personel. We all are being asked to do more in this current economy so why can't we ask the same of current employees of Indy Car teams? When was the last time Larry Curry or others like him did more than push paper? It is not personal, it is simply re doing the business model. Most companies have, maybe it is time for Indy Car teams to do the same?
ReplyDeleteI just noticed that I listed chief mechanics twice. You can subtract $150k out of my two car team. Now, I'm right at $2 million for personnel and bare minimum stuff (while still leaving out engines and tires and a couple other things). That's 21 employees for a 2-car team, or 11 employees for a 1-car team. I just don't know how you can pare that back much more. Cut down to four mechanics per car and bring in two weekend warriors for each car? Make two of your mechanics the two truckies and pay them an extra $10k each for the extra responsibility (because that's a whole extra level of responsibility for that job). Making those two changes knocks you down to 15 full-time employees for a two-car team, and brings your personnel costs down around $400k per car from $550k or so. Better, but still not enough of a difference to suddenly make IndyCar affordable to massive amounts of teams.
ReplyDeleteI think what I'm getting at here is that cutting down operating costs for teams will only go so far. You'll have to increase revenues to make the numbers balance out.
Speedgeek,
ReplyDeleteThat really would be best, wouldn't it? Ultimately, you're right. At some point you must produce a product, and that product is going to cost some amount of money. The only question left to be answered is exactly what the bottom-line threshold might be.
But how to increase revenues? Promoting these cars and these drivers to American racing fans? Frankly, I see no evidence to suggest that it will work. The product is not designed for a large portion of U.S. racing fans.
Racing in Brazil apparently increases revenues, but is it strategically advisable? I believe that it is not.
It's a puzzle that's missing a couple of pieces. You will never solve it via promotion. Restructuring and drastically reducing the cost of competing would give IndyCar many more attractive options than it currently possesses.
Best Regards,
Roggespierre
Best example of RP's point is the current Indy 500 numbers. They went down...not up ! If they continue to fall as I expect, the value of Indy Car goes down. That simple!!! So if they go down the cost to run a product has to fall in line with the product's value. Example...computers....next few years they will be replaced with the Iphone or Blackberry. Costs to sell...going up. Prices..coming down! Same for the phones. Once markets are saturated they also will fall. When market mature, only so much value is left. Indy Car is no different.
ReplyDeleteSpeedgeek,
ReplyDeleteThere's another tact we can take with this. Instead of trying to strip-down the current product, we can start with a baseline of what it would cost to run the IndyCar series with a less involved car and then value-add to reach a level of performance the fans would find acceptable.
Without getting into all the details and working off the two guys and a truck business model, we could show up for all the domestic IndyCar races with an F2000 car, run the races and make it back home with a season budget of roughly $250K.
While the F2000 cars put on a good show, I doubt IndyCar fans would find a 140hp, 140 mph race car acceptable as an IndyCar. Then we just start adding value from that $750K budget we're working with.
The bottom-line is that you can run a car with a comparable level of performance to the current car for $1MM/yr. You can't, however, run a car for $1MM/yr. with (a) a motor that costs +$1MM/yr., (b) a chassis whose parts cost +$250K/yr. and (c) requires an army of engineers and personnel that cost +$1MM/yr.
So my question is: how much fan value do (a), (b) and (c) bring to the equation?
It's just a simple cost-benefit analysis. A substantial portion of an IndyCar team's budget is spent on things that add very little to the fan/customer value proposition.
-John
Thanks for supporting the F2000 argument, and why cheap little cars won't work.
ReplyDeleteIt took less than a staff of ten to run a 82C March/Cosworth. Why the difference? That's all the money there was to do it with.
Running a familiar spec car with plug and play engines? Six, including the truck driver. That's a budget cap issue, not an imperative that improves the competition. In fact, the additional engineering and fabrication for R&D creates the strata of competitive levels, it does not enhance them.
These teams fly 20 per car to overseas races. Guys still back at the shop to watch on TV.
Andy
Well maybe instead of having the cars run the race, we could get all the engineers out there and have them run around the track. That's where most of the sponsor dollars are going anyway.
ReplyDeleteThe point is if you don't allow data acquisition, you don't need a data tech. Same goes with the engineers: if you don't allow custom shocks and shakers, you don't need them either. Data acquisition and/or engineering is primarily of benefit to the teams, not the fans.
The American race fan just doesn't seem interested in that sort of competition. It works in F1, where the fans are more fans of the marquees than the drivers, or in football where the fans are more interested in the team than the players, but the American racing fans seem more interested in driver v. driver than Team Roger v. Team Chip.
You remind me of a guy I used to know named Zackley.
ReplyDeleteEgg Zackley.
Andy Minion
'Scuse me, Egg?
ReplyDeleteI just read this little bit:
"The bottom-line is that you can run a car with a comparable level of performance to the current car for $1MM/yr."
That, sir, is cracked.
Andy Minion.
Thank you for the info. It sounds pretty user friendly. I guess I’ll pick one up for fun. Thank u.
ReplyDelete