IndyCar Future: the macro view

The gentleman pictured above is Herbert Hoover, the 31st President of the United States. Fairly or not, his is the face of Great Depression.

You might be asking yourself what President Hoover has to do with IndyCar racing?

If a growing number of economists and hedge fund managers is correct, then we might just be headed toward the type of deflationary recession that prompted your grandparents to hide cash under the mattress and to wear the same overcoat for 50 years.


Keynesians and Austrians are beginning to agree that the risk of a global economic depression has never been greater. For those who are not familiar with economic schools, I shall say only that these two typically agree on exactly nothing.

If the economists are correct - and I note that they frequently are not - then what should IndyCar do in order to prepare? I have indicated my preference for low cost leadership positioning in the U.S. motorsports marketplace. Others have thoughtfully disagreed.

If the bottom really is falling out of the global economy, then what is IndyCar's best course of action?

I look forward to reading your thoughts.

Roggespierre

Another reason to cut IndyCar Costs

In the past, I have worked hard to explain here why increasing television ratings should be jobs one, two and three for IndyCar management.

Simply stated, there is no other metric that can be leveraged in so many different ways to increase revenue to the league, its promoter-customers, and its suppliers of racing teams.

Reaching this conclusion is easy. However, accomplishing the objective is extremely difficult.

I invite you to read this fascinating Ad Age story about the value of prime time television ratings.

What might we be able to extrapolate from the article with regards to IndyCar racing sponsorship value? Is this good news or bad news?

I invite you to answer the question before I provide quantitative analysis.

Roggespierre

Benefits of Pricing IndyCar to its Market Value

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

Edmonton IndyCar event loses $3.9 million

This can not bode well for temporary racing circuits in the IndyCar Series. According to the CBC, the 2009 Rexall Edmonton Indy lost $3.9 million. The good news is that this is an improvement compared with 2008, when the Edmonton IndyCar event lost $5.2 million.

For those who are keeping score, that's $9.1 million in government funds that have been flushed down the toilet in just two years. If IndyCar were to attract a substantial television audience, then the money might be justified as an investment.

Unfortunately, that is not the case. The Edmonton Indy earned a 0.4 cable rating on ESPN in 2008 and a .24 cable rating on Versus in 2009.

U.S. television viewers have spoken. There is very little demand for this event.

The math is not difficult. The municipal and provincial governments have backstopped $9.1 million in exchange for a grand total of approximately 700,000 U.S. television viewers over two years. That's $13 per viewer.

If Edmonton were a profit-seeking enterprise, then it would have no choice but to follow Richmond out the door. When the contract expires following the 2010 Edmonton Indy, I suspect that we should anticipate the same conclusion.

Roggespierre

IndyCar Supply Chain Follies

IndyCar fans and journalists appear to be hopeful that Tony Cotman will solve many of the problems that imperil the IndyCar Series. Regrettably, the evidence suggests otherwise.

Like Brian Barnhart, Cotman is apparently determined to dictate the IndyCar supply chain from above. Supporting evidence is provided by Marshall Pruett at SpeedTV.com.

Supply Chain Economics

The practice of dictating the supply chain is one that has to go. Tony George did this initially to ensure that the IRL would have sufficient supply in 1997. It was a short-term solution that somehow became a long-term policy. Cotman then adopted it when he oversaw development of the DP01 for ChampCar. So it would seem that the decision-makers at the IRL now share a bias in favor of micromanaging the supply chain. This is a huge mistake, in my view.

An efficient supply chain must develop organically. Vendors must compete to maximize quality and minimize cost. Teams must be allowed to manage their own product life cycles and spend what they determine they can afford.

When a single vendor is chosen and a maximum price is dictated, that price becomes the effective minimum price because there is no market competition. Costs are artificially increased and an unnatural barrier to prospective new entrants is created. This practice also increases the amount of compensation that the league must provide to teams in order to ensure that enough of them show up to race.

Dictating the supply chain is costing the IRL millions each year, in my view. The decision that Barnhart and Cotman are about the make will certainly cost the IMS more than Ron Green ever did. It is interesting that a sole-source supply chain likely makes technical enforcement much easier than it would be if teams were to choose from multiple options offered by an unlimited number of vendors. Perhaps this is coincidence.

A Better Way

Barnhart and Cotman should be in the business of telling the teams what they may not do. Technical rules are best when they are composed of constraints that evolve in correlation with technologies and economies. Right now IRL management is picking economic winners and losers. This creates gross inefficiencies throughout the IndyCar economic universe.

Recall the USSR. It didn't work there, either.

For example, an economist would not be surprised to learn that the 2010 Honda engine lease is ridiculously overpriced. After all, without Honda, there would be no supply of IndyCar engines. The IRL has therefore surrendered all of its bargaining power to Honda.

In addition, the lease price that is incurred by the teams includes the St. Pete Tax, the Toronto Tax, and the Mid-Ohio Tax. Therefore, the teams and the IRL, via IndyCar TEAM, are sponsoring those three races. That the money is laundered (legally) through Honda does not change the ultimate direction of the cash flows.

Thus, we can conclude that much of the cost of IRL engines in 2010 will have absolutely zero to do with engines. Such is the cost of incompetent management.

Microeconomics 101

Establishing a middle ground between open competition and managed competition is undoubtedly difficult. But I would argue that IndyCar's core economic problems are far more elementary and not at all exclusive to the business of racing. Unfortunately, it seems that the IRL lacks managers who understand basic microeconomics well enough to devise a cost-effective solution.

The lack of sufficiently sophisticated strategic managers is costing good and loyal people their jobs at the World's Greatest Race Course.

The Indianapolis Motor Speedway Board of Directors can and must do better.

Roggespierre

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.

Math!

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 SpeedTv.com, 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

Therefore:

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.

Roggespierre

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.

Roggespierre

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.

Roggespierre

IndyCar Economics: Why they'll Race in an Alley

As the IndyCar Series evacuates to Japan, we invite citizens to consider the following numbers. They are the dreary residue of market rejection, the just sentence for failing to serve consumers. The Committee of Public Safety has every reason to trust the sources that provided this information.

• The standard sanction fee for an IndyCar event is in the range of $1.2 million to $1.5 million. The number is highly variable.
  
• The IRL incurs costs associated with racing operations in the amount of $500,000 per event.
• The IRL distributes approximately $1 million per event to teams via IndyCar TEAM.

Therefore, the best case scenario is one in which the IRL breaks even. An Indy Lights race requires additional prize money in the amount of $360,000. The IRL does not charge the promoter because, as little market value as the IndyCar Series possesses, the Lights series offers none whatsoever.

Thus, the IRL business plan calls for an operating loss at each IndyCar event unless a supply chain can be arbitraged or a government subsidy can be secured.

Cash Flow-a-Go-Go

Of course an event sponsor can alleviate the financial burden considerably. Unfortunately, the IRL and its teams frequently sponsor their own races.

• Honda is title "sponsor" at St. Petersburg, Toronto and Mid-Ohio
• Honda's IndyCar participation is subsidized by teams that overpay for spec engines
• Teams are subsidized by the Indianapolis Motor Speedway through IndyCar TEAM
  

Therefore, Honda receives title sponsorship for three events without incurring a net cash outflow. Why would any firm offer cash to sponsor an IndyCar race when, for all intents and purposes, Honda gets three of them for free?

Manufactured Partnership

Perhaps the teams and the IRL don't mind sponsoring their own races. Do they care that they are funding Honda's Formula Dream "sponsorship" that allows Hideki Mutoh to participate? Does Hideki Mutoh add any reciprocal economic value to the IndyCar product?

Honda might be writing the checks that pay for the series to travel to Motegi next week, but that does not mean that it is paying the freight. Does Motegi add reciprocal value to the League?

But wait! Didn't Terry Angstadt just say that Honda has agreed to reduce the price of its engine lease program next year? Was that not a significant and benevolent act of partnership?

No, it wasn't. Declining marginal cost per unit due to economies of scale is the natural result of mass producing homogeneous products, such as spec engines and parts. Honda's production costs next year will be less than they were this year. Remember, too, that the lease is really a user fee. Ilmor does much of the the rebuild work. How many new engines is Honda required to add to its existing stock in 2010? None? A few?

Honda's costs will decrease in each year that further development is not necessary. Might that be why Honda Performance Development has become enthusiastic about the IRL remaining a single manufacturer series? Of course it is.

More Deep Capture: Honda Edition

The Committee of Public Safety has been told that Honda now thinks of the IRL as a customer rather than a partner. Does that mean that Honda is cash flow-positive on its all-inclusive IndyCar project? It sure sounds that way.

If that is the case, then why is Honda still credited as a league sponsor? Why is its name on every Indy car if in fact it is extracting and not contributing revenue? Why do the team owners wear Honda shirts on race day? Did the IRL and its teams pay for those, too?

Did you notice all of those Honda commercials during race telecasts this year? Neither did we. Let's hope that nobody at the IRL earned a commission for this deal.

Is anyone asking these questions at the IRL? In the House of France, Lesa France Kennedy, proud owner of an economics degree from Duke University, is meticulously analyzing cash flows. Who is her counterpart at the IRL? Is it the salesman or the racing operations guys?

Happy Labor Day Weekend from the Committee of Public Safety

Roggespierre

Take the Subway: IndyCar Cost Leadership

The Committee of Public Safety today took delivery of a note from a loyal citizen. His comments bring to light a worthy argument regarding alternative strategies that would make IndyCar racing competitive in the marketplace.

Previously, Roggespierre wrote that NASCAR (sans-culottes!) has demonstrated that ample consumer demand exists for U.S. oval racers. Therefore, the IRL should furnish U.S. oval racers.
Citizen John provides a counter-argument that bears repeating.

"The market demands Big Macs also, but that doesn't mean you can establish
a competitive advantage in that marketplace by providing what the market
demands." - Citizen John

We agree. Imitation does not yield competitive advantage. We know this because we suffered along with John Amos's character in Coming to America. An independent fast-food entrepreneur, he could not fathom why customers refused to give up the Big Mac in favor his offering, the Big Mic.


Strategic Alternatives

Citizen John favors a differentiation strategy to achieve competitive advantage.

"One tactic is to look beyond your category to the larger category of your
business and your competitor's business, and develop a position where your
competitor can't efficiently compete against you. So instead of providing Big
Macs, essentially do what Subway did: they created a
category and filled it within the larger fast food category that the market
leader couldn't compete with." - Citizen John

This is a classic example of the product differentiation competitive strategy. Citizen John recommended that the IRL position itself in the broader sports entertainment category rather than the traditional motorsports market segment.

We prefer a different strategic alternative because the IRL is a subsidiary of the Indianapolis Motor Speedway Corp, a firm that, in our humble opinion, is entrenched by default in the narrower motorsports category. In our view, the lone viable alternative that remains is that of low cost leadership. John Amos should have cut costs and offered the Big Mic at a competitive price. The IRL is no different.


Take the Subway: IndyCar Cost Leadership

From its inception, NASCAR (sans-culottes!) positioned itself as the low cost competitor in major U.S. motorsports. But the Cup Series' exponential growth since the early 1990s has resulted in abandonment of that position. You simply can not be the low cost leader when championship caliber teams require annual sponsorship revenue of approximately $18 million per car.



Consequently, a secondary market has evolved for NASCAR Cup sponsorship. It is ironic that one of the participants in this market is Subway, primary sponsor for Carl Edwards' Roush Racing Ford at three races this season.

We would prefer that Subway sponsor an IndyCar team for the entire season. But that will not happen until the IRL gets its cost structure under control. We have determined that a championship caliber IndyCar team is worth 6.51% of the total value of a similar team, such as Edwards' Roush Racing team, in NASCAR Cup. Three Cup races are equal to 8.82% of the Cup season. Because 8.82% is greater than 6.51%, we must concede that Subway made the right decision. Three Cup races are worth more than 17 IndyCar races.

If IndyCar slashes its costs until they are equal to the product's market value, then the series and its teams will be able to offer sponsorship opportunities that are simultaneously equal in value and exponentially lower in price than those offered by NASCAR Cup and its teams.

That is competitive advantage. Sorry, Carl, but that pretty yellow paint scheme is going on an IndyCar for a full season of racing!

We thank Citizen John for his comments and invite others to submit similarly worthy ideas.

On behalf of the Committee of Public Safety

Roggespierre

Angstadt & Roggespierre on Raising IndyCar Value

This quote from IRL Commercial Division President Terry Angstadt was originally published by Bruce Martin at Versus.com.

Raising the Value of the Series

"That is through big investments by key partners. Just like every other sports property raises their value it is a combination of efforts through team sponsors, our sponsors, and our direct investment." - Terry Angstadt

We shall now explain why Angstadt is wrong on every level. His statement includes the following four implicit assumptions. Each is unsound.

1. Sufficient demand exists for the current IndyCar product "like every other sports property." In fact there is no evidence of this.


2. Quantifiable (in dollars) demand is greater than the total cost of producing the IndyCar product. "Value" is created not with financing, but rather with positive cash flow from operations. If total demand does not exceed total cost, then there is neither positive cash flow nor value creation. Such is the present state of IndyCar racing.


3. The product would be successful if it were sufficiently financed by "big investments by key partners." Robust financing does not increase market demand. For example, Phillip Morris USA and the Target Stores Supply Chain overpay for IndyCar team sponsorship. This does not mean that the value of IndyCar team sponsorship is greater than other potential sponsors might have believed. It means only that Penske and Ganassi figured out how to sell sponsorships in different markets.


4. The product will be successful with increased 3rd party promotion. This silly notion is a traditional and cherished belief among IndyCar participants. 3rd party firms get involved in racing to sell and promote their own products, not the racing series.
   

Built to Last: Raising IndyCar Value

Here's how we'd do it.

First, identify the present value of the IndyCar product relative to the competition. We did that here and found that a championship caliber, one car IndyCar team is worth approximately 6.51% of a similar NASCAR (sans-culottes!) Cup Team. Therefore, our valuation is $1.3 million.


Second, slash that team's annual cost of operating until it corresponds with the team's value, $1.3 million for 17 races. We recognize that this will not be possible until new specs are introduced in 2012.


Third, having benchmarked operating cost to market value, the IRL and its teams may undertake the following activities in order to "raise the value of the series."

• Teams acquire sponsors at market price rather than via supply chain arbitrage


• IRL reduces subsidies via IndyCar TEAM program


• IRL reduces sanction fees, increasing the number of promoters wanting IndyCar events


• IndyCar adds ovals, attracting U.S. drivers that can be sold to a U.S. audience


• Team owners hire competitors to drive their cars rather than to finance their operations


• New teams enter and current teams expand, improving on-track competition


• Sponsors spend more on activation and promotion and less on team operating costs


• IRL reallocates portion of TEAM distributions to direct promotion of IndyCar Series


• Financial risk is reduced for all IndyCar stakeholders

Why the IRL Needs Managers

Such are the results of effective strategy, customer focus, product development, and supply chain management, activities that the present IRL structure does not permit. That is why Terry Angstadt has little choice but to hope for "big investments by key partners." He must rely on team and league sponsors that either 1) do not exist, or 2) participate only because they acquire something of greater value in another market altogether. Angstadt possesses little capital for direct investment because he must burn cash to subsidize teams that provide a product that the market has rejected.

Indeed, Terry Angstadt's comments are wrong on every level. His is a sales plan that would recapitalize the IRL. It will not raise the value of the IndyCar Series.

Roggespierre

The Deal: IndyCar, Danica, Chip & Gillette

Is a deal brewing that involves Danica Patrick, Chip Ganassi, the IndyCar Series, and the Gillette division of Procter & Gamble? It's certainly plausible. Here's what we know.

• Gillette is part of Ganassi's leveraged supply chain deal with Target
• Chip Ganassi is rumored to have a sponsor interested in Danica
• Ganassi said publicly that Danica should stay in IndyCar and that he will not take her to NASCAR
• Jerry Gappens of New Hampshire International Speedway spilled the beans on a proposed IndyCar race at Gillette Stadium in Foxboro, Massachusetts
• Gillette has rumored interest in title sponsorship of the IndyCar Series
• Danica remains non-committal about her IndyCar/NASCAR "decision"

The Committee of Public Safety suspects that Ganassi is trying to strike a deal with IMG's George Pyne, Danica's representative, to put her in a Ganassi Indy car with primary sponsorship from Gillette.

The Problem

Danica starring in television commercials featuring Gillette products is worth much more than Danica driving an Indy car. Sponsoring her IndyCar program means Gillette must spend at least $7 million per season (probably more) of which $5.7 million is not justified by consumer demand for IndyCar racing. Pyne, a former NASCAR executive, therefore plans to take Danica and Gillette to NASCAR, where the price of sponsorship is justified by market demand.

Plausible Scenario #1

Ganassi tells the IRL's Terry Angstadt that IndyCar will lose Danica unless somebody underwrites Gillette's sponsorship of her ride at TCGR. Angstadt recalls that Gillette owns naming rights to the football stadium in Foxboro, Massachusetts. He proposes the "Indy 200 at Gillette Stadium" to sweeten the pot and keep Danica in IndyCar.

But that creates another problem. Who will pay the sanction fee for the Gillette Stadium event? Angstadt turns to the best tool in his toolkit, Apex Brasil. He lines up the International Events Unit to promote the Foxboro race and to assume the financial risk that goes with it.

Then Angstadt goes for the home run. He pitches Gillette a Brazilian-manufactured alternative to some product it has to buy anyway. It could be steel, plastic, payroll software, toilet paper - it doesn't matter so long as Gillette buys a lot of it. The Apex Brasil firm kicks some of its newfound Gillette revenue to the Indy Racing League and some to Chip Ganassi Racing.

If the deal is big enough, then IndyCar becomes the Gillette IndyCar Series. Danica Patrick joins Chip Ganassi Racing in a "Gillette" sponsored Indy car. Apex Brasil pays for both deals but fulfills its mission, landing a large new account in the United States for a Brazilian firm.

IndyCar takes to the parking lot at Gillette Stadium. Jerry Gappens' head promptly explodes. Bruton Smith looks even more like Don Rickles. The IRL invites Ganassi Racing's Mike Hull to design the new Indy car. The IMS breaks ground on the Terry Angstadt Luxury Suites & Day Spa.

The transaction did not increase ticket sales at IndyCar races. Television ratings did not improve. But the IRL is convinced that those things will happen just as soon as Gillette activates its IndyCar title sponsorship. Supply chain arbitrage saved the day!

Three years later, the IRL is still looking forward to Gillette's sponsorship activation. Gillette wanted and got Danica Patrick at fair market value. It did not care that in the process it had somehow acquired IndyCar Series naming rights, a race in a parking lot, and 15-million cubic feet of Brazilian gauze.

Plausible Scenario #2

Gillette declines the Deal of the Century and takes Danica to NASCAR, where fair market value includes the cost of operating a racing team. IRL management rationalizes that George Pyne, the former NASCAR executive, had intended to deliver Danica to his former employer all along. IndyCar returns to the business of planning a new generation of cars and engines it can't afford.

Roggespierre

IndyCar: Why no Miller Lite, Energizer?

Why do we not have a Miller Lite car or an Energizer car in the IndyCar series?

Loyal citizens already know the answer. It is because the value of full-season primary sponsorship of a one-car IndyCar team is $1.3 million. If the cost of sponsoring a team for the season were equal to $1.3 million, then there would be a Miller Lite car, an Energizer car, and many others.

Regrettably, putting an entry on the track at all 17 IndyCar races costs approximately $4 million. If you want to run near the front and get whatever television exposure is available, then the budget needs to be in the $7 million range. Miller Lite and Energizer are not going to pay $7 million, or even $4 million, for a $1.3 million product. That would be stupid.

The two dominant teams in IndyCar have figured out how to sell a $1.3 million product for $7 million or more. Team Penske is leveraging its long-term relationship with a tobacco company that is forbidden from advertising anywhere else. Target Ganassi Racing arbitrages the Target Stores supply chain. Andretti Green Racing is using Ganassi's arbitrage strategy to leverage the supply chain at 7-Eleven (and, we suspect, Meijer Stores). That's why Miller Lite has a decal the size of a postage stamp on Tony Kanaan's car. Wonderful.

Many of Ganassi's associate sponsors would be good candidates for primary sponsorship with other teams. These are large firms with money to spend if the advertising opportunity is priced at its actual market value. In fact, Energizer was primary sponsor of Robby McGehee's IndyCar efforts in 1999 and 2000. This ended when Chip Ganassi moved his team to the IRL full-time. Coincidence? Maybe, but maybe not.

Examine the list of consumer products among the associate sponsors at Target Chip Ganassi Racing. Some are paying more to Target for in-store concessions than most primary IndyCar sponsors distribute to their respective teams.

Is it any wonder that Target Ganassi Managing Director Mike Hull is a big fan of high-tech racing? His firm needs high-tech racing in order to keep team costs greater than team values. Otherwise, TCGR's associate sponsors might become interested in primary sponsorship elsewhere in the series, just as Energizer did with Robby McGehee in 1999 and 2000.

Why don't we hear the Penske guys lobbying publicly for technology? Perhaps it's because the only threat to take their sponsorship is the federal government.

IndyCar needs a Miller Lite car and an Energizer car. The only way to achieve this outcome is to slash the cost of "producing" an IndyCar entry until it is equal to $1.3 million annually per car. That's the proper valuation. To those who don't like it, we're sorry. We don't like it either, and we didn't make this mess.

Team owners with legitimate sponsors can hire drivers that fans might actually want to see. This, too, would be bad for Target Ganassi Racing because it would likely have to compete with those popular drivers in order to keep its sponsors.

Much is at stake. Few understand. The examples above are not the exception - they are the rule. Perhaps some day we'll share the story of Moen, John Menard and Paul Estridge. It's good fun. We apologize for teasing.

For now, we're much more concerned with Ganassi. He and his surrogates, in our opinion, are obstructing the only economically rational path to growth for IndyCar Racing and hastening the decline of the Indianapolis 500. We don't blame them - their incentives are misaligned with the rest of the series, and that's not necessarily their fault.

We seek only to reduce the influence wielded by TCGR with regard to the new specs.

We even root for them sometimes.

Chair of the Committee of Public Safety

Roggespierre

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

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

Roggespierre

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

Roggespierre

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.