I present the following whopper of a quote from the Indianapolis Business Journal's Anthony Schoettle.

For many years, the series has operated under the false notion that the
teams are the most important component of the series. Don't get me
wrong. The teams are important, but they're not the singular element that
will make this series go.

Schoettle is correct, in my opinion. Teams supply a very important portion of the IndyCar product. They are not, however, the whole product. They aren't even close.

For example, no one in his or her right mind would claim that the Penske, Ganassi and Andretti teams are not far superior to those that participated full-time in the Indy Racing League prior to 2002.

Nevertheless, the facts indicate that interest in IndyCar racing has actually decreased since the Big 3 showed up. We know this because we have seen the crowds dwindle at multiple venues. We also have television ratings- the Indy 500, other network races, and cable events - that tell the same story.

Teams that show up with largely unknown financiers posing as drivers are not doing IndyCar any favors. Furthermore, the few IndyCar drivers who were actually hired by their teams aren't exactly easy for Randy Bernard & Company to sell.

The time has come to quit treating those teams with deference.

Roggespierre

IndyCar: Light Flickers at Penske & AGR

Apparently, management at Team Penske and Andretti Green Racing has figured out something that we've been trying in earnest to explain for the better part of a month.

The American public does not care and likely will not care about the present roster of drivers in the IndyCar Series.

According to Curt Cavin of the Indianapolis Star, the Penske and AGR teams have requested that the 2010 Indianapolis 500 take the green flag at its traditional 11am start time. But this isn't about tradition. It's about making it possible for NASCAR (sans-culottes!) Cup drivers, who U.S. race fans do care about, to race at Indy.

Cavin reported that Team Penske's Tim Cindric requested the change in a meeting between team owners and IRL management prior to the IndyCar event at Chicagoland.

Needless to say that we agree with the underlying logic of Cindric's proposal. Television ratings at Indy were lousy this year. Television ratings for the entire series have been lousy this year. The Indianapolis 500 needs an infusion of drivers that are in demand among consumers.

However, Cindric's idea is the wrong kind of solution. We are not prepared to admit that the Indianapolis 500 is subordinate to a run-of-the-mill Cup race. We would hate to see the Indianapolis Motor Speedway concede this point and move the start time when a much better solution is possible.

What might that solution be, exactly?

We suggest that IndyCar teams hire IndyCar drivers that might appeal to U.S. racing fans.

Teams are responsible for the IndyCar racing product just as Delphi is responsible for the products of its auto manufacturer customers. IndyCar teams like to think of themselves as customers of the series, but they're wrong. They are suppliers to the series - and if you're not convinced, then ask yourself who pays whom.

As suppliers, IndyCar teams are responsible for enabling the IRL to put a product on the track that appeals to end users (fans). Drivers are a fundamental component of that product. This is true at every IndyCar race, and particularly at the Indy 500.

Of course, IndyCar teams can't afford to hire NASCAR Cup stars. That is both a problem and another reason to make the next generation of IndyCar chassis and engines much, much less costly than the present specs.

We applaud Tim Cindric and Michael Andretti for recognizing that IndyCar racing is not competitive in the marketplace. That is why team financing is not correlated with the value of the racing product. Solutions will come with structural change, some of which the present IndyCar teams will certainly not enjoy.

U.S. race fans will tune in to Indy again when it is re-established as a destination - and not a diversion - for racing drivers that are accepted in the marketplace.

Roggespierre

IndyCar AGR Crack Up

Andretti Green Racing and Andretti Green Promotions are splitting. Michael Andretti will take the racing team. Kim Green and Kevin Savoree will get the company that promotes races in St. Petersburg and Toronto.

The Republic isn't sure what to make of this. It seemed as if Savoree was the chief deal maker at AGR. Maybe he and Kim Green believe the business of promoting events at temporary circuits is more promising than the business of running an IndyCar team. We would be inclined to agree, particularly if Danica Patrick is headed to either another IndyCar team or to NASCAR (sans-culottes!)

The irony is that Honda's "sponsorship" of St. Pete, Toronto and Mid-Ohio is effectively subsidized by the teams. How's that? Teams overpay HPD for engines. Honda then redirects that money to race promoters and Formula Dream, which is believed to be heading for the exit at AGR. If a rift really did break out among the AGR partners, then the prospect of owning races that are subsidized, in part, by Michael's team must cause Savoree and Green to break out in Cheshire cat grins.

If Honda does take the Formula Dream "sponsorship" elsewhere in 2010, then we would not be surprised to see Andretti partner with another existing team. This is rank speculation, we admit, but it is based on underlying economic facts. Because operating an IndyCar team is overpriced, team owners are going to have to do whatever they can to stay in the game.

And it's no secret that Michael Andretti has been telling people he needs new money for 2010.

Danica Delivers the Goods in the Marketplace

This space competes for readers just as IndyCar (allegedly) competes for consumers. Page views here increase 5x when "Danica" is in the title. Readers searching for "Danica Patrick" are infinitely greater than those searching for all other drivers combined; none has delivered a single hit to this site.

The Republic can only imagine what might happen if IndyCar could attract drivers like Tony Stewart and Kasey Kahne to join Danica. We might be as successful as Jayski.

But IRL management doesn't try to influence driver selection. This is not only a huge mistake, but also a failure to manage its product. Teams wouldn't like it, but so what? As suppliers to the IndyCar Series, their job is to provide a product that IndyCar can sell. Right now they are failing miserably by any objective measure. This is, after all, a spectator sport. Right?

If Danica escapes to NASCAR - and she will if she's economically rational - then IndyCar might finally hit rock bottom. Then, perhaps, the cars that race at Indy can be managed by someone with enough guts to identify an audience and serve it.

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

Danica Patrick : Go and Save Yourself!

Dear Danica,

Citizens here know a bit about the business of IndyCar racing. We therefore write to offer some unsolicited yet humble advice. Do with it what you will.

You have made public your interest in NASCAR. As a lifelong IndyCar fan, I implore you to turn south, get the best deal you can, even if it's in the Nationwide Series, and go. Run - do not walk and do not look back - because the present direction of IndyCar racing will be of little benefit to you.

You're the Special Surprise in a box of cereal that the kids don't want.

You do not need to race at airports, parking lots, harbors, parks, city streets or any other temporary circuit. These "events" are the unmistakable signs of market rejection. I imagine that you have already figured this out. If so, then we suggest that you trust your instincts because your instincts are good. Phony racing circuits aren't your forte, anyway.

That said, the type of oval racing you'll do in NASCAR will be unlike anything you've ever done before. I suggest that you get in a midget or sprint car this winter. Competing in front-engine, tube-frame cars with lots of horsepower and little downforce is good training for the rigors of NASCAR. You'll learn a lot and be better for it.

What about winning the Indy 500? Yes, you could do it some day. But, much as it pains me to write this, so what? The IRL now serves its team owners and their managers, engineers and drivers who want to accumulate as many laptops, electronic gizmos, and road and street races as possible. Make no mistake - they all hope you stay. They would love to use you as an asset to underwrite a product that consumer rejection has bankrupted twice and likely would have a third time if not for mergification. Don't do it. The Indy 500 will suffer for it, and so will you.

NASCAR and its teams are fundamentally sound, professionally managed enterprises. Did you notice during your Carolina tour that NASCAR teams look like real, operating companies? Did you see guys molding, fabricating, and tooling in those shops? Strange, isn't it?

You see, Danica, NASCAR teams began with nothing - they earned everything they have, and they're still working for it. IndyCar teams inherited market acceptance and consumer demand but chose to throw it away, financing their whims with underwriters including shareholders, tobacco companies, auto manufacturers, drivers and their rich parents, scam artists, dictators, narcotics traffickers, governments, the Indianapolis Motor Speedway, each other, and, most frequently, supply chain arbitrage. Who has time to build a multi-billion dollar business based on mass market acceptance when you're having a really swell time racing at an airport in front of a solid crowd for Texas high school football?

The remaining IndyCar teams intend to race the way they want to race, and they fully expect to convince a new enabler to pay for it. They'll probably pull it off, too, with help from Apex Brasil. Sure, names of other "sponsors" will adorn the cars and event titles, but most of the cash will have come from the behemoth. Danica, the Brazilian industrial supply chain has nothing to offer you. You're already in demand right here. If you go to NASCAR, then the demand will actually extend to the race track. You'll have to get used to it.

Danton, Marat and I wish you well. Selfishly, we hope you stay. We love Indy cars and believe that you could help revive the sport. But we see the emerging strategy, and we know how this story ends.

On behalf of the Committee of Public Safety

Yours,

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

IndyCar Scourge - The Leveraged Supply Chain

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

"Same as it ever was." - David Byrne

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


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


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


• 1995 - Budweiser dethroned. The world's top sports advertising brand abandons Indy car primary sponsorship. It strikes a leveraged supply chain deal with Kmart, increasing funding to Newman Haas Racing while subtracting another entry from the series. Budweiser continues primary sponsorship of Rick Hendrick's #25 Chevrolet in NASCAR.

The emerging strategy is one that we have seen before. The Committee on Public Safety trusts that citizens know the difference between an enterprise that is well capitalized and one that possesses a product that consumers actually want. Leveraged supply chains funnel money to racing teams and promoters. Leveraged supply chains do not create demand for the racing product.

That is why certain IndyCar participants love them.

We witness our future in our past.

Roggespierre

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 Glory Days Part II

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

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

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

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

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

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


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


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


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

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

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

Roggespierre

IndyCar Price and Market Value

Budget estimates for running a championship caliber, one-car IndyCar team for the 2009 season range from $7 million to $8 million. But the Republic wonders, what should it cost? The question draws opinions from team owners, sponsors, fans and IRL officials. But opinions don't really matter. The only valuation that counts is the one dictated by the free market. And, believe it or not, the market provides some surprisingly consistent estimates.

In finance, the relative value of assets - firms, securities, real estate - is derived from the market prices of similar assets. Because NASCAR (sans-culottes!) Cup and IndyCar operate in the same industry, have similar sources (not values) of revenues and costs, and rely on nearly identical supply chains, we shall use data from Cup to benchmark the market value of a top IndyCar team.

Previously, Roggespierre wrote wistfully of the day when corporations might choose to sponsor IndyCar racing for its own sake. Adjusting the cost of participation to its market value is something that must occur if that day is to come.

WARNING: This requires some very simple math.

According to Jayski.com, the first 21 races of the 2009 NASCAR Cup season attracted a total of 148.17 million U.S. television viewers. Comparatively, the Indianapolis Business Journal and others report that the first twelve races of the 2009 IndyCar Series attracted 10.37 million U.S. TV viewers. Note that our comparison does not include qualifying, special programs, and other events because the ratios would not change materially.

For both series, we divide total viewership by the number of races thus far in 2009 and get the numbers below.

• Average NASCAR Cup event = 7.055 million viewers



• Average IndyCar event = 0.864 million viewers

Next, we divide the viewership total for the average Cup race by the viewership total for the average IndyCar race. We learn that the value of the average NASCAR Cup event is 8.16 times greater than the value of the average IndyCar event. This is a key data point for advertisers that purchase on a strict cost-per-thousand basis. Another way of demonstrating the difference in market value is to say that the average IndyCar race is worth 12.25 percent of the average NASCAR Cup race.

As Danton often jokes when washing down stewed tortoise with a rancid Burgundy while lunching at the Jacobins, just you wait. It can get worse.

And indeed it does, as we have not yet accounted for the fact that NASCAR Cup runs twice as many races as the Indy cars. This factor must be included because we are seeking the market value of running a one-car IndyCar team for an entire season.

NASCAR Cup: 7.055 million viewers * 34 events = 225.760 million viewers
IndyCar: 0.864 million viewers * 17 events = 14.688 million viewers*

*IndyCar is positively skewed by a favorable deviation due to the Indy 500. If we were to calculate the averages at season's end, then the IndyCar numbers would likely be worse.

We are now ready to calculate our relative valuation rate. We divide projected IndyCar season viewership by projected NASCAR Cup season viewership.

14.688 million IndyCar viewers / 225.760 million NASCAR Cup viewers = .06506

The market, as a function of U.S. television viewership, values a championship caliber, full-season IndyCar team at approximately 6.51% of the total value of a similar NASCAR Cup team. We rounded up.

Budgets for top NASCAR Cup teams are estimated to be between $18 million and $20 million per season. Having determined relative market value at 6.51%, we know that the correctly priced operating budget for a top IndyCar team for the season is approximately $1,302,000.

That is how much a championship-caliber IndyCar team should cost given its market value. In the present cost structure, $1.302 million is enough to cover the season engine lease and three front wing assemblies. You still need a chassis, tires, gearbox, crew, driver, race shop, travel & lodging, hauler and someone to drive it, components and replacement parts.

Available data regarding title sponsorship for the series suggest that our relative valuation is very much in the ballpark. NASCAR Cup's deal with Sprint Nextel is estimated to be worth $700 million over ten years, or approximately $70 million per season. Using our 6.51% relative valuation rate, we estimate that the market price for title sponsorship of the IndyCar Series is $4.557 million per season. Using this figure, we can say with some confidence that John Menard's offer of less than $4 million per year for title sponsorship is a bit low. Conversely, Terry Angstadt's asking price of $8 million to $9 million per year is too high.

Perhaps this explains why title sponsorship is so elusive. The IRL has no doubt turned down its share of low-ball offers. But the market value of the IndyCar product is considerably less than the asking price.

We might also better understand why so many corporations prefer to sponsor NASCAR Cup teams for three or four races rather than back an IndyCar team for the entire season. Given the cost per thousand calculations, a standard metric in the advertising industry, part-time sponsorship of a Cup car remains a significantly better value.

Finally, we can deduce some hints about the "technology vs. cost" argument that is beginning to perk and boil again as anticipation builds the for new IndyCar technical specifications. The Penske and Ganassi teams have every incentive to prevent market value from entering the equation that determines new specs. Teams that have sponsorship to support annual budgets of $7 million to $8 million per car gain nothing if teams with $1 million budgets are able to compete with them for sponsors and race wins.

Citizens are advised to keep this in mind the next time Target Ganassi Racing Managing Director Mike Hull proclaims that the future of IndyCar racing is best secured with high-tech race cars. Although it is true that Hull and his employer are well served by expensive technology - which, by the way, is not the same thing as innovation - it does not necessarily follow that all IndyCar stakeholders stand to gain from a high-tech approach.

Indexing the cost of entry to market value will not solve all of IndyCar racing's challenges. But it will address many of the bigger ones. The Republic hopes that IRL management has the necessary courage and discipline to make it happen.

Roggespierre

IBJ lacks Drill-Down on IndyCar and IMS

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

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

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

IBJ Speed Needs (IRL)

1. Increase sponsorships, including finding a title sponsor.
2. Add engine and chassis makers to the series.
3. Expand series in the right national and global markets.
4. Contain costs for the teams.
5. Improve languishing television ratings of races as well as attendance.
6. Improve exposure for teams, and help them gain more sponsors.
7. Evaluate long-term viability of IRL under the Hulman-George family umbrella of companies or another owner.

That should solve the problem - a mere seven gargantuan tasks. And nowhere is it supposed that the product might in fact be central to the problem. Notice how each "problem" solves itself if we suppose that the IRL develops its product into something that a critical mass of customers actually wants.

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

The Republic is very excited about tomorrow's keynote entry here at The Indy Idea. We shall look at what the cost of running a top IndyCar team should be, given the market value of the overall product. Danton is geeked. Marat has his quill at the ready. We hope that you will join us and provide commentary of your own.

Roggespierre

IndyCar Teams: Build Something!

Revolution can be so disappointing.

Early IRL stalwarts, think back with Roggespierre to those hopeful days of early 1997, when the new cars and engines were going to transform Indy car racing into an egalitarian enterprise. The new, production-based engines from Nissan and the automaker formerly known as General Motors would be available, at one low, low price, to everyone. Once more, teams could work on their own engines! The oppressive reign of leases, sealed blocks and manufacturer badges would be banished forever.

Suckers, we were.

The dirty little secret was that the teams did not want to work on engines. John Menard and Ed Rachanski, good revolutionaries, both, were exceptions. A.J. Foyt, apparently of his own free will, chose to lease his motors from Katech Engine Development. The remaining Aurora teams contracted with Roush, Comptech, Rocketsports, Speedway and Brayton, in addition to Menard and NAC. Herb "Herbie Horsepower" Porter and Rick Long resurrected the Infiniti before turning it over to Tom Walkinshaw.

The early Indy Racing League was revolutionary in the existential sense, but it failed to rid Gasoline Alley of an entrenched culture of consumerism that began in the 1980s and that continues to this day.

F1 teams build things. NASCAR teams (sans-culottes!) build things. Ford-Freaking-Focus Midget teams build things. IndyCar teams order things and have them delivered with some assembly required. The royals shall be served.

The result is a massive outflow of cash from IndyCar teams to Dallara, HPD and Ilmor. Guess who's left without any money? It's the guy who "hired" the aristocrat in Pilotis to drive his car, that's who.

NASCAR teams (sans-culottes!) keep tens of millions in their pockets every year by making things and selling them to each other. They figured out the benefits of kereitsu even before those treasonous counterrevolutionaries from Toyota showed up.

I'll give IndyCar teams this much. Ever since George Bignotti turned Robin Herd's lame-ass March F1 chassis into a mass-produced U.S. open wheel behemoth, IndyCar teams have demonstrated a keen appreciation for the Division of Labor.

Roggespierre hears that Americans are fed up with outsourcing. But it looks like the only ones that are doing anything about it live south of the Mason-Dixon Line (sans-culottes!)

Meanwhile, the IndyCar guys can't even sell their old stuff like they used to because they keep it and buy update kits every year. And yet they wonder why getting to 33 at Indy is tough? Nincompoops!

So, please, Mr. Barnhart, take heed of this advice. Imagine an IndyCar tub that has all of the neat-o safety additions that you guys have worked so hard on over the past few years. Bid it out, get a good price, and have the low bidder start taking orders. Then let the teams do the rest.

IndyCar is hurting because the underlying economics make no sense. No fundamental problem will be solved by push-to-pass, option tires, or any other Cotman gimmick. And please tell me you aren't serious about that three-wheeled Indy car I've been hearing about.

All due respect, Mr. Barnhart, you don't serve the teams. They are your suppliers - they provide an essential portion of your product. But they don't pay you, so they're not your customers. The kind of help they need from you is tough love. They must stop hitting on grid girls, roll up their sleeves and get their hands dirty. Let them build stuff and sell it.

Advertising and B2B supply chain opportunities aren't getting better any time soon, and those are the businesses your teams are in. Do them a favor and make them build, not buy. The results might be, gasp, interesting, perhaps so much so that fans will want to buy tickets and watch the fine coverage on Versus.

The old order must be crushed and Gasoline Alley society subjected to the will of the People. Fail in this endeavor, sir, and the knitters might put you, too, on the next ox cart to Revolutionary Square.

And you really don't want that.

Roggespierre