Marlboro Tix Nix: Another Drag on IndyCar

Perhaps we now know why Richmond is not on the 2010 IndyCar schedule.

According to Curt Cavin of the Indianapolis Star, Phillip Morris USA will not continue its free ticket voucher program at IndyCar races in 2010.

No wonder Terry Angstadt has become so fond of promoters that are subsidized by governments.

It is difficult to imagine that IndyCar will return to Kansas Speedway after 2010 unless more than 50,000 Middle Americans suddenly determine that what they really want to watch at the Kansas oval is an international road racing series. The Kansas IndyCar race was supported not only by the Marlboro ticket program, but also by NASCAR fans who were forced to buy bundled tickets.

Now, both subsidies are gone.

Phillip Morris USA will continue to sponsor Team Penske - for 2010, at least. But perhaps we now are better able to understand why Tim Cindric has become so keen to bring star NASCAR drivers to Indy next year in order to increase television ratings.

Roggespierre

IndyCar: Cindric Tips Hat to NASCAR Drivers

This is getting weird.

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

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

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

He was at it again down south this past weekend. Amazingly, Cindric in effect told reporters that the Indianapolis 500 needs to include NASCAR drivers if it is to feature the world's best.

"I think the Indy 500 needs to have the best drivers in the world. They need to have access to that race. There are so many guys that are NASCAR drivers now that tell me that some day they want to drive in the Indy 500." - Tim Cindric

We do not disagree with Cindric's assessment of the driving talent in NASCAR. After all, most of the best IndyCar drivers are there. And, frankly, we're glad that the Indianapolis 500 still appeals to NASCAR stars. But we are still left to wonder why Cindric is so enthusiastic about bringing them to the May Classic.

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

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

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

These are not rhetorical questions.

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 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.