IndyCar: Why Robin is Wrong about Versus

We hate to say we told you so, but...

It was only a matter of time before IndyCar insiders began to blame Versus for their inability to draw a U.S. television audience. We are somewhat surprised that it happened so quickly. Otherwise, it was predictable enough to be certain.

Robin Miller devoted his column on SpeedTV.com to IndyCar's U.S. television partner. He added some data to make the case that he first wrote about in this week's mailbag.

"...IndyCar needs to get out of the Versus deal. It doesn't matter if the show is good, nobody's watching." - Robin Miller

We like Miller because he loves the Indianapolis 500 and IndyCar racing. We do, however, disagree with him at times. His views tend to mirror those of insiders, which is understandable. But insiders don't get to determine what the market will accept.

The ongoing DirecTV saga notwithstanding, Versus has demonstrated that it is perfectly capable of drawing a legitimate audience if it has a product that U.S. television viewers want to see. The problem is not Versus; it is that the present permutation of IndyCar racing is not designed to attract a U.S. audience.

This series has no legacy stars to lean on - no A.J. Foyt, Mario Andretti, Al and Bobby Unser, Gordon Johncock, and so on. It therefore should race at venues that will attract drivers that can be sold to American fans of motorsports. Instead, the IndyCar Series is moving in the opposite direction.

There is nothing wrong with road and street racing, per se. The problem is that, combined with formula cars and international events, road and street races have unintended consequences. They tend to attract international road racers for whom there is very limited demand in the U.S. market.

How, exectly, are events in Toronto, Edmonton, Japan and Brazil supposed to increase U.S. television ratings? A good portion of street racing's appeal is that it can draw attendees for reasons that are unrelated to the core racing product. Why, then, should the IRL be surprised when it fails to convert those event-goers into television viewers? There are other parties to attend, after all.

Versus has a right to be more frustrated with IndyCar than IndyCar is with Versus. Remembering who is the customer and who is the supplier is a frequent challenge for IndyCar insiders, so we shall remind them here that in this case the customer is Versus. It paid money for this - not much, but some.

Versus has promoted the IndyCar product during popular programming, only to discover that there is very little demand. Production quality has generally exceeded expectations. On-air talent, another frequent object of blame, has improved.

IndyCar is a market failure because the product is designed to please participants and insiders rather than auto racing consumers in the United States. The latter group has demonstrated that it will tune in consistently to watch a product that is designed for its benefit.

It's not 1995 Anymore

Television ratings are less important when market inefficiencies can be exploited and supply chains can be arbitraged. However, unlike CART, the IRL will not succeed in these pursuits because tobacco advertising inefficiencies have been corrected and nearly all U.S. industrial supply chains lead to NASCAR (sans-culottes!). That is why IndyCar is now attempting to arbitrage the Brazilian supply chain.

As we have written before, we like television ratings because they provide a reliable measurement of market acceptance. They can not be bought. They are not influenced by comp tickets and compulsory attendance at corporate outings. They can not be camouflaged by signage and majestic terrain. They are not perverted by four-day attendance figures. They tell the truth even when the truth hurts badly.

The IRL must manage its product. Doing so will require that it take actions that will not be liked by some of its suppliers of racing teams. Costs must be slashed. Many drivers must be replaced.

Unless and until customers are served to their satisfaction, the IndyCar Series will remain a market failure. To think that ABC and ESPN would accept a time buy is ridiculous. ESPN could not wait to get rid of this product. That is why it allowed the IRL to leave a year early.

The marketplace is competitive. ESPN has many, many more options than it did back when CART bought air time. IndyCar racing in its present form does not deserve a major U.S. television partner.

Versus is stuck with IndyCar.

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

Appeal to the Indianapolis Motor Speedway Board

Citizens, we must expose the entrenched interests that threaten the future of IndyCar Racing!

We know that the correct price of sponsorship for a top IndyCar team is $1.3 million. However, recent comments by Terry Angstadt make clear that the IRL hopes only to reduce costs from their present level of $7 to $8 million per season.

Not Good Enough

The cost of operating a top IndyCar team must be no more than $1.3 million. Otherwise, there will be no new sponsors for IndyCar Teams. Advertising decisions are made by MBAs who are trained to do what their spreadsheets tell them to do. The secondary market for NASCAR Cup sponsorship (think: Subway) will continue to be of greater value.

Robin Miller has floated a $3-$4 million dollar target. We believe that Robin has very good intentions, but his figure is still at least double the market value of the product. Furthermore, we believe that his valuation was likely provided by Target Chip Ganassi Racing, an organization that distributes abnormal economic returns to Chip Ganassi and Mike Hull precisely because TCGR competes in an overpriced series.

Unlike Team Penske, Target Chip Ganassi Racing is financed with a sponsorship artifice that is divisible. TCGR does not have to compete with other IndyCar teams for consumer products sponsors. Why? Because TCGR can offer something of much greater value than team sponsorship - namely, concessions from a large national retailer. Therefore, Ganassi and Hull would act irrationally if they were to accept a cost structure for IndyCar teams that is equal to the promotional market value of those teams. They do not have to lose sponsors outright in order for their individual returns to decline.

We are confident that TCGR has contacts protecting its interests inside the IRL and the IMS; it would be foolish not to because so much is at stake. Ganassi and Hull have every incentive to see that the IRL manager who dares to bring operating costs in line with market value loses his head.

To the IMS Board of Directors

Please consider the individual economic interests of your suppliers of racing teams, which vary greatly. The interests of Target Chip Ganassi Racing are not at all aligned with your own. Do your managers defer to them out of fear for their jobs? If not, then you have marvelously courageous managers.

We would not blame you for disregarding the pseudonymous writer of an obscure website. We therefore encourage you to hire a consultant to provide analysis and protect the Board of Directors - not management, not partners, not suppliers, not customers, and not family members who are not Board members.

This consultant should not be someone who knows racing, but rather someone who knows business. He or she should be a complete outsider who does not travel in racing circles. Contacts of "friends" should not be trusted because "friends" have interests that are not aligned with yours. We can provide the names of several candidates that are highly respected in industry and academia. They have no interest in auto racing. Therefore, they are free to look out for yours.

Our email address is provided.

Roggespierre

IndyCar Doesn't Deserve Danica

With each passing hour, it appears increasingly likely that Danica Patrick will take our advice and transfer her various talents to the NASCAR Nationwide Series. Tony Stewart, once mocked as the poster boy of the Indy Racing League, appears to be involved in the deal. Needless to say that nobody is mocking Stewart anymore.

We really have very little to say about Danica's decision. We try to adhere to rational economic analysis. Therefore, we had no choice but to assume that Danica would go to NASCAR, where she will not be the only driver that satisfies consumer demand.

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