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 TV Switch: You Make the Call

We are now ready to revise our estimated sponsorship increase per team. Last time, we established that moving from Versus to a broadcast network would require that IndyCar find a cable partner for the four night races. This will reduce the $987,930 in additional sponsorship per team for the season.

Robin Miller reported that coverage on Versus in the 2009 season has achieved a .32 average rating. According to Miller, this equates to "less than" 240,000 viewers. We shall disregard the "less than" clause for simplicity's sake.


More Math!

Because we do not know the number of viewers that watched the races in Texas, Kentucky, Chicagoland and Motegi in 2008, we must estimate the number of viewers that is equal to a 1.0 cable rating. This shall establish a basis for our analysis and revision.

240,000 viewers / .32 rating = 750,000 viewers

Frankly, that doesn't seem right. I would think that it would be greater. Still, it's probably close enough.

Therefore, a 1.0 cable rating is the equivalent of 750,000 television viewers. The 2008 IndyCar race at Texas happened to get a 1.0 rating. Therefore:

750,000 * 1.0 = 750,000 viewers for Texas

The Kentucky event in 2008 earned a .43 cable rating. Therefore:

750,000 * .43 = 322,500 viewers for Kentucky

The Chicagoland race earned a .8 broadcast rating on ABC in 2008. This is not a helpful number because broadcast and cable tabulations are not the same and because the Chicagoland event was held during the day in 2008. However, because Chicagoland and Kentucky apparently underachieved at night on Versus in 2009, we'll assume that these two races shall attain similar audiences again in 2010. Therefore:

750,000 * .43 = 322,500 viewers for Chicagoland

Motegi was rained out, televised live and re-aired in 2008. Could this possibly be more difficult? The best rating, .33, was earned by the rebroadcast. That is the number we'll use.

750,000 * .33 = 247,500 viewers for Motegi


More Revision

Previously, we established that each race in 2010 would attract 914,750 more viewers on a broadcast network than on Versus. There are twelve such races. However, we then recalled that we would need a cable partner for the four races discussed above.

The question: how many of those additional viewers did we lose due to night races on cable?

914,750 * 4 races = 3,659,000 viewers if the events had been during the day on network

750,000 + 322,500 + 322,500 + 247,500 = 1,642,500 viewers for night races on cable

3,659,000 - 1,642,500 = 2,016,500 viewers lost from our original calculation

I enjoy the night races. Apparently, I am representative of nothing in particular. If I were an IRL manager, then I would want to identify the tangible benefits of racing at night that offset the loss of more than 2 million television viewers.

But I digress.


The Bottom Line

We know that each viewer is worth $0.09 in the market for racing team sponsorship. We can now calculate how much sponsorship value was lost due to night races on cable.

2,016,500 * 0.09 = $181,458

The bottom line is now in sight.

$987,930 - $181,458 = $806,472

Therefore, each team may anticipate selling $806,472 in additional sponsorship if the IRL elects to move twelve races from Versus to some combination of a broadcast network and a high-reach cable partner.

You don't think we're done yet, do you? Good.

Recall that all of these values assume a championship caliber entry. The Ganassi and Penske teams can anticipate $806,472 in additional sponsorship. Paul Tracy and KV Racing Technology are not likely to appear on screen nearly as often as the top two teams. We therefore must discount the value. Monster likely did this a couple years ago when it told Tracy that the IRL ratings were worth $1.2 million for the entire season on ABC and the ESPN family of networks.

We really have no choice but to guess what the correct discount rate might be. Let's say 5 percent.

$806,472 * .95 = $766,148 in additional sponsorship to Paul Tracy and KV Racing Technology

There is one more adjustment remaining. Because we benchmarked the value of a top NASCAR (sans-culottes!) Cup team, we must account for premium pricing that NASCAR teams can negotiate because they are the dominant market leader. IndyCar teams have little bargaining power and therefore must accept less. A 3-percent discount rate might not be enough, but that is what we'll use.

$766,148 * .97 = $743,164 additional sponsorship to Paul Tracy and KV Racing Technology


For What It's Worth

Should the IRL cancel its contract with Versus and purchase air time? Recall that the cost to the IRL will be $7.2 million. In exchange, Paul Tracy and KV Racing Technology can anticipate selling $743,164 in additional sponsorship to GEICO. The same opportunity would be available to all teams.

That's enough to cover 82.5% of Paul Tracy's Honda engine lease if the lease price is decreased, as expected, to $900,000 for the 2010 season.

We still haven't figured out 1) how the IRL and the teams would share the $7.2 million cost of buying time for twelve races, and 2) how many teams will be able to sell the additional inventory. If the latter number is fewer than ten, then the IRL and its teams will lose money outright.

If it were my decision, then I would stick with Versus. Paul Tracy would probably disagree. We will not speculate about Robin's opinion.

We do welcome yours.

Roggespierre

IndyCar: Network TV worth It?

We have determined that moving from Versus to network television in 2010 would provide each IndyCar team an opportunity to acquire additional sponsorship in the amount of $987,930. Unfortunately, we also know that this valuation must be wrong.

The 2010 schedule includes night races at Texas, Chicagoland, Kentucky and, for all intents and purposes, Motegi. No network is going to air an IndyCar race in prime time at any price. Therefore, four of the twelve races in question must be carried on cable.

In addition, Texas is the lone night race that has consistently attracted a substantial audience. That event beat the Tour De France and Lance Armstrong on Versus in 2009.

Regrettably, other night races have not produced similar results. We would therefore argue that at least some of the ratings decline in recent years is likely due to the events at Kentucky and Chicagoland having been moved from Sunday afternoon to Saturday night. This is an interesting and important issue for later discussion.

The question that must be answered is this: how many additional viewers can the IRL reasonably expect to get if the four night races are aired on a cable channel that offers greater reach than Versus? Regardless of what that number might be, we should expect that the IRL will not get the 914,750 additional viewers that it can anticipate getting on network telecasts.

Thus, the expected value of additional sponsorship to each team must be something less than $987,930. We should also keep in mind that IndyCar races will be more difficult to find. It will have deals with ABC, perhaps another broadcast network, and at least one cable network.

There will be no on-air promotion for the events that do not air on ABC. This is a time-buy, after all. Networks are in the business of promoting properties in which they have invested.

And we still have not addressed the issue of probability. How many teams can we expect to actually sell additional sponsorship in an amount that is less than $987,930?

The IRL knows that it will get Paul Tracy and GEICO, so that's one. Six more must be certain before the league can even consider switching. Why? Because Versus is contractually obligated to pay the IRL $6 million for 12 races in 2010. If no more than six teams are able to acquire something less than $987,930 in additional sponsorship, then the IRL would do better by handing over checks in that amount to those six teams. And we haven't even begun to consider how the league and the teams might share the cost of switching.

It is likely that the teams want this to happen; Robin Miller probably would not have written about it if that were not true. Thus, Terry Angstadt, Tony Cotman, Brian Barnhardt and staff have a new and unforeseen issue that requires immediate resolution. As we are all aware, IRL management is dealing with more than a few ongoing difficulties. It now has another one.

We invite citizens to tell us what management should do.

Perhaps the guys in the IZOD shirts don't have it so easy.

Roggespierre

IndyCar: Seeking a TV Solution

**Note: edited to include John's data in Comments below**

The Committee of Public Safety seeks help from the citizens.

Many are worried about the IndyCar television contract with Versus. Most, in our estimation, would prefer that the IRL purchase and re-sell time on a major network.

For the sake of argument, we shall assume that there is a network that is willing to enter into such an arrangement.

Robin Miller has reported that ChampCar purchased air time on NBC and CBS for $800,000 per race. He added that IndyCar would not need to spend as much because it has an in-house production company. Therefore, let's assume that each race would cost an additional $600,000.

Total cost also includes opportunity cost. In this case, that means adding $6,000,000 of unrealized revenue from Versus. Citizen John was kind enough to provide advertising revenue projections for this project. His number is $6,000,000. This is convenient because it offsets the opportunity cost.

Let's do the Math!

Total Cost (Revised): (600,000 * 12) + 6,000,000 - 6,000,00 ads = $7,200,000

How many additional viewers can the IndyCar Series expect to attract?

IRL Average on ABC 2009 (no Indy) = 1,154,750 viewers
IRL Average on Versus 2009 = 240,000 viewers

Additional Viewers per Race: 1,154,750 - 240,000 = 914,750

Total Additional Viewers: 914,750 * 12 races = 10,977,000 additional viewers

Therefore, the network arrangement would cost the league $7,200,000 and allow for 10,977,000 additional viewers.

Cost per Viewer: $7,200,000 / 10,977,000 = $0.66 per additional viewer

That's fairly expensive. Still, it might be worth it.

The Benchmark

Previously, we calculated that NASCAR (sans-culottes!) Cup earns an audience of 7.055 million viewers per event. That number has likely changed because NASCAR has completed additional races. Still, we'll use the number.

7.055 million viewers * 34 Cup Races = 225.760 million viewers for the season

We also cited published reports that a top NASCAR entry is valued in the marketplace at $20 million. Therefore, we divide that number by total viewers to get the cost per viewer that is paid by NASCAR team sponsors.

20,000,000 / 225,760,000 = $0.09 per viewer

Therefore, each viewer is worth $0.09 in the market for racing team sponsorship. Did we not say that $0.66 per additional viewer was fairly expensive?

Anyway, the IndyCar teams should therefore anticipate acquiring additional sponsorship in the amount of:

$0.09 per viewer * 10,977,000 additional viewers = $987, 930

The Results

The IRL spends an additional $7,200,000
The IRL loses $6,000,000 in revenue
The IRL recoups $6,000,000 in advertising
Total Cost to IRL = $7,200,000

Each team acquires sponsorship value of $987,930

Shall we say 22 teams will run each race next year?

22 teams * $987,930 = $21,734,460 total projected revenue to teams

Conclusion

This remains a very tough call.

21,734,460 team revenue - 7,200,000 IRL cost = 14,534,460 value to enterprise

The decision hinges on the probability that all 22 teams will in fact acquire $987,930 in additional sponsorship due to the move from Versus to a network broadcaster. Each team that fails to do so will cause the "team revenue" and "value to enterprise" to decrease. This is where an assumption must be made.

Also, there is no firm anywhere that would agree to incur $7.2 million in additional costs so that its suppliers might earn an additional $21,734,460 in revenue. However, it is also true that the IRL will benefit if it has teams that are better financed.

We ask the citizens: what would you do?

1. How should the IRL and its teams share the $7.2 million switching cost?
2. What is the probability that all 22 teams will reach the $987,930 threshold due to the switch?
3. How should the IRL and the teams spread the financial risk associated with teams that fail to acquire the additional sponsorship?
4. How much advertising do you think the IRL can sell? This number is important because it will offset a portion of the cost. Citizen John has answered this question for us. Thank you, Citizen John. All resulting changes are in green.
5. Is the switch worth it to the IRL and its teams, provided that they can agree to specific terms?

Obviously, we have had to make some assumptions. Otherwise, this is the way the decision would be made - a real, or at least plausible, IRL management decision. The answer might not be so obvious as it seemed in Robin's original column.

We invite you to help us fill in the blanks and tell us what should be done.

Roggespierre

More Reasons Robin is Wrong about Versus

We appreciate the data cited by Robin Miller in his recent column on SpeedTV.com. Some numbers were new to us. Others confirmed our own.

In fairness to Versus, a television partner that has followed through on its commitments to the IndyCar Series, we believe that some additional numbers should be cited. Citizens will recognize a few, but new data are included.

• 2008 Oregon vs. Oregon State football game on Versus drew 1.6 million viewers
• 2008 Stanley Cup Game #2 on Versus drew 2.3 million viewers
  

So it would seem that Versus can draw an audience. However, it does require programming that U.S. television viewers actually want to see.

Incidentally, this information is the product of a cursory Google search. It is not difficult to find.

• 2009 Tour De France increased 98% year-over-year to 527,000 viewers on Versus (daily 8:30-9:00AM)

The reason was the return of Lance Armstrong, riding near the front of the running order. United States television viewers have spoken clearly. The guy on the bike makes a difference.

So, too, we would think, do the drivers in the cars.

How many viewers do you think an IndyCar race would attract on a weekday at 8:30 in the morning?

We suspect that when the ratings are released for this weekend's Texas-Wyoming football game on Versus (sans DirecTV), IndyCar will have even more reason for embarrassment. But that is belaboring the point.

Although insiders might not want to admit it, IndyCar's problems, though difficult to resolve, are easy to identify. The television partner is not one of them.

There is a reason that Tim Cindric is practically begging NASCAR drivers to participate in the Indianapolis 500 next year. Could it be that ESPN and ABC might want to opt-out of their yearly 5-race schedule early? Might Phillip Morris USA be teetering? Will there be 33 starters next year without NASCAR money?

Quit blaming the television partner and give consumers what they want. This is the way business works; the IRL and its teams are not entitled to exemptions.

Some products simply can not be sold at a cost that is cheap enough and to a market that is large enough to justify their existence. The IndyCar Series in its present composition is one of them.

Roggespierre