IndyCar Economics: Why they'll Race in an Alley

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

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

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

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

Cash Flow-a-Go-Go

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

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

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

Manufactured Partnership

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

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

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

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

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

More Deep Capture: Honda Edition

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

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

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

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

Happy Labor Day Weekend from the Committee of Public Safety

Roggespierre

IndyCar TEAM Deep Capture

Our criticism of the IndyCar TEAM subsidy program is well established. The mere thought of adjusting appearance money distributions to improve IndyCar's market competitiveness causes profound chafing among team owners.

Money for Next to Nothing

Those are the same team owners that furnish a racing product that the market has rejected. Some received free IRL equipment as mergification gifts from the Indianapolis Motor Speedway. Others have been provided various levels of sponsorship by the Indy Racing League. Some are pressing IRL management to not only adopt new technical specifications that most teams can't afford, but also secure an underwriter to bear the risk of non-payment.

And yet they still expect to receive evenly distributed payments for merely showing up with a car and a non-performing asset behind the wheel. IRL Commercial Division President Terry Angstadt practically conceded the point in his recent comments to Bruce Martin of Versus.com.

Apparently, IndyCar TEAM is indeed negotiable, so long as it serves the interests of the present team owners. We know this because Angstadt is amenable to restricting payments to a seemingly arbitrary number of teams.

"That's a 22 to 24 car number. We would need to make decisions beyond that on some kind of criteria on how you get one of those spots because that is a huge commitment from the League. If we have 28 cars not all of them are going to be able to share in the program." - Terry Angstadt

Let there be no doubt that the present teams are firmly in control of the IndyCar Series. How, exactly, does restricting car count increase the value of the IndyCar product?

Citizens who are old enough to remember the CART "franchise" system will notice the similarities. In both cases, the goal is to protect the existing participants at the expense of prospective new entrants. This is a disservice to customers who might like to see large fields at IndyCar races and bumping at Indianapolis.

In essence, the teams want the IRL to further devalue its product, approve new equipment that costs more than the product's market value, secure 3rd party financing to underwrite its development, and subsidize the teams to cover whatever cost remains. That the IMS Board of Directors might allow this scheme to come to fruition is incomprehensible. Nevertheless, because the IRL is managed by racing operations personnel and a salesman, that is exactly what appears to be happening.

IndyCar TEAM distributions should be indexed to quantifiable market demand for the portion of the product that each individual team contributes. This is a typical supply chain arrangement.

An Example of Extreme Makeover IndyCar TEAM
Dennis Reinbold might be our favorite IndyCar team owner. We shall therefore use him as an example and hope that he does not take offense.

We suspect that our proposed measures of demand would demonstrate that Buddy Rice, the 2004 Indianapolis 500 champion, contributes more than rookie Mike Conway to the value of the IndyCar Racing product. We shall not say here that Conway got the ride because his family owns FM Conway, a large construction company in the United Kingdom that happens to be one of Conway's sponsors, but we suspect that the fact might have augmented his candidacy. We would, however, propose that Dreyer & Reinbold Racing receive less appearance money for furnishing Conway than it would have received had Buddy Rice remained in the car.

Product Management is Marketing

This is an example of product management, an activity that is sorely lacking at the Indy Racing League. In our scenario, IndyCar TEAM is transformed from a subsidizing expenditure into a marketing incentive program. Every team that shows up to race would get some money, but those that add greater value would get significantly more.

We hope that the IMS Board and the IRL will consider our proposal or something similar. We wish to see IndyCar Racing grow to become a competitive product. Aggressively managing the product, using money that has already been earmarked for expenditure, would be a good place to start.

Roggespierre

Take the Subway: IndyCar Cost Leadership

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

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

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

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


Strategic Alternatives

Citizen John favors a differentiation strategy to achieve competitive advantage.

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

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

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


Take the Subway: IndyCar Cost Leadership

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



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

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

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

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

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

On behalf of the Committee of Public Safety

Roggespierre

IndyCar Translator: Can't Sell these Guys

The Republic shall now examine another gem from IRL Commercial Division President Terry Angstadt. Read Bruce Martin's complete story at Versus.com.

On Other Drivers Sharing in the Attention that Danica Gets

"We have our three points leaders going to Miami Tuesday because they have earned it. We have had stability in our name drivers and it is up to PR to shed the light on those that deserve it. Ryan Briscoe is a really fair guy and a phenomenal race car driver. He is really unbelievable." - Terry Angstadt

Translation: I Can't Sell these Guys

This speaks volumes. Angstadt effectively concedes that Ryan Briscoe, Dario Franchitti and Scott Dixon have had ample opportunity to establish market demand for their talents, but have failed. Apparently, being "a really fair guy and a phenomenal race car driver" does not suffice when the goal is mass market acceptance.

If anyone should be taken aback by Angstadt's comments, then it is IRL Public Relations chief John Griffin. The Big Cheese just threw down the gauntlet, deflecting blame to Griffin for past, present and future failures to promote drivers whose talent is not in demand. Thanks, buddy.

We do not judge markets here; we observe and analyze them. If the market demands U.S. oval racers, as Tim Cindric and Michael Andretti have in essence admitted, then the IRL should do everything in its power to furnish U.S. oval racers. Why should NASCAR (sans-culottes!) be permitted to have a monopoly on drivers that U.S. racing fans want to see?

Roggespierre

Danica Patrick: IMG not Buying IndyCar Pitch?

Jayski is reporting that Danica Patrick returned to the Stewart Haas NASCAR (sans-culottes!) shop Monday afternoon. Meanwhile, IRL Commercial Division President Terry Angstadt is in Brazil, where he hoped to finance the 2010 version of his overpriced product and land a season opening race in the process.

Keeping Danica Patrick in the IndyCar Series is "very important." So Angstadt told Versus.com's Bruce Martin.




Angstadt's further musings on this subject require translation and analysis. We are pleased to provide these services to interested citizens. Those who are new to the subject should know that Danica is represented by International Management Group (IMG).

"We have worked hard and closely with IMG to give them confidence in our
series and her role in the future of the series." - Terry
Angstadt

It is unlikely that NASCAR (sans-culottes!) was required to provide such assurances. It has demonstrated that abundant demand exists for its Cup Series and Grand National Series products. Conversely, nearly all empirical evidence suggests that the market for the present IndyCar product is already small and still shrinking. Pity Terry Angstadt, who must convince a sophisticated marketing and financial firm that down is in fact up.

"I really respect the magnitude of this decision for her... That is why we
are respecting that as best we can with IMG." - Terry Angstadt

With all due respect, we have no idea what this means. Perhaps we can infer that failing to manage one's product tends to reduce one to pandering.

"It is sales, marketing, PR, venue selection, where she feels most
competitive... IMG challenges us and we respond accordingly." - Terry
Angstadt

These comments are fascinating. Danton suggests that Angstadt's list of generic activities is intended to imply that IndyCar knows how to maximize returns to Danica and IMG. That is, after all, why IMG is involved.

The reference to "venue selection" lends specificity and intrigue. For example, the IMG Speakers Series markets Danica's public speaking engagements. This effort is unlikely to yield favorable results in Japan and Brazil. In addition, we doubt that IMG has much enthusiasm for Edmonton. Who could blame IMG for suspecting that Danica's participation at these venues would cause her to forfeit significant revenue opportunities?

Is Danica in over her Head?

It is clear that the IRL hopes that Danica will stay because she has a greater probability of winning races in the IndyCar Series. Danica seemed to be leaning that way less than two weeks ago. Now, suddenly, she is silent and the issue remains unresolved.

If Danica intended all along to use NASCAR to get a better deal in IndyCar, then she must realize by now that she hired the wrong firm to represent her. This is not the starstruck IMG that Mark McCormack founded. Today's permutation is an aggressive profit maximizer that exists for the purpose of distributing abnormal returns to Ted Forstmann and his investors. In this case, that would mean taking Danica to NASCAR.

Roggespierre