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

IndyCar Extreme Makeover Redux

This afternoon Roggespierre received a note from Saint Just, who argued that our earlier post, Extreme Makeover: IndyCar TEAM Edition, contains a fundamental flaw.

You might recall we suggested that because some drivers are worth more than others to those who buy tickets and watch on TV, IndyCar TEAM appearance money should be reallocated to account for driver popularity.

Saint-Just counters that IndyCar team owners don't want compensation based on driver value, performance value, or any other criteria other than that of showing up and putting a car on the track. The owners, Saint-Just argues, see TEAM payments as their money, and they're not interested in sharing it. Team owners apparently fear that, if driver value were used to calculate TEAM compensation, then drivers could argue that they should get a cut.

Fans do not think about such things. Rest assured, participants certainly do.

All due respect to Saint-Just, Roggespierre rejects the notion that this concern exposes a flaw in his proposed Extreme TEAM Makeover. The problem, it would appear, is that the Indy Racing League is afraid of its team owners. Fear might even be justifiable, but the scenario is hardly unusual. For example, suppliers of lithium ion batteries currently wield tremendous bargaining power over their customers. But can we say the same about IndyCar teams?

WARNING: The following is a partial analysis of the IRL's strategic position. It is likely to be dry, and to many, boring. Citizens seeking entertaining IndyCar content this evening should consult other sources. Roggespierre recommends Pressdog.com and MyNameIsIRL.com. Both are excellent. The Indy Idea will return to Revolutionary frivolity tomorrow.

With that, we commence with our analysis.

In his 1979 classic essay, Competitive Strategy, Harvard Business School professor Michael Porter identified what he called Five Forces that determine a firm's profitability. One of those forces is the bargaining power of suppliers. IndyCar team owners collectively supply the entries that compete in IRL races. They are therefore suppliers to the IndyCar Series.

Porter wrote that suppliers can exercise power over a firm. If Saint-Just is correct - and we have every reason to think that he is - then we can assume that IRL managers believe that the team owners hold a measure of power over the series. If true, then Porter would suggest that the teams might quit the series or charge higher prices - appearance fees and bonuses - in exchange for the services they furnish.

Previously, we asked whether or not IndyCar teams do in fact have this presumed power. Adopting the Porter model, they do if:

1. the teams' cost of switching to another series is relatively low
2. the inputs (to the IRL product) of each individual team are highly differentiated
3. the threat of substitute inputs (new teams) into the IRL ranks is low
4. the ratio of racing series to teams is high
5. the threat of forward integration by the teams is high
6. the threat of backward integration by the IRL and its customers is low
7. the cost of inputs furnished by teams to the IRL is high relative to the selling price the IRL gets from its customers

We use these tests to analyze the bargaining power of IndyCar teams. We shall then determine whether or not Roggespierre's proposed TEAM Makeover should be implemented. Note that this is a fundamental business decision that has nothing to do with either sales or operations. Therefore, it seems that there is no one at the IRL whose job it is to conduct analysis of this sort and to make strategic decisions that flow from it.

Nevertheless, we press on.

"Yes" indicates sources of bargaining power for the teams.
"No" indicates sources of bargaining power for the IRL.

1. Q: Are teams' cost of switching to another series relatively low? A: No. Some teams are already in other series, primarily NASCAR Cup, where the cost of additional entries is prohibitive. Any team that switches to a different series will incur a capital outlay for new equipment. Unless a sponsor or an auto manufacturer covers that cost - an unlikely scenario now that firms of all types are reducing costs in series ranging from F1, to Cup, to ALMS - switching is not a plausible option for most IRL teams.
2. Q: Are the inputs that each individual team contributes to the IRL product highly differentiated? A: No. The teams furnish commodities - race entries - that are differentiated only to the extent that some drivers are more appealing than others to those who buy tickets and watch on TV. Scuderia Ferrari is the exception, but that is Formula 1's problem.
3. Q: Is the threat of substitute inputs (new teams) relatively low? A: Yes. IndyCar equipment is cost prohibitive for prospective team owners unless they have sponsors lined up to underwrite the project.
4. Q: Is the ratio of comparable series to teams relatively high? A: No. There are four comparable spectator-supported series - Formula 1, Cup, Grand National, and IndyCar. F1 does not race in the United States and is extremely cost prohibitive. Cup teams have been consolidating for years, primarily to reduce costs via scale economies. That leaves Grand National and IndyCar. The former is dominated by Cup teams and their satellites, making the cost of entry greater than it might otherwise be.
5. Q: Is the threat of forward integration by the teams high? A: No. This was already tried. It was called CART. The teams forward integrated, forming their own series, but they didn't go all the way. Rather, they continued to leverage the value of participating in the Indianapolis 500, their largest event and one they did not control. When Tony George created the IRL, the teams' experiment in forward integration reached a crossroads: they could either abandon the strategy altogether or continue on without Indianapolis. Although they chose the latter, the teams transferred much of the financial risk to shareholders via an initial public offering of stock, by definition an exit strategy. The present economic climate, the financial condition of most teams, and the existence of the IRL under IMS control render a new adventure into forward integration a non-starter.
6. Q: Is the threat of backward integration by the IRL and its customers low? A: No. In fact, it's already happening. Vision Racing, co-owned by an IMS board member, is an example of backward integration. If another IMS board member were to start her own team, then the existing IRL teams would lose additional bargaining power. The same would be true if, say, Texas Motor Speedway started its own IRL team.
7. Q: Is the cost of inputs that teams contribute to the IRL high relative to the selling price the IRL gets from its customers? A: Yes. Herein lies the primary source of bargaining power for the present IRL teams. The supply and demand curves intersect at the point of transaction, the one at which all prospective team owners who possess both the resources and the inclination to present an entry for IRL competition are already doing so. There are only two ways to shift this point of intersection: 1) reduce the cost of entry, or 2) increase the willingness of the able and/or increase the resources of the willing. This is why the next IndyCar spec is so important. It must be inexpensive enough to attract additional team owners that do not have substantial corporate backing. This would not only increase bumping at Indianapolis and car counts at all IRL races, but also reduce the bargaining power of the individual team owners.

That's five No's and two Yes's. The IndyCar teams are not so powerful after all. It is ironic but true that the present recession lends tremendous strategic leverage to the IRL. One might believe intuitively that, because the IRL needs teams and the economy is bad, the league should therefore do whatever it takes to keep its present teams happy. But that notion is wrong. Although the economy has deprived the league of revenues, it has deprived the teams of both revenues and bargaining power. The relative gain is accrued to the IRL.

In conclusion, the present circumstances provide a rare opportunity for the IRL to impose long-term, strategic policies that will ultimately benefit all of its stakeholders. The teams might resist some imperatives, but they lack alternatives that would empower them to demand the short-term outcomes they desire.

The opportunity to arrange the playing field for the next generation of IndyCar racing is, therefore, at hand. Sadly, it seems that there is no one at the IRL who is in position to take appropriate action.

Roggespierre

Extreme Makeover: IndyCar TEAM Edition

Roger Penske sells lots of cars. He purchases popular models from the factory, marks them up, and sells them to his customers. We assume that Mr. Penske does not pay much, if anything at all, for models his customers don't want.

Regrettably, the Indy Racing League does.

If you show up and race an IRL event with an IRL car, then the league will award you tens of thousands of dollars. Got a tomato can driving your Dallara? That's not a problem. You get paid the same appearance fee as everyone else.

Unveiled in October 2007 (transcript linked in title above), the Team Enhancement Allocation Matrix (TEAM) was conceived to ensure that enough teams show up for each IndyCar race. Admirably egalitarian, IndyCar TEAM promised an appearance reward of approximately $60,000 per race for full season entries.



Roggespierre, champion of equality for all citizens, was impressed. Danton, however, argued that much of TEAM is a colossal waste of much needed cash. After careful consideration, Roggespierre agrees that TEAM is a good candidate for an Extreme Makeover.


Danton's argument is simple: teams that show up with Danica Patrick, Paul Tracy and Helio Castroneves at the wheel are worth far more to the league than those that "hire" aristocrats who have no popular appeal. Why should the IRL compensate teams of both types equally? Teams are suppliers to the league, Danton argues, and they should be compensated according to the relative market value of the goods and services they supply. This seems reasonable.



We are talking about a "nudge" of the type that behavioral economists favor. The IRL should distribute a far, far greater percentage of appearance money to teams that employ drivers that fans want to see. Increased payments to marketable driver might also begin to address the confounding problem of homegrown IndyCar stars leaving for the riches of NASCAR (sans-culottes!)



Subjective evaluation of drivers' relative popularity would invite charges of corruption, nepotism, xenophobia, and worse. Therefore, the IRL must establish an objective mathematical TEAM compensation equation and publish it for all stakeholders. It might look something like the following.



(Kindly allow Roggespierre to really MBA this one:)


Assumptions

• Each Factor is indexed 1 to 10 according to proportionate value
• TEAM appearance money is accrued on a per race basis
• Does not include bonuses for 1st through 5th place finishers at each race

Factors
for each Team (X) per event employing Driver (Y)

1. Q = Driver (Y) Q-score per 3rd party market research firm = weight 35%
   
2. E = Driver (Y) % of Most Popular Driver Votes - at races only = weight 25%
   
3. W = Driver (Y) % of Most Popular Driver Votes - online (IndyCar, Versus) = weight 10%*
   
4. P = Championship Points earned by Team (X) with Driver (Y) = weight 30%
   

*ballot stuffing is easier online

The calculation



for each race that Team (X) employs Driver (Y)

.35Q+.25E+.1W+.3R = TEAM Points



The sum for each race would then be added together to arrive at the total TEAM Points for a given IndyCar team. Appearance fees would be distributed proportionately.


Drivers might have to adjust their community outreach activities in order to convince people to attend the races. Reading The Lorax to Mrs. Goulet's kindergarten class is a commendable and benevolent activity. However, those little derrieres are unlikely to be in the stands on race day, and even if they are, their parents will have been the ones who made the purchase decision.


Some argue that the top finishers should get more prize money, that it's unfair to reward popularity. For them, we have a saying here in the Republic: Tough Tuberculosis.

This is serious business - sex and violence and rock-n-roll and (legal) price discrimination.



The IRL needs revenue, for which it needs fans, for which it needs a product that people watch on TV when they're not watching it in person. The IRL must think of itself as a retailer, much like Target Stores or Penske Auto. Those firms require that their vendors' prices correlate with customer demand. Why should the IRL be any different?



Roggespierre