Motley Fool Hidden Gems Investing - Does F1 Need Netflix?

Episode Date: March 23, 2024

The Netflix show “Drive to Survive” completely changed the sport of motor racing. But Formula One’s story begins long before the streamer stepped in. Joshua Robinson and Jonathan Clegg are sports reporters at the Wall Street Journal and co-authors of the new book, “The Formula: How Rogues, Geniuses, and Speed Freaks Reengineered F1 into the World’s Fastest Growing Sport.” Ricky Mulvey caught up with them both to discuss: How a used car dealer became a global entertainment magnate. Why the underdog never seems to win in racing. The inseparability of Ferrari and F1. Host: Ricky Mulvey Guests: Jonathan Clegg, Joshua Robinson Producer: Mary Long Engineers: Rick Engdahl Companies discussed: LSXMA, FWON.A, FWON.B, FWON.K, RACE, MBGY.Y, NFLX, AAPL Learn more about your ad choices. Visit megaphone.fm/adchoices

From morning hockey with a cup of coffee, to Timbits and road trips, Tim's and Canadian Tire have always gone together. Now it's official. You can now earn Canadian Tire money at Tim's. Link your Triangle Rewards and Tim's Rewards accounts to earn twice with every Tim's run. Terms and conditions apply. Visit timhordens.ca slash triangle for details. Ferrari has used F1 as its primary marketing tool forever and is so intrinsically linked to the sport. It's the only team that has participated in every season of Formula One. And it was Bernie who said a long time ago in conversation with Enzo that Formula One is Ferrari and Ferrari is Formula One.

You cannot separate one from the other. So all of that contributes to a huge amount of pressure to perform that often Ferrari collapses under. i'm mary long and that's joshua robinson a sports reporter at the wall street journal and co-author of the new book the formula how rogues geniuses and speed freaks re-engineered f1 into the world's fastest growing sport my colleague ricky mulvey caught up with joshua and his co-author jonathan clegg for a deep dive into the world of motor racing they also discuss why Formula One's parent company is happy to have you forget the sport's pre-2017 history, the evolution of Ferrari's mythology, and whether the timing of Netflix's drive to survive

was a lucky punch or a stroke of genius. Joshua and John, I have to say, I was reading your book on a flight and there's a part of me where I'm like, I'm going to read 20 pages of this book. It's a book for work. All right, fine. i ripped through this thing i had so much fun reading the formula i'm delighted that you are able to uh to join us today i know you can't probably label it like this but i think it is a um it is a excellent and entertaining prequel to drive to survive if you're a fan of the show on netflix so thanks for joining us on motley fool money thanks for having us yeah thank you so one of the things you write you say uh basically formula one is based is perfectly happy for

its fans to assume that the organization started in 2017. So either one of you, why is that? Well, I think there's a lot of it. Much of the Liberty era of Formula One is about rebranding it, about representing it to the world as this very polished, very glitzy sort of entertainment product. And I think that's one reason it's happy to look past the pre-2017 history, Because that was often gritty, full of some unsavory characters. They were racing in places that sometimes involved dealing with the KGB, for instance. We can get into that later with Bernie Eccleston. And that was also a time when the reality of F1 often involved extreme levels of danger and tragedy. So I think Liberty was happy to airbrush all of that and present to the world, hey, we have this thing that's also on Netflix. It's a modern TV epic. Yeah, it's my favorite reality show. It's one of my favorite television shows. You know what? No, let's hit it now. I got an outline, but I think if I were listening and I heard Bernie Ecclestone in KGB, Bernie Ecclestone was – he was the supremo. He was the boss of Formula One for 40 years. And in getting races done, he had plenty of successes with the European circuit, getting the races to the Middle East, some missteps in America that I want to get to.

But yeah, he had some interesting dealings with the KGB. Can you tell our listeners about that? um well bernie eccleston first of all is a former used car dealer who became a driver agent eventually bought a team in the early 70s and realized that the product they were selling was not racing it was a television product and it was they were in the tv rights business and the sponsorship business and he built up the business over the course of 40 years into a global series that was prepared to go anywhere and take pretty much anyone's dollar and so in the 70s and 80s he got it in his head that he really wanted to race behind the Iron Curtain. There were

negotiations with Brezhnev in the Soviet Union. Eventually, they had to settle for communist Hungary, where he says he was quite happy to deal with the KGB because, as Bernie told me when I was sitting in his living room in Switzerland, they were straight shooters. So he quite enjoyed that. As we were saying, he's one of those people who's been largely airbrushed from the pre-Netflix era of Formula One. John, you're nodding. Yeah, yeah. I think when you talk about Liberty Media being very happy for people to believe that the series started in 2017, a large part of that is because its pre-2017 history is kind of inextricably tied to this small, white-haired maniac named Bernie Eccleston. and um they would rather people knew much less about him the better the less people knew about

him the better because um you know he has enjoyed um you know some rubbing shoulders with some unsavory characters and um you know is a man of um a few scruples there is a lot of controversy with formula one one of the stories that your book dives into that i think has been maybe airbrushed from the official history is crash gate either one of you can you can you give our listeners the the primer on crash gate and how that controversy maybe changed formula one crash gate was an episode that took place in 2008 at the josh remind me it was the singapore grand prix singapore grand prix that's right and what had began like a perfectly regular grand prix was delayed for a safety car incident that's when uh in f1 when when someone crashes and the

remnants of their car are scattered over the circuit they have to bring out what's called a safety car, which is like a sort of regular road car. The drivers all then have to do a couple of laps driving very slowly behind the safety car before the race can resume. This particular safety car incident happened quite early in the race. And at what turned out to be a very convenient time for Fernando Alonso, who had qualified very low down in sort of the high teens and had just taken a pit stop, gotten some new tires on his car and found himself after the safety car incident at the at the front of the pack while the sort of um leading contenders had been had been moved to the back and he then went on to win the race which you know would have been

perfectly reasonable were it not for the fact that the car that crashed was his teammates car and it ultimately emerged that his teammate had been ordered to crash to drive into the wall um you know at 100 miles an hour on purpose in order to rig the race for his teammate to to win this was something that um came to light only after the race happened although when we spoke to you know one of the team principals who was taking part in that race he described fernando alonso's look on standing on the podium so alonso had maybe a look of guilt he's not enjoying the moment of a race when when you normally expect drivers to pump their hands into the air exactly exactly on the top step of the podium his only win of the season and he sort of wore the somber

look of a man who knew that he had got to the top of the podium by nefarious means. Or he's following the rules that McLaren set out, which we can get to. But how did the investigators know that crashes happen all the time in Formula One? People run into walls sometimes, but how do they know that this one was on purpose? So they were able to look at the telemetry on the car, which is the set of sensors that record almost like a black box on an airplane, everything that happens in the car. And what they could tell is as he came into this corner and was heading for the wall, he didn't really lift off the gas and didn't apply the brakes in a way that any normal person would if they were about to crash. So they were able to determine that it

was intentional. Subsequent interviews revealed that they had been planning this in quite an intricate way to be as far away from the cranes as possible for maximum inconvenience and guarantee a safety car. And the fallout was really that in the process of all of this, a Brazilian driver named Felipe Massa was denied a bunch of points because he got caught behind the pack in the big reshuffle. And ultimately, it cost him a world championship by one point. And since then, he is suing in British court to be reinstated as the 2008 world champion and for about $80 million in prize money and lost income as someone who would have been a world champion because he never got that title. It's interesting to me where Formula One is a sport where at its surface,

it's supposed to be like a pure meritocracy in some ways because whoever's the fastest wins, but it's also a sport that's named after its rule book and one where it's incredibly hard to find justice. One, I think, recent example of that would be it would have been Ferrari at um, Las Vegas, even this year where a driver hits a drain cover during qualifying rips out the underside. And ultimately the team is punished for it because they have to use new parts over a mistake that the track made because, because there's no flexibility within, within the rules of this sport, except when it's fought about like it, the higher levels, there's very, there's very little intentional, unintentional, um, understanding.

Yeah. I mean, I think that's the sort of great take one of the great takeaways of the book is that as you mentioned this is a sport literally named after the rule book the formula applies you know applies to the technical specifications that each team has to use each year when they build these cars and yet the entire history of the sport is basically about people trying to break the rules and getting away with it and even the most successful teams and the sort of like dynastic teams that we think of as as dominating the sport at various points in throughout f1 Most of those successes were built on identifying sort of gray areas and loopholes in the rulebook and exploiting those to maximum advantage. And then was anyone actually fired for CrashGate?

They were banned from F1 for two years. Yeah, the Renault team was banned from F1 for two years. And Flavio Briatore, who was the team principal, was suspended. We've mentioned Liberty Media. it's actually it's a company that um last week it was reported that warren buffett increased his stake in it's it's not quite as opaque as bernie ecclestone but it's it's certainly one that sort of shies away from from the spotlight can you what is liberty media it was the company started by john malone um who is the telecoms and broadcast giant um and who uh it has its fingers

and a lot of pies, but it's, you know, outside of Formula One, it's obviously, it's got Live Nation, it owns the Atlanta Braves, and it has a lot of quite diverse interests, you know, dating back to a vast cable network empire. And so it invested in Formula One because it wanted a truly global sports property that it thought was undervalued. And it had been held for a long time, sort of in between the period of Bernie's, you know, sort of total reign over F1. And, you know, the sport, the business needed to be cleaned up and prepared for another sale. And that was done by a private equity firm in London called CVC. And they held on to it for about a decade before flipping it to Liberty Media. So when you talk about ownership of Formula One, this is the part that, like,

it confuses me. What do you own when you own Formula One? it's a great question you own what is often referred to as the commercial rights to to f1 so you uh are in control of the broadcast rights in control of sponsorship and in control of any kind of licensing you don't own the circuits because those are done by local promoters and you don't own the teams obviously because those are all privately held so you you kind of you don't even own the rules because that's done by the the motorsport world governing body known the FIA. So you are the organizer and, and, um, yeah, you, you own the commercial rights is a good way to put it. Seems like a good business if, if, uh, if you can get it. Um, another company

that is very old company, but it's back really back on the come up is, uh, is Ferrari right now. Um, and when we talk about branding, when we talk about marketing, I don't think there's, I'd struggle to think of a company that's done a better job at this than Ferrari, actually maybe Red Bull. But what were the ingredients? What created Ferrari's mythology where we think of it as this premier racing car champion? So one thing that's really amazing about Ferrari, and I think that even we didn't realize initially, was how relatively young the company is. The first Ferraris didn't roll off the line in Maranello until 1947. So Enzo had been building cars at Alfa Romeo before then, but all he really wanted to do was race. And so he was selling road

cars to finance more racing. And what was incredible at the time is that right in this sort of post-war period where people were starting to have disposable income again, he built cars that won critical races in front of just the right people. So movie stars and like the crowned heads of Europe. And suddenly Ferrari took on this idea of glamour very quickly. And it also found a group of people to appreciate Ferrari and appreciate this kind of old world luxury at the right time. And that was Americans. Americans loved Ferrari in the 50s and 60s. And that contributed a huge amount to building up the mythology. And in many ways, Ferrari did not love americans and that that maybe made the the love grow a little bit that was the secret of selling

old world luxury in the new world that uh that enzo understood which was if you mistreat americans and make them feel like they're not good enough for this you'll own them for life yeah um and i think one one rule that i learned about reading your book is uh how how enzo allowed ferraris to be portrayed where what was it there's a movie where they wanted to put ferraris in and he basically said you can kill a driver in one of my cars but the car cannot lose a race and i think that rule still might be in effect with uh with the the latest ferrari movie that came out it's amazing how um ferrari has leveraged f1 to you know to market itself around the world um when you think this is a company that has basically never never really advertised certainly not

advertised on tv f1 is its kind of marketing and advertising arm and you know one of one of my favorite, um, you know, nuggets from the book is that the whole reason that we, um, when we think of an Italian sports car, we think of, you know, we picture the red sort of machine is because in the early days of F1, that was the color given to all Italian cars. They used to, they used to have different colors for different nationalities. So French cars would be blue, um, German cars would be white or silver, which is why we think of Mercedes, the silver arrows, uh, Italian cars were given the color red and that's why when you you know your mind when you picture a italian sports car you always think of it as red because you know that that was the color that was the

color they were they were given by f1 and and really no team like you say you know with a possible exception now of red bull but but no team has really um used f1 to market itself around the world as effectively as ferrari so what do you think what's been happening with with ferrari's resurgence because while it did it dominated the the aughts um with with michael schumacher then it then it falls behind this is something that ferrari is intensely unhappy about where you have the the dynasty of toto wolf and lewis hamilton at mercedes and now you have a uh what is it two straight constructors and drivers titles with with red bull max verstappen last year i think what did he win he went basically all but two races ferrari was the only non-red bull winner of a grand prix

last year, and there was only one of them. But yeah, this is a source of intense frustration in Maranello. But also, Ferrari is, for all of its technical aptitude and stylistic brilliance, is also the team that can't get out of its own way a lot of the time. They've been known in recent years as these bumbling guys who mess up pit stops, pick the wrong strategy, and just can't quite put all the elements you need together sometimes it's just straight up bad luck but the pressure to win at Ferrari is incredibly intense and that dates back to Enzo and I think a lot of that comes down to the fact as as John explained that you know Ferrari has used F1 as its primary marketing tool forever and is so intrinsically linked to the sport it's the only

team that has participated in every season of Formula One and it was Bernie who who said a long time ago in conversation with Enzo, that Formula One is Ferrari and Ferrari is Formula One. You cannot separate one from the other. So all of that contributes to a huge amount of pressure to perform that often Ferrari collapses under. So now, and I think you pointed out something interesting, your book talks about it, which is the internal culture that that creates, where you have such intense pressure, but you also have people who are unwilling to work with each other. I think it was basically people are almost more collaborative between, I think it was Britain and Japan, than they were in the same hall of a Ferrari office building. And then

that sort of entropy can end up collapsing in on itself. Right now, we're at a point, though, where people are a lot more optimistic about Ferrari in 2024. And part of that has to do with the signing of Lewis Hamilton. Certainly, Ferrari's investors are really optimistic about it but from the story perspective what's going on with the resurgence why are folks so much more optimistic about ferrari today than they were five or six years ago well i think yeah one of the reasons um like you say is is uh but they've signed lewis hamilton for the 2025 season um and you know hamilton obviously is the the uh tied for the record number of championships easily leader in the most career F1 wins, most F1 pole positions, one of the truly great drivers

in F1 history. I think also they're optimistic because we're not far away from a rules change now. And one of the things that has characterized F1 through the years is that every four, five, six years, they rip up the rule book and release a new series of specifications, which has the knock-on effect of reordering the grid. What that means is that the teams that are in the middle or at the back can sometimes get propelled to the front as they interpret the new regulations better, whereas the teams who were on top, who are trying to maximize their window and win as much as possible under the old rules, then find themselves moving to the back. I think that's really the only thing that will end Red Bull's run at the moment, is a change of the rules. Frankly, they're so far

ahead that it really wouldn't be a surprise if they won every single race this year what the sport needs is one of these um technical you know upheavals to sort of reorder things and the next round of those is due for 2026 so what you're seeing is ferrari are getting closer to red bull you know they're certainly the closest challenger to red bull but i think what they're also doing is positioning themselves to really capitalize on the rules change that comes in 2026 at which time hamilton would have had a year in the car and hopefully they'll be sort of you know firing on all cylinders and able to really you know attack this rules change and and be the team that really you know interprets the rules most effectively and and starts out on top yeah because

this is a sport that needs a rule rules change to stop basically what complete domination in a sport and that's that's what the history has been with we mentioned ferrari with with michael schumacher Then you have Mercedes and now, now a burgeoning dynasty at red, not even burgeoning. You have a dynasty at Red Bull. Why is F1 a sport where the underdog has such a difficult time winning or even, even getting to the top on any of the races? You know, we think about, um, bait like baseball, for example, you can have the worst team play the best team, but you know, 20 to 30% of the time, the worst team might come out on

top, pick your sport. I think, I think there might be some similar percentages, but in, in formula one, that's completely not the case. Why is that? I think, one, there is so much that goes into building a winning car that has to go right. You have to have the right combination of driver, of car, of strategy, of performance and qualifying and everything else. So there is less variance there. But in a larger sense, the teams, as they look at every rule change, will spend a year or two years devising the right kind of setup and finding all the right loopholes.

And there are some people who are just much, much better at that than others. And Adrian Newey, for instance, who is the technical director at Red Bull, is one of them. And so those are the moments in that phase of development where you can really steal a march on the rest of the field. And what makes it difficult to then catch up is that there are huge limitations now on budget, on wind tunnel testing time. So all of that just makes it hard to close gaps because once your car is kind of set at the beginning of the season, there's a very minimal number of things you can do to improve it. You can sort of marginally upgrade certain parts, but you're not going to change the overall aerodynamic design in a significant way at that stage of the season. I think it also gets to the balance between the human aspect of F1, the driver and what he controls, versus the engineering and technological aspect. One car is just quicker than the other. A baseball team can play, and on their best day, this player is better than another, and on another day, that might be completely different. But the one machine is just faster than the other. And, and although the human aspect plays a role, um, you know, it's, it's sometimes it's not enough to overcome the fact that, that the car just isn't as fast as one of the competitors.

one of the main themes in your book is basically uh who has the upper hand right throughout um with bernie ecclestone it's bernie ecclestone has the upper hand with pretty much every single racetrack with the exception of uh what monaco um then you have sort of him getting towards the end and then these new investors come in ecclestone getting the upper hand against the other teams that he's competing against every team in formula one trying to get the upper hand on each other um in any given racing season one company that comes in unexpectedly and cheaply is netflix which completely changed the sport completely changed the fandom and they get into the paddock like as you write about relatively cheaply this would have been completely unheard of just just a

few years ago how does netflix sort of get started in formula one as you say relatively cheaply um so during the bernie era the paddock had been this kind of sanctum sanctorum where it was impossible to you know he wanted to control everything and every image of formula one you know lewis hamilton talks about every time he posted something on instagram he'd get a cease and desist from bernie um they didn't he didn't want to let cameras in he didn't want anyone sort of prying because this belonged to the teams this belonged to f1 and if there was going to get things, if things were going to emerge from there, he wanted to get paid for it. Liberty comes in sort of a, as a much savvier media operation. And in one of their many efforts

to, to kind of open things up, lands on this idea with Netflix, um, not knowing what it was going to turn into. And, you know, to this, you know, it was so kind of, uh, off the wall and, and many teams were suspicious of it. Ferrari and Mercedes didn't even participate in season one. they, they kind of kept it at a safe distance, but pretty soon it exploded. And it's no coincidence that, you know, season two dropped two weeks, uh, before the pandemic became, you know, what it was in, in 2020 and two weeks before everyone was about to spend a year sitting on the couch watching TV. Um, and, and Total Wolf said to us that to this day, they don't really know if the whole netflix experiment and the way it it exploded it just lifted the sports to new the sports

to new heights was uh you know a lucky punch or a stroke of genius yeah it's at this point who who do you think has the upper hand in the relationship does does formula one have a sport where it can say you know what we're gonna we're gonna take our reality show to uh to apple or to uh, Hulu, something like that? Or does, is Netflix or is Netflix in control of those, those negotiations? I think at the moment, um, Netflix is in control because I think F1, uh, you know, as, as we, as we discussed, I think there's still so much sort of uncertainty around what exactly makes this show work so successfully that F1 would be sort of very loathe to, you know to try something new because this has been you know the probably the biggest single

factor in in the sports growth popularity um over the last five years so you know netflix certainly has that to its advantage we've also seen you know it's also funny that we've seen like them try to sort of repeat this formula with other sports and it hasn't really worked they've tried with tennis they've tried with golf they've tried with um you know cycling pro cycling and none of them have really sort of caught fire in the way that drive to survive did you know whether that's to do with the timing aspect you know the fact that the drive to survive dropped during covid or whether that's the fact that um the people that make up the sort of cast of f1 are sort of uniquely well attuned to deliver like great reality tv because they are generally young

very good looking, smart, articulate, vicious back biters and like, you know, snipers and constantly shit talking each other. I don't think anyone really knows exactly why Drive to Survive has worked in a way that typical fly on the wall sports documentaries generally haven't. And, you know, F1 are pretty open about that and pretty open about the fact that they're just going to sort of ride this wave while they can. And, you know, I think that they're, so they sort of see this as a chance to kind of shore up their popularity and sort of raise the floor so that if and when Drive to Survive does go away, they've still got enough people who are willing to stick around. And like you say, I'm sure that they will find a way to put an F1 behind the scenes show

somewhere else in the event that Netflix does pull the plug. What do you think, so Formula One famously on the cutting edge, you talk about how, what is it, even the truck drivers are the best truck drivers liberty media has has been at the forefront of changing the way people interact with formula one one example now is the uh what is it the virtual reality headsets where you're going to be able to look down on essentially a live race circuit and see where all of the cars are that's just one example what do you think fans should how should uh how do you think how do you think fans will interact with formula one in three to five years how do you think that'll change well i think that's the next frontier for f1 and you know in the as it prepares for a post

drive to survive future um it's throwing a lot of stuff at the wall trying to figure out what's going to stick you know and whether that is finding other ways for them to consume like you know non-race content so i'm thinking of projects like the brad pitt jerry bruckheimer apple movie uh that's due out in 2025 whether that's also changing the live race experience which, you know, they've been pretty good about already in giving, giving access to much more data. I think, you know, your real petrol heads who still watch F1 are now watching it with two or three screens where they have live timing and things like that. And that was a, that was already a major step for F1, which, you know, when Liberty came in, felt this is still too opaque. People

still don't know what's happening. Let's have the live, uh, the live list of positions on screen at all time so that you know what you're looking at um you know with the rise of virtual reality and things like that i think the one thing i've heard they they want to do is create a kind of erasing situation where you in your you know with your rig at home or on your laptop can race against live positions uh that the drivers in the race are taking up so i mean there are a lot of options here and technology maybe for the first time kind of exists to do that whether the appetite is really there for people who uh you know primarily interact with that one through drive to survive or you know drivers instagrams it remains to be seen that's good i'm gonna take that on easy mode first

before i jump into a sim racing car against for stop and so sergio perez and uh lewis hamilton in the bunch last question might be an unfair one so you can feel free to swat it back at me Liberty Media got Formula One for about $8 billion. You're writing a sequel in 10 years. Maybe it's called The Formula, Back and Better Than Ever. Let's get down to boogieing. I don't know. But you got a sequel coming out for your Formula One book. How do you think we'll look back on that deal and maybe Formula One in 2024? I'm not certain that Liberty Media will still own it by then, in 10 years' time. There was a rumored Saudi bid for about $20 billion. dollars. Liberty kind of joked that it was probably, if it were true, it was probably a

little bit low, but I think there is an element of truth to it. I don't think that, you know, the way we've seen the Saudi public investment fund throw money around in global sports, that F1 is one that they can necessarily resist. They're all, you know, through Aramco, they're already one of the major sponsors of the sport. They just had a Grand Prix in Saudi Arabia and the Gulf footprint is expanding all the time in motorsport. So I think that'll come back at some stage. They are perfectly capable of making $8 billion look like a total steal. Joshua, John, thank you so much for your time. Thank you for your book. If it's not clear, I'm happy to recommend it to readers and listeners of Motley Fool Money. I really had a good time with it. The formula,

how rogues, geniuses, and speed freaks re-engineered F1 into the world's fastest growing sport. Thank you for your book. Thank you for your time. Thanks so much for having us. as always people on the program may have interest in the stocks they talk about and the motley fool may have formal recommendations for or against so don't buy or sell stocks based solely on what you hear i'm mary long thanks for listening we'll see you tomorrow I'll see you next time.