Regulatory Changes and Their Impact on the Costs and Quality of the 2014 Formula 1 World Championship

An older article wrote years ago that I published here since I believe the concept is still relevant.
Governing bodies, whether in politics or sport are granted regulatory authority by the members of the body they govern.   While it is true that some regulate only when necessary, most usually seek to over regulate and believe that most problems are due to a lack of regulation.  What they fail to realize is that a change in regulation almost (unless it is a deregulatory change) ALWAYS increases costs and decreases efficiency of the process.  These changes, in almost all cases will lead to a decrease in quality for the end-user, especially during the transition process and the initial rollouts of the new programs.  In this case, the result will most likely be a decrease in quality of the viewing experience of the Formula 1 fans, both at the events and on TV.
I am using the 2014 season of the Formula 1 World Championship because it is the greatest example.  This 2014 season will see complete regulatory changes to the aerodynamics, engine technology, weight limits, and fuel loads.  While this will make every car that competes in the series look different from ’13, which we have already seen, it also changes the way they run, and makes substantial changes to their reliability.
It is or should be clear to all now that this sweeping regulatory change will bring with it a massive decrease in quality.  The team principle of RBR called the engines a game changer (http://www.planetf1.com/driver/18227/9118104/-New-engines-will-be-a-game-changer-), boy has the game at Red Bull changed.  How has their preseason gone?  Beyond the Mercedes powered teams, how has every other team’s preseason gone?  The Renault engine has questionable reliability, and other reports have questioned the efficiency of the Ferrari power unit.  The fans in Australia usually show up not knowing who will have the edge; this year they may see half the field not finish and the Mercedes team win by more than 2 laps.
Now on to cost caps and fairness…  Massively changing how a car is designed from the ground up, and changing to an engine with a clean sheet design adds up to large amounts of money needing to be spent.
Let’s say it costs X = (A+B+C+D+E) to fund a F1 team for an entire year; I’m keeping this basic.
Let’s assume it costs: A to travel the world w/ the cars, personnel (non driver and race engineer), & gear necessary to run a race
   B to pay the engineers (salary)
C to build and develop the cars
D to pay the drivers (Salary)
E all other costs
If the total amount of money each team had were equal, they would still be forced to decide whether they wanted to spend their funds on engineers or drivers.  At the end of the day a driver with less skill could be assisted to victory by a great engineering team and vice versa.  Either way, the group with the most skill (either by pilot or designer) will win regardless of budget.
Cost caps initially sound like a good idea for the smaller teams (Marussia et. al) that could only dream of the bankrolls of the large teams (RBR et. al).  Teams that have more numerous and financially sound sponsors should be able to take that money and spend it on their F1 operations without fear of hitting a cap.  Realistically, if Caterham F1 Team had the same operating budget as Red Bull Racing, there still would be 0 guarantees that they would improve from their current position.  Ferrari has what is considered by many to be an almost unlimited budget for their F1 operations.  Yet over the past 4 years it has been RBR year after year with Vettel starting first, running away with it and finishing first.  This is not because RBR has a much higher operating budget than Ferrari.  What it boils down to is the personnel and management decisions of each team.  A team with less of a budget has a higher incentive to recruit new and unknown engineering talent to the sport.  Certainly Mr. Newey will not be around forever, but I am sure he will be here longer than the lifespan of a few of Mark Webber’s 2013 cars.  New engineers will eventually have to fill the positions taken by today’s designers.
In fairness, who said F1 was fair?  Is it fair to the big team that would now be forced to spend less?  Competitors in both sport and business should never accept such a theme.  Look at golf for one moment; if all sets of golf clubs were forced to be equal in appearance and ability, where would the innovation in the sport come from?  The golfer with the most talent would be able to get the most out of the club most of the time, and therefore win most of the time.  The same would happen in F1.  The more the cars are equalized, the more that 1 driver with the most skill would emerge as the driver most likely to be victorious.  If that were to continue to happen, what would be argued then?  Would that driver have to be forced to sit out a race?  Or would that team have their budget lowered via regulatory statute?
Lastly on cost caps, there will always be ways around them than could ever be regulated.  The innovation, ingenuity, and finances that could be spent developing the cars would then be spent by upper management to get around the cost capping rules; there is certainly no way to regulate out the competitive edge of the teams and drivers.  This is a money-making operation, if one team does well consistently, it is good for that team and the sport, yet it can also be bad for the sport; that will never go away.  However if everyone performs equally, there is no incentive for sponsors to jump onto one specific team or group of teams. Sponsors will jump to whoever has historically had the bigger names, which would leave the smaller teams out again.  Fixing this would require more regulations, and the cycle would go on and on.
I have mentioned the ‘Vettel’ effect in a previous post, it turns out my prediction was true:  (http://www.planetf1.com/driver/18227/9149164/Vettel-s-run-blamed-for-poor-TV-figures).  The proper solution to the problem is for rival teams to use what resources they have to innovate and remove RBR from the top spot.  Innovation in a sport such as F1 can lead to great technologies that can impact the lives of millions of drivers across the world once they make their way down to regular road legal vehicles.  While all innovations may not be pretty (http://www.planetf1.com/news/3213/9123502/Whiting-Cars-Could-Be-Ugly-And-Odd), the fact that something looks strange may just catch the eyes of new fans and return some to the sport that may have stopped watching over the past few years.  Also, it is important to note that while these innovations and changes are the result of new regulations, it is equally true that with a deregulatory shift, the cars would change just as dramatically.  Just imagine how much different things would be if both the size and shape of wings, and the way that exhaust gas exits a vehicle were not regulated.
In an age where private sponsorship money appears to be in short supply, it would be foolish to attempt to further regulate it out of the sport.  Instead of teams complaining about rising costs (http://www.planetf1.com/driver/18227/9089959/Fernandes-warns-of-bleak-future) they should advocate for a deregulatory shift.  Consistently changing regulations costs large amounts of money consistently.  A deregulatory shift would cost a large amount of money once and free up teams and their designers to develop the best, most efficient package possible.  If the governing body of Formula 1 wanted to move gradually towards fuel efficiency, why not mandate that teams could use any engine package they wanted to, with any amount of electric assist they wanted, producing any amount of power they desired, while reducing the amount of fuel by 3.7kg (simple weight of a liquid gallon) per year.  Over time the engines would become more efficient and the impact of the cost would be greatly diminished by being spread out over time.
10 cars may be better than 22…
The spirit of competition dictates that the best win.  The winner should attract the most money and sponsorship.  Rather than Mercedes stating that the top teams spend at an unsustainable level (http://www.planetf1.com/driver/18227/9106214/F1-spending-unsustainable-Mercedes) comparable to the smaller ones; if they feel strongly enough about it, there should be nothing stopping them from willingly giving up some of their knowledge to a lesser team to bring them up to their level, but they’d never do that because it goes against the spirit of competition.  The same goes for RBR saying the same thing (http://www.planetf1.com/driver/18227/9139707/Horner-condemns-rising-costs).  Perhaps they should argue for a rule allowing intelligence sharing between the teams.   The larger teams could decide how much to share, certainly they would not want a lesser team to develop into their equal.  The sharing would have to be voluntary.
Any team that could afford to do so should also be able to test as must as possible to improve their overall product.  Cash strapped teams that are forced to deal with incredibly costly regulatory change cannot produce a great product.  If by chance those teams attract a sponsor and combine that money with talented engineering and a bit of luck, being prohibited from testing as much as possible stops the team from improving their product and potentially acquiring new sponsorship.
At the end of the day we must remember that this is a business.  Without millions in sponsorship dollars to the teams, drivers, and race facilities we would see an immediate and major difference in the sport.  We no longer see races in Turkey, Valencia, or Korea (South) because those facilities cannot pay the large sums of money demanded by Mr. Ecclestone to host races there.  There could be a great race in New Jersey at Port Imperial, yet once again it comes down to cost, even the backdrop of NYC is not enough of an incentive to attract enough private sponsorship.  All must be wary of what a decreased product in 2014 could potentially do to sponsors.
Regulatory change for the sake of regulating is never the answer.  Allowing all of the teams the opportunity to spend as much as possible on engineering, drivers, and testing improves the competitiveness of their cars and should be the way forward if the goal is to truly see the best most advanced vehicles on the planet battle for the top spot.  Competition is not fair; there will always be winners and losers as long as groups of teams are incentivized to stay in the championship.
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