(Tobacco + TV + Tracks = $2 Billion)
by Thomas C. O'Keefe, U.S.A.
Thomas O'keefe, a long time contributor of Atlas F1, set out to study and hopefully understand the true motivations that drive The Supremo of Formula One - Bernie Ecclestone. The result, exclusively published here at Atlas F1 in four parts, is one of the most extensive profiles ever written about the man who IS Formula One
Part III - EC vs. F1
Fast forward 18 years from that day in Maranello when Enzo Ferrari blessed the Peace Pact that ended the FISA/FOCA War, and Bernie now finds himself the eminence grace of the sport and again embroiled in controversy over who controls the commercial rights to Formula One, this time not with the likes of Balestre or Pironi but with the powerful European Commission, which holds in its hands the future of Empire Ecclestone.
What is the European Commission ("EC") and what is its beef with Bernie? The European Commission is the entity set up by the European governments who constitute the European Union to implement the European Community Treaties. The EC's mission is to translate the goals of the European Union from treaties into policy to ensure that goods, services, capital and people can move freely throughout the 15 Member States of the European Union, which collectively contain a population of 370 million.
One of the EC's functions is to act as guardian of the European Union's treaties and apply European Union legislation so that all citizens and participants in the single European market benefit from the level playing field that has been created. Pursuant to that function, the EC is empowered to bring antitrust cases against Member States or companies violating the antitrust provisions of European Community laws. This is where Bernie and Formula One fit in: the EC believes that the TV broadcasting rights system Bernie has so painstakingly crafted is a monopoly that runs afoul of the laws of the European Union.
Notwithstanding its critical role in making the European Union work as a single market, the EC is not omnipotent; its role is to propose policies and priorities but the ultimate decisions are the responsibility of the Counsel of the European Union, whose members are ministers from the governments of the Member States. And the EC's actions are subject to review in the courts.
However it must be acknowledged that enforcement powers of the EC, which is based in Brussels and is European not U.K.- oriented, are mighty: if the Commission ultimately finds that Bernie has infringed Articles 81 and 82 of the European Community Treaty which prohibit pricing and distribution practices that are anti-competitive and also prohibit the abuse of a dominant position within a certain market, the contracts concerning the commercial exploitation of broadcasting rights that Bernie and Max have worked so assiduously to put in place over these last eighteen years would be rendered automatically void and would have to be renegotiated.
In addition, the European Commission is also empowered to fine the FIA and Bernie's companies 10% of "turnover", which is legal/accounting gibberish for the "take", including the sale of broadcasting rights, ticket prices and other revenues. It is rumored that the gross revenues of Formula One for this last year were $414 million, so theoretically, the European Commission could end up imposing some significant multi-million dollar "stop and go" penalties on Bernie's companies if the case goes against them.
Significantly, the 15 Member States of the European Union include the United Kingdom (Silverstone & Brands Hatch), Belgium (Spa), Spain (Barcelona & Jerez), Italy (Monza & San Marino), Ireland, Holland (Zandvoort), Austria (A1 Ring), Germany (Hockenheim & Nurburgring), France (Magny Cours & Paul Ricard), Luxembourg, Portugal (Estoril), Greece and the Northern Countries of Sweden, Finland and Denmark. Switzerland, the new headquarters site for the FIA, is conspicuously absent from the list of Member States. The danger is that if the EC rules against Bernie and it is upheld in the European Court of Justice and Bernie carries through on his threats, most of Europe could become a Formula One Free Zone. What is the fight over TV rights all about and how has Bernie attempted to protect himself against an unfavorable ruling by the EC that would void the existing contracts that are the foundation for his whole enterprise? The difficulties begin with the lay of the land: since television rights are governed by the national law of the country in which the race is held and may ultimately be controlled the owner of the land on which the race takes place, Bernie has been forced to come up with an approach to acquiring the TV rights that is enforceable under some 14 different legal systems. Here is Bernie's patented solution to this myriad of legal problems, according to remarks made by Max Mosley on the eve of the 1999 British Grand Prix:
"Bernie has realized at a very early [date] that it was essential for the future of Formula One to have all the television rights in one basket.
While Max is an articulate and effective Chief Counsel for Bernie, his bluster that "the decisions of the Commission are irrelevant to Bernie" is whistling past the graveyard, putting a brave face on a serious situation.
The gist of the EC's competition statute as applied to Bernie's bundle of rights is that if this aggregation of contracts violates the EC's antitrust law – including the critical assignment to Bernie of whatever TV rights the FIA as the organizing entity of Formula One may have to broadcast the Formula One World Championship – then Bernie's whole contractual House of Cards is in danger of collapse.
More importantly, those risk-averse investment bankers on Wall Street and in London, those bondholders holding the Bernie Bonds and future equity shareholders in Formula One Holdings like you and me who might want to buy shares in Bernie's company once Formula One goes public, need to know with certainty that Bernie's pastiche of "rights" contracts gathered from hither and yon will hold up and are enforceable.
In the current uncertain environment, it is a good guess that there are a dozen opinions of counsel floating around law offices in London and New York that advise the investment community that notwithstanding the robust financial health of Formula One cash flows, there can be no assurance that the current contractual structure of Formula One TV Broadcasting Rights will not be unraveled by the EC.
Thus, Bernie's decision to issue $1.6 billion in Bernie Bonds now (bonds are debt instruments that have to be repaid upon maturity ) and wait until the EC case is over to refinance that debt upon the issuance of $2 billion in stock to the public (stock is equity that does not have to be repaid). To Bernie, who is used to making deals on the hoof, the delays incident to the capital raising process left him numb: "I could never ever have imagined that things could have drawn on so long ... the lawyers and accountants have been living with us for a year and a half and its driven us all mad."
Given this uncertainty and given Bernie's legendary shrewdness, what will happen to bring certainty to the situation? To begin with, it is important to recognize that although the EC has these sweeping and draconian powers in a litigation context, most commercial matters are settled out of court rather than litigated to judgment. In addition, the main players in the EC are at root politicians, and with all that the EC has on its plate governing the European Union, it is hard to comprehend how Formula One somehow became one of its priorities.
Max Mosley is already paving the way for a rapprochement with the EC. In his remarks before the British Grand Prix, Max was justifiably pleased with the apology the FIA had recently received from the EC because of the EC's inappropriate release of confidential information to the press in December 1997 as to the EC's investigation into Formula One. Max also complimented the EC's incoming Competition Commissioner Mario Monti (by contrast to former Competition Commissioner Van Miert who initiated the investigation) and commented that the head of the new Competition Directorate at the EC "appears to be someone who wishes to resolve problems rather than adding to them."
Translation: the new EC team has apologized for the misdeeds of the old EC team and now that we have the EC on the ropes we will go in and arrange a settlement with them before the EC disgraces itself further. It is interesting to note that Commissioner Monti is an economist and ex-university president who has also served on the boards of Italian banks and major companies including Fiat.
Indeed, there is already precedent for settlement within the EC's Formula One proceeding itself. Initially, a complaint was filed by AETV, a German television production company specializing in the marketing of international motor sport championships such as the European truck racing championship. Subsequently, the BPR/GTR organization, which promotes an international series for Grand Touring cars, also filed a complaint with the EC. AETV's and BPR/GTR's formal complaints triggered the EC's in-depth investigation. The EC has announced that BPR/GTR's complaint has been withdrawn following an undisclosed financial settlement.
AETV seems to be a more determined complainant and even has a website devoted to its dispute with Bernie. AETV's managing director, Wolfgang Eisele, met with Bernie in London back in 1996 to resolve the issues of the FIA's control over European truck racing but by mid-1997 the parties had not resolved their differences and AETV sought relief at the EC and in the German courts. Mr. Eisele's most recent comments do not sound conciliatory, stating that "the Mosley/Ecclestone cartel seems to be illegal and has to be stopped."
But no matter how bitter AETV's press releases sound, it is always conceivable that if AETV could be brought around to settlement, the EC could itself close-out the ongoing investigation after stitching together some ameliorative measures that might foster more competition in Bernie's next round of broadcast rights contractual negotiations. As a palliative, in addition to settling up with AETV, Bernie might also agree to remove certain of the more blatant antitrust violations from the Concorde Agreement, including the provision that supposedly prevents a place like Silverstone from running Indy Cars as long as a Formula One race uses the track.
It should also be noted that Max and Bernie, believing that the best defense is a good offense, have filed their own affirmative litigation against the EC in the Court of the First Instance of European Communities in Luxembourg (the court that supervises the EC's actions), alleging that public statements made by the EC in violation of the EC's own confidentiality rules caused loss of revenues to the FIA and tarnished its reputation, another proceeding-within-a-proceeding that needs to be resolved. It would seem that a face-saving tripartite settlement of some kind is the inevitable way out.
A protracted EC investigation, including appeals to the Court of Justice of the European Communities – Max at one point speculated that it might take 3 or 4 years if the case gets fully litigated and that is probably a conservative guess – would be too long for the investment community to tolerate and, at a time when both Bernie and Max are talking retirement, it would seem that a settlement should be in the offing sooner rather than later.
But Bernie is not going to gamble everything on a settlement with the EC and characteristically is taking no chances: instead, he is re-structuring his business as if the EC were to rule against him. The FIA has been moved from Paris to Geneva to get out from under the EC's regulatory thumb: can the return of the Swiss Grand Prix (where motor racing was outlawed in the mid-1950's) be far behind? (The last "Swiss" Grand Prix was held at Dijon in France in the topsy turvy 1982 season; will Paul Ricard be the site of the new "Swiss" Grand Prix?)
Tellingly, Bernie seems particularly interested recently in guaranteeing the loyalty of the owners of the racetracks where Formula One races are held since they may ultimately be determined to be the true owners of the TV rights; Bernie is jettisoning truculent track owners like the BRDC at Silverstone in favor of those people and venues more likely to take their cues from him.
Tony George, owner of the Indianapolis Motor Speedway, owes Bernie for choosing Indy over other U.S. cities like San Francisco, Long Beach and Las Vegas, which also wanted the race. Australia now owes Bernie a favor because the FIA revised the Year 2000 calendar so that Australia (instead of Malaysia) still comes first on the schedule. Most recently, Bernie announced that we may have seen our last Grand Prix at Spa this year unless the tobacco advertising ban is lifted; he suggested the revamped Zandvoort in Holland as a replacement.
Indeed, all the negotiations of new races in Asia and Bernie's recent trip to Brazil (playing Sao Paulo off against Rio) as well as the acquisition of the Paul Richard circuit in France by a Bernie-related company is a course of dealing that further reflects Bernie's hedge against the future: if all else fails, the EC rules against him and the House of Cards collapses, a new Formula One World Championship will instantly rise like The Phoenix from the ashes, brought to you from a core group of Bernie-affiliated circuits: Australia, Brands Hatch, Brazil, Switzerland, Hungary, Monaco (the EC will never tell Prince Rainier what he can and cannot do), Paul Ricard, Indianapolis and the Asian circuits.
Who will be left to object? Only the Formula One team owners (remember them?) remain as a check and balance on Bernie's plans but Bernie has demonstrated time and again that he can outmaneuver the team owners. Occasionally, Messrs. Dennis, Williams, Jordan, Sauber and the much-lamented Ken Tyrrell have bristled at Bernie's actions but as a group they have proved to be ineffectual in mounting any coherent opposition to Bernie or the FIA. And besides, by accepting 47% of the gross revenues received from the sale of Formula One broadcasting rights, the team owners have already been effectively coopted until the next amendment to the Concorde Agreement in the Millennium. As Bernie told the International Herald Tribune, "what it amounts to is the teams would like to steal some of the business. [But] they've got a contract."
In terms of his continuing latitude in running Formula One, Bernie will also benefit from the ongoing influx of major manufacturers into Formula One – Daimler Chrysler (McLaren-Mercedes), Ford (Jaguar), BMW (Williams) Honda (Jordan and BAR) and perhaps Toyota and, of course Fiat (Ferrari). These manufacturers are thrilled at the "platform" Bernie has created from which the manufacturers intend to showcase their products. The corporate cultures of all these manufacturers are embedded with the importance of advertising and promotion and you can be sure they recognize a quality product when they see it. Bernie's Formula One Circus, beamed out terrestrially or digitally to billions, is just what they want. As long as Bernie keeps the trains running on time and continues to expand the exposure of Formula One, Bernie will receive no opposition from the new owners of Formula One, the Manufacturers.
Next Week: The Final Part of "Formula Bernie"
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Thomas C. O'Keefe is a lawyer who practices law in the U.S. Virgin Islands and in New York. He became captivated with Formula One and visiting race-tracks after watching Jimmy Clark cross the finish line to win the Indianapolis 500 in 1965 and following his F1 career thereafter.