Senior auto racing sources have expressed concern that the launch of Formula One’s online streaming service in the United States has created a roadblock for brands to align themselves with the cable broadcast of the series on ESPN.

The service, known as F1 TV Pro, was launched this year and streams races directly to viewers without going through traditional networks which is why it is referred to in the trade as an Over The Top (OTT) system. The driving force behind its introduction in F1 is Liberty Media, the investment firm which bought the series for $4.6 billion last year and listed it on the Nasdaq with the ticker FWONK.

F1’s TV audience is accelerating in the US but the broadcast is commercial free (BEHROUZ MEHRI/AFP/Getty Images)

Soon after taking over the wheel Liberty began looking for new opportunities to boost F1’s revenue and this fuelled the launch of F1 TV Pro. It is a huge gamble for a number of reasons.

Firstly, developing the system required investment with uncertain gain. A report released in January by the investment bank Morgan Stanley predicted that by the end of this year just 104,000 people will have signed up with only 10,000 of them in the US. At an annual cost of $100 that drives just $1m of revenue.

The longer-term outlook is rosier with Morgan Stanley predicting 1.9 million subscribers worldwide by 2027 including 227,000 in the US. However, it remains to be seen whether these projections will be met, especially as the US total of paying customers is around half of the number who currently watch each race.

The streaming service hasn’t got off to a flying start as it was beset with so many bugs that it forced F1’s chief executive Chase Carey to declare in August that it will get “a proper commercial launch next season.”

If the service sputters, the risk isn’t just that Liberty has spent money on developing it. Together, fees from networks are F1’s second biggest source of revenue and comprised 33.7% of the $1.8 billion that it made last year. By streaming the races directly to viewers, F1 TV Pro competes with the networks and although their contracts in some markets, like Sky’s in Britain, prevent it from being launched, Liberty has insisted on allowing it to go ahead in others. One of the most high-profile is the US.

Until this year F1 was broadcast in the US by NBC Sports Network which took over from the SPEED Channel in 2013. NBC’s live race audience grew nearly 70% over the five years of its contract and in 2017 alone its Total Audience Delivery rose 14% to 558,000 making it the highest F1 viewership for a single US cable network in more than 20 years.

In light of this success, it is little surprise that NBCSN didn’t want to compete with F1’s streaming service as it could cannibalize the audience it has diligently built up. According to a recent report by motoring magazine Autoweek, multiple sources at NBC have confirmed that it does not compete with sports properties, whether it’s the Olympics, NFL, soccer’s World Cup, F1 or anything else.

“We would have been able to stream it as well but they would have been able to sell it and what that meant is they could have gone to people who don’t get our channel,” said one of the sources at NBC. “They would have been able to go to people who don’t get NBC or NBCSN and sell them the race. It would be a direct competitor and we don’t do that with anybody, from NASCAR to golf to hockey to the Olympics. Nobody. And you can’t do that in the UK with Formula One. So we said no”

Sources inside NBC and across the wider auto racing industry told Autoweek that NBC had offered $40 million to continue broadcasting F1 for another seven years. It was a 43% uplift on its previous fee of $4 million which was disclosed in the Morgan Stanley report. According to one stakeholder, NBC shook hands with F1’s former chief executive Bernie Ecclestone in 2016 but the deal hit the skids when Liberty insisted on going ahead with F1 TV Pro in the US.

“F1 had a tremendous opportunity. NBC offered them $40 million,” says the source who is familiar with the talks. “They offered to Bernie $40 million, which was a big increase, and were going to promote it along with the World Cup. It was 2016 when they made the offer and the deal was accepted to go to ESPN in the spring of last year.”

NBC was much more than a broadcaster and acted more like a promoter for F1 in the US which still only has one race despite the accelerating interest in the sport. NBC promoted F1 during the Super Bowl and its mighty Sunday Night Football NFL show which has around 20 million viewers. In 2014 and again last year it lined up appearances for Lewis Hamilton on The Today Show, which gets another four million viewers.

If NBC had broadcast F1 this year “it would have been promoted throughout the Ryder Cup or throughout the Kentucky Derby or the Stanley Cup play-offs in advance of Monaco,” says a senior source at the network. It even ran adverts for the US Grand Prix across its group of channels during the month before the race to help drive ticket sales.

F1 ended up heading to ESPN which allowed it to stream its races but, according to the Morgan Stanley report, is not paying F1 an annual fee. So, not only has Liberty lost the $40 million from NBC but it has not recouped it from its replacement and is only getting an estimated $1 million from F1 TV Pro this year. That’s just the start. ESPN hadn’t broadcast F1 since 1997 and it soon showed.

When ESPN previously broadcast F1 in 1997 Canadian Jacques Villeneuve won the championship (Paul-Henri Cahier/Getty Images)

Rather than sending a crew to each race ESPN opted for the easier solution of simply using Sky’s coverage and inserting its advertising schedule into it. This meant that ad breaks appeared at seemingly random moments with no explanation afterwards of the on-track events which had been missed as the Sky commentators weren’t aware that ESPN was cutting to commercials. It stands in stark contrast to NBC’s picture-in-picture view which allowed viewers to keep up with the action during an ad break.

ESPN fixed this problem with an innovative solution. It secured sponsorship from car cleaning product Mothers Polish and now runs the entire race without ad breaks. It’s a benefit to viewers but perhaps not to F1 itself.

A consequence of having no ad breaks is that brands which want to promote themselves to viewers in the US can no longer advertise during the race broadcast. A source familiar with ad sales at NBC said that the network “have people who used to buy advertising in Formula One from us and they are now spending that money on NASCAR, on IndyCar on a bunch of other motorsports programmes that we have.”

What if sponsors of teams want to promote their partnerships during the ad break whilst the US Grand Prix, or indeed any race, is being shown on ESPN? Teams are losing out on this opportunity and F1 has lost out on the increased fee from NBC. The potential upside for the series hinges on whether interest in its streaming service revs up.

As one executive told Autoweek, “Formula One’s audience is older, it’s wealthier and it is very sophisticated but while they love technology in Formula One, they don’t want to watch it on their phones, or their iPads or their computers. They want to watch it on a big screen. The average age of a Formula One fan in the US is 59 years-old and that viewer is not going out and buying apps especially if he can watch it for free on ESPN.”

It remains to be seen whether F1 will be able to steer around this hurdle or whether it would have been best not to try and reinvent the wheel with its streaming service in the first place.