IndyCar Series and Motorsports and Sports Business

IRL losing momentum again

August 7, 2006

With the wheels falling off its most recent merger effort with rival Champ Car, industry observers are wondering if the Indy Racing League has blown its engine this time around.

Smoke coming from the series' business model indicates it's leaking oil. Two IRL teams recently folded and at least two more are in serious financial distress. Television ratings and race attendance is either flat or trailing last season, and even staunch series supporters--from team owners to officials at engine manufacturer Honda Motor Corp.--are grumbling about stymied fan interest and the lack of progress in merger talks.

"Teams are struggling, and if this business model isn't changed, I see it even becoming a harsher environment in 2007, especially for the lower-tier teams," said Eric De Bord, president and CEO of PROtential, a Woodridge, Ill.-based firm that pairs sponsors with motorsports properties. "The IRL has a serious challenge in front of it."

But IRL officials said all is far from lost.

"We see some good signs this year, and going forward into 2007," said John Griffin, the league's vice president of public relations.

Among the favorable indicators is the "I am Indy" marketing campaign fashioned by former Kiss front man Gene Simmons and a related merchandise line that is gaining traction; a cadre of young, popular drivers headlined by Marco Andretti, Sam Hornish Jr., Danica Patrick and Dan Wheldon; and the series' Downforce Fan Club, which has picked up more than 20,000 members in its first year.

And while attendance and television ratings aren't going up this year, they are holding steady, Griffin said. IRL officials also plan to expand their schedule next year from 14 to 16 or 18 races next year.

IRL executives say a merger with Champ Car for 2007 is still possible, and are continuing talks with Champ Car honchos. Ownership and control of the merged series, though, continues to be a major sticking point.

Critical car count

In spite of the optimism coming from IRL headquarters, sponsors, suppliers and team members are becoming uneasy over the prospect of not merging with Champ Car--and worse, potentially trailing the rival series' car count next year.

Champ Car will have a new, cheaper chassis formula next season, down more than $100,000 to about $300,000 per car, and series co-owner Kevin Kalkhoven is promising 20 to 24 cars.

Meanwhile, IRL's Cheever Racing and Hemelgarn Racing--which was co-owned by NBA star Carmelo Anthony--folded recently. Several other teams have no primary sponsor and could shutter at season's end Sept. 10.

A.J. Foyt's diminished role as team owner throws that team's future into question. Foyt's son, Larry, is set to step in, but some observers think A.J.'s absence could kill the team's profile and sponsorship sales efforts. All told, IRL's car count could fall to 16 or less in 2007. The series started with 20 cars this year.

"The top teams are very stable," said Fred Nation, IRL spokesman and one of series President Tony George's top lieutenants. "A lot of the other teams are in the market for sponsors. That's really no different from any other series."

But recent comments by Rahal Letterman Racing co-owner Bobby Rahal indicated frustration and discord among the IRL's top-tier teams. Rahal later recanted statements made last month to reporters about departing the series. But he continues to indicate he could downsize his operation by two cars, to a single car. Rahal recently lost star driver Danica Patrick to Andretti Green Racing, which is one of the series' few prosperous teams.

In the wake of Rahal's comments, officials for Ganassi Racing, Team Penske and Andretti Green came out in strong support of the IRL.

Nation said the IRL likely would have as many cars competing next year as Formula One, which is viewed as the pinnacle of open-wheel racing globally. F1 usually has 18 to 22 cars, but Dennis McAlpine, New York-based financial analyst covering motorsports and entertainment, said that's hardly a fair comparison.

"F1 has heavily sponsored, well-financed teams," McAlpine said. "The Indy Racing League has a number of teams running on a shoestring, and I don't see that changing any time soon."

And Champ Car is in no better shape, he said, with several teams surviving on subsidies from Kalkhoven. Champ Car officials were not available for comment.

"If Champ Car and Indy Racing League merged, I think they'd draw fan interest and sponsor support to have enough strong teams to field a good 20 cars," McAlpine said. "Instead, you have two North American-based open-wheel series on the edge of financial ruin."

The willingness of Kalkhoven--who made his fortune in the fiber optics and telecommunications industries--to pump money into the series should be frightening to the IRL and its founder, McAlpine said. "He's showing he has staying power."

In the years immediately following the formation of the IRL in 1996, many motorsports business experts believed George propped up teams in his series. During the last five years, IRL executives have said teams receive no subsidies.

Nation is confident the series will have enough cars next year to draw sufficient fan and sponsor interest.

"You need a critical mass, and that critical mass is around 18," he said.

Magic number

Though IRL doesn't disclose details of its agreements with race promoters and track owners, McAlpine said most contracts require a guaranteed 18 cars.

"Fans want to see competition, and to have that you have to have a minimum number of cars racing around the track," he said. "Promoters and track owners will be the next defectors if they can't maintain a healthy car count."

While most top teams continue to stand behind the league, a key ally continues to lobby hard for a merger with Champ Car. Honda, the series' sole engine manufacturer, is hedging its bet by joining other forms of motorsports. Next year, Honda will begin supplying engines for the American LeMans Series, an effort motorsports experts think could take the company's focus away from the IRL.

Honda has a contract to supply engines to the IRL through 2009, but executive Robert Clarke has continually voiced his displeasure about being the league's sole engine supplier.

"In our opinion, neither series is healthy," Clarke told reporters this summer. "If you were to take away the subsidies from both series they would likely disappear. Unless the two series get together, it's hard to see how the future will be anything but a steady downward path."

Up and down

Last year, the IRL was touting a litany of metrics that showed series growth. Television ratings soared 53 percent from 2004 to 2005, attendance increased 9 percent, merchandise sales were up 75 percent, and Web traffic on the IRL site rose 162 percent. According to Joyce Julius and Associates, an independent Ann Arbor, Mich.-based media research firm, sponsors got 57 percent more exposure during 2005 IRL telecasts than in 2004.

"For that, the IRL can say, 'Thank you, Danica," said McAlpine.

Most distressing to sponsors is that the series couldn't carry that growth forward this year. The league sees it differently.

"I've said all along, we need to compare this year to two years ago," Griffin said. "When you do that, our numbers will be up."

Sponsors are most distressed by TV ratings that seem stuck, hovering around 1.0, PROtential's De Bord said. A 1.0 rating by New York-based Nielsen Media Research indicates 1 million households nationwide tuned into the program. Even the Indianapolis 500 TV rating fell from 6.5 in 2005 to 5.1 this year. Despite its lackluster performance, the IRL's TV numbers are still better than Champ Car's.

"TV ratings are the biggest challenge in sponsorship sales," De Bord said. "And right now, some would say the IRL's TV ratings don't support a one-to-one return for the lower teams. I think if the teams that folded could have attracted any kind of sponsorship, they'd still be here today."

De Bord said the flamed-out merger likely hit lower-tier teams hardest. McAlpine agrees.

"Those teams were probably selling the likelihood of the merger to potential sponsors, and when it fell through, they went away," McAlpine said.

Faded TV allegiance

While the IRL has a TV contract with ABC/ESPN that runs through 2009, the networks' agreement to air NASCAR races next year has series officials concerned. ESPN plans to begin airing a weekly auto racing show that most think will cater to NASCAR, and IRL commentator Rusty Wallace is rumored to be headed to the NASCAR broadcasts.

"[ABC/ESPN] has a serious investment with NASCAR, much higher than with the IRL, so you can guess where the resources will go," said Tim Frost, president of Chicago-based Frost Motorsports, a consulting firm specializing in motorsports business operations.

Frost said ABC/ESPN's acquisition of the rights to air NASCAR comes right as the networks were increasing their marketing muscle behind the open-wheel series.

"Along with car count and sponsorship sales," Frost said, "TV ratings are the best sign of series health, and you have to wonder where that's headed."

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