Wednesday, November 11, 2009

Toyota Bags Formula One

Formula One has the potential to implode over the coming year with only three major manufacturers still committed to the sport. Toyota, BMW and Honda are out. Ferrari is threatening to leave. Renault is going to decide its future by the end of the year. Formula One's program costs are absolutely outrageous. Some have put estimated costs of funding a two car team at upwards of $300-400 million a year. The corresponding quantifiable benefits are dubious.

Quite some time ago we remarked that leisure and entertainment businesses were likely to see a seminal shift in coming years. I have had this discussion with friends and they have generally looked at me in disbelief when I have remarked compensation numbers in the leisure and entertainment industries could drop by 90% in extreme cases - a point we have made on here before.

People are simply well too naive about reality. Hollywood entertainers, professional athletes and others involved in the leisure business making $15, 20, 30 or more million a year are living through their own bubble that is simply not sustainable. People have become so accustomed to this dynamic over the past few decades that they don't stop to think about the unsustainable economics. I would classify this in the same vein of the advertising bubble we have written extensively about. ie, People are simply well too naive as to sustainable economics.

Another example I am dubious about is the completion of Disney's newly announced plans for a new Shanghai theme park. Between future social volatility and China's coming economic strife, it's highly probable Disney will eventually cancel these plans. Since leaders at Disney are well unaware of these future dynamics, plans will continue until some marked event awakens them to reality. For a small stipend, I would gladly share a presentation of my work with Disney's board of directors. Actually, a nice barter would be unlimited lifetime access to the wonderful Disney properties. Obviously including airfare. Haha.

Many industries beyond Formula One are on the precipice as I write this. Another example includes the terrible financial shape of the NHL. Its financial problems are deep and systemic. And what is their answer? Taxpayer funding. Often threatening to leave cities without financial assistance. Ahem. Where might these firms relocate to with every major municipality in financial trouble?

Remember, were the Federal Reserve not backstopping the economy with trillions of dollars of taxpayer money, a phenomenon which cannot continue forever, entertainment firms and sports franchises would already be in bankruptcy reorganizing. First on the list of any reorganizations in the entertainment and leisure industry would be the adjustment of salaries and compensation commitments of people making bubble earnings.

The party is over. The unwinding begins. And that means some of the world's wealthiest people are likely to experience the same fate as many of the world's most underprivileged. That is, bankruptcy. A dynamic we have hammered on repeatedly. That is, many of the people who most benefited from current economic ideology would eventually succumb to it.
posted by TimingLogic at 8:50 AM