Sources close to NBC have revealed that it agreed to pay $40 million to continue broadcasting Formula 1 for seven years, beginning in 2018, but put the brakes on the offer when the sport announced its plan to stream races online.

The NBC Sports Network began broadcasting F1 in 2013 after a 17-year run by SPEED Channel -- the precursor to Fox Sports 1. NBCSN initially signed a four-year contract and a source says that “at the beginning of the fourth year we began having conversations about a five-year extension which would have seen a significant uptick in the fees we were paying.”

According to a report released in January by the investment bank Morgan Stanley, NBC was paying $4 million annually. The source confirms this and says “the deal was a five-year contract with a two-year option. If it had gone the full seven years it would have paid Formula 1 $40 million.” It comes to around $5.7 million annually, which is a 43 percent increase on the previous contract.

“We had basically come to a handshake on this deal,” says the source, adding that it stalled when F1 was sold by the private equity firm CVC to Liberty Media in September 2016. NBCSN extended for one year on similar terms to its original contract and CVC informed it that F1’s new chief executive, Chase Carey, and commercial boss, Sean Bratches, would need to approve the longer-term renewal.

“The long and short of it is that we still commenced conversations with Chase and Sean, and they basically wanted the same deal that we had put on the table but they also wanted to be able to create their own app which they would run at the same time that we were on the air.”

Known in the trade as an Over The Top, or OTT, service, the F1 TV Pro app cuts out broadcasters by streaming races directly to viewers online. Television contracts in markets like Great Britain prevent F1 from competing with the broadcasters by streaming the races. Liberty refused to give ground in the United States, and this put it on a collision course with NBCSN.

“We are a television network and a television channel that relies on advertising,” says the source. “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. 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 U.K. with Formula 1. So we said no.”

This left F1 high and dry, and it ended up heading in the direction of Bratches’ previous employer, ESPN. He rose to become its executive vice president of sales and marketing but left after failing to get the top job when ESPN president George Bodenheimer stepped down in 2014. According to the Morgan Stanley report, ESPN is not paying F1 an annual fee, so not only has it lost the $40 million from NBC but it has not recouped it from its replacement. However, ESPN does allow F1 to stream its races online, and the sport has put its chips on this.

Liberty hasn’t released any details about the F1 TV Pro subscriber numbers, but the Morgan Stanley report forecast that it would hit just 10,000 in the U.S. this year. At an average cost of $100 per year, it would put F1’s total revenue from it at just $1 million this year. This was before the disastrous debut of the service in May, which was beset with so many glitches that Carey has since been forced to admit that it will get “a proper commercial launch next season.”

The source at NBC says that the sluggish forecast reflects the network’s findings. “Formula 1’s audience is older, it’s wealthier and it is very sophisticated. But while they love technology in Formula 1, 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 1 fan in the U.S. is 59 years old, and that viewer is not going out and buying apps, especially if he can watch it for free on ESPN.”

F1 is gambling on streaming because the Morgan Stanley report predicts that by 2027 the app will have 227,000 subscribers in the U.S. with a further 1.7 million elsewhere. But it might not have an easy ride on the way there.

ESPN hadn’t broadcast F1 since 1997, and it soon showed. Rather than sending a crew to each race, it 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 afterward of the on-track events that had been missed as the Sky commentators weren’t aware that ESPN was cutting to commercials. It stands in stark contrast to NBCSN’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 U.S. brands that want to promote themselves to viewers can no longer advertise during the race broadcast. “It has lost a lot of its commercial appeal by going commercial free,” says the source. “We have people who used to buy advertising in Formula 1 from us, and they are now spending that money on NASCAR, IndyCar and a bunch of other motorsports programs that we have.”

It appears to be a roadblock to F1 sponsors promoting their partnerships to U.S. fans during the race, and that’s just the start.

“Where the sport really benefited from NBC is when it would get promoted in things like Sunday Night Football and other NASCAR programming,” says the source.

“We significantly raised the profile of Formula 1 in the United States by doing things like putting Lewis Hamilton and the Mercedes car live on 'The Today Show' in the run-up to the U.S. Grand Prix. We promoted it at the Super Bowl and the Olympics, which gave it a high-profile and high-prestige position.”

It is a view echoed by Bobby Epstein, boss of Circuit of the Americas in Austin, which will host the U.S. Grand Prix next week. “NBC did an excellent job for sure and used their various properties to promote F1 and the United States Grand Prix. Certainly, I wish 'SportsCenter' would cover Formula 1, but they know their audience. From the promoter’s point of view, I hope that ESPN will be able to influence ABC properties to put some of the drivers on talk shows ('Good Morning America' or 'Jimmy Kimmel Live!' for example). We don’t get them on this continent very often, so we have to feature them when they are here. It would otherwise be a missed opportunity.”

ESPN has a two-year contract, and the NBC source says the network hasn’t necessarily given the relationship the red light for good.

“We love the property and we like the people we did business with. We never say never and we would have conversations with folks if the opportunity came along, but I can tell you definitively we wouldn’t do the deal that they have on the table now.”

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