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Monday, June 20, 2005

In What Universe?

The US Grand Prix disaster occurred yesterday. Why did it happen? Who's to blame?

The story is, essentially, this. Formula One has a rule (new this year) requiring cars to race on the same tires on which they qualified. Teams driving on Michelin tires discovered, after qualifications, that the tires were prone to sudden deflation if driven at racing speeds through the sharp turns near the end of each lap. Michelin could not discover the cause of the problem, and recommended that the teams not race on those tires. Michelin and the teams using their tires proposed some alternatives that would have allowed their cars to run. Formula One refused to make any modifications. Apparently, as well, the Ferrari team, in particular, refused to agree to any modifications in the conditions of the race. So the cars using Michelin tires did not run; only the six cars running on Bridgestone tires "raced."

How could this have happened?

Organizations like Formula One nust establish the conditions of the races and rules that enforce these conditions. It seems clear, however, that the rule requiring the use of the same set of tires in qualifiying and in the race was not intended for a case in which the tires were found to be defective. Clearly, the rule was intended to prevent some teams from gaining an edge in qualifying by using tires designed for speed, but not for manueverability or for durability, and then gaining an edge by switching tires designed more directly for racing conditions. (Incidentally, it's not clear to me why the rule was needed, except to reduce marginally the cost to teams.) The failure of Formula One to recognize the need to adapt to a situation that was not anticipated seems the clearest cause of the fiasco. How could the organization not have realized the potentially huge, negative consequences of turning one of their races into a farce? (If it can happen once...) In what universe did this "make sense"?

Individual teams can be expected to seek their own advantage in the application of the rules. But even so, one would think that long-term considerations would come into play. Clearly each team wants to win every race. But equally clearly, each team benefits from competitive races, from races that are exciting, from races that attract fans and sponsors and advertisers. These are long-run considerations. It certainly looks as if Ferrari focused solely on their short-term interests in refusing to seek compromises in this race that might have reduced their chances of winning this race, but would have enhanced their long-term interests. I find it difficult to believe that this will not damage the perception racing fans have of Ferrari, and thus prove detrimental to them individually, as well as to the sport as a whole. In what universe does this "make sense"?

Michelin certainly precipitated the crisis by providing tires that would not be safe under the conditions of contest that existed. But, it seems to me, they behaved responsibly in informing the teams using their tires, and Formula One, of the dangers the tires posed. They behaved responsibly in recommending that the cars not drive using those tires. And it seems to me that the teams using Michelin tires alos behaved responsibly.

What is likely to come of this?

I thing we can anticipate a class-action lawsuit filed on behalf or ticket-purchasers, seeking a refund on tickets and compensation for the travel costs incurred by ticket-purchasers. This could easily approach $100 million in damages, if the suit succeeds. I can see the network (The Speed Network, I believe) suing for a return ot the rights fee they paid for the race, and for other compensation (e.g., the network may feel obliged to refund advertising payments--or it may be required to do so; the network's ratings may be damaged). Even the Indianapolis Motor Speedway might sue, either to void a contract for future races or to receive damages for what happened this year.

Formula One racing has damaged itself. I see every reason to believe that this will damage attendance and television ratings and sponsorships in the immediate future.

Michelin may lose its Formula One business altogether.

In what universe could rational decision-makers with even an intermeidate-term time horizon have allowed a relatively minor issue to escalte into this?


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