The March Madness Effect

By Mark Riddix | March 02, 2010 AAA
The March Madness Effect

The National Collegiate Athletic Association (NCAA) tournament, known as March Madness, is right around the corner. March Madness is a three-week tournament featuring 65 college basketball teams, all competing to see who is the best college basketball team in the country. March Madness is a cash cow for the 65 teams that are lucky enough to receive an invitation to participate. The tournament is not just about fun and entertainment - it's big business. The NCAA has an 11-year, $6 billion deal with CBS to broadcast the tournament games. More than 90 percent of the NCAA's operating revenue is derived from this tournament alone. Unlike the championship games in college football and baseball, the NCAA does not have to split its revenue with any corporate sponsors. Since the NCAA controls the tournament, it reaps the benefits of all the revenue and is able to share it with all tournament teams. (Investors: learn why some companies stand apart from the herd. Check out Spotting Cash Cows.)

Here's How It Works
The NCAA distributes money to every Division I conference based on the performance of each conference's teams over the previous six years in the NCAA tournament. According to the NCAA's Revenue Distribution Plan, every game that a team plays up to the finals during March Madness earns that team one basketball unit. Every basketball unit was worth approximately $206,020 last year. If a team advances to the championship game, it would earn $1,030,100. Let's say Kansas earned 25 units over the past six years. The Jayhawks would have earned a total of $5,150,500. This money would than be divided up equally among all teams in the Big 12 Conference with each team receiving $429,208. Every team in the tournament shares its revenue with all teams in its conference. During the 2008-09 season, Division I conferences received a total of $154.7 million from the basketball fund for participating in the NCAA tournament. The Big East, ACC, Big 12, Pac 10 and SEC have generated the most money for their respective conferences.

Benefits For Players And Schools
A good showing in the NCAA tournament can be a huge financial windfall for a university. Tournament teams benefit from increased giving by alumni and boosters. Everyone wants to be associated with a winner, and colleges experience an uptick in giving when their teams do well in the NCAA tournament. The increased ticket, apparel and memorabilia sales boost the bottom line. Who wouldn't be proud to wear a sweatshirt or hat of a Final Four team? Universities with successful teams can charge more for sponsorship deals and broadcasting rights. Deep tournament runs during March Madness provide schools with free publicity and national exposure. Successful NCAA tournament runs during the 1990s and 2000s put small schools like Gonzaga, Davidson Butler and George Mason on the map. One game in the NCAA tournament can make the athletic department's budget for a small school. (Blood, sweat and tears belong on the basketball court, but your money deserves some training time, too. Find out how in Get Your Budget In Fighting Shape.)

National television exposure makes it easier for college coaches to attract top high school talent. College players benefit as well. A good showing during March Madness can boost a player's stock for the NBA draft and lead to a multimillion-dollar contract. Players like Stephen Curry and Tyrus Thomas were thrust into the national spotlight and shot up teams' draft boards due to stellar performances during March Madness.

Missing Out On March Madness
Missing the tournament can be a death blow to a school's operating budget. Small schools rely on March Madness income to make their athletic departments profitable. According to Forbes Magazine, money earned during March Madness does not just support basketball programs - the revenue contributes to academic departments, non-revenue generating sports and the local community. Missing out on March Madness can force colleges to cancel non-revenue generating sports like volleyball, golf and swimming. The revenue also supports school building projects and pays for scholarships. Perennial Final Four teams like Louisville, North Carolina, Duke, Kentucky and Kansas generate substantial operating incomes that contribute to all facets of their respective universities. (For related reading, see Zooming In On Net Operating Income - a long-run profitability measure that smart investors can count on.)

Bottom Line
As you can see, conferences, universities and players all benefit from March Madness. The NCAA is currently talking about expanding the tournament from 65 teams to 96. Expanding the tournament would add more games, which would mean the NCAA could earn more money in television rights fees. This money would increase the payout to conferences and let more teams in on a slice of the pie.

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