5 Ways March Madness Makes Money

By Jean Folger | March 22, 2011 AAA
5 Ways March Madness Makes Money

The NCAA Basketball Tournament, known as March Madness or the "Big Dance," was conceived in 1939 by the National Association of Basketball Coaches. The tournament, which currently features 68 college basketball teams, is a single elimination match organized by the National Collegiate Athletic Association (NCAA). Teams advance to different levels referred to as the Sweet Sixteen (regional semifinals), the Elite Eight (regional finals) and the Final Four (the four regional champions). The tournament, held each year in March, is one of the United States' most popular sporting events, sneaking in the timeline between the Super Bowl and the beginning of Major League Baseball season. Responsible for billions of dollars of economic impact, from advertising costs, to ticket sales and wagers, March Madness moves money.

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1. Broadcast Rights
This year's partnership between CBS and cable's Turner Sports (a division of Time Warner (NYSE:TWX) will spread the March Madness games over four broadcast channels. CBS has scored deals with the NCAA for broadcast rights for nearly three decades. The price tag? In 1982, CBS agreed to pay the NCAA $16 million per year for the broadcast rights.

The recent April 2010 deal, consisting of a 14-year, $10.8 billion contract, will generate $771 million per year for the NCAA - nearly 50 times the size of the 1982 deal. (To understand more about business deals and how companies set a value on them, check out DCF Analysis: Coming Up With A Fair Value.)

2. Advertising
CBS's motivation stems from the tournament's ability to draw millions of viewers, and, therefore, entice advertisers. Companies wanting to air a 30-second advertisement during round one March Madness games will hand over approximately $100,000 to CBS. The price soars to more than $1 million for a 30-second slot during the game's finals. During the 2010 games, CBS earned about $651 million in advertising revenue, falling behind only the NFL playoffs which generated $793.8 million during the same year.

3. Conferences and Member Schools
Money that the NCAA receives from March Madness media contracts, known as the "basketball fund", are distributed among the Division I basketball playing schools and conferences. About 17% of the contract is divvied up between the Division I schools depending on the number of sports the school plays; approximately 33% goes to the schools based on the number of scholarships they award; and 50% is performance-based, taking into consideration the conferences' previous six years of tournaments.

Conferences allocate the basketball fund differently: some divide the money equally between all the conference schools, while others offer greater rewards to those teams having the best performance during the tournament. For the five years beginning with the 2005-2006 seasons, the top three earners were the Big East Conference, receiving a total of $86.7 million from the basketball fund; the Big 12 Conference, gaining $77.8 million; and the Atlantic Coast Conference (ACC), earning $76.4 million.

The Big East Conference has been the dominant player, with an average of $17.3 million in revenue each year to divide amongst its 16 member schools, compared with an $8.6 million conference-wide average. (Paying for college could leave put a full court press on your finances, check out Pay For College Without Selling A Kidney.)

4. Ticket Sales and Sponsorships
Ticket sales and sponsorships for March Madness games generate more than $40 million each year for the National Collegiate Athletic Association. This money, combined with revenues from broadcast rights, represents 96% of NCAA's entire revenue.

Despite the potential for large earnings, each of the more than 300 Division I schools hoping to make it to the tournament have to invest heavily in the recruitment process, world-class training facilities and event venues, superior coaches (garnering salaries in the millions) and academic tutoring to assist the athletes with maintaining eligibility. [5] For some schools, these investments pay off when their team or conference advances in the tournament; for others, it is a risky investment that leaves the program in the red. (Also check out Nonprofit Millionaires.)

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5. Wagers
Millions of sports fans each year make bets on the NCAA Basketball Tournament. Experts have estimated that upwards of $7 billion is wagered on the March Madness games, exceeding the Super Bowl's estimated $6 billion in bets. Close to 40 million March Madness brackets are filled out each year in the United States by people trying to guess the outcome of the games.

A controversial report by Challenger, Gray & Christmas purports that approximately 8.4 million private sector work hours will be lost during the three weeks of the tournament (the study assumes workers would be otherwise productive, which may not always the case). Multiplied by the average hourly wage of $22.87, the lost productivity equates to $192 million in wages, the report concludes. (People often compare stocks to gambling, but how close are they really? See Going All-In: Comparing Investing And Gambling.)

You Win Some, You Lose Some
March Madness is undoubtedly one of the most widely anticipated, viewed and wagered-on games in American sports. Costs and revenues for the short "season" reach the billions, with the NCAA being the prevailing profiteer. Substantial dollar figures allude to March Madness being a money-fest, but it is not necessarily so for many. More accurate is March Madness's economic impact, bringing in money and shelling out money, sometimes just as quickly. This is evidenced by the fact that only a few of the schools, despite receiving large percentages of the coffers and significant revenue from ticket sales, are still left in the red when all is said and done.

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