March Madness Economics

By Investopedia Staff | March 21, 2011 AAA
March Madness Economics

The opening weekend of March Madness is over and we've seen it all already: familiar faces, traditional powerhouses steamrolling their early competition, Davids beating Goliaths, last second buzzer beaters and Gus Johnson losing his mind (what else is new?). While many consider the annual NCAA Division I Men's Basketball tournament to be one of the greatest tournaments in sports, there's more to the madness than just the teams battling for their place in the Final Four. Like all great sporting events, the tournament has its share of economic impacts on a variety of levels. Here are just a few of the places the dollars come and go during these three amazing weeks every March. (Keep the kids out of your hair and wallet by saving on summer camps, sports leagues, day trips and more. Check out Budget-Friendly Summer Fun.)

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Television
In a dramatic shift from the years of CBS controlling the airwaves during the tournament and deciding which games the viewers were able to watch, this year the TV rights will be split. In a landmark deal between long-time rights holder CBS and Time Warner's Turner, the two television competitors will split the rights for the next 14 years. The total cost for the television rights is in the neighborhood of $10.8 billion.

Along with the steep price-tag come the revenues from broadcasting the tournament, both on television and via other media outlets. Last year CBS is estimated to have raked in about $620 million from TV advertising alone, while revenues from "non-traditional" sources were up 20%. Even with more and more people watching their favorite television shows in non-traditional ways, sporting events have still managed to keep live viewership growing, and there's nothing quite like the nail-biting thrills of a last second jumper.

The Schools
As highlighted in a recent article in Forbes, the NCAA pays out the revenues it receives from its television rights deals (the aforementioned $10.8 billion) to the schools dependent upon their performances in the NCAA Tournament over a 6 year rolling span, with each team receiving so much for every game played in the tournament. So basically, the more games you win, the more money you receive. Forbes estimates that each victory is worth roughly $256,000. While this sounds like a great system of meritocracy, it's actually heavily skewed in favor of the large schools that play in the "big-name" conferences.

The Big East for example, which houses traditional powerhouse programs like Connecticut, Georgetown and Syracuse has been awarded nearly $90 million in March Madness winnings. Compare this to the earnings of the Mountain West, which is home to BYU, San Diego State and UNLV, being awarded less than $20 million total. While the compensation system is by no means unfair, as money is directly tied to performance, it can result in a system in which the rich get richer and the smaller schools have a tougher time closing the gap when recruiting top level talent. (Level up your winnings by investing in this fast-paced, highly skilled industry. See Power Up Your Portfolio With Video Game Stocks.)

Sports Tourism
From the first game in Dayton, Ohio to the National Championship in Houston, the cities involved in hosting their respective regional games throughout the tournament expect to see a positive economic impact from the tournament. With each team bringing in thousands of out of town fans to its games, cities like Denver, Cleveland and New Orleans expect to see economic impact numbers in the millions. The biggest winner should be Houston however, where estimates have direct spending from March Madness fans topping the $100 million mark.
By creating a weekend festival feel, the host cities do much more than just cash-in on the games themselves, as local bars, restaurants and malls are expecting massive crowds during their host weekends. Hotels especially will be counting the money signs, as historical occupancy levels have increased 40% during the tournament. Also, some hoteliers have been successful in mandating minimum three-night stays while increasing rates as well.

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Vegas Wins, Your Boss Loses
Sportsbook experts estimate that roughly $75 million will be wagered in Vegas on March Madness - money lines, spreads, props and basically any bet you would ever want to make. Although Ohio State entered the tournament as the number one overall seed, that hasn't stopped Dukies and Jay Hawk backers from throwing their hard-earned money behind these two perennial contenders. And if you thought the money floating around in Vegas was big, then you're probably not in an office bracket. Estimates place the total dollar amount of American office pools in excess of $3 billion, with the total cost in productivity in the neighborhood of $1.8 billion. (The glitz and glam of Hollywood could help put some more glitz in your pocket. Check out Analyzing Show Biz Stocks.)

That's right - you and your co-workers (who made a big fuss about having to pay for the coffee that used to be free) have no problem throwing $10, $20, even $50 on one of the most unpredictable events on the planet. Not to mention that the wife's boss will probably end up winning again this year, even though she doesn't know what state Morehead State is located. But I'm sure you didn't either before this past weekend.

The Bottom Line
With so much money in play, it's easy to forget that March Madness is one of the greatest amateur sporting events in the world. These kids have spent thousands of hours in the gym hoping to play in front of millions for a chance to go to the Final Four. While some of them will go on to fame and fortune in the NBA, over 90% of them will not. So let's remember that for the players laying it all on the line these unforgettable three weeks, it really is for the love of the game.

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