March Madness & the Billion Dollar Nonprofit

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Today, I teamed up with Andrew Petcash to breakdown the economics of March Madness. Andrew writes a fantastic newsletter, The Petcash Post, that covers the business of athletes and sports. Give him a follow on Twitter and check out his site.

This Is March

The NCAA is a fascinating organization. While it is technically a nonprofit, the country’s largest college sports association generates more than $1B in revenue each year.

However, that revenue is heavily concentrated in one event:

March Madness.

March Madness, the NCAA Division 1 basketball tournament played every spring, is the second biggest event in American sports after the Super Bowl. 14 cities host 68 teams in this single-elimination tournament, and a final champion is crowned in early April.

In 2010, CBS and Turner Sports signed a 14 year, $10.8B deal with the NCAA for exclusive broadcasting rights to all games. Six years ago, this deal was extended through 2032 for $8.8B, or an average of $1.1B per year.

This chart from Bloomberg shows the average contract value per year.

March Madness now drives ~90% of the NCAA’s revenue thanks to this lucrative broadcasting deal (media contracts for the Power Five Football conferences and the College Football Playoff are separate from the NCAA).

In 2019, the last pre-COVID season, the NCAA generated $1.07B in total revenue with $855M of that coming from television and radio rights.

However, the COVID-19 pandemic disrupted this entire business model. With the cancellation of 2020’s March Madness Tournament, this revenue source was in jeopardy.

Insurance set aside in case of tournament cancellation only paid out $270M, a far-cry from the nearly $900M that was to be generated from the tournament.

This $600M reduction in revenue directly affected member institutions. The majority of tournament broadcast revenue is allocated as “units” to different conferences based on how their teams perform each year.

Conferences are awarded two kinds of units. The Equal Conference Fund allocates one unit per team that qualifies for the tournament to conferences, while the Basketball Performance Fund awards units for each additional game appearance after the first round.

Basically, conferences earn one unit for every team that qualifies for the tournament, and another unit for each subsequent game that their team plays in.

A conference can divide up the money however it wants, but the NCAA suggests schools evenly split the payout, and most conferences follow the recommendation.

These units are paid out over six years, with their values increasing from season to season. Unit prices are quoted in one-year terms.

Last year, these units were worth $337,141 per year. Thanks to their increase in value over time, units won in 2021 will likely be worth more than $3M over six years.

Power Five Conferences that have lucrative independent broadcasting deals for football don’t depend on the March Madness units to survive; March Madness is a cherry on top. For smaller conferences, such as those with G5 and FCS football programs that lack large TV media contracts, March Madness is a significant portion of their budgets.

With 2020’s tournament canceled, there were no new units issued, and payouts from prior years were reduced.

Thankfully, March Madness was back on track last year with nearly $900M in media contract revenue and $613M distributed to schools.

So why would CBS and TBS pay $900M for annual broadcasting right?

Because they are printing money from advertising revenue.

Ad Revenue

Advertisers paid $910M in 2019 and an estimated $1.05B in 2021, yielding the host networks more than $100M in profits in both years. Outside of the NFL playoffs (namely the Super Bowl), March Madness is the highest ad revenue-generating post season in American sports.

Individual slots for 30 second ads cost anywhere from a few hundred thousand dollars in the early rounds to $2M+ in the final. AT&T alone spent $74.7M on advertisements in the 2021 tournament, followed by $48.7M from Capital One, $46.7M from Geico, and $39.5M from Buick.

With tens of millions of fans tuning into games from every corner of the country, March Madness provides a massive audience for advertisers.

How Much Money Do the Host Cities Make?

14 cities host 68 teams in March Madness each year. Dayton, Ohio has hosted the “First Four” for 20 years, earning $66M in additional revenue from 2001 to 2016. Meanwhile, Houston saw $300M in revenue directly attributed to hosting the Final Four in 2016, and Phoenix saw an additional $325M in 2017.

Hosting games, especially the Final Four, pays well. Because of this, the NCAA has a strict selection process.

Prospective hosts must submit a proposed budget, complete a facility questionnaire, detail a safety and security plan, and provide a certificate of liability insurance.

According to NCAA guidelines, the primary criteria in evaluating the sites are the quality and availability of the facility and other necessary accommodations; revenue potential; attendance history and potential; geographical location; and operating costs. In addition, greater consideration may be given to sites with the highest frequency of daily airline arrivals and departures.

The grand prize of a $300M pay day is still more than worth the hassle though.

The NCAA gets paid. The networks get paid. The advertisers get paid. The cities get paid. What about the players?

NIL Revolution

2022 is the first year that NIL deals are allowed during March Madness.

For those unfamiliar, NIL, or Name, Image, & Likeness, was a new set of rules passed by the NCAA last summer that allows for college athletes to profit from their… name, image, and likeness. Before the new NIL rules, players were not eligible to receive compensation outside of scholarships and living expense stipends.

For the first time ever, players can cash in on their market values while still being college students.

Leading up to the tournament we have already seen several cool collaborations:

Paolo Banchero and Chet Holgrem signed a deal with Yahoo Sports to promote their best bracket contest.

Drew Timme inked a partnership with Dollar Shave Club behind their “chin-fluencer” campaign.

Outback Steakhouse found duos around the country that will be playing in the NCAA tournament for both men’s and women’s basketball:

• Duke University – Trevor Keels and Lexi Gordon

• University of North Carolina – Caleb Love and Deja Kelly

• University of Michigan – Hunter Dickinson and Naz Hillmon

• University of Maryland – Julian Reese and Angel Reese

• Villanova University – Collin Gillespie and Maddy Siegrist

• Arizona State University – Marcus Bagley and Jade Loville

I’m sure more deals will be announced as teams/players make deep runs in the tournament.

Ads vs NIL

As we mentioned earlier, CBS and Turner Sports currently have an $8.8B extension with the NCAA for the rights to broadcast March Madness through 2032.

The networks will likely generate between $1-2B in ad revenue per tournament, making this a profitable venture for all involved parties.

Last year, advertisement prices ranged from a few hundred thousand dollars in the Round of 64 to well over $2M for a 30 second spot during the championship game.

This year, CBS and Turner lined up more than 140 advertisers, including more than 35 new advertisers, across linear, digital and social platforms.

CBS and Turner Sports jointly operate and manage their corporate champions advertising program, which brings in over 60% of advertising revenue for the tournament. Participating partners are allowed to advertise across all 90 NCAA championships.

This year, the networks have three corporate champions (AT&T, Capital One & Coca-Cola) and 14 corporate partners (Aflac, Buffalo Wild Wings, Buick, Geico, Great Clips, Invesco, LG, Marriott, Nabisco, Nissan, Pizza Hut, Reese’s, Unilever and Wendy’s).

What’s Better: Direct NIL Deals or TV Ads?

Brands have three advertising options this year:

• Traditional TV/Digital Ads

• TV/Digital Ads with NIL Deals

• NIL deals through just social media

In years past, the only option was to run traditional TV/digital ads. NIL rules changed the game.

Now, there are two new options for brands — they can sign athletes to be featured in their TV/Digital Ads, or they can skip paying CBS/Turner altogether and instead sign NIL deals with athletes who will push out the messages on their social media accounts.

Which of these options will perform better?

1. Pay CBS $2M for a 30 second ad slot on TV

2. Pay 20 basketball players $100k to promote the brand on social media 2 times a week during March Madness

We think option 2 would return a much higher ROI.

2022 will be an important trial run of testing for many major brands. Come the 2023 NCAA Tournament, we’ll see refined marketing strategies.

Closing

Thanks to March Madness, the NCAA is one of the richest “nonprofits” in the world.  For decades, the wealth was shared between the NCAA, its member institutions, and host cities, while players were hung out to dry.

However, new NIL rules have given athletes a chance to capitalize on their skills while they are playing. March Madness is only getting bigger, and there is no telling how much money will be made and value will be unlocked as this tournament continues to evolve.

Now let's go watch some hoops.

- Jack and Andrew

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