Our latest Freakonomics Radio on Marketplace podcast is called “How Money Is March Madness?” (You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript below.)
The gist: the annual NCAA basketball tournament grabs a lot of eyeballs, but turning them into dollars hasn’t always been easy — even when the “talent” is playing for free.
Last year, March Madness reportedly earned its highest TV ratings in 18 years. This year’s Super Bowl, meanwhile, was the third most-watched broadcast in TV history (behind two earlier Super Bowls), despite (or because of?) an electrical blackout. Interestingly — to me, at least — these two premier TV sporting events are sold very differently: the Super Bowl rotates annually among one of three networks while the NCAA is in the midst of a 14-year contract with CBS and Turner Sports. How does that difference affect ad revenue?
That’s one question we try to answer in this piece. In an earlier piece for the NFL Network, we looked at the economics of Super Bowl ad sales. In this piece, we lean on the research firm Kantar Media to see how March Madness measures up. Although he doesn’t appear in the podcast, Jon Swallen of Kantar was a font of information. He tells us that two years ago, CBS and Turner may have lost money on March Madness, as they pay roughly $770 million a year for broadcast rights but took in only $728 million in TV ad revenue. But last year, Swallen says, CBS and Turner — which broadcast ever single game in the tourney — took in more than $1 billion.
This makes March Madness “the most lucrative sports TV franchise in the country in terms of advertising revenue,” Swallen told us, “bigger than the Super Bowl, bigger than the entire NFL playoffs, and larger than the combined revenue that’s brought in from the Major League Baseball playoffs, plus the NBA, plus the National Hockey League.” That said, broadcasting every game in the tournament of course raises production costs as well, so it’s hard to know just how profitable the enterprise may be.
In the podcast, you’ll also hear from Northwestern economist Jeff Ely (he blogs here), who came up an auction system for Northwestern basketball tickets and thinks that the NCAA and NFL might do well to consider using an auction for selling ad slots. He has an even nuttier idea for how to raise more revenue, which I will not spoil here, but it has something to do with this.
Kai RYSSDAL: Time now for a little Freakonomics Radio. It’s that moment in the broadcast every couple of weeks we talk to Stephen Dubner, the co-author of the books and the blog of the same name. It is, yes, yes, it is the hidden side of everything. Dubner, good to have you back.
Stephen J. DUBNER: Hey Kai, great to be back. Are you a big college basketball fan?
RYSSDAL: You know, medium-ish. I tune in for the tournament.
DUBNER: Okay, so the tournament is just underway. That’s the March Madness N.C.A.A. basketball tournament for those who don’t know; it runs three weeks. And every single game now is televised on either CBS or one of the Turner networks. It’s remarkably popular, millions and millions of viewers. So I thought it might be fun to just see how good these networks are at turning those millions of viewers into dollars.
RYSSDAL: And how good are they?
DUBNER: Well before we even get into the actual money, one striking thing is ownership. So CBS and Turner have locked up March Madness in a 14-year contract, which is in direct contrast to that other marquis sporting event, which is the Super Bowl. That rotates each year between one of three networks.
RYSSDAL: Which is to say the Super Bowl is year-to-year business; March Madness is a steady income.
DUBNER: You got it.
RYSSDAL: It’s recurring business.
DUBNER: You got it. So here’s the thing, so if I’m one of the three Super Bowl networks, CBS, NBC, or Fox, I actually have to root for my rivals during the off years because I want them to drive the price up, because whatever price increase they perform I then inherit it and get to build on it the following year.
RYSSDAL: For the ad rates, right.
DUBNER: Exactly, yeah.
RYSSDAL: Alright, so can we then infer that the Super Bowl is more profitable than March Madness?
DUBNER: That was the inference I was interested in finding out. And the truth is it’s really hard to tell. So it depends how you measure it. The Super Bowl ad rates have increased more quickly, more steadily than the N.C.A.A. Championship game ad rates, but March Madness has done a few other things. They have increased the number of games they show to the point where last year, year-over-year alone, the N.C.A.A. Tournament was worth 35 percent more to the networks last year. They took in $1 billion in revenue, which as of now, makes March Madness the most valuable postseason sports franchise on TV.
RYSSDAL: Well yeah, but you know, and I know, Mr. Dubner, that revenues do not equal profits my friend.
DUBNER: That is exactly right. And these networks, whether it’s the Super Bowl or March Madness, they pay a lot of money for the rights to broadcast, and they pay a lot of production costs. Two years ago, CBS and Turner paid more for the rights to broadcast than they took in in total ad revenue.
DUBNER: So it’s quite possible to lose money. On the other hand, as you know, loss leaders can be nice for a business like a TV network.
RYSSDAL: So where are we? Are we feeling sorry for them? That’s not what you’re saying is it?
DUBNER: I…It’s not for me to say whether you should feel sorry for the network. I will say this, from an economic standpoint it does seem that they’re leaving money on the table, however.
RYSSDAL: How so?
DUBNER: Well, you know, the way ads are sold on TV is still pretty old-fashioned. Somebody will set a price, there’s a little bit of negotiation. So we thought we could apply a little Freakonomics here and maybe offer some solutions. We talked to Jeff Ely, he’s an economist at Northwestern University. He thought it might behoove the networks to think about auctioning off these ad slots.
Jeff ELY: Economists like auctions because they are kind of the ideal mechanism for finding out how much people are willing to pay for things and at the same time getting them to pay that much.
RYSSDAL: Alright, well, so does that shake things up then?
DUBNER: It might shake things up. It’s hard to say for better or worse. If you really want to shake things up Jeff Ely has another idea. You know, Kai, how every year you hear about the Super Bowl ads that get rejected for one reason or another?
RYSSDAL: Oh yeah, yeah, so like PETA had one at some point, right?
DUBNER: And here’s the thing, we remember that, and they didn’t have to pay for that ad to air. As Jeff Ely points out it’s great publicity, they don’t have to pay the $4 million, so here’s his idea.
ELY: I would charge a huge fee to even submit an ad for consideration for the Super Bowl. Everyone who is accepted would have that fee reimbursed and then charged just the advertising rate of having their advertisement aired. And everyone who was rejected would not get their fee reimbursed. And effectively what I would be doing would be charging for the right to have your advertisement rejected.
RYSSDAL: But the Super Bowl’s like the biggest sporting event on the planet, right? And March Madness, while big, is not that.
DUBNER: It is…There are plainly differences between the two. It’s a different event, as you said, they appeal to different constituencies. Also, let me point out one other huge difference that doesn’t get discussed very much between March Madness and the Super Bowl, which is the amount of money, of all that money, that goes to the actual talent. So in the NFL, the average player salary is roughly $2 million a year. That’s average. In the N.C.A.A., again, these are amateur college athletes, the average salary is exactly zero dollars and zero cents. So one thing we do know for sure is where those hundreds of millions of ad dollars are not going, and that is to the athletes themselves.
RYSSDAL: Stephen Dubner, Freakonomics.com is the website. We’ll see you in a couple of weeks, man.
DUBNER: Thanks for having me, Kai.
RYSSDAL: Alright, see ya.