Freakonomics Radio - 119. How Money Is March Madness?

Episode Date: March 21, 2013

The 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.

From APM, American Public Media, and WNYC, this is Freakonomics Radio on Marketplace. Here's the host of Marketplace, Kai Risdahl. Time now for a little bit of Freakonomics Radio, that moment in the broadcast every couple of weeks where 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. Hey, Kai, great to be back. Are you a big college basketball fan? You know, medium-ish. I tune in for the tournament. Okay. So the tournament is just underway. That's March Madness. NCAA basketball tournament, for those who don't know, 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. And how good are they? 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 marquee sporting event, which is the Super Bowl. That rotates each year between one of three networks. Which is to say the Super Bowl is year-to-year business. March Madness is a steady income, right?

It's a recurring business. You got it. So here's the thing. If I'm one of the three Super Bowl networks, that's 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. Right. For the ad rates, right? Exactly. All right. So can we then infer that the Super Bowl is more profitable than March Madness? 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 NCAA championship game ad rates. But March Madness has done a few other things. the number of games they show to the point where last year, year over year alone, the NCAA tournament was worth 35% more to the networks last year. They took in a billion dollars in revenue, which as of now makes March Madness the most valuable postseason sports franchise on TV. Well, yeah, but you know and I know, Mr. Dubner, that revenues do not equal profits, my friend. 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.

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. So where are we? Are we feeling sorry for them? That's not what you're saying, is it? 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.

How so? 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. 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. All right. Well, so does that shake things up then? Well, yeah, it might shake things up. 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? Oh, yeah, yeah. So like PETA had one at some point, right? 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.

I would charge a huge fee to even submit an ad for consideration for the Super Bowl. Everyone who was accepted would have that fee reimbursed and then charge 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. But the Super Bowl is like the biggest sporting event on the planet, right? And March Madness, while big, is not that. It is a different, 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 NCAA, again, these are amateur college athletes, the average salary is exactly $0.00. 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. Stephen Dubner, Freakonomics.com is the website. We'll see you in a couple of weeks, man. Thanks for having me, Kai. All right, see you. Hey, podcast listeners, coming up next time on Freakonomics Radio, we put together a roundtable discussion with some of the biggest brains we could find on how to fight childhood obesity. In grocery stores, unhealthy foods would have to be restricted to certain locations.

Abolish sucrose and high fructose corn syrup. Obviously, you can do better than the current tapeworm, but there are some pretty good tapeworms out there right now. Ideas you probably won't hear anywhere else. That's next time on Freakonomics Radio.