119. How Money Is March Madness?

[0] From APM, American Public Media and WNYC.

[1] This is Freakonomics Radio on Marketplace.

[2] Here's the host of Marketplace, Kai Risdahl.

[3] 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.

[4] It is, yes, yes, it is the hidden side of everything, Dubner.

[5] Good to have you back.

[6] Hey, Kai, great to be back.

[7] Are you a big college basketball fan?

[8] You know, medium -ish.

[9] I tune in for the tournament.

[10] Okay, so the tournament is just underway.

[11] That's March Madness.

[12] 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.

[13] It's remarkably popular, millions and millions of viewers.

[14] So I thought it might be fun to just see how good these networks are at turning those millions of viewers into dollars.

[15] And how good are they?

[16] Well, before we even get into the actual money, one striking thing is ownership.

[17] 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.

[18] That rotates each year between one of three networks.

[19] Which is to say the Super Bowl is year -to -year business.

[20] March Madness is a steady income, right?

[21] It's a strategic business, yeah.

[22] You got it.

[23] So here's the thing.

[24] 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.

[25] Right, for the ad rates, right?

[26] Exactly.

[27] All right.

[28] So can we then infer that the Super Bowl is more profitable than March Madness?

[29] That was the inference I was interested in finding out.

[30] And the truth is, it's really hard to tell.

[31] So it depends how you measure it.

[32] 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.

[33] they have increased 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.

[34] They took in a billion dollars in revenue, which as of now makes March Madness the most valuable postseason sports franchise on TV.

[35] Well, yeah, but you know and I know, Mr. Dubner, that revenues do not equal profits, my friend.

[36] That is exactly right.

[37] And these networks, whether it's a Super Bowl or March Madness, they pay a lot.

[38] lot of money for the rights to broadcast, and they pay a lot of production costs.

[39] Two years ago, CBS and Turner paid more for the rights to broadcast than they took in in total ad revenue.

[40] So it's quite possible to lose money.

[41] On the other hand, as you know, lost leaders can be nice for a business like a TV network.

[42] So where are we?

[43] Are we feeling sorry for them?

[44] That's not what you're saying, is it?

[45] It's not for me to say whether you should feel sorry for the network.

[46] I will say this.

[47] From an economic standpoint, it does seem that they're leaving money on the table, however.

[48] How so?

[49] Well, you know, the way ads are sold on TV is still pretty old -fashioned.

[50] Somebody will set a price.

[51] There's a little bit in negotiation.

[52] So we thought we could apply a little free economics here and maybe offer some solutions.

[53] We talked to Jeff Ealy.

[54] He's an economist at Northwestern University.

[55] He thought it might behoove the networks to think about auctioning off these ad slots.

[56] Economists like auctions because they are kind of the ideal.

[57] mechanism for finding out how much people are willing to pay for things and at the same time getting them pay that much.

[58] All right.

[59] Well, so does that shake things up then?

[60] Well, yeah, might shake things up.

[61] Hard to say for better or worse.

[62] If you really want to shake things up, Jeff Ely has another idea.

[63] You know, Kai, how every year you hear about the Super Bowl ads that get rejected for one reason or another?

[64] Oh, yeah, yeah.

[65] So like PETA had one at some point, right?

[66] And here's the thing.

[67] We remember that, and they didn't have to pay for that ad to air.

[68] As Jeff Ely points out, it's great publicity.

[69] They don't have to pay the $4 million.

[70] So here's his idea.

[71] I would charge a huge fee to even submit an ad for consideration for the Super Bowl.

[72] Everyone who was accepted would have that fee reimbursed and then charge just the advertising rate of having their advertisement aired.

[73] And everyone who was rejected would not get their fee reimbursed.

[74] And effectively, what I would be doing would be charging for the right to have your advertisement rejected.

[75] But the Super Bowl is like the biggest sporting event on the planet, right?

[76] And March Madness, while big, is not that.

[77] It is a different.

[78] There are plainly differences between the two.

[79] It's a different event, as you said.

[80] They appeal to different constituencies.

[81] Also, let me point out one other huge difference.

[82] It 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.

[83] So in the NFL, the average player salary is roughly $2 million a year.

[84] That's average.

[85] In the NCAA, again, these are amateur, cop.

[86] athletes, the average salary is exactly $0 .0 .0.

[87] 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.

[88] Stephen Dubner, Freakonomics .com, is the website.

[89] We'll see in a couple of weeks, man. Thanks for having me, Kai.

[90] All right.

[91] See you.

[92] Hey, podcast listeners.

[93] 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.

[94] Stores on healthy foods would have to be restricted to certain locations.

[95] Abolish sucrose and high fructose corn syrup.

[96] Obviously you can do better than the current tapeworm, but there are some pretty good tapeworms out there right now.

[97] Ideas, you probably won't hear anywhere else.

[98] That's next time on Freakonomics Radio.