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April 7, 2018

NCAA’s March Madness: The Financial Implications for Division 1 Men’s Basketball

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While the NCAA is a non-profit organization, they aren’t shy about admitting that the NCAA March Madness tournament is one of the only events that generates a lot of money. It’s worth noting the NCAA plays no role in the business operations or negotiations of the College Football Playoff, which is handled by the FBS. After a financial audit was concluded, the NCAA recently released the financial statement for the fiscal year ending August 31, 2017. Reporting $1.045 billion in total revenue for the 2017 fiscal year, this was the first time the NCAA openly admitted they were actually a billion dollar yearly enterprise (Alex Kirshner, SB Nation).

Breakdown of $1.045 Billion the NCAA Generated in 2017:

According to the same 2017 financial statement (available on NCAA.org), the revenue is broken down as follows:

  •      Television and marketing rights fees – $821,386,522
  •      Championships and NIT tournaments – $129,404,400
  •      Investment Income–net – $47,126,913
  •      Sales and services – $30,367,807
  •      Gain–other – $26,338,166
  •      Contributions–other – $2,000
  •      Contributions–facilities–net (Temporarily Restricted) – $6,738,688

The lion’s share of the revenue comes from a deal made by the NCAA and CBS/Turner, which gave them broadcast rights to the March Madness tournament. The 2010 deal was a 14-year contract that paid the NCAA $10.8 billion over that time period and it gave CBS/Turner the exclusive rights to put the tournament on TV (Rodger Sherman, SB Nation). In 2016, the NCAA signed an 8-year extension with Turner for $8.8 billion, which means, eventually, the NCAA will be making over $1 billion in revenue from selling television broadcasting rights for the March Madness tournament alone (Alex Kirshner, SB Nation).

The rest of the revenue is relatively negligible when compared to the lucrative broadcasting deal. The “Championships and NIT tournaments” revenue is likely to include a compilation of ticket, parking, merchandise, concessions, and other sales not related to television revenue. From a revenue perspective, this means the people who watch the NCAA March Madness tournament on TV are a lot more valuable than the people actually in attendance at the games. Revenue from the net of “Investment Income” is pocket change compared to the CBS/Turner deal. The NCAA, like any cash-rich entity in the United States, has said they invest in high-quality bonds, securities, mutual funds, and U.S. government debt obligations with a maturity of more than three months (Steve Berkowitz, Jodi Upton, & Erik Brady, USA Today). The only other revenue worth providing further detail on from the NCAA’s financial statement is the money they made from the sale of ArbiterSports, LLC, which they had a 68% stake in. Likely to be bucketed in the “Gain–other” category, the NCAA was compensated approximately $25.3 million for their stake in ArbiterSports (Eben Novy-Williams, Bloomberg). Circling back to the $821 million made by the NCAA in “television and marketing rights fees”, as the NCAA is a non-profit organization, it’s important to understand where that revenue goes and how it impacts the future of NCAA basketball, in particular, moving forward.

Payouts from the NCAA’s March Madness Tournament

While there are many things the NCAA does with the revenue from the March Madness tournament, such as pay administrative salaries and fund other smaller tournaments not intended to be profitable, a little over 30% goes into what they call the “basketball fund” (David Ingold & Adam Pearce, Bloomberg). Approximately 40% of the total money distributed by the NCAA every year is done so through this fund, meaning it represents a significant amount of the school’s budget. This process has been in place since 1991, almost two decades before the 2010 deal the NCAA made with CBS/Turner, with the money from the fund getting disbursed to conferences in what the NCAA describes as “units”. With the exception of the championship round, a unit share is allotted for every round a team plays in the March Madness tournament. However, the payout is not straightforward; it’s not as if a “Team A” makes it to “Round B” so thus they are awarded “Amount C”. The NCAA explains their basketball fund unit distribution system in the following way:

“The basketball fund provides for money to be distributed to Division I conferences based on their performance in the Division I men’s basketball championship over a six-year rolling period (for the period 2007-2012 for the 2012-13 distribution). Independent institutions receive a full unit share based on its tournament participation over the same rolling six-year period. The basketball fund payments are sent to conferences and independent institutions in mid-April each year” (NCAA.org).

For one, independent teams (most famously Notre Dame, until they joined the “old” Big East Conference for the 1995-96 season) are cut out of the fund’s revenue split if they don’t win themselves. Notre Dame didn’t make the NCAA March Madness tournament from 1991-1995, thus missing out on substantial revenue, as they couldn’t rely on any conference teams to earn units during those down years. There are currently no independent D1 men’s basketball teams and the unit revenue distribution model is a huge deterrent for teams thinking of leaving a conference. Each unit rises 3% in value annually; for the 2016-17 season, one unit from the March Madness tournament was worth $264,859 (Richard Johnson, SB Nation).

Winners and Losers of NCAA Basketball Fund Unit Distribution Model

Since there are no current independent NCAA D1 men’s basketball programs, the fund’s money is dispersed to each conference per the unit distribution model. To put it bluntly, the big winners in this distribution model are poor performing teams in top NCAA men’s basketball conferences. Take Rutgers for example; the Scarlet Knights compete in the elite Big Ten Conference with March Madness regulars like Michigan State, Michigan, Purdue, Ohio State, Maryland, Wisconsin, etc. Despite not making a single tournament appearance since this distribution model went into effect in 1991, Rutgers gets some share of revenue from the success of the above schools. Not only are they regularly in the tournament, but it’s very common to see a Big Ten team making a deep tournament run (Michigan State lost in the National Championship Final in 2009 and the National Semifinals in 2010 and 2015; Michigan lost in the National Championship Final in 2013). Rutgers gets a share from the revenue of all these units and it’s unrestricted, meaning they can spend that money however they see fit.

This brings us to the main loser of the NCAA’s basketball fund unit distribution model: high performing teams in conferences comprised of mostly subpar D1 men’s basketball programs. The Big Ten and the ACC aren’t the best examples because even though they have some poor performing D1 programs, they frequently have multiple schools in contention for a national title. The Gonzaga Bulldogs are probably the best example, having won their WCC conference tournament 16 of the last 20 seasons (WCCsports.com). Getting an automatic bid from winning their conference tournament, the Bulldogs often find themselves as the only team from the WCC in the March Madness bracket. Moreover, Gonzaga isn’t an easy first-round knockout team by any means; in 2017 they lost in the National Championship Game to the UNC Tar Heels. Between 1991-2015, the Bulldogs earned the WCC 36 units. Over that same time period, the other nine WCC team’s combined for 40 total units (Richard Johnson, SB Nation). Gonzaga head coach Mark Few sharply criticized this flaw in the NCAA tournament payout structure. Few commented “We need to talk long and hard about [NCAA tournament] money distribution that we’re making for the league, and if they’re not spending it on basketball, we don’t need to be sponsoring swimming at those schools or whatever they’ve got going. They’re not all in” (John Blanchett, Spokesman Review).

According to the NCAA, while conferences are strongly urged to distribute the revenue equally they aren’t technically required to do so. Smaller conferences value each unit much more than previously mentioned elite NCAA men’s basketball conferences, like the Big Ten or ACC. For the smaller conferences, the revenue from the NCAA’s basketball fund unit distribution model can account for around 25% to 50% of the conference’s total annual revenue (Will Hobson, Washington Post). This forces some leagues, like the Colonial Athletic Association (CAA), to get creative with how they distribute the funds. In a discussion about his league revenue distribution method Tom Yeager, Commissioner of the CAA, explained, “The standard of living if you will, is dependent on the men’s basketball tournament.” The CAA has a complicated formula for revenue sharing from the NCAA’s basketball fund. The CAA is guaranteed an automatic bid into the NCAA March Madness tournament, which goes to the winner of their conference tournament. The CAA keeps one unit for that automatic bid, which was worth nearly $270,000 in 2016, then the rest of the leftover money is divided into two halves. Half is equally distributed among the ten conference teams while the other half is competitively doled out through what the CAA calls an “excellence fund” (Will Hobson, Washington Post).

There’s no doubt that many will continue to debate how the NCAA’s basketball fund unit distribution model can be made more effective in order to improve NCAA Division 1 men’s basketball as a whole. However, the same people debating this topic can surely agree on at least one thing: a lot of money is at stake. With a non-negligible portion of the revenue going towards salaries of NCAA employees, league commissioners, lucrative head coaching contracts, and other personnel not necessarily even affiliated with the March Madness tournament (as Gonzaga head coach Mark Few eloquently noted), it’s likely the NCAA will eventually have to proactively take a much closer look at whether or not the players competing in Division 1 men’s basketball truly do receive a fair shake too.


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