Why March Madness Isn't Always an Economic Win

If your brackets aren't busted by now, you are definitely in the minority.

Ah, the joys of March Madness. The NCAA basketball championship is a thrilling time for fans and a profitable time for the NCAA. Television rights for March Madness earn 95% of the NCAA’s yearly basketball revenue, more than $771 million.

The NCAA has a complicated formula for distribution of these revenues that accounts for the conference, the number of teams in the conference, how many teams from the conference make the tournament and how many games the teams win into the amount paid to schools. 

In some conferences, these revenues are evenly split among member teams even if they don't make the 68-team tournament, but in others they pay only those teams that make the cut. Additionally, the NCAA gives each participant teams money for travel for each game they play in the tournament. 

In addition to actual cash from the tournament, March Madness success has a measurable impact on factors like college applications, including out-of-state applications, bookstore and apparel sales and alumni contributions. Eric T. Bradlow, a professor at The Wharton School at the University of Pennsylvania, found these effects were even greater with first-time participants and "Cinderella" teams, who make it much further in the tournament than expected. 

An example of this spike was the surprising 2006 George Mason team that upset the defending champion North Carolina and the tournament favorite Connecticut before losing to eventual champions Florida in the Final Four. The university had out-of-state applications increase 40%. Bookstore sales in March alone matched the entire previous year and athletic alumni contributions increased 52% the following year.

George Mason professor Robert Baker studied the effect the tournament had on the school for the following two years and estimated the university had received $677,474,659 in free media advertising between TV appearances and written publications.

The Local Impact

Of course, the economic impact of the NCAA tournament extends beyond just the participating teams. This year’s Final Four will be held in New Orleans and Louisiana Lt. Governor Jay Dardenne claims the event will bring an economic impact of $134 million to the region. 

Still, some experts say hosting such events have a much smaller impact than estimated, and often don't actually boost a cities' economy at all. Professors Victor A. Matheson and Robert A. Baade at Holy Cross looked at Final Four host cities from 1970 to 1999 and found that the average impact was actually negative:

#-ad_banner_2-#"Using this model the average real economic impact (in 1999 dollars) from the [men's Final Four] over the period 1970 through 1999 is estimated at -$44.28 million, or the model indicates that the average host city experienced a reduction in real income of $44.28 million as a consequence of the event. This compares to typical booster estimates predicting gains ranging from $25 million to $110 million. The median estimated economic impact equaled a loss of $6.44 million."

The figures used by cities grossly oversimplify impact by just taking the number of visitors expected at the event, the number of days they are staying in the city and the average amount they will spend in a day to reach the economic impact. Economists dig deeper to analyze the real impact of these events rather than a simplified formula.

[InvestingAnswers feature: The Business of College Bowl Game Sponsorships]

Tourism officials don't factor in that many of the attendees to the games might be locals who don't stay in hotel rooms or spend as much money as visitors from out of the region. Secondly, they don't take into consideration visitors who save a visit to a city for a sporting event. This is economic impact that the city would have experienced at a different time, only the visitor would have had more of their money go into the city versus tickets for basketball games. 

Finally, they don't factor in the crowding out of locals. Basically, locals who either know that big events are happening or see the traffic from big events are less likely to go out to eat or spend money there while the event is going on.

Sponsors also ignore the costs with hosting an event. Significant expenditures for public safety, sanitation and public transportation are never factored into these economic impact numbers.

According to a separate study by Matheson, "An examination of metropolitan area-wide personal income during thirty NCAA Men's Final Four Basketball tournaments found that, on average, personal incomes were lower in host cities during 16 tournament years."

So, the long and short is that the financial impact of March Madness is good for the NCAA and the member schools, but it might not be such a good investment for host cities.

The Investing Answer: The economic impact of decisions often goes beyond face value. Participation in March Madness may carry benefits beyond even the check cut by the NCAA to teams. However, hosting the event might carry financial costs well above simple estimates. 

[Basketball fan? Read more about the financial aspects of the sport in: Are NBA Franchises Smart Investments?]

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