How CBS beat ESPN and kept the NCAA happy

(Fortune) -- Men's basketball could be paving the way for the future of television. Last week, Turner Broadcasting System and CBS joined forces to broadcast the Division I NCAA men's basketball finals, starting in 2011. The $10.8 billion deal will last through 2024, and bump up the number of teams in the tournament from 65 to 68.

"I can't think of another sporting event of this magnitude that's been shared between two media outlets," said David Levy, president of sales, distribution and sports at Turner. He said that Turner has worked with CBS (CBS, Fortune 500) before on the Olympics and the PGA Championship, but never to this extent. (Disclosure: Turner is owned by Time Warner, which also owns Fortune.)

Starting in 2010, CBS and Turner will collaborate completely on sales, distribution and promotion. And they're going to pool the revenue. "It doesn't matter where it airs," says Levy, everybody gets the money that comes in from more NCAA coverage.

The tournament setup drives the deal, says Sean McManus, president of CBS News and Sports. "It's custom-made for a network cable partnership because of the amount of games in a short period of time."

How CBS saved its contract

"CBS did a terrific job in bringing up the popularity and the success," says Levy. But, "it kind of outgrew its ability to provide kind of coverage that the fans want."

The deal means that CBS gets help managing a major moneymaker that got unwieldy. "The last three years of the current deal that the NCAA opted out of were [going to be] extremely challenging for the network," says McManus, because the price of the tournament rights got expensive. CBS was looking at about $2.13 billion in fees over the next three years for rights to the tournament.

With this deal, McManus says, "we were able to keep one of the great events with a new, aggressive, exciting cable partner."

CBS and Turner will kick 96 percent of their profits back to the NCAA over the course of the partnership. They're projecting this will work out to $740 million, which takes into account the money spent on the championship and the series.

That's significantly more than the roughly $550 million the NCAA was getting every year from their previous deal with CBS. Revenue from the men's basketball championship generates about 90-95% of the total amount of money that the NCAA has to spend, says Bob Williams, the NCAA's managing director of public and media relations. "Everyone focuses on the money, [but] from our standpoint, this is really going to allow us to support NCAA student athletes for well over the next decade.

How the NCAA chose

The NCAA formed a specific committee just in time to figure out what to do with the cash coming in. The head of the committee, Harvey Perlman, Chancellor at the University of Nebraska, Lincoln, says that some will go directly to conferences, some to certain sports programs, and that they're looking into enhancing student assistance programs. He says that the NCAA has gotten some flak for getting more money. "Acquiring revenue isn't a bad thing, the question is how you spend it."

The all-inclusive coverage was a crucial part of the deal for the NCAA, says Williams. CBS and Turner offered a powerful enough package to outbid ESPN, who bid aggressively for the finals, according to McManus, and lost. ESPN will still cover the tournament as sports news, since sports nuts will take March Madness coverage wherever it's coming from, but they won't get another shot at the games themselves for a long time to come.

The big question is whether viewers will want every second of March Madness over the next 14 years. CBS and Turner are banking on it.

"We all know that marquis sports content is expensive-we also know it's must-see programming that drives audiences, ratings growth and advertising," says Levy. "There's a built-in passion base on this property, one that we know will resonate for 14 years, we don't have any doubt about that."

If this works, it could serve as a model for sports coverage. It also reignites the media chatter that CBS and Turner are a natural business fit-as a network without a cable presence and vice-versa. Levy says the network and cable coverage combo could work for the Olympics, or an event where, like with the NCAA championships, there's more content than the network could reasonably cover. McManus can't predict a comparable event, but he says that CBS would certainly consider one if it came up.