Nike

Transcript from https://podmenti.com/t/3e1f9d54a6534f33

Listeners, you should know, David and I were texting before this debating do we
Change this thing around, do we play with this? Should we reorganize this section? And he texted me, let's just do it.
So
in the Honor of Bad Jokes by David Rosenthal.
Here we go.
Who got the truth?
Is it you, is it you, is it you Who got the truth now?
Is it you, is it you, is it you?
Sit it down, say it straight
Another story
Welcome to season 13, episode one of Acquired, the podcast about great technology companies and the stories and playbooks behind them.
I'm Ben Gilbert.
I'm David Resenthal.
And we are your hosts.
There's an age old question in business.
What is more important?
A great product.
Or great.
Marketing.
Well, today we have literally the perfect case study in that very question.
in Nike.
Does breakthrough innovation drive that business?
Or is their core competency really around their profound advertisements and their
sponsorship deals with athletes and teams or their
Probably best in the world brand positioning.
To understand it, we have to examine Nike's entire sixty year history, of course, because this is acquired.
And because Shoe Dog is so good. That's amazing. You gotta start at the beginning.
So really the question is what makes this company the single largest apparel business in the world today, outside of luxury, of course.
And how is it possible to be a shoe company that does over fifty billion dollars in revenue?
When they technically don't make a single shoe.
So you may think you know Nike from the movie Air or Shoe Dog, but what hasn't been told is how those old stories tie to the gigantic shift in strategy.
that Nike is really in the middle of right now.
Well, L Ps, we gotta thank you for voting for this episode. David and I have had it sort of in our episode backlog for
two, three years and when we put it up for a vote.
the overwhelming majority of you selected this as our next episode. So if you also want to vote for future episodes and become an acquired LP, that is acquired.fm slash LP.
If you want an update every time we drop a new episode so you don't miss it, you can sign up at acquired.fm slash email.
And we'll be dropping little Easter eggs and hints in those emails to tease about what the next episode is gonna be.
So that's acquire.fm slash email. Don't miss a new episode.
And lastly
Make sure you check out ACQ2, our second show where we interview people who are building their companies today.
available in any podcast player.
And without further ado, listeners, as always, this show is not investment advice. Dave and I may have investments in the companies we discuss, and the show is for informational.
and entertainment purposes.
Only David Rosenthal, what is that stack of books on your desk? Oh my God. I think Amazon owes a thank you note to acquired LPs, because I bought
Every Nike.

out there. I mean my six foot long desk is covered
in Nike.
Fuck.
So fun to read all of them. I thought there was just shoe dog. I didn't realize there was the literally over a dozen that you and I collectively read.
There's so many of them. I read thousands of pages.
But there are
Three bucks.
Then I'll basically tell you
More or less the same story.
that we weave together to come up with our
Core acquired Nike story here today.
And I bring it up because
It's actually pretty important what these three books are.
The first.
Of course is shoe dog.
The goat.
Business memoir.
Of all time.
The second
is a book called Just Do It that was written by the journalist Donald Katz.
Ben, do you know who Donald Katz is?
Ooh, I do not.
So
Don after he wrote this book, and I think he wrote one or two other books
He had quite the career change. He went on
to found the company Audible.
Oh, really? Isn't that crazy?
It's kinda cool that that was founded by a journalist.
Yeah, just wild. So he wrote kind of the canonical third party journalist take on Nike.
And then the third book.
is a book called Swoosh.
Which
I bet most people have not read, but kinda like Taste of Luxury. I think people who are really in the know in the footwear industry have read this book.
It was written by one J B Strasser.
And her sister, Lori Beckland.
J B Strasser is Julie Strasser, who was the wife
Of Rob Strasser.
Now
Rob, if you've seen the movie Air.
The character played by Jason Bateman.
Is
Rob Strasser. Nike's
Legendary
First.
Head of marketing.

Among many that is not discussed in the movie.
Is that
Rob shortly after signing Jordan.
had an enormous fight
With Phil Knight.
left the company with Peter Moore.
Who was the designer behind Jordan's.
And ended up joining Adidas as CEO of Adidas America just a few short years later.
It's like an incredible betrayal.
This is like a Judas level betrayal. I mean to say he was persona non grata around Nike is uh
understatement of the century. And here's this book that was written in real time by his wife as this was all happening.
Incredible.
Yeah. So Strasser we'll get into his contributions, but he is
Probably second only to Phil Knight in willing Nike into existence.
We start, however, with
The shoe dog story, the origin of
Blue ribbon sports.
And actually a little bit before Shoe Dog starts.
In July nineteen forty eight.
When one Bill Bauerman becomes the head track coach.
At the university
Of Oregon.
Now
Bill.
was a legendary
figure in addition to being
Nike's co founder, along with
Fell knight.
I mean, kinda the only way to describe him is he was like a descendant of the survivors of the Oregon Trail.
The cowards never started and the week died along the way was one of his favorite sayings. Yes.
So
Bill's dad
Was the governor of Oregon.
And
Bill fought in World War Two.
As a major.
And he actually negotiated at the end of the war the stand down of a German
Batillion.
He's also such a character.
He lived in a remountop in the Oregon Mountains.
uh the mail delivery people who would come up to his home
kept knocking over his mailbox with their trucks.
So he rigs the mailbox with explosives to blow up
The truck the next time it happens, and he literally blew up the truck. I mean
The stuff you could get away with and uh
The fifties.
They do not make'em like that anymore.
No they do not.
So
When Bill comes home after the war, he first coaches high school and then he becomes
The head track coach at the University of Oregon.
He takes this background and character that he has
And he becomes maybe arguably the most successful
Track coach.
in American history. So I believe
Bill coaches the first American sub four minute milers.
He ends up coaching several Olympic teams. He definitely turns the University of Oregon into the most prestigious track program in America.
You know, he's
A national celebrity, which is
Pretty crazy for
Oregon in the nineteen forties, nineteen fifties.
Right.
So
A few years into Bowerman's tenure as head coach,
He recruits
A pretty
Talented.
Middle
Distance runner, freshman.
From Portland, nearby.
One Phil Knight.
Now
Phil also has some interesting Oregon roots. He's the son of Bill Knight, who is another well-known University of Oregon alum.
He was a former lawyer in Portland.
And he's the publisher of the Oregon Journal.
Newspaper.
Phil follows in his dad's footsteps. He majors in journalism at Oregon and he runs for Bowerman.
And
I would say Phil is okay.
As a runner.
Well, it's interesting. Phil Knight would describe himself in his prime as an okay runner.
Because he was running with
the best collegient runners in the world coached by Bill Bowerman, who barely gave Phil Knight the time of day.
I get the sense he was not a man of many words and certainly almost no words of encouragement other than run faster.
And so you've got Phil Knight, the guy runs a four minute thirteen second mile.
And is convinced he's okay.
This is exactly what I was gonna say. I think at any other school Phil would have been a star.
This isn't really in shoe dog, but I know Phil's personality from reading so much about him over the past couple of weeks.
I think he probably went
to Oregon in part.
Because he wasn't gonna be a star there. I mean, he is
I think the most introverted
CEO that we have ever
Covered on acquired. I mean, Rockefeller was pretty introverted, but he looks like Elon Musk compared to Phil Knight. Yeah, and a lot of the CEOs that show up in these acquired episodes

private people, but it's mostly because they want to stay out of the limelight. And when they're in the limelight, you can see that they can turn it on and they're bright and shiny and they're sort of loving working the room
That's not Phil Knight at all.
Not at all. I mean I um
was super lucky. I owed a huge thank you in my life to Phil Knight. I went to
Stanford Business School. I was one of the first classes to graduate at the night management center that he endowed there. Didn't he give your graduation speech?
Exactly.
It was amazing. It was kind of the first draft of Shoe Dog that he had been working on. The book came out a couple of years later. So great. But I remember thinking
This does not seem like the founder and CEO of
Nike. You know, even here talking at Stanford, the most warmly receptive
audience possible, like
He was very nervous.
Yeah.
Huh.
So night runs at Oregon.
And it's important to say we should note about Bowerman.
He was definitely a
Person, a man, like they don't make any more.
But despite what you might think, he wasn't militaristic.
He really was pretty innovative. He was the first
track coach, maybe college coach of any sport.
Who really put a focus on rest for his runners.
And
Part of this famously for the Nike story, too, was
Technology and was shoes. So
Bowerman actually taught himself how to be a cobbler and would take
athletic shoes, usually Adidas athletic shoes, and modify them or even build his own and then use
His athletes as guinea pigs to any advantage that they could have.
he would be looking for and shoes were part of it.
And the technology that Bowerman was experimenting with.
was crazy stuff. He would rip shoes apart and he would rebuild them. This is from the Nike website.
With snake skin, deer hide, or fish skin. Goofy and crazy stuff.
And his guinea pig was Phil Knight because Phil
Wasn't at the front of the pack, so he could sort of afford to experiment on him. So very fortunate for Phil Knight and his future that he was not the fastest runner on the Oregon team.
Exactly. This is where it all comes together. So
After
Phil graduates.
He
goes to business school right after undergrad to Stanford, to Stanford GSP, hence the connection.
He
Graduates from G S B in nineteen sixty two.
It's also crazy. Nike feels like such a modern company. This was a long time ago.
So
In Phil's
final term there at Stanford, he takes what is then the
Only quote unquote entrepreneurship.
course at GSP. I mean, today there's like a hundred different entrepreneurship courses.
Taught by the
The famous Professor Frank Schalenberger, who night gives
Tons of credit too for
Blue ribbon sports and ultimately Nike.
And
In the course for night's final paper.
He writes the business plan for
Blue Ribbon Sports.
Pretty much word for word.
His thesis is that he knows from growing up with his dad, and I think he actually maybe spent some summers
at college and then at G S B
working in the newsroom at the Oregon Journal.
And he knows from the photography department
that high end professional cameras
had traditionally been
The domain of
The Germans.
Leica was the most famous.
Camera brand.
And then at this point in time in the
Fifties and sixties.
The Japanese are starting to enter the market. So Nikon was the big Japanese entrant. Fuji Rico.
Exactly. They made great cameras.
And they undercut
Like a on prices by a huge amount.
And he also knows
about the sporting goods market from his time at Oregon and
Particularly.
being a test pilot, as they would say, for Bill's shoes.
And actually the dynamics.
Are pretty much exactly.
The same in the athletic goods market.
There are
Two companies.
Both German.
That dominate.
Sports equipment.
One.
Of course is Adidas.
Or Adi DAS, as the Germans would say. Yes, as we will get into in just a sec here.
And the other one, to a lesser extent, was Puma.
Now
There was an American
athletic apparel footwear maker in Converse and others.
But
Converse at the time was stuck in the Canvas shoe era, which was already like ancient history. So if you know Chuck Taylor, all stars, you know, the famous seminal
Converse shoes, but if you had to guess
When do you think Chuck Taylor played basketball?
Ooh, let's see.
I think if I remember our NBA episode, the NBA was really getting going like
post war, so like the fifties. I'd guess he was an early fifties NBA player.
Yeah, you might think so. Contemporaneously with the time we're talking about right now.
No, Chuck Taylor played professional basketball in the nineteen twenties.
Whoa. That's when the Chuck Taylor All Star Technology
is from it's a canvas shoe.
By this point in time, the market had migrated to leather upper shoes, but
Of which
Adidas or Adidas was the leading
technology manufacturer of it.
Hm.
So
Anyway.
Basketball shoes wasn't really the market yet. It would become much, much later, as we shall see. The market was
Running shoes.
And
It was like an okay market, but this was not
the camera market. So Phil Knight's thesis here.
It actually didn't get any sort of notice or praise famously from his classmates or even really from the faculty,'cause they're like
Okay, this is a good idea to apply
Japanese low end disruption to the athletic and the footwear market, but
This is not a big market.
The market such as it existed was tracks shoes.
Right.
think about how you would define a market size.
There's not that many track athletes at any given point in history, so
Not that interesting.
And it's worth maybe saying one word on the Adidas or Adidas story before we
Move back to Phil Knight and Shoe Dog here.
Because it's pretty crazy. So
It's called Adidas because Adidas was founded by Adolf Dossler, or Addy for short, Addy.
Does
In like the
Nineteen.
Twenties?
Yes. So after World War One when Germany was totally decimated, but before
World War Two.
He becomes like a
Fairly well known.
Elite cobbler.
shoe purveyor, track cleat purveyor to Olympians at the time. So actually
Ironically, I guess Jesse Owens
Wins.
The nineteen thirty six Olympics.
The big
American.
Demonstration.
literally beating Hitler in Berlin in Germany.
In
A D shoes.
And actually that was Adi Dossler taking a big risk.
By sneaking a pair of
Adidas shoes to someone who could get them to Jesse Owens like the night before his race. And Jesse Owens was like, Oh, these are actually awesome. And so it was like a big sort of
Uh oh, is this gonna be a problem for Audi when it comes out that the American one wearing German shoes?
Interesting. I didn't know that part of the story. That makes sense because
Adi's older brother, Rudy,
worked with him in the business, as did Adi's wife.
And sun.
After World War Two, though, the two brothers have a huge acrimonious split.
Rudy goes off.
And starts a separate shoe company.
It never came out what the fight was about, but
One of the rumors is that
Rudy went and fought in the Nazi army and Adi didn't. Oh and maybe that might have
I don't know, but may have had something to do with it.
Anyway, crazy, Rudy goes across town and starts a competing company after the war.
Named.
Puma.
Craziest thing. Adidas, Adidas, and Puma.
Or the two brothers.
They're both the Dossler brothers. Crazy.
Okay, so take us back to Phil Knight.
Phil has this idea in this class in business school, this good idea but small idea.
To sell Japanese
track shoes in the US and undercut.
I did this.
In
Nineteen sixty three, after he graduates.
Phil decides that he's gonna go
off before he really starts life.
He's gonna go take a trip around the world and he convinces one of his buddies from GSB to go with him.
They go first to Hawaii famously, and the buddy meets a girl in Hawaii and why would I leave Hawaii? Yeah. I mean smart guy.
Phil though goes on to Japan.
And he's still thinking about this idea.
When he's in Japan he starts going to tracks in Tokyo.
I'm watching what people are wearing running around the tracks.
And he observes and he decides that
D.
Tiger brand shoes that he's seeing are the best.
So he looks up the company that makes tigers.
Turns out they're made by a company called Onitsuka, which is based in Kobe in the south of Japan, near Osaka.
And Phil
For a desperate introvert.
Kinda crazily. This is how passionate he is about this idea.
He gets it in his head that he's gonna hop on a train from Tokyo.
And just go knock on their door. And
Say hi to the Onatuka Corporation.
And uh maybe ask them if he could import some of their shoes.
So
The story goes that he shows up on the door and I can only imagine what twenty three year old Phil Knight is feeling as he's
Going through this.
Well, this is the other side of Phil's personality, where
He's sort of a tortured soul.
He's introverted.
But he's
Unbelievably driven. He has a splinter in his mind where when his buddy's like, actually, this is pretty good, I'm gonna stay in Hawaii, feels like
But I'm longing for something.
Yes. There's something wrong with my existence in the world that needs to be fixed and I need to go and find out.
where I belong and what to do and how to change the world and
how to build something. And I think he's got a motor that's just different than the way that other humans operate.
I've been thinking a lot about uh I think this is uh David Senra saying that
the CEOs and the founders of these companies that we cover that he covers
They are the ginghist cons of our time.
And Phil doesn't
Present as a Genghis Khan. Yes.
But he still is. Right. Deep down underneath all that introvert.
He
has that same drive that
John Rockefeller had that an Elon Musk has, that a Mark Zuckerberg has. And this unbelievably competitive spirit.
is the founding element of Nike's culture that permeates to this day.
At Nike.
You play to win.
And I think everyone shows up to work and you wear Nike stuff and you don't ever wear any of the competitors, not to hey, I want to try out this stuff. It's like
Hey.
We don't do that here. That's playing for the other team. Get off the other team. You're on our team. And you wake up every day.
And you show up
to go to work and kick your competitors asses.
And sometimes that takes them to
questionable places that we'll talk about later in the episode. But Nike is
Among the most competitive cultures in the world.
It's funny you say Nike there is sort of founding principles. Because Nike isn't gonna come for quite a while here.
While Phil is making this train trip down to Kobe.
He suddenly has a realization. His plan is he's gonna show up at the door
He's gonna say that he's an American businessman, you know, a distributor and he wants to distribute there.
Shoes in America, literally his business plan from the GSP class.
He doesn't have a company though.
And he doesn't have
A name for the company. So he has to
Think fast and come up with
A name.
And there are multiple conflicting stories about where the name comes from.
The one that Phil tells is that the name Blue Ribbon Sports comes from him.
Thinking back to his childhood days, becoming a track athlete in middle school and high school, he
He talks about he got cut from the baseball team and his mom encouraged him to go out for track and then the blue ribbons that he won.
at his track meets, you know, really helped define his personality. Very nice story. Very nice story. That's where the name comes from.
The other story that appears in the other books is
Is that Phil was out drinking the night before. Either drinking
Paps Blue Ribbon P V R beers.
Or I think more likely the other one that I read is Suntory Blue Ribbon Whiskey, which is a Japanese whiskey brand.
You saw a billboard or something like that.
And that that's where the name
Blue ribbon came from. As with any of these stories, we'll never know, and it's probably some of both.
Yes.
Either way.
Perhaps driven by this.
Drive to succeed.
Phil.
puts on the performance of a lifetime in this
Meeting.
He claims that he is a
US businessman.
From America. He's gone to Stanford Business School. He has a company called Blue Ribbon Sports. He wants to import their shoes.
By the way, he ran track for the legendary Bill Bowerman, who of course they know.
He
Tells them.
That he's done market research.
He thinks that the US
track shoe, I mean a running shoe market.
could be a one billion dollar market.
Which he totally makes up. He has no evidence to back this up whatsoever.
He's done
Lots of market research. Lots of market research.
And it is completely wrong in both directions.
the actual US market for
Running shoes at
this point in time. I mean
There's no way it was a billion dollars. Like maybe
A hundred million.
Maybe I mean we just we're talking about like running was not a thing. It was a thing that
Athletes did. Right.
And the running craze or the fitness craze hadn't really started yet. So
To give you a sense, David, I think you're probably spot on with that maybe a hundred million, maybe two hundred million for
track shoes in the US.
the branded athletic shoe market all up, including all sports.
For the whole US, across all age groups, everything.
Two billion dollars.
Right.
So he's completely wrong on what it actually is at that point in time.
He's also completely wrong on what it would become in the other direction, thanks to Blue Ribbon and Nike. Right. They had a large hand in growing.
And I'll spoil it for listeners, the branded athletic shoe market in the US today.
is a hundred and thirty billion dollars. Now obviously not all of that is
track and running, but like
A large part is running shoes,
And that's growing five percent year over year. So still a growth market, even at that scale, which by the way, that number, 130 billion, just to like compare it against some other things.
That is bigger than the video game market.
Wow.
I mean, not everybody has to play video games.
But everybody's gotta wear shoes.
So
Knight leaves this meeting, this performance of a lifetime.
He gets an agreement from Onituka that if he
wires them fifty dollars, they will send
Samples of the shoes.
To his office.
Back in the States.
I
His family home in Portland, Oregon.
So
First thing Nate does, he gets in touch with his dad. I don't know, he sends him like a telegram or something.
Back in Portland and asked him to wire
Fifty dollars to the Anatuka corporation of Japan.
Four
Purchasing samples.
He gets home, I think it's two or three months later after this. Surely the shoes would have arrived, but Surely the shoes would have arrived. He rushes home.
says, Hi mom. Hi Dad.
Did the shoes arrive?
His dad's like what she's.
The shoes
did not arrive. The shoes would not arrive for almost another year.
Wow.
A little
Foreshadowing and uh
what doing business with only Tsuka is gonna be like for the fledgling blue ribbon sports.
And this is just to like get some samples to see if he can sell fifty dollars worth of shoes. That takes over a year.
So Phil gets home, he's disappointed. He's got to start his life. He gets a job as an accountant. He's got a business school degree. He's studying to take the CPA exams and become a licensed
CPA.
And then finally.
At the end of nineteen sixty three, I think right around Christmas, Phil writes in Shoe Dog.
The samples
Show up.
And
Phil.
Gets them, you know, they're great, they're what he remembers.
He thinks
You know, these aren't
quite maybe as good as Adidas, but
They're good enough, and I can sell them cheaply enough that
My business plan will work.
Right. They're way cheaper.
So
Phil gets back and writes on toca, says great, I would like to be
The US distributor for
Track and field shoes.
And Onitsuka says, Okay, great, you can be the distributor for the Western United States. We already have somebody that we're working with on the East Coast, but you can have the Western.
Thirteen states.
Feels like great.
He quits his accounting job
He starts the company, he goes to work, he hires one of his twin younger sisters, who I think was maybe still in high school to like
Help him part time.
With receiving the inventory and setting them out and stuff. The naivete is just dripping off of Phil at this point. It's like, Oh, good, I have a business, so surely I will make enough money to be able to quit my job and hire people.
Yes. And
Now he doesn't have enough money to open a retail outlet, or even really to get enough inventory to sell wholesale to other retailers.
So
His
Genius business plan.
I don't know how much of this was part of the Stanford paper or not.
Is he's gonna drive around to track meets.
In Oregon and up and down the West Coast.
And
Sell the shoes out of his car.
Pretty awesome.
That's like legitimately doing the shoe leather work that no one else is willing to do and
getting through that hard part to get your business off the ground, establishing proprietary distribution channels.
Yes.
Speaking of proprietary.
He
Also has
Another
Actually really great idea.
Which is that
While he's driving around.
He'll go down to Eugene.
And see his old
Coach.
Bowerman.
At the University of Oregon.
And he thinks.
Oh if I could get Bill
To put his runners.
In tigers.
then that would be great marketing.
For me.
And I know he's not always super happy with Adidas. We're gonna have a better relationship. He'll be able to experiment with these shoes.
And I'll sell'em to him for cheap because
At this point in time, even the legendary Bill Bowerman and the University of Oregon
They bought
Oh.
The shoes. Nobody was giving them shoes. It was like a major line item in their budget.
Crazy.
And so let's just take a quick pause and recognize
This company that would eventually become Nike.
Started.
A
Not as Nike.
B, not with a swoosh.
C not making a product. It's literally just importing and reselling someone else's product.
And the plan is to build a big business off the back of not actually making things.
Not exactly what GSP or any other business school would determine a recipe for success here. But maybe that penciled more at the time. Being in this super globalized world that we're in now with the internet and companies with these massive resources that can scale immediately. And venture capital.
Exactly. And venture capital, which can just supercharge a company's growth if something's working.
The idea that your core competency is just distributing someone else's product.
among a geographic area where you have a relationship with customers.
That might have actually been a pretty good plan and much more defensible in a way that
It's much harder to build something like that from scratch now.
That's a super good point.
And it turned out actually that
On it's a
had already studied the US market, whether they agreed with Phil's plucked out of thin air market size or not. They wanted to enter the market.
But they didn't think they could do it on their own. So they actually were looking for somebody like Phil.
Yeah.
So Phil
Goes down to see Bowerman.
And
To Phil's surprise, I mean, Bowerman is not a warm and fuzzy guy. He's never really shown Phil much encouragement when he ran for him.
Or since
Barman says
This is a pretty good idea.
Нали
Do I want to do it?
The shoes.
For cheap.
I want you to cut me in on the deal.
I want to be partners with you in this company.
And Phil is like
Lord.
And like real partners, 50-50 ish.
It's not like I want you to like toss me a percent here or there for being an advisor or something. It's like okay, great, co founders.
Just like that.
So
Feels like
What's the deal you
have in mind. Uh I think originally Bowerman says fifty-fifty and then he sleeps on it and he comes back with his lawyer and he says, actually
Let's do fifty-one, forty nine. I want you to have fifty one, me to be forty-nine.'Cause I don't really want to be involved here. Now on the one hand
This is super exploitatory of Bowerman of his old athlete that still obviously looks up to him like a father. It's kinda like there weren't
really VCs yet in this era, but when there would be like
VCs taking fifty, sixty, seventy percent of the company.
On the other hand.
This is a no brainer yes for Phil. Right. He's giddy about it. He's like, oh, only half the company? Great.
Well and
If Phil doesn't do this deal, the
He would have a hundred percent of
Phil Knight's Blue Ribbon Sports.
But he does do the deal and he gets fifty one percent of
Bill Bowerman's
Yes. Blue ribbon sports, which is a completely different animal. Yes.
So
I was thinking about this. After reading Shoe Dog, I was like
Hm,'cause I just read it for the second time.
It just feels a little weird that Bowerman would just
kind of immediately be like, yes.
I'll go into business with you.
person who ran for me that I never had a particularly close relationship with.
And so
I've always wondered like why was he so eager to do this?
And
As part of the research, I stumbled upon this guy named Scott Reems.
who was formerly a Nike historian. He worked in a marketing department and then for over twenty years worked at
Nike and became the company historian. He has an epic set of LinkedIn posts.
That are really like
these incredible gems pointing out things in company history. And so he's got this post. He says
Based on letters in the University of Oregon and Nike archives, Bill Bauerman corresponded directly with many footwear manufacturers.
In the nineteen fifties.
So like
Fifteen plus years before this.
Including Adi Dossler.
directly to Adi Dosler.
Trying to purchase shoes for his runners directly to avoid retail markup. He made it clear he had ideas on how to make running shoes better. Remember, these are in letters to Adi Dossler.
Years before.
But the responses he received
referred him to footwear distributors in the United States for Adidas.
and ignored his design offer.
So Bowerman is sitting there and he is
primed. He's like, Oh, you're gonna import foreign shoes and give me a deal. I'm in.
Just like Onitsuka was
primed to receive young Phil Knight.
So it was Bauer then Ben then.
This is so awesome.
I was gonna save this for a reveal later in the episode.
Scott Reams is
Legendary. He was, as you say, Nike's corporate historian. He worked super closely with Phil on writing Shoe Dog. Oh, did you read his post too? I sent you his LinkedIn. Did you look through them all too?
Not only I sent him a message on LinkedIn.
I talked to him. I spent
Hours talking to Scott. Really? He spent a few days
Helping me.
Point.
our version, acquired's version of the Nike story together. We have a huge, huge thank you to him, but
I was gonna surprise you with this. This is super cool.
That is so awesome.
Oh, that's so cool. I guess I should tell you. So listeners, we talked to like
nearly a dozen people to prepare for this episode.
I also want to thank Eric Sprunk, who is a twenty seven year Nike veteran.
And David, you know that I chatted with him, but
He was COO until a couple of years ago, and very cool to get his perspective and Scott's perspective. I'm curious if you have any other nuggets that come up too. Oh, I've got one in particular that I want to bring Scott's perspective in, but it's a little farther in the story. So okay, we've got
Fifty one night, forty nine Bowerman in.
Blue ribbon sports.
They each put in five hundred dollars to finance the first
Big shipment of inventory of tigers from Onitsuka.
And

Do they meaning Phil.
Does what he intended to do. He drives around to track meets around the Pacific Northwest and um
Sells them out over the back of his car.
And
Even with that.
funny sales strategy. And in Shoe Dog, Phil
Talks about this.
Well
He was in Hawaii with his buddy.
The way they made money was they sold encyclopedias door to door, and then Phil gets a job as a um stockbroker trying to sell stocks.
He doesn't make any sale like he's the most introverted person in the world. He can't be a salesman.
But for some reason when he's selling shoes, when he's doing
His crazy idea.
He can literally just go to track meets.
And convince kids and their parents to buy these shoes out of the back of his car. When you believe in something, sales are just natural.
It's so true.
So they sell out.
Basically immediately.
And then they plow all the profit that they're making back into the next orders of inventory from only Tsuka.
They do.
eight thousand dollars in revenue in nineteen sixty four.
That doubles in nineteen sixty five, they do sixteen thousand dollars in revenue.
But Ben, as I think you're about to say.
There's kind of a problem here.
Well, there's a few problems. One of which is they're not making that much money. It's not
A great
gross margin business. You have to pay to import these shoes from Japan. How much can you really mark them up to sell them? And if you're making I don't know
two, three bucks profit, something like that, on each pair of shoes.
You have to sell a lot of shoes if you're only
way to get money to buy more inventory is
the profits from the shoes that you sold last order.
I don't even know how you double year over year because
Where is the money coming from to get the inventory? This is not a solvable
Problem. It's a circular issue. There's no way to do it.
So
Phil is selling.
The Tigers for six dollars and ninety five cents a pair.
It costs him and Bowerman about three dollars and fifty cents.
To get each pair of shoes.
So that leaves what, about three dollars and fifty cents.
Pretty soon Phil hires his first full time employee.
The legendary Jeff Johnson, who has a huge role in
Nike, as we shall see.
Once Jeff and other sales reps
Come on board.
He's giving them about a dollar seventy five in commissions.
So half the gross margin ends up going into sales and marketing expenses. Exactly. So that leaves what, a buck seventy five, maybe two dollars, like you said, in profit per pair.
How are you gonna order more inventory at three dollars and fifty cents a pair when you're making
Two dollars in profit per pair.
The math doesn't pencil.
Wow.
Quick aside on Jeff Johnson.
Like we said, he is
Absolutely legendary.
He
also sells out of the back of his car. He's based in California. He met
Knight at Stanford. Jeff was a Stanford undergrad who ran track and met Knight while he was at GSP.
Johnson.
Stells out of the back of his car.
He evangelizes the brand, he designs shoes, he eventually opens Nike's first retail store in LA. He sets up manufacturing, he moves back and forth across the country.
He's basically like
Everything you would ever want.
in a first employee at a company.
To find a Jeff Johnson.
Is
the most incredible thing that could ever happen to a startup company. And he has an irrational passion for running, which basically no one else did at the time. Here's a great quote from Shoe Dog. So it's in Phil Knight's voice.
In nineteen sixty five, running wasn't even a sport.
It wasn't popular.
It wasn't unpopular, it just was.
To go out for a three mile run was something weirdos did.
presumably to burn off their manic energy.
Running for pleasure, running for exercise, running for endorphins, running to live better and longer. These were things that were unheard of.
People went out of their way to mock runners. Drivers would slow down and honk their horns. Get a horse, they'd yell, throwing a beer or soda at the runner's head, and he goes on to say that Johnson had
Many sodas thrown at his head while he was out running. This is one of the moments that just
floored me rereading Shoe Dog and internalizing that.
Yeah, running.
I go for a run.
Maybe three times a week these days. Right. It's just normalized into life. Every time I walk out in the street.
basically anywhere in the world, unless I'm like truly in the middle of nowhere. You see people
Running.
And the idea that motorists would throw beer and soda cans at runners.
It's crazy.
Yeah.
Totally wild.
So back to this financing.
Issue.
As you
can imagine the only way
to grow as a company with the set of operating constraints that Blue Ribbet Sports has
Is through.
Financing.
And the only way to get
financing in Portland, Oregon in those days.
was to go to
Oregon regional banks.
I think actually there were
laws in the US that
corporate banking could not happen across state lines. Correct. So there are only like two or three banks.
Yeah.
Night even has the option of going to.
Yep.
And by the way, when you're going to get money from the bank, it's not equity capital.
They're not saying like a venture capitalist would say.
Oh, I'll buy a piece of your business and value it at this and give you the money at that.
It's just
Pure
Lone.
that you owe back to them at some point in time with interest.
Yeah.
And
the bankers who were making these loans in Portland then was a very, very small town in a very, very small state.
On the west coast of the US.
They're not gonna be very risk seeking.
They're gonna be quite risk averse.
So there's another good passage that I grabbed from Shoe Dog that explains this.
Phil night.
I was projecting sixteen thousand dollars in my second year, and according to my banker, this was a very troubling trend.
A one hundred percent increase in sales is troubling, I asked.
Your rate of growth is too fast for your equity, he said.
Growth off your balance sheet is dangerous.
And this is where Phil Knight's complete opposite approach comes in. He goes, Life is growth.
Business is growth. You grow or you die.
And the banker says that's not how we see it.
And
There's a couple important points to make in here, one of which is this equity they're referring to.
We refer to equity these days, especially in startup land, as percentage points in a startup.
And
What he's talking about here is the technical definition of equity.
The book value of equity. Right. Your total assets minus your total liabilities is your equity. And in many cases, you can sort of squint at this if you don't have a lot of liabilities or a lot of debt on your books and say, Okay, so it's basically like the cash in the bank. It's the assets you have on hand is your equity.
So what this banker is basically saying to Phil Knight is
I will only loan you
Up to the amount of money that I already know you have.
Yep.
Now
That's not terribly helpful. It's basically a cash advance. It's like well
The money that I have is sort of tied up in other stuff like inventory and you're just loaning me enough money for me to make my next order, but
There's not actually any real new capital. It's not like there's a post money valuation. You're basically just saying, You can borrow these dollars and then you can give them back to me and I'm gonna cap your dollar limit super low.
Yeah. It's basically factoring. Right. Is what it's known as today. Right.
So
Yeah, as you can imagine, there are quite a lot of struggles with
the various banks in Oregon and it's all
Very well. Chronicled in.
Shoe dog.
So since
Growth is literally rate limited by the banks.
Knight decides that he can't
Justify taking a salary.
He goes back to being an accountant by day. He joins Price Waterhouse in the Portland office.
He does that for a couple of years. I mean years, years. Takes a long time to grow this thing.
Eventually Blue Ribb does become big enough and he needs to devote enough time to it that he can't be a full time accountant.
So instead he gets a job teaching accounting at
Portland State.
Where he meets
Two women.
Both of which will change his life.
The first one is a student.
Man, things were different in the sixties. A student in um
His first class that he teaches named Penny Parks.
Who uh he sees has uh create
Potential as an accountant.
So he hires her as a bookkeeper part time while she's a student, I believe.
For blue ribbon sports
Very shortly thereafter she becomes Penny.
Night.
His wife.
No I
Think of
Gash like.
Sixty years, maybe something like that.
The other woman he meets is an art student.
Not an accountant.
An art student named Carolyn Davidson.
And Phil overhears her talking with some friends in the hallway one day, talking about art classes.
And he stops her and he says
Hey.
I've got a company. We need some part time art and design work for like
Brochures and
Sponsorship collateral.'Cause everyone's telling him that he needs to do advertising. Phil Knight to this point, which is hilarious given Nike today, doesn't believe in advertising. And so he's like
Fine, I'll give in to some other people who are advising me that I should make some brochures or something. And the way I'm gonna do it is I'm gonna hire a part time student.
from Portland State to do my advertising collateral for two dollars an hour. Yes. She says sure.
Put a pin in that. We are gonna come back.
to Carolyn Davidson and the um Nike art department.
In a minute here. Yes.
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Okay, David. So
Should we share the Carolyn Davidson thing now, or don't we need to evolve Nike a little bit more before it really comes into play?
Yeah, put a pin in it. We'll come back to it.
So
In the meantime.
By hook or by crook and
You know, maybe.
Only Tuca as we will see would argue by crook.
Blue ribbon sports's sales do keep growing. They do
Mm.
Getting
Just enough and just enough in time financing to finance there.
inventory and orders from
Tiger and only took a
In
Nineteen sixty six they do forty four thousand dollars in revenue. In nineteen sixty seven they do
Eighty four thousand dollars in revenue, you're noticing a doubling theme here.
Turns out.
Even from a very low base, if you double every year for like twenty years.
You can still become a big company.
So then.
In nineteen sixty seven.
Bowerman.
You know, Bowerman's
been involved, his name, his association with the company has been huge throughout all this.
But
Like you were saying a minute ago, Ben.
His real motivation is he wants
R and D access. He wants to be able
To make.
Shoes. And in nineteen sixty seven,
ahead of the nineteen sixty eight Mexico City Olympics.
He comes up with a new idea for an entirely
New
type of shoe, one that he probably can't really manufacture on his own.
But now he has this relationship with Tiger with only Tukem.
And his idea is that
Rather than leather.
On the
Upper parts.
Of

What if we instead use a breathable material like nylon?
So that
My runner's feet aren't sweating throughout the whole race.
On the one hand, like yes, nobody likes sweaty feet.
On the other hand, if your feet swe in leather shoes over the course of several miles
Well, they're gonna get heavier and weighed down.
And so maybe this might help the shoes stay lighter. And Bowerman is obsessed with lightweight.
In his shoes.
So
Onitsuka is very receptive to this, they think.
Great.
We love this. We'll make the shoe. We can do that. We can source the nylon. We'll make the shoe.
So Bowerman and Phil get together, they're like, This is amazing. We're gonna have our
own model, you know, that we've designed, that Bowerman's designed.
Which you should already start to get a little bit nervous here'cause it's like, Well, okay, who Who owns this shoe?
Exactly. Well that would be for the courts to decide.
the blue ribbon shoes design company owns the design and they hired a contract manufacturer, or is it more like, Oh, we just gave you a little suggestion idea and like we BRS don't own anything?
Yeah.
The relationship
Complicates a little bit here. It's no longer just
Hey we're the American distributor of tigers.
So Bauerman and Phil
want to call the shoot. They actually want to borrow from the Adidas playbook.
And call the shoe the Aztec ahead of the Mexico City.
Olympics.
Adidas has been doing this for years, they always come out with new shoe models ahead of
Whatever the Olympics is in the world every four years.
Adidas, of course, has already beaten them to the punch. They have trademarked a shoe that they're coming out with called the Azteca Gold.
And I don't know if it's Blue Ribb or Anizuka decides that the Aztec is too close to that.
So
Legend has it.
You know, knowing these men. I assume this is quite true.
Bowerman.
is casting about for other ideas for names of the shoe and he says tonight
What was the name of that Spanish guy that
Kick the you know what out of the Aztecs.
And Knight is like, Oh, that's Cortez. And uh thus
D.
Blue ribbon slash tiger.
Cortez.
is born.
Naming aside,
The
Nylon uppers are a huge innovation and this becomes a
Big hit.
I bet
Someone out there is wearing Nike Cortezes right now.
It's become like a lifestyle shoe and less of a running shoe,'cause the definition of a running shoe has changed dramatically.
And so
The fascinating thing is if you look down at your Nike Cortez or you Google a picture of it
It's basically exactly the same as the thing that they came out with, but when they came out, it had the Onitsuka now ASICs.
design on it, not the swoosh.
Yeah, spoiler alert, Tiger eventually became
A six.
Yes.
So
Also in nineteen sixty seven, Bauerman has another
Just
Monumental contribution.
His contributions, though sporadic when they happen, are
Enormous. Yeah.
So he writes a book.
I feel like some marketing agency these days would advise a startup on Oh yeah, this is how you build a market, you know.
Write a book, start an evangelizer movement.
Bauerman just does this because it's what he wants to do.
He had gone on a trip to visit another
international track coach in New Zealand.
A few years earlier.
And he
Discovers.
The concept of jogging.
I don't even know if the word jogging really existed in America.
at this point in time. The idea of running not to win.
But
to run for joy or for physical fitness.
was a entirely foreign concept.
All right, I'm gonna read a paragraph from Shoe Dog here.
This is Phil Knight.
He told me on top of everything else he was also writing a book.
A book, I said.
About jogging, he said gruffly.
Bowerman was forever
griping that people make the mistake of thinking only elite Olympians are athletes.
But everyone's an athlete, he said.
If you have a body, then you're an athlete.
Now he was determined to get this point across to a larger audience.
the reading public.
Sound interesting, I said.
But I thought my old coach had popped out a screw.
Who the heck would want to read a book about jogging?
This is Phil Knight, the founder of Nike!
Right. I mean even Phil Knight.
Is like jogging. That's crazy.
So Bowerman writes this book. It's called Jogging, a Physical Fitness Program for All Ages.
He writes the book, it comes out in nineteen sixty seven.
Life magazine, and Life magazine was
Huge in America at the time. They come out to Oregon and they write
A profile of him and his
jogging clubs that he started for the citizens of Eugene of all ages to get into jogging and physical fitness.
And
By God, I mean as much as anything.
This

Is what starts

Fitness movement.
In America.
Yep.
It's the craziest thing.
I keep going back and forth when looking at Nike and say
Did they
benefit from this enormous wave that they were writing.
Or did they create a wave?
And I think it was actually both.
Yes.
So Knight has this great quote about this later in life. He's asked literally this question, if Nike started the fitness revolution, and his answer is so typically Phil Knight. He says
We were at least right there.
And we sure rode it for one hell of a ride.
I love it.
Here's a crazy bit of trivia, David.
So
For me, when I reflect back on like the birth of the jogging movement, because I'm a millennial and I wasn't there, I think of Forest Gump.
You know, he's running across America and all these people running with him and
that time and that aesthetic to me is like, Oh, that's when jogging sort of really took off.
He was wearing Nike Cortezes.
Yeah.
Perfect.
So great.
And the fact that Blue Ribbon really did have
starting to become pretty real distribution at this point.
to the West Coast
They actually had built a brand and a trustworthiness with customers and coaches and that sort of thing for themselves.
that not only could Bowerman write the book and evangelize and have the idea
But they could actually get shoes onto the feet of people'cause out of this budding company, they actually had a little bit of distribution. And more than just athletes.
Yeah.
Or more importantly, changing the definition of athlete.
Yes. I like that. Changing the definition.
More than just people who define themselves by their occupation, whether amateur or professional as athletes. Right.
So
By nineteen seventy
Just a short.
While after this,
Blue ribbon is now doing over half a million dollars in annual sales. So they're like a real
Company, yeah.
They're selling out of the Cortezes literally as fast as they can get them off the boats from Japan.
Onitsuka renews
Blue ribbons distribution agreement in nineteen seventy for three more years.
to run through nineteen seventy three.
When this happens.
Fill then.
goes to the bankers in Oregon and
Ask for
Hey.
You know. Great.
The Cortez is selling out great. Fitness is this new thing. We're a half a million dollar revenue company. We've got a three year
Ironclad deal with our manufacturer. Surely you could assign some value to that contract, if not to our
brand and our team and all these other intangibles.
You won't just treat us as if we're
book value now, like we'll have some real enterprise value because you can invest in our
Enterprise here, our enduring institution.
So he asks for a line of credit.
Of one point two
million.
Dollars.
To finance.
inventory. He never asked for a over million dollar
Line of credit before. He trips the alarms. He trips the alarm system. One point two million dollars.
A kid off the street can literally walk down sand hill and raise one point two million dollars today. Inflation adjusted, it's probably like eight million dollars or something.
Sure, whatever. But a kid off the street can walk into Stanford and raise eight million dollars today. Exactly. Just say it's an AI company. So
The bankers.
Not literally, although literally they would do this very shortly thereafter. They throw him out.
They're like No.
We're done here.
You can't be doing this. We're done.
I'm just fascinated by this concept of
It's almost as if the idea of enterprise value didn't exist.
that literally a company could only possibly be thought of
as its assets minus its liabilities.
So what that meant was if you want to grow your company and you want to grow it as fast as possible.
then it means you can only take out as much debt as you have assets in the company.
But you probably shouldn't.
Because
then if anything goes wrong, your company is like immediately wiped out because
Yeah.
debt to assets ratio is like literally a hundred.
And what Phil Knight did was
all of the time kept it at a one hundred percent ratio or close to it, like a ninety percent ratio. He'd look and see how many assets they had and say,
Great, we should have exactly that much debt too, so I can grow as fast as possible. And so it kinda becomes this game of musical chairs.
Where when you're levered that hard
You need to be growing super fast.
Because you need to
get that inventory off the boat, sell it, so you can as fast as possible go and pay off the bank.
So that A, the interest doesn't pile up and you don't trip a bunch of covenants, but B, so that then you can go ask them for another loan to do the same thing again.
And you literally
Need growth.
as the only way to keep the lights on. It's not just growth as a virtu, it's growth as a necessity.
And this in addition to the
competitive thing I mentioned earlier, where Nike is a competitive company.
Nike is a growth company.
And if you go to their investor relations page to this day,
Across the top.
In big bold letters, it says.
Nike Inc. is a growth company.
They were born out of this is the only possible way to continue our existence.
Is grow so we can pay off the bankers.
Two three.
One.
This is so sad.
That's the way it was. And
Thank God the business world has evolved.
Since then. I mean you can decry the ridiculousness of
Startups and V C and tech and all that now, but
This is a way better alternative than
The way things used to be.
Two though.
Ironically
I actually as crazy as this sounds.
Think it was a critical element of
Nike.
succeeding and becoming Nike.
Because if it were too easy
There would have been a flood of other competitors.
Or Anitsuka and others would have just done this themselves. Right. It's like many of the stories we tell that it's path dependent.
The only way to have built what they built was to have endured what they endured in a system that was stacked against them.
Yes. And there's huge survivorship bias here. Yep.
But
The journey that they had to go through to survive.
Is incredible.
Plenty of other companies maxed out their available credit and debt all the time and had a one hundred percent
Liabilities to assets ratio and went out of business. And went under, yes.
Yeah, Nike almost does.
So
When this happens when he gets thrown out of the banks.
Phil needs to do something to raise money. So he decides
The only thing he can think of is to do a small
public offering, like a local IPO.
Remember how Ben and Jerry's was the first direct listing?
Yeah, I think it's something like that where they sold shares Ben and Jerry sold shares in Vermont to like their neighbors. Yes.
This is what Phil wants to do.
And this is how bad it is. So A, he changes the name of the company.
This is so good. Nike isn't anywhere in the picture yet.
He changes the name of the company to sports dash tech.
T E K.
With the idea that oh, this'll make us sound like a technology company and then people'll be interested in investing. Cause he hears that
People are getting financing for their business in the form of equity capital, where they're willing to assign a valuation to the company and regardless of what your current sales and assets look like, that sort of
takes your potential future growth into account and gives you
capital in exchange for that. What they want is a percent of the upside, you know, equity investing as we know it.
Today in startups.
And
All of that is happening.
in Northern California into tech companies, as we chronicled on the Sequoia episode with Don Valentine. It's that era.
Exactly. We are right in that era now. Don is about to start
Sequoia
A lot of this is happening around Stanford. Of course, Phil up in Oregon is hearing about this.
But once anybody, you know, any proto venture capitalist digs into sports tech, they're gonna be like No
So what I've never been able to figure out is did he change it to sports tech inc and then change it back to blue ribbon sports, or did they sort of like
I'm trying to figure out if they ever literally change the name on documents. Oh, that's a great question for Scott Reams. We'll have to ask everyone. Yeah, yeah. So
This is how bad it is, though. The offering
Fail.
Nobody's interested. None of these proto VCs
None of the local business people in Portland, they're all like, Oh, no, no.
This is a terrible company. Well, and Phil Knight undersell it too.
Before he learns some of his later lessons.
It's his super humble
You know, I'm not a very good runner, I'm only a four thirteen miler type attitude. Right. Oh sex.
Yeah, and so that's not gonna sell shares in your company.
Yep.
So
He ultimately has to raise some money from
the families of some of the employees of Blue Ribbon, most famously Bob Widell, who would
Become
Nike's first president other than Phil, when Phil
Takes a sabbatical later in the eighties.
Bob is this amazing story. He was also a Bowerman runner, had a terrible accident
in college and was confined to a wheelchair for the rest of his life.
becomes one of Nike's and Blue Ribbon's first employees.
And then becomes a huge leader.
builds so many things at the company and becomes the first.
President other than Phil.
But he doesn't come from wealth and his family
loans I think three or five thousand dollars.
to Blue Ribbon. Like
A huge amount of money for them.
It's like
a huge amount of the family's net worth.
Phil would convert that into equity before the actual IPO.
And they would become millionaires and change their lives. It's amazing. Yeah. The way that he was financing this was basically through convertible debt. And so all the pre IPO little friends and family financings that he's doing here are convertible notes.
So this brings us
The Anis.
Either Mirabellus or
Hariba.
Depending on how you wanna think about it. I just butchered both Latin and French there, but
Clearly this financing path isn't gonna work for the next stage of growth.
Eventually, night I think he reads in either a magazine or a newspaper article.
About
Japanese trading companies.
How he had never heard of Japanese trading companies before then, given the amount of business he was doing in Japan.
is crazy, although it was in Onitsuka's strong interest.
Four.
Phil and Blue Ribbon not to find out about Japanese trading companies.
As we shall see.
And what they are is this very strange type of company that we don't
really have, at least in the tech ecosystem today? No. Does not exist in America or in most countries.
And it's sort of a hybrid between
A lender?
And
A
supply chain partner.
Where it's a company that
has some primary business that they're doing.
private equity firm slash holding company.
Yes.
It's a company that in this particular instance has a business that they're in.
And generates a bunch of cash. So what do you do with the company's treasury? Well, you could do boring stuff with it, or you could make strategic investments with it.
Or you could operate a financing business.
where you leverage all of the unique relationships you have from the parent company
To
due diligence to advantage your investments.
to put your foot on the scale and you're using the fact that you have a large treasury to
open a competitively advantaged bank.
Especially
in sourcing international goods.
Yes, to do asset.
Based on the
Financing.
Exactly.
What blue ribbon?
Needs.
So
The company that he ends up meeting at the local branch office of it in Portland. I think they might have been the only
Japanese trading company with a branch office in Portland.
is Nisho EY.
Which is one of the smaller ones. Today the company is called SoJets.
Today it is still a forty billion dollar revenue company.
Back then in nineteen seventy one, it was a one hundred billion dollar
annual revenue company.
And it was I think the sixth largest.
Japanese trading company.
many listeners probably will have heard of are companies like Mitsubishi
Or Mitsui or Sumitomo.
These are
enormous companies and especially in the seventies as Japan was really rising. We told the story on the Sony episode.
Nisho I was
A godsend.
For blue ribbon.
And it could have gone either way.
That was the thing with these Japanese trading companies is if you weren't super clear on exactly what you wanted up front.
it could totally go the way of private equity.
Where
Oh, you tripped one covenant, or up you
This that the other thing and suddenly
they're able to own a controlling interest of your company or they're able to take over management and install their own people.
It was a PE style financing where oftentimes they would sort of take over and absorb the businesses that they were financing. So Phil Knight was going into this.
Saying okay.
that really, really, really can't happen to Blue Ribbon. What can I possibly negotiate with these guys to
Make it so that
their interests are aligned with mine.
But not in a way that could compromise my control.
Right,'cause he gets a little spooked.
According to Shoe Dog
Phil.
Walks into the office of Nisho Iwai in Portland. This is like
the Portland, Oregon branch office of Nisho EY.
Meets with
One of the officers there who would go on to become
An incredible personal relationship for
Nike and for Phil.
A guy named Tom Sumaragi.
And he offers on the spot.
to finance
All of Nike's inventory on the spot in a meeting in the branch office in Portland. So Phil's like, Whoa
How do I deal with these guys?
Right.
They're a little too eager. This can't be that good of a deal. What's going on here?
It turns out ultimately it's a great deal.
And why is it a great deal? Well, the first thing you have to know is Nisho knows Japanese manufacturers. And so they start asking Phil Knight questions like,
Well, who do you work with in Japan? And like would you ever make your own shoes? And are you looking for relationships with more factories? And so they start to get the sense that like maybe eventually
We could
put our foot on the scale in certain ways and help this company win. And so if we're doing business with them,
as their financing partner, this could be really good for us too.
So Phil.
In retrospect makes the mistake.
Of calling up on Itsuka.
And saying hey.
You know, I'm in this lurch with financing.
I just met Nisho EY. They offered to finance all my orders with you guys.
Would you be okay if I do it?
And they immediately say
Absolutely not. And the reason they say absolutely not is Ben, just like you're saying, they know what's gonna happen here.
is Nisho is gonna say to Phil
Hey.
You know, this is nice that you're
buying onitsuka's inventory. Onizuk, I think is like a
twenty, thirty, maybe forty million dollar revenue company in Kobe at this point in time. Right.
This could creep into us.
Nisho is a hundred billion dollar company, right? Nisha's gonna say, Hey, we'll introduce you to manufacturers to factories here in Japan.
Build your own shoes. Make your own brand.
Screw these tiger guys.
And that is exactly what happens.
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Okay, so Blue Ribbon's in this interesting situation where
They've been kicked out of their bank.
from a lending perspective. They can still keep their money there. They still have the operating accounts, but they can't get any more
debt there to finance their inventory, which they need to buy. You know, they need this cash to be able to buy their next round to grow the company.
Nisho enters the picture. How does it go from here?
So this basically sets off a whole chain of events that
Would later get prosecuted in court.
So
On its okay.
As we said, they are super nervous. They know what this niche of relationship is gonna mean for blue ribbon and it's not good for them.
So they start
Looking around.
Uh
working with other potential distributors in the US. They assume
That blue ribbon.
one way or another is gonna end their relationship with them here.
They also as kind of a last ditch effort.
Make an offer to buy Phil out.
to buy blue ribbon. And Phil
Thinks he's being smart here.
He stalls. He doesn't say yes, he doesn't say no. He's like oh let me talk to Bowerman.
Yes.
And one thing I was trying to figure out, so in
Shoe dog.
It doesn't give a value.
Phil just says that his contact at Onituka
Offers.
T.
buy fifty one percent of blu ribbon.
and keep him as a minority partner.
And
From some other sources.
Phil Knight.
says in interviews is that they offered to buy it for book value.
Yes, that's what I read too.
Which I imagine is like zero.
So
It's a pretty terrible deal. Cause what is the book value
of a company that one hundred percent of the time has its capital tied up in inventory. Right. It's zero.
So it's zero or most generously
It's the value of the inventory.
So in nineteen seventy one.
I believe they did one point three million
In
revenue.
Which best estimates
would be that their
cost was something like six, seven hundred thousand.
Right. But they probably turned that inventory several times. So at any given point in time the inventory is less than that.
Right.
So it's a terrible deal, it's a takeover, and so Phil Knight's basically just like I don't wanna piss them off by declining, so I'll just say nothing.
He knows at this point that
He's done with Onitsuka.
They're gonna go
Whitney show and they're gonna set up their own
factory relationships and make their own shoes.
Bye.
He can't just shut off.
Tiger. It's gonna take time to spin this stuff up. He needs the tiger shoes in the interim. So he stalls.
And by the way, this relationship so far has been unbelievably fruitful. They're at the point now where because of Blue Ribbon
Seventy percent of runners in the US, mind you, runners is not a large category yet, but runners in the US.
have only Tsika shoes.
Yeah.
So this is pretty important.
Yeah.
So there's a whole bunch of stuff. Phil hires a spy. There's a thing where the Onitsuka management team comes over.
to visit Blue Ribb headquarters. Phil steals some documents out of the guy's briefcase. Literally the guy gets up to go to the bathroom or something, and Phil
Grabs it.
out of a folder and photocopies it.
Yeah, it's pretty bad. Even worse.
Phil is a combination, as we keep saying, of Genghis Khan and like extremely introverted and really naive. He writes a memo to the whole company saying that he's hired a spy at Onitsuka. This is not the kind of stuff that you want coming up in legal discovery later. A whole bunch of this stuff happens. They end up in this literal Mexican standoff here where like
There's no way out without firing shots.
And somebody has to fire
A shot first.
And it's Phil. Phil shoots first. He's like Han, he shoots first.
And I say Mexican standoff too,'cause A, that is the situation they're in.
B.
The first shot gets fired.
In
Mexico.
So while Phil is waiting on spinning up the Japanese factory relationships with Nisho Iwai.
He remembers from back
in the Mexico City Olympics in nineteen sixty eight, I think.
That there was a factory, I believe, in Guadalajara.
That
Adidas had used
To make.
Soccercleet.
For the Olympics.
And he says, You know, those soccer cleats that Adidas made were pretty good.
Let me go down to that factory.
And see if I can get some of those cleats.
And we'll sell them.
here in America as blue ribbon American football ecletes.
Now technically
He thinks this won't violate his exclusivity agreement.
with Ani Tsuka because Ani Tsuka doesn't make
Football cleats.
No that's
Debatable. Yeah.
there's a paragraph in the written agreement that gives Phil Knight three years or whatever it is of exclusive distribution.
In exchange.
He is forbidden from
importing other brand of track and field shoes.
And so theoretically he thinks as long as they're not track shoes is fine.
So he goes down to the factory in Mexico, he's like, Can I get the shoes? And they're like, Yeah, sure.
What do you want to put on them? When we made them for Adidas, you know, we had the three stripes on them, the Adidas stripes.
What design do you want on your version of these shoes? And oh yeah, by the way, what do you want to call them?
And Phil's like, um Let me get back to you on both of those.
So
He goes home to Portland.
And calls up who else?
Carolyn Davidson. Yep the part time art department at Blue Ribbon Sports for two dollars an hour.
And he asks her.
To design something like Adidas's stripes.
That can go on the sides of these soccer slash football.
Cleats.
And
Huge thank you here to Scott Reims for helping us sort out exactly what the timeline is and what the details are. Cause it's not well understood how this all went down.
And
you can actually hear quotes from Phil Knight in interviews and a little bit in Shoe Dog where it disputes
other records of how this all went down. And people care a lot about this because obviously what we're getting here is the origin of the swoosh and of Nike. And so how does this end up happening?
The most interesting thing is
from Scott, he put this on LinkedIn, he talked to Carolyn herself about this. Her recollection is that
Originally in the request to create what became the swoosh.
They wanted
structural support.
as an element in the design.
And she came back with some designs. They didn't like any of them.
And so
In the second revision
they drop the requirement that it be supportive in any way and that it's
just about having the brand sewn onto the outside.
Also, super importantly
This is not the name.
That we're talking about here. So point one.
We're just talking about a logo to go on the shoes.
So all the thought of like oh the swoosh is like the wing of the goddess of victory.
No, not the case. This is before the name.
Right. So it's literally not inspired by the Greek goddess of victory. Like I was just in France. I just stood in front of the Winged Victory statue. It's this beautiful, incredible thing.
in Paris, there's this myth running around forever and ever that the swoosh is inspired by one of those wings. The name Nike came after the design of the swoosh, which by the way
Also was not called a swoosh yet.
Okay, so as you say she goes through two rounds of sketches, when the second round comes back
They're out of time. The factory is calling and they're like hey
Shoes are just about ready. We just gotta put the sides on'em.
What do you want?
So finally Phil and Jeff Johnson and Bob Widell, they're sitting around and a couple other folks.
And they're like, Well, we gotta pick one.
And they're like, Well, maybe
I don't know, this one that kinda looks like a check mark.
maybe is the best of the bunch. And Phil very famously says the line
I don't love it.
But maybe it'll grow on me.
And that
Big Hobbs.
The squish.
Now, ultimately they do give Carolyn stock in the company before the IPO, so she makes more than
Two dollars an hour, but for this project, she was paid thirty five dollars.
Which also she said she spent way more than seventeen and a half hours, but it was just kind of coming up with some price to charge.
Fun thing about I did the math.
on the IPO shares.
When Nike went public, they did give her five hundred shares.
The stock price today is around a hundred and ten and it has split
Seven times.
So
Two to the seventh times a hundred and ten dollars a share times her five hundred shares.
is worth seven million dollars today.
Nice.
heard Phil say somewhere. I think it might have been in the GSP graduation speech.
I believe he said that she held the shares.
Yes, as late as twenty sixteen, twenty seventeen.
He is on the record saying she has never sold a share.
Yeah.
Wow.
Incredible. Pretty cool.
So they send the logo off.
So a short while later, factory in Mexico calls them up and it's like All right.
Shoes are done.
We're ready to box them and ship them.
What should the model name of these shoes be?
Like the Cortez or
The Aztec of gold or you know, whatever they had called them.
What's the model name of the shoes?
And so
Back it.
Thank you headquarters, they're all sitting around brainstorming.
And this is where
All the famous ideas that get thrown out. Phil Knight loves Dimension Six.
the other people are throwing out the Bengal, the Falcon, you know, all the naming ideas.
The idea is they want to name the model of the shoes, like these cleats. What are the cleats called?
They're not coming up with a name for
the company. And it's the idea it's gonna be the blue ribbon dimension sixes.
Yes.
So legend has it.
And as best as we can tell, this is actually true.
In typical Phil Knight style.
He can't make a decision. They're waiting towards the end. It's the same story as happened with the logo.
All over again.
They're batting it around and then the night before they need to finally drop dead, give the name of the shoes to the factory.
Jeff Johnson.
comes in and is like, I had a dream.
Last night.
Johnson.
And in the dream.
The name came to me.
Nike.
And everybody's like
What are you talking about?
What are you talking about? And he's like
The winged
Greek.
Goddess of Victory.
These are gonna be the Nike football cleats.
And everybody's like
All right. Well, we like that better than the other stuff. Ship it.
But
It wasn't
that big a deal. Like it was a big deal, but it wasn't that big a deal.
This wasn't.
Intended to be Nike.
This was intended to be the name of the model of the football clip.
that they weren't even sure was gonna work.
Right. And it didn't work.
Turns out this factory not very high quality.
Well, no, I don't think that was the problem. I think the factory was fine. I mean they made shoes for Adidas for the Olympics. The problem was it was in Guadalajara.
It doesn't get very cold in Guadalajara.
So
The shoes were great.
But
In freezing temperatures they would crack. They'd never been tested in the cold.
And
You know, as
Americans at least know many.
American football games are played in cold temperatures.
So they order three thousand pairs they sold them. Apparently the Notre Dame football team wore them that year, or at least the quarterback did.
Then they would crack in cold weather. So it was a very inauspicio start to uh
Nike and the swoosh here.
Yeah, it's kind of amazing that they
even continued after that, or that they didn't just give up and say, Okay, shoe distribution sounds a lot better than making shoes.
Yes. But again, whether it violated the letter of the agreement with Onitsuka or not, ultimately the courts would decide it didn't.
But
It's game over here. Like the relationship is done. They have burned the bridge.
It's over.
Yeah, and this to me
is a little bit of a thing in Nike's DNA.
Where
They are competitive.
all the way up to the line and then one toe over.
Yeah.
What's the Uber corporate value toe stepping from the Travis era? It's very much that. It's we are fiercely competitive. And at this point in time it was to stay alive. So I get it.
But for their whole existence, it's like, is there anything we can do that other people aren't doing'cause they kinda think you can't, but maybe we'll do it anyway and deal with the repercussions.
That kind of happens with Nike over and over and over again.
And for most of these
situations this one very much included.
Yeah, like this ends up in lawsuits and
Yeah, it's probably a toe over the line.
On the other hand, it's also a little bit like Uber in the early days with toe stepping, like
The alternative was the taxi industry.
It's
Good for the world that they stepped a toe over the line. Like they didn't do this, there's no Nike.
Yeah.
So
With that.
Only take a
pulls out of the relationship. They don't send any more tigers to Blue Ribbon.
Phil signs a deal.
Finally with Nisho EY.
And the core part of the deal is
Nisho will A
Finance.
All of
Blue ribbons.
Financ, henceforth.
Pretty much at a scale that
goes all the way up to the moon. I mean they're a hundred billion dollar revenue company.
Certainly way more than any of the Oregon banks could do.
And they'll do that at market interest rates.
Two.
Nisho will help.
Blue ribbon.
set up direct manufacturing relationships in Japan, which they do.
And then three, in exchange for all that, Nisho gets a four percent royalty
on every shoe that blue ribbon sells.
Which ultimately ends up being.
A great relationship. And that's on top of the financing. So they already owe interest on borrowing the money, but now they additionally owe a four percent royalty.
Yes, this is sort of like the
Trading company playbook.
And is that just for the inventory they finance or all sales? I believe it's for all sales.
Whoa does that still exist?
I don't know. I doubt if it does in the same way.
I know that the relationship with Disho EY continued for like
thirty, forty years, like a very long time.
If it still does exist today, I I'm sure it is not.
The same terms.
But this goes on for a very long period of time.
Wow.
I mean
At this point in history to have the house in order with a strong financtor, there's crazy stuff we didn't even cover. Like he got kicked out of
multiple banks, the FBI got involved.
They were playing it a little bit too fast and loose, where they were using every available penny.
to buy inventory and so there would be checks that bounced for payroll and things like that.
When these things
topple, they topple all at once. And so they had like
A Day where they got called into the bank and then the bank called the FBI and then they got investigated for fraud.
It was
An insane.
Few years there.
Yeah. Shoe dog has a lot of great like
Phil Knight's personal experience going through this, which is
I mean it's worth the read no matter what, but read it for that.
But
Safe to say this moment here in what is it, nineteen seventy one? Seventy one, seventy two.
They can kind of
take a deep breath and say, Well, the business ahead is still really hard because now Onitsuka is going to be working against us.
We have to figure out how to design and make shoes ourselves.
But at least we have a real financing partner that has struck a deal to work with us.
Yeah.
So once this is all in place.
Phil goes over to Japan.
And works with Nisho, goes visits lots of factories.
ends up meeting the Nepon rubber.
Factory.
He's touring with lots of folks and it's sort of a test of these
factories of whether they can be a good partner is he pulls out a Cortez
And he asked the factory how long it would take them.

a version of this shoe.
So he meets with Nepon Rover in the morning they say
Let's go out to lunch. Let us borrow
The shoe, inspect it a little bit.
We'll come back after lunch and we'll have an answer for you.
They come back after lunch.
And they're
Isn't almost perfect.
Duplicate of the Cortez sitting there on the conference room table.
And Phil's like, hell yeah. This is what I'm talking about. What an amazing way to do business.
'Cause he had met with all these other factories that were like, Oh, we'll get back to you in a few weeks and like over lunch
They built one.
Amazing. So he is jazzed.
He orders.
All sorts of models.
Can you do all the running shoes that
We slash tiger were doing before at least the ones that we're going to do.
We and Bowerman designed.
They're like, Yep.
No problem.
It's like can you do tennis shoes, basketball shoes, cleats? He's like, Yep, yep, yep, whatever you want.
So um
In a kind of very unfilled nightlike peak of confidence here.
He says, Great, well I'll just start writing out model names. So he
Right out.
The Wimbledon tennis shoe, the Forest Hill tennis shoe, the Blazer basketball shoe, the Bruin basketball shoe.
The marathon, of course the Cortez.
He's like great, let's do
All of them.
And these are Nike franchises that stood the test of time. Many of these shoes are still made.
The Blazer for sure, yep, of course the Cortez.
And uh they're like okay.
Great. And then fell like
One more thing.
The boxes.
Can you make them bright orange? I want them to stand out.
And Depan Rover's like
You got it, man. Whatever you want.
That's awesome.
So great.
And to this day, they're orange.
And by the end of this trip
Phil in Blue Ribbon Sports has a whole new line of athlet shoe models.
Coming out of Japan.
With a much better relationship, solid financing.
And a brand new brand.
To show it all off.
The winged goddess of victory.
Nike.
Yep.
And
There's kind of this funny thing where it is still blue ribbon sports.
So in nineteen seventy one, they do create Nike Inc.
It is a wholly owned subsidiary of Blue Ribbon Sports, and it is responsible for manufacturing.
Well, or contracting with manufacturers to make this line of shoes.
This Nike designed line of shoes owned by Blue Ribbon Sports, of course, later on.
These would flip and Nike would become the parent company, but for now it's a subsidiary of Blue Ribbon.
Amazing.
So
Phil gets home and he tells Bowerman about this.
And this is where we're going to be able to do
Yet another.
Sporadic but incredible.
Bauerman.
Stroke of genius.
comes to play.
For
Blue ribbon slash Nike.
Bauerman's jazzed.
He's like, Great, I never like the Onatuka guys that much anyway. Hey, but he doesn't really care about that. What he cares about is he's like
Wait, so there are factories now? We can tell them exactly what to do? You mean
I'm the new chief R D officer of Blue Ribb Sports.
Let's get to work.
So
That weekend. Supposedly it was the weekend right after
Night.
told Bowerman about what was happening.
He goes home.
And over breakfast on Sunday.
Bill is sitting there.

is making waffles for breakfast. And honest to God, I think, you know, I mean according to Scott, according to everybody, this really happened.
Bill is struck with inspiration.
And he's like, Hey, honey.
Can I
Borrow that waffle iron.
Borrow. That waffle iron was not coming back.
He goes out.
In the back and his
Mountain.
Home.
And uh
He had a vat of polyurethane sitting there, and he had it.
Because
The University of Oregon had just redone their track.
I made it into a polyurethane track instead of a cinder track.
And Bowerman at the time was like, Well, this is great.
This is the future, the Olympics are gonna do this and whatnot.
But
The shoes that I have that I have my runners in, they're not gripping the track that well.
And so
He sees the waffle iron and he's like
What if I pour polyurethane into the waffle iron?
Which
has two problems. Yes, the shape is the yeah, you can imagine how that could grip a track well.
There's two problems. One
Hot polyurethane, super toxic.
The man for many years of his life,'cause he's been experimenting forever, is like
Breathing in all these hot, terrible chemicals. He's literally a mad scientist. Yes.
And two.
Pouring hot polyurethane into a waffle iron is going to permanently glue the iron shut.
Yes.
Which is exactly what happens.
So apparently the first actual
Waffle trainer shoe.
was inspired by this design, but like he literally couldn't make one in a traditional waffle iron. Now, according to Scott, in a really like you cannot make this stuff up.
Everybody thought that that original waffle iron was lost to history and like was this even true or apocryphal anyway.
Years and years later.
After Bill had died.
His I think it was his kids.
are going through the estate. No outback is up in the mountains. Like they didn't have real trash service. So they threw the trash
In like a
Garbage pile in the back.
And they're doing some renovations of the house or something.
Somehow
They discover out in the trash heap.
The glued shut waffle iron.
And it is in Nike's possession.
To this day.
Awesome.
Isn't that awesome?
So
Where of course this is leading is the waffle trainer.
Which is
Another one of Bowerman's
genius inventions and becomes the first
Big hit shoe for the new
Nike brand.
He
Would
Eventually after gluing the first waffle iron shut, then create a mold out of plaster in the waffle iron, pour polyurethane into that.
And then make it.
The Waffle Souls.
For the shoes.
They work incredibly well on artificial surfaces, not just tracks.
But also Astroturf, which is becoming a thing at this point in time. So the University of Oregon football team wears them that year on their new Astroturf field.
It's like a huge thing. They beat Oregon State wearing their waffle trainers. This is
Incredible publicity.
For Nike.
And I think
The waffle trainer is starting to be worn outside of track situations. Like this is the first hint.
of a lifestyle sneaker.
Yes.
I forget what the first colorway that they do it in is.
Look at you, you sneakerhead over there, colorway. Colorway. Eventually, I think it's Phil who's like, Oh, we should do this in a blue
That'll go well with blue jeans.
Yeah.
the canonical
Old school waffle trainer is blue with a yellow swoosh.
And I think a lot of those were sold to be lifestyle shoes going with blue jeans.
Which turns into Nike's real business eventually.
But
That
the success on the field, on AstroTerf fields, the success in track.
That year, so this is nineteen seventy two.
Blue ribbon's first full year doing sales.
As Nike purely on their own.
They do three point two million dollars in revenue. Remember, just a couple of years before their last kinda
Full year.
with Tiger, they were doing half a million dollars in revenue. So to go from
All the crazy drama ending the Tiger relationship.
Starting up their own factory production.
making the waffle trainer to be at three point two million dollars fulfled by Nisho.
What a great spot to be in.
Nike is designing their own shoes and going direct to the manufacturer.
I think the benefit to the business at this point is not margin expansion.
It's purely aliveness and can we convince people

from us that aren't onisuga tigers.
'Cause to this point.
It's still unproven.
If it's
Hey
Blue ribbon has great distribution and people will buy anything from these guys because we trust the company, or if it's
People really wanted Onituka Tiger'cause they were really good shoes for runners.
And I don't really want whatever this new thing you're selling is.
Yes.
And it turned out
That it was the former.
People were willing
Definitely willing.
To buy blue ribbon shoes.
And to buy Bill Bowerman shoes.
Regardless of Tiger and Onitsuka.
Which is kind of amazing. That is completely opposite to what my intuition would have suggested.
I would have definitely believed
There's these shoes that are popular among other competitors. So I should be wearing them to be as competitive as them. If I run them myself, I learn to like them.
It's very strange that it ends up being the relationship.
That matters.
Like thinking, Oh, I trust whatever this running shoe distribution company
is now making because they say it's good. I'm sure it's good.
Well, this is how important Bowerman was.
He started jogging. Not only was he Bill Bowerman.
You know, legendary track code. He also started jogging.
So the convergence of things, all the butterfly wing flapping that had to happen for Nike to become Nike.
Right at this time.
Right is
Nike is being born and Blue Ribbon is going out on their own.
Bowerman.
Yeah, it's
A generational.
Runner.
Uh.
Oregon.
Steve Prefontaine.
Tragedy.
Like
Weirdly, so many.
people we've covered recently on Acquire dies in a car crash way too young.
You know, James Dean style, which
Ironically, of course, just cements his legacy.
But
Pre
was
The American runner.
He was on the cover of Sports Illustrated while he was a runner at Oregon for Bowerman.
He
simultaneously held
Every American record.
for every distance between two thousand and ten thousand meters.
It's crazy. He died holding every single one of those records. Yes.
Incredible.
And
He did this.
At Oregon and then later as a professional, but still for Bowerman and his
Olympic teams.
In Nike's
Right as Nike was starting.
You can't script this.
Any better.
And in fact.
He was not allowed to take a paid endorsement due to AAU rules.
Yes, this is another toe stepping that's gonna happen here. Just like snatching the document out of the briefcase, whatever it takes to win.
Phil Knight figures out a way
to A make sure that he's running in Nike's
And B
make sure that he doesn't need to worry about money.
by finding a clever way to not do a paid endorsement, but something else.
And this is one of those things that the AAU and the amateur rules and all that, like Nike was a thousand percent on the side of right here.
And Nike was on the side of the athlete, which is a thing that they've always been and is a huge part of their strategy. Yes. So what was happening was
Amateur athletic rules and the Olympic organizing committees.
Rules.
Where that you had to be an
Amateur. You couldn't be a professional athlete. You couldn't
Take endorsements or take money.
To race.
Pre was this poor kid from Oregon.
So after he graduated and wasn't at the university anymore.
He literally had to bartend to make money.
While he's simultaneously holding the American records.
In every major distance.
event.
This is criminal.
So what Phil does
Is he decides to employ pre
As a corporate employee of Nike, as the national director of public affairs.
For five thousand dollars a year. With no responsibility. Yes. And there's this amazing quote in Shoe Dog.
Phil says.
People asked me what that meant.
I said it means he can run fast.
So great. So great. Ha
This is the perfect encapsulation.
I'm gonna foreshadow just a little bit here.
of the later number three in the later
Nike
Document.
of the ten principles of Nike.
That we will talk about in a bit.
Number three. It's so great.
Perfect results count, not a perfect process.
Break the rules, fight the law.
That's exactly
Will and Nicky are doing here.
Yep.
You bet.
So that's on the sort of proto marketing front that this early
Nike.
Playbook is getting going. You know, five thousand dollars for the
Best publicity you could
possibly.
It's filled like
Basically inventing sports marketing. I mean, there's a sort of nascent idea of athlete sponsorship at the time, but it really
This is the invention of it as we know it today, and all athletic brands are defined by athletes, and this is really the first instance.
Yes.
That's
Part one.
of just the brilliant kind of restart up of the Nike startup playbook that
Phil puts together here.
Part two.
Equally brilliant and innovative.
He comes up
With an idea for what he calls the futures program.
So
The way retailing worked back then.
And Nike had their own stores always, but they also sold through retailers, of course.
The retailers would place orders with Nike and
to buy the shoes and then they would resell them at retail.
And then they would pay.
After they got the inventory.
This is how retail works. This is like the law of the land. Not the official law, but the way it all works. Yep.
Phil comes up with the idea,'cause remember, he's got the niche show UI partnership, but financing is still
Like he's scarred by this.
So he goes to the retailers and says
If you commit
And pay.
For your orders.
Six months in advance,
Blue ribbon will give you a seven percent discount. And we're gonna call this
The Nike Futures program.
So he's essentially moving his financing from
Banks and Nisho Ewy.
over to his retail partners, to his customers.
And the retailers, of course, tell them to take a hike at first.
But then the waffle trainer comes out.
And they can't make enough of'em. And retailers can't get enough of'em. And the only way that they can get
The waffle trainer
Sweet, sweet inventory.
There's delicious waffles that they want is to sign up for the futures program.
And this really starts Nike down a path of
They're
distribution strategy being a wholesaler. They sell to retail chains.
And
for decades starting here in the early seventies.
They are predominantly someone who reaches their customers through an intermediary, through retail.
Yes.
So that's the second piece.
The third piece then is sort of obvious and has happened all along, but now as Nike is making their own shoes
is outsourcing and global outsourcing of manufacturing.
So again, Nike
Now, I'm not going to be able
They did actually buy a factory in New Hampshire along the way, which is a little bit of a detour. Phil sent Jeff Johnson out to like buy it and run it.
That was more of a stopgap measure while they were transitioning from Tiger. Kind of a hedge too.
It was a hedge, yes.
And it was a secret hedge. Again, break the rules, fight the law.
They use Nisho's money
Which was supposed to be to buy inventory, instead to plow it into CapEx of buying and rehabbing a factory.
And then they were secretly operating their own factory with money that was not supposed to be used for that purpose. But again, Nike break the rules, fight the law. And here they are today a huge and successful company.
I like that. Break the rules, fight the law sounds
Much more inspiring than toe stepping.
So
Global outsourcing though.
At first this of course is in Japan with Nippon rubber.
But as we are saying, Japan is
coming up in the global economy.
And right around this time.
Nixon.
cuts the dollar peg to the yen loose.
And the yen starts floating against the dollar. So up until this point, from after World War Two until the mid seventies,
The yen was pegged to the dollar.
Once the currency floats, and the Japanese economy, of course, has come up hugely over these decades.
Now currency issues become a big problem.
for Nike in terms of importing from Japan.
And the cost of labor is going up. So
Basically the writing's on the wall. There's no way that they're getting shoes for three dollars a pair anymore anytime soon.
This means
That they gotta go find other countries to make the shoes in.
Yep.
So Phil and a bunch of the management team starts flying around Asia. They go to Taiwan, they go to South Korea, ultimately they go to China, they go to Indonesia, they go to Vietnam, and this is where
The Nike Global Production.
Machine.
is born.
And at first it's primarily Taiwan and then South Korea that they go to.
Then
the big move is into China, both in terms of production and for selling. I think there's a scene in Shoe Dog even when he's on the trip around the world in nineteen sixty three that he like
peers into China from Hong Kong and is
Dreaming about two billion feet.
In
China.
Uh Nike would be one of the very first companies and I think the first
footwear company that would be allowed to sell in China.
To sell and open factories. They sort of open the country for the industry.
So
This we would certainly be remiss.
Yeah.
doing a Nike episode if we didn't talk about the downside.
Of this.
The upside, of course, is
Cheap shoes. And the upside, I think you can make a strong argument.
in the case with many of those countries that
This is part of the
coming up process in the global economy. If you look at what happened to
The Japanese economy, to the South Korean economy, to the Taiwanese economy.
They went from making shoes.

Chips to making technology to being
Global economic powers.
It's part of the process.
At the same time.
People are making like
Seventy cents a day working in these factories.
Totally.
Well, let's flash forward to the nineties here, where this really hits a flash point, and then I think we'll come back to the story.
While we're here, we may as well be here.
So stories hit the news of some really horrible things like child labor, stitching soccer balls on dirt floors and high temperatures, toxic glues. Carcinogens.
Et cetera.
Nike fans looked at this as
Oof, the company really has a black mark on their otherwise great reputation.
But it kinda was the natural endpoint of an idea that had been in the company's DNA the whole time. I mean, literally Phil Knight's Stanford paper is about arbitraging cheap labor from importeds and selling into markets willing to pay higher prices.
They should have realized this is where it could have gone if left unchecked.
So
To add insult to injury, Nike wildly mishandled this.
They tried to act like it wasn't their problem. They literally said to the press, Oh
We don't make shoes.
Mark Parker later walked this back with a stance where he said, Ignorance is not bliss. You have to understand the systemic issues and work with factory partners to solve them.
They did.
do a huge amount of work to clean up their act.
They created new standards for factory partners. They published supplier lists.
They have third party audits of factories. They do huge investments in RD and invented things like new types of glu that weren't toxic, which they then went on to share with their competitors.
But David, I don't know, there is still this interesting and more theoretical question.
What is the line of acceptability?
and who should determine it.
Obviously when a company trips a clear, bright line like child labor.
There is appropriately public outcry.
But what about when the lines are blurrier? Are seventy five degree factories okay, or are three dollar wages fine if the local average is two dollars an hour?
At the end of the day, there's a discomfort of sitting with the idea that in order to manufacture a product that you are buying from shoes to smartphones.
Somebody has to work in conditions you wouldn't endure.
even if it's better than all of their other options. And companies need to grapple a spectrum that they sit on.
On one end, there's making the absolute maximum margin.
And on the other end, there's creating labor conditions that customers would totally be fine with if they learned every single little detail.
And in the nineties, Nike chose to sit too far on maximizing the margin side of things.
and they intentionally turned a blind eye to what was going on in the factories and they were in the wrong.
Because it led to exploiting people.
One of the
Things that we're gonna do.
Nike folks were really surprised by at the time when the controversy came up.
Is they were like
All the other shoe companies do it this way. All the clothing companies do it this way. Why are we being picked on? Yeah, but Nike started it and they're the biggest. But I think it's even more than that.
People.
had come to love Nike so much.
And the brand represented
So much.
That it was like
A huge betrayal. It was a disappointment. It was like Oh, I thought you were better than that.
You are about inspiring greatness, and this is not greatness.
And I think that's really interesting that like
Yeah, this was part of Nike from the beginning.
But because of everything else that made Nike successful.
It's super ironic that
they didn't hold themselves to the high standard that the whole company was all about.
And then their customers.
We're like, yo, this doesn't compute.
Yeah, they sort of discovered they couldn't have their cake and eat it too, of saying
We are the brand that inspires you. Oh, but by the way, anytime there's an issue, oh, that's one of our suppliers problems.
We simply don't make shoes.
Even though it is technically correct, the court of a public opinion will find you guilty.
So
Okay, back to the mid nineteen seventies.
In nineteen seventy four, these
pieces of the Nike startup.
Playbook. The
inventing sports marketing, basically. Sponsoring quote unquote pre for
Five thousand dollars.
The
outsourcing your financing.
to your retail partners.
And then the
Global outsourcing of manufacturing.
All of this combines
In nineteen seventy four for just
An explosive year.
I can't remember exactly the phrase, but in you, Dog Phil says something like
The limiters were off. The governors were off. We could run.
They do eight million dollars.
In revenue in nineteen.
Seventy four.
Which is up almost a hundred percent. They nearly doubled again in nineteen seventy three to nineteen seventy four.
Nineteen seventy four is also a momentous year for
Blue ribbon because they finally
Settle the legal battles with Onitsuka.
And they win.
In court.
Amazingly.
Ultimately
they settle for Onitsuka paying Blue Ribbon four hundred thousand dollars, which by this point in time is
A pittance to Blue Ribbon.
But the actual
Butterfly flaps its wings. Hugely important outcome of this.
For the Nike journey.
Is that the court case with Onitsuka
Leads to one Rob
Stressor. Yes. Coming into
Phil night.
And the Nike
Orbit.
He was their lawyer on this case, right?
Yes. Strasser was the junior attorney.
at the Portland law firm that was working on the Nike case.
And stress are.
It's just
A force. I mean, this guy was not cut out.
To be a corporate lawyer. He actually comes in
After the case is settled.
to Blue Ribbon as in house counsel.
But then
Phil quickly realizes like oh this guy is
way more valuable to me than has my lawyer.
Hm.
You know, everybody else in Nike at the time.
They're all former runners. Most of them ran for Bowerman.
Strasser is I think about six foot two.
And weigh over three hundred pounds.
And he has an equally
outsized personality as his actual size.
He gets the nickname within Nike of Rolling Thunder.
And boy does he roll like
Thunder.
And while
He and Phil, of course, did
Ultimately.
Clash.
And
There was the terrible betrayal.
That happened. For a while they were thick as thieves.
Yes. So the first thing that Phil puts Rob in charge of
Is taking this
really early sports marketing concept of doing sponsorship deals with athletes.
And blowing it out.
So they had already before Rob joined done
The first
official
Sponsorship of an athlete with Illy Nastasi, the tennis player. They paid him$10,000 to wear Nike tennis shoes. Oh boy, how quaint.
When Strasser comes in.
He starts doing sponsorships in a systematic
Manner.
So he goes out
And negotiates with athletes and agents. He signs up like half the NBA for peanuts. Now, not the big stars, but the journeyman, the role players in the NBA.
He just
obliterates them and their agents in negotiations. I mean, they're getting like
I don't even know the dollar amounts, but not a lot. They're getting free shoes.
Basically.
And then Nike is showing up on nationally televised broadcasts every single night.
Yeah.
This leads
Then to a bigger initiative.
That Strasser puts together. And if you've
Watch the recent
movie air.
About.
Yeah, Jordan.
This totally gets played as like a Sonny Viccaro thing.
Strasser hires Sonny Vicaro.
to come in and build the college basketball program.
For Nike.
And this is another just
Equally.
Brilliant.
Mm-hmm.
So Strasser gets sunny.
To go around
The country.
And sign up.
Coaches.
of the big basketball schools.
to become Nike coaches. Now there's nothing preventing the coaches
At schools.
From being consultants, advisors, running Nike clinics. No.
You can pay him whatever you want.
You pay them whatever you want, right? And they can tell their teams to do whatever they want. There's no contract between the team and the coach about wearing shoes, but if the coach says, Hey
I really like this shoe company.
You should wear the shoes on court. What do you think the players are gonna do? It's actually a team policy. Yeah, exactly. So within a month.
Of working on this.
Strass or
And Vicaro have gotten.
UNLV.
Georgetown, Texas.
Arkansas.
They get legendary coach Jimmy V at Iona to sign up.
to be committed to being Nike coaches and their teams wearing Nike. And this is hilarious. So
All this is happening.
The Washington Post gets word of this.
They run a real pearl clutchy article saying that this is shameful.
Nike is commercializing the purity of college athletics. Like, Oh my God, give me a break. Like these kids are being exploited. Like at least they're getting free shoes here now.
In the article.
The post mistakenly says that
Iowa.
is one of the colleges that Nike has signed up, not Iona.
So Lude Olson, the coach at Iowa, who's legendary, he goes on and coaches at Arizona. Lots of listeners probably know who Lou Olson is. He's in the Hall of Fame now.
Instead of being pissed off.
that he was included in this shameful article with the post. He calls up Nike and he's like
Yo, can I get in on this?

So then they sign up loaded Iowa and then Arizona and he becomes a big Nike coach.
It's incredible. Strasser then takes the same playbook to college football.
Signs all the big coaches in schools, all the big powerhouses for peanuts.
This is incredible. No.
Selling football cleats is never a big business for Nike, but college football
Is
Huge. I mean still huge. Lotta eyeballs on those swooshes. Lotta eyeballs on those swooshes.
And this is so clarifying of what their sports marketing strategy is.
These endorsement deals are not about
the sneakers that that basketball player is going to sell, or oh, I want to buy the cleats that my favorite college football team is wearing on the field.
No one else plays football other than college football students and the very few NFL players that exist. So
There's really nothing to buy.
But what you do see are these swooshes.
And it's cementing that brand in your head of this is what real athletes wear.
So
One thing that's worth mentioning.
This is sort of obvious, but didn't
click for me until really getting pretty deep in the research here for Nike.
There are actually
Only three sports.
That matter.
So Nike, Adidas, you know, Rebok, they sponsor lots of sports.
But
Running
Basketball.
And tennis.
Are the only sports.
that matter because those are the only shoes that normal people can wear.
Normal people don't wear baseball cleats or football cleats or soccer cleats, no matter how
popular those sports are.
Yeah.
Even to this day.
All the marketing, all the athletes.
Everything you see on TV of Nike.
And the other
Athletic companies.
It's not about getting you to buy the shoes that that athlete is wearing.
It's about getting you to buy
Nike. Right.
The funnel is
Every single one of those is a brand impression. So consider them all billboards.
And then
They just need to manufacture enough product.
to meet needs in your life.
That you can go and participate.
in the brand story.
by buy things that you need in your life.
And you're inspired to do that because what you saw on those moving billboards on all the players running around.
But the products that the players are wearing are made for them in their athletic journey. And the products that you're buying at the store are things that are made for you in your athletic and increasingly lifestyle journey.
But you're inspired by what you see on the billboards.
You're buying.
Victory. Right. And so their whole business eventually becomes
figuring out this multi-sided equation of
Can we create enough demand? Like it literally on their income statement says.
Demand creation.
by doing these sponsorships. And then can we create the right product mix for people to participate in our brand by giving us their dollars? Yes.
Now I don't wanna say
That
Stress or alone.
architected this grand strategy, or even I'm not really sure that Phil or anybody at Nike understood this at this time.
But certainly Strasser
Executes this.
In just an incredible way. Nobody else was doing this. The college coaches, they ran the table.
And it was just
An incredible run in the late seventies.
All the while
The jogging movement.
is just getting bigger and bigger and bigger. Right. Keep in mind, they still only make running shoes. There's no apparel. There's no shoes for other sports really. There's like some things on the margins, but ninety plus percent of their revenue is running shoes. Yeah. The core sales, what they are marketing
is go buy a waffle trainer and wear'em with your blue jeans. Yep.
So
Through the late seventies, revenue just doubles year over year over year. They go from fourteen million in sales.
to twenty nine million in sales, to seventy one million in sales, finishing out in nineteen seventy nine with a hundred and fifty million in sales.
Yes.
It was nineteen seventy six when they officially changed the actual name of the company to Nike.
Then nineteen seventy seven was a huge year, as you say they do seventy million in revenue.
That year. They signed John McEnroe.
They crossed a thousand employees, so it's getting to be a real
beefy organization.
Two other things.
They bring one
Former NASA engineer.
And true mad scientist.
Frank Rudy.
Into the fold.
The inventor.
of air soul technology.
Phil Knight.
Is not a fan of when he hears about the idea.
Well,
He thinks it's a crazy idea at first. Phil's meeting with Rudy. He's like I don't even know how Rudy
Got into my office. Who is this crazy dude?
He's about to kick him out and then Rudy's like, Yeah, Adidas didn't want it either, and Phil's like, Oh
You said the A word. All right, let me try it. So supposedly Phil goes for a run in the prototypes.
of the air souls. And he's like, Yeah, actually these are pretty great. And we should say for anybody who doesn't know
Everything that you hear of now, the Air Max, the Air Jordan, the Air Force One.
It is
A literal

that sits in the mid soul. So think about
the thing between the lower sole, the rubber on the bottom.
And inside of the insole, the basically the part of the shoe that you can't get to that's underneath your heel.
And sometimes that runs all the way across, all the way up to the toe.
That replaces
Fousing.
Instead using a little
airbag that magically doesn't pop.
Yeah, I mean Rudy really was a
Genius.
So
Phil's like all right, let's do it.
He tasks who else?
Rob Strasser with going and doing a deal with Rudy.
They do a deal, Rudy gets between ten to twenty cent royalty for each pair of air
sole technology shoes that Nike sells. Eventually Nike would just buy Rudy's company and Rudy would become an employee of Nike.
So still here in nineteen seventy seven.
Strasser's just on fire.
I don't know.
the full context around this. Scott Reams has a great LinkedIn post, but as best as we can tell,
Ben, as you said, the company was growing hugely. There are all these new employees there who are just kind of taken for granted that Nike is
Winning.
Strasser gets kind of pissed off one day.
And he goes to his typewriter.
And he fires off a memo.
Hm.
Xeroxes he copies this memo.
And
Paste it up on the walls all around the office of Nike.
Ten.
Principles.
And this document is just
Amazing. We've tweeted it before. It's going around the internet.
Yeah.
It's going around the internet.
But it's going around the internet.
Described in the following way.
Here is the document that Phil Knight wrote.
Articulating Nike's principles.
Here are the things that are wrong with that statement.
One.
Phil Knight did not write it. Rob Strasser did.
Two.
Nike's principles.
Also incorrect.
When this was written, it was actually still blue ribbon sports.
So that it was not.
Yet the Nike Corporation.
Three.
The top of the document has this like thin wispy swoosh.
That was never the Nike swoosh. This is someone's attempt who doctored this at some point.
to make it look like some old version of the swoosh.
There is an old version of the swoosh, which we will link to in our sources.
It is still in the US PTO for the swoosh trademark.
It is a hand drawn version, Carolyn's hand drawn version of the swoosh, that looks nothing like this weird thin wispy thing that was like doctored and added to the document. So
Not Nike Inc.
Not the swoosh. There was never a swoosh on the document. It was done on a typewriter. How are you gonna do that? And three
Not Phil Knight.
But yes.
Oh my god.
These principles are amazing.
And we're gonna go through'em.
All right listeners.
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Okay, David.
What
Are these principles.
All right.
Nike principles, according to Rob Strasser in nineteen seventy seven.
One.
Our business is change.
Two.
We are on offense.
Uh
The time.
Three.
Alluded to
Perfect results count.
Not a perfect process.
Break the rules.
Fight the law.
Number four, this is as much about battle as about business.
Five. Assume nothing.
Make sure people keep their promises.
Push yourselves.
Push others.
Stretch the possible.
Number six.
Live off the land, number seven, your job isn't done until the job is done.
Eight.
Dangers.
With uh
underlined as a heading.
Bureaucracy.
Personal ambition.
Energy takers versus energy givers.
Knowing our weaknesses.
Don't get too many things on the platter.
Number nine, it won't be pretty.
And then number ten.
If we do the right things.
Well make money.
Damn near automatic.
It's so good.
That's so good.
That last one is
so spot on for any business through to this day. It's so easy to get wrapped up on all the other
Crap.
You do the right things.
You make product the customers love, you market it right, you build a brand, you will make money damn near automatic.
So
I read these differently than I used to read them.
Because when I didn't know Nike's journey, I sort of would just read them and be like, Yeah, that's awesome. Or like, wow, that's so pithy. I can't believe their official corporate values are
In such a pithy way.
stream of consciousness all from Rob Strasser, all into the typewriter, and like
Some of them.
Are things that
Nike would never say today.
because it shows the trade offs inherent in their business. I mean, live off the land is cringeworthy, right?
It's almost like
You guys, you had this huge labor issue. It's not good.
So you sort of see where some of the stuff comes from. Break the rules, fight the law.
I think there's also something very clear, dangers, bureaucracy.
personal ambition. Like
This is a foreshadow of Rob Strasser.
hating the bureaucracy at Nike after its IPO that we'll talk about in a second, clashing with Phil Knight. Developing his own personal ambition. And developing his own personal ambition, leaving and going to Adidas. So there's like so much in here that when you really start to know the company's history and story and the head space that he was in when he punched this out.
It reads entirely differently to me than I sort of used to just read it as a
Hey, I love Nike, a brand, wow, so cool. I wish I could work at a company that had these pithy punchy values.
Yeah, this is definitely one of those cases where ignorance is bliss.
Yeah.
But man, they're awesome.
The one that is still in Nike's maxims today that they distribute to employees that is, David, something you and I both hold near and dear and think of with acquire it is.
We're on offense all the time.
You don't win by playing defense.
Nope.
Okay, so we're approaching nineteen eighty, they're about to go public, and they are entirely a running shoe company.
still no sign of the Nike that they are today where they have apparel, where they're diversified across a zillion sports.
And from their revenue?
There's
Basically a running shoe company that makes shoes for men. That is where their revenue comes from.
So Nike IPOs, the second week of December in nineteen eighty.
The same week as Apple. Unbelievable. It's amazing.
You get all the way through Shoe Dog there is
Basically, no mention of market cap at IPO. It's the craziest thing. Like it really underscores how much nobody believed enterprise value mattered then. Yep.
It was about four hundred million dollars, the market cap at IPO Apple for
Comparison's sake was one point eight billion dollars.
Now, interestingly, before they went public, Bowerman sold most of his stake back to Phil Knight.
Actually, this was related to some of the financings earlier, but as Nike got bigger, he just didn't want to be a major listed shareholder in a
highly visible public company.
Certainly he was in retirement age towards the end of his life. He was like
I'm gonna sell my steak back to Phil.
So when they went public after the IPO, Phil owned forty six percent of the company.
And was overnight one of the richest people in America.
And it the craziest thing is like
One of the richest people in America then.
was a hundred and seventy eight million dollars.
Yes. Quite different. Now
He was far from the top richest person in America. But still this made national headlines.
Yeah.
So
This
Is where shoe dog ends.
Which is kind of crazy. I had forgotten this before I went back and reread it.
There's no Jordan.
There's no
huge fall from grace that is about to happen for Nike, basically right after they go public.
Phil picked an interesting time to end the story.
Very much so. Especially because right after they go public, Phil goes on sabbatical for a year. It's sort of like
You know, the job's done. Wash my hands of it.
Ben, the job's not done until the job is done. There you go.
But like the whole company
There was a lot of hubris going on.
They're on top.
Will you own the running shoe market?
We've been in this magical secular growing trend forever.
And it's just surely gonna continue, right?
And the fitness boom continues.
But
Running is not exactly the thing that keeps carrying. I mean, they have fifty percent market share.
In running shoes at this point in America.
And yet
their growth in the future is going to be dictated by where they go from there. Cause it's really hard to have more than, you know, 50% market share in an industry like this.
Early Nike.
Did so many things right, but they made one critical mistake.
They mistook
The running and the jogging boom.
for the broader fitness boom.
The broader fitness boom.
was a massive secular trend that continues through to this day.
The running boom.
was a cyclical trend that was part of
the fad driven fitness cycle.
And
By the early eighties, as we're heading into everything that the eighties was and that the seventies were not.
Running and jogging is out.
And aerobic, sorry.
And
Nike
absolutely refuse to see that and refuse to do aerobics like on principle.
fascinating. I mean in nineteen eighty Rebok USA is founded
And by nineteen eighty eight, Reebok eclipses Nike.
in sales.
Yes, at well over a billion.
And it's not like
Nike fell out of favor in running and it's not like people who were running stopped running.
But
Nike had ridden the running boom at this insane growth rate of running. And even if running continued, its growth rate was going to massively taper off and they were going to stop growing their market share. So like they really did need to look elsewhere. And I think it was pure hubris.
that blinded them from finding their next market.
So Rebuck, funny, originally a British company.
Started as foster and sons.
They were the company that made the tracks shoes for the nineteen twenty four British Olympic team that was the basis for the movie Chariots of Fire. The reebok we all know.
Well not today, but
Back then.
is a completely different animal. It's a marketing driven company started by a guy named Paul Fireman, who is American.
And pretty quickly.
They developed a business plan to cash in on the aerobics fad and they made
A shoe that in Nike's principled opinion.
Sucked.
But it went really great with leg warmers, you know? It was all white. It had soft leather that wrinkled it looked good. Women loved it. It was everything that Nike was not.
And they're
rise, like you said, Ben, was even steeper and faster.
Dead Nike's.
Ironically, Reback would end up much later getting acquired by
I did this.
And then spun back out to private equity recently.
Wow.
So financially.
They're sitting pretty pretty.
They've just raised twenty two million in the IPO, which then was a lot of money.
They
Basically wouldn't need any more money after that. They raised one smaller pipe later in their history, but
The company was basically built on debt financing and this twenty two million in the bank from IPO.
And
You can see how they got
Fat and lazy.
Their whole life they were starved for capital. Finally they had it.
Their whole life they were the underdog. They're not the underdog. They've got half the running market and this dominant brand where they just steamrolled the competition to get into all these
Sports, but
Right at the same time as the
A Robix Boom is coming up.
Adidas is becoming a very real competitor in the sports marketing deals, too. And so Nike is kind of realizing like, ooh, we are not
nearly as well capitalized as them.
And they're kinda gonna come eat our lunch and all these deals where we just figured out that you can
pay people and they'll wear your stuff. So our
Cheap brand advertising's kinda going away.
And meanwhile in our core like
consumer actual reason people buy
truckloads of shoes, the fitness market.
The swooshing sound you hear is that going to rebuk.
Yes.
So
Interestingly.
Financially.
There only are a couple quarters where Nike's revenue declines.
I think that's because of the futures program kind of saves their skin again.
Retailers had to commit.
six plus months in advance to their orders.
And
Yeah, Nike was able to
At least maintain.
revenue through a lot of this, but the actual underlying dynamics of the business are
Ugly at this point in time.
The market, like I said, is
Swooshing away.
So that brings us
To nineteen eighty four.
Phil Knight actually
wrote in the letter to shareholders that year.
Nineteen eighty four.
Lake Georgia well predicted.
was not a good year for Nike.
Everything that we talked about is happening.
But
Nineteen eighty four was also
The seed of something.
Pretty incredible.
That would make everything that happened before.
And Nike look like child's play.
And that would be
A young kid
From North Carolina.
Michael.
Jordan.
Who walks in the door?
This is such a fun time to do the Nike episode because the movie Air just came out.
Which really is like a fun kind of summer blockbuster movie.
Also very, very inaccurate in how it portrays
Everything.
Oh yeah. No, it's a very fun, campy work of fiction.
I mean it gets the broad
Point. Right.
Michael Jordan saved Nike.
Absolutely.
One hundred percent.
The character involved and how it all went down and
What the deals were. No.
Almost all wrong.
There's a lot of little dynamics that we can be mad about. Like it was kind of Strasser's baby to do the deal, not Vicaro's baby to do the deal.
you know, Vicaro never flew to North Carolina to negotiate at Michael's house with Michael's mother like the all of this doesn't actually happen. They weren't gonna fire everyone in the basketball division if this didn't work.
But again, factual inaccuracies are fine.
It's the characters that they messed up that really bothered me.
I know I'm doing a review of a movie that maybe not all of you have seen, so spoilers, but like
God, they make Phil Knight.
Just
Not at all who Phil Knight is.
They make him out to be kind of a rub.
And
after watching every interview he's ever given and reading all the stuff about him and I just don't think that
the Ben Affleck character is anything like
Fill night.
Anyway.
Air's entertaining.
Here's the real story.
The big important thing
From
Michael Jordan.
The Air Jordan one.
And then everything it became in the Jordan brand.
Is that
It didn't just save Nike.
It changed the world.
That's a super
Campy thing to say, but it is one hundred.
percent true. If you walk down
Any street.
Pretty much anywhere in the world today.
Or you go into
Any
Event, building, venue, whatever, and you look at what people are wearing, they are wearing
Sneakers.
And they are mostly wearing
basketball shoes and running shoes. That was not
The case.
Before
Air Jordans.
Air Jordan's.
And Michael Jordan
made sneakers into culture.
So
Nike takes a chance.
There's a kid out of North Carolina. He's picked third in the draft. He's really good. He just took the game winning shot.
To win the NCAA.
Final four.
But you know, he's not LeBron in high school.
Yeah, he was picked third.
Right.
I remember going to see LeBron as a high school athlete because I lived near Akron, Ohio, and he went to St. Vince St. Mary's famously. And like
He was very obviously
one of the best NBA players.
as a freshman in high school.
Jordan wasn't quite that. He was a different type of player. He was not as big and as physical as a lot of the guys dominating the NBA at the time.
And so
Doing a
big deal with Jordan really was more of a gamble for Nike than they would do with really any athlete today.
So let's talk about
what that deal was and why it was so different.
Nike like we just said.
Their back's against the wall.
They need to do something to save the company.
And it's actually Strasser who puts this deal together. And together with Sonny Vicaro, as portrayed the movie, goes after Jordan, but Strasser puts it all together.
So the deal is.
is a two and a half million dollar minimum guaranteed payout over five years.
But that's not actually how the economics work.
The revolutionary aspect of the deal.
Was
The payouts were calculated in
As a five percent royalty on gross revenue.
From the sales.
Of air Jordans.
The whole line, the shoes, the merchandise, everything.
It's almost like the way the book industry works. They gave him an advance
on the first 500K a year, but you know, once he sold through the advance, he was going to get a five percent participation on any of the shoe sales. Right. And it goes even deeper than that.
This structure
was completely revolutionary. So
The way shoe deals were done at the time. So
Magic Johnson and Larry Bird were the biggest stars in the NBA at the time. They were both signed with Converse.
Their deals were roughly a hundred thousand dollars a year in cash payments.
To wear the converse weapons.
Ben, have you ever worn the Converse weapons? No, never. Do you know what they are? No. No, I don't. These are not
Airbirds.
They weren't signature shoes. Nike says we're gonna make you a signature shoe.
And then you were gonna participate in the upside from that. They did that intentionally. It wasn't Jordan who asked for that. Nike wanted it that way. They thought we need to incentivise Jordan.
Two
build the dream here. We need to tie this all together. And
It's brilliant counter positioning because all their competitors basically couldn't do it. Converse has too many stars to go all around signing these A
you get some of the upside deals. Like Nike had freaking nothing to lose. They, of course, they could give away some of the upside. If Commerce is going to do this or E Dis is going to do this, they actually do have quite a bit to lose.
By giving away upside. Of course, Nike, it turns out it was a big paycheck that they cut Jordan for years and years and years. But
Nike was truly doing something here that their competitors could not. And it was smart to figure out what are the things that by being small and cash constrained and under penetrated in the NBA,
What strengths do we have?
Right. It goes even further.
Also in the deal.
The previous year.
Nike had sold four hundred thousand
pairs of Nike basketball shoes.
They include a clause that Jordan gets a royalty.
on incremental sales in future years beyond the baseline.
Uh
Everything in the Nike basketball line. I did not realize that.
This is how it works. We alluded to this earlier in the episode.
It's the halo effect.
Yes, the Jordans.
are important and we'll talk all about the Air Jordan ones in a second here.
But it's not about the Jordans.
It's about the swoosh and it's about the halo effect and the lifting up of the whole company's sales.
I had no idea that Jordan got a royalty of non-Jordan shoes.
He did.
And this would eventually morph into the Jordan brand and the Jordan line and
Cion Williams and Jason Tatum and like they are Jordan athletes. This is
Part of it.
So
Nike also guarantees a minimum ad spend to promote
The Jordan line.
They're all in here.
They also give Jordan stock options in the company.
This is
A
Hell of a deal.
And it's smart for Nike.
So
There's something kind of interesting here, which is
I was trying to figure out if I would describe this as a partnership.
David, you and I are partners in acquired.
we together benefit from the upside and the downside.
That
is what makes a partnership.
Is this a partnership? Is there any scenario where Jordan has any downside or is all of the downside owned by Nike?
No, it's all owned by Nike'cause there's the minimum guaranteed payment. Right. For
Two and a half million dollars over five years. That seems like a pittance today.
But that was huge. Nobody else was getting that kind of money.
So here's the thing, and this was chronicled in the movie. This is absolutely true.
Jordan didn't want to work with Nike. Nike was for the second rate pro players. Jordan wanted Adidas.
Jordan was a kid in the eighties, like a teenager.

that sneakers had started to transcend into culture.
It was Adidas.
Hip hop, break dancing.
Track suits, shell toes. That was Adidas.
That was what Jordan wanted.
And so to
Put a finer point.
On this here.
Jordan didn't want to be Nike's partner, so he basically wasn't.
And they backed up the truck for him. And some of that truck was in variable comp and some of that truck was in cash.
But
Make no mistake, that is what this is. Is Nike having no leverage, Jordan having all the leverage, and getting
A landmark.
unbelievable deal still to this day
unmatched in terms of the amount of dollar outflows that has gone to an athlete because of it.
Yeah. So
Jordan actually
Takes the deal and shops it to Adidas afterwards and he's like.
I really don't want to go with Nike. Like I really want to be with Adidas. You don't have to match this.
Can you just come anywhere in the ballpark close?
And Adidas is like
We could give you a hundred thousand dollars a year. And uh
And so reluctantly Jordan goes with Nike. But you're so right and it's so important. It sets
Up the incentives.
Well
Jordan also is on offense all the time. This is a guy who plays to win. So you give him the incentives
He and Phil Knight are gonna get along real well.
So here's what happens.
In that first year, the Air Jordan ones
This is gonna be very incredible. Some of you know this, some of you gonna listen to this, you're gonna be blown away.
Hang on, because there is a second part to this story that is not what you expect.
In the first year.
Air Jordan Ones.
sell one hundred and twenty six million dollars. That's the shoes and the associated merchandise with it.
David, do you know what their goal was?
Three million dollars over three years.
So it's about 15% of Nikki's entire revenue for the whole year. In the first year.
They sold one point five milyen pair in the first six weeks.
After releasing them.
So
Put aside.
the halo royalties that Jordan is getting on the rest of Nike basketball. Let's take just the five percent
Of that hundred and twenty six million dollars that he made in his first year.
That's six point three million dollars that Jordan got from Nike in nineteen eighty five.
Do you know what Jordan's contract with the Bulls was?
It's too perfect.
Six point three.
Million dollars.
Over seven years.
So he made the exact same amount from the Nike deal in his first year. He made his entire
Seven year contract with the Bulls in his first year. Wow.
I always wanted to think of the story as like wow, Jordan took some risk and it paid off big on the back end.
It's like
It paid off immediately and he had to make no trade offs to do it.
He got the cash guarantees.
And he got the royalty upside, and it happened immediately.
And it only got bigger from there.
Well
Trade offs.
I think there are two things.
One, none of this would have happened if Jordan didn't turn out to be Jordan.
Totally. And in fact, that's literally true. If he wasn't what were the three clauses? If he didn't either win rookie of the year or win the NBA finals or win the MVP or something, there was an out in the contract. Oh, interesting. I didn't know that.
They were basically like we will give you the entire farm, or five percent of the farm, if
you are a phenom and if you're not interesting.
So there was some protection for Nike. Yes.
And I think he's Michael Jordan, so whatever the thing was, he got all three of them.
Oh, it wasn't the NBA finals, it wasn't become an all star.
Ah, interesting. Which I think he did in the first year. Yes. Yeah. Yes. That's right because the other players kept the ball away from him uh and they froze him out because they were so jealous.
Okay.
One, Jordan had to become Jordan.
Two though.
He sacrificed a huge amount.
There's this great quote from Jordan when he retired for the first time.
He said
Phil Knight and Nike have made me into a dream.
And that's
Very sweet on the surface, but
That's very dark underneath of it.
Michael Jordan's life.
was no longer
the life of a normal person or anything close to it.
And
Now, to a certain extent that happens to every star, but like
Today you're like duh. But back then
This was the first time this happened. Jordan
Became a dream.
And that's
Very hard to live with as an actual human being.
So there was some downside.
Yeah, David, you're so right. Imagine that I come to you and I say
Hey, I'm gonna pay you and give you revenue upside and you know, all you have to do is do the thing that you're already good at and work hard at the thing you're already passionate about.
By the way, I'm gonna use your face on five million dollars of media, of paid media in the next few months.
It's like, Whoa, what?
But
That's it for any normal life that I get. Like right out the bat. Right. And he's a kid. Yes. So again, like this is all normal today. Everybody understands this. LeBron knew exactly what he was getting into when he signed with Nike out of high school and went to the NBA, but like
This was the beginning of all of this.
So why did they sell so well? That's sort of this interesting$126 million in the first year. Like why was the demand for them crazy? Did people just love Michael Jordan?
Nike
This is
I think the first time they really flex
their ability to
recognize an opportunity for an incredible marketing moment.
So back in eighty four
Jordan starts wearing in
Pre season and in warm ups.
Some modified air ships.'Cause Nike's actually not
done making the Air Jordan one yet.
And so he's wearing these black and red shoes that are now called the Jordan Breads B R E D.
And these shoes are black and red.
And
In the NBA, you wear white and that's it.
And so Jordan's
getting ready to play in the league with these black and red shoes, which again he hasn't actually worn on court, and to this day
No one can find footage of him wearing
The black and red
precursor to the Air Jordan one, these modified airships on the court. So we're not actually sure that it happened. Right. Because it takes a while to actually make a new shoe. So the Air Jordan one is still in production. Right.
But
This black and red catches the league's attention.
David Stern says, Hey, you can't wear those. We're gonna find you if you do
In fact, this results in literally writing a letter that doesn't state the dollar amount, but does say
Hey, it's against league policy to where
the black and red shoes. It doesn't mention the Air Jordan. It doesn't mention the Air Jordan one. It just says those black and red shoes.
And this gives Nike.
This incredible opportunity.
to make a marketing moment out of it.
Now
It would have actually been very expensive because the way that the fine work technically after you dig into it for a while is
One thousand dollars for the first infraction.
Five thousand dollars for the second infraction.
It may have even been the case that it was ten thousand dollars for the third
Over an eighty two game season and facing possible ejection,
It's a big tab for Nike and it's a big problem for Jordan.
And before he could even wear
these black and red shoes in a game.
Or have the opportunity to
They switched. The Air Jordan one, they made white and red. The one that is iconic that you can go
buy and then they make all the remakes out of the AJ one is not
The bread.
And the bread is the thing that kicked up the big issue. Anyway.
So Jordan, they just film him in this incredible commercial where he's just standing there and the camera pans down.
From his head.
To his feet.
Where he's wearing the black and red.
And it just goes.
Um
Bong and puts these black bars over the shoes.
And they make a whole big deal out of the fact that these shoes are so great.
They are
Banned in the NBA.
and you can go buy'em at your local retailer.
And people go nuts.
So great. Such a good story.
And the coda to all this is
Even after reading all these books and watching all these videos and these interviews
I actually don't know what dollars ever changed hands.
Some people said it was five thousand dollars times an eighty two game season. Some people said it was one thousand dollars ever and then nothing after that.
I have even heard that no dollars ever exchanged.
between Nike and the NBA or Nike and Michael Jordan because the fine was never levied, it was a threat that then Nike made
that Air Jordan won't before anything could be enforced. If anybody knows, please.
join the Slack and shoot us a DM or put it in the general channel. I'm very curious.
The thing that's so great though, Nike, right? Like it doesn't matter.
It's the story, it's the dream. Like it doesn't matter.
Right.
They just put it in a freaking Hollywood movie that it was five thousand times eighty two games and that's all anybody's gonna remember. Oh bad.
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Okay, so I mentioned a minute ago about the other side of the Air Jordan one story.
It's not the dark side of Michael Jordan's fame.
I think this is crazy. I don't think anybody really knows this.
Nike
sold a hundred and twenty six million dollars worth of Air Jordan one shoes and merchandise in the first year.
Fact.
Another fact that gets put out there is that Nike sold a hundred and fifty million dollars of Air Jordan shoes and merchandise during the first three years.
Now if you look at that, you're like
Wait a minute.
What happened? Something bad happened in years two and three. Yes.
And indeed something bad did happen in years two and three, and in year one.
Nike needed
That first year.
of the Jordan deal to be a huge hit.
So they stuffed the channel.
They
pushed so much product on retailers.
And through the futures program and whatnot.
That
That's how they hit the$126 million in sales. There wasn't actually$126 million of demand for Jordan products that year.
Hm. So good commercial, but not$126 million of demand commercial. I mean, there probably was I'm making this up fifty, seventy, a hundred million dollars of demand like
Unprecedented for any shoe in history for a single year.
But Nike also effectively took some steroids on this one. Yep.
That turned into a huge problem.
Because the retailers and the buying public had a huge hangover the next year in year two.
That was compounded by two issues. One
Jordan broke his foot early in the season of his second year, missed most of the season.
Two.
The Air Jordan Two's
Sucked.
There's kinda no other way to
Put it.
This was where Strasser, who again had masterminded all of this.
The Jordan deal, the Jordan Ones, working with his collaborator Peter Moore.
All this stuff.
They kinda went rogue.
The Air Jordan Twos cost a hundred dollars. The Air Jordan ones cost sixty five dollars.
The Air Jordan Twos were made in Italy out of premium Italian leather.
This doesn't sound like
The Nike playbook.
This also doesn't sound like a good basketball shoe. Do you want to play basketball in
Gucci Leather?
Probably not.
Jordan didn't like the shoes.
They were not good to play basketball in. They were super stiff. They were hard to break in.
They didn't
Fit his style, right?
So A, he wasn't playing. B, he wasn't incentivized to push them. I mean, he was economically incentivized, but he didn't like the shoe.
It all kinda.
Fell apart.
On top of that.
As this is all happening.
Strasser.
And more too along with him, but you know, really Stressor is
Becoming
Increasing rogue within
Maggie.
He
Breaks away.
He starts a new
Division in a separate office complex from the rest of the
Of the company.
Called the New Products Division. Dude, this is like very Steve Jobs Macintosh.
One hundred percent. I mean literally like the parallels here. Unfortunately comes to a tragic end.
He sets up his new campus, new division.
You know, away from Knight, away from the rest of the company. He mandates that
all new product launches have to go through him and this new group and that they're gonna take control and streamline the process and
The Jordan Two's come out of this. Obviously it's not a very good shoe.
This becomes
A big problem.
Obviously.
There's only one way.
That this is gonna end.
Either
Strasser is gonna become CEO of Nike.
Or Strasser's gonna leave Nike.
Yep.
Um
Strasser ain't gonna become CO of Nike.
Because
One.
Phil Knight is CO of Nike.
Two, Nike has a dual class voting structure.
Phil Knight controls all the high vote chairs and he controls the board.
So
Really?
This is the end.
For stress.
They get in a huge fight in nineteen eighty seven.
Strasser leaves the company.
He goes off.
And takes more with him, Peter Moore.
And they start a consulting firm in Portland called Sports Incorporated.
All of which is fine.
And you could imagine a future where one day night and stress are might reconcile.
And they could be friends again and say, Wow, Rob, you've had such, you know, incredible part of the Nike journey contribution to everything. We can bury the hatchet.
Well
Sports Incorporated takes on as one of their major clients.
Adidas.
And eventually their only client.
And then eventually Adidas the company
moves their North American headquarters to Portland, Oregon, and makes Strasser
The CEO.
of Adidas.
America.
Oof.
And then incredibly tragically, this is just terrible.
Eight months into the job.
Stress or
has a massive heart attack and dies, I believe, at age forty six.
Oh, it's just terrible.
Yeah.
But
The betrayal.
That this is.
And genders.
It's irreversible, Ben. You talked about earlier the Nike culture. There's a quote from Jeff Johnson, blue ribbon employee number one, who I think had already left the company at this point.
He's asked in the book Just Do It about Rob becoming CO of Adidas and he says
I know they Adidas aren't what they once were.
But Adidas people were the Huns. I would starve to death before I would work for Adidas. Wow.
And then when Rob dies, Phil does not attend his funeral.
It's really just heartbreaking.
There's a
quote that sums it up in this Portland Monthly article.
that talks about why Strasser isn't known to many people outside the companies and why his role sort of fades into history.
And they say why?
Because his work was vital to both, which makes it incredibly
difficult to neatly write him into the mythology of either one.
For Adidas, it was a brand revival conceived and executed by a fat American ex-Nike guy and his artsy partner.
For Nike, Strasser's overachievements are overshadowed, if not severely tarnished because he was a traitor.
From Phil Knight.
It might have been okay if he had just quit.
But he went to work for Adidas, an intolerable betrayal I never forgave him.
Yeah.
Oof.
And still the repercussions of this exist to this day.
Adidas is
American headquarters.
Are still in Portland, Oregon. Yep.
And they poach a lot of Nike people.
Yep.
So, okay.
Back to Jordan.
The plot.
Thickens here.
Jordan's not happy. Strasser was his guy there.
Yeah.
Strasser was his guy.
Strasser leaves, starts this new company, starts working for Adidas.
becomes the CEO of Adidas.
Jordan's gonna go to Adidas.
The writing's on the wall here.
Jordan's deal is up in ninety.
Right.
Not only is this deal up in ninety, but
Hm.
Tries to renegotiate.
So in year three
Jordan is so unhappy.
The wheels are in motion at Adidas, Adidas with Strasser not yet at the helm, but whispering in the ear.
is gonna be willing to do a Jordan type deal for Jordan.
Michael always wanted to do this anyway.
He's gonna break the deal with Nike and go with them. Yep.
So
Back to Nike and Phil.
This is serious wartime mode.
They schedule a pitch meeting with Jordan. This is I think towards the end of year three.
of the deal to try and save him, to try and re sign him. They're willing to do anything.
renegotiate the deal, give him more economics.
Give him another shoe, anything.
Phil goes.
To a bright young star.
Within
Nike design group.
Tinker.
Hatfield.
Formerly of Nike's architecture and building planning team, he wasn't even a hired as a shoe designer.
He was an architect. This is super important.
Tinker was another Bowerman guy. He ran track for Bowerman in Oregon and studied architecture.
And then he comes into Nike and together with Mark Parker, who would become
The CEO of Nike.
They design the Air Max, they design the Air Trainer, they're part of Nike's revival on the running and training side and competing.
Ultimately in aerobics.
With their trainer.
Now that Strasser and Moore are gone, Tinker
is the star that
He can give Jordan, he says.
Go fly out.
to Chicago. Go with Howard White.
Jordan's guy, a Nike.
Go talk to him.
Come home like
Bearing your shielder on it, essentially.
So Tinker goes out.
I remember he's trained as an architect and then became a shoe designer. What do architects do when they meet with their clients? They ask them questions. They say, What do you want? What are your specifications?
Tinker sits down with Jordan and he's like
Tell me what you don't like about the Jordan two.
They're too tough to break in.
Okay, cool. What else is wrong with them?
They're high tops. You know, that's too much weight.
I'm Michael Jordan.
I need
lightness on my feet. I want to fly. I don't want the extra weight.
Okay, cool.
In an ideal world, Michael.
What shoe would you want? What would it look like?
Michael's like, Well
I want a great basketball shoe.
That will also look great off the court.
But it needs to be both. It can't be like the Jordan Two.
That look great off the court.
Maybe.
But sucked as a basketball shoe.
Tinker's like Okay.
Noted.
So he goes back to Nike.
Works feverishly, Jordan comes in for this last ditch.
pitch meeting. He shows up four hours late.
Phil starts the meeting and it's like Oh boy, here we go.
Tinker like an architect.
Has
The shoe.
Under a black cloth on the table.
Just like Steve Jobs in the keynotes many years later.
Phil hands the meeting over to Tinker and he's like
Michael?
I took notes on our conversation.
Here.
is the Jordan three.
And he pulls the shroud off.
And hands the shoe to Jordan.
And he's like
It's the shoe you asked for. He goes right down the checklist.
Soft leather that doesn't need to be broken in. You can wear a new pair in every single game.
Mid cut height.
Not a high top. Not a low top. The support you need without the weight of a high top.
Elephant print leather.
For style off the court that won't detract from performance on the court.
And then
The Pias de Resistance.
No swoosh.
There's a little swoosh on the back tab.
The main logo
Is
The Jordan.
Jump man.
Logo.
On
The tongue.
The jumpman logo did exist beforehand. Peter Moore had actually designed it.
But it was never in the prime position. It was always the swoosh.
And then the jump man.
It's like heretical.
at Nike at this point to not have the swoosh be the main character.
But Michael Jordan didn't really want to be a Nike, so the only way to keep him is to kinda hide the swoosh.
It's kinda like carkening back to the beginning of like Phil Knight could have had a hundred percent of blue ribbon sports.
Or he could have had fifty one percent of
Bill Bowerman's Blue Ribb Sports.
Yeah.
It's pretty crazy,'cause the whole point of these deals is to get swoosh impressions.
And
They were willing to say
we think it's gonna be profitable enough in the long run to be in business with you.
That we will
not put the swoosh on the side of these shoes.
And they were extremely right to do that.
Indeed. So as part of that, they renegotiate the deal.
Jordan agrees to stay with Nike.
The Jordan brand becomes its own sub segment within Nike.
It's own shoes, its own clothes, its own colors, its own logo, its own advertising, all managed
Stand alone.
And then ultimately, this would take several years, but it would become
Zion Williamson, where's Jordan's?
Jason Tatum, where's Jordan's?
The University of Michigan, for some reason, is Jordan, not Nike as their official uniform supplier.
UN C is
Jordan's.
And so do you know what changed in that renegotiation?
Yes.
So
They extend the deal for seven more years.
I believe at the same five percent royalty on gross sales.
But
There's the new massive
further commitment to making the Jordan subbrand.
Much more of its own brand.
And they up the total guarantee.
to at least eighteen million dollars. So from two and a half to eighteen.
In three years.
Wow.
Ultimately just like the two and a half, that's meaningless because
Jordan brand sales.
Go back up in
Eighty eight, eighty nine, ninety four.
On and on and on. Two hundred million, three hundred million, four hundred million, five hundred million in sales.
This is when they do the spike and mike ads with Spike Lee.
Gotta be the shoes. And Wyden Kennedy, gotta be the shoes.
Jordan.
earns over the course of this contract.
Easily at least a hundred million dollars. Easily.
Over the seven year Yeah, it's just dwarfing what he's earning from the NBA.
In his total career from basketball contracts.
he made something like ninety million dollars.
So I mean you even said it in that first year, just from the get go, with his Nike earnings were way outpacing his NBA earnings.
Yeah.
Now interestingly
At retail.
Again, back to this halo strategy.
The Jordan three's and then all Jordan's subsequently.
Really, this is when they become the luxury.
Brand.
The Jordans are Nike's Louis Vuitton trunk.
Yeah, they make a lot of revenue from them.
Yeah, they sell a lot of them.
But you know what, it also helps them sell a lot of wallets.
Yeah.
So the Jordan three is priced at like two hundred dollars or something?
One hundred dollars.
But this is nineteen eighty eight, nineteen eighty nine.
Right, okay. That makes sense.
All right, so you mentioned how much he made at the end of that seven year contract.
There's something mind blowing going on today in twenty twenty-three with the Jordan brand, and I don't think people quite have a handle on what has happened in the last three years.
So the Jordan brand is the fastest growing part of Nike.
Nike grows like ten percent a year. The Jordan brand over the last three years
keeps growing at like 35%.
It does
billions in revenue growing at thirty five percent.
So this past year they just reported FY twenty two.
The Jordan brand did six point six billion dollars in revenue.
Let's assume that the five percent figure is still
Accurate enough. It's accurate ish.
Jordan's making over three hundred million dollars a year.
from the Jordan brand at a five ish percent royalty. He retired
For the last time.
Twenty.
There is no athlete making
three hundred million dollars a year.
Michael Jordan will make five, maybe ten billion dollars over his lifetime from the Jordan brand.
Absolutely unprecedented for an athlete.
He's effectively a founder.
of a brand
that is growing thirty five percent at six plus billion dollar revenue scale.
With
All the operations and distribution and marketing of Nike.
It is unfathomable.
So he did active work for many years in order to build the brand equity.
But he does passive work now to keep it alive.
Of course, he has sort of input on who they're signing to the Jordan brand. He has sort of a vote.
in that
But
In Michael staying out of trouble.
And Michael staying
The dream
He builds a tremendous amount of brand equity.
And Nike reaps ninety five percent of that. So like they're perfectly happy with this arrangement. They're happy to cut him three hundred million dollar checks.
I would be too if I was earning the other side of the six point six billion dollars.
But Jordan totally has had to
shape his life in order to be the dream Michael.
And continue to be that.
He is so synonymous with the brand that he has to be perfect to keep the brand doing what it's doing.
Yes.
And that's the dark side for Michael.
One more
Really critical.
thing I wanna say about all this and Jordan and the building of the dream and the changing of culture.
Before we move on to
All the rest of Nike history, which we will cover here.
You can't ignore two.
Again the timing in this.
All of this coincided.
with the rise of ESPN and Sports Center.
And
That was so important.
in the early days, like when Steve Prefontaine was on the cover of Sports Illustrated or some of the tennis players, it was like there was a Nike line of
Oh, we could spend X million dollars in advertising, but if we get our shoes on the cover of Sports Illustrated, that's worth twenty million dollars.
With ESPN and Sports Center.
those athletes and Michael Jordan being all over that twenty four seven every night. That was twenty million dollars a night.
Of free advertising.
That's a great point.
So off the back of the Rise of the Jordan brand, in nineteen eighty eight, they launched the Just Do It campaign with the very first I think this is the first Wyden and Kennedy ad, right?
Uh second real big one. The first was the revolution ad with the Beatles that they did for the Air Max.
Okay.
Ticker Hatfield and Mark Parker join.
And so they're kind of finding their footing again. They're
realizing that
Okay, we can diversify outside of running, we can find a lot of places to sell the dream, we can make different products to monetize the dream to let people participate.
Their market cap hits a billion dollars at this point in 1988. So investors are starting to wake up to like, huh, they're building something really special here.
They opened their first Nike town in Portland.
The early nineties, late 80s, early nineties are just all good for Nike. I think by ninety-one, their market cap hit five billion. By ninety-six, their market cap hit ten billion. And they're really just executing the strategy that we talked about.
But at scale.
Until they get hit with
Everything we already talked about on the labor challenges and that controversy.
Yep.
So
That's a tough few years. Interestingly, like right around the dot com crash is also kind of tough for them.
their uh market cap drops from twenty billion to eight billion dollars. They weren't in any way yet a tech company.
But tough times right around the same time period.
An interesting thing from that front.
Losing Kobe to Adidas was big.
Really big.
And people forget this. People forget that Kobe was an Adidas athlete first.
Yes. In the same way that people forget that Kanye was a Nike athlete or a Nike uh rapper. Rapper first.
But yeah, those early two thousands were not a great time for Nike. But then interestingly
Kobe.
Was so unhappy at Adidas.
And wanted
what Nike could give him that he bought Adidas out of his deal to move over to Nike.
Oh yeah, I have the numbers. So Kobe was with Adidas from ninety six to two thousand and two.
And he hated the Kobe Tos so bad that it's rumored that he paid eight million dollars to get out of his contract so he could move over to Nike.
Yeah.
That was a huge win for Nike and a big turnaround. Like two thousand two is really when it started to get good again for them.
Yeah.
I'm sure part of that was the shoes and
Yeah.
By all accounts the Kobe Two's sucked.
I do think there is, and this will get to analysis in a little bit.
Nike can do something for athletes.
For the big superstars.
That the other companies can't. Oh, and right around the same time in two thousand three is when LeBron came into the NBA and Nike signed him out of high school.
Yeah.
Okay, so two thousand two they get Kobe, two thousand three they get LeBron.
They've cleaned up their image, they're cleaning up their factories, they're cleaning up their supply chain.
In two thousand and three, they acquire Converse for three hundred and nine million dollars.
their once faux and you know, now Nike's in the multi-billion dollar market cap, and Converse is a tiny fraction of that size.
Two thousand three, Michael Jordan retires.
And it's fascinating just to get a quick data point.
The Jordan brand
That year in two thousand and three.
Is doing seven hundred million dollars a year.
And today it's doing six point six billion. And that's been the delta since he stopped playing basketball.
I mean the thing is both of those numbers are bonkers.
Right. Seven hundred million dollars is
Bonkers.
And
Six billion dollars.
is bongers. Yeah, Jordan has completely transcended a sponsorship deal and turned into a brand.
The notion, the platonic ideal of Jordan is a brand more than a human.
So in two thousand six another important thing happens.
And
Most people didn't realize it at the time because keep in mind 2006
over an Apple.
Steve Jobs is still the CEO.
So not a lot of people know this guy named Tim Cook's name.
But Tim joins Nike's board.
I believe in like late 2005 he joined the board. He immediately starts helping Nike into understanding how to use digital technology to transform their business.
And in two thousand and six
They launch the Nike Plus iPod. Yes. Yes.
Which
What's not a
Terribly successful product.
in the market.
But man, did it help Nike understand where the puck is going.
And
This was the first corporate use of plus in a product name. Oh, was it really? This
Is the moment.
That has led to the
Terribleness of the sea of digital corporate products today.
We all have this to think. Plus this, plus that, plus blah, blah, blah. I'm surprised there's not a Jordan plus out there. No, there's not because Jordan is too well managed to brand. I actually did not know that. That was the origin of plus.
It was interesting'cause it was this little like thing that you would put in the insole of certain shoes and it would measure your stride length and your you know, all the metrics about running and it would report it to your iPod'cause it had a little like
30 pin connector thing you could put into your iPod. It was the most clunky cluey thing ever. But as that evolved into the fuel band, and then as the fuel band evolved into apps on your iPhone.
Nike started really building a way to have a relationship.
With their customers.
directly.
And not just through their product.
But with this sort of suite of services.
And two thousand and six, and then again in like twenty thirteen, fourteen, they'd had a sort of a new strategy start.
There's really these clear moments in time where the company
changed its DNA. And I go all the way back to two thousand six on the technology one.
It also completely changed their acquisition strategy.
Cause up until then, they had been acquiring brands.
They bought Converse, they had bought Starter. Starter was gonna kinda be their like Walmart brand. Oh, that's right. Colhan. Kolhan, yeah.
And
I think this sort of
Aha moment happened where they realized
Actually, what we want to be doing is pouring everything into the flywheel of the Nike brand. So they divested a bunch of stuff, but they started acquiring capabilities.
from a bunch of these other companies to help them make this tech migration.
It's like a two decade thing where they have
these two different strategies that are happening at the same time. One is the digitization.
And to give you a stat on how impressive that is.
Across the four mobile apps that Nike operates today.
They have 500 million users a quarter.
Who are now using
Nike digital apps.
from their e commerce app to their running app.
Run club, training club, sneakers.
and the Nike Mobile store.
Huge user base.
all sort of started at this moment in time where they realized A, we should be in technology and B, we should be making acquisitions not of other brands, but of
technologies that we can integrate to help us
extend our brand and participate more in the lives of our customers. The other thing
And this is a little bit later. This is more of the twenty thirteen, fourteen era. They pull the trigger on this.
big strategy shift away from
What Phil Knight
had sort of pioneer with the retail relationships to go direct.
And Nike started to realize
In this new era, this internet era, this global era, where you have to be at scale to execute certain strategies,
They're gonna be the player at scale.
that can execute a direct strategy that can operate Nike.com to sell shoes directly to customers.
that can operate retail stores and all these different places to go directly to customers.
And
They're not all the way there. And I think there's a lot of like we'll talk in their sort of bare bull case about
where they are in that transition and how successful it will be.
But
There is this
tipping point where a brand becomes
The scale player. Like, think about Disney in media. They've become the scale player. They can run a different playbook and go directly to customers in a way where
other places that make content need to integrate with the existing distribution channels.
Disney can make a 10, 15 year transition, especially with the right technology to go direct. Nike's basically betting that they're also one of these hero brands that can run that playbook.
For context, today Nike is what more than twice the size of Adidas.
Yeah. Who is more than three times I think the size of the number three player.
Which is sketchers, maybe? Yep, it's super power law distributed.
The other aspect of that
is personalization. Nike I actually
Think is
Really at the forefront of apparel.
Personalization with what started as Nike ID.
And now is I think called Nikki by me.
But anybody can make
Their own Nike shoes.
In their own colours with their own designs on them.
To be able to do that at scale with their customer base.
And produce the standard lines.
That requires a level of scale economies that
Nobody else can really match.
Okay, so that's like the twenty fourteen era where they really start to execute this
digital and direct migration.
Around this time you have this very old idea of sneakerheads starting to take root
in a big way, this huge growth category.
Where the secondary market for shoes
In most situations you would think like used shoes are worthless.
And like I'm being tongue in cheek here because most, you know, secondary market shoes are not used.
Well until recently.
Any mainstream person would have said of course to that statement. Right.
But
There became, David, to your point about
Jordan and Nike creating culture and participating in cultural movements and
changing the way that people move around in the world and having a sneaker as a thing that defines you rather than a sneak as a thing you throw on for the tennis court, but you wear, you know, proper shoes anytime you go somewhere else.
They really have
figured out how to reach an audience and tap into their identity in a way that the original Phil Knight tracks shoe thing never could have dreamed.
And shoes have become this
method for self expression and
The secondary market.
It's huge. It's like a some estimate two billion dollar, some people estimate six billion dollar.
Category.
Keep in mind all of athletic shoes are what, what did I say? 150 ish? You know, somewhere around there. So still a tiny fraction compared to
the athletic sneaker market.
Broadly.
But
Who would have thought that used special edition shoes or secondary sales of shoes could possibly be a
single digit billion dollar ecosystem.
Right.
I mean this is
Companies like Goat and StockX and
We'll talk about this more in analysis, but
Nike has made the, I think very conscious decision.
not to capture any of that value.
Yeah, I'm fascinated by that.
I think they've figured out clever ways to make a bunch of money on limited edition sneakers without having to be the marketplace for all the secondary sales.
The other way that Nike potentially could capture this value
would be to massively increase their prices. And this is really interesting. I think this is where Nike is
Different.
From
the luxury brands that we've covered.
The L VM H is
The Porsches.
Porsche.
Makes
Tens of thousands of dollars of incremental gross margin with their
Library wine colors that you can buy.
Nike sells these
Incredibly limited edition retro and otherwise sneakers.
But they
Sell them for
Hundred fifty bucks, two hundred bucks, maybe three hundred bucks, like not a lot of money.
The instant that they get purchased, you can turn around and sell them on the secondary market for five thousand dollars, some of these shoes, ten thousand dollars, maybe more.
That is a very intentional decision by Nike not to capture that value. And I think the reason they do it is to make all of this.
work to make the dream work in a way that
Is
applicable to everybody on the planet and not
Just
Louis Vuitton's market.
Is they have to keep it attainable.
And so they're willing to let that
two six billion dollars or whatever.
Go to secondary players, go to StockX.
In order to
Keep the dream alive.
It's pretty crazy.
I don't think there is anything that I can buy from Nike that costs five hundred dollars.
Yeah.
And yet
Nike absolutely
produces many items that are worth
Way more than five hundred dollars.
Right.
And like it's not even a high number. It's not like oh I can't buy something from Nike for$10,000. Like I really can't think of a single thing I could possibly purchase for them, even for five hundred.
Right. The one product that I know of
was the mags, the back to the future shoes.
that they actually produced. But those were for Michael J. Fox's charity. I think they made fifty of them and
Sold them for seventeen thousand dollars, if I have that right. Hm.
But A that was for charity.
B that was like
Obviously a stunt.
That's not Louis Vuitton.
All right, here's what I can buy for four hundred and ninety dollars. I can get American and National League jerseys for the all star game.
Mm.
And they have some football shoes that cost three hundred dollars.
Curious.
Wow.
Crazy.
But the point still stands.
They make it up in volume.
Yeah.
Yes.
I really can't think of anything else off the top of my head where
I
company is making such a obvious and clear choice.
to give value to other players in the ecosystem. Yeah. Whether those be companies or just people who are arbitraging.
Yeah.
Just like a luxury brand.
they have to market the dream.
but their mechanism for capturing is entirely different.
Yeah.
Okay, I'm gonna move us.
quickly here through twenty eighteen to today, so we can analyze the business in its current state.
So in twenty eighteen, something pretty special happened.
They pulled the trigger on a Wynn and Kennedy ad
with Colin Kaepernick.
about standing for something.
The Dream Crazy Ad.
Yeah.
the text of which obviously was just Colin Kaepernick's face and says, believe in something even if it means sacrificing everything.
They companied it with a commercial
it launched online, Kaepernick tweeted it, then they did these big billboards in every major city.
I remember the first time I saw it and I was like
Wow.
Nike.
Executed.
perfectly on exactly what they were trying to do here. It strikes you emotionally, much like many of the Nike commercials.
It was at a particular moment in time.
where they saw an opportunity to do something that they felt was right.
and become the center of media conversation for like months. Like this was the advertisement of the year.
And in fact.
I know that
when they launched this, they actually scrapped their plans for the whole rest of the year for a whole bunch of ad campaigns that were already ready for a different way that they were gonna do the thirtieth anniversary relaunch of Just Do It. And instead
made everything in this new tone. This Kapernik ad struck such an incredible chord.
And made a lot of people super angry.
on the sort of other side of the political aisle of this particular issue that Nike was supporting, that like
it entirely changed Nike's media plan in every geography for every sport for the rest of the year.
Yeah.
This was two years.
Before Black Lives Matter became a really, you know, big thing with George Floyd. This actually was like a big risk.
If this had been done two years later,
it would have played out very differently.
It would have been way less of a risk. They would have been just like every other company. Just like everyone else. Yeah.
And it's quite illustrative that we aren't really talking about
Anything that Kaepernick did.
We just assume that the whole audience has seen this ad, understands the power of this ad.
That says a lot about the ad itself, the meta context around
how we're talking about it.
I do think this is a good place to open up what is Nike's media strategy, because it's very clear, especially over the last twenty years.
That
They pick a social issue.
that they feel strongly about.
And they drive a truck through it in the American media market and say, Hey, we wanna prioritize this and we wanna say we stand for this and we wanna say we stand for and support something. And there's a cynical way to take that, which is like they've done the analysis and they believe that.
in doing this, they're gonna build more love than they're gonna piss people off from, you know, those people are worth losing because we prefer these people instead and we think these people's disposable income is high enough or there's enough of them or whatever.
I actually don't think that's the way that it operates. I think it is like
An executive and creative gut feel.
This is a set of values we feel are right.
And we're gonna continue to bet the company on the people that identify with that set of values are a great customer segment for us and we can grow within it.
I really do think it's quite touchy feely.
Yep. And this is also, you know, back to the Kapernik ad.
This is
To my mind.

Pinnacle of
The brand Halo.
element of this. Yeah.
Kaepernick.
Played football. Not an important sport for Nike in terms of shoe sales.
Hadn't played in several years.
It wasn't about football. He was sitting there on the Nike roster getting paid. There was a bunch of uh press about how they were thinking about actually cutting him.
And then someone internally is like, Whoa, what are you thinking? This is a huge opportunity for us. But like
It's hard to be a Nike athlete when you're no longer a professional athlete.
Yeah.
This is like the ultimate example.
For me of
The addition.
The sponsorship, the campaign, it's not about the shoes. It's about the halo. Yeah.
Despite that
going really well for them in twenty eighteen.
They did just have a whole bunch of other controversies.
big Me Too issues at the executive level, the person that everyone thought was going to be the CEO and next after Mark Parker and many of his people around him.
We're shown the exit.
There was the whole Oregon project. That's their competitive running group.
With doping and all the alleged abuse going on there. So there's these sort of like
Coming out of twenty nineteen, they really did kind of just need to like clean things up and write the ship.
And it was very fortunate that while all of this was going on
They're big competitors.
We're all kind of screwing up.
And especially going into Covid, like none of their competitors figured it out.
There's these smaller shoe brands and you look at on or Hoka or Brooks.
A lot of these
niche players have done well in growing
But Nike hasn't had a formidable
Scale.
competitor.
Adidas has just been nothing but mistakes over there the last few years. And so Nike has had some of these issues.
But
has kind of been fine and after they brought in John Donahoe
They've been able to clean up the organization, reset for the next chapter, execute this shift to a direct and digital strategy.
While I think they take a little bit of a breath and say like
Okay, what does Nike in twenty thirty?
look like and how can we make sure that we don't sort of stagnate here.
Oh, this is great. I have so much to say. Let's officially transition to analysis and do power, and then you can update us on the business today as we go.
Great. So
Okay.
Power.
For new listeners, as part of the analysis on every episode, we do a segment called Power, which is based on Hamilton Helmer's incredible business strategy book, Seven Powers. Yep.
Which is basically
What is it that enables a business to achieve persistent differential returns and be more profitable than their closest competitor on a durable basis?
So
David.
I think
There is a trap.
laid for us on this episode. But I'm curious. Oh you said you had a transition to power, so I'm curious where you were going.
Okay.
So
Obviously we're gonna talk about brand here.
In a minute.
But
But
Scale economies. Yes.
Are written.
all over this company in this episode for me.
And
This
Is
the clearest thing in my mind that makes this industry and Nike's position and strategy within it.
so different from, say, an L VMH or a Porsche or any of the others. I mean I guess Porsche has scale economies.
But
If you look
At the sneaker industry.
We talked about this a minute ago. It's such a power law.
There's Nike, there's Adidas that's half their size.
And then the third place player is well less than half of Adidas's size.
Yes, after that is Skechers, then Puma, then ASICs Converse under armor, but like
massively declining market share curve.
Yeah.
Okay.
Now compare that.
To the rest of the apparel industry.
It's wild how different it is, right?
Think about fashion, think about clothes, think about shirts, think about
Pants, think about jackets, think about whatever.
No other corner of the apparel industry looks like this.
In that there are
Two
Three, four,
Companies that make
A huge share of
All of the sneakers that the world wears.
That's wild.
It's totally wild.
It also
is massively scale economies driven because
The way that
You acquire customers and retain customers.
is with this brand halo of sponsoring these big athletes and putting on these large
very expensive.
branded events and competitions.
And
Small companies can't do that.
the primary way that you get someone to be a twenty year customer of Nike
Is to go and spend
money on the biggest athletes in the world.
And the whole game, just like Netflix, is
Nike's acquiring content.
Nike is acquiring
the lebrons of the world to be Nike athletes.
And
The Lebrons of the world are gonna go where there's the most dollars flowing to them.
And who can give them the most dollars? The people with the biggest customer bases.
It's not just
Yeah.
Nike is paying
LeBron a check every year for a lot of money, like Converse was back in the day. It's not like, Oh, here's your hundred thousand dollar check, right?
There's alignment and an incentive
To be part of the biggest machine. So like the Kobe situation is so illustrative of this, right? Kobe was with Adidas.
Yeah, maybe the Kobe two sucked. Like I don't know and he didn't like the shoe. I doubt that was the issue. I think the issue was what Nike could do for Kobe.
And thus what Kobe could participate in
Was
exponentially higher than even what Adidas could do.
And like that is huge power.
Yeah, it's fascinating.
I mean
The game is figure out how to have the most customers that you can sell apparel to, and then you get to buy the biggest billboards.
And you get to align interest with the biggest billboards.
It's a content game on the customer acquisition side.
And you can make the best commercials that are the most inspiring.
I mean
That I guess doesn't take as many dollars. You know, you can produce an incredible commercial for a hundred thousand dollars, but the talent in it is gonna cost you millions.
The Super Bowl slot is gonna cost you millions.
I think a lot of
Nike's
power on a go forward basis.
is totally the scale economy stuff.
Yeah.
Totally agree.
And they had lots of counter positioning in the old days. Like the whole Jordan thing was a pure counter positioning play.
Yes.
the other companies couldn't do it because Magic and Bird would never tolerate
Jordan getting uh
Fundamentally much better deal. Correct.
Yeah, they had too much to lose.
Yeah.
So brand.
I think this is a trap.
on this episode.
I think
Nike.
is a brand.
First and foremost, what they do is build this incredible brand, sell the dream.
support athletes, inspire people.
But
When you literally
understand how Hamilton defines brand power.
And
The perfect example is the Tiffany ring.
You get a Tiffany ring versus an unbranded diamond ring of the exact same caliber, you're probably paying
ten to thirty thousand dollars more for the Tiffany engagement ring.
And
There's a pureness.
To that.
brand premium concept.
Mm-hmm.
Does Nike really have a brand premium?
Mm or is it the athletes that have the brand and Nike's scale economies let them
by the athlete's brands. Right. As Trent Griffin would put it, wholesale transfer pricing, where actually the athletes are the ones that sort of hold the power and Nike's happy to pay up for it and pass through all the
profit pool to the pinnacle athletes.
Unquestionably that was the case in nineteen eighty four with Michael Jordan.
And then again in nineteen eighty seven, eighty eight, when they renegotiated the deal.
Right.
But let's look at an Air Force One or a Dunk.
You know, the dunk loaves that everyone's wearing right now.
They're not
really generating
Pricing power on that.
Maybe off of something purely unbranded.
But off of Adidas?
People are more likely to buy the Dunk Low SB than whatever the Adidas equivalent is.
But the prices are pretty equivalent.
Yeah, they're not paying more for them. Right. Now maybe again that's a
Intentional choice by Nike.
But in this category I do think
Yeah, if the dunks cost more than the Adidas Sheltos.
I don't know, maybe Sheltas would be popular right now. Right. For whatever reason, Nike has either decided not to or can't.
Raise the prices.
where their brand differentiates them. And I think it's fascinating.
The Nike running shoes that I buy that are what are 160, 180 dollars.
The equivalent Adidas pair is 160, 180 dollars. Same with the equivalent new balance pair.
And so if you assume that they do have brand power
Nike's making a conscious choice.
not to
capture that value in making all those shoes more expensive than competitors.
Yeah.
But I do think
Despite.
You're saying.
the trap and I think there is a big trap in overestimating brand value of Nike.
It does definitely have brand value.
And brand power.
Yeah.
It shows up in a different way. It shows up not in pricing.
It shows up in the fact that I often don't look at a competitor. I will only go by the Nike thing.
Yeah.
My thought exercise on this, which is a little different than my usual brand power thought exercise, which is
Can you?
Kill it.
Can you intentionally kill Nike? No, you can't.
It can't die. It will be with us in a hundred years.
Ooh, that's quite a take.
Oh, you don't think Maggie's gonna be here in a hundred years?
I think you could totally kill Nike in the next thirty if you wanted to.
I also don't like your premise and I disagree with your Dior thing that the really good brands or the way you can tell if something's luxury or or a durable brand is like if you couldn't kill it if you tried. I think that's too squishy.

Okay, fair enough.
I have something.
Way less squishy for you here, though.
Okay.
I think
I was talking with Scott Reems about this.
I have no data on this whatsoever.
But I don't think it is a controversial statement.
To say.
That's
The swoosh logo.
is tattoo on more bodies around the globe than any other company logo.
I'm sure that's the case.
It has to be the case.
So
If that's not brand power right there I know it doesn't fit Hamilton's definition. Yeah, it's a sleight of hand.
What Nike is first and foremost
is a brand.
What the entity is is a brand.
Because they don't make sneakers, which we'll talk about in a second here.
They don't seem to charge more than their competitors.
Yeah, I'm literally looking at Adidas gross profit margins are on average higher than Nike's. Nike's current
rolling last four quarter gross profit margin is forty four percent.
Adidas is forty six percent. And Adidas
Every single quarter for the last ten years.
has had a higher gross margin.
What is going on here? Why isn't Nike with a better brand than
Anyone else in their space and one of the hero brands in the entire world
They don't seem to be getting a special Nike markup.
This is again and this is purely conjecture.
I do think this isn't intentional.
Decision on Nike's part.
I think they absolutely
Could sell.
Five hundred, one thousand, five thousand, ten thousand dollar Nike items.
They absolutely could.
And they choose not to.
I think because if they did that
Well, one thing we didn't talk about.
So
Nike announced a few years ago.
Yeah.
their whole marketing strategy was gonna be reoriented around, I think, twelve cities.
in the world.
And they were gonna focus everything they did from a marketing standpoint.
On
thinking about what it would mean to be interesting in those cities.
So what's behind that?
And the cities are like
New York, Los Angeles, Tokyo, Shanghai, Rio, Paris, et cetera.
And I think what's behind that is
Nike.
needs to be accessible to the taste makers in those cities.
And that doesn't mean
Wealthy people. That means people on the streets.
That means young people.
That means
people who can't afford five thousand dollar items but want to be participating in the pinnacle of Nike
I'm not talking about five thousand dollar items. I'm talking about charging two hundred dollars instead of a hundred and eighty because there's a swoosh on it when the market
price for those shoes seems to be a hundred and eighty eight, no matter who makes them.
Hm.
Why don't they do that?
Is it because
Of what it says right at the top of their IR website, which is Nike Inc. is a growth company.
And they care more about growth than harvesting profit dollars.
Mm.
It could be. I think the thing that is so confounding here
Is
The secondary markets.
There is no question that the value of many Nike items is well above their selling price.
Right.
And I don't think that's the case for Adidas.
Maybe for some items, but I doubt as many as Nike.
Yeah, I don't know. I don't have a clear answer here. I think my best answer is
They want the most swooshes out there in the world.
And there's some sweet spot where they're willing to trade off profit dollars for that.
for the sort of continued brand presence where the swoosh feels like
A ubiquitous thing.
and a brand people celebrate and are excited about and they just want it reinforced on everyone everywhere. So they're willing to give margin dollars for that.
Ooh.
Maybe this actually all comes back to scale economies.
'Cause it's kinda the same thing with Amazon, right? Or Netflix.
For a given price.
Netflix can offer more value or could in the past.
offer more value.
Than anyone else.
Amazon with prime.
can offer way more value.
than anybody else. This is the scale economy play.
Yeah.
I don't think the rest of the powers are particularly worth talking about. The most interesting thing is there's not any switching costs.
There's not any network economies. There's not a cornered resource.
I frequently switch shoe brands, all the time.
And that would be like one of the things that I'm least excited about about any shoe or apparel company is
Unlike tech businesses, there's no potential for any form of lock in. And there's no potential for really any form of network effects. Like, come on, how am I gonna benefit from other people wearing
Nike's.
Maybe like
in the Nike Run app, being able to share stuff with my friends who also have the Nike Run app, but it's thin.
That's not how they make their money.
Yeah.
Agreed.
So
Interestingly, I guess what I would conclude on power is
Nike is first and foremost a brand.
That
From a seven powers perspective, most leverages scale economies to get their outsized profitability.
Totally agree with that.
Nice.
Okay.
I will catch us up now and give us the numbers on the business today and then we can go into playbook.
So Nike is at absolutely astonishing scale. They are a$51 billion revenue business growing 10% year over year.
As I mentioned at the top of the show, they're the largest apparel company in the world, except for the luxury category. L VMH and AirMez got em beat.
Nike sales to women alone.
are bigger than all of Lululemon's revenue. Wow.
Take that in for a minute. That's shocking. I feel like that's an illustrative stat.
And Nike has really lagged in developing products for women. That's exactly what I was gonna say. It's just eight point six billion of their fifty billion dollars of revenue.
Wow.
It's like every corner of Nike.
is bigger than the brand that you associate with that space.
You know?
Yeah.
The Nike brand does forty nine billion
So there's some other revenue in there, Converse and
I think there's some other catch all, but basically there's Nike in Converse.
And Nike includes Jordan.
So I mentioned earlier this shift to direct that Nike has been in the midst of for it's basically like a ten year journey.
About sixty percent is still wholesale, is still sold through retailers.
And
Impressively, forty percent of this very large business is fifty billion dollar revenue business.
is now done selling products directly to consumers, either in stores or on their website.
I can't imagine how difficult that transition is to make when you forge these like long partnerships.
With retailers.
Come back to that in a second.
Their gross margin profile forty four percent.
So
It's
sort of interesting looking historically, David, we've been a tech podcast and we've looked at lots of software businesses that have these
seventy, eighty percent gross margin businesses.
You know, Nike has real costs, as you would expect with
materials, labor, logistics, cost of storing all this inventory.
Forty four percent
Not bad.
Let's just remember luxury. L V MH is a sixty eight percent gross margin business. Air Mez is a seventy one percent gross margin business. So Nike is
better than a car company, but it ain't no luxury.
Yeah.
So Nike does six point four billion in operating income. So that's their income before taxes.
twelve and a half percent operating margin.
So that's sort of what you should think about there sort of take home.
Not a software company.
Yeah, lots of costs involved in this business.
They have eight and a half billion dollars sitting in inventory, which even for Nike is high.
Mm.
That's a point we'll revisit in our analysis here.
Unlike the Nike of old,
They also, in addition to that inventory, have ten point seven billion dollars in cash and similar uh equivalents.
So
The company is no longer constrained by how much capital they have available to them.
While it's been a growth company, they kind of don't know what to do with the cash.
It's sort of this interesting question of well, the way they started is that they could use one hundred percent of their cash.
all the time to go buy more inventory and reinvest that in the business. And that was true for like a couple of decades.
They've now had thirty consecutive quarters of increasing dividend payouts. So it's a dividend stock with 11 billion of cash on hand.
in addition to continually paying these dividends.
It's funny, this doesn't jibe for me with the statement on the investor relations page, like he's a growth company. I mean, I guess ten percent growth at their scale is impressive. Thirty five percent growth in the Jordan brand is very impressive.
So you might think it seems like they could reinvest more in the business to grow faster.
They already spend four billion dollars a year on
Demand creation.
And I assume that's like their sports marketing budget.
I think the wording on the financial statement is interesting too. They literally look at it as
We're basically going out and buying media.
to create demand for our products.
Yeah.
I mean, that's a hundred percent what it is.
Yes.
Like we were saying.
It's not really that different than Netflix acquiring or producing content for Netflix. Right. They just monetize in a different way.
Yeah.
Footwear is almost three X the apparel business on a revenue basis. So at least by revenue, footwear is still their bread and butter.
And in part, it's just selling sneakers to people that go wear sneakers every day and wear'em out.
Once or twice a year, and then need to go buy some more sneakers. And that's like most people in the world. It's a pretty incredible market that they now get to address.
you know, a hundred and fifty billion dollar athletic footwear markets crazy.
When you look at

Pretty interesting thing that they list, which is their wholesale equivalent revenue breakdown.
Which is basically saying.
Yeah, we sell some of this direct, but we want to put apples to apples and make these unit sales sort of adjusted as if they were all sold through our wholesale channel.
Men's is 51%.
Women's is twenty one percent.
Kids is twelve percent.
And the Jordan brand broken out separately. Like all of this excluding. The Jordan brand is the six point six billion dollar business that makes up the other sixteen percent.
of that pie chart.
Holy God.
Yeah.
Men's inclusive of Jordan if you just assume Jordan is three quarters men.
That means that they're selling sixty four percent of their product.
to Matten.
So remember when I said at IPO they sell sneakers to men?
It's like
Kinda the same business as it was, but a super different business than it was at the same time.
Yes.
In some sports specifically, like just to dive into one example.
They have a near monopoly in basketball shoes.
Nike and the Air Jordan brand's share of performance basketball.
was eighty six percent. And the stat's a few years old. It was right before the pandemic.
But the dominance was even more prevalent in the lifestyle basketball category, where they have ninety-six percent share.
I have to wonder
The other shoe companies
Who are still doing
Big deals in the NBA.
Let's take Under Armour and Steph Curry here in San Francisco. Like
What are they doing? Name another Under Armour athlete.
I mean they exist, but I don't think I could, right? Like
Why?
And obviously it's worth it to Steph. Steph could sign with Nike tomorrow, but Under Armour is just paying him a boatload of cash. And I think also gave him tons of equity in the company and whatnot. But like why?
I mean, I just think it's a bad move for Under Armour. I think this is the classic thing that we've talked about in eleven different industries of don't get caught in the middle in the age of the internet.
It's so obvious in media. It's becoming obvious in universities.
But be the New York Times or be acquired, but don't be the Cleveland Plain dealer.
Or B Disney or B Doug Demiro.
Or in this world.
Be Brooks or be Nike. Right.
But don't be Under Armour, who's not a platform brand. They don't have the size and scale and everything that accrues to a Nike, but they're trying to run a mini Nike playbook and they need to run a completely different playbook.
Yeah.
Totally agree.
So
Nike is just leaning into this in a big way. They're now the official uniform supplier of the MLB, the NFL, and the NBA.
And they're throwing huge dollars. Like the NFL deal alone is something like a two hundred million dollar a year.
Deal.
And David, you were telling me
Nike doesn't even get to sell
the jerseys to customers. It's literally just to get the swoosh on the game day.
Jerseys.
This is
absolutely fascinating and blew my mind when I talked to a few people in the industry about this.
So yes.
The official jerseys, let's take the NBA, for example.
Nike
replaced Adidas a few years back as the official jersey maker of the NBA.
When
Most
MBA jerseys are sold to buyers who pay money for them.
Aka fans.
Not
The players.
Most of those are
replica jerseys.
Which I'd heard that term before and I never thought about what it meant.
Most of those are made by Fanatics, which has run an incredibly interesting playbook in the sports world and the sports marketing world over the past few years.
They are replicas made and sold by Fanatics in conjunction with the teams and
of the jerseys that the players wear. Nike pays to make the jerseys that the players wear.
It is a billboard. It is a sponsorship. That is what they are paying for.
But that's probably not what you're gonna buy. You're gonna buy a replica from the team store that is made by Fanatics.
That has the Nike swoosh on it.
Which in many ways that's
Part of why Nike is willing to pay to sponsor the NBA is because the replica jerseys get more swooshes out there in the world, even if it's not on things that they sell.
It's a billboard. Even if it's not on things that they make.
Right.
That's wild.
It's totally wild.
You would think the value chain would flow the other way, where you would make money from the jerseys sold because you are an apparel company, but instead you're paying to put your swoosh on jerseys made by other people.
One final thought on this athletic shoe market being a hundred and thirty billion dollar market.
I mean
Nike totally participated in a world change and helped to change the world.
that we all wear sneakers all day.
What an insane market to address that there are 14 billion feet in the world and we all wear out the shoes. It's just a thing we need to just keep replacing. What a fantastic thing to get to sell.
It really is surprising to me that they haven't
quite figured out price discrimination.
With the exception of some of these very specialized shoes, which I'm probably not going to go buy.
I'm just not a sneakerhead, so I'm not gonna go buy any of this limited edition color, this, that, and the other thing, right? Something I have to like keep in a closet in a bag. It's not my bag.
But
So if you like exempt away that part of the market.
There's probably some shoes that I should and would pay five hundred dollars for, and yet those shoes don't seem to exist. And that's very surprising to me.
Yeah.
Okay, so those are the numbers on the business today. You wanna go to playbook?
Let's do it.
Okay.
Playbook.
The first one, I know I've said it a few times on this episode.
I totally want to like ingrain it in the ears of listeners.
Where Nike will come up with the most creative, clever way to win.
And even if it's
Breaking a little bit of a rule.
It's fine.
The best illustration of this is Breaking Two. Did you watch that, David? Oh yeah.
So good. It was compelling. Unbelievably compelling. But they said what are all the rules to competitive running?
If you're gonna have a pacer on a run with you, it needs to be the same pacer the whole time so that you can't cheat and like rotate in pacers.
You can't
wear certain types of shoes that have ill defined rules. And so Nike
stages this event with their shoes that provably make you four percent faster.
than you've ever been before. And they drive a Tesla with a laser and a whole bunch of pacers around this guy.
And they're like, you know what?
We're gonna make this big media spectacle out of this guy setting the world record and breaking the two hour
Marathon time.
And like he came close.
And it was an unbelievably entertaining event to watch.
And what they said was we don't care if this is legal or not in competition. We're just doing a stunt.
You know, and you guys can debate afterwards if this actually set the world record for the marathon time or not. And I just thought it was like
There's nothing more perfectly Nike.
Then saying like well
Those rules are like quite cute.
But Nike is a growth company. But Nike is a growth company. That's the ultimate non sequitur. I hope that becomes a mean.
But Nike is a growth company.
It's actually better if you open it on mobile'cause the sub headline goes away. So it's literally just a black and white picture of Serena Williams that says Nike Inc. is a growth company. The first time I opened it on my phone, I was like, That is a okay.
All right. Making that pretty clear.
So
I don't know. I think you sort of see some of that in the best DNA of Nike and in the crappy DNA of Nike, like the Morgan project stuff. So
It's important to understand that to understand the company. Hey Ben, break the rules, fight the law.
That's right.
Another big one is
The things that
Are your very strength can go too far and become your weakness.
And
They totally pioneered outsource manufacturing in Asia, which is also why they got hit so hard and deserve to get hit so hard.
When
that became an issue.
I always think
Everyone should always just be aware in your business that
Your greatest strength is also your greatest weakness and you just have to factor it in. Like you just have to know
It was weird to me how wildly caught off guard they were.
by like, Oh well, but we're not a shoe company.
Come on.
Can't say that. Yeah.
On the note of not a shoe company
There's a great analogy here.
to T SMC.
And in fact, there's a great analogy here.
to the NVIDIA and qualcomms of the world and Nike.
Nike is a fabulous shoe company.
Yes.
Yes.
I think that is ultimately the answer to is Nike a shoe company? Sure.
This is our semiconductor episode this season. They're a fabulous shoe company.
Yes. And unlike
TSMC semiconductor manufacturing is wildly differentiated. Shoe manufacturing, there's like two or three really big ones that Nike works with.
They're unbelievably prescriptive. They source all the materials. They do lots of audits, stuff like that, but it runs
quite differently than their apparel business, which has like thousands of manufacturers that they work with, which are all custom for all the different
Fabrics and stuff that they need to make.
And so
In some ways it's like the fabulous semiconductor industry, but unlike semiconductors,
The manufacturing isn't as
CapEx intensive to start.
And there's not as much process power in it.
So you actually do have this like highly fragmented
foundry equivalent, like manufacturing ecosystem of people who can make your stuff.
To the scale economies power question.
To the extent in footwear.
That there are limited
Numbers of
factory operators that are the big ones that are fully audited that you want to work with.
being the scale player that can dominate the capacity in those factories.
Is a huge advantage.
Yep, that's exactly right.
While we're on manufacturing is sort of a funny note.
Nike manufactures zero shoes.
But
They manufacture one hundred percent.
of the nitrogen filled little airbags.
They do it in Oregon because that's trade secret. And then they ship those over to their Asian manufacturing facilities to put them in the shoes.
Do they do that with any of the other technology like FlyNit or
React.
I don't know.
I don't think so on Flynet.
I don't know if you're gonna make the fly knit.
In the US, you may as well assemble it.
Yeah, I would assume not.
So I also think it's one of these interesting things where like Nike gets hit.
Basically all shoes are made the same way.
There's some companies that like to claim credit for oh my gosh, this one's made in the US. Well, like part of it's assembled in the US, but basically everyone
you know, either makes the whole shoe or the upper
outside the US and I think New Balance is a
US brand, but like it's not
To my understanding, it's not all made.
Here.
It's like designed by Apple in California.
Right.
The other huge theme that I think is important to take away here is for the first
fifteen years of Nike.
It was a story of leverage.
Every single
point along the way up until nineteen eighty one.
they took the highest leveraged route they possibly could.
The whole thing was betting the farm on top of betting the farm.
And
We are telling Nike because it is the survivorship bias story, and there are many that
would have failed along the way because at any given point they would have gotten slightly ahead of their skis
And the hundred percent debt to assets ratio would have caught up with them and then poof, they go out of business.
And Phil Knight even put up he and Penny's house.
to guarantee a loan.
If it came down.
Yeah.
all would have come down.
There's no slack in the system at all.
It even continued through to the Jordan story, right?
Nobody else was gonna do that deal.
Yep.
Exactly.
So Phil Knight basically never took on any equity investors, and so he took no dilution.
He and his management team and Bill Bowerman owned
Fifty six percent at IPO, him owning forty six percent.
'Cause he just kept betting the farm all on debt and
Basically had no buffer at all.
So what that means is
On IPO day he was worth 178 million, and today he's worth about forty billion.
When you own forty six percent of your company at IPO
And it goes on to become a top fifty company in the world.
That is how you become the twenty fifth richest person in the world.
He shot the moon and he kept ownership the whole way.
Yep.
Okay, so we talked a lot about this brand halo idea. I wanna put a specific fine point on what the strategy is.
They create pinnacle products for athletes.
I think oftentimes without even thinking about
How does this translate to something the ordinary person could buy or wear?
the athletes find their way to it either through a brand deal nowadays or in the early days, you know, through
their local running shop who has something cool and exclusive.
You build brand
With
that niche athletic community by being obsessed with that particular athlete's journey and designing products for them and customizing experiences for them.
That brand
then seeps out into the broader consciousness, either through paid media.
Or through just organic word of mouth, that Nike stands with athletes. They're obsessed with it. They make the experience of being an athlete the best thing possible.
And then
They extend.
And when I say they extend, they figure out what products that need to make
that fit into the universe of the consumer psyche of how could I be
like that dream that I'm watching? How can I participate in this feat of athleticism and show that this is like me too?
And the hardest thing is
figuring out how to extend to that audience and make products for them to buy.
With
Out.
Compromising.
That step one, that belief that you make pinnacle products.
And what Nike has been able to do and thread that needle and figure out how to make the
fifteen dollar t shirt that you get at Dick Sporting Goods with the swoosh on it.
And also
Convince me that the very best
shoes to run in is the, you know, Nike Vaporfly, Next Percent, whatever, whatever.
Again, just like our L VMH episode, it's amazing that they can make a little wallet clutch for a credit card and an ID.
And a two hundred thousand dollar handbag.
Yeah.
Only thing I would add to that is uh just reiterate what
kinda has hit me through doing the research in this episode is that
Athletes are Netflix shows. Yeah. I didn't think of that until we were actually recording here.
And these days especially in the beginning it was
Athletes are
Billboards and Netflix shows in that, you know, on Sports Center or whatever, like you're gonna see the swoosh.
Now with social media.
And the modern world.
It literally is a Netflix show. People are following
You name it.
Patrick Mahomes, Serena Williams.
They have a following.
Who are following their lives like a reality TV show.
You wanna hear an insane quote that dates all the way back to nineteen eighty three?
Rob Strasser.
wrote this in an internal memo.
Individual athletes, even more than teams, will be the heroes. Symbols more and more of what real people can't do anymore.
Risk and win.
Yes.
I see your Rob Strasser quote and I will one up you a Phil night quote. Give it to me.
This is actually about filled night in just two minutes.
Around the time Michael Jordan became a Nike guy, Phil Knight had finally begun to apply in full measure his hunch that if the general public could be helped to imagine great athletes as he imagined them.
As having implications of the very best that the human spirit had to offer.
Then those athletes would become
Like the heroes of old
The heroes in books.
And people would come to those heroes and listen to what they had to say.
Yes.
I love it.
Side with the athletes.
Sell the dream.
People will buy products.
Yes.
Interestingly enough, too, in this Rob Strasser quote
Where he says
individual athletes even more than the teams. This was the big takeaway from our NBA episode.
that is about marketing the athletes, not marketing the teams.
Now what's really interesting, since we did the NFL episode earlier this year after doing the MBA episode,
I've really changed my thought on this. The NFL is a better business as a league.
Than the MBA.
No question in my mind.
But
the amount of value created out of the leagues.
I think more value is created out of the MBA.
The NFL just captures way more value and thus is the more valuable league.
This Nike episode is totally solidified.
For me.
the value coming out of the MBA.
Jordan, Kobe, LeBron, goes on and on. Zion.
Wemby Victor Wem Maya, the new
Phenom coming out of France, that was the number one pick of the Spurs.
He's already a Nike athlete.
Fascinating.
And basketball again, because it directly translates to
Those are the shoes that people can buy. Whether they buy that model or a different model, they are buying those shoes. They're not buying football cleats.
And
It's the face.
of the person. It's not behind a helmet. It's like
They're the heroes.
Right. Yeah, basketball's quite helpful in that
there's a reason to buy those shoes just to wear them around. Like you don't have to invent a new product for people to buy to participate in the brand story like you do with football.
I mean it's funny'cause it's the Gatorade line, not the Nike line about Michael Jordan, but like
Be like Mike.
If you want to be like Mike, it's really easy. You just buy the shoes.
If you want to be like
Patrick Mahomes, it's a little harder. Right. I don't have any pads. I don't have a helmet. I have nothing in common with Pat Mahomes. No shoes will change that.
Yeah.
I have one that I've been trying to think on and at one point in the research I wrote down
When you sell commodities, brand matters a lot.
Is Nike differentiating a commodity?
with their brand, or are they not in the commodity business?
Well this

Start of the episode.
This is the crux of the question.
I think there's two answers.
The prestige models.
The Jordans.
The retros, the vapor flight, what have you. The prestige hundred and fifty plus dollar Nike models.
I don't think those are commodities, I think those are products.
Nike also sells a lot of
fifty, sixty, seventy dollar pairs of shoes. Those are probably commodities that are helped by the brand Halo.
Yeah. Bifurcating it like that does make sense.
Someone told me that in many years the Monarch has been their best selling shoe, which is this
Crazy high margin dad barbecue shoe.
That
no athlete has ever worn for anything. Everyone should just Google Nike Monarchs and you're like, oh yeah, no, my parents wear that.
I don't know, it's like the ultimate barbecue shoe.
And
That's kind of what America buys.
And so they've sold enormous volumes of this thing.
I'm like one more kid away from
becoming a Nike monarch. Ironically, it's actually caught on with Gen Z. And so there's this weird thing now where like people are wearing monarchs ironically
So the monarchs
are objectively a commodity product and they're super differentiated by having the Nike brand on them.
Whereas
The Vaporfly
for the two years that it came out, the next percent thing that the breaking two marathon got ran in, it was like
by far the best running shoe on the market for two whole years.
That is actual R D product that differentiates itself.
So Phil Knight has the final word on this.
In an interview maybe
eight, ten years ago.
He said when directly asked the question, Are you a product company or a marketing company?
We're a marketing company.
And the product is our most important marketing tool.
Mm.
I disagree.
I think the athletes are your most important marketing tool.
I think the product is a monetization method.
for the marketing that you do through athletes.
But
If you admit that, then you're saying that we don't have differentiation in our product.
But I do think it's quite telling that they started distributing someone else's product and
Yeah, they do lots R and D.
But at the end of the day.
They succeed because they have built the best brand in the world, the most amazing distribution in the world.
and the most tear jerking marketing that anyone ever watches. And they have a thirty year enduring brand.
For thirty more years, Nike will be
I can't predict after that, but Nike will be uh
brand that people look up to and are inspired by.
Yeah.
Totally agree.
And it's interesting even like telling a little bit of the
athlete story along the way here too.
Even that.
story of the product is what's important.
That's kinda part of the myth of the marketing of the brand with the athletes, right?
You know, the Jordan two, the Jordan three. Like, yeah, the Jordan Two sucked, sure. Like everything I said
Probably true. I think MJ probably really believes that, as do many people.
On the other hand, it's also a really convenient story. Or the Kobe story of Oh Kobe's
You know, Adidas shoes sucked.
Right.
Yeah.
makes for a really good story for the soap opera that is the athlete's life that is
The Netflix show that they're selling. Right. Being a soap opera keeps them in the spotlight and keeps the opportunity to have more impact with sponsor eyeballs.
Yep.
This whole sponsor celebrity thing is
Both a
Asset if you do it well and a massive liability if you do it wrong.
Nike's strategy has very clearly been celebrate athletes.
Adidas has had the strategy that seems to be like celebrate eyeballs.
where they'll sponsor anyone with attention. It's rappers, it's musicians. Oh boy. It's some athletes. It's celebrities. It's
Do we want to talk about Kanye? Well, this is quite interesting. So I think Nike was smart.
I think they legitimately premeditated, ooh, we don't want to be associated with this person.
And so they drove a really hard bargain and notoriously in twenty fifteen, Kanye walked away from Nike and so they refused to give me creative control.
I think Nike
didn't see exactly what was coming with Kanye, but I do think they realized
Hm.
Our entire brand is built on celebrating athletes, and while we should be in business with
celebrities in some way, shape, and form. I mean, there's these great old stories of Rob Strasser making sure that movie stars were wearing Nike's and driving around Hollywood.
We're here to celebrate athletes and stand by athletes and like
We would stand by Tiger Woods. We did.
in some really trying times in his life where a lot of people turned against him.
Would we stand by Kanye? No. We don't know what to celebrate about him.
And so
I don't think they had too much foresight knew exactly what was gonna happen.
But
I think they've clarified their strategy that they're athlete focused. And
For anyone who hasn't been paying attention.
He blew up Adidas's year.
Adidas net income has basically evaporated and gone to zero.
They used to make
over two billion dollars a year in profit and the last four quarters on a rolling basis, they've made less than a hundred million. So two billion down to a hundred million.
And they claim around five hundred million dollars of this is the Yeezy write down.
They posted an actual net loss last quarter.
It is a pretty disastrous situation over there, and there's a full out slide in their deck.
Where they admit we think we're better than this and we're not.
Oof.
I didn't realize it was that bad. It's bad. It's really bad. They're in a complete reset year.
Well I think maybe part of this
What?
has happened.
Is the Nike can participate in getting their billboards.
in these other aspects of popular culture, music being
the biggest example of it.
without having to
Have rappers.
be sponsors because
How much Nike placement is there in music?
A ton. How many songs are there about Michael Jordan to this day?
Or LeBron or Zion or
Jamarant or what have you.
Yeah.
There's a lot of different ways to play it, and Nike seems to have played the chessboard quite intelligently. Quite
Intelligently, yeah.
All right.
So
Here we are at the end of analysis.
The bear case and the ball case.
So
There's a bear case that we haven't talked about.
Which is
Nike's in a weird place when Mark Parker retires. He was supposed to have a successor.
The successor.
Is out for me two reasons.
And a bunch of other people too.
They're theoretically thin on people who could take the job.
They bring in John Donahoe. John was the CEO of Service Now, was the CEO of eBay, and was the CEO of Bane.
So
Not from
Uh.
sneaker business. But was a board member. He was a board member, so he knows Nike's history from that level, but different than I mean Mark Parker started as a sneaker designer.
very different sort of lineage coming in.
He designed the Pegasus, which I think is the longest single running model with no pauses in Nike's history. I ran in a Pegasus two days ago.
Oh, that's amazing.
So John comes in.
And
is sort of this external hire. I get the sense I'm not sure he'll be a twenty year CEO. I get the sense this is sort of like
figure it out time for Nike, stabilize things, get him set in a good direction.
And then figure out
who from the bench is the right next person. I don't know how long it'll be, but it's just like a vibe that I get from reading stuff.
Well, Nike's also so
Insular.
People
develop up through the company and stay there forever.
Yeah.
So Covet happened.
around the same time that he's coming in to take over
And
They've sort of decided to do this big reorg where they used to have an org structure super focused on each sport.
And that meant that it was people's jobs and whole teams' responsibilities to track
The athlete's journey.
through their experience playing that sport.
And they provided
crazy amounts of
support to athletes.
And like here's an example.
At the last Olympics they wanted
Every single sport.
to have
the option to be wearing Nike shoes, every athlete.
Well, many sports don't require shoes. And Nike said, That's fine with us. We just want to have a presence and we want to support those athletes. They did a bunch of R and D on all sorts of crazy things, including like
A gymnastics.
Partial shoe.
for one specific gymnastics event because they're just obsessed with how do we make the athlete experience.
If they end up in swooshes and people understand what we're all about, they'll wanna participate in our brand story too.
Well,
This reorg was sort of
intended to realign teams at Nike with
the way that they actually interface with the outside world.
So now it's men's, women's, and kids.
Because
You go into a Nike store on Fifth Avenue in New York and there's a floor for men's, women's, and kids.
And you go into a
Dick sporting goods and there's a men's, women's, and kids. And so it kinda makes sense.
You shouldn't send twelve people from Nike.
one representing every sport to go meet with the one buyer at the menswear department of that
shoe store, but Nike's an incredibly matrixed organization. And so that's sort of the thing that was happening.
The bare case in this is
what has kinda gotten lost
is an obsession and focus on these individual sports and the journeys in these sports.
Let's look at the trainers, like just a a little example in running.
As we learned in the Brooks episode.
The business.
for them is in the trainers. It's not the race day shoes. It's what you're wearing to get your three mile or your five mile in
A few mornings a week and you wear those out and then you buy another pair and it's a great business.
So there's some Nike running department.
who needs to be sort of obsessing over that journey and growing
their sales and their share in not just race day shoes with this amazing vapor fly stuff, but like the trainers.
But look at what's actually happening in the running market.
You've got
Brooks?
On
And
Hoka.
all becoming billion dollar revenue run rate companies in the last eighteen months.
Nike
Fortunately, their big competitors like Adidas have just
been out to lunch.
But these little competitors who are all nipping at their heels are doing a great job focusing on their niches.
And when you simplify an organ the way that Nike has
There's a little bit of a concern.
Around
Are they still focusing on the niches and are they still focused on serving athletes in the same way in an obsessive way?
That they have been in the past. Okay.
I buy that as a bear case.
So
There's a lot of nuance there, but I think that
In the same way as that old Disney quote, So with Disney animation goes the company, sort of like so with running goes Nike.
That's a bellwether.
Fair enough.
I totally see what you're saying.
I think if you were to say that the equivalent Disney animation for a Nike
was running at the beginning. I think it is unquestionably basketball today.
Fair.
And I don't see them.
Slowing in basketball. Well, I mean, that's the thing is it's like kind of hard to come up with a bear case.
They're all these like little nitpicky like I listen to a bunch of Tegas calls and I listen to the earnings calls on quarter and like in doing my like investor diligence on this.
These are the sorts of things that people are concerned about.
A big one is like this.
potential reversal of strategy on D to C
Like they
reopened Macy's and they put more inventory in Foot Locker in the last couple of quarters.
And that's sort of concerning'cause
The whole narrative has been we're going direct.
But also, uh oh, we have too much inventory, so we gotta blow it out and, you know, discount it through our retail channels.
There's lots of questions to management about if that sort of thing is happening right now.
Big slowdown in China, not just them, but all the big brands. It seems like the Chinese market is shifting to
Chinese native brands, or there's a lot of signs that that might happen.
And so, you know, the China market is a huge important set of consumers to Nike. So I think them figuring out
Especially how their social justice stances fit in.
With
The C C P controlled China.
That's a huge open question and are they gonna be able to address that?
biggest market in the world for feet or not.
You know, at scale is sort of the question.
Yeah.
Make sense?
Honestly, that's the best I got for bear case.
Let me add on one more. I I don't think this is really a bear case, but if you're
Viewing this through the lens of should I buy the stock.
Not investment advice, but you know, versus other companies I could put my money into.
As incredible as this

Operations.
The power, the scale economies, the brand, I think the durability.
It's still.
Not a software gross margin business.
Nor is it ever going to be. I love that our complaint is always it's not a SaaS company. Well, it's a really good business model. I mean, look, if you could put all your dollars, you could put it into SaaS companies, you could put it into Nike.
Right.
I do think Nike has
Incredible durability.
Yeah.
I mean that's the ball case.
These scale economies are super real.
And
They're in pole position to just keep
Spending.
And keep investing.
in building this incredibly durable brand and like products will come and go.
There will be five year stints where they have the most amazing running shoes that everyone needs to marathon in, and there'll be years where they don't.
But
The Nike brand
and their media strategy and their brand voice and the way that they deploy into all these local markets and tweak the messaging to be local appropriate in every corner of the world and manufacture at scale. Like it's just
The Nike brand means something to
billions of people.
And Nike knows how to make it keep meaning something to them.
Yeah.
Like I said earlier.
There are a lot of swoosh tattoos on bodies around this planet.
That is a bullcase right there.
Yeah.
In the world of globalization and the world of the internet.
returns to scale are a big deal and they're in the scale position.
And I'm sure both hardcore basketball fans and sneakerheads would nitpick with this statement.
But
To me, Nike basketball.
And the sneaker head culture.
Is the
Core of
The driving force, you know, the pinnacle of the halo, the Jordan brand.
And I just don't
C
Like that feels like as strong as it's ever been to me.
Yeah.
Completely agree.
I mean the you listen to these Tigus calls with Adidas people and they're like our issue is how to figure out how to make the brand cool again and that does not show up in any way, shape, or form in the Nike interviews.
Yeah.
Totally.
All right, well that closes out Baron Bull.
I have some fun trivia for you, David.
Love it.
So
I saw you tweet something about
some person in this episode being related to a person in a previous episode.
I think Daniel Eck commented on it and I was trying to figure out what you had just found.
And I'm wondering if this is it.
So I'm gonna read from Wikipedia.
Nisho Ewy was involved in a corruption scandal in 1979 after it passed on a$500 million yen bribe from McDonnell Douglas to the director of the Japanese Defense Agency in an attempt to influence the sale of the F4 Phantom aircraft to the Japan Air Self-Dense Force.
The scandal was uncovered only three years after a similar scandal involving Lockheed conspiring to bribe Prime Minister Tanaka.
For anyone who didn't listen to our Lockheed episode, we talked about this bribe.
bringing down the Prime Minister of Japan and oh my God, it happened through Nisho.
Yeah. Amazing.
I did find that and that is an amazing connection and the deep cut is great for acquired lore. But that is not what I tweeted about.
My tweet was actually about something slightly different, which was
People that we come across in the acquired universe, minor characters who go on to be major characters in other stories.
And it was actually about Don Katz and Audible. Oh, interesting.
Yeah, that's a good one too.
Which I love these wild career changes where like you go from being
A journalist and an author.

Technology company.
Yeah.
It's pretty cool.
All right.
Quick carve out.
I think you should go listen to Mark Andreessen on Lex Friedman and then you should listen to him again on Ben Thomson in that order.
He's been on a little bit of a media tour since he did the it's the entry in Horwitz strategy. It's like everything we talked about on the the episode with them and how they're
the most media savvy in the game, in part because of working with Margit there.
But like, oh my God, he's so smart.
And it's just a
privilege to get to listen to him talk every once in a while. And it's fun that he's out talking right now because his perspective on AI is also, yes, he's talking his book, and also
All of his arguments are extremely compelling.
He's very smart, so I recommend you listen to it.
Well, it's like LeBron.
selling shoes. You know that he's
selling shoes. But
My God, he's amazing.
Right. It's like, Oh, listen to the venture capitalist who has thirty billion under management, where a lot of it is like betting on the future that AI is gonna be this big thing that's good for the world. Talk about how AI is good for the world. Yes.
I can acknowledge that and listen to him and then be like
And I completely agree with almost everything you're saying.
Yeah.
Uh great. I've listened to the Ben Thompson interview, but not the Lex one yet. So I'll have to do that.
I am breathing a huge sigh of relief over here because I was
More than ever certain that.
We were gonna
have the same carve out today.
Can you guess what mine is?
No.
Maybe not,'cause we've been so deep in Nike research to not pay attention to current events. Mine
Is speak now.
Taylor's version. Which just came out.
And I feel like speak now at least
For me in my
Taylor Swift experience.
Is like the
forgotten album. Like I just never think about it. Totally. And uh
Then when it came out and I was like, Oh wow. Well A, I was surprised that she's even continuing to do
The re releases. I thought so. I was like, she doesn't need to do this anymore. She's got the leverage. Yeah, the ultimate power move would be to stop.
So pleasant surprise that it came out.
And also pleasant surprise to rediscover.
Speak now. Like there are some bangers on there.
Great album.
It's so funny listening to her now. How old is Taylor now?
She's exactly my age, thirty four.
Well, she's thirty three, she'll be thirty four.
And to hear her singing songs from when she was twenty one.
It's just such a fun
Chuck to position.
Yeah.
That's cool. I gotta listen to it. I literally haven't done anything other than read about Nike, so Yeah

It's good.
There's some great songs on there. I'll enter my uh three day window right after we finish recording where I can pay attention to other things again before starting research for the next one.
Yeah.
Speaking of
We should pick a topic. I there's like a thousand I wanna do. So after this I'll give you a call and we can talk about it.
With that.
You can
Get notified, new feature that we just launched, of all new episodes launching. Go to acquire.fm slash email.
And we will
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But that's the way to get on the email list. Many of you are already on that. Thank you for doing that. It is awesome to be able to have that direct connection with you and not rely on a Twitter algorithm or anything um letting you know that we're live. Anything subject to change.
Yes.
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With that listeners.
Thank you for going on this.
Blue ribbon journey with us, and we'll see you next time in Dimension Seven.
Wow. Uh you are bringing a new energy to these outro. I like it. It came to me in a fever dream.
Wow, that is some Black Air Forces energy. Yep. All right, later. All right, listeners. We'll see you next time.
Who got the truth?
Is it you, is it you, is it you Who got the truth now