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Listener's, you should know David and I were texting before this debating, do we change this thing around? Do we play with this? Should we reorgnization section? And he texted me, let's just do IT so in the honor of bad jokes by abroad and doll.

here we go. Easy, you wait, you wait, you who got? Easy you busy, you you sit me down stand. Welcome to season thirteen.

episode one of acquired the podcast about great technology companies and the stories and playbox behind .

them and debt. David.

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 break through innovation drive that business? Or is their core compense y really around their profound advertisements and their sponsorship deals with athletes and teams or their probably best in the world brand positioning? To understand that, we have to exam in nike y's entire sixty year history, of course, because this is acquired .

and because .

shoe dog is so good, it's amazing you got to start 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 giant tic shift in strategy that nike is really in middle of right now.

Well, L, P, S, we got to thank you for voting for this episode. David. I've had IT out of 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 episode, is and becoming acquired.

L P, that is acquired df m slash, if you want an update, every time we drop a new episode so you don't miss IT, you can sign up at acquired data m slash email. And we will be dropping little easter eggs and hints in those emails to tears about what the next episode is gna be. So that's acquired data FM slash email.

Don't miss a new episode and lately, make sure you check out A C Q two, our second show where we interview people who are building their companies today available in any podcast player and without further to do listeners. As always, this show is not investment advice, David, I may have investments in the companies we discuss, and the show is for informational and entertainment purposes only. David rosen, all, what is that stack of books on your desk?

Oh my god, I think amazon is. Thank you to acquire. I buy every nike book out there. I mean, my six quite long desk is covered in nike books, is so funder. And I thought there was just shoot.

G, I didn't realize there was the literally over a dozen that uni collectively read.

There are so many of them, I read thousands of pages, but there are three books that all basically tell more or less the same story that we leave together to come up with our core acquired niki story here today. And I bring IT up because it's actually pretty important what these three books are. The first of courses you dog the go business memory of all time. The second is a book called just do IT that was written by the journalist Donald cats. Then do you know who Donald cats is?

Who I do not so done 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. Auto h really .

isn't that crazy. It's kind of call that that was founded by a journalist.

Yeah, just want to he kind of economical third party journalists take on nike. And then the third book is a book called switch, which I bet most people have not read, but kind of like taste luxury. I think people who are really in the know in the foot are industry have read this book.

IT was written by one jb stressor and her sister Larry bland. Jb streaker is Julie dresser, who was the wife of rob dresser. Now, rob, if you've seen the movie air, the character played by Jason is rob stress, er, nike's legendary first head of marketing. The item among many that is not discussing the movie is that rob, shortly after signing Jordan, had an enormous fight with film night, left the company with Peter Moore, who was the designer bean Jordans, and ended up joining a dias A C E O of adidas amErica just a few short years later.

Second, incredible betrayal.

This is like a juice level betrayal. I think to say he was personal na around nike is under statement of the century and here is this book that was written in real time by his wife as this was all happening.

incredible. Yeah so stress er will get into his contributions but he is probably second only to fill night in willing nike into existence.

We start however, with the shoot g story, the origin of blue ribbon sports and actually a little bit before shoe dog starts in july one thousand and forty eight when one bill bowerman becomes the head track coach at the university of oregon. Now bill, with a legendary figure, in addition to being nike's cofounder, along with fell night, I mean, kind of the only way to describe him as he was like a descendant of the survivors of the organ trail.

The cowards never started in the week, died along the way with one of his favorite settings. yes. So bil's dad was the governor of organ. 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 battle on. He's also such a character.

He lived going to a remote mountain top in the origin mountains at the male 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. If he literally blew up the truck, I would the stuff you could get away within the fifties.

They do not make them like that anymore.

No, they do not. So when bill comes home after the war, he first coaches high score, and then he becomes the had track coach at the university of organ. 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 miles. He ends up coaching several olympics teams. He definitely turns the university of oregon into the most prestigious track programme in america. H, you know, he's a national celebrity, which is pretty crazy for organ in the nineteen forty, one thousand and fifteen.

right?

So a few years into vironment s ten years as head coach, he recruits a pretty talented middle distance runner, freshman from portland nearby one fill night. Now phil also has some interesting oregon roots. He is the son of bill night, who is another well known university of organ alarm.

He was a former lawyer in portland land, and he's the publisher of the origin on journal newspaper. Phil follows in his dads for steps, majors in journalism or again, and he runs for barring. And I would say film is okay as a runner. Well, it's .

interesting. Fill light would describe himself in his prime as an OK runner because he was running with the best client runners in the world, coached by bill bowerman en, who barely gave filled night. 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 the night the guy runs a four minute thirteen second mile and is convinced his OK.

This is exactly what I was gonna say. I think at any other school film would have been a star. This isn't n't really in shoe dog, but I know fills personality from reading so much about him over the past couple weeks, I think he probably went to organ in part because he wasn't gonna be a star there. I mean, he is, I think, the most introverted C E. O that we have ever covered on acquired I mean, roc filler was pretty introverted, but he looks like you on must compare the .

film night yeah and a lot of the CEO that show up in these acquired episodes are deeply 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 their bright and shiny and their sort of loving working the room that's not feel night at all.

Not at all. I mean, I was super like I got a huge thank you in my life to fill night. I went to stand for business school. I was one of the first classes to graduate at the night management center that he and out there.

Didn't he give your graduation speech?

exactly? IT was amazing. I was kind of the first draft of shoe dog that he had been working on.

The back came a couple years later, so great. But I remember thinking this does not seem like the founder and C. E.

O of nike, or even here talking at stafford the most warmly receptive audience possible, like he was very nervous. Yeah huh so night runs at origin and it's important to say we should know about man. He was definitely a person, a man like they don't make anymore.

But despite what you might think, he wasn't military tic. 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 famous ly for the nike story, too, was technology and was shoes. So bowerman actually taught himself how to be a cobler and would take athletic shoes, usually add as athletic shoes, and modify them, or even build his own, and then use his athletes, says ginning pigs, to any advantage that they could have he would be looking for. And shoes were part of IT.

And the technology that barron 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, dear hide or fish skin, goofy, crazy stuff.

And his ginny pig was full night because fill wasn't at the front of the packs. So he sort of afford to experiment on him. So very fortunate for a film night in his future that he was not the fastest runner on the organ team.

exactly. This is where IT all comes together. So after phil graduates, he goes to business school right after undergrad two, stanford to stanford gsp.

Hence the connection. He graduates from G S, B. In thousand, nine hundred and sixty two.

It's also crazy. Naked feels like such a modern company. This was a long time ago. So in VS final term there at stafford, he takes what is the only quote, quote, entrepreneurship course, A G S P M. Today there's like a hundred different premiership courses taught by the famous professor Frank shelling burker, who night gives tons of credit to for river sports and ultimately nike. And in the course for night's final paper, he writes the business plan for blue river 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 in a gsp working in the news room at the origin journal. And he knows from the photography department that higher professional cameras had traditionally been the domain of the germans. Like a was the most famous camera brand. And then at this point time, in the fifties and sixties, the japanese are starting to enter the market. So icon was the big japanese entrant.

fuji rko.

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 all, again, in particularly being a test pilot, as they would say, for bills, shoes. And actually, the dynamics are pretty much exactly the same in the athletic goods market, there are two companies, both german, the dominy sports equipment. One, of course, is a ideas or audio.

as as the germans would say.

yes, says we will get into, and just a sec here. And the other one, to a lesser extent, who is poa. 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, chucked Taylor all stars, you know, the famous converse shoes. But if you had to guess, when do you think chuck Taylor played basketball?

Let's see. I think if I remember our NBA episode, the NBA was really getting go in like post war. So like the fifties, i'd guess he was an early fifty N, B, A player.

Yeah, you might think of contemporaneous sly with the time we're talking about right now, no checks Taylor played professior baseball in the nineteen oh, that's when the checks Taylor all star technology is from it's a canvas shoe. By this pointing time the market had migrated to leather upper shoes of which aid as or adidas was the leading technology manufacturing of IT. So anyway, baseball shoes wasn't really the market yet.

I would become much, much later as we shall see. The market was running shoes. And IT was like a OK market. But this was not the camera market.

So full nights, this is here, IT actually didn't get any sort of notice or praise famously from his classmates or even really from the faculty because daily, okay, this is a good idea to apply japanese load disruption to the athletic apparel market in the football market. This is not a big market. The market such as that existed was tracie, right?

Think about how you would define a market size. There is not that many track athletes that in a given point in history. So not that interesting .

and its worth maybe saying one word on the adidas or adidas story before we move back to fell night and dog because it's pretty crazy. So it's called adidas because adidas was founded by adidas ler or 阿迪 for short adidas in like the .

nineteen twenty years。 Yes, so after .

what war won, where germany was totally designated, but before world war two, he becomes like a fairly well known elites cobler super vare track clt pervyse to oliba ian at the time, to actually, ironically, I guess je O S wins the one nine hundred and thirty six olympics. The big american demonstration, literally beating hiller in berlin, in germany, in A D shoes.

Actually, that was audio star taking a big risk by sneaking a pair of the shoes to someone who can get them to just the o ens like the night before is race. And just I O N was like, these are actually awesome. And so IT was like a big sort of, uh, h, is this going to be a problem for audio? And IT comes out that the american one wearing gerber shoes.

interesting. I didn't know that part of the story that makes sense because ody's older brother, rudy, worked with him in the business, as did audi's wife and son. 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 thought in the nai army, and adi didn't. And maybe that might have, I don't know, but maybe had something to do with that. Anyway, crazy rudy goes across town and starts a competing company after the war, named hua .

crazier thing aid.

As adidas and puma are the two brothers, they are both the dos brothers. crazy.

Okay, so take us back to fill night.

Phil has this idea in this class, in business school, this good idea, but small idea, to sell japanese track shoes in the U. S. And undercut.

I did this in one thousand nine hundred and sixty three. After he graduates, fill decides that he's gone to go off before he really starts life. He's going to go take a trip around the world.

And he convinces one of his bodies from gsp to go with, they go first, hawaii famously, and the body meet a girl. And hawaii, like, why would I live a way? yeah.

I mean, smart guy feel though, goes on to japan. And he still thinking about this idea. When he is in japan, he starts going to tracks in tokyo and watching what people are wearing running around the tracks.

And he observes, and he decides that the tiger brand shoes that he singing are the best. So he looks up the company that makes tigers. Turns out they are made by a company called onic suga, which is basing kobe in the south of japan, near osa, and fill for a desperate introvert kinds crazy.

This is how passionate is about this idea. He gets IT in his head that he's gona hop on a train from tokyo and just go knock on their door, say hi to the only corporation, and maybe asked 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 fill night is feeling as he's going through this.

Well, this is the other side of fills personality, where he sort of a tortured soul. He's introverted, but he's unbelievably driven. He has a splinter in his mind where when his bodies, like actually pretty on to stay and her White feels like but i'm longing for something.

Yes, there is something wrong with my existence in the world that needs to be fixed. And I need to go and find out where I belong in 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 I think this is a David cena saying that the CEO and the founders of these companies that we cover, that he covers, they are the ginger st. Kind of our time and fill doesn't present as a ginger st can. Yes, but he still is right deep down underneath all that inter vert, he has that same drive that john roca fellow had, that an elon must CS, that a mark eaker caz.

And this unbelievably competitive spirit is the founding element of nike's culture that permeates to this day at nike. You played a 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. It's like, hey, we don't do that here.

That's playing for the other team. Get off the other team, your 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 will talk about later the episode. Nike is among the most competitive cultures in the world.

It's funny you say nike, there is sort of founding principles because nike doesn't couldn't come for quail here. Wide file is making this train trip down to cobain. 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 business man, you know, a distributor. He wants to distribute their shoes in america, literally his business plan from the gsp classroom.

He does not 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 taking back to his childhood days, becoming a track athlete in middle school and high school talks about, I got cut from the baseball team, and his mom encouraged him to go out for track. And then the blue ribbons that he won had to track me to see, to really help to find 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 that film without drinking the night before, either drinking haps bu ribbon, P V R beers, or I think more likely, the other one that I read is suntory blue rib in whisky, which is a japanese whisky brand. We saw a billboard or something like that, and that that's where the name blue ribon came from.

as with any stories, will never know, and it's probably some of both.

yes. Either way, perhaps driven by this drive to succeed, fill puts on the performance of a lifetime in this meeting. He claims that he is A U.

S. Business man from america, he's gone to stanford school. He has a company called blue river in sports.

He wants to import their shoes, by the way. He ran track for the legendary bill barr man, who of course they know. He tells them that he's done market research.

He thinks that the U. S. Track shoe, 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 U. S market for running shoes that this point time, I mean, there's no way that was a billion toll like maybe one hundred million maybe. I mean, we just stop talking about like running was not a thing IT was the thing that athletes did and .

the running craze or the fitness craze hadn't really started yet. So to give you a sense, dave, I think your Price spot on with maybe hundred million, maybe two hundred million for track shoes in the U. S.

The branded athletic shoe market all up, including all sports for the whole U. S. Across all age groups, everything, two billion dollars.

right? So he's completely wrong on what is actually is at that point time. He's also completely wrong on what IT would become in the other direction. Thanks to b and nike, right?

They had a large handing, growing and all spoil IT for listeners. The branded athletic show market in the us. Is one 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 one hundred and thirty billion, just like comparing some other things that is bigger than the video game market.

Wow, hey, I mean, not everybody has to play video games, but everybody get wear shoes. So night leaves this meeting, this performance of a lifetime. He gets an agreement from only to go 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 pittman dog. And so first thing that does, he gets in touch with his dad, I don't know he sense like a telegram or something that important to asked him to wire fifty dollars to the onto the corporation of japan for purchasing these samples. He gets home and he gets two or three months later.

after this, surely the shoes would have arrived.

but surely the shoes would have. He rushes home, says, time on, hi dad. Did the shoes arrive? His dads like, what shoes? The shoes did not arrive.

The shoes would not arrive for almost another year. Wow, a little for shadow again. Now, what doing business with only two cos is gonna be like for the fledged blue river in sports.

And this just like get some samples to see if he can sell fifty dollars with their shoes.

That takes over a year. So get pointed. He's to started his life. He gets in the job as an account and he's a business school degree study to take the cpa exams, a licensed CBA. And then finally, at the end of one thousand nine hundred and sixty three, I think grater around Christmas fell rates and share the saplings show up, and phil gets them, you know, the great there, what he remembers, he thinks, you know, these aren't quite maybe as good as a distance, but they're good enough. And I can sell them cheaply enough that my business plan will work right.

There are way cheaper.

So they'll gets back and right down to sugar says, great. I would like to be the U. S. Distributor for tracking field shoes on the sugar says, okay, great. You can be the distributor for the western united states.

We already have somebody that we're working with on the 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 key hires one of his twin Younger sisters, who I think was baby still in high school, to, like, help him part time with receiving the amatory and sending the mountain and stuff.

The navy is just dripping off a fill. 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. He's going to drive around to track meets in organ 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 of 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 to go down the u gene and see his old coach barran 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 the deis.

We're gonna a Better relationship. He'll be able to experiment with these shoes and i'll sell them on to him for cheap because at this point in time, even the legendary bill bowerman in the university of oregon, they bought all the shoes. Nobody was giving the shoes. I was like a major liner 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 rush. 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 D.

S. P. Or any other business school would determine a recipe for success here.

But maybe that pencilled more at the time being, in this super globalized world that were in now with the internet and companies with these massive resources that can scale immediately venture capital, exactly in venture capital, which can just super charge companies growth if something's working. The idea that your core competency is just distributing someone else's product among the 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 is much harder to build something like that from scratch.

Now that's a super good point. And IT turned out actually that on its suka had already studied the U. S. market.

Whether they agreed with fills plucked out a in air market size or not, they wanted to enter the market, but they didn't think they could do IT on their own. They actually, we're looking for somebody like film. yep.

So phil goes down to sea, barron, and to fill surprise of environment. Ment is not a warm and fuzzy y he's never really shown fill much encouragement when he ran for him or since barman says this a pretty good idea. Not only do I want 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 fill is like flawed .

and like real partners, fifty fifty ish. It's not like I want you to like toss me a percent here there for a bit advisor or something. It's like, okay, great confounders just like that.

So feels like what's the deal you have in mind? I think originally, vironment is fifty fifty. And then he sleeps on IT.

He comes back with his lawyer. He says, actually, let's do fifty one, forty nine. I want you to have fifty one, me to be forty nine because I don't really want to be in the ty.

Now on the one hand, this is a super exploitation ory of borrowing of his old athlete that still obviously looks up to him like a father. It's kind like weren't really VC 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, fulfill right?

He's getting about IT. He's like, oh, only half the company. great.

Well, and if fill doesn't do this deal, he would have a hundred percent of fillin tes blue river sports. But he does do the deal, and he gets fifty one percent of bill bowerman. Yes, blue river in sports, which is a completely different animal.

So I was thinking about this after reading shoe dog. I was like, could I just wait for the second time? IT just feels a little weird that barrowman would just kind of immediately be like, yes, i'll go in the 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 the sky named Scott reams, who was formally a nike history, and he worked in the marketing department, and then for over twenty years, worked at nike and became the company historian. He has an epic set of linked din post that are really like these incredible gems, pointing out things in company history.

And so we've got this post, he says, based on letters in the university of organ and nike archives, bill bowman corresponded directly with many football manufacturers in the nineteen fifties. So like fifteen plus years before this, including audio, soler directly to audio, or trying to purchase shoes for his runners directly to avoid retail markup, he made a clear he had ideas on how to make rutting shoes Better. Remember, these are in letters to audio ler years before, but the responses he received referred him to football distributors in the united states for and ignored his design offer. So bowman is sitting there and he is primed. He's like, oh, you're going to import foregone shoes and give me a deal a in.

just like on each to go, was primed to receive Young film night. So was barren. But then this is so awesome, I was going to save this for reveal later in the episode.

Scott, ms. Is legendary. He was, as you say, nike's corporate historian. He worked super closely .

with fill on writing shoe dog through.

Not only I sent him a message. Jn, link down. I talk to. I spent hours talking the sky, really.

He spent a few days helping me put our version, acquired the version of the nike story together. We have a huge, huge. Thank you to him. But I was gna surprise you with this. This is picture .

as so awesome, are 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 think x brunk, who is a twenty seven year nike veteran, and David, you know that I chat with him, but he was co until a couple years ago, and very cool to get his perspective and Scott's perspective. I'm curious you on the .

other not gets that come up to. H, i've got one in particular, but I won to bring Scott's perspective in. But it's a little father in OK, we've blue sports, they eat, put in five hundred dollars to finance the first big shipment of inventory of tigers from money to go.

And they do. They meaningful, does what he intended to do. He drives around to track, meets around the pacific northwest and sells them out of the back of his car.

And even with that funny sale strategy, and in shoe dog fill talks about this while he was in hawaii with his buddy, the way they made money was they sold in cyc clap dia door to door. And then phil gets a job as a stock broker trying to sell stocks. He doesn't make any silly.

He's the most introverted person in the world. He can 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 some sales are just natural.

it's so true. So they sell out basically immediately and then they play all the profit that they're making back into the next orders of inventory from only tuk up. 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 is 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 the import. The issues from japan, how much can you really mark them up to sell them? And if you're making, I don't know, two, three books profits, something like that on each pair shoes, you have to sell a lot of shoes. If your only way to get money to buy more inventory is the profits from the shoes that you saw 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 is no way to do IT.

So fill is selling the tigers for six dollars and ninety five cents a pair. IT costs him, and barring about three dollars and fifty cents to get each parachute. So that leaves, what about three dollars and fifty cents? Pretty soon, fill hires his first full time employee, the legendary jeff Johnson, who has a huge role in niki. 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 in the sales expenses exactly.

So that leaves what a buck seventy five, maybe two dollars, like he said, in profit. prepare. How are you going to to order more inventory at three dollars and fifty cents appear when you're making two dollars in profit? prepare.

The math doesn't pencil. wow. Quick aside on jeff Johnson. He said he is absolutely legendary.

He also sells out of the back of his cards based california. He met night at stanford. Jeff wasn't stanford underground who ran track and met night while he was a gsp.

Johnson sells out of the back his car, he eventualities es the brand. He designs shoes. He eventually opens naki s first retail store in a, he set up manufacturing. He moves back and forth across the country. He is 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 start up 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 is in fill in thousand nine hundred and sixty five. Running wasn't even a sport.

He wasn't popular. IT wasn't unpopular. IT just was to go out for a three mile run was something weird, did presumably to burn off the manic energy.

Running for pleasure, running for exercise, running for endorphin s, running to live Better and longer. These were things that were unheard of. People went out of their way to mock runner. Drivers would slow down and honk their horns, get a horse, they 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.

Values out running. This is one of the womens that just flared me rereading shoe dog and internalizing that, you know, running. I go for a run maybe three times a week these days.

right? It's just Normalized in the life .

every time I walk out in the street, basically anywhere in the world less i'm like truly in the middle, nowhere you see people running. And the idea that motors would throw beer and soda cans at runners is 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 constraint, the blue B T. Sport tez, is through financing.

And the only way to get financing in portland, len origin, in those days was to go to oregon. Regional banks. I think actually there are laws in the U.

S. That corporate banking could not happen across state lines. And so they're only like two or three banks that night even has the option of going to yep.

And by the way, when you're going to get money from the bank is not equity capital. They're not saying, like a venture capitalist would say, I will buy a piece of your business and value IT at this and give you the money at that. It's just people one that you go back to them at some point time with interest.

yep. And the bankers who are making these loans in portland land then was a very, very small town in a very, very small state on the west coast of the U. S. They're not gonna a be very risk seeking. They're gonna be quite risk averse.

So there's another good passage that I grab from a shoe dog that explains this fill night. I was projecting sixteen thousand dollars in my second year, and according to my banker, this was a very troubling trend. One hundred percent increase in sales is troubling.

I asked, your rate of growth is too fast for your equity? He said. Growth of your baLance sheet is dangerous.

And this is where a film nights complete opposite approach comes and 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 of important points to make in here, one of which is this equity they're referring to. We refer to equity these days, especially in start up blend, as percentage points in the startup p. 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 dead on your books and say, OK, what's basically like the cash in the bank, the assets you have on hand is your equity. So what this banker is basically saying to feel night is I will only loan you up to the amount of money that I already know you have.

But 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 and other stuff like inventory and you're just loan 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 evaluation. You're basically just saying you can borrow these dollars and you can give them back to me and i'm going to cap your dollar limit. Super low.

Yeah it's basically factory right is what is known as today.

right?

So yeah, as you can imagine, there are quite a lot of struggles with the various banks in organ, and it's all very well chronic in shoe dog. So since growth is early rate limited by the banks, night decides that he can't justify taking a salary. He goes back to being an account by day.

He joins press waterhouse in the portland office. He does that for a couple years of years. Years takes a lung time to grow this thing. Eventually, blue robbyn does become big enough, and he needs to devote enough time to get that he can be a full time account. So instead, he gets a job teaching accounting at portal lin state, where he meets two women.

both of which will change his life.

The first one is a student. I mean things were different in the sixties. A student in his first class that he teaches named petting parks, who ah he sees has uh create potential is an account.

So he hires her as a bookkeeper per part time while he's a student I believe for blue band sports, very certain there. After SHE becomes penny night, his wife, now think of goshi. Sixty years may be like that.

The other woman he meets is an art student, not an account, an art student named Caroline Davidson. And fill over here are talking wisdom friends in the hallway one day talking about art classes and he stops. Ed turney says, hey, i've got a company. We need some part time art and design work for, like pressure and sponsorship collateral because everyone's .

telling him that he needs to do advertising fill night to this point, which is hilarious given niki today doesn't believe in advertising. And so he's like, fine, i'll given to some other people who are advising me that I should make .

some pressures or something and the way i'm going to do IT is going to higher he part time student from portal land state to do my advertising collateral for two dollars an hour. yes. SHE says, sure.

Put a pin in that we are going to come back to Carol and Davidson and the nike art department in a minute. Te, here. yes.

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Yeah, so learn how you can put A I agents to work for your people by clicking the link in the shower notes or going to service now dot com slash A I dash agents. Okay, David. So should we share the current and David something now? Or don't we need to evolve nike a little bit more before really comes into play?

Yeah, put a pin in IT. I'll come back to IT. So in the meantime, by hooker, by broken, you know, maybe on the two is we will see what argue by crook. Blue rubin sports sales do keep growing.

They do keep getting just enough and just enough in time financing to finance their inventory and orders from tiger and oni to a in one hundred and sixty six, they do forty four thousand dollars in revenue. In nineteen nineteen sixty seven, they do eighty four thousand dollars in revenue. 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 one hundred and sixty seven bowerman, remember, no baLance been involved. His name, his association with the company, has been huge throughout all this. But like you are saying a minute to go in, his real motivation is he wants R N D access. He wants to behavior to make shoes.

And in one thousand nine hundred and sixty seven, ahead of the one thousand nine hundred and sixty 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 two king. And his idea is that, rather than leather on the upper parts of these tracks, shoes, what if we instead use a breath able material like now on, so that my runners feet aren't sweating throughout the whole race? On the one hand, I guess nobody likes sweet feet.

On the other hand, if your feet wet a lot and leather shoes over the course of several miles or they're gonna get heathy er and way down. And so maybe this might help the shoes stay later. And bar is obsessed with light weight in his shoes, so only sugar is very receptive to this.

They think, great. We love this will make the shoe. We can do that. We can source.

The airline will make the shoe, so barman and fill get together like this. amazing. We're gona have our own model. You know that we've designed the barren designed which .

you should already start to get a little bit nervous here because it's like.

okay, who who owns the shoe exactly? Well, that would be for the .

courts to decide. Is IT like the blue ribbon shoes design company owns the design and they hire a contract? Or is IT more like a we just gave you a little suggestion, idea.

And like we B R S, don't know anything. Yeah, the relationship complicates a little bit here. It's no longer just, hey, where the american distributor of tigers.

So barman and phil want to call the shoot. They actually want to borrow from the adidas playbook and call the shoe the s tech ahead of the mexico city olympics. He did has been doing in this for years.

They always come out with new shoe models ahead of whatever the olympics is in the world every four years. I did this, of course, has already beaten them to the punch. They have trademarked a shoe that they are coming out with called the as tech gold. And I don't know if it's babbin or autistic. A decides that the ad tech is too close to that.

So legend has, and you know, knowing so good these men, I assume this is quite true about man, is casting about for other ideas, for names, the shoe, and he says that what is the name of that spanish guy that kick the, you know what, out of the as text and that is like, that's cortez. And thus the blue river in slash tiger cortez is born. Naming aside the nine line ups are a huge innovation, and this becomes a big hit.

I bet someone out there is wearing nike cortez is right now, it's become like a lifestyle shoe and less of a running shoe, because the definition of a running shoe has changed dramatically. And so the fascinating thing is, if you look down at your nike cortez, are 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 on its sugar now design on IT, not the switch .

spoil alert. Tiger eventually became a six. yes. So also in one thousand sixty seven environment has another just monumental contribution.

His contributions, those paradise they happen, are enormous. Yeah, so he writes a book. I feel like some marketing agency these days would advise a start up.

Oh yeah, this is how you build a market, right? A book started eventualities. A movement by man 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 time. The idea of running not to win, but to run for joy for physical fitness was an entirely foreign concept.

All right, i'm going to read a paragraph from shoe dog here, this a full night. He told me, on top of everything else, he was also writing a book, a book I said about jogging. He said, graph y bowman was forever grapes, 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 sounds 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 feel night, the founder of nike.

right? I mean, even feel night is like jogging. That's crazy. So man writes, this book is called jogging, a physical fitness program for all ages.

He writes the book that comes out in one thousand nine hundred and 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 U.

G, E. Of all ages to get into jogging in physical fitness. And by god, I mean, as much as anything, this book in this article is what starts the fitness movement in america.

Yep, it's the craziest thing I keep going back. And fourth, 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 he was actually both. yes.

So night 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 feel night he says, we were at leased right there, and we sure wrote IT for one hell of a ride.

I love IT. Here's a crazy vita trivia, David. So for me, when I reflect back on like the birth of the jogging movement, because I am a millennial and I wasn't there, I think of forest gump, you know, he's running across america, and these people are uniting 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 cortez. 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 bowman write the book and evAngelize and have the idea, but they could actually get shoes under the feet of people, because out of this budding company, they actually had a little distribution.

And more than just athletes yeah or are .

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, professional as athletes, right? So by one thousand nine hundred and seventy, just a short while after this, blue ribbon is now doing over half a million dollars in annual sales. So they are like a real company now.

They're selling out of the cortez is literally as fast as they can get them off the boats from japan. On IT, suka renews blue ribbons distribution agreement in one thousand and seventy for three more years to run through thousand nine hundred and seventy three. When this happens, film then goes to the bankers in organ and asked for, hey, you know, great. The selling a great fitness. Is this new thing where a half a million dollar revenue company, we've got a three year iron clad deal with our manufacture.

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 were book value now like we'll have some real enterprise value because you can invest in our enterprise. Here are enduring institution.

So he asks for a land of credit of one point two million dollars to finance inventory. He never asked for a over million dollar line of credit before.

He drifts the alarms.

He tripped the alarm system. One point two million dollars a kid off the street can literally walk down sand hill and race one point two million dollars today inflation .

adjusts its probably like eight million dollars or something, sir, whatever. But I could off the street can walk at a stand for and raise million .

dollars exactly just say it's an AI company so the banker is not literally, although literally they would do this very shortly there after they throw him out. They they like, no, no, no, we're done here. You can be doing this.

We're done. I'm just fascinated by this concept of IT, almost as if the idea of enterprise value didn't exist, that literally a company could only possibly be thought of as IT as its minus cess 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 companies like immediately wiped out, because your debt to assets ratio was like literally a hundred. And what film night 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 he asks they had and say, great, we should have exactly that much debt too.

So I can grow as fast as possible. And so that kind of becomes this game of musical chairs, where when you're level that hard, you need to be growing super fast because you need to get that inventory of 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 convenience.

But b, so that then you can go ask him for another alone 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 virtue, 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 ink is a growth company they were born out of. This is the only possible way to continue. Our existence is grows so we can pay off the bankers.

Two things here. One, this is so sad. That's the way I was. And thank god the business world has evolved since then. I mean, you can declare a ridiculousness of startups in VC and take all that now, but this is a way Better alternative than the way things used to be too. Though ironically, I actually, as crazy as this sounds, think IT was a critical element of nike succeeding and becoming nike because if they were too easy. There would have been a flood of other competitors or on sugar, and others would have just done this themselves.

right? It's like many of the stories we tell that it's past 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, yes, 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 how to one hundred percent liabilities to asset ratio and went out .

of business and went on under yes. And nike almost does. So when this happens, when he gets throwing out of the banks, phil needs to do something to raise money.

So he decides dolin he can think of is to do a small public offering like a local IPO. Remember how bin Jerry was the first direct listing? Yeah, I think it's something like that where they sold shares.

Bin Jerry sold shares in vermont to like their, 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 is anywhere in the picture. Yet he changes the name of the company to sports dash tech. T E, K, think with the idea that, oh, this make a sound like a technology company that people be interested in investing because .

he hears that people are getting financing for their business in the form of equity capital where they are willing to assign valuation to the company. And regardless of what your current sales and assets look like, that sort of takes your potential future growth in into account and gives you capital and exchange for that. What they want is a percent of the upside. You know, equity investing, as we know, IT today and startups. And all of that is happening in northern california into tech companies, as we chronicled on the zoia episode with don valentine, is to that era.

exactly. We are right in that area. Now done is about to start sqa. A lot of this is happening around stanford, of course, fill up an oregon is hearing about this. But once anybody, you know, any proto venture capital alist digs in the sports tech, they are a like, no.

So what I ve never been able to figure out is that he changed IT to sports tech ink and then change IT back to blue bin sports. Or did they sort of like, i'm proud to figured that they ever literally changed .

the name on documents? That's a great question. First out, rems have to ask, yeah, yeah.

This is how bad IT is, though the offering fails. Nobody he's interested. None of these proto VC, none of the local business people important. They are like, oh no, oh, this is a terrible company.

Well, and film might undersells IT too, before he learned some of his later lessons. It's his super humble, you know not a very good run around only a forth thirteen milor type attitude.

right? Shocks yeah.

And so that's not going to cell here in your company.

Yeah so he ultimately has to raise some money from the families of some of the employees of most famous ly bob, who would become nike's first president other than fill when fill takes a saba al later in the eighties.

But is this amazing story? He was also a barman, runner, had a terrible accident in college, and was confined to a wheelchair for the rest of his life, becomes one of the nike's embley robb's first employees, and then becomes a huge leader, built so many things that the company becomes the first president other than fill. But he doesn't come from wealth. And his family loans, I think, three or five thousand dollars to live in, like a huge amount of money for them.

It's like a huge amount of the family's network.

Phil would convert that into equity before the actual IPO, and they would become million airs and changed their lives.

It's amazing. Yeah, the way that he was financing this was basically through convertible debt. And so all the pri po little friends and family finance things that he's doing here are convertible notes.

So this brings us to one thousand nine and seventy one, the anus, either mira Bellas or Harry ba, depending on how you want to think about IT. I just butcher both latter's and french there. But clearly, this financing path isn't gonna work for the next stage of growth. Eventually night, I think you reads neither a magazines or a newspaper article about japanese trading companies, how he had never heard of japan ane's trading companies before then, given the amount of business he was doing into pain is crazy. Although he was in OK s strong interest for filing blue river in not to find out about jap anise trading companies, as we shall see.

And what r is a 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 is a company that has some primary business that they are doing? Slash private .

equity firms, lash 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 do 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 competitive ly advantage to bank, especially in sourcing international goods.

yes, to do asset based financing exactly what ley ribon needs. So the company that he ends up meeting at the local branch office important, I think they might have been the japanese trading company with a branch office important, is this show E Y, which is one of the smaller ones today. The company is called so jets today.

IT is still a forty billion dollar revenue company. Back then in one thousand nine hundred and seventy one, IT was a one hundred billion dollar annual revenue company. And IT was, I think, the sixth largest japanese trading company.

The other ones that many listeners probably will have heard of, our companies like my ubi or matsui or sumitomo, these are enormous companies in, especially in the seventies, as japan was really rising. We told the story on the SONY episode de I show. U, I was a godsend for blue bon.

and I 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 up you trip to one cover and or up you just 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 P E style financing, were often times they was sort of take over and absorb the businesses that they were financing. So film night was going into this saying, okay, that really, really, really can't happen to blue river. In what can I possibly negotiate with these guys make IT so that their interests are aligned with mine, but not in a way that could compromise my control.

right? Because he gets a little spooked, according to shoe dog fill, walks into the office of neo U I. important. This is like the portland org in branch of neo E. Y.

Meets with one of the officers there who would go on to become an incredible personal relationship for nike and phil, a guy named tom swima ogi. And he offers on the spot to finance all of nike's inventory on the pot in a meeting in the brand office import. So feels like, wo, how do I deal with these guys?

right? There are 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 niche nose japanese manufacturers. And so they start asking, feel my 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. So if we're doing business with them as their financing partner, this could be really good for us.

too. So fill, in retrospect, makes the mistake of calling our bonuses a and saying, hey, you know, i'm in this lurch with financing. I just met me, show E, Y, they offered to finance all my orders with you guys. Would you be OK if I do IT and they immediately say absolutely not and the reason they say absolutely not is been just like you're saying they know what's going to happen here is the show is going na say to fill hey, you know this is nice that you're buying only suck as your inventory only suki think is like a twenty thirty, maybe forty million dollar revenue company in kobe at this point time.

right? This could creep into us.

Show is a hundred billion dollar company. Nica is going to say, hey, we will introduce you to manufacturer to factors here, japan, build your own shoes, make your own brand. Screw these tiger guys.

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So blue ribs 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 stole the Operating accounts, but they can't get any more det there to finance their inventory, which they need to buy. Now they need this cash to be able to buy their next round to grow the company. Nico enters the picture.

How does he go from here? So this basically sets off a whole chain of events that would later get prosecuted in court. So on its sugar, as we said, they are super nervous.

They know what this ntia relationship is gonna mean, verbally, rib in, and it's not good for them. So they start looking around at working with other potential distributors in the us. They assume that blue ribbon, one way or another, is going to end their relationship with them here.

They also, as kind of a last ditched effort, make an offer to buy, fill out to buy blue ribbon and feel thinks he's being smart here. He's stalls. He doesn't say yes.

He doesn't say no. He's my god. 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. Pilger says that his contact only to offers to buy fifty one percent of blue ribbon and keep him as a minority partner. And from some other sources, what film night says in interviews is that they offered to buy IT for book value.

Yes, that's what I read to which I imagine is like zero.

So it's a pretty terrible deal because what is the book value of a company that one hundred percent of the time has its capital tied up in inventory? zero. So it's zero or most generously, it's the value of the inventory. So in one hundred seventy one, I believe they did one point three million in revenue, which best estimates would be that their cost with something like six, seven hundred thousand.

right? But they they probably turned to that inventory several times. So at any given point, time of the inventories .

is less than that, right? So it's a terrible deal. It's a takeover. And so fill nights basically just like I don't want to pass them off by declining. So or just say nothing .

he knows at this point that he's done with on his sugar. They're gonna go with me show and they're gona set up there on factory relationships and make their own shoes. But he can't just shut off tiger. It's gonna take time to spend this stuff up. He needs the tiger shoes in the anim.

so he stalls. And by the way, this relationships so far has been unbelievably fruitful. They're at the point now where because of blue ribbon, seventy percent of runners in the U.

S. My do runners is not a large category yet, but runners in the U. S. Have only seeker shoes.

Yeah so this is pretty important. Yeah so there's a whole bunch of stuff feel highs of spy. There's a thing where the on its sugar management team comes over to visit the river in headquarters, fills, steals some documents out of the guys briefcase.

literally, the guy is up to go to the bathroom or something and fill grabs out of a folder and photocopy.

He said, yeah, it's pretty bad. Even worse, feels the combination, as we keep saying, of ginger st. kon.

And like, extremely inverted and really naive, he write a memo to the whole company saying that he's high her to spy. I don't need sugar. This is not the kind of stuff that you want coming up in legal discovery.

Later i'll hold bn to this stuff happens. They end up in this literal mexican stand off here warehouse. There's no way out without firing shots.

And somebody has to fire a shot first at its fill. Fill shoots first is like han, he shoots first. And I say, mexican stand off two, because, a, that is the situation there.

And b, the first shot gets fired in mexico. So wilfu is waiting on spinning up the japanese factory. Relationships with me show A Y. He remembers from back in the mexico city olympics in one nine hundred and sixty eight, I think that there was a factory, I believe, in gata hara, that aias had used to make sockets for the olympics. And he says, you know, those sock clients that A D as made were pretty good.

Let me go down to that factory and see if I can get some of those kids, and we'll sell them here in amErica as blue ribbon amErica and football cleats. Now technically, he thinks this won't violate his exclusivity agreement with only sugar, because only sugar doesn't make football kids. Now that's debated. Yeah, there's a .

paragraph in the written agreement that gives full night three years or whatever IT is a exclusive distribution. In exchange, he is forbidden from importing other brands of track and field shoes, and so theoretically thinks as long as not tracked shoes is fine.

So he goes down to the factory. And mexico is like, can I get the shoes? And I, yes, sure. What do you want to put on them when we made them for a data? You know we had the three stripes on them, the edita stripes.

What design do you want on your version of the issues and know, yeah by the way, what do you want to call them and feels like um let me get back to you but so he goes home to poland and calls up who else Carolin, David's son, part time art department of blue river sports for two dollars hour. And he asks her to design something like A D strips that can go on the sides of these soccer slash football clips. And huge. Thank you here to Scott s for helping us sort out exactly what the timeline is and what the details are because it's not well understood IT how this all went down.

And you can actually hear quotes from film night in interviews and a little bit and 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 link down. He talked to care in herself about this. Her recollection is that originally, in the request to create what became the rush, 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 be supportive in any way and that it's just about having the brand shown under the outside.

Also, super importantly, this is not the name that we're talking about here. So point one, we are just talking about a logo to go on the shoes. So all the thought of like, oh, the switch 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 out as a Victory like I was just in france. I just stood in front of the wind Victory statue. Is this beautiful, incredible thing in paris. There is this myth running around forever and ever that the who is inspired by one of those wings, the name nike, came after the design of the woosh, which, by the way, also was not called the ssh yet.

Okay, so as you say, he goes to two round sketches when the second round comes back. There are all the time the factory is calling and they're hate. Shoes are just already. We just got to put the sides on what do you want. So finally, feel and jeff around in a couple of folks and like, well, we get to pick one and like, well, maybe I don't know this one, the kind looks like a check market maybe is the best of the bunch. And fill, very famously, says the line, I don't love IT, but maybe i'll grow on me.

And that .

becomes the swoosh. And ultimately, they do give Caroline stock in the company before the IPO. So SHE makes more than two dollars now. But for this project, he was paid thirty five dollars.

which also, he said he spent way more than seventy and a half hours, but was just coming up with some Price to charge. Fun thing about, I did the math on the IPO shares when, like you would public, they did give her five hundred chairs. The stock race today is around one hundred and ten, and IT has split seven times. So two to the seventh times, a hundred and ten dollars a share times for five hundred shares is worth seven million dollars today.

nice. And I heard feel, say somewhere I think I might have been in the G. S. Speak graduation speech. I believe he said that he held the shares.

yes, as late as twenty sixteen, twenty seventeen. He is on the record saying he has never .

a result the share. Yeah, wow.

incredible prequel.

So they send the logo off. So a short while later, factory and mexico calls them up, is like, are 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 of they has take a good, you know, whatever they had called them, what's the model name of the shoes? And so back IT like headquarters, they're all sitting around brainstorming.

And this is where all the famous ideas that get thrown out full night loves to mention six. The other people are thrown out. The bengal, the falk in, you know, all the naming ideas, the ideas they want to name, the model of the shoes like these clicks. What are the clicks called? They're not coming up with the name .

for the company. And it's the idea. It's gonna. The blue ribbon dimension sexes.

yes. So legend has IT, and it's best as we can tell. This is actually true in typical film night style.

He can make a decision. They're waiting towards the end. It's the same story has happened with the logo all over again. They're batting IT around and then the night before they need to finally dropped dead, give the name of the shoes to the factory.

Jeff Johnson comes in in his like, I had a dream last night, Johnson, and in the dream the name came to me. Nike, and what is like? What are you talk IT about? What are you talk IT about? Like the winged greek god is a Victory.

These are gonna be the nike football class. And what is alright? Well, we like that Better than the other stuff ship IT.

But IT wasn't that big deal. Like IT was a big deal, but IT wasn't that big deal. This wasn't intended to be niki. This was intended to be the name of the model of football today that they were me. I was going to work right, and I 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 may choose for a deas for the olympics.

The problem was that was in IT doesn't get very cold. In guadala a so the shoes were great, but in freezing temperatures they would crack. Theyd 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 all them, apparently, the note game football team more than that year at this, the big, then they were cracking cold by there. So is a very good spicious start to a nike in the street 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 yes.

But again, whether violated the letter of the agreement with on its sugar or not, ultimately the courts would decided, didn't but the game over here, like the relationship is done, they have burnt the bridge. It's over. yeah.

And this to me, is a little bit of a thing in nike's D. N. A. Where they are competitive all the way up to the line and then one to over. Yeah.

what's the uber corporate value to stepping from the travis era? It's very much that .

it's we are fiercely competitive. And at this point in time, I was to stay alive. So I get but for their whole existence, it's like, is there anything we can do that other people aren't doing because they kind of think you can't, but maybe we'll do IT anyway and deal with that kind of happens with nike over, over.

over again. And for most of these situations, this one very much included. Yeah, like this ends up in lawsuits. And yes, probably a toll over the line. On the other hand, it's also a little bit like uber in the early days with two stepping like the alternative with the taxi industry. It's good for the world that they stepped a toe over the line and like they didn't do this, there's no nike.

yep.

So with that only took a pull out of the relationship. They don't send any more tigers to bill ivan fill signs of deal finally with show E Y. And the core part of the deal is nico will a finance, all of blue ribs financing needs hence forth, pretty much at a scale that goes all the way up to the moon.

I mean, there a hundred billion dollar revenue company, certainly way more than any the organ banks could do. And we'll do that at market interest. Its two me show will help blue river in set up direct manufacturing relationships in japan, what they do. And then three, in exchange for all that, nico gets a four percent royalty on every shoe. That blue ribbon cells, which ultimately ends up being a great relationship.

and that's on top of the financing. So they already own interest on borrowing the money, but now they additionally O A four percent royalty.

Yes, this is sort of like the trading company playbook.

And is that just for the inventory they finance for all sales?

I believe .

IT for all sales. Wow, does that still exist?

I don't know, I doubt if he does. In the same way, I know that the relationship with the show E I continued for leg thirty, forty years, like a very long time. If IT still does exist today, I am sure that is not the same terms. But this goes on very.

very long period of time. I wow I mean, this point in history to have the house in order with a strong financing partner, there's crazy stuff 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 checked that bounced for payroll and things like that. When these things top, they topple all at once.

And so they had like a day where they called into the bank, and then the bank called the F, B. I, and then they got investigation for fraud. IT was an insane few years there. Yeah.

shoe dog has a lot of great, like few nights personal experience going through this, which is, I mean, it's worth to read no matter what, but read IT for that.

Safe to say this moment here in what is a one thousand nine hundred seventy one one seventy, they can kind of take a deep breath and say, well, the business has had is still really hard because now only suga is gonna 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, so go over to japan and works with me, show goes, visits, lots of factories, ends up meeting the nippon rubber factory, restoring the thoughts of folks.

And he sort a test of these factories, of whether they can be A A partner, is he pulls out of cortez, and he asked the factory how long IT would take them to make a version of this show, sorry, meets with me pond river in the morning the same, let's go out to lunch, let us borrow the shoe inspected a little bit, will come back after lunch. We'll have an answer for you. They come back after lunch and there is almost perfect, duplicated the cortez sitting there on the conference room room table and feels like, here, yeah, this is what i'm talking about.

What are an amazing way to do business? Because he had met with all these other factories there go, we will get back in a few weeks. And like over lunch, they built one.

amazing. So he is just, just, he orders all sorts of models. He's like, can you do all the running shoes that we slash tiger we're doing before, at least the ones that we embellishment designed up? No problem.

I can you do tennis shoes, basketball shoes cleans like up up, whatever you want. So in a kind of very unfair, like peak of confidence here, he says, great. Well, have to start right now model name.

So he writes out the wimbleton tenison e the forest till tenison e the blazer. Basketball shoe, the blue in basketball shoe, the marathon. Of course, the cortez is like, great. Let's do all of them.

And these are nike franchise that stood the test of time. Many of these shoes are still made .

the blazer for sure. Yep, of course, the cortez and h they're okay. great. And then feels like one word thing, the boxes.

Can you make them bright orange? I want them to stand out and be on rivers like you got a man, whatever you want. awesome. So great. And to this day, the orange, and by the end of this trip, fail. And blue ribon sports has a whole new line of athletic shoot models coming out in japan with a much Better relationship, solid financing and a brand new brand to show IT all off the wing. IT got as a Victory.

Nick yp, and there is kind of this funny thing where IT is still blue ribbon sports. So in one thousand nine hundred and seventy one, they do create nike ink. IT is a holy own subsidiary of blue river in sports.

And IT is responsible for manufacturing well, are contracting with manufacturer to make this line of shoes, this nike design line of shoes owned by blue urban sports. Of course, later on, these wood flip and nike would become the parent company buff. For now, it's a subsidiary of blubbing.

amazing. So feel, get told, many tells, powering about this. And this is where yet another sports tic, but incredible bowman stroke of genius, comes to play for blue ribbon slash nake brument jazz.

He's like, great. I never liked the only to you guys that. But he doesn't really care about that.

What he cares about is like, wait. So there are factories now. We can tell them exactly what to do.

You mean i'm the new chief R. N. D. Officer of blue ribby sports. Let's get to work.

So that weekend, supposedly IT was the weekend right after night, told barrowman about what was happening. He goes home and over breakfast on sunday, bill is sitting there. His wife, barbra is making waffles for breakfast.

And honest to god, I think, you know, a nobody does really happened. Bill is struck with inspiration. And he's like, hey, honey, can I borrow that waffle iron? Borrow that wave iron was not coming back.

He goes out in the back in his mountain home, and now he had a that of polyurEthane ting there. And he had IT, because the university organ had just redone their track and made IT into a poli, earthy track instead of a cinder track. Embarrassed at the time was like, well, this is great.

This is the future, the olympics. Are you going to do this and what not? But the shoes that I have, that I have my runners and they're not grip in the track that well.

And so he sees the wave iron. He's like, what if I pour polio? They in into the wafer iron.

which has two problems. Yes, the shape is, you can imagine how that could grab a track. Well, there's two problems. One, hot polio thing, super toxic. The man for many years of his life, because he's been experimenting forever, is like breathing and all these hot.

terrible chemicals. He's literally A D scientist.

And to pouring hot poly ethie into a wolf iron is going to permanently glue the iron 是 yes.

which is exactly what happens.

So apparently the first actual wafer trainer shoe was inspired by this design. But like, you literally couldn't make one in a traditional wafer air. Now.

according this god, in a really, you cannot make this stuff up. Everybody thought that that original wafer iron was lost history.

And like, was this even true? Or a poker foul? Anyway, years and years later, after billet died, is I think as these kids are going through the estate, no and how back is up in the mountains like they didn't have real trash service, so they drew the in like a garbage pile in the bag and they're in some renovations to 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 barons genius inventions and becomes the first big hit shoe for the new nike brand. He would eventually, after glowing the first wafer iron shut, then create a model out of plaster in the wafer iron.

Poor polar thing into that and then make the wafer souls for the shoes. They work incredibly well on artificial surfaces, not just tracks, but also astro turf, which is becoming a thing at this point time. So the university of origin football team wears them that year on their new air term field.

It's like a huge thing. They beat our and Steve wearing their wafer trainers. This is incredible ble publicity for nike.

And I think the wafer 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 color way that they do IT in is.

OK you sneaker head over the color way?

Or eventually I think it's fill who's like, oh, we should do this in a blue. They will go well with blue jeans. Yeah, the canonical old school waffle trainer is blue with a ello swoosh. And I think a lot of those we're sold to be lifestyle. He is going with blue jeans.

which turns in to nike y's real business eventually.

But that the success on the field on asteria fields, the success in track that year, this is one thousand nine and seventy two blue ribbons. First full year doing sales as nike purely on their own. They do three point two million dollars in revenue member just a couple of years before they are last kind of full year with tiger. They're doing a 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 wafer trainer to be at three point two million dollars, fully financed fyne show what a great thought 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, purely a aliveness. And can we convince people to buy things from us that aren't only sugar tigers? Cause to this point, it's still unproven if it's hey, blue ribon has great distribution and people will buy anything from these guys because we trust the company or if its people really wanted to took a tiger because they were really good shoes for runners and I don't really want whatever this new thing your cell is.

yes. And IT turned out that IT was the former people were willing, definitely willing, to buy blue ribon shoes and to buy bill bowerman shoes, regardless of tiger. And on its suka.

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.

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 built bowerman, you know, legendary trac de, he also started. So the convergence of things, all the butterfly wing flapping that had to happen for nike to become like right at this time, right, is niki is being born and blue river is going out on their own.

Bowerman gets a generational runner at or again Steve profaning tragedy, like readily so many people we've covered recently, on acquired dies in a car crash, way too Young, you know, James steam style, which ironically, of course, to cement his legacy. But he was the american runner. He was on the cover of sports illustrated while he was a runner at organ 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.

incredible. And he did this at all again and then later as a professional, but still for bowerman and his olympic teams in niki, right? As nike was starting, you can't scrip this any Better.

And in fact, he was not allowed to take a paid endorsement due to au rules.

Yes, this is another toe stepping that's gonna happen here.

just like snatching the document out of the brief case whenever IT takes to win, film night 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.

yes. And this is one of those things that the aau and the amateur rules, 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 in the olympic organizing committees. Rules were that you had to be an amateur.

You could not be a professional athlete. You can take endorsements or take money to race. Three was this poor kid from oregon. So after he graduated and wasn't at the university anymore, he literally had a bar tend 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 as a corporate employee of nike as the national director of public affairs for five thousand dollars .

year with no responsibility.

And there's this amazing quote to dog, phil says, people asked me what that meant. I said, that means he can run fast. So great, so great. Uh, this is the perfect encapsulation a for shadow.

Just a little bit here of the later number three in the later a nake document of the ten principles of naked that we will talk about in a bit. Number three is so great, perfect results count, not a perfect process. Break the rules, fight the law. That's exactly what fell in nike are doing here.

Yes.

you bet. So that's on the sort of proto marketing front that this early nike playbook is getting going to five thousand dollars for the best publicity you could possibly ever get.

It's feel like basically inventing sports marketing. I mean, there is a sort of Nathan 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 restarting p 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 the retailers.

Of course, the retailers would place orders with nike to buy the shoes, and then they were to be selling 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, that the way IT all works.

Yeah, bill comes up with the idea because, remember, he's got the ne show U. I. partnership. But financing is still like he's guard 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 going to call this the nike futures program. So he's essentially moving his financing from banks and neo E Y. Over to his retail partners, to his customers. And the retail is, of course, told me to take hike at first, but then the lawful trainer comes out and they can make enough of them and retailers can get enough of them. And the only way that they can get the wafer 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 their distribution strategy, being a whole seller they sell to retail chains. And for decades, starting here in the early seventies, they are predominantly someone who reaches their customers through an intermedia through retail.

That's the second piece. The third piece then is sort of obvious and has happened along. But now as nike is making their own shoes, is outsourcing and global outsourcing of manufacturing.

So again, nike isn't making the shoes in their own factories now. They didn't actually buy a factory in new hampshire along the way, which is a little bit of a deer. Phil sent jeff Johnson out to, like buy IT and run IT that was more of a stop gap measure while they were transitioning from .

tiger kind of a hedge too.

I was a head, yes.

And IT was a secret hedged again. Break the rules, fight the law. They use natives money, which was supposed to be to buy inventory instead, to play into capex of buying and rehab a factory.

And then they were secretly Operating their own factory with money that was not supposed to use for that purpose. But again, nike, break the rules, fight the law. And here they are today, a huge successful company.

I like that. Break the rules, faith the law. Sounds much more inspiring than toe stepping. So global outs are think, though, at first, this, of course, is in japan with new bond 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 ID 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 ratings on the world, there is no way that they're getting shoes for three dollars appear anymore, anytime soon. This means that they got to go find other countries to make the shoes.

And yeah.

so fell in. 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, go to vietnam. And this is where the nike global production machine is born and at first is primarily taiwan in the south korea that they go to, then the big movies into china, both in terms of production and for selling. I think there's a scene and shoe dog, even when he's on the trip around the world in one thousand nine hundred and sixty three, that he leg peers into china from hong kong and is dreaming about two billion feet in china. A nike would be one of the very first companies, I think the first football are company that would be allowed to sell in china .

to sell and open factories. They is part of open the country for the industry.

So this, we would certainly be remiss in doing a nike episode if we didn't talk about the downside of this. The outside, of course, is tip 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 to making chips to making technology, to being global economic powers, is part of the process. At the same time, people are making like seventy cents a day. Working in these factor .

is 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.

What we're here. We may as well be here. So stories hit the news of some really horrible things, like child labour, stitching soccer balls on dirt floors and high temperatures.

toxic glues cards acedera.

Nike fans looked at this as uf, the company really has a black mark on their otherwise great reputation. But IT kind of was the natural end point of an idea that had been in the company's DNA the whole time. Me literally film at stanford paper is about arbitraging cheap labor from imported goods and selling into markets willing to pay higher Prices.

They should have realized, this is where I could have gone, if left unchecked. So to add insult to injury, nike wildly must handle 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 walk this back of the 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 publish supplier, they have third party audits of factories.

They do huge investments and R, N, D. And invented things like new types of glue that weren't toxic, which they then went on to share with their competitors. But David and a, there is still this interesting and more theoretical question.

What is the line of acceptance 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? There are three dollar wages? Fine, if the local averages two dollars an hour.

At the end of the day, there's a discomfort of sitting with the idea that in order to manufacturer 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 company ies need a grapple with a spectrum that they sit on. On one end, there is making the absolute maximum margin, and on the other end, there's creating labor r 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 what was going on in the factories. And they were in the wrong because IT LED to exploited people.

One of the things that naked folks were really surprised by at the time when the controversy came up is they really like all the other shoe companies do at this way, all the clothing companies do at this way.

Why are we being quick done? Yeah, but nike started. And 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 I was like, a huge betrayal. IT was a disappointment. He 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 I like, yeah, this was part of naked from the beginning but because of everything else that made niki successful, it's super ironic that they didn't held themselves to the high standard that the whole company was all about and then their customers really like this doesn't compute yeah.

they sort of discover they couldn't have their cake and eat. Two 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. You simply don't make shoes, even though IT is technically correct, the court of a public opinion, you will find you guilty.

So OK back to the in one thousand nine seven, in one thousand hundred and seventy four, these pieces of the nike start up playbook, the inventing sports market in basically sponsoring court and quote, pref five thousand dollars, the outsourcing your financing to your retail partners, and then the global outsourcing of uc turing. All of these combines in one thousand nine and seventy four for just an explosive ere.

I can't remember exactly the phrase, but in two dog felt. So something like the limits were off. The governors were off.

We could run. They do eight million dollars in revenue in nineteen seventy four, which is up almost twenty percent. They nearly .

doubled again in one thousand nine hundred and twenty three to one thousand nine hundred seventy four.

one thousand nine hundred and seventy four is also a moment this year for bay ribbon because they finally settle the legal battles with any sugar, and they win in court. amazing. Ultimately, they settle for only took up paying blue riband four hundred thousand dollars, which by this point time is a pitance to blue bin. But the actual butterfly flaps its wings. Hugely important outcome of this for the nike journey is that the court case with on its suka leads to one rob dresser, yes, coming into filler and the nike orbit.

He was their lawyer on this case.

right? Yes, stress or was the junior attorney at the portland law firm that was working on the nike case. And stress er is just of force. I mean, this guy was not cut out to be a gorp ate lawyer.

He actually comes in after the case is settled to blue ribbons in house council, but then felt quickly realizes, like all this guys way more valuable to me than has my lawyer. You know, everybody else in nike at the time, they're all former runners. Most of them ran for bowman stress er 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 with nike of rolling thunder and boy is hero like the and while he unfilled, of course, did ultimately clash. And there was a terrible betrayal that happened .

for a while.

They were thick as Steve. 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 alien stasi, the tennis player. They paid him ten thousand dollars to wear niki tennis shoes. Boy, how point? When dresser 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 N. B, A for peanuts.

Now, not the big stars, but the journey in the role players in the N. B. A. He just obliterates them in their agency 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 the nike is showing up on nationally televised broadcast every single night.

Yep.

this leads them to a bigger initiative that stress or puts together. And if you've watched the recent movie air of our air Jordan, this totally gets played as like a Sunny varo thing. Strasser hires Sunny varo to come in and build the college basketball program for nike.

And this is another just equally brilliant move. So customer gets Sunny to go around the country and sign up coaches of the big basketball schools to become nake coaches. Now there's nothing preventing the coaches at schools from being consultant advisors running naked clinic.

No, you pay whatever you want. You pay whatever you want, right? And they can tell their teams to do whatever they want. There is no contract between the team and the coach about wearing shoes, but if the coach says, hey, I really like the shoe company, you should wear the shoes on what you think the players are a IT actually.

a team policy actually. So within a month of working on this stress and varo have got U N L V Georgetown, texas arkansaw, they get legende coach Jimmy V A. Iona, to sign up to be committed to being nike coaches and their teams wearing nike.

This is hilarious. So all this is happening. The washington post gets word of this.

They run a real pero cute article saying that this is shameful. Nike is commercializing the purity of college athens. Like, I like that giving a break.

Like, these kids are being exploited. Like, at least you're getting free shoes here. Now in the article, the post mistakenly says that aoa is one of the colleges that nike has signed up, not iona.

So lude awesome. The coached iwa, who is legendary, he goes on and coaches at the zoo. A lots of listeners probably know who lude ulson, and he is 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, you can I get on on this so that they set up luted IOS, the arizona. And he becomes a big nike coach, incredible, stressed, then takes the same playbook to college football signs, all the big coaches in schools, all the big powerhouses for peanuts. This is incredible.

Now, selling foobar class is never a big business for naked. But college football is huge. I mean, still huge.

Lot I balls on those shoes.

Lot of I balls on those shoes.

This is so clarifying of what their sports marketing strategy is. These endorsement deals are not about the stickers that that basketball player is going to sell or, oh, I want to buy the kites that my favorite color football team is wearing on the field. No one else plays football rather than college foobar students in the very few N, F, L players that exist. So there's really nothing to buy. But what you do see are these shoes, 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 researcher. For nike, there are actually only three sports that matter. So nike edis, you know, rebuck, 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 noral. People don't wear baseball create, or football clues, or soccer cleat, no matter how popular the sports are. Yep, even to this day, all the marketing, all the athletes, everything you see on T, V, of nike and the other athletics companies is not about getting you to buy the shoes that that athlete is wearing.

It's about getting you to buy nike, right? The fund is every single one of those is a brand impression. So consider them all billboards and then they just need to manufactured enough products to meet needs in your life that you can go and participate in the brand story by buying things that you need in your life.

And you're inspired to do that because what you saw on those moving bill boards and 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 cited equation of can we create enough demand like IT, literally on their income statement says men 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 want to say that stress er alone architected this grand strategy or even i'm not really sure that filer anybody at nike understood at this time. But certainly stress er 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 is no appeal. There is no shoes for other sports, really. There is like some things on the margins, but ninety plus percent of their revenue .

is running shoes. Yes, the core sales, what they are marketing, is go by a wafer trainer and wear on with your bullied gins. Yp.

so through the late seventies, revenue just doubles year over year over year. They go fro m 44 million and sales to twenty nine million and sales to seventy one million sales finishing out one thousand nine hundred and seventy nine， with a hundred and fifty million in sales.

Yes, there one thousand nine hundred seventy six when they officially changed the actual name of the company to nike. The one thousand hundred and seventy seven was a huge year. As you said, they do seventy million in revenue that year.

They sign john mack and roll. They cross a thousand employees. So it's going to to be a real beef organza.

Two other things. They bring one former NASA engineer and true mad scientist, Frank rudy, into the fold. The inventor of air sole technology.

which fills is not a fan of when hears about the idea.

Well, he fixes IT a crazy idea. First fills meeting with rudy. I can't even know how rudy got into my office.

Who is this crazy? Is about to kick him out them really like, yeah, A D is didn't want to be there and feels cool. You said word, let me try that so I supposedly, phil goes for a run in the prototypes of the air. Souls needs pretty.

And we say, if for anybody who doesn't know everything that you hear of now, the area, max air, jo air, one IT, is a literal air bag. Actually, it's a nitrogen bag that sits in the middle. So think about the thing between the lower soul, the rubber on the bottom and inside of the install, the basically the part of the shoe that you can't get to that underneath your heel. And sometimes that runs all the way across, all the way up to the toe that replaces from questioning, instead using a little airbag that magically doesn't pop.

Yeah, I think really, really was a genius. So feels like our let's do IT he tasks who else rob stress er with go and do in a deal with beauty. They do a deal rate gets between ten to twenty cent royalty for each pair of air sole technology shoes that niki cells.

Eventually, nike would just buy rudie company, and rudy would become an employee of nike. So still here in one thousand nine hundred and seventy seven stresses just on fire. I don't know the full context around this.

Scout reams has a great linked in post. But as best as we can tell, ban, 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 waiting.

Stress gets kind of pissed off one day, and he goes to his type ter and he fires off a memo. He zero axes, he copies this memo and tasted IT up on the walls all around the office of nike ten principles. And this document is just amazing. We've tweed IT before it's go on 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 fell in night route articulating nike's principles. Here are the things that are wrong with that statement.

One filled night did not write IT rob just, or did two nike principles also incorrect? When this was written, IT was actually still blue rib in sports, so that was not yet the nike CoOperation. Three, the top of the document has this, like thin whiskey switch.

That was never the nike switch. This is someone's attempt to doctor this at some point to make IT look like some old version of the swiss. There is an old version of the swoosh, which we will link to in our sources.

IT is still in the U. S, P, T, O. For the woosh trademark, IT is a hand drawn version, Caroline's hand drawn version of the switch that looks nothing like this weird thin whiskey thing that was like doctor and added to the document.

so. Not nike ink, not the rush. There was never a switch on the document.

IT was done on a typed writer. How are you going to do that? And three, not fill night. But yes, oh my god. These principles are amazing and we're gonna through. We want to think our long time friend of the show, vantine, the leading trust management platform, venta, of course, automate your security reviews and compliance efforts. So frameworks like soc two I saw twenty seven o one gdpr and hip compliance and modeling ing vent to takes care of these otherwise incredibly time and resource training efforts for your organization and makes them fast and simple.

Yeah, fanta is the perfect example of the court that we talk about all the time here and acquired jeff basis, this idea that the company should only focus on what actually makes your beer taste Better. I E spend your time and resources only on what's actually gone to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. IT plays a major role enabling revenue because customers and partners demand IT, but yet IT add zero flavor to your actual product that IT .

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And thanks to friend of the show, Christina anta, CEO, all acquired listeners get a thousand dollars of free credit van to a com. Slash acquired. Okay, David, what are these principles?

Are naked principles? According to b dresser, in one thousand and seventy seven, one, our business is change. Two, this is so good, we are on offence all the time.

Three, we are the a little 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 the underline is 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 will make money dam near automatic.

It's so good.

so good. That last one is so spotted on for any business through to this day is so easy to get wrapped up on all the other crap. You do the right things, you make product to customers love you market IT right? You build a brand, you will make money dam near automatic.

So I read this differently than I used to read them, because when I didn't know nike y's journey, I sort of would just read them and be like, yeah, that's awesome. More like, wow. That's so pithy.

I can't believe their official corporate values in such a pithy way. No, this is stream of consciousness, all from robbers or all into the typewriter. And like, some of them are things that nike would never say today, because IT shows the tradeoffs inherent in their business.

I am live off the land. It's clinch worthy, right? It's almost like you guys you have 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 four shadow of rob dresser hating the bureaucracy at nike after its IPO that will talk about this, I can clashing with fill night.

developing his own personal ambition .

and developing his own personal ambition, leaving and going to add as 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. Then 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 definite, one of those cases where ignorance is bliss.

Yeah, but man, they're awesome. The one that is still in nike's maxson s today that they distribute to employees. That is David. You and I both hold near and deer and think of of the we're on offence all the time.

You don't win by playing defense. no.

okay. So we're approaching one hundred 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 a perl where they are diversified across the zilia sports and from their revenue. They're basically a running shoe company that makes shoes for men. That is where their revenue comes from.

So nike IP s the second week of december in one thousand nine hundred eighty. Thus the week as apple, unbelievable. You get all the way .

through shoe dog. There is basically no mention of market cap at IPO. It's the crazier thing like IT really underscores how much nobody believed enterprise value matter.

Then, yeah, he was about four hundred million dollars. The market cap at IPO apple, for comparison sake, was one point eight billion dollars. Now, interestingly, before they went public, bowerman sold most of a stake back to fill night.

Actually, this was related to some of the finances earlier bit 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 is like i'm going to sell mistake back to fill. So when they went public after the IPO fell, owned forty six percent of the company, and was overnight one of the rich test people in america.

And at the crazy st. Thing is like one of the richest people in amErica then was one hundred and seventy eight million dollars.

Yes, quite different now. He was far from the top rate test person in america, but still this made national headlines. Yeah, so this is where shoe dog gans, which is kind of crazy.

I had forgotten this before. I went back and reread IT. There is no Jordan.

There is no huge fall from Grace that is about to happen for nike. Basically, right after they go public. Phil picked an interesting time, and the story very much so.

especially because right after they go public, fill goes on saturday for a year. It's sort of like, you know, the jobs done, wash my hands of IT.

then the job is not done until the job is done.

Here you go. But like the whole company, there is a lot of hubris going on. There are on top. We are on the running shoe market.

We've been in this magical, secular growing trend forever, and it's just surely gone to continue, right? And the fitness boom continues. But running is not exactly the thing that keeps Carrying. I mean, that fifty percent market share in running shoes at this point in america. And yet their growth in the future is going to be dict by where they go from there because it's really hard to have more than you know fifty percent market share in an industry like this.

Early nike did so many things right, but they made one critical mistake. They miss took the running in 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 cynical trend that was part of the fat driven fitness cycle. And by the early eighties, as we're heading and to everything that the eighties was and that the seventies were not running in, judging out, and a robots are in, and nike absolutely refused to see that and refuse to do a robic like on principle.

fascinating. I mean, in thousand, thousand and eighty reboc, U. S. A. Is founded. And by thousand thousand eighty eight, reboc a clipsed nake in sales.

yes, at well over a billion dollars.

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, three was going to a massively taper off. And they were gonna p growing their market share. So they really did need to look elsewhere. And I think IT was pure hubris that blinded them from finding their next market.

So reback funny, originally a british company, started as Foster and suns. They were the company that made the track shoes for the nineteen twenty four british, all the victim. That was the basis for the movie cheries of fire.

The reback, we all know well, not today, but back then, is a completely different animal, is a marketing driven company started by a game, paul fireman, who is american, and pretty quickly they develop a business plan to cash in on the erotics fed. And they made a shoe that, in niki s. Principal opinion, sucked.

But IT went really great with legwarmers. You know, IT was all way IT had soft leather that wrinkle that looks good. Women loved IT.

IT was everything that nike was not. And their rise, like he said, bin, was even steeper and faster than nike's. Ironically, reback would end up much later getting acquired by s and then spun back out the private .

equity recently. wow. So financially there something pretty, pretty. We'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 in the twenty two million in the bank for my po. And you can see how they got fat and lazy their whole life. They were starved for capital.

Finally, they had IT whole life. They were the underdog. They are not the underdog. They've got half the running market and the dominant brand where they just steamroll the competition to get in all these sports deals.

But right at the same time as the uh robots boom is becoming up, A D is is becoming a very real competitor in the sports marketing deals too. And so nike is kind of realizing like, oh, we are not nearly as well capitalized as them. And they are kind of going to come eat at launch. And all these deals where we just figured out that you can pay people and there where your stuff so are cheap brand advertisers can go away. And .

meanwhile, in our core, like consumer actual reason, people buy truck loads of shoes. The fitness market, the switching sound you hear, is that going to review?

yes.

So interestingly, financially, there only are a couple of quarters where nike's revenue declines. I think that because of the futures program, kinder 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 switching away. So that brings us to nineteen eighty four.

Fill night actually wrote in the letter to shareholders that year one thousand nine hundred and eighty four, like George well predicted, was not a good year for nike. Everything that we talk about is happening. But ninety eighty four was also the seed of something pretty incredible that would make everything that happened before in naked like child's play.

And that would be a Young kid from north CarOlina, ina 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. And how IT portrays everything?

Oh yeah, no, it's a very fun. Can be work of fiction.

I mean, IT gets the broad point right? Michael Jordan saved nike absolutely one hundred percent. The characters involved in 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 stressors, baby to do the deal, not varas baby to do the deal. No, vaca, never fluid in north CarOlina. A to negotiate at Michael house with Michael mother like that.

All of this doesn't actually happen. They work in a fire every the baseball division, if this didn't work. But again, factual inaccuracies are fine. It's the characters that they mess 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 that they make feel night, just not at all who felt like is they make him out to be kind of a rube and after watching every interviews ever give in and reading all stuff about him. And I just don't think that the beneath flight characters, anything like, feel like, anyway, iris entertaining. Here's the real story.

The big important thing from Michael Jordan, the air Jordan one. And then everything I became in the Jordan brand is that IT didn't just save nike. IT change the world.

That's a super happy thing to say. But IT is one hundred percent through. If you walk down any street, pretty much anywhere in the world today, are you going to any event building? Then you, whatever.

And you look at what people are wearing, they are wearing sneakers, and they are mostly wear ring basketball shoes and running shoes. That was not the case before air Jordans. Air Jordans and Michael Jordan made sneakers in the culture.

So nike takes chance. There is a kid at the north CarOlina. He picked third in the draft.

He's really good. He just took the game winning shot to win the N. C. A, A final four. But you know, he's not lebron in high school.

Yeah, he's picked third, right? I remember going to see lebron as a high school athlete because I live near acron o ohio. And he want to save to say marries famously.

And like he was very obviously one of the best N. B. A 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 MBA 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.

right? So let's talk about what the deal and why I was so different. Nike, like we just said, they're backs against the wall.

They need to do something to save the company. And it's actually dresser who puts this deal together and together with Sunny varo. As portrayed, the movie goes after Jordan, but stress puts IT all together.

So the deal 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 payout. Ts were calculated 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 me advance on the first five hundred k year. But you know, once he sold through the advance, he was gonna a five percent participation on any of the shoe sales deep than that.

This structure was completely revolutionary. So the way show deals were done at the time. So magic john and Larry bird were the bigger stars in the MBA at the time.

They were both signed with converse. Their deals were roughly one hundred thousand dollars a year in cash payments to wear the converse weapons. Then have you ever worn the converse weapons? no.

Do you know what they are? No, no. I, these are not air birds. They were signature shoes.

Nike says, we are going to make you a signature shoe, and then you are 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 did to incentivize Jordan to build the dream. Here we need to tie this all together.

and it's brilliant counter positioning because other 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 freak nothing to lose. Course, they can give away some of the upside if converse is going to do this, or you do this is going to do this, they actually do have quite a bit to lose by giving a way upside, of course nikky IT.

Turns out there was a big paycheck that they cut Jordan for years and years and years. But nike was truly doing something here with their competitors, could not. And IT was smart to figure out what the things that by being small and cash constrained and underpin trated in the N. B. A, what strength 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 an gets a royalty on incremental sales in future years beyond the baseline of everything in the nike basketball line.

I did not realize .

that this is how that works. We eluted to this earlier in the episode. It's the halo effect. Yes, the Jordans are important, will talk all about the air Jordan ones in a second here. But it's not about the Jordans. It's about the switch and it's about the halo effect and the lifting up of the whole company sales.

I had no idea that Jordan got a royalty of non Jordan shoes.

He did. And this would eventually more into the Jordan brand and the Jordan line and sign Williams and Jason tadeo. And like they are Jordan athletes, this is part of IT.

So nicky also guarantees a minimum add band 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 is something kind of interesting here, which is I was trying to figure out if I would describe this as a partnership. David and I, our partners and 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 in by nike because there's the minimum guarantee 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 wanna work with nike. Nike was for the second rate pro players. Jordan wanted to do this. Jorden was a kid in the A, B, like a teenager. To the extent that sneakers had started to transcend into culture, IT was a detest hip hop, break dancing, track suits, shell toes. That was A D is that was where Jordan wanted.

And so to put a finer point on this here, Jordan didn't want to be nike partner, so he basically wasn't. And they backed up the truck forum. 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 to A D. S.

afterwards. needs. Like, I really don't want to go with nike. Like, I really want to be with the details. You don't have to match this.

Can you just come anywhere in the ballpark close? And a did is like, we could give you one hundred thousand dollars a year and h as a reluctantly, Jordan goes with nike. But you're so right and it's so important. IT sets up the incentives even though Jordans no downside. He's like, well.

Jordan also is on offence all the time. This is a guy who plays to win, so you give him the incentives. Fill night are gonna long real well.

So here's what happens in that first year, the air Jordan ones. This is gona be very incredible. Some of you know this, some of you going to listen this. You can be blown a way. Hang on, because there is a second part to this story that is now 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 fifteen percent of niger's entire revenue for the whole year.

In the first year, they sold one point five million pair in the first six weeks after releasing them.

So put aside the halo royalties the journ 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 at six point three million dollars that Jordan got from naked in one hundred and 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 amount from the nike deal in his first year.

He made his entire. Contract with the balls in his first year.

Wow, I always wanted to think of the story is like, well, Jordan took some risk. IT paid off big on the back end. It's like he paid off immediately and he had to make no tradeoffs to do IT. He got the cash guarantees and he got the royalty upside. And IT happened immediately, and I only got bigger from there.

Well, tradeoffs. I think there are two things. One, none of this what had happened if Jordan didn't turn out to .

be Jordan totally in. In fact, that's literally true. If he wasn't, what were the three laugh? If he didn't either win lucky the year, or when the N, B, A, finals or when the M, V, P, or something there was an out in the contract. H, I did that. They are basically like we will give you the entire farm, or five percent of the farm if you are a phenomenon, 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. IT wasn't the N B. A finals. IT was to become an all star.

Ah interesting, which I think he did the first. Yes, yes, yes, that's right. Because the other players kept the ball away from him and they froze them out because there was so jealous.

Okay, one, Jordan had to become Jordan too, though he sacrificed a huge amount. T there's this great quote from Jordan when he retired for the first time. He said, phil night 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 different extent, that happens to every started, like today, you like dub.

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 are so right. Imagine that I come to you and I say, hey, i'm going to a pay you and give you revenue upside and you know, all you have to do is do the thing that are already good at and work hard to the thing you're already passionate about. By the way, i'm gona use your face on five million dollars of media of paid media in the next few months it's like, wow, what but that's IT for any Normal life that I get like a right out the bed and .

he's a cap yes. So again, like this is all Normal today, everybody. Lebron knew exactly what he was getting into when he signed with nike at a high school, went to the M. V. A bit like this was the beginning of all of this.

So why did they sell so well that sort of this interesting hundred and twenty six million dollars in the first year? Like why was the demand for them crazy? Do 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 Prices and and in warmups, some modified airships because now he's actually not done making the year Jordan one yet. And so he's wearing these black and red shoes that are now called the Jordan bread B. R, E.

D. And the shoes are black and red. And in the M, B, A you wear White, and that's IT. And so jorn 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 prior to the arjo dan one, these modified airships on the court. So we're not actually sure that IT happened because .

IT takes a while to actually make a new shoe. So the air join .

one is still in production, right? But this black and red catcher's league attention, David stern says, hey, you can't wear those. We're going to 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 the policy to where the black and red shoes IT doesn't mention the Jordan IT doesn't mention the year jorden 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 even been the case that IT was ten thousand dollars for the third over in a two game season, and facing possible ejection is a big tab for nike. IT is a big problem for Jordan.

And before he could even wear this black and red shoes in a game or have the opportunity to they switched, the are Jordan one. They made White and red, the one that is, I contact that you can go by, and then they may go. The remakes out of the A, J 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, is just standing there in the camera, panned down from his head to his feet, where he's wearing the black and red and IT just goes bang, bang and put 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 N.

B. A. And you can go buy them 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 in eighty two games 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 in the NBA or nike and ichael Jordan, because the fine was never levied. IT was a threat that then nike made the air Jordan once before. Anything could be enforced. If anybody knows, please join this lack and shoot A D M. Put IT in the general channel.

And very curious, the thing that's so great though nike really like IT doesn't matter. It's the story. It's the dream. Like IT doesn't matter, right?

They just put them in a freaking hollywood movie that IT was five thousand times eighty two games.

and that's all anybody he's gonna remember add. okay. So I mention 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 one hundred and twenty six million dollars worth the air Jordan one shoes in merchant in the first year. fact.

Another fact that gets put out there is that nike sold one hundred and fifty million dollars of air Jordan choose and merton days during the first three years. I have you look at that like, wait a minute, huh? What happened?

Something bad happened in years two and three. Yes.

and indeed, something that 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 channel, they pushed so much product on retailers and to the futures programme and what not that that's how they hit one hundred and twenty six million dollars in sales. There wasn't actually one hundred and twenty six million dollars of demand for Jordan products that year.

嗯， so good commercial, but not how to twenty six million dollars of demand commercial.

I mean, there probably was I making this up fifty, seventy, one hundred million dollars of the and like unprecedented for any shoe in history for a single year. But niki also effectively took some steroid on this one. Yes, that turned into a huge problem because the retailers and the buying public had a huge hang over 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 miss most of the season to the air. Jordan tools sucked.

There is kind of no other way to put IT. This was where stressor, who, again, in master minded, all of this, the Jordan deal, the Jordan ones, working with this collaborator, Peter Moore, all this stuff, they kind of went. Rog, the air Jordan oos caused a hundred dollars.

The air Jordan ones cost sixty five dollars. The air Jordan tools 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 shot. You want to play basketball in duty water? Probably not.

Jordan didn't like the shoes. They were not good to play basketball, and 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 incentives to push them.

I mean, he was economically incentivize, but like the shoe IT, all kid fell part on top of that. As this is all happening. Dresser, and more too along with them. But a really dresser is becoming increasingly rogue within nake, he breaks away. He starts a new division in a separate office complex from the rest of the company, called the new products division.

Do 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, go away from later, away from the rest the company.

He Mandates that all new product launches have to go through him in this new group and that they're gana take control and streamline the process. The Jordan tools come out of this. Vivian li is not a very good shoe.

This becomes a big problem. Obviously, there is only one way that this is going to end. Either stressors is onna become C E O of nike or stress ers is onna leave nike and stress in going to become C O of nike.

Because one felt night to C O of nike. Two, nike has a door class voting structure. Film night controls, all the high vote chairs.

And he controlled the board. So really, this is the end for stressor. They get in a huge fight in one thousand nine hundred eighty seven. Street leaves the company. He goes off and takes more with them, Peter mom, and they start a consulting firm, import land called sports incorporated, all of which is fine. And you could imagine a future where one day night and stress my reconcile and they could be friends again and say, well, rob, i've had incredible part of the naked journey contribution to everything we can bury. The well sports incorporated takes on as one of their major clients, atis, and eventually .

there are only clients.

and then eventually a despise. The company moves their north american headquarters to portland. Door again, makes, stressed the C.

E. O of a datas america. 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, just terrible.

Yeah but .

the betray that this engenders, it's a reverse small band you talked about earlier the nike culture. There's a quote from jeff Johnson, blue ribbon mpl yee number one, who I think I already left the company at this point. He's asked in the book just do IT about rob becoming sea of a deas and he says, I know they a dedas aren't what they once were, but the details, people were the hunt. I would starve to death before I would work for a and then when rab dies file, if does not attend his funeral, this is really just tartlets king.

There's a quote that sums up up in this portal land monthly article, the talks about why stress, or isn't known to many people outside the companies, is why his role sort of fees into history.

And they say why? Because his work was vital to both, which makes IT incredibly difficult to neily write him into the mythology of either one for a deas IT was a brand revival conceived and executed by a fat american x nike guy and his arc partner for nike. Stress over achievements are overshadowed, if not severely tarnished, because he was a trader from fill night IT might have been OK if he had just quit. But he went to work for the datas and intolerable betrayal. I never forgive him.

yeah. And still, the repercussions of this exists to this day. Adea is american. Heck, orders are still important organ.

yep. And they poached .

a lot of nike people. yeah. So, okay, back to Jordan. The plot thickened here. Jordan's not happy dresser with his guy there. Yeah stress er was this guy stress er leaves starts this new company starts working for a dedas becomes the C E. O of edas Jordans gonna to A D as the writing on the wall here, I mean.

Jordan's deal is up .

in ninety, right? Not only is the deal up in ninety, he tries to be negotiate. So in year three, Jordan is so unhappy, the wheels are in motion at a edas with dresser not yet at the helm, but whispers ing in the year 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. yeah.

So back to nike and fill. This is serious warm time 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 resign him. They're willing to anything, renegotiate the deal, given more economics. Give him another shoe. Anything fill goes to break. Young star within the nike design group, tinker hatfield.

formally of nike y's architecture and building planning team. He was not even hired as a shoe designer.

He was an architect. This is super important. Tinker was another bowerman guy. He ran track for bowerman at org and studied architecture.

And then he comes in the nike and together with mark Parker, who would become the C E. O of nike, they design their max, they design the trainer. They are part of nick's revival on the running and training side and competing ultimately in a robots with the air trainer.

Now the stress er and Morgan tinker is the star that he can give Jordan he says, go fly out to chicago go with Howard White, Jordan's guy and nike. Go talk to him. Come home like bearing your shielded on IT essentially.

So taker goes out. I remember he's trained. There's an architect and then became a shoe designer. What are architects do when they meet with their clients? They ask some questions.

They say, what you want? What are you specifications taker sits down with Jordan and he's like, tell me what you don't like about the Jordan too. They are too tough to break in.

Okay, cool. What else is wrong with them? Their high tops, you know, that's too much weight.

I'm Michael Jordan. I need lightness of my feet. I want to fly. I don't want the extra wait. Okay, cool.

In an ideal world, Michael, what you would you want? What would IT look like? Michael say, well, I want a great basketball shoe that will also look great off the court.

But IT needs to be both. That can be like the Jordan two that look great off the court, maybe, but suck. There's a basketball shoe thinkers, like, okay, noted.

So he goes back to nike work previously. Jordan comes in for this last pitch pitch meeting. He shows up four hours late IT all starts. The beating is like a boy. Here we go.

Tinker like an architect has the show under a black cloth on the table, just like Steve jobs in the keynotes many years later, fill, hence the meeting over the tinker. He's like, Michael, I took notes on our conversation. Here is the Jordan three and he pulls the shrewd off and hands the shoe to Jordan.

And he's like, it's the shoot 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 letter for style off the court that won't tract from performance on the court. And then the P.

S. Aidance no switch. There's a little wish on the back tab. The main logo is the Jordan jump man logo on the tongue. The jump min logo did exist beforehand. Peter Moore had actually designed, but IT was never in the prime position. IT was always the switch and then the dump man.

it's like herdal at nike at this point to not have the switch be the main character, but Michael Jordan didn't really want to be a nike, so the only way to keep him is to can hide the wish.

It's kind of like car getting back to the beginning of, like film night could have had one hundred percent of glory bin sports, or he could have had fifty one percent of bill bowerman blue ribon sports.

Yeah, it's pretty crazy because the whole point of these deals is to get through impressions and they were willing to say we think it's gna be profitable enough in the long run to be in business with you that we will not put the shoes 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 with in nike, its own shoes, its own cloth, 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 sian Williams. And where's Jordans? Jt, where is Jordans?

The university of michigan, for some reason, is Jordan not nike as the official uniform supplier.

U. N, C is Jordans.

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 ung gross sales. But there is 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 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, 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 Sparkly, it's got to be the shoes.

And why in Kennedy got to be the shoes? Jordan turns over the course of this contracts easily, at least one hundred million dollars easily over the seven year. Yeah it's just dwarf fing what he's learning from the M. B. A.

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 of his nighty earnings, were waiting out pacing his NBA earnings.

yep. Now interestingly at retail, again, back to the tailor of strategy, the Jordan three days and then all Jordan subsequently. Really, this is when they become the luxury brand.

The Jordans are nike's levitan trunk. Yeah, they make a lot of revenue from, yeah, they sell a lot of them. But you know, IT also helps themselves .

a lot of wallet. yeah. So the Jordan three is Priced like two hundred dollars or something.

H, one hundred dollars. But this is nineteen eighty eight.

nineteen eighty nine, right? Okay, that make sense. All right. So you mentioned how much you 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 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 up like thirty five percent. And IT does billions in revenue growing at thirty five percent.

So this past year, they just reported f 12。 The Jordan brand did six point six billion dollars in revenue. Let's assume that the percent figure is still accurate enough. It's accurate ish. Jordan's make IT over three hundred million dollars a year from the Jordan brand at a five fish percent royalty.

He retired for the last time twenty years ago.

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 is effectively 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 brands.

He is 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 anonymous 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 want to say about all this in Jordan and the building of the dream and the changing of culture before we will move on to all the rest of native history, which we've cover here. You can ignore to, again, the timing in this. All of this coincided with the rise of E, S, P, N. And sports center.

And that was so important in the early days, like wind c preventing was on the cover, sports illustrated or some of the tennis players, that was like there was a naked line of, oh, we could spend x million dollars in advertising, but if we get our shoes on the cover of sport illustrated, that's where twenty million dollars with E, S, P. N. In sports center, those athletes, and Michael Jordan being all over that twenty four, seven every night, there was twenty million dollars a night of free advertising .

at a great point. So off the back of the rise of the Jordan brand in one thousand nine hundred eighty eight, they launched, they just do IT campaign with the very first, I think this is the first wide. And Kennedy at right.

second, real big one. The first was the revolution ad with the beetles that they did for the air. Max o, another ticker have field in 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 one thousand nine hundred eighty eight. Investors are starting to wake up to like, huh, they're building something really special here.

They open their first nike town in portland. The early nineties, late eighties, early nineties are just all good for nike. I think by ninety one, their market cap hit five billion. By ninety six, the market cap hit ten billion and the really just executing the strategy that we talked about, but at scale, until they get hit with everything we are talking about on the labor chAllenges and that controversy.

yeah so .

that's a tough few years. Interestingly, like right around the dot com crashes also kind of tough for them. Their market cap drops from twenty billion to eight billion dollars. They weren't in any way yet attack company. But tough times right around the same time period.

An interesting thing from that front, losing kobe to A D this was big.

really big. And people forget this, people forget that kobe wasn't A D as athlete first, yes, in the same way that people forget that cane was a nike .

athlete or a nike er rapper first. But yeah, those early two thousands were not a great time for nike. But then interestingly, kobe was so unhappy I did this and wanted what nike could give him, that he bought a data out of his deal and move over the nike.

Oh yeah. I have the numbers. So kobe was with the datas from ninety six to two thousand and two, and he hated the koby tools.

So bad. That is rumor that he paid eight million dollars to get out of his contracts so he could be lover in nike. Yeah, that was a huge win for nike. And a big turnaround like two thousand and two is really when I started to get good again for them.

Yeah i'm sure part of that was the shoes and yeah, by all accounts, the kobe to 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 years when lebron came into the N. B. A.

And nike signed him out of high school. Yeah, okay. So two thousand.

Two, they get kobe. Two thousand and three, they get lebron. They're cleaned up their image. They are cleaning up their factories. They are cleaning up their supply chain.

In two thousand and three, they acquire converse for three hundred and nine million dollars there once foo and you, now in I, in the multibillion dollar america. Captain converses, a tiny fraction of that size. Two thousand and three, Michael Jordan retires.

And it's fascinating just to get a quick date of point. The Jordan brand that year in two thousand and three is doing seven hundred million dollars a year and today is 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 bonus.

Yet Jordan has completely transcended a sponsorship deal and turned into a brand. The notion, the play tonic ideal of Jordan is a brand more than a human. So in two thousand and six, another important thing happens, and most people didn't realize that at the time, because, keep mind, two thousand six over an apple.

Steve jobs is still the C. E. O. So not a lot of people know this guy name, tim cooks name.

But tim joins nike y's board. I believe in, like late two thousand and five, he joined the board. He immediately starts helping nike in the understanding how to use digital technology to transform their business. And in two thousand and six, they launched the nike plus ipod.

yes, yes.

which was 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 is a product. Me, oh, was IT. really.

This is the moment that has LED to the terrible ness of the sea of digital corporate process. Today we all love this to think, plus this, plus that, plus blob bomb. S P. Joran s out there. No there, because joran is, well, a to.

And I was funy.

The origin of plus .

IT was interesting, because IT was a little like thing that you would put in the install of certain shoes, and IT would measure your stride length and all the metrics about running. And IT report IT to your ipod, because I had a little like thirty pin connector thing you could put in to your ipod. IT was the most clunky clue 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 products, but with this sort of sweet of services. And two thousand and six. And then again, in like twenty thirteen, fourteen, they had had a sort of a new strategy.

Start this really these clear moments in time where the company changed its DNA. And I go all the way back to two and six on the technology. One, IT also completely changed their acquisition strategy because up until then, they had been acquiring brands.

They bought converse. They had bought starter. Starter was gonna onna. Be there like .

walmart brand, how? That's right.

Coin, coin. 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 fly wheel of the nike brand.

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 five hundred million users a quarter who are now using nike digital apps, from their e commerce APP to the running APP run club.

train 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 the lives 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 fill night had sort of pioneer with the retail relationships to go direct. And nike started to realize in this new era, this internet era of this global era, where you have to be yet scale to execute certain strategies. They're gonna be the player at scale that can execute direct strategy that can Operate niki dot com to sell shoes to customers, that can Operate retail stores and all these different places to go directly to customers.

And they're not all way there. And I think there's a lot of like will talk in their sort of burble 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 ten, fifteen year transition, especially with the right technology to go direct. Nike is basically betting that there are also one of these hero brands that can run that playbook.

For context today, nike is what more than twice the size of a yahoo is more than three times, I think the size of the number three player, which is sketchers .

maybe yeah it's super power of distributed.

The other aspect of that is personalization. Nike, I actually think, is really at the forefront of a parl personalization with what started as nike I. D. And now is, I think, called nike by me. But anybody can make their own nike shoes in their own colors, with their own designs on them, to be able to do that at scale with their customer base and produced the standard lines that requires a level of scale economists 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 sneaker heads 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 chequer 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 sneaker as a thing you threw on for the tennis court. But you will 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 film night track you thing never could have dreamed. And shoes have become this method for self expression. And the secondary market is huge, like some estimate two billion dollars, some people estimate six billion category.

Keep in mind all of athletic user or what what do I say one hundred and fifty years know somewhere around there. So still a tiny fraction compared to. The athletics speaker market broadly, but who would have thought that used special edition shoes or secondary sales or shoes could possibly be a single digit billion dollar ecosystem?

I mean, this is companies like go and stark xin. We'll talk about this more in analysis, but nike has made the, I think, for a conscious decision not to capture any of that value.

Yeah, i'm fascinated by that. I think they're 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 a nike is different from the luxury brands that we've covered.

The L V M H is the porters. Portia makes tens of thousands of dollars of incremental gross bargain with their library, one colors that you can buy. Nike sells these incredibly limited edition retrolental otherwise sneakers, but they sell them four hundred fifty box, two hundred box, maybe three hundred box, like not a lot of money.

The instant that they get personal, you can turn around and sell them on the secondary market for five thousand dollars, some of the the issues, 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 lu vat'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 stock s 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 cost 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 even a high number. It's not like all I can buy something from nike for ten thousand dollars like I really can't think of a single thing I could possible purchase for them even for five hundred.

right? The one product that I know of was the max, the bag of the future shoes that they actually produced. Those were for Michael j.

Fox is charity. I think they made fifty of them and sold them for seventeen thousand dollars, if I have that right. But a, that was for charity. B, that was like, obviously a stone that's not love.

A on right? Here's what I can buy for four hundred ninety dollars. I can get american and national league jerseys for the all star game HMM. 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.

yes. I really can't think of anything else off the top of my head where a 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 arbitrating yeah.

just like a luxury brand, they have to market the dream. But their mechanism for capturing value is entirely different. Yeah OK.

I went to move us quickly here through twenty eighteen to today so we can analyze the business in its current state. So in twenty twenty, something pretty special happened. They pulled the trigger on a White and Kennedy ad with college cronic about standing for something.

The dream crazy ad.

yeah. The text of which obviously was just colon carrick face and says, believe in something, even if that means sacrificing everything they accomplish with a commercial IT launched online cabinet tweed IT than they did these big billboards in every major city. I remember the first time I saw, 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 scrap their plans for the whole rest of the year for a whole bunch of ad campaigns.

They were already ready for a different way that they were gonna the thirty university we launch of just do, and instead made everything in this new tone. This cabinet add struck such an incredible cord and made a lot of people super angry on the sort of other side of the political isle 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 big thing with George flood. 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. yes.

And it's quite illustrative that we aren't really talking about anything that cabinet did. And 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 want to prioritize this and we want to say we stand for this and we want to 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 going to build more love than they're going to piece people off from. You know, those people are worth losing because we prefer these people instead, and we think these people disposable income is high enough for there's enough of them.

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 alright, and we're going to 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 up.

And this is also you back to the cabinet cat. This is to my mind, the pinacle of the brand halo element of this yeah captive played football, not an important sport for nike in terms of shoe sales hadn't played in several years. That wasn't about football, he said there on the .

nike roster getting paid. There is a bunch of press about how they were thinking about actually cutting him. And then someone eternally is like, wow, 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. This is like the ultimate example for of the add, 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 to issues at the executive level, the person that everyone thought was going to be the C E. O and next aftermath and many of his people around him were shown the eggs IT.

There was the whole organ project that's their competitive running group with doping and all the alleged abuse going on there. So this is 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, well, all of this was going on. Their big competitors were all kind of screwing up and especially going into COVID like none of their competitors figured that out. There's these smaller shoe brains, and you look at on or hok a Brooks, a lot of these niche players have done well in growing, but niki hasn't had a formidable all scale competitor.

IT did. This 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 dona ho, they've been able to clean up the organization, reset for the next chapter, execute this shift to a direct 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 listers. As part of the analysis on every episode, we do a segment called power, which is based on hamilton and helmers incredible business strategy book, powers.

which is basically what is that, 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 a laid for us on this episode. But i'm curious, you said you had a transition to power. I'm curious where you were going.

okay. So obviously, we're going to 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 niger's position and strategy within IT so different from C, N, L, V made or a portion and the other somebody portion has scale economies. But if you look at the sneaker industry we talked about this minute ago, it's such a power law. There's nike. There is a data that half their size, and then the third place player is well less than half of a deas success.

Yes, after that is sketchers than puma than asic converse under, but like massively declining market.

okay. Now compare that to the rest of the apparel industry. It's wild.

How different IT is, right? Think about fashion, think about cloes, think about shirts, think about can't, think about jackets, think about whatever. No other corner of the apparent l industry looks like this. And that there are two, three, four companies that make a huge share of all of the sneakers that the world wears.

That's a wild, is 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 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 lebron of the world to be nike athletes. And the lebron of the world are going to go where there is the most dollars flowing to them and who can give them the most dollars. The people with the biggest .

customer basis is not just that 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 one hundred thousand dollars check right there is aligning and an incentive to be part of the biggest machine. So like the kobe situation is so illustrative of this rate.

Kobe was with the details yeah maybe the kobe to suck. Like, I don't know when 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 a did this could do. And like, that is huge power.

That's fascinating. I mean, the game is figure out how to have the most customers that you can sell a peril to and then you get to buy the bigger billboards and you get to a line interest with the biggest bill board. IT is 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 one hundred thousand dollars, but the talent in IT is gonna you millions? The super poll slaw is going to cost you millions. I think a lot of nike's power on a go forward basis is totally the scale economy stuff.

you 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, in that the other companies couldn't do IT because magic and bird would never tolerate Jordan getting a fundamentally .

much Better deal. They are too much to lose. 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 e ring, vers and unbranded diamond ring of the exact same calibre you're probed, paying ten to thirty thousand dollars more for the Tiffany engagement ring. And there is a peerless to that brand premium concept. Does nike really have a brand premium?

Or is IT the athletes that have the brand and make you scale economies, let them buy the athletes brands right .

as tangible fin would put a wholesale transfer pricing? Or actually, the athletes are the ones that sort of hold the power and nike is happy to pay up for in past through all the profit pool to the pinna athletes.

Unquestionably, that was the case in one thousand eighty four with Michael Jordan. And then again, in one thousand hundred and eighty seven and eighty eight when they're .

negotiated the deal, right? But let's look at an air force one or a dunk. You know the dunk lows that everyone's wearing right now, they're not really generating pricing power on that maybe off of something purely unbranded, but off of the datas. People are more likely to buy the dunk low sb than whatever the edit as 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, yes, the dunks cost more than the editor. shelters? I don't know, maybe shelter 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 a hundred and sixty hundred eighty dollars. The equivalent adidas pairs one hundred and sixty hundred eighty dollars. Same with the equivalent new baLance pair. And so if you assume that they do have brand power, nike is making a conscious choice not to capture that value in making all those shoes more expensive than competitors.

Yep, but I do think despite you saying the trap, and I think there is a big trap in over estimating brain value of nike, IT does definitely have brand value and brand power .

yeah is 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.

Yep, 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 niki? No, you can't. I can't die. IT will be with us in one hundred years.

That's quite a take.

Oh, you don't think that he's gonna here in one hundred years.

I think you could totally kill nike in the next thirty if you want to to I also don't like your promise. I disagree with your dear thing that the really good brands are the way you can tell something. Luxury, a durable brand is like if you couldn't ill IT if you tried, either get too shy.

Okay, fair enough. I have something way less quality for you here though.

Okay.

I think I talking without dreams about this. I have no data on this whatsoever, but I don't think IT is a controversial statement to say that the swiss logo is tattled 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 hamilt in .

definition yeah the slide of hand, what nike is first and foremost is a brand. What the entity is, is a brand because they don't make sneakers we'll talk about. And second here, they don't seem to charge more than their competitors.

I'm literally looking at A D as growth profit margins are on average higher than nike's. Nike is current rolling last forequarter. Gross profit margin is forty four percent. I did as is forty six percent and I did is 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 is an intentional decision on the key part. I think they absolutely could sell five hundred, one thousand, five thousand, ten thousand dollar nike items.

They absolutely good. And they choose not to, I think because if they did that, what one thing we didn't talk about. So nike announced a few years ago that their whole marketing strategy was going to be reoriented around, I think, twelve cities in the world.

And they were going to a 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, lossy, angles, tokyo, shanghai, rio, paris at ta. And I think what's behind that is nike needs to be accessible to the task makers in the 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 pinning of nike.

I'm not only love five thousand dollars tems. I'm talking about charging ing two hundred dollars instead of one hundred and eighty because there's a sush on IT when the market Price for those shoes seems to be a hundred. Nadia, no matter who makes them, why don't they do that is IT because of what IT says right at the top of their I R website, which is nike ink is a growth company and they care more about growth than harvesting profit dollars.

Um 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 A D S. 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 wishes out there in the world. And there are some sweet spot where they're willing to trade off profit dollars for that for the sort of continued brand presence, where the hush 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.

Oh, maybe this actually all comes back to scale economies because its kind of the same thing with amazon, right? Or netlist 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, wait, 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 is not any switching cost. There is not any network economies. There's not according red resource, I frequently switch shoe brand all the time, and that would be like one of the things that i'm least excited about, about any issue or apparent company is unlike tech businesses, there is no potential for any form of locking and there is no potential for really any form of network affects. Like come on how I get a benefit from other people wearing nike maybe like and the nike run out being able to share stuff with my friends who also have the nike run out, but it's thin. That's not how to 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 power's perspective, most leverages scale economies to get their outsize .

profitability.

Totally grew 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 niki, is that absolutely astonishing scale? They are a fifty one billion dollar revenue business, growing ten percent year over year. As I mentioned at the top of the show, there is the largest apparel company in the world, except for the luxury category.

L V M H N R S got nike sales to women alone are bigger than all of luu lemons revenue. Wow, take that information. That's shocking. I feel like that's an illustrative stat. And nike has really lagged in developing products for a women.

That's exactly what .

I was going to 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 you have the nike brand does forty nine billion, so there's some other revenue in their I think there are some other catch all. But basically, as nike in converse and nike includes Jordan.

So I mentioned earlier, this shift to direct that nike has been in the midst of for specially like a ten year journey, about sixty percent is still a wholesale, is still sold through retailers and impressively, forty percent of this very large business, fifty billion doll 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 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 niki 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, a luxury LV is a sixty eight percent gross margin business. ARM as as a seventy one percent gross margin business. So nike is Better than a car company, but in a luxury up. So nike does six point four billion and Operating incomes that their income before taxes, twelve and a half percent Operating margin. So that sort of what you should think about that sort of take home.

not a software company .

yeah lots of cost involved in this business. They have eight a half billion dollars sitting in inventory, which even for nike is high. That's the point will 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 equivalence. 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 in the business. That was true for like a couple of decades. They've now had thirty consecutive quarters of increasing divided payout. Ts, so is the divided stock with eleven billion of cash on hand in addition to continually paying these dividends.

It's fly. This doesn't job for me with the statement on the investor relations page like he is a growth company. I mean, I ten percent growth that their scale is impressive. Thirty five percent growth in the Jordan brand is very impressive.

So you might think that 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 like their sports marketing budget, I think the wording on the financial statement is interesting too. They literally look at IT as or basically going out and buying media to create demand for our products. Yp.

I mean that one hundred percent what IT is? yes. Like we're saying, it's not really that different than netflix acquiring or producing content for netflix.

right? They just modified. A different way.

Yeah.

footwear is almost three x the appeal business on a revenue basis. So at least by revenue, foot are is still their bread and butter. And in part, it's just selling sneakers to people that go wear sneakers everyday and wear them out once or twice a year. They need to go buy some more sneakers. And that's, like most people in the world, is a pretty incredible market that they now get to address.

You know, hundred and fifty billion dollar athletic foot are markets crazy? When you look at this 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 adJusting as if they were all sold through our wholesale channel. Mens is fifty one percent, women is twenty one percent, kids is twelve percent.

And the Jordan brand, broken out separately, like all of this, excludes Jordan. The Jordan brand is the six point six billion dollar business that makes up the other sixteen percent of that pie chart. Holly, god, yeah men's .

inclusive of Jordan.

if you just a sin Jordan's three quarters men, that means that they're selling sixty four percent of their product to men in so member, when I said at IPO, they sell sneakers to men, it's like kind of the same business as IT was, but a super different business .

that 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 area Jordan brands share of performance basketball was eighty six percent in the status a few year old old's 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 deal in the N. B. A. Let's take under armour and steff curry here and secret isca. Like what are they doing?

Name and another underarm or athlete?

I mean, they exist, but I don't think I could right? Like why? And obviously it's worth that to steff staff could sign with nike tomorrow, but under armour just paying him a both lot of cash and I think also gave in tens equity in the company and what not.

But like why I mean that they just think is a bad move for under armour. I think this is the classic thing that we've talked about. Eleven different industries have, 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 Cliff in plain dealer or be disney or be dog a mirror .

or in this world be Brooks or be nike, right?

But don't be under rubber who is not a platform brand. They don't have the size and scale and everything that accused to a nike, but they're trying to run a mini nike playbook. And I 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 uniform supplier of the M, L B, the nfl and the N B. A. 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 are telling me niki doesn't even get to sell the jerseys to customers, is literally just to get the switch on the game day jerseys.

This is absolutely fascinating and blew my mind when I talk to a few people in the industry about this. So yes, the official jerseys, let's take the M, B, A for example. Nike replaced A, D, A A few years back as the official jersey maker of the MBA, when most M, B, A jerseys are sold to buyers who pay money for them, A, K, A, fans, not the players.

Most of those are replicated jerseys, which I heard that term before. I never thought about what I meant. Most of those are made by fanatics, which has run an incredibly interesting playbook in sports world, the sports marketing world, over the past few years.

They are replay made and sold by phonetics in conjunction with the teams 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 going to buy. You're going to buy a replica from the team store that is made by fanatics that has done nike switch on IT, which in many ways .

that part of wine nike is willing to pay. response. The N B A, is because the replicate jse's get more is 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 at 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 in a peril company, but instead you're paying to put your sush on jersey 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 fourteen 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 issues, which i'm probably not going to go buy.

I'm just not a speaker hit, so i'm not gonna go buy any this limited edition color or this that the other thing right something I like keep in a close in the 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. job. okay.

So those are the numbers on the business today. You wanna a play book? Let's do IT. okay. playbook.

The first one I know i've said in a few times on this episode, i'd totally want to like in grain IT, in the ears of listeners ers, 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, too. Did you watch that? David?

O yeah, so I was compelling.

unbelievable compelling. But they said, what are all the rules to competitive running? If you're going to a pacer on to run with you, IT needs to be the sam Epacer o r t he w hole t ime s o t hat y ou c an't c heat.

And like rotating pacers, you can't wear certain types of shoes that have ill defined rules. And so like you, stage is this event with their shoes that provably make you four percent faster than you've ever been before. And they drive a tesler with a laser and a whole bunch of paces around this guy. And they're like, you know what, we're going to 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 unbelievable, ably entertaining event to watch. And what they said, well, as we don't care if this is the legal or not in competition, we're just doing a stunt, you know and you guys can debate afterwards if this actually said the world record for the marathon time or not and I thought I was like, there's nothing more perfectly nike then saying, like, well, those rules are like a quite cute, but now he is a growth company.

but nike is a growth company. That's the ultimate non sector. I hope that becomes a mean, but nike is a growth company.

It's actually Better if you open up on mobile because the sub headline goes away was literally just a black and White picture of reno Williams. This is nike yen as a growth company. The first I open on my phone is like, that is 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 organ project stuff. So it's important to understand that, to understand the .

company have been break the rolls, fight the law.

It's right. Another big one is the things that are your very strength can go too far and become your weakness. And they totally pioneer, 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, we're not a shoe company.

Come on, can say that on .

the note of not a shoe company, there's a great analogy here to T, S, M. C. And in fact, there's a great analogy here to the NVIDIA and cocos of the world and nike. Nike is a fabula shoe company. Yes.

yes. I think that .

is ultimately be the answer to is nike H E. company.

This is our semicon on ductor episodes season.

There are a familist shoe company, yes. And unlike S M C, semiconductor manufacturing is widely 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 ought IT stuff like that. But IT runs quite differently than their appeal business, which has like thousands of manufacturer 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 fabrice 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 boundary equivalent, like manufacturing ecosystem of people who can make your .

stuff to the scale economies power question. To the extent in foot tweet 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.

You have exactly rate. What will our manufacturer? Sort of? Funny note, nike manufacturers zero shoes, but the manufacturer, one hundred percent of the nitrogen filled little airbags. They do IT in organ because that trade secret. And then they ship those over to their asian manufacturing facilities to put him in the shoes.

Do they do that with any the other technology like flying IT or react?

I don't know. I don't think so on flying IT. I don't know if you're gna make the flying IT in the U. S.

You made as well assembled? Yeah, I assume not.

So I also think get one of these interesting things like naked, get hit. Basically all shoes are made the same way. There are some companies that like to claim credit for, oh my gosh, this ones made the U.

S. Well, like part of its assembled in the us. But basically everyone you know either makes the whole shoe or the upper outside the U.

S. And I think new baLance is A U. S. brand. But like it's not to my understanding is not all made here 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 one thousand and 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 survivor ship by a story. And there are many that would have failed along the way, because at any given point, they would have gotten slave ahead of their, and one hundred percent debt to assets ratio would have cut up with them and then prove figure of business and film. I even put up he in pennies house to guarantee alone, if IT came down IT, all would have come down. There is no slack in the system at all.

And even continued through to the Jordan story, right? Nobody else was gonna do that deal.

Yep, exactly. So film night basically never took on any equity investors and so he took no delusion. He in his management team and bill barber man owned fifty six percent of IPO him owning forty six percent because he just kept betting the farm all on debt and basically had no buff er at all.

So what that means is on I P O day, he was worth one hundred and seventy eight 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.

Yeah okay. So we talked a lot about this brand halo idea. I want to put a specific fine point on what the strategy is. They create pinacle products for athletes, I think, often times, 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, 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 athletes journey in designing products for them and customizing experiences for them. That brand then seats 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 that.

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 feet of athleticism and show that this is like me, too.

And the hardest st thing is figuring out how to extend that audience and make products for them to buy without compromising that step one, that belief that you make pinna 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 exporting goods with the switch on IT. And also convinced me that the very best shoes to run in is the, you know, nike vapor fly, next percent, whatever, whatever. Again, just like our L V H episode, it's amazing that they can make a little wallet clutch for a credit card and I D and a two hundred thousand hour handbag.

Yep, all the thing I would add to that is a just creator. What kind of has hit me through doing the research in this episode is that athletes are netflix shows. Yes.

I didn't think that until we are actually recording here.

And these days, especially in the beginning, that was athletes are billboards and deflect shows in that, you know, on sports center, whatever. Like, you're going to see the switch now with social media and the modern world. IT literally is a netflix show.

People are following you name IT, Patrick m. Homes, Serena Williams. They have a following who are following their lives like a reality T. V show. Oh.

you want here in insane, quote, the dates all the way back to one thousand hundred and three. Rob streaker wrote this in the 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 stress ter quote, and I will want to help you a fill nights. Te, give me to me, this is actually about fill injustice. Around the time Michael Jordan became a nike guy, film night had finally begun to apply in full measure.

His hunch that of the general public could be helped to imagine great athletes as he imagine them as having implications of the very best that the human spirit had to offer. And 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. Decide with the athletes, sell the dream people buy products. Yes, interestingly enough to, in this rob stressed quote, where he says individual athletes, even more than the teams, this was the big take away from our NBA episode that is about marketing the athletes, not marketing the teams.

Now it's really interesting, since we did the nfl episode earlier this year after doing the NBA 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 N B A.

The N, F, L is captures. Wait, more value. And this is the more valuable league. But this nike ever sode is totally solidified for me, the value coming out of the M B A, Jordan, kobe lebron.

Because on and on zon, when be Victor? When mie the new enum coming out of france, there was the number one pic of the spurs. He's already a nike athlete. Fascinating and baseball 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 that are not buying football cleats. And it's the face of the person. It's not behind a helmet. It's like they are the heroes.

right? Yeah, basketball is quite helpful in that there is a reason to buy those shoes just to wear them around. Like you don't have to invent a new product for people abide to participate in the brand story like you do with football.

I think it's funny because it's the gator red line, not the nike line about Michael Jordan. But like be like mike, you want to be like mike, it's really easy. You just buy the shoes if you want to be like patch my homes is so little hard.

right? I don't have any path. I don't have a helmet. I have nothing in common with pat. My homes, no shoes will change that. I have one that i've been trying to think on 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 they not in the commodity business?

Well, this gets to your question at the start of the episode. This is the crux of the question. These two answers, the prestige models, the Jordans, the retro, the vapor fly, what have used the prestige hundred and fifty plus dollar naked models?

I don't think those are commodities. I think those are products. Nake also sells a lot of fifty, sixty, seventy doing pairs shoes. Those are probably commodities that are helped by the brain halo.

Yeah, by forcing 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 dead bar. Cue sue that no athlete has ever worn for anything. Everyone just google niki monarch and, you know, like, go yeah no of my parents were that I don't 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 and like .

ironically caught on with enz. And so oh, we think we are like people are wearing monarch ironically. So the monarch are objectively a commodity product, and they are super differentiated by having the nike brand on them.

Whether the vere fly for the two years that IT came out, the next percent thing that the breaking two marathon got, renn IT was like, by far the best running show on the market for two whole years. That is actual R N D product that differentiates itself. So fill light has the final word on this. In an interview maybe eight, ten years ago, he said when directly asked the question, are you product company, your marketing company? We are a marketing company, and the product is our most important marketing tool.

I disagree.

I think the athletes are your most important marketing tool. I think the product is a monitise ation 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 not R N D. But at the end of the day, they succeeded 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 theyve a thirty years in during brand for thirty more years. Nike will be, I can't predict after that, but nike will be a brand that people look up to an inspired by job.

Totally agree. And this is just a even like telling a little bit of the athlete story along the way here too. Even that a story of the product is what's important.

That kind of part of the myth of the marketing of the brand with the athletes, right? You know, the Jordan to the Jordan three, like, yeah, the Jordan two. Such sure. Like everything I said, probably true. I think mj probably really believes that, as do many people on the other, is also a really convenient story, or the kobe story of, uh, the kobe, you know, I did issues sucked, right? Sure makes for a really good story for the sop Opera that is the athletes life, that is the deflect show that they're selling, right?

Being a so poppa keeps them in the spotlight and keeps the opportunity to have more impact with sponsor ibs.

This whole .

sponsor celebrity thing is both a asset, if you do at well, in a massive liability, if you do IT wrong. Nike strategy has very clearly been celebrate athletes. A dinas has had the strategy that seems to be like celebrate eyeballs, where there's sponsor anyone with attention, it's rappers, it's musician. Yes, it's some athletes, it's celebrities.

It's do we want to talk about time?

Well, this is quite interesting. So I think nike was smart. I think they legitimately premeditated.

H, we don't want to be associated with this person. And so they drove a really hard bargain. And notoriously in twenty and fifteen, ka walked away from nike. And so they refused to give me creative control.

I think nike didn't see exactly what was coming with ky, but I do think they realized, hm, our entire brain is built on celebrating athletes and what we should be in business with celebrities in some way, shape and form. I mean, there's these great old stories of rob. Streamers are making sure that we will be starters were wearing night and drive 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 kyi? Know, we don't know what to celebrate about him.

And so I don't think they had too much for a site. New was going to 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 a data as year a datas, net income has basically evaporated and gone to zero.

They used to make over two billion dollars a year in profit in the last four quarters. On a ruling basis, they've made less than one hundred million. So two billion down to a hundred million, and they claim around five hundred million dollars of this is the easy right down.

They posted a natural real net loss last quarter. IT is a pretty disastrous situation over there. And there is a full out slide in their deck the where they admit we think we're Better than this and we're not.

No, I don't know. That was bad. It's bad.

It's really bad. They're in a complete reset year .

when I think may be part of this. What has happened is 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 naked placement is there in music? A on how many songs are there about Michael Jordan to this day or lebron, or zon or jan or what have you? Yeah, there's a lot of .

different ways to play IT. And nike seems to have played the chest board quite intelligently.

Well, yeah.

alright. So here we are at the analysis, the bear case in the ball case. So there is a bare case that we haven't talked about, which is nike is 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 are theoretically thin on people who could take the job they bring in. John, dona ho, john was the CEO of service now was the C. E. O of ebay, and was the CEO of being not from the speaker business.

but was a board member.

He was a board member, so he knows nike history from that level. But different than mean, mark Parker started as a sneaker designer, very different sort of lineage coming in.

He designed the peg is, which I think is the longest single running model with .

no pauses in the go.

Oh, that's amazing. So john .

comes in and is sort of this external higher? I get the sense, i'm not sure, held a twenty year CEO. I get the sense this is sort of like fir IT out time for nike stability things, get him set a good direction and then figure out who from the bench is the right next person. I don't know how long I will be, but it's just like a vibe that I get from reading stuff.

What mike is also so insulted. People develop up through the company and stay there .

forever yeah so cove IT happened around the same time that he's coming into takeover and they've sort of decided to do this big reorganize to have an orchestra ture super focused on each sport. And that meant that there was people's jobs and whole teams s responsibility, ie. S to track the athletes journey through their experience playing that sport.

And they provided crazy amounts of support to athletes. And like here is an example, at the last olympics, they wanted every single sport to have the option to be wearing nike shoes. Every athlete will. Many sports don't require shoes, and nike said, that's fine with us. We just want have a presence that we want to support those athletes.

So they did a bunch of R N D on all source 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 Better. If they end up in sushi and people understand what we're all about, they'll we want to participate in beran story too. Well, this is org was sort of intended to reline teams at nike with the way that they actually interface with the outside world.

So now it's mens, women and kids. Because you go into a nike store on fifth avenue in new york and there's a floor for mens, women and kids, and you go into a dix porting goods and there's a man, women and kids. And so I kind of 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 chew store. But niki is an incredibly matrix organization. And so that sort of the thing that was happening, the bear case in this is what has kona gotten lost, is an obsession and focus on these individual sports and the journeys and these sports.

Let's look at the trainers, like just A A little example. And running, as we learned in the Brooks episode, the business for them is in the trainers. It's not the race issues. It's what you're wearing to get your three mile or your five mile and a few morning a week and you wear those out and then you buy another pair. And it's a great business.

So there are 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 with this amazing vapor fly stuff, but like the trainers, but look at what's actually happening in the running market. You've got books on and oka all becoming billion dollar revenue run rate companies in the last eighteen months. Nike, fortunately, their big competitors like a das, 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. When you simplify an organ in the way that niki has, there's a little bit of a concern around are they still focusing on the nitches and know 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 bad case.

So there's a lot of new ones there. But I think that in the same way of that, all disney quotes. So with disney animation goes the company sort of like. So with running goes nike, the the bell weather.

Fair enough. I totally see what you saying. I think if you were to say that the equivalent disney animation for was running at the beginning, I think that is unquestionably basketball today fair and I don't see them slowing. And basketball.

well, mean that the thing is is like kind of hard to come up with bear case. They're all these like little nitpicky. Like I listened to bunch of tigers calls and I listen other 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 maces and they put more inventory in footlocker in the last couple quarters. And that sort of concerning because the whole narrative has been we're going direct but also, uh h we have too much inventory, so we got to blow IT out and you discount IT our retail channels.

There's lots of questions to managment about if that sort of thing is happening right now. Big slow down in china, not just them, but also big brand IT. Seems like the chinese market is shifting to chinese native brands or there is a lot of science that, that might happen. And so you know, the china market is a huge important set of consumers to niki.

So I think them figuring out especially how their social justice stances fit in with the C, C, P, controlled china, a huge job in question, and are they going to be able to address the biggest market in the world for feet or not at scale is sort of the question. Yeah, make sense. Honestly, that's the best I go for bear case.

Let me add on one more. I I don't think this is really a bad case, but if you are viewing this to the lens of should I buy the stock, not investment advice, but you first is other companies that could put my money into. As incredible as this company is Operations, the power, the scale, economy is the brand. I think the durability is 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 fast company.

Well, it's really good business model. I would look if you could put all your dollars, you could put IT in the SaaS company is you could put IT in the nike, right? I do think niki has incredible durability.

Yeah, I mean, that's the old case. These scale economies are super real and there are in poll 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 years since where they have the most amazing running shoes that everyone needs to marathon in, and there will be years where they don't but the nike brand and their media strategy and their brand voice and the way that they deploy and to all these local markets and tweet the messaging to be local, appropriate and record of the world. And manufacturer at scale, like it's just the nike brand, means something to billions of people, and nike knows how to make IT keep meeting something .

to them job. Like I said earlier, there are a lot of switch tatoes on bodies around this planet that is a bulcke right there.

Yep, in the world of globalization and the world of the internet. Returns to scale are a big deal and there in the scale position.

and i'm sure about hard core basketball fans and sneaker heads with net pic with this statement. But to me, naked basketball and the sneaker head culture is the core of the driving force to the panicle of the halo, the Jordan brand. And I just don't see like that feels like as strong as it's ever bit to me.

Yeah, completely agree. I mean, you listen to these tigers calls with the datas people and they are like our issue is how to figure out how to make the brand to cool again. And that does not show up in any way. Shape reform in the nike interviews.

Yeah, totally.

All right. Well, that closes out. Bear in ball. 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 danel like commented on IT. I was trying to figure out what you had just found.

And i'm wondering if this is IT. So i'm going to a read from wikipedia niche. O E. I was involved in a corruption scandal in one thousand nine seventy nine after IT passed on eight five hundred million dollar yen bribe from mcDonald Douglas to the director of the japanese defense agency in an attempt to influence the sale of the f four phantom aircraft to the japan air self offense force. The scandal was uncovered only three years after a similar scandal involving lucky conspiring to bribe prime minister to, for anyone who didn't listen to our lucky epo de, we talked about this bribe bringing down the minister of japan and oh my god, IT happened through ntia.

Yeah, amazing. I did find that. And that is an amazing connection. And the deep cut is great for required law. But that is not what I tweet 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 and other stories. And IT was actually about done cats and audible.

oh, interesting. Yeah.

that's good on to which I love these wild career changes. Where did you go from being a journalist and an author to starting a technology company?

cool. alright. Quick carve out. I think you should go listen to mark Andrews and on lex freedmen and then you should listen to him again on venti that order.

He's been on a little bit immediate two since he did. It's the interesting horwich strategy. It's like everything we talked about on the episode with them and how there the most media savi in the game, in part because of working with market there.

But like, oh my god, he's so smart and it's just a privilege to get to listen to him talk once 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 is very smart. So I recommend you listen to what's .

like the Brown selling shoes. You know that he's selling shoes, but my god, he's amazing, right? It's like.

go listen to the venture capitalist who has thirty billion under management, where a lot of IT is like betting on the future, that A I is gonna this big. That's good for the world. Talk about how A I is good for the world. Yes, I can access ledge that and listen to him and then be like and I completely agree with almost everything you're saying.

uh, great. I have listened to the bento's interview, but not the lex one yet. So I 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. Because we've been so deep in nike research to not pay attention to current events. Mine is speak now Taylors version, which just came out and I feel speak now, at least for me in my tailor swift experience is like the forgotten album like I just never think about IT tally and uh then when he came out as like, oh wow well A I was surprised that she's even continuing to do the rereleases.

I thought that I was like, SHE wouldn't need to do this anymore.

She's got the average. yeah. The ultimate power move would be to stop.

So pleasant surprise that I came out and also pleasant surprise to rediscover speak now like there are some bangers on. Great album. It's so funny listening to her now how will .

this tailor now she's exactly my thirty four well.

is 3734 and to hear her singing songs from when he was twenty one， it's just such a fun just to position yeah.

that's ool. I got to listen to. I literally ever done anything other than read about nike.

So yes, it's good. There's some great songs on there.

I'll enter my three day window right after we finish recording where I can pay attention. Other things again before starting research for the next one. Yeah, speak enough. We should pick a topic.

There's like a thousand I want to do so after this all can we can we talk about IT? With that, you can get notified new feature that we just launched of all new episodes launching go to acquire dota, A M slash email and we will include some fun easter rigs and there in addition, just tell you the episodes, 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 letting you know that were .

life anything subject to change?

Yes, become an L P, acquired dota FM slash L P A C Q two is in any podcast player, given I have a couple fun interviews, cute up for that. So a should have some good stuff coming soon and join the slack, acquire dt, F, M, slash, slack. With that listener's, thank you for going on this blue ribbon oursel with us, and we'll see you next time in dimension seven.

Wow, you are bringing a new energy to these outer. I like IT IT .

came to me a few dream.

Wow, there is some black and forces energy. We will see the next time who got. The truth got the truth.