listeners you should know David and I were texting before this debating do we change this thing around do we play with this should we reorganize this section and he texted me let's just do it so in the honor of bad jokes by David Rosenthal here we go [Music] welcome to season 13 episode one of acquired the podcast about great technology companies and the stories and playbooks behind them I'm Ben Gilbert I'm David Rosenthal and we are your hosts there's an age-old question in business what is more important a great product or great marketing well today we have literally the perfect case study in


that very question in Nike does breakthrough Innovation Drive that business or is their core competency really around their profound advertisements and their sponsorship deals with athletes and teams or they're probably best in the world brand positioning to understand it we have to examine Nike's entire 60-year history of course because this is acquired and because shoe dog is so good that's amazing you gotta start at the beginning so really the question is what makes this company the single largest apparel business in the world today outside of luxury of course and how is it possible to be a shoe company that does over 50


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 tied to the gigantic shift in strategy that Nike is really in the middle of right now well LPS we gotta thank you for voting for this episode David and I have had it sort of in our episode backlog for two three years and when we put it up for a vote the overwhelming majority of you selected this as our next episode so if you also want to vote for future episodes and become an acquired LP that is LP if you want an update every time we drop a new episode so you


don't miss it you can sign up at email and we'll be dropping little Easter eggs in hints in those emails to tease about what the next episode is going to be so that's email don't miss a new episode and lastly make sure you check out acq2 our second show where we interview people who are building their companies today available in any podcast player and without further Ado listeners as always this show is not investment advice Dave and I may have investments in the companies we discuss in this show is for informational and entertainment purposes only David Rosenthal what is that stack of books on your desk oh my


God I think Amazon owes a thank you note to acquired LPS because I bought every Nike book out there I mean my six foot long desk is covered in Nike books it's so fun to read all of them I thought there was just shoe dog I didn't realize there was the literally over a dozen that you and I collectively read there's so many of them I read thousands of pages but there are three books that I'll basically tell more or less the same story that we weave together to come up with our core acquired Nike story here today and I bring it up because it's actually pretty important what these three books are the first of course is shoe dog the goat business


Memoir of all time the second is a book called just do it that was written by the journalist Donald Katz Ben do you know who Donald Katz is ooh I do not so don after he wrote this book and I think he wrote one or two other books he had quite the career change he went on to found the company audible oh really isn't that crazy it's kind of cool that that was founded by a journalist yeah just what so he wrote kind of the canonical third-party journalist take on Nike and then the third book is a book called swoosh which I bet most people have not read but kind of like Taste of luxury I think people who are really in the know in the Footwear industry have


read this book it was written by one JB Strasser and her sister Laurie becklund JB Strasser is Julie Strasser who was the wife of Rob Strasser now Rob if you've seen the movie Air the character played by Jason Bateman is Rob Strasser Nike's legendary first head of marketing an item among many that is not discussed in the movie is that Rob shortly after signing Jordan had an enormous fight with Phil Knight left the company with Peter Moore who was the designer by Jordan's and ended up joining Adidas as CEO of Adidas America just a few short years later it's like an incredible betrayal this is like a Judas level betrayal I mean to say he was Persona


nangaratta around Nike is uh understatement of the century and here's this book that was written in real time by his wife as this was all happening incredible yeah so Strasser will get into his contributions but he is probably second only to Phil Knight in willing Nike into existence we start however with the shoe dog story the origin of Blue Ribbon Sports and actually a little bit before shoe dog starts in July 1948 when one bill Bowerman becomes the head track coach at the University of Oregon now bill was a legendary figure in addition to being Nike's co-founder along with Phil Knight I mean kind of the only way to describe


him is he was like a descendant of the survivors of the Oregon Trail the cowards never started and the weak died along the way was one of his favorite sayings yes so Bill's dad was the governor of Oregon and Bill fought in World War II as a major and he actually negotiated at the end of the war The Stand Down of a German Battalion he's also such a character he lived in a remote Mountaintop in the Oregon 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 and he literally blew up


the truck I mean the stuff you could get away with in the 50s they do not make him like that anymore no they do not so when Bill comes home after the war he first coaches high school and then he becomes the head track coach at the University of Oregon he takes this background and character that he has and he becomes maybe arguably the most successful track coach in American history so I believe Bill coaches the first American sub four minute milers he ends up coaching several Olympic teams he definitely turns the University of Oregon into the most prestigious track program in America you know he's a national celebrity which is pretty crazy


for Oregon in the 1940s 1950s right so a few years into bowerman's tenure as head coach he recruits a pretty talented middle distance Runner freshman from Portland nearby one Phil Knight now Phil also has some interesting Oregon Roots he's the son of Bill Knight who is another well well-known University of Oregon Alum he was a former lawyer in Portland and he's the publisher of the Oregon Journal newspaper Phil follows in his dad's footsteps he majors in journalism at Oregon and he runs for Bowerman and I would say Phil is okay as a runner well it's interesting Phil Knight would describe himself in his prime as an okay Runner because he was


running with the best Collegiate runners in the world coached by Bill Bowerman who barely gave Phil Knight the time of day I get the sense he was not a man of many words and certainly almost no words of encouragement other than run faster and so you've got Phil Knight the guy runs a four minute 13 Second Mile and is convinced he's okay this is exactly what I was gonna say I think at any other school Phil would have been a star this isn't really in shoe dog but I know Phil's personality from reading so much about him over the past couple weeks I think he probably went to Oregon in part because he wasn't going to be a star there I mean he is I think the most


introverted CEO that we have ever covered unacquired I mean Rockefeller was pretty introverted but he looks like Elon Musk compared to Phil Knight yeah and a lot of the CEOs that show up in these acquired episodes 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 they're bright and shiny and they're sort of loving working the room that's not Phil Knight at all not at all I mean I um was super lucky I got a huge thank you in my life to Phil Knight I went to Stanford Business School I was one of the first classes to graduate at the


Knight Management Center that he endowed there didn't he give your graduation speech exactly it was amazing it was kind of the first draft of shoe dog that he had been working on the book came out a couple years later so great but I remember thinking this does not seem like the founder and CEO of Nike you know even here talking at Stanford the most warmly receptive audience possible like he was very nervous yeah huh so night runs at Oregon and it's important to say we should note about Bowerman he was definitely a person a man like they don't make anymore but despite what you might think he wasn't militaristic


he really was pretty Innovative he was the first track coach maybe college coach of any sport who really put a focus on rest for his Runners and part of this famously for the Nike story too was technology and was shoes so Bowerman actually taught himself how to be a cobbler and would take athletic shoes usually Adidas athletic shoes and modify them or even build his own and then use his athletes as guinea pigs to any advantage that they could have he would be looking for and shoes were part of it and the technology that bauerman was experimenting with was crazy stuff he would rip shoes apart and he would rebuild them this is from the Nike


website with snakeskin deer hide or fish skin goofy crazy stuff and his guinea pig was Phil Knight because Phil wasn't at the front of the pack so he could sort of afford to experiment on him so very fortunate for Phil Knight and his future that he was not the fastest runner on the Oregon team exactly this is where it all comes together so after Phil graduates he goes to business school right after undergrad to Stanford to Stanford GSB hence the connection he graduates from GSB in 1962. it's also crazy Nikki feels like such a modern company this was a long time ago


so in Phil's final term there at Stanford he takes what is then the only quote-unquote entrepreneurship course at GSP I mean today there's like a hundred different entrepreneurship courses taught by the famous Professor Frank schallenberger who Knight gives tons of credit to for Blue Ribbon Sports and ultimately Nike and in the course for knight's final paper he writes the business plan for Blue Ribbon Sports pretty much word for word his thesis is that he knows from growing up with his dad and I think he actually maybe spent some summers at college and then at GSB working in The Newsroom at the Oregon journal and he knows from the


photography Department that high-end professional cameras had traditionally been the domain of the Germans Leica was the most famous camera brand and then at this point in time in the 50s and 60s the Japanese are starting to enter the market so Nikon was the big Japanese entrant Fuji Rico exactly it made great cameras and they undercut Leica on prices by a huge amount and he also knows about the Sporting Goods Market from his time at Oregon and particularly being a test pilot as they would say for Bill's shoes and actually the Dynamics are pretty much exactly the same in the athletic Goods Market there are two companies


both German the domini sports equipment one of course is Adidas or Adidas as the Germans would say yes as we will get into in just a sec here and the other one to a lesser extent was Puma now there was an American Athletic Apparel Footwear maker in Converse and others but Converse at the time was stuck in the canvas shoe era which was already like ancient history so if you know Chuck Taylor All-Stars you know the famous seminal Converse shoes but if you had to guess when do you think Chuck Taylor played basketball oh let's see I think if I remember our NBA episode the NBA was really getting going like post-war so like the 50s I'd


guess it was an early 50s NBA player yeah you might think so contemporaneously with the time we're talking about right now no Chuck Taylor played professional basketball in the 1920s whoa that's when the Chuck Taylor All-Star technology is from it's a canvas shoe by this point in time the market had migrated to leather upper shoes of which Adidas or Adidas was the leading technology manufacturer of it so anyway basketball shoes wasn't really the market yet it would become much much later as we shall see the market was running shoes and it was like an okay Market but this was not the camera market so Phil Knight's


thesis here it actually didn't get any sort of notice or praise famously from his classmates or even really from The Faculty because they're like okay this is a good idea to apply Japanese low-ed disruption to the Athletic Apparel Market in the Footwear Market but this is not a big Market the market such as it existed was track shoes right think about how you would Define a market size there's not that many track athletes at any given point in history so not that interesting and it's worth maybe saying one word on the Adidas or Adidas story before we move back to Phil Knight and shoe dog here because it's pretty crazy so it's called Adidas


because Adidas was founded by Adolf dassler or ADI for short ADI Das in like the 1920s yes so after World War One when Germany was totally decimated but before World War II he becomes like a fairly well-known Elite cobbler shoe purveyor track cleat purveyor to Olympians at the time so actually ironically I guess Jesse Owens wins the 1936 Olympics the big American demonstration literally beating Hitler in Berlin in Germany in Adidas shoes and actually that was ADI dasler taking a big risk by sneaking a pair of Adidas shoes to someone who could get them to Jesse Owens like the night before his race and Jesse Owens was like oh these


are actually awesome and so it was like a big sort of uh oh is this going to be a problem for audio when it comes out that the American one wearing German shoes interesting I didn't know that part of the story that makes sense because adi's older brother Rudy worked with him in the business as did adi's wife and son after World War II though the two brothers have a huge acrimonious split Rudy goes off and starts a separate shoe company it never came out what the fight was about but one of the rumors is that Rudy went and fought in the Nazi army and ADI didn't and maybe that might have I don't know but may have had something


to do with it anyway crazy Rudy goes across town and starts a competing company after the war named Puma craziest thing Adidas Adidas and Puma are the two brothers they're both the dosley brothers crazy okay so take us back to Phil Knight Phil has this idea in this class in business school this good idea but small idea to sell Japanese track shoes in the US and undercut Adidas in 1963 after he graduates Phil decides that he's going 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 buddies from TSB to go with him they go first to Hawaii famously and the Buddy


meets a girl in Hawaii and it's like why would I leave Hawaii yeah I mean smart guy Phil though goes on to Japan and he's still thinking about this idea when he's in Japan he starts going to tracks in Tokyo and watching what people are wearing running around the tracks and he observes and he decides that the tiger brand shoes that he's seeing are the best so he looks up the company that makes Tigers turns out they're made by a company called onitsuka which is based in Kobe in the south of Japan near Osaka and Phil for a desperate introvert kind of crazily this is how passionate he is about this idea


he gets it in his head that he's gonna hop on a train from Tokyo and just go knock on their door and say hi to the onitsuka corporation and maybe ask them if he could import some of their shoes so The Story Goes that he shows up on the door and I can only imagine what 23 year old Phil Knight is feeling as he's going through this well this is the other side of Phil's personality where he's sort of a tortured Soul he's introverted but he's unbelievably driven he has a splinter in his mind where when his buddy's like actually this is pretty good I'm going to stay in Hawaii it feels like but I'm longing for something


yes there's something wrong with my existence in the world that needs to be fixed and I need to go and find out where I belong and what to do and how to change the world and how to build something and I think he's got a motor that's just different than the way that other humans operate I've been thinking a lot about uh I think this is a David senra saying that the CEOs and the founders of these companies that we cover that he covers they are the Genghis khans of our time and Phil doesn't present as a Genghis Khan yes but he still is Right deep down underneath all that introvert he has that same drive that John Rockefeller


had that an Elon Musk has that a Mark Zuckerberg has and this unbelievably competitive spirit is the founding element of Nike's culture that permeates to this day at Nike you 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 stuff it's like hey we don't do that here that's playing for the other team get off the other team you're on our team and you wake up every day and you show up to go to work and kick your competitors asses and sometimes that takes them to questionable places that we'll talk


about later in the episode but Nike is among the most competitive cultures in the world it's funny you say Nike there as sort of founding principles because Nike isn't going to come for quite a while here while Phil is making this train trip down to Kobe he suddenly has a realization his plan is he's gonna show up at the door he's going to say that he's an American businessman you know a distributor and he wants to distribute their shoes in America literally his business plan from the GSB class he doesn't have a company though and he doesn't have a name for the company so he has to think fast and come up with a name and they're multiple


conflicting stories about where the name comes from the one that Phil tells is that the name Blue Ribbon Sports comes from him thinking back to his childhood days becoming a track athlete in middle school and high school he talks about it got cut from the baseball team and his mom encouraged him to go out for track and then the blue ribbons that he won at his track meets you know really helped Define his personality it's a very nice story very nice story that's where the name comes from the other story that appears in the other books is that Phil was out drinking the night before either drinking Pabst Blue Ribbon PVR beers or


I think more likely the other one that I read is suntory Blue Ribbon whiskey which is a Japanese whiskey brand we saw a billboard or something like that and that that's where the name Blue Ribbon came from as with any of these stories we'll never know and it's probably some of both yes either way perhaps driven by this drive to succeed Phil puts on the performance of a lifetime in this meeting he claims that he is a U.S businessman from America he's gone to Stanford Business School he has a company called Blue Ribbon Sports he wants to import their shoes by the way he ran track for the legendary Bill Bowerman who of course they know he


tells them that he's done market research he thinks that the U.S tracks you know 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 at this point in time I mean there's no way it was a billion dollars like maybe 100 million maybe I mean we just were talking about like running was not a thing it was the thing that athletes did right and the the running craze or the fitness craze hadn't really started yet so to give you


a sense David I think you're probably spot on with that maybe 100 million maybe 200 million for track shoes in the U.S the Branded athletic shoe market all up including All Sports for the whole us across all age groups everything 2 billion dollars right so he's completely wrong on what it actually is at that point in time he's also completely wrong on what it would become in the other direction thanks to Blue Ribbon and Nike right they had a large hand in growing and I'll spoil it for listeners the Branded athletic shoe market in the U.S today is 130 billion dollars now obviously not all of that is track and running but like a large part is running


shoes and that's growing five percent year over year so still a growth Market even at that scale which by the way that number 130 billion just to like compare it against some other things that is bigger than the video game Market wow hey I mean not everybody has to play video games but everybody's gotta wear shoes so Knight leaves this meeting this performance of a lifetime he gets an agreement from onitsuka that if he wires them fifty dollars they will send samples of the shoes to his office back in the States I.E his family home in Portland Oregon so first thing Knight does he gets in touch with his dad I


don't know he sends him like a telegram or something back in Portland and asked him to wire fifty dollars to the onitsuka corporation of Japan for purchasing these samples he gets home I think it's two or three months later after this surely the shoes would have arrived but surely the shoes would have arrived he rushes home he says hi Mom hi Dad did the shoes arrive his dad's like what shoes the shoes did not arrive the shoes would not arrive for almost another year wow a little foreshadowing in uh what doing business with onitsuka is going to be like for the fledgling Blue Ribbon Sports and this is just to like get some


samples to see if he can sell fifty dollars worth of shoes that takes over a year so Phil gets home he's disappointed and he's got to start his life he gets a job as an accountant and he's got a business school degree he's studying to take the CPA exams and become a licensed CPA and then finally at the end of 1963 I think right around Christmas Phil writes in shoe dog the samples show up and Phil gets them you know they're great they're what he remembers he thinks you know these aren't quite maybe as good as Adidas but they're good enough and I can sell them cheaply enough that my business plan will work right they're way cheaper so Phil gets


back and writes onitsuka says great I would like to be the US distributor for track and field shoes and onuzuka says okay great you can be the distributor for the Western United States we already have somebody that we're working with on the East Coast but you can have the Western 13 states feels like great he quits his accounting job he starts the company he goes to work he hires one of his twin younger sisters who I think was maybe still in high school to like help him part-time with receiving the inventory and sending them out and stuff the naivete is just dripping off a Phil at this point it's like oh good I have a business so surely I will make enough


money to be able to quit my job and hire people yes and now he doesn't have enough money to open a retail outlet or even really to get enough inventory to sell wholesale to other retailers so his genius business plan I don't know how much of this was part of the Stanford paper or not is he's going to drive around to track meets in Oregon and up and down the west coast and sell the shoes out of his car pretty awesome that's like legitimately doing the shoe leather work that no one else is willing to do and getting through that hard part to get your business off the ground establishing proprietary distribution channels yes


speaking of proprietary he also has another actually really great idea which is that while he's driving around he'll go down to Eugene and see his Old Coach Bowerman at the University of Oregon and he thinks oh if I could get Bill to put his runners in Tigers then that would be great marketing for me and I know he's not always super happy with Adidas we're going to have a better relationship he'll be able to experiment with these shoes and I'll sell them to him for cheap because at this point in time even the legendary Bill Bowerman and the University of Oregon they bought all the shoes nobody was giving them shoes it


was like a major line item in their budget crazy and so let's just take a quick pause and recognize this company that would eventually become Nike started a not as Nike B not with a swoosh c not making a product it's literally just importing and reselling someone else's product and the plan is to build a big business off the back of not actually making things not exactly what DSP or any other business school would determine a recipe for Success here but maybe that penciled more at the time being in this super globalized world that we're in now with the internet and companies with these massive resources that can scale


immediately and Venture Capital exactly and Venture Capital which can just supercharge a company's growth if something's working the idea that your core competency is just Distributing someone else's product among a geographic area where you have a relationship with customers that might have actually been a pretty good plan and much more defensible in a way that it's much harder to build something like that from scratch now that's a super good point and it turned out actually that onitsuka had already studied the US market whether they agreed with Phil's plucked out a thin air Market size or not they wanted to enter the market but


they didn't think they could do it on their own so they actually were looking for somebody like Phil yep so Phil goes down to see Bowerman and to Phil's surprise I mean Bowerman is not a warm and fuzzy guy he's never really shown Phil much encouragement when he ran for him or since Bowerman says this is 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 Phil is like floored and like real Partners 50 50-ish it's not like I want you to like toss me a percent here or there for being an advisor or something


it's like okay great co-founders just like that so Phil's like what's the deal you have in mind uh I think originally Powerman says 50 50 and then he sleeps on it and he comes back with his lawyer and he says actually let's do 51.49 I want you to have 51 me to be 49 because I don't really want to be involved here now on the one hand this is super exploitatory of Bowerman of his old athlete that still obviously looks up to him like a father it's kind of like there weren't really VCS yet in this era but when there would be like VCS taking 50 60 70 of the company on the other hand this is a no-brainer yes for Phil right he's giddy about it he's like oh


only half the company great well and if Phil doesn't do this deal he would have a hundred percent of Phil Knight's Blue Ribbon sports but he does do the deal and he gets 51 of Bill bowerman's yes Blue Ribbon Sports which is a completely different animal yes so I was thinking about this after reading shoe dog I was like hmm because I just read it for the second time it just feels a little weird that Bowerman would just kind of immediately be like yes I'll go into business with you person who ran for me that I never had a particularly close relationship with and so I've always wondered like why was he so eager to do this and as


part of the research I stumbled upon this guy named Scott Reams who was formerly a Nike historian he worked in the marketing department and then for over 20 years worked at Nike and became the company historian he has an epic set of LinkedIn posts that are really like these incredible gems pointing out things in company history and so he's got this post he says based on letters in the University of Oregon and Nike archives Bill Bowerman corresponded directly with many Footwear manufacturers in the 1950s so like 15 plus years before this including ADI dasler directly to adidaser trying to purchase Shoes for his Runners directly


to avoid retail markup he made it clear he had ideas on how to make running shoes better remember these are in letters to ADI dassler years before but the responses he received referred him to Footwear distributors in the United States for Adidas and ignored his design offer so Bowerman is sitting there and he is primed he's like oh you're gonna import foreign shoes and give me a deal I'm in just like onitsuko was primed to receive young Phil Knight so it was Powerman but Ben this is so awesome I was gonna save this for a reveal later in the episode Scott Reams is legendary he was as you say Nike's corporate historian he worked super closely with


Phil on writing shoe dog oh did you read his post too I sent you his LinkedIn did you look through them all too not only I sent him a message on LinkedIn I talked to I spent hours talking to Scott really he spent a few days helping me put our version acquired's version of the Nike story together we have a huge huge thank you to him but I was gonna surprise you with this this is super cool that is so awesome oh that's so cool I guess I should tell you so listeners we talked to like nearly a dozen people to prepare for this episode I also want to thank Eric sprunk who is a 27 year Nike veteran and David you know that I chatted with him


but he was CEO until a couple years ago and very cool to get his perspective and Scott's perspective I'm curious if you have any other nuggets that come up too oh I've got one in particular that I want to bring Scott's perspective in but it's a little farther in the story great all right so bauerman so okay we've got 51 night 49 Bowerman in Blue Ribbon Sports they each put in 500 to finance the first big shipment of inventory of tigers from onitsuka and they do they meaning Phil does what he intended to do he drives around to track meets around the Pacific Northwest and um sells them out over the back of his car and even with that funny sales strategy and in


shoe dog Phil talks about this while he was in Hawaii with his butt the way they made money was they sold encyclopedias door-to-door and then Phil gets a job as a stockbroker trying to sell stocks he doesn't make any silly he's the most introverted person in the world he can't be a Salesman but for some reason when he's selling shoes when he's doing his crazy idea he can literally just go to track meets and convince kids and their parents to buy these shoes out of the back of his car when you believe in something sales are just natural it's so true so they sell out basically immediately and then they plow all the profit that they're making


back into the next orders of inventory from only tsuka so they do eight thousand dollars in Revenue in 1964 that doubles in 1965 they do 16 000 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 to import these shoes from Japan how much can you really mark them up to sell them and if you're making I don't know two three bucks profit something like that on each pair of shoes you have to sell a lot of shoes if you're only way to get money to buy more


inventory is the profits from the shoes that you sold last order I don't even know how you double your over year because where's the money coming from to get the inventory this is not a solvable problem it's a circular issue there's no way to do it so Phil is selling the Tigers for 6.95 a pair it costs him and Bowerman about three dollars and fifty cents to get each pair of shoes so that leaves what about three dollars and fifty cents pretty soon Phil hires his first full-time employee the legendary Jeff Johnson who has a huge role in Nike as we shall see once Jeff and other sales reps come on board he's giving them


about 1.75 in commissions so half the gross margin ends up going into sales and marketing expenses exactly so that leaves What a buck 75 maybe two dollars like you said in profit per pair how are you gonna order more inventory at three dollars and fifty cents a pair when you're making two dollars in profit per pair the math doesn't pencil wow quick aside on Jeff Johnson like we said he is absolutely legendary he also sells out of the back of his car he's based in California he met Knight at Stanford Jeff was at Stanford undergrad who ran track and met Knight while he was at GSB Johnson sells out of the back of his car he evantalizes the brand he designs


shoes he eventually opens Nike's first retail store in La he sets up manufacturing he moves back and forth across the country he 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 startup company and he has an irrational passion for running which basically no one else did at the time here's a great quote from shoe dog so it's in Phil Knight's voice in 1965 running wasn't even a sport it wasn't popular it wasn't unpopular it just was to go out for a three mile run was something weirdos did presumably to burn off their manic


energy running for pleasure running for exercise running for endorphins running to live better and longer these were things that were unheard of people went out of their way to mock Runners drivers would slow down and honk their horns get a horse they'd yell throwing a beer or soda at the runner's head and he goes on to say that Johnson had many sodas thrown at his head while he was out running this is one of the moments that just floored me rereading shoe dog and internalizing that you know running I go for a run maybe three times a week these days right it's just normalized into life every time I walk out in the street basically anywhere in the world


unless I'm like truly in the middle of nowhere you see people running and the idea that motorists would throw beer and soda cans and 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 constraints that blue ribbon Sports has is through financing and the only way to get financing in Portland Oregon in those days was to go to Oregon Regional Banks I think actually there were laws in the U.S that corporate banking could not happen across state lines correct 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 it's not Equity Capital they're not saying like a venture capitalist would say oh I'll buy a piece of your business and value it at this and give you the money at that it's just pure loan that you owe back to them at some point in time with interest yeah and the bankers who are making these loans in Portland then was a very very small town in a very very small state on the west coast of the U.S they're not going to be very risk-seeking they're going to be quite risk-averse so there's another good passage that I grabbed from shoe dog that explains this Phil Knight I was


projecting sixteen thousand dollars in my second year and according to my banker this was a very troubling Trend a 100 increase in sales is troubling I asked your rate of growth is too fast for your Equity he said growth off your balance sheet is dangerous and this is where Phil Knight's complete opposite approach comes in he goes life is growth business is growth you grow or you die and the banker says that's not how we see it and there's a couple important points to make in here one of which is this Equity they're referring to we refer to equity these days especially in startup land as percentage points in a startup and what he's talking about here


is the technical definition of Equity the book value of equity right your total assets minus your total liabilities is your equity and in many cases you can sort of squint at this if you don't have a lot of liabilities or a lot of debt on your books and say okay so it's basically like the cash in the bank it's the assets you have on hand is your Equity so what this Banker is basically saying to Phil Knight is I will only loan you up to the amount of money that I already know you have yep now that's not terribly helpful it's basically a cash advance it's like well the money that I have is sort of tied up in other stuff like inventory and you're


just loaning me enough money for me to make my next order but there's not actually any real New Capital it's not like there's a post money valuation you're basically just saying you can borrow these dollars then you can give them back to me and I'm going to cap your dollar limit super low yeah it's basically factoring right is what it's known as today right so yeah as you can imagine there are quite a lot of struggles with the various banks in Oregon and it's all very well chronicled in shoe dog so since growth is literally rate limited by the Banks Knight decides that he can't justify taking a salary he goes


back to being an accountant by day he joins pricewaterhouse in the Portland office he does that for a couple years I mean years years takes a long time to grow this thing eventually Blue Ribbon does become big enough and he needs to devote enough time to it that he can't be a full-time accountant so instead he gets a job teaching accounting at Portland State where he meets two women both of which will change his life the first one is a student I mean things were different in the 60s a student in his first class that he teaches named Penny Parks who uh he sees has uh create potential as an accountant so he hires her as a bookkeeper part-time while


she's a student I believe for Blue Ribbon Sports very shortly thereafter she becomes Penny Knight his wife now I think I'm gosh like 60 years maybe something like that The Other Woman he meets is an art student not an accountant an art student named Carolyn Davidson and Phil overhears here talking with some friends in the hallway one day talking about art classes and he stops her and he says hey I've got a company we need some part-time Art and Design work for like brochures and sponsorship collateral because everyone's telling him that he needs to do advertising fill night to this point which is hilarious given Nike today doesn't believe in


advertising and so he's like fine I'll give in to some other people who are advising me that I should make some brochures or something and the way I'm gonna do it is I'm gonna hire a part-time student from Portland State to do my advertising collateral for two dollars an hour yes she says sure put a pin in that we are going to come back to Carolyn Davidson and the Nike art Department in a minute here yes but first now is a great time to tell you about one of our favorite companies here at Acquired and a new sponsor this season oh David you teaser what else could anyone possibly design for Nike that would change Phil Knight's


life it's a great story and there's more to it than I think you've heard before so what sponsor are we talking about brand new one for us company called blinkist we are doing something pretty special with them here at acquired blinkist as you might know takes books and condenses them into the most important points I really could have used that for research on this one yes it lets you read or listen to the summaries so it's great for people who want to read more books but you might not have time to get to your whole dream bookshelf now we told the good people at blinkist how we go about researching for Acquired and they had an idea and we're


running with it so if you go to Nike or click the link in the show notes you can get blinks for the Nike books that we use to research this episode and many of them they are making custom for you guys in real time so expect more Nike books to be showing up as they're literally making these for the acquired audience and not only that if you use the link you'll get the whole Nike collection for free as these books get added and blinkist has told us anyone who signs up through that link or uses the coupon code Nike will then get an additional 50 off a premium subscription to all 6 500 titles in their Library so for those of you who


lead companies and organizations I know there's a lot of Founders and Executives listening blinkist also lets your company become a customer with blinkist for business so 1500 different organizations use this worldwide this gives you not only access to condensed books but also courses and coaching Pathways like leadership from Simon sinek or courses on mindfulness or communication and history it's awesome for teaching new skills or for the Learning and Development Department at your company so a fun way this came about a little acquired behind the scenes blinkist was just acquired by go1 which is a friend of the show where the


founder and the leadership team have been long time acquired listeners David and I are both investors in go one and now blinkist and we'll share more about go one later this season but know that they are an amazing One-Stop shop to get all the content that you need for your company like for your whole Workforce from HR trainings to specific skill development classes and they get that content from the best places in the world to produce that content it's not like they're making something you've never heard of they probably have awesome content that you're looking for just bundled into one easy subscription so back to blinkist to join the 27


million people who use blinkist go to Nike or click the link in the show notes to get access to what we use for research pretty cool okay David so should we share the Carolyn Davidson thing now or don't we need to evolve Nike a little bit more before it really comes into play yeah put a pin in it we'll come back to it so in the meantime by hooker by Crook and you know maybe onitsuka is we will see would argued by crook Blue Ribbon Sports is 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 onitsuka in 1966 they do forty four


thousand dollars in Revenue in 1967 they do 84 000 in Revenue noticing a doubling theme Here turns out even from a very low base if you double every year for like 20 years you can still become a big company so then in 1967 Bowerman remember you know bowerman's been involved his name his association with the company has been huge throughout all this but like you were saying a minute ago Ben his real motivation is he wants r d access he wants to be able to make shoes and in 1967 ahead of the 1968 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 onitsuka and his idea is that rather than leather on the upper parts of these track shoes what if we instead use a breathable material like nylon so that my runner's feet aren't sweating throughout the whole race on the one hand like yes nobody likes sweaty feet on the other hand if your feet sweat a lot in leather shoes over the course of several miles well they're going to get heavier and weighed down and so maybe this might help the shoes stay lighter and Bowerman is obsessed with lightweight in his shoes so onitsuka is very receptive to this they think great we love this we'll make


the shoe we can do that we can Source the nylon we'll make the shoe so Bowerman and Phil get together like this is amazing we're gonna have our own model you know that we've designed the bowerman's designed which you should already start to get a little bit nervous here because it's like well okay who who owns this 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 hired a contract manufacturer or is it more like oh we just gave you a little suggestion idea and like we BRS don't own anything yep the relationship complicates a little bit here it's no longer just


hayworthy American distributor of tigers so Bowerman and Phil want to call the shoe they actually want to borrow from the Adidas Playbook and call the shoe the Aztec ahead of the Mexico City Olympics Adidas has been doing this for years they always come out with new shoe models ahead of whatever the Olympics is in the world every four years Adidas of course has already beaten them to the punch they have trademarked a shoe that they're coming out with called the Azteca gold and I don't know if it's Blue Ribbon or onitsuka decides that the Aztec is too close to that so Legend hasn't you know knowing so good these men I assume this is quite true Bowerman


is casting about for other ideas for names of the shoe and he says tonight what was the name of that Spanish guy that kicked the you know what out of the Aztecs and Knight is like oh that's Cortez and uh thus the Blue Ribbon slash tiger Cortez is born naming aside the nylon uppers are a huge Innovation and this becomes a big hit I bet someone out there is wearing Nike Cortez's 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 or you Google a picture of it it's basically exactly the same as the


thing that they came out with but when they came out it had the onitsuka now Asics design on it not the swoosh yeah spoiler alert tiger eventually became Asics yes so also in 1967 Bowerman has another just Monumental contribution his contributions though sporadic when they happen are enormous yeah so he writes a book I feel like some marketing agency these days would advise a startup on oh yeah this is how you build a market you know write a book start an evangelize a movement Bowerman just does this because it's what he wants to do he he had gone on a trip to visit another International track coach in New Zealand a few years earlier


and he discovers the concept of jogging I don't even know if the word jogging really existed in America at this point in time the idea of running not to win but to run for Joy or for physical fitness was an entirely foreign concept all right I'm going to read a paragraph from shoe dog here this is Phil Knight he told me on top of everything else he was also writing a book A book I said about jogging he said gruffly Bowerman was forever griping that people make the mistake of thinking only Elite Olympians are athletes but everyone's an athlete he said if you have a body then you're an athlete now he was determined to get this point


across to a larger audience the reading public sound interesting I said but I thought my old coach had popped out a screw who the heck would want to read a book about jogging this is Phil Knight the founder of Nike right I mean even Phil Knight is like jogging that's crazy so Bowerman writes this book it's called jogging a physical fitness program for all ages he writes the book it comes out in 1967 Life magazine and Life Magazine was huge in America at the time they come out to Oregon and they write a profile of him and his jogging clubs that he started for the citizens of Eugene of all ages to get into jogging and physical fitness and by God I mean


as much as anything this book and this article is what starts the fitness movement in America yep it's the craziest thing I keep going back and forth when looking at Nike and say did they benefit from this enormous wave that they were riding or did they create a wave and I think it was actually both yes so Knight has this great quote about this later in life he's asked literally this question if Nike started the fitness Revolution and his answer is so typically Phil Knight he says we were at least right there and we sure wrote it for one hell of a ride I love it here's a crazy bit of trivia David so for me when I reflect back on like


the birth of the jogging movement because I'm a millennial and I wasn't there I think of Forrest Gump you know he's running across America and all these people running with him and that time and that aesthetic to me is like oh that's when jogging sort of really took off he was wearing Nike Cortez's yeah perfect so great and the fact that blue ribbon really did have starting to become pretty real distribution at this point to the West Coast they actually had built a brand and a trustworthiness with customers and coaches and that sort of thing for themselves that not only could Bowerman write the book and evangelize and have the idea but they


could actually get shoes onto the feet of people because out of this budding company they actually had a little bit of distribution and more than just athletes yeah or more importantly changing the definition of athlete yes I like that changing the definition more than just people who Define themselves by their occupation whether amateur professional as athletes right so by 1970 just a short while after this Blue Ribbon is now doing over half a million dollars in annual sales so they're like a real company now they're selling out of the Cortez's literally as fast as they can get them off the boats from Japan


onitsuka renews blue ribbons distribution agreement in 1970 for three more years to run through 1973 when this happens Phil then goes to the bankers in Oregon and asks for hey you know great the Cortez is selling out great Fitness is this new thing we're a half a million dollar Revenue company we've got a three-year iron-clad deal with our manufacturer surely you can assign some value to that contract if not to our brand and our team and all these other intangibles you won't just treat us as if we're Book value now like we'll have some real Enterprise Value because you can invest in our Enterprise here our enduring institution so he asks for a


line of credit of 1.2 million dollars to finance inventory he never asked for a over million dollar line of credit before he trips the alarms he trips the alarm system 1.2 million dollars a kid off the street can literally walk down Sand Hill and raise 1.2 million dollars today inflation adjusted it's probably like eight million or something sure whatever but a kid off the street can walk out of Stanford and raise eight million dollars today exactly just say it's an AI company so the bankers not literally although literally they would do this very shortly thereafter they throw him out they're like no no we're done here you can't be doing this we're


done I'm just fascinated by this concept of it's almost as if the idea of Enterprise Value didn't exist that literally a company could only possibly be thought of as its assets minus its liabilities so what that meant was if you want to grow your company and you want to grow it as fast as possible then it means you can only take out as much debt as you have assets in the company but you probably shouldn't because then if anything goes wrong your company is like immediately wiped out because your debt to assets ratio is like literally a hundred and what Phil Knight did was all of the time kept it at a 100 Ratio or close to it like a 90 ratio he'd look


and see how many assets they had and say great we should have exactly that much debt too so I can grow as fast as possible and so it kind of becomes this game of musical chairs where when when you're levered that hard you need to be growing super fast because you need to get that inventory off the boat sell it so you can as fast as possible go and pay off the bank so that a the interest doesn't pile up and you don't trip a bunch of covenants but B so that then you can go ask them for another loan to do the same thing again and you literally need growth as the only way to keep the lights on it's not just growth as a 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 Inc is a growth company they were born out of this is the only possible way to continue our existence is grow so we can pay off the bankers two things here one this is so sad that's the way it was and thank God the business world has evolved since then I mean you can decry the Ridiculousness of startups in VC and Tech and all that now but this is a way better alternative than the way things used to be


who though ironically I actually as crazy as this sounds think it was a critical element of Nike succeeding and becoming Nike because if it were too easy there would have been a flood of other competitors or onitsuka and others would have just done this themselves right it's like many of the stories we tell that it's path dependent the only way to have built what they built was to have endured what they endured in a system that was stacked against them yes and there's huge survivorship bias here yep but the journey that they had to go through to survive is incredible plenty of other companies maxed out their available


credit and debt all the time and had a 100 liabilities to assets ratio and went out of business and went under yes and Nike almost does so when this happens when he gets thrown out of the banks Phil needs to do something to raise money so he decides the only thing you can think of is to do a small public offering like a local IPO remember how Ben Jerry's was the first direct listing yeah I think it's something like that where they sold shares Ben and Jerry's sold shares in Vermont to like their neighbors yes this is what Phil wants to do and this is how bad it is so a he changes the name of the company


this is so good Nike isn't anywhere in the picture yet he changes the name of the company to sports Dash Tech t-e-k yes Inc with the idea that oh this will make us sound like a technology company and then people be interested in investing because he hears that people are getting financing for their business in the form of equity Capital where they're willing to assign a valuation to the company and regardless of what your current sales and assets look like that sort of takes your potential future growth into account and gives you capital in exchange for that what they want is a percent of The Upside you know Equity investing as we know it today in


startups and all of that is happening in Northern California into tech companies as we chronicled on the Sequoia episode with Don Valentine it's that era exactly we are right in that era now Don is about to start Sequoia a lot of this is happening around Stanford of course Phil up in Oregon is hearing about this but once anybody you know any proto-venture capitalist digs into sports Tech they're gonna be like no oh so what I've never been able to figure out is did he change it to sportstech ink and then change it back to Blue Ribbon sports or did they sort of like I'm trying to figure out if they ever literally changed the name on documents oh that's a great question for


scout Reams we'll have to ask him yeah yeah so this is how bad it is though the offering fails nobody's interested none of these Proto VCS none of the local business people in Portland they're all like oh no no this is a terrible company well and Phil Knight undersells it too before he learns some of his later lessons it's his super humble you know I'm not a very good runner I'm only a 413 Miler type attitude right oh sucks yeah and so that's not going to sell shares in your company yep so he ultimately has to raise some money from the families of some of the employees at Blue Ribbon most famously Bob woodell who would become Nike's


first president other than Phil when Phil takes a sabbatical later in the 80s Bob is this amazing story he was also a Bowerman Runner had a terrible accident in college and was confined to a wheelchair for the rest of his life becomes one of Nike's and blue ribbons first employees and then becomes a huge leader builds so many things at the company and becomes the first president other than Phil but he doesn't come from wealth and his family loans I think three or five thousand dollars to Blue Ribbon like a huge amount of money for them it's like a huge amount of the family's net worth Phil would convert that into Equity before the actual IPO


and they would become Millionaires and change their lives it's amazing yeah the way that he was financing this was basically through convertible debt and so all the pre-ipo little friends and family financings that he's doing here are convertible notes so this brings us to 1971. the Anis either mirabellas or haribula depending on how you want to think about it I just butchered both Latin and French there but clearly this financing path isn't gonna work for the next stage of growth eventually night I think he reads in either a magazine or a newspaper article about Japanese trading companies how he


had never heard of Japanese trading companies before then given the amount of business he was doing in Japan is crazy although it was in onitsuka's strong interest for Phil and Blue Ribbon not to find out about Japanese trading companies as we shall see and what they are is this very strange type of company that we don't really have at least in the tech ecosystem today no does not exist in America or in most countries and it's sort of a hybrid between a lender and a supply chain partner where it's a company that has some primary business that they're doing slash private Equity Firm slash holding company yes it's a


company that in this particular instance has a business that they're in and generates a bunch of cash so what do you do with the company's treasury well you could do boring stuff with it or you could make strategic Investments with it or you could operate a financing business where you leverage all of the unique relationships you have from the parent company to due diligence to Advantage your Investments to put your foot on the scale and you're using the fact that you have a large treasury to open a competitively advantaged Bank especially in sourcing International Goods yes to


do asset based financing exactly what Blue Ribbon needs so the company that he ends up meeting at the local branch office of it in Portland I think they might have been only Japanese trading company with a branch office in Portland is nisho ey which is one of the smaller ones today the company is called sojitz today it is still a 40 billion dollar Revenue company back then in 1971 it was a 100 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 are companies like Mitsubishi or mitsui or Sumitomo these are enormous companies


and especially in the 70s as Japan was really Rising we told the story on the Sony episode was a godsend for Blue Ribbon and it could have gone either way that was the thing with these Japanese trading companies is if you weren't super clear on exactly what you wanted up front it could totally go the way of private Equity where oh you tripped one Covenant or up you this that the other thing and suddenly they're able to own a controlling interest of your company or they're able to take over management and install their own people it was a PE style financing where oftentimes they would sort of take over and absorb the


businesses that they were financing so Phil Knight was going into this saying okay that really really really can't happen to Blue Ribbon what can I possibly negotiate with these guys to make it so that their interests are aligned with mine but not in a way that could compromise my control right because he gets a little spooked according to shoe dog Phil walks into the office of nisho iwai in Portland this is like the Portland Oregon branch office of nisho ey meets with one of the officers there who would go on to become an incredible personal relationship for Nike and for Phil a guy named Tom sumaragi and he offers on the spot to


finance all of Nike's inventory on the spot in a meeting in the branch office in Portland so it feels like whoa how do I deal with these guys right they're a little too eager this can't be that good of a deal what's going on here it turns out ultimately it's a great deal and why is it a great deal well the first thing you have to know is nisho knows Japanese manufacturers and so they start asking Phil Knight questions like well who do you work with in Japan and like would you ever make your own shoes and are you looking for relationships with more factories and so they start to get the sense that like maybe eventually we could put our foot on the scale in


certain ways and help this company win and so if we're doing business with them as their financing partner this could be really good for us too so Phil in retrospect makes the mistake of calling up onitsuka and saying hey you know I'm in this Lurch with financing I just met nisho ey they offered to finance all my orders with you guys would you be okay if I do it and they immediately say absolutely not and the reason they say absolutely not is Ben just like you're saying they know what's going to happen here is nisho is gonna say to Phil hey you know this is nice that you're buying onitsuka's inventory onitsuka I think is like a 20


30 maybe 40 million dollar Revenue company in Kobe at this point in time right this could creep into us the show is a hundred billion dollar company right Nisha is going to say hey we'll introduce you to manufacturers to factories here in Japan build your own shoes make your own brand screw these tiger guys and that is exactly what happens yes and before we get into exactly how this all plays out and effectively the real founding of Nike creating their own shoes and how that all goes down with this financing as a key part of it this is a great time to tell you about our next brand new sponsor of acquired carusoe Crusoe is


honestly one of the coolest companies in the world right now they are a cloud infrastructure provider so just like AWS and Azure that's purpose built for AI training and inference so just like Phil Knight had the crazy idea of taking on Adidas with blue ribbon Crusoe and its Founders Chase and Cully had the crazy idea a few years ago that they could take on AWS and Azure and Incredibly they're actually pulling it off and for many AI workloads you'll get significantly better cost performance trade-off from Crusoe than any traditional cloud provider yeah so the way they did this is genius and kind of insane so one they get better


performance just by building their infrastructure specifically for AI so like literally their entire data centers are nothing but rows and rows of Nvidia a100s and h100s so they have the benefit of focus and specialization and two this is what's really special about Crusoe they use wasted energy to power their data centers this is so cool a single Nvidia h100 Under full load consumes about the same amount of power as 10 U.S homes yeah so this is crazy Crusoe has gone out to oil fields around America and the world think like Texas Montana Etc and they have built their data centers right on top of oil and gas flares and renewable energy areas like


wind farms so as some of you might know oil and gas production often has a process called flaring where they have to burn off excess product it's an enormous waste of energy and as you can imagine it's also a huge greenhouse gas problem it depletes the ozone it increases carbon footprint you get it Crusoe helps to reduce this by instead converting those flaring emissions into powering your AI workloads they literally build AI data centers on top of Wells that would be flared otherwise yeah it's crazy and the key Insight that really made this possible was that Amazon and Microsoft and Google's data centers have to be physically located


close to where the quote-unquote internet happens I.E where internet usage is but for 99 of AI workloads latency doesn't matter so Crusoe can put these data centers out where energy happens in these oil fields and wind farms instead yep and as an aside while we're here talking about Nike's asset-backed financing strategy what Crusoe is doing also requires billions in capital funding they finance the build out of these data centers not through Venture Capital but through similar structures as Nike just from large endowments and Foundations instead of Japanese trading companies although if nisho ey is interested I'm sure they


would be happy to work with them too so if you or your company or your portfolio companies have ai workloads that you could use lower cost and more performant infrastructure for and I'm pretty sure that's everybody listening to this podcast right now go to that's acquired or click the link in the show notes okay so blue ribbons in this interesting situation where they've been kicked out of their Bank from a lending perspective they can still keep their money there they still have the operating accounts but they can't get any more debt there


to finance their inventory which they need to buy you know they need this cash to be able to buy their next round to grow the company Nisha enters the picture How does it go from here so this basically sets off a whole chain of events that would later get prosecuted in court so onitsuka as we said they are super nervous they know what this Nisha relationship is going to mean for Blue Ribbon 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 gonna end their relationship with them here they also as kind of a last-ditch effort make an


offer to buy Phil out to buy blue ribbon and Phil thinks he's being smart here he stalls he doesn't say yes he doesn't say no he's like oh let me talk to Bowerman yes and one thing I was trying to figure out so in shoe dog it doesn't give a value Phil just says that his contact at onitsuka offers to buy 51 of blue ribbon and keep him as a minority partner and from some other sources what Phil Knight says in interviews is that they offered to buy it for Book value yes that's what I read too which I imagine is like zero so it's a pretty terrible deal because what is the book value of a company that 100 of the time has its capital tied up in inventory right it's zero so it's


zero or most generously it's the value of the inventory so in 1971 I believe they did 1.3 million in Revenue which best estimates would be that their cost was something like six seven hundred thousand right but they probably turned that inventory several times so at any given point in time the inventory is less than that right so it's a terrible deal it's a takeover and so Phil Knight's basically just like I don't want to piss them off by declining so I'll just say nothing he knows at this point that he's done with onitsuka they're gonna go with nisho and they're gonna set up their own Factory relation ships and make their own shoes but he


can't just shut off tiger it's going to take time to spin this stuff up he needs the tiger shoes in the interim so he stalls and by the way this relationship so far has been unbelievably fruitful they're at the point now where because of Blue Ribbon 70 of runners in the U.S mind you Runners is not a large category yet but runners in the U.S have onitsika shoes yeah so this is pretty important yeah so there's a whole bunch of stuff Phil hires a spy there's a thing where the onitsuka management team comes over to visit Blue Ribbon headquarters Phil steals some documents out of the guy's briefcase literally the guy gets up to


go to the bathroom or something and Phil grabs it out of a folder and photocopies it yeah it's pretty bad even worse Phil is a combination as we keep saying of Genghis Khan and like extremely introverted and really naive he writes a memo to the whole company saying that he's hired a spy at onitsuka this is not the kind of stuff that you want coming up in legal Discovery later a whole bunch of this stuff happens they end up in this literal Mexican standoff here where like there's no way out without firing shots and somebody has to fire a shot first and it's Phil Phil shoots first he's like hot and he shoots first and I say Mexican standoff too because a


that is the situation they're in B the first shot gets fired in Mexico so while Phil is waiting on spinning up the Japanese Factory relationships with nisho iwai he remembers from back in the Mexico City Olympics in 1968 I think that there was a factory I believe in Guadalajara that Adidas had used to make soccer cleats for the Olympics and he says you know those soccer cleats that Adidas made were pretty good let me go down to that factory and see if I can get some of those cleats and we'll sell them here in America as Blue Ribbon American football cleats now technically he thinks this won't violate his exclusivity agreement with onizuka


because onitsuka doesn't make football cleats now that's debatable yeah there's a paragraph in the written agreement that gives Phil Knight three years or whatever it is of exclusive distribution in exchange he is forbidden from importing other brands of track and field shoes and so theoretically he thinks as long as they're not track shoes is fine so he goes down to the factory in Mexico he's like can I get the shoes and they're like yeah sure what do you want to put on them when we made them for Adidas you know we had the three stripes on them the Adidas Stripes what design do you want on your version of these shoes and


oh yeah by the way what do you want to call them and Phil's like um let me get back to you so he goes home to Portland and calls up who else Carolyn Davidson yummy part-time art department at Blue Ribbon sports for two dollars an hour and he asks her to design something like Adidas's Stripes that can go on the sides of these soccer football cleats and huge thank you here to Scott Reams for helping us sort out exactly what the timeline is and what the details are because it's not well understood how this all went down and you can actually hear quotes from Phil Knight in interviews and a little bit in shoe dog


where it disputes other records of how this all went down and people care a lot about this because obviously what we're getting here is the origin of the swoosh and of Nike and so how does this end up happening the most interesting thing is from Scott he put this on LinkedIn he talked to Carolyn herself about this her recollection is that originally in the request to create what became the Swoosh they wanted structural support as an element in the design and she came back with some designs they didn't like any of them and so in the second revision they dropped the requirement that it be supportive in any way and


that it's just about having the brand sewn onto the outside also super importantly this is not the name that we're talking about here so point one we are just talking about a logo to go on the shoes so all the thought of like oh the swoosh is like the wing of the goddess of Victory no not the case this is before the name right so it's literally not inspired by the Greek goddess of Victory like I was just in France I just stood in front of the winged victory statue it's this beautiful incredible thing in Paris there's this myth running around forever and ever that the swoosh is inspired by one of those wings the name Nike came


after the design of the swoosh which by the way also was not called a swoosh yet okay so as you say she goes through two rounds of sketches when the second round comes back they're out of time the factory is calling and they're like hey shoes are just about ready we just got to put the sides on them what do you want so finally Phil and Jeff Johnson and Bob Waddell they're sitting around and a couple other folks and they're like well we got to pick one and they're like well maybe I don't know this one that kind of looks like a check mark it maybe is the best of the bunch and Phil very famously says the line


I don't love it but maybe it'll grow on me and that becomes the swoosh now ultimately they do give Carolyn stock in the company before the IPO so she makes more than two dollars an hour but for this project she was paid 35 which also she said she spent way more than 17 and a half hours but it was just kind of coming up with some price to charge fun thing about I did the math on the IPO shares when Nike would public they did give her 500 shares the stock price today is around 110 and it has split seven times so two to the seventh times a hundred and ten dollars a share times her 500 shares


is worth seven million dollars today nice and I heard Phil say somewhere I think it might have been in the GSP graduation speech I believe he said that she held the shares yes as late as 2016 2017 he is on the record saying she has never sold the share yeah wow incredible pretty cool so they send the logo off so a short while later Factory in Mexico calls them up and it's like all right shoes are done we're ready to box them and ship them what should the model name of these shoes be like the Cortez or the Azteca gold or you know whatever they had called them what's the model name of the shoes and so back at Nike


headquarters they're all sitting around brainstorming and this is where all the famous ideas that get thrown out Phil Knight loves Dimension six the other people are throwing out the Bengal the Falcon you know all the naming ideas the idea is they want to name the model of the shoes like these cleats what are the cleats called they're not coming up with a name for the company and it's the idea it's going to be the Blue Ribbon Dimension sixes yes so Legend has it and as best as we can tell this is actually true in typical Phil night Style he can't make a decision they're waiting towards the end it's the same story as


happened with the logo all over again they're batting it around and then the night before they need to finally drop dead give the name of the shoes to the factory Jeff Johnson comes in and is like I had a dream last night Johnson and in the dream the name came to me Nike and everybody's like what are you talking about what are you talking about and he's like the winged Greek goddess of victory these are gonna be the Nike football cleats and everybody's like all right well we like that better than the other


stuff ship it but it wasn't that big a deal like it was a big deal but it wasn't that big a deal this wasn't intended to be Nike this was intended to be the name of the model of the football cleat that they weren't even sure was going to work right and it didn't work turns out this Factory not very high quality well no I don't think that was the problem I think the factory was fine I mean they made shoes for Adidas for the Olympics the problem was it was in Guadalajara it doesn't get very cold in Guadalajara so the shoes were great but in freezing temperatures they would crack they'd never been tested in the cold and you know as Americans at least


know many American football games are played in cold temperatures so they ordered 3 000 pairs they sold them apparently the Notre Dame football team wore them that year at least the quarterback did then they were cracking cold weather it was a very inauspicious start to uh Nike in the here yeah it's kind of amazing that they even continued after that or that they didn't just give up and say okay shoe distribution sounds a lot better than making shoes yes but again whether it violated the letter of the agreement with onitsuka not ultimately the courts would decide it didn't but it came over here like the relationship is done they have burned


the bridge it's over yeah and this to me is a little bit of a thing in Nike's DNA where they are competitive all the way up to the line and then one toe over yeah what's the Uber corporate value toe stepping from the Travis era it's very much that it's we are fiercely competitive and at this point in time it was to stay alive so I get it but for their whole existence it's like is there anything we can do that other people aren't doing because they kind of think you can't but maybe we'll do it anyway and deal with the repercussions that kind of happens with Nike over and over and over again and for most of these situations this one very much included


yeah like this ends up in lawsuits and yeah it's probably a toe over the line on the other hand it's also a little bit like uber in the early days with toe stepping like the alternative was the taxi industry it's good for the world that they stepped a toe over the line like they didn't do this there's no Nike yep so with that onitsuka pulls out of the relationship they don't send any more Tigers to Blue Ribbon Phil signs a deal finally with nisho ey and the core part of the deal is nisho will a Finance all of blue ribbons financing needs henceforth pretty much at a scale that goes all the way up to the Moon I mean they're a hundred billion dollar


Revenue company certainly way more than any of the Oregon Banks could do and they'll do that at Market interest rates two Nisha will help Blue Ribbon set up direct manufacturing relationships in Japan which they do and then three in exchange for all that nisho gets a four percent royalty on every shoe that blue ribbon sells which ultimately ends up being a great relationship and that's on top of the financing so they already owe interest on borrowing the money but now they additionally owe a four percent royalty yes this is sort of like the trading company Playbook and is that just for the inventory they finance or all sales


I believe it's for all sales whoa does that still exist I don't know I doubt if it does in the same way I know that the relationship with the show ey continued for like 30 40 years like a very long time if it still does exist today I'm sure it is not the same terms but this goes on for a very long period of time wow I mean at this point in history to have the house in order with a strong financing partner there's crazy stuff we didn't even cover like he got kicked out of multiple Banks the FBI got involved they were playing it a little bit too fast and loose where they were using every available Penny to buy inventory


and so there would be checks that bounced for payroll and things like that when these things topple they topple all at once and so they had like a day where they got called into the bank and then the bank called the FBI and then they got investigated for frog it was an insane few years there yeah shoe dog has a lot of great like Phil Knight's personal experience going through this which is I mean it's worth the read no matter what but read it for that but safe to say this moment here in what is it 1971 71 72 they can kind of take a deep breath and say well the business ahead is still really hard because now onitsuka is going to be working against


us we have to figure out how to design and make shoes ourselves but at least we have a real financing partner that has struck a deal to work with us yep so once this is all in place Phil goes over to Japan and works with nisho goes visits lots of factories ends up meeting the Nippon Rubber Factory he's touring with lots of folks in his sort of test of these factories of whether they can be a good partner is he pulls out a Cortez and he asks the factory how long it would take them to make a version of this shoe so he meets with Nippon rubber in the morning they say let's go out to lunch let us borrow the shoe inspect it a


little bit we'll come back after lunch and we'll have an answer for you they come back after lunch and there is an almost perfect duplicate of the Cortez sitting there on the conference room table and Phil's like hell yeah this is what I'm talking about what an amazing way to do business because he had met with all these other factories they're like yeah we'll get back to you in a few weeks and like over lunch they built one amazing so he is jazzed he orders all sorts of models he's like can you do all the running shoes that we slash tiger were doing before at least the ones that we and


Bowerman designed they're like yep no problem it's like can you do tennis shoes basketball shoes cleats is like yup yup yup whatever you want so um in a kind of very unfilled night like peak of confidence here he says great well I'll just start writing out model name so he writes out the Wimbledon tennis shoe the Forest Hill tennis shoe the Blazer basketball shoe the Bruin basketball shoe the marathon of course the Cortez he's like great let's do all of them and these are Nike franchises that stood the test of time many of these shoes are still made the blazer for sure yep of course the Cortez and uh they're like okay great and then Phil's like one more


thing the boxes can you make them bright orange I want them to stand out and Nippon rubber is like you got it man whatever you want it's awesome so great and to this day they're orange and by the end of this trip fill and Blue Ribbon Sports has a whole new line of athletic shoe models coming out of Japan with a much better relationship solid financing and a brand new brand to show it all off the winged goddess of Victory Nike yep and there's kind of this funny thing where it is still Blue Ribbon Sports so in 1971 they do create Nike Inc it is a wholly owned subsidiary of Blue Ribbon Sports and it


is responsible for manufacturing well or Contracting with manufacturers to make this line of shoes this Nike designed line of shoes owned by Blue Ribbon Sports of course later on these would flip and Nike would become the parent company but for now it's a subsidiary of Blue Ribbon amazing so Phil gets home and he tells Bowerman about this and this is where yet another sporadic but incredible Bowerman stroke of Genius comes to play for Blue Ribbon slash Nike barman's jazzed he's like great I never liked the onitsuka guys that much anyway hey but it doesn't really care about that what he cares about is he's like wait so there are factories now we can


tell them exactly what to do you mean I'm the new Chief r d officer of Blue Ribbon Sports let's get to work so that weekend supposedly it was the weekend right after Knight told Bowerman about what was happening he goes home and over breakfast on Sunday bill is sitting there his wife Barbara is making waffles for breakfast and honest to God I think you know I would according to Scott acacorn to everybody this really happened bill is struck with inspiration and he's like hey honey can I borrow that waffle iron borrow that waffle iron was not coming back he goes out in the back in his Mountain Home and uh he had a vat of polyurethane sitting


there and he had it because the University of Oregon had just redone their track and made it into a polyurethane track instead of a cinder track and Bowerman at the time was like well this is great this is the future the Olympics are going to do this and whatnot but the shoes that I have that I have my runners in they're not gripping the track that well and so he sees the waffle iron he's like what if I pour polyurethane into the waffle iron which has two problems yes the shape is yeah you can imagine how that could grip a track well there's two problems one hot polyurethane super toxic the man for many years of his life


because he's been experimenting forever is like breathing in all these hot terrible chemicals he's literally a mad scientist yes and two pouring hot polyurethane into a waffle iron is going to permanently glue the iron shut yes which is exactly what happened so apparently the first actual waffle Trainer shoe was inspired by this design but like he literally couldn't make one in a traditional waffle iron now according to Scott in a really like you cannot make this stuff up everybody thought that that original waffle iron was lost to history and like was this even true or apocryphal anyway years and years later after Bill had


died his I think it was his kids are going through the estate no and I'll back his Memphis is up in the mountains like they didn't have real trash service so they threw the trash in like a garbage pile in the back and they're doing some Renovations of the house or something somehow they discover out in the trash Heap the glued shut waffle iron and it is in Nike's possession to this day that is awesome isn't that awesome so where of course this is leading is the waffle trainer which is another one of bowerman's Genius inventions and becomes the first big hit shoe for the new Nike brand he would eventually after gluing the first Waffle


iron shut then create a mold out of plaster in the waffle iron pour polyurethane into that and then make the waffle souls for the shoes they work incredibly well on artificial surfaces not just tracks but also AstroTurf which is becoming a thing at this point in time so the University of Oregon football team wears them that year on their new AstroTurf field it's like a huge thing they beat Oregon State wearing their waffle trainers this is incredible publicity for Nike and I think the waffle trainer is starting to be worn outside of track situations like this is the first hint of a lifestyle sneaker yes I forget what the first


colorway that they do it it is look at you you sneak your head over there colorway colorway eventually I think it's Phil who's like oh we should do this in a blue that'll go well with blue jeans ah yeah the canonical old school waffle trainer is blue with a yellow swoosh and I think a lot of those were sold to be lifestyle shoes going with blue jeans which turns into Nike's real business eventually but that the success on the field on AstroTurf Fields the success in track that year so this is 1972. blue ribbon's First full year doing sales as Nike purely on their own they do 3.2 million dollars in Revenue remember just


a couple years before their last kind of full year with tiger they were doing half a million dollars in Revenue so to go from all the crazy drama ending the tiger relationship starting up their own factory production making the waffle trainer to be at 3.2 million dollars fully financed by nisho what a great spot to be in Nike is designing their own shoes and going direct to the manufacturer I think the benefit to the business at this point is not margin expansion it's purely aliveness and can we convince people to buy things from us that aren't onitsuka Tigers because to this point it's still unproven if it's hey Blue Ribbon has great distribution


and people will buy anything from these guys because we trust the company or if it's people really want to know natsuka tiger because they were really good shoes for runners and I don't really want whatever this new thing you're selling is yes and it turned out that it was the former people were willing definitely willing to buy Blue Ribbon shoes and to buy Bill bowerman's shoes regardless of tiger and onitsuka which is kind of amazing that is completely opposite to what my intuition would have suggested I would have definitely believed there's these shoes that are popular among other competitors so I should be wearing them to be as


competitive as them if I run in them myself I learn to like them it's very strange that it ends up being the relationship that matters like thinking oh I trust whatever this running shoe Distribution Company is now making because they say it's good I'm sure it's good well this is how important Bowerman was he started jogging Not only was he Bill Bowerman you know legendary track coach he also started jogging so the convergence of things all the butterfly wing flapping that had to happen for Nike to become Nike right at this time right is Nike is being born and Blue Ribbon is going out on their own Bowerman gets a


generational runner at Oregon Steve Prefontaine tragedy like weirdly so many people we've covered recently unacquired dies in a car crash way too young you know James Dean style which ironically of course just cements his legacy but pre was the American runner he was on the cover of Sports Illustrated while he was a runner at Oregon for Bowerman he simultaneously held every American record for every distance between two thousand and ten thousand meters it's crazy he died holding every single one of those records yes incredible and he did this at Oregon and then later as a professional but still for Bowerman and


his Olympic teams in Nikes right as Nike was starting you can't script this any better and in fact he was not allowed to take a paid endorsement due to AAU rules yes this is another toe stepping that's gonna happen here just like snatching the document out of the briefcase whatever it takes to win Phil Knight figures out a way to a make sure that he's running in Nikes and B makes sure that he doesn't need to worry about money by finding a clever way to not do a paid endorsement but something else and this is one of those things that the AAU and the amateur rules and all that like Nike was a thousand percent on the side of right here and Nike was on the


side of the athlete which is a thing that they've always been and is a huge part of their strategy yes so what was happening was amateur athletic rules in the Olympic organizing committees rules were that you had to be an amateur you couldn't be a professional athlete you couldn't take endorsements or take money to race pre was this poor kid from Oregon so after he graduated and wasn't at the University anymore he literally had to bartend to make money while he's simultaneously holding the American records in every major distance event this is Criminal so what Phil does is he decides to


employ pre as a corporate employee of Nike as the national director of public affairs for five thousand dollars a year with no responsibility yes and there's this amazing quote in shoe dog Phil says people ask me what that meant I said it means he can run fast [Laughter] so great so great huh this is the perfect encapsulation I'm gonna foreshadow just a little bit here of the later number three in the later Nike document of the 10 principles of Nike 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 Phil


and Nike are doing here yep you bet so that's on the sort of Proto marketing front that this early Nike Playbook is getting going you know five thousand dollars for the best publicity you could possibly ever get it's Phil Knight basically inventing Sports Marketing I mean there's a sort of nascent idea of athlete sponsorship at the time but it really this is the invention of it as we know it today and all athletic brands are defined by athletes and this is really the first instance yes that's part one of just the brilliant kind of re-startup of the Nike startup Playbook that Phil puts together here part two equally brilliant and Innovative he


comes up with an idea for what he calls the Futures program so the way retailing worked back then and Nike had their own stores always but they also sold through retailers of course the retailers would Place orders with Nike to buy the shoes and then they would resell them at retail and then they would pay after they got the inventory this is how retail works this is like the law of the land not the official law but the way it all works yep Phil comes up with the idea because remember he's got the new show UI partnership but financing is still like he's scarred by this so he goes to the retailers and says if you commit and pay


for your orders six months in advance Blue Ribbon will give you a seven percent discount and we're going to call this the Nike Futures program so he's essentially moving his financing from Banks and nisho ey over to his Retail Partners to his customers and the retailers of course tell them to take a hike at first but then the waffle trainer comes out and they can't make enough of them and retailers can't get enough of them and the only way that they can get the waffle trainer sweet sweet inventory those 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 wholesaler they sell to retail chains and for decades starting here in the early 70s they are predominantly someone who reaches their customers through an intermediary through retail yes so that's the second piece the third piece then is sort of obvious and has happened all along but now as Nike is making their own shoes is outsourcing and Global Outsourcing of manufacturing so again Nike isn't making the shoes in their own factories now they did actually buy a factory in New Hampshire along the way which is a little bit of a detour Phil sent Jeff


Johnson out to like buy it and run it that was more of a stop Gap measure while they were transitioning from Tiger kind of a hedge too it was a hedge yes and it was a secret hedge again Break The Rules fight the law they use nisho's money which was supposed to be to buy inventory instead to plow it into capex of buying and rehabbing a factory and then they were secretly operating their own Factory with money that was not supposed to be used for that purpose but again Nike Break The Rules fight the law and here they are today a huge and successful company I like that break the rules fight the law sounds much more inspiring than toe stepping so Global


Outsourcing though at first this of course is in Japan with Nippon rubber but as we were 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 II until the mid 70s 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 wall there's no way


that they're getting shoes for three dollars a pair anymore anytime soon this means that they gotta go find other countries to make the shoes in yep so Phil and a bunch of the management team starts flying around Asia they go to Taiwan they go to South Korea ultimately they go to China they go to Indonesia they go to Vietnam and this is where the Nike Global Production machine is born and at first it's primarily Taiwan and then South Korea that they go to then the big move is into China both in terms of production and for selling I think there's a scene in shoe dog even when he's on the trip around the world in 1963 that he like peers into China from


Hong Kong and is dreaming about 2 billion feet in China and Nike would be one of the very first companies and I think the first footwear company that would be allowed to sell in China to sell and open factories they sort of open the country for the industry so this we would certainly be remiss in doing a Nike episode if we didn't talk about the downside of this the upside of course is cheap shoes and the upside I think you can make a strong argument in the case with many of those countries that this is part of the coming up process in the global economy if you look at what happened to the Japanese economy to the South Korean economy to


the Taiwanese economy they went from making shoes to making tips to making technology to being global economic Powers it's part of the process at the same time people are making like 70 cents a day working in these factories totally well let's flash forward to the 90s here where this really hits a flash point and then I think we'll come back to the story while we're here we may as well be here So Stories hit the news of some really horrible things like child labor stitching soccer balls on dirt floors and high temperatures toxic glues carcinogens Etc Nike fans looked at this as oof 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 I mean literally Phil Knight's 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 it could have gone if left unchecked so to add insult to injury Nike wildly mishandled this they tried to act like it wasn't their problem they literally said to the Press oh we don't make shoes Mark Parker later walked this back with a stance where he said ignorance is not Bliss you have to understand the systemic issues and work


with Factory Partners to solve them they did do a huge amount of work to clean up their act they created new standards for factory Partners they published supplier lists they have third party audits of factories they do huge investments in r 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 I don't know there is still this interesting and more theoretical question what is the line of acceptability and who should determine it obviously when a company trips a clear bright line like child labor there was appropriately public outcry but what about when the lines are blurrier or 75


degree factories okay or our three dollar wages fine if the local average is two dollars an hour at the end of the day there's a discomfort of sitting with the i idea that in order to manufacture a product that you are buying from shoes to smartphones somebody has to work in conditions you wouldn't endure even if it's better than all of their other options and companies need to Grapple with a spectrum that they sit on on one end there's making the absolute maximum margin and on the other end there's creating labor conditions that customers would totally be fine with if they learned every single little detail and in the 90s Nike chose to sit too far on


maximizing the margin side of things and they intentionally turned a blind eye to what was going on in the factories and they were in the wrong because it led to exploiting people one of the things that Nike folks were really surprised by at the time when the controversy came up is they were like all the other shoe companies do it this way all the clothing companies do it this way why are we being picked on yeah but Nike started it and they're the biggest but I think it's even more than that people had come to love Nike so much and the brand represented so much that it was like a huge betrayal it was a disappointment it was like Oh I thought


you were better than that you are about inspiring greatness and this is not greatness and I think that's really interesting though like yeah this was part of Nikki from the beginning but because of everything else that made Nike successful it's super ironic that they didn't hold themselves to the high standard that the whole company was all about and then their customers were like yo this doesn't compute yeah they sort of discovered they couldn't have their cake and eat it too of saying we are the brand that inspires you oh but by the way anytime there's an issue oh that's one of our suppliers problems we simply


don't make shoes even though it is technically correct the court of a public opinion will find you guilty so okay back to the mid-1970s in 1974 these pieces of the Nike startup Playbook the inventing Sports Marketing basically sponsoring quote-unquote pre for five thousand dollars the Outsourcing your financing to your Retail Partners and then the global Outsourcing of manufacturing all of this combines in 1974 for just an explosive year I can't remember exactly the phrase but in shoe dog Phil says something like the limiters were off the governors were off we could run they do eight million dollars in Revenue in 1974


which is up almost 100 they nearly doubled again in 1973 to 1974. 1974 is also a momentous year for Blue Ribbon because they finally settle the legal battles with onitsuka and they win in court amazingly ultimately they settle for onitsuka paying Blue Ribbon four hundred thousand dollars which by this point in time is a pittance to Blue Ribbon but the actual butterfly flaps its wings hugely important outcome of this for the Nike Journey is that the court case with onitsuka leads to one Rob Strasser yes coming into Phil Knight and the Nike orbit he was their lawyer on this case right yes Strasser was the junior attorney at the Portland Law Firm


that was working on the Nike case and Strasser is just a force I mean this guy was not cut out to be a corporate lawyer he actually comes in after the case is settled to Blue Ribbon as in-house counsel but then Phil quickly realizes like oh this guy is way more valuable to me than as my lawyer you know everybody else at Nike at the time they're all former Runners most of them ran for Bowerman Strasser is I think about six foot two and weighs over 300 pounds and he has an equally outsized personality as his actual size he gets the nickname within Nike of Rolling Thunder and boy does he roll like thunder and while he and Phil of course


did ultimately clash and there was the terrible betrayal that happened for a while they were thick as thieves yes so the first thing that Phil puts Rob in charge of is taking this really early Sports Marketing Concept of doing sponsorship deals with athletes and blowing it out so they had already before Rob joined done the first official sponsorship of an athlete with ili nastassi the tennis player they paid him ten thousand dollars to wear Nike tennis shoes oh boy how quaint when Strasser comes in he starts doing sponsorships in a systematic manner so he goes out and negotiates with athletes and agents he signs up like half the NBA


for peanuts now not the big stars but the journeyman the role players in the NBA he just obliterates them in their agency in negotiations I mean they're getting like I don't even know the dollar amounts but not a lot they're getting free shoes basically and then Nike is showing up on nationally televised broadcasts every single night Yep this leads then to a bigger initiative that Strasser puts together and if you've watched the recent movie air about Air Jordan this totally gets played as like a sunny Vaccaro thing Strasser hires Sonny Vaccaro to come in and build the college basketball program for Nike and this is


another just equally brilliant move so Strasser gets Sunny to go around the country and sign up coaches of the big basketball schools to become Nike coaches now there's nothing preventing the coaches at schools from being Consultants advisors running Nike clinics no you can pay whatever you want you're paying whatever you want right and they can tell their teams to do whatever they want there's no contract between the team and the coach about wearing shoes but if the coach says hey I really like this shoe company you should wear the shoes on court what do you think the players are gonna do it's


actually a team policy yeah exactly so within a month of working on this Strasser and vacaro have got UNLV Georgetown Texas Arkansas they get legendary Coach Jimmy V at Iona to sign up to be committed to being Nike coaches and their teams wearing Nike this is hilarious so all this is happening The Washington Post gets word of this they run a real pearl clutchy article saying that this is shameful Nike is commercializing the purity of College athletics like oh my God give me a break like these kids are being exploited like at least they're getting free shoes here now in the article the post mistakenly says that Iowa is one of the colleges


that Nike has signed up not Iona so lewd Olson the coach at Iowa who's legendary he goes on and coaches at Arizona lots of listeners probably know who lewd Olson is he's in the Hall of Fame now instead of being pissed off that he was included in this shameful article with the post he calls up Nike and he's like yo can I get in on this so that they sign up looted Iowa and then Arizona and he becomes a big Nike coach it's incredible Strasser then takes the same Playbook to college football signs all the big coaches in schools all the big powerhouses for peanuts this is incredible now selling football cleats is never a big business


for Nike but college football is huge I mean still huge a lot of eyeballs on those swooshes a lot of eyeballs on those swooshes and this is so clarifying of what their Sports marketing strategy is these endorsement deals are not about the sneakers that that basketball player is going to sell or oh I want to buy the cleats that my favorite college football team is wearing on the field no one else plays football other than college football students and the very few NFL players that exist so there's really nothing to buy but what you do see are these swooshes and it's cementing that brand in your head of this is what real athletes wear so one thing that's worth


mentioning this is sort of obvious but didn't click for me until really getting pretty deep in the research here for Nike there are actually only three sports that matter so Nike Adidas you know Reebok they sponsor lots of sports but running basketball and Tennis are the only sports that matter because those are the only shoes that normal people can wear normal people don't wear baseball cleats or football cleats or soccer cleats no matter how popular those sports are yep even to this day all the marketing all the athletes everything you see on TV of Nike and the other Athletics companies it's not about


getting you to buy the shoes that that athlete is wearing it's about getting you to buy Nike right the funnel is every single one of those is a brand impression so consider them all Billboards and then they just need to manufacture enough 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 Billboards 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 and your athletic and increasingly lifestyle Journey but you're inspired by what you see on the Billboards you're buying Victory right and so they're whole business eventually becomes figuring out this multi-sided equation of can we create enough demand like it literally on their income statement says demand creation by doing these sponsorships and then can we create the right product mix for people to participate in our brand by giving us their dollars yes now I don't want to say that Strasser alone architected this Grand strategy or even I'm not really sure that Phil or anybody at Nike understood this at this time but


certainly Strasser executes this in just an incredible way nobody else was doing this the college coaches they ran the table and it was just an incredible run in the late 70s all the while the jogging movement is just getting bigger and bigger and bigger right keep in mind they still only make running shoes there's no apparel there's no shoes for other sports really there's like some things on the margins but 90 plus percent of their revenue is running shoes yeah the core sales what they are marketing is go buy a waffle trainer and wear them with your blue jeans yep so through the late 70s Revenue just double zero over year over year they go from 14


million in sales to 29 million in sales to 71 million in sales finishing out in 1979 with 150 million in sales yes there's 1976 when they officially changed the actual name of the company to Nike the 1977 was a huge year as you said they do 70 million in Revenue that year they signed John Mcenroe they cross a thousand employees so it's going to be a real beefy organization two other things they bring one former NASA engineer and true mad scientist Frank Rudy into the fold the inventor of air Soul technology which Phil Knight is not a fan of he hears about the idea


well he thinks it's a crazy idea at first Phil's meeting with Rudy he's like I don't even know how Rudy got into my office who is this crazy dude he's about to kick him out and then Rudy's like yeah Adidas didn't want it either and feels like oh you said the a word all right let me try it so supposedly Phil goes for a run in the prototypes of the air souls and he's like yeah actually these are pretty great and we should say for anybody who doesn't know everything that you hear of now the Air Max the Air Jordan the Air Force One it is a literal airbag actually it's a nitrogen bag that sits in the midsole so think about the thing


between the lower sole the rubber on the bottom and inside of the insole the basically the part of the shoe that you can't get to that's underneath your heel and sometimes it runs all the way across all the way up to the toe that replaces foam cushioning instead using a little airbag that magically doesn't pop yeah I mean Rudy really was a genius so Phil's like all right let's do it he tasks who else Rob Strasser with going and doing a deal with Rudy they do a deal Rudy gets between 10 to 20 cents royalty for each pair of Air Soul technology shoes that Nike sells eventually Nike would just buy Rudy's company and Rudy would become an employee of Nike so still here in


1977 Strasser is just on fire I don't know the full context around this Scott Reams has a great LinkedIn post but as best as we can tell Ben as you said the company was growing hugely there are all these new employees there who are just kind of taken for granted that Nike is winning Strasser gets kind of pissed off one day and he goes to his typewriter and he fires off a memo he xeroxes he copies this memo and tastes it up on the walls all around the office of Nike 10. principles and this document is just amazing we've tweeted it before it's going around the internet yeah it's going around the


internet but it's going around the internet described in the following way here is the document that Phil Knight wrote articulating Nike's principles here are the things that are wrong with that statement one Phil Knight did not write it Rob Strasser did two Nike's principles also incorrect when this was written it was actually still Blue Ribbon Sports so that it was not yet the Nike Corporation three the top of the document has this like thin wispy swoosh that was never the Nike Swoosh this is someone's attempt who doctored this at some point to make it look like some old version of the swoosh there is an old version of


the swoosh which we will link to in our sources it is still in the USPTO for the swoosh trademark it is a hand-drawn version Carolyn's hand-drawn version of the swoosh that looks nothing like this weird thin wispy thing that was like doctored and added to the document so not Nike Inc not the swoosh there was never a swoosh on the document it was done on a typewriter how are you going to do that and three not fill night but yes oh my God these principles are amazing and we're gonna go through them but first we want to tell you about our third favorite company of the episode David who is it it is statzig yes back in action with acquired this is their


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near real-time visibility into how these features actually impact your business metrics yeah it's been so fun to watch stat cities growth even just over the last couple months the market was clearly hungry most companies today are working with expensive clunky and disjointed Point Solutions or under-resourced with internal product experimentation tools statsig works with large Enterprises they have a startup program they're powering some of the hot and fastest growing brands in AI as well one quote I particularly love this is from a data scientist at one of their customers we're operating like a large experimentation organization at an


Enterprise tech company organizing tracking and analyzing multiple experiments providing intuitive visualizations that even enable non-technical users to make informed business decisions what's really cool is that the company that this data scientist is from Black Crow which is an AI startup is running statsig natively in their snowflake data warehouse we talked on our acq2 episode with kamakshi from samuha about bringing compute into Data warehouses like Snowflake and this is a great example of that happening here with statsig yep acquired community members can take advantage of a special offer including 5 million free events


per month including White Glove onboarding experience and migration support so you can visit acquired to learn more and 10x your product experimentation velocity oh and one more thing David and I are going to be doing an event with statzig live in San Francisco a product growth Forum honestly it's going to be an amazing speaker lineup the chief product officer from brex the chief marketing officer from instacart and the CTO of figma are all going to be there Vijay Raji the CEO and founder of statzig who many of you know well at this point from our acq2 episode with him also going to be there and it should be pretty great


so if you want to hang out with David and I August 10th in San Francisco you can click the link in the show notes to register it is selling out fast so make sure to grab a spot we'd love to see you at the statsig event okay David what are these principles all right Nike principles according to Rob Strasser in 1977. one our business is change two oh this is so good we are on offense all the time three we already alluded to perfect results count not a perfect process Break The Rules fight the law number four this is as much about battle as about business five assume nothing make sure people keep their promises push yourselves push


others stretch the possible number six live off the land number seven your job isn't done until the job is done eight dangers with a underline as a heading bureaucracy personal ambition energy Takers versus energy givers knowing our weaknesses don't get too many things on the platter number nine it won't be pretty and then number ten if we do the right things we'll make money damn near automatic it's so good that's so good that last one is so spot on for any business through to this day it's so easy to get wrapped up on all the other crap you do the right things you make product that customers love you Market it right you


build a brand you will make money damn near automatic so I read these differently than I used to read them because when I didn't know Nike's journey I sort of would just read them and be like yeah that's awesome we're like wow that's so pithy I can't believe they're official corporate values are in such a pithy way no this is stream of Consciousness all from Rob Strasser all into the typewriter and like some of them are things that Nike would never say today because it shows the trade-offs inherent in their business I mean live off the land it's cringe-worthy right it's almost like you guys you had this huge labor issue it's


not good so you sort of see where some of this stuff comes from Break The Rules fight the law I think there's also something very clear dangerous bureaucracy personal ambition like this is a foreshadow of Rob Strasser hating the bureaucracy at Nike after its IPO that we'll talk about in a second clashing with Phil Knight developing his own personal ambition and developing his own personal ambition leaving and going to Adidas so there's like so much in in here that when you really start to know the company's history and story and the headspace that he was in when he punched this out it reads entirely differently to me than I sort of used to just read


it as a hey I love Nike a brand wow so cool I wish I could work at a company that had these pithy Punchy values yeah this is definitely one of those cases where ignorance is bliss yeah but man they're awesome the one that is still in Nike's maxims today that they distribute to employees that is David something you and I both hold near and dear and think of what the choir it is we're on offense all the time you don't win by playing defense nope okay so we're approaching 1980 they're about to go public and they are entirely a running shoe company still no sign of the Nike that they are today where they have apparel where they're Diversified across the zillion


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 IPOs the second week of December in 1980 the same week as Apple unbelievable this is amazing you get all the way through shoe dog there is basically no mention of market cap at IPO it's the craziest thing like it really underscores how much nobody believed Enterprise Value mattered then yeah it was about 400 million dollars the market cap at IPO Apple for comparison's sake was 1.8 billion dollars now interestingly before they went public Bowerman sold most of his stake back to Phil Knight actually


this was related to some of the financings earlier but as Nike got bigger he just didn't want to be a major listed shareholder in a highly visible public company certainly he was in retirement age towards the end of his life he was like I'm gonna sell my steak back to Phil so when they went public after the IPO Phil owned 46 of the company and was overnight one of the richest people in America and the craziest thing is like one of the richest people in America then was 178 million dollars yes quite different now he was far from the top richest person in America but still this made national headlines yeah so this is where shoe dog


ends which is kind of crazy I had forgotten this before I went back and reread it there's no Jordan there's no huge fall from grace that is about to happen for Nike basically right after they go public Phil picked an interesting time to end the story very much so especially because right after they go public Phil goes on sabbatical for a year it's sort of like you know the job's done wash my hands of it Ben the job's not done until the job is done there you go but like the whole company there was a lot of hubris going on there on top we owned the running shoe market we've been in this magical secular


growing Trend forever and it's just surely going to continue right and the fitness boom continues but running is not exactly the thing that keeps carrying I mean a 50 market share in running shoes at this point in America and yet their growth in the future is going to be dictated by where they go from there because it's really hard to have more than you know 50 market share in an industry like this early Nike did so many things right but they made one critical mistake they mistook the running and the jogging boom for the broader Fitness Boom the broader Fitness boom was a massive secular Trend that continues through to this day the


running boom was a cyclical Trend that was part of The Fad driven fitness cycle and by the early 80s as we're heading into everything that the 80s was and that the 70s were not running and jogging is out anaerobic sorry and Nike absolutely refused to see that and refused to do aerobics like on principle fascinating I mean in 1980 Reebok USA is founded and by 1988 Reebok eclipses Nike 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


rate was going to massively taper off and they were going to stop growing their market share so like they really did need to look elsewhere and I think it was pure hubris that blinded them from finding their next Market so Reebok funny originally a British company started as Foster and Sons they were the company that made the track shoes for the 1924 British Olympic team that was the basis for the movie Chariots of Fire the Reebok we all know well not today but back then is a completely different animal it's a marketing driven company started by a guy named Paul fireman who is American and pretty quickly they


developed a business plan to cash in on the aerobics fat and they made a shoe that in Nike's principled opinion sucked but it went really great with leg warmers you know it was all white it had soft leather that wrinkled it looked good women loved it it was everything that Nike was not and their rise like you said Ben was even steeper and faster than Nike's ironically Reebok would end up much later getting acquired by Adidas and then spun back out to private Equity recently wow so financially they're sitting pretty pretty they've just raised 22 million in the IPO which then was a lot of money they basically wouldn't need any more money after that


they raised one smaller pipe later in their history but the company was basically built on debt financing and this 22 million in the bank from IPO and you can see how they got fat and lazy their whole life they were starved for Capital finally they had it their whole life they were the underdog they're not the underdog they've got half the running market and this dominant brand where they just steamrolled the competition to get into all these Sports deals but right at the same time as the aerobics boom is coming up Adidas is becoming a very real competitor in the Sports Marketing deals too and so Nike is kind of realizing like oh we are not


nearly as well capitalized as them and they're kind of gonna come eat our lunch and all these deals where we just figured out that you can pay people and they'll wear your stuff so our cheap brand advertising is kind of go into a and meanwhile in our core like consumer actual reason people buy truckloads of shoes the fitness Market the swooshing sound you hear is that going to Reebok yes so interestingly financially there only are a couple quarters where Nike's Revenue declines I think that's because of the Futures program kind of saves their skin again retailers had to commit six plus months in advance to their orders and yeah Nike


was able to at least maintain Revenue through a lot of this but the actual underlying dynamics of the business are ugly at this point in time the market like I said is swooshing away so that brings us to 1984. Phil Knight actually wrote in the letter to shareholders that year 1984 Lake George Orwell predicted was not a good year for Nike everything that we talked about is happening but 1984 was also the seed of something pretty incredible that would make everything that happened before in Nike look like Child's Play and that would be a young kid from North Carolina


Michael Jordan who walks in the door this is such a fun time to do the Nike episode because the movie Air just came out which really is like a fun kind of summer blockbuster movie also very very inaccurate in how it portrays everything oh yeah no it's a very fun campy work of fiction I mean it gets the broad point right Michael Jordan saved Nike absolutely 100 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 strasser's baby to do the deal not vacaro's baby to do the deal you know vacaro never flew to North


Carolina to negotiate at Michael's house with Michael's mother like that all this doesn't actually happen they weren't gonna fire everyone in the basketball Division if this didn't work but again factual inaccuracies are fine it's the characters that they messed up that really bothered me I know I'm doing a review of a movie that maybe not all of you have seen so spoilers but like God they make Phil Knight just not at all who Phil Knight is they make him out to be kind of a Rube and after watching every interview he's ever given and reading all this stuff about him and I just don't think that the Ben Affleck character is anything like Phil Knight


anyway air is entertaining here's the real story the big important thing from Michael Jordan the Air Jordan one and then everything it became in the Jordan brand is that it didn't just save Nike it changed the world that's a super campy thing to say but it is 100 true if you walk down any Street pretty much anywhere in the world today or you go into any event building venue whatever and you look at what people are wearing they are wearing sneakers and they are mostly wearing basketball shoes and running shoes that was not the case before Air Jordans Air Jordans and Michael Jordan made sneakers into


culture so Nike takes a chance there's a kid out of North Carolina he's picked third in the draft he's really good he just took the game-winning shot to win the NCAA Final Four but you know he's not LeBron in high school yeah he was pick third right I remember going to to see LeBron as a high school athlete because I live near Akron Ohio and he went to St Vincent St Mary's famously and like he was very obviously one of the best NBA players as a freshman in high school Jordan wasn't quite that he was a different type of player he was not as big and as physical as a lot of the guys dominating the NBA at the time and so doing a big deal with Jordan


really was more of a gamble for Nike than they would do with really any athlete today all right so let's talk about what that deal was and why it was so different Nike like we just said their backs against the wall they need to do something to save the company and it's actually Strasser who puts this deal together and together with Sonny Vaccaro as portrayed the movie goes after Jordan but Strasser 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 payouts 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 them an advance on the first 500k a year but you know once he sold through the advance he was going to get a five percent participation on any of the shoe sales right and it goes even deeper than that this structure was completely revolutionary so the way shoe deals were done at the time so Magic Johnson and Larry Bird were the biggest stars in the NBA at the time they were both signed with Converse their deals were roughly a


hundred thousand dollars a year in cash payments to where the converse weapons Ben have you ever worn the converse weapons no never do you know what they are no no I don't these are not air Birds they weren't signature shoes Nike says we are going to make you a signature shoe and then you are going to participate in the upside from that they did that intentionally it wasn't Jordan who asked for that Nike wanted it that way they thought we need to incentivize Jordan to build the dream here we need to tie this all together and it's brilliant counter positioning because all their competitors basically couldn't do it Converse has too many stars to go


all around signing these a you get some of the upside deals like Nike had freaking nothing to lose and of course they could give away some of the upside if Converse is going to do this or Adidas is going to do this they actually do have quite a bit to lose by giving away upside of course Nike it turns out it was a big paycheck that they cut Jordan for years and years and years but Nike was truly doing something here that their competitors could not and it was smart to figure out what are the things that by being small and cash constrained and underpenetrated in the NBA what strengths do we have right it goes even further also in the deal the previous


year Nike had sold 400 000 pairs of Nike basketball shoes they include a clause that Jordan 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 it works we alluded to this earlier in the episode it's the halo effect yes the Jordans are important and we'll talk all about the Air Jordan Ones in a second here but it's not about the Jordans it's about the swoosh and it's about the halo effect and the lifting up of the whole company's sales I had no idea that Jordan got a royalty of non-jordan shoes he did and this would eventually morph into the Jordan brand


and the Jordan line and Zion Williams and Jason Tatum and like they are Jordan athletes this is part of it so Nike also guarantees a minimum ad spend to promote the Jordan line they're all in here they also give Jordan stock options in the company this is a hell of a deal and it's smart for Nike so there's something kind of interesting here which is I was trying to figure out if I would describe this as a partnership David you and I are Partners in acquired we together benefit from the upside and the downside that is what makes a partnership is this a partnership is there any scenario where Jordan has any downside


or is all of the downside owned by Nike no it's all owned by Nike because there's the minimum guaranteed payment right for two and a half million dollars over five years that seems like a pittance today but that was huge nobody else was getting that kind of money so here's the thing and this was chronicled in the movie this is absolutely true Jordan didn't want to work with Nike Nike was for the second rate Pro players Jordan wanted Adidas Jordan was a kid in the 80s like a teenager to the extent that sneakers had started to transcend into culture it was Adidas hip-hop break dancing track suits Shell Toes that was Adidas that was what


Jordan wanted and so to put a finer point on this here Jordan didn't want to be Nike's partner so he basically wasn't and they backed up the truck for him and some of that truck was invariable comp and some of that truck was in cash but make no mistake that is what this is is Nike having no leverage Jordan having all the leverage and getting a landmark unbelievable deal still to this day unmatched in terms of the amount of dollar outflows that has gone to an athlete because of it yeah so Jordan actually takes the deal and shops it to Adidas afterwards and he's like I really don't want to go with Nike like I really want to be with Adidas you don't have to


match this can you just come anywhere in the ballpark close and Adidas is like we could give you a hundred thousand dollars a year you know and uh and so reluctantly Jordan goes with Nike but you're so right and it's so important it sets up the incentives even though Jordan has no downside he's like well Jordan also is on offense all the time this is a guy who plays to win so you give him the incentives he and Phil Knight are gonna get along real well so here's what happens in that first year the Air Jordan Ones this is going to be very incredible some of you know this some of you going to listen to this you can be blown away hang on because


there is a second part to this story that is not what you expect in the first year Air Jordan Ones sell 126 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 [Laughter] it's about 15 percent of Nike's entire revenue for the whole year in the first year they sold 1.5 million pair in the first six weeks after releasing them so put aside the Halo royalties that Jordan is getting on the rest of Nike basketball let's take just the five percent of that 126 million dollars that he made in his first year


that's 6.3 million dollars that Jordan got from Nike in 1985. do you know what Jordan's contract with the bulls was it's too perfect 6.3 million dollars over seven years so he made the exact same amount from the Nike deal in his first year he made his entire seven-year contract with the bulls in his first year wow I always wanted to think of the story as like wow Jordan took some risk and it paid off big on the back end it's like it paid off immediately and he had to make no trade-offs to do it he got the cash guarantees and he got the royalty upside and it happened immediately and it only got bigger from there well


trade-offs I think they're two things one none of this would have happened if Jordan didn't turn out to be Jordan totally and in fact that's literally true if he wasn't what were the three Clauses if he didn't either win rookie of the year or win the NBA finals or win the MVP or something there was an out in the contract oh interesting I didn't know that they were basically like we will give you the entire Farm or five percent of the farm if you are a Phenom and if you're not interesting so there was some protection for Nike yes and I think he's Michael Jordan so whatever the thing was he got all three of them oh it wasn't the NBA Finals it wasn't


become an All-Star ah interesting which I think he did in the first year yes yeah yes that's right because the other players kept the ball away from him and they froze him out because they were so jealous okay one Jordan had to become Jordan two though he sacrificed a huge amount there's this great quote from Jordan when he retired for the first time he said Phil Knight and Nike have made me into a dream and that's very sweet on the surface but that's very dark underneath of it Michael Jordan's life was no longer the life of a normal person or anything close to it and now to a certain extent that happens to


every Star but like today you're like duh but back then this was the first time this happened Jordan became a dream and that's very hard to live with as an actual human being so there was some downside yeah David you're so right imagine that I come to you and I say hey I'm gonna pay you and give you Revenue upside and you know all you have to do is do the thing that you're already good at and work hard at the thing you're already passionate about by the way I'm gonna use your face on five million dollars of media of paid media in the next few months it's like whoa what but that's it for any normal life that I get like right


out the bat right and he's a kid yes so again like this is all normal today everybody understands this LeBron knew exactly what he was getting into when he signed with Nike out of high school and went to the NBA but like this was the beginning of all of this so why did they sell so well that's sort of this interesting 126 million dollars in the first year like why was the demand for them crazy did people just love Michael Jordan Nike this is I think the first time they really Flex their ability to recognize an opportunity for an incredible marketing moment so back in 84 Jordan starts wearing in preseason and in


warm-ups some modified airships because Nike's actually not done making the Air Jordan 1 yet and so he's wearing these black and red shoes that are now called the Jordan breads bread and these shoes are black and red and in the NBA you wear white and that's it and so Jordan's getting ready to play in the league with these black and red shoes which again he hasn't actually worn on Court and to this day no one can find footage of him wearing the black and red precursor to the Air Jordan one these modified airships on the court so we're not actually sure that it happened right because it takes a while to actually make a new shoe so the Air Jordan 1 is


still in production right but this black and red catches the League's attention David Stern says hey you can't wear those we're gonna find you if you do in fact this results in literally writing a letter that doesn't State the dollar amount but does say hey it's against League policy to where the black and red shoes it doesn't mention the Air Jordan it doesn't mention the Air Jordan one it just says those black and red shoes and this gives Nike this incredible opportunity to make a marketing moment out of it now it would have actually been very expensive because the way that the fine work technically after you dig into it for a while is one thousand


dollars for the first infraction five thousand dollars for the second infraction it may have even been the case that it was ten thousand dollars for the third over an 82 Game season and facing possible ejection it's a big tab for Nike and it's a big problem for Jordan and before he could even wear these black and red shoes in a game or have the opportunity to they switched the Air Jordan 1 they made white and red the one that is Iconic that you can go buy and then they make all the remakes out of the AJ one is not the bread and the bread is the thing that kicked up the big issue anyway so Jordan they just film him in this incredible commercial


where he's just standing there and the camera pans down from his head to his feet where he's wearing the black and red and it just goes and puts these black bars over the shoes and they make a whole big deal out of the fact that these shoes are so great they are banned in the NBA and you can go buy 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 an 82 Game season some people said it was one thousand


dollars ever and then nothing after that I have even heard that no dollars ever exchanged between Nike and the NBA or Nike and Michael Jordan because the fine was never levied it was a threat that then Nike made the Air Jordan Ones before anything could be enforced if anybody knows please join the slack and shoot us a DM or put it in the general Channel I'm very curious the thing that's so great though Nike right like it doesn't matter it's the story it's the dream like it doesn't matter right they just put it in a freaking Hollywood movie that it was five thousand times 82 games and that's all anybody's gonna remember oh man


okay so I mentioned a minute ago about the other side of the Air Jordan one story it's not the Dark Side of Michael Jordan's Fame I think this is crazy I don't think anybody really knows this Nike sold 126 million dollars worth of Air Jordan one shoes and merchandise in the first year fact another fact that gets put out there is that Nike sold 150 million dollars of Air Jordan shoes and merchandise during the first three years now if you look at that you're like wait a minute huh what happened something bad happened in years two and three yes and indeed something bad did happen in years


two and three and in Year One Nike needed that first year of the Jordan deal to be a huge hit so they stuffed the channel they pushed so much product on retailers and through the Futures program and whatnot that that's how they hit the 126 million dollars in sales there wasn't actually 126 million dollars of demand for Jordan products that year so good commercial but not 126 million dollars of demand commercial I mean there probably was I'm making this up 50 70 100 million dollars of demand like unprecedented for any shoe in history for a single year but Nike also effectively took some steroids on this one yep that turned into a huge problem


because the retailers and the buying public had a huge hangover the next year in year two that was compounded by two issues one Jordan broke his foot early in the season of his second year missed most of the season two the Air Jordan 2s sucked there's kind of no other way to put it this was where Strasser who again had masterminded all of this the Jordan deal the Jordan Ones working with his collaborator Peter Moore all this stuff they kind of went rogue the Air Jordan 2s cost a hundred dollars the Air Jordan Ones cost 65 the Air Jordan 2s were made in Italy out of Premium Italian leather


this doesn't sound like the Nike Playbook this also doesn't sound like a good basketball shoe do you want to play basketball in Gucci leather probably not Jordan didn't like the shoes they were not good to play basketball and they were super stiff they were hard to break in they didn't fit his style right so hey he wasn't playing B he wasn't incentivized to push them I mean he was economically incentivized but he didn't like the shoe it all kind of fell apart on top of that as this is all happening Strasser and more too along with him but Reno really Strasser is becoming increasingly


Rogue within Nike he breaks away he starts a new division in a separate office complex from the rest of the company called the new products division dude this is like very Steve Jobs Macintosh 100 I mean literally like the parallels here unfortunately comes to a tragic end he sets up his new campus new division you know away from night away from the rest of the company he mandates that all new product launches have to go through him in this new group and that they're gonna take control and streamline the process and the Jordan twos come out of this obviously it's not a very good shoe this becomes a big problem


obviously there's only one way that this is gonna end either Strasser is going to become CEO of Nike or strasser's Gonna Leave Nike yep and stressor ain't gonna become CEO of Nike because one Phil Knight is CEO of Nike two Nike has a dual class voting structure Phil Knight controls all the high vote shares and he controls the board so really this is the end for stresser they get in a huge fight in 1987. Strasser leaves the company he goes off and takes more with him Peter Moore and they start a consulting firm in Portland called Sports Incorporated all of which is fine and you could


imagine a future where one day night and Strasser might reconcile and they could be friends again and say wow Rob you've had such you know incredible part of the Nike Journey contribution to everything we can bury the hatchet well Sports Incorporated takes on as one of their major clients Adidas and eventually their only client and then eventually Adidas buys the company moves their North American headquarters to Portland Oregon and makes Strasser the CEO of Adidas America and then incredibly tragically this is just terrible eight months into the job Strasser has a massive heart attack and dies I believe at age 46.


oh it's just terrible yeah but the Betrayal that this engenders it's irreversible Ben you talked about earlier than Nike culture there's a quote from Jeff Johnson Blue Ribbon employee number one who I think had already left the company at this point he's asked in the book just do it about Rob becoming CEO of Adidas and he says I know day Adidas aren't what they once were but Adidas people were the Huns I would starve to death before I would work for Adidas wow and then when Rob dies Phil does not


attend his funeral it's really just heartbreaking there's a quote that sums it up in this Portland Monthly article that talks about why Strasser isn't known to many people outside the companies and why his role sort of Fades into history and they say why because his work was vital to both which makes it incredibly difficult to neatly write him into the mythology of either one for Adidas it was a brand Revival conceived and executed by a fat American ex Nike guy and his artsy partner for Nike strasser's overachievements are overshadowed if not severely tarnished because he was a traitor from Phil Knight it might have


been okay if he had just quit but he went to work for Adidas an intolerable betrayal I never forgave him yeah and still the repercussions of this exist to this day Adidas is American headquarters are still in Portland Oregon yep and they poach a lot of Nike people yep so okay back to Jordan the plot thickens here Jordan's not happy Strasser was his guy there yeah Strasser was his guy Strasser leaves starts this new company starts working for Adidas becomes the CEO of Adidas Jordan's gonna go to Adidas the


writing's on the wall here I mean Jordan's deal is up in 90 right not only is this deal up in 90. he tries to renegotiate so in year three Jordan is so unhappy the wheels are in motion at Adidas Adidas with Strasser not yet at the helm but whispering in the year is going to be willing to do a Jordan type deal for Jordan Michael always wanted to do this anyway he's gonna break the deal with Nike and go with them yep so back to Nike and Phil this is serious wartime mode they schedule a pitch meeting with Jordan this is I think towards the end of year three of the deal to try and


save him to try and re-sign him they're willing to do anything renegotiate the deal give him more economics give him another shoe anything Phil goes to Bright Young Star within the Nike Design Group Tinker Hatfield formerly of Nike's architecture and building planning team he wasn't even a hired as a shoe designer he was an architect this is super important Tinker was another Bowerman guy he ran track for Bowerman in Oregon and studied architecture and then he comes into Nike and together with Mark Parker who would become the CEO of Nike they designed the


Air Max they designed the Air Trainer they're part of Nike's Revival on the running and training side and competing ultimately in aerobics with their trainer now that Strasser and more are gone Tinker is the star that he can give Jordan he says go fly out to Chicago go with Howard white Jordan's guy and Nike go talk to him come home like burying your Shield or on it essentially so ticker goes out and remember he's trained as an architect and then became a shoe designer what do Architects do when they meet with their clients they ask them questions they say


what do you want what are your specifications Tinker sits down with Jordan and he's like tell me what you don't like about the Jordan 2. they're too tough to break in okay cool what else is wrong with them they're high tops you know that's too much weight I'm Michael Jordan I need lightness on my feet I want to fly I don't want the extra weight okay cool in an Ideal World Michael what shoe would you want what would it look like and Michael's like well I want a great basketball shoe that will also look great off the court but it needs to be both it can't be like the Jordan 2 that look great off the court maybe but


sucked as a basketball shoe tinker's like okay noted so he goes back to Nike Works feverishly Jordan comes in for this last ditch pitch meeting he shows up four hours late Phil starts the beating and it's like oh boy here we go Tinker like an architect has the shoe under a black cloth on the table just like Steve Jobs in the Keynotes many years later Phil hands the meeting over to Tinker he's like Michael I took notes on our conversation here is the Jordan 3. and he pulls the Shroud off and hands the shoe to Jordan and


he's like it's the shoe you asked for he goes right down the checklist soft leather that doesn't need to be broken in you can wear a new pair in every single game mid-cut height not a high top not a low top the support you need without the weight of a high top elephant print leather for style off the court that won't detract from performance on the court and then the fiesta resistance no swoosh there's a little swoosh on the back tab the main logo is the Jordan Jumpman logo on the tongue the Jumpman logo did exist beforehand Peter Moore had actually designed it but


it was never in the prime position it was always the swoosh and then the Jumpman that's like heretical at Nike at this point to not have the swoosh be the main character but Michael Jordan didn't really want to be a Nike so the only way to keep him is to kind of hide the swoosh it's kind of like car getting back to the beginning of like Phil Knight could have had 100 of Blue Ribbon sports or he could have had 51 of Bill bowerman's Blue Ribbon Sports yeah it's pretty crazy because the whole point of these deals is to get swoosh Impressions and they were willing to say we think it's going to be profitable enough in the long run to be in business with you


that we will not put the swoosh on the side of these shoes and they were extremely right to do that indeed so as part of that they renegotiate the deal Jordan agrees to stay with Nike the Jordan brand becomes its own sub segment within Nike its own shoes its own clothes its own colors its own show its own advertising all managed Standalone and then ultimately this would take several years but it would become Zion Williamson wears Jordans Jason Tatum wears Jordans the University of Michigan for some reason is Jordan not Nike as their official uniform supplier UNC is Jordan's and so do you know what changed in that


renegotiation yes so they extend the deal for seven more years I believe at the same five percent royalty on gross sales but there's the new massive further commitment to making the Jordan sub brand much more of its own brand and they upped the total guarantee to at least 18 million dollars so from Two and a Half to eighteen in three years wow ultimately just like the two and a half that's meaningless because Jordan brand sales go back up in 88 89 90 on and on and on 200 million 300 million 400 million 500 million in sales this is when they do the Spike and Mike ads with


Spike Lee It's gotta be the shoes and white and Kennedy gotta be the shoes Jordan earns over the course of this contract easily at least 100 million dollars easily over the seven year yeah it's just dwarfing what he's earning from the NBA in his total career from basketball contracts he made something like 90 million dollars so I mean you even said it in that first year just from the get-go with his Nike earnings were way outpacing his NBA earnings yep now interestingly at retail again back to this Halo strategy the Jordan 3s and then all Jordans subsequently really this is when they become the luxury brand the Jordans


are Nikes Louis Vuitton trunk yeah they make a lot of revenue from them yeah they sell a lot of them but you know what it also helps them sell a lot of wallets yeah so the Jordan 3 is priced at like 200 or something or 100 but this is 1988 1989. right okay that makes 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 2023 with the Jordan brand and I don't think people quite have a handle on what has happened in the last three years so the Jordan brand is the fastest growing part of Nike


grows like 10 a year the Jordan brand over the last three years keeps growing at like 35 and it does billions in Revenue growing at 35 so this past year they just reported FY 22 the Jordan brand did 6.6 billion dollars in Revenue let's assume that the five percent figure is still accurate enough it's accurate-ish Jordan's making over 300 million dollars a year from the Jordan brand at a five-ish percent royalty he retired for the last time 20 years ago there is no athlete making 300 million dollars a year Michael Jordan will make five maybe 10 billion dollars over his


lifetime from the Jordan brand absolutely unprecedented for an athlete he's effectively a founder of a brand that is growing 35 at six plus billion dollar Revenue scale with all the operations and distribution and marketing of Nike it is unfathomable so he did active work for many years in order to build the brand Equity but he does passive work now to keep it alive of course he has sort of input on who they're signing to the Jordan brand he 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 95 of that so like they're perfectly happy


with this Arrangement they're happy to cut him 300 million dollar checks I would be too if I was earning the other side of the 6.6 billion dollars but Jordan totally has had to shape his life in order to be the dream Michael and continue to be that he is so synonymous with the brand that he has to be perfect to keep the brand doing what it's doing yes and that's the dark side for Michael one more really critical thing I want to say about all this and Jordan and the building of the dream and the changing culture before we move on to all the rest of Nike history which we will cover here you can't ignore it too again the timing


in this all of this coincided with the rise of ESPN and SportsCenter and that was so important in the early days like when Steve Prefontaine was on the cover of Sports Illustrated or some of the tennis players it was like there was a Nike line of oh we could spend x million dollars in advertising but if we get our shoes on the cover of Sports Illustrated that's worth 20 million dollars with ESPN in SportsCenter those athletes and Michael Jordan being all over that 24 7 every night that was 20 million dollars a night of free advertising that's a great point so off the back of the rise of the Jordan brand in 1988 they launched the just do it


campaign with the very first I think this is the first widen and Kennedy ad right uh second real big one the first was the revolution ad with the Beatles that they did for the Air Max okay another ticker Hatfield and Mark Parker join and so they're kind of finding their footing again they're realizing that okay we can diversify outside of running we can find a lot of places to sell the dream we can make different products to monetize the dream to let people participate their market cap hits a billion dollars at this point in 1988 so investors are starting to wake up to like huh they're building something really special here they open their


first Nike Town in Portland the early 90s late 80s early 90s are just all good for Nike I think by 91 their market cap hit 5 billion by 96 the market cap hit 10 billion and they're really just executing the strategy that we talked about but at scale until they get hit with everything we already talked about on the labor challenges and that controversy yep so that's a tough few years interestingly like right around crash is also kind of tough for them their market cap drops from 20 billion to 8 billion dollars they weren't in any way yet a tech company but tough times right around the same time period an interesting thing from


that front losing Kobe to Adidas yes was big really big and people forget this people forget that Kobe was an Adidas athlete first yes in the same way that people forget that Kanye was a Nike athlete or a Nike rapper rapper first but yeah those early 2000s were not a great time for Nike but then interestingly Kobe was so unhappy at Adidas and wanted what Nike could give him that he bought Adidas out of his deal to move over to Nike oh yeah I have the numbers so Kobe was with Adidas from 96 to 2002 and he hated the Kobe twos so bad that it's rumored that he paid 8 million dollars to get out of his


contract so he could move over to Nike yeah that was a huge win for Nike and a big turnaround like 2002 is really when it started to get good again for them yep I'm sure part of that was the shoes and yeah by all accounts the Kobe 2s 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 2003 is when LeBron came into the NBA and Nike signed him out of high school yep okay so 2002 they get Kobe 2003 they get LeBron they've cleaned up their image they're cleaning up their factories they're cleaning up


their supply chain in 2003 they acquire Converse for 309 million dollars they're once faux and you know now Nikes and the multi-billion dollar market cap and Converse is a tiny fraction of that size 2003 Michael Jordan retires and it's fascinating just to get a quick data point the Jordan brand that year in 2003 is doing 700 million dollars a year and today it's doing 6.6 billion and that's been the Delta since he stopped playing basketball I mean the thing is both of those numbers are Bonkers right 700 million dollars is Bonkers and six billion dollars is Bonkers yeah Jordan has completely transcended a sponsorship deal and turned into a brand the notion


the platonic ideal of Jordan is a brand more than a human so in 2006 another important thing happens and most people didn't realize it at the time because keep in mind 2006 over an apple Steve Jobs is still the CEO so not a lot of people know this guy named Tim Cook's name but Tim joins Nike's board I believe in like late 2005 he joined the board he immediately starts helping Nike into understanding how to use digital technology to transform their business and in 2006 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 in a product name oh was it really this is the moment that has led to the terribleness of C of digital corporate products today we all have this to thank plus this plus that plus blah blah blah I'm surprised there's not a Jordan plus out there no there's not because Jordan is too well managed to Brand I actually did not know that's funny that was the origin of plus it was interesting because it was this little like thing that you would put in the insole of certain shoes and it would measure your stride length and your you know all the metrics about running and it would report it to your iPod because


it had a little like 30 pin connector thing you could put into your iPod it was the most clunky cluji 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 Suite of services and 2006 and then again in like 2013-14 they had a sort of a new strategy start there's really these clear moments in time where the company changed its DNA a and I go all the way back to 2006 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 going to kind of be their like Walmart brand oh that's right Cole Haan Cole Haan yeah and I think this sort of aha moment happened where they realized actually what we want to be doing is pouring everything into the flywheel of the Nike brand so they divested a bunch of stuff but they started acquiring capabilities from a bunch of these other companies to help them make this Tech migration it's like a two decade thing where they have these two different strategies that are happening at the same time one is the digitization and to


give you a stat on how impressive that is across the four mobile apps that Nike operates today they have 500 million users a quarter who are now using Nike digital apps from their e-commerce app to their running app run Club Training Club sneakers and the Nike Mobile store huge user base all sort of started at this moment in time where they realized a we should be in technology and B we should be making Acquisitions not of other brands but of technologies that we can integrate to help us extend our brand and participate more of the lives of our customers the other thing and this is a little bit later this is more the 2013-14 era they pull the trigger on


this big strategy shift away from what Phil Knight had sort of pioneered with the retail relationships to go direct and Nike started to realize in this new era this internet era This Global era where you have to be at scale to execute certain strategies they're gonna be the player at scale that can execute a direct strategy that can operate to sell shoes directly to customers that can operate retail stores and all these different places to go directly to customers and they're not all the way there and I I think there's a lot of like we'll talk in their sort of bearable case about where they are in that transition and how successful it


will be but there is this Tipping Point where a brand becomes the scale player like think about Disney in media they've become the scale player they can run a different Playbook and go directly to customers in a way where other places that make content need to integrate with the existing distribution channels Disney can make a 10-15 year transition especially with the right technology to go direct Nike's basically betting that they're also one of these hero brands that can run that playbook for context today Nike is what more than twice the size of Adidas who is more than three times I think the size of the number three player which is Skechers maybe yep


it's super power law distributed the other aspect of that is personalization Nike I actually think is really at the Forefront of apparel personalization with what started as NikeiD 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 produce the standard lines that requires a level of scale economies that nobody else can really match okay so that's like the 2014 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-in-cheek here because most you know secondary Market shoes are not used well until recently any mainstream person would have said of course to that statement right but there became David to your point about Jordan and Nike creating culture and participating in cultural movements and changing the way that people move around in the world and having a sneaker as a thing that defines you rather than a sneaker as a thing you throw 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 Phil Knight track shoe thing never could have dreamed and shoes have become this method for self-expression and the secondary Market is huge it's like a some estimate two billion dollars some people estimate six billion dollar category keep in mind all of athletic shoes are what what did I say 150-ish you know somewhere around there so still a tiny fraction compared to the athletic sneaker Market broadly but who would have thought that used special edition shoes or secondary sales of shoes could


possibly be a single digit billion dollar ecosystem right I mean this is companies like goat and stockx and we'll talk about this more in analysis but Nike has made the I think very conscious decision not to capture any of that value yeah I'm fascinated by that I think they've figured out clever ways to make a bunch of money on limited edition sneakers without having to be the marketplace for all the secondary sales the other way that Nike potentially could capture this value would be to massively increase their prices and this is really interesting I think this is where Nike is different from the luxury brands that we've covered the lvmh's the


Porsches Porsche makes tens of thousands of dollars of incremental gross margin with their Library wine colors that you can buy Nike sells these incredibly limited edition retro and otherwise Sneakers but they sell them for 150 bucks 200 bucks maybe 300 bucks like not a lot of money the instant that they get purchased you can turn around and sell them on the secondary market for five thousand dollars some of these shoes ten thousand dollars maybe more that is a very intentional decision by Nike not to capture that value and I think the reason they do it is to make all of this work to make the dream work in a way


that is applicable to everybody on the planet and not just Louis Vuitton's Market is they have to keep it attainable and so they're willing to let that to six billion dollars or whatever go to secondary players go to stockx in order to keep the dream alive it's pretty crazy I don't think there is anything that I can buy from Nike that costs 500 yeah and yet Nike absolutely produces many items that are worth way more than five hundred dollars right and like it's not even a high number it's not like oh I can't buy something from Nike for ten thousand dollars like I really can't think of a single thing I could possibly


purchase for them even for 500 right the one product that I know of was the mags the Back to the Future shoes that they actually produced but those were for Michael J Fox's charity I think they made 50 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 stun that's not Louis Vuitton all right here's what I can buy for 490 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 arbitraging yeah just like a luxury brand they have to market the dream but their mechanism for capturing value is entirely different yep okay I'm gonna move us quickly here through 2018 to today so we can analyze the business in its current state so in 2018 something pretty special happened they pulled the trigger on a widen and Kennedy ad with Colin Kaepernick about standing for something the dream crazy ad yup the


text of which obviously was just Colin Kaepernick's face and says believe in something even if it means sacrificing everything they accompanied it with a commercial IT launched online Kaepernick tweeted it then they did these big Billboards in every major City I remember the first time I saw it and I was like whoa Nike executed perfectly on exactly what they were trying to do here it strikes you emotionally much like many of the Nike commercials it was at a particular moment in time where they saw an opportunity to do something that they felt was right and become the center of media conversation


for like months like this was the advertisement of the year and in fact I know that when they launched this they actually scrapped their plans for the whole rest of the year for a whole bunch of AD campaigns that were already ready for a different way that they were going to do the 30th Anniversary relaunch of just do it and instead made everything in this new tone this Kaepernick ad struck such an incredible chord and made a lot of people super angry on the sort of other side of the political aisle of this particular issue that Nike was supporting that like it entirely changed Nike's media plan in every geography for every sport for the rest of the year


yeah this was two years before black lives matter became a really you know big thing with George Floyd this actually was like a big risk if this had been done two years later it would have played out very differently it would have been way less of a risk they would have been just like every other company just like everyone else yeah and it's quite illustrative that we aren't really talking about anything that Kaepernick did we just assume that the whole audience has seen this ad understands the power of this ad that says a lot about the ad itself The Meta context around how we're talking about it I do think this is a good place


to open up what is Nike's media strategy because it's very clear especially over the last 20 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 then they're going to piss people off from you know those people are worth losing because we prefer these people instead and we think these people's disposable


income is high enough for there's enough of them or whatever I actually don't think that's the way that it operates I think it is like an executive and creative gut feel this is a set of values we feel are right and we're 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 yup and this is also you know back to the Kaepernick ad this is to my mind the Pinnacle of the brand Halo element of this yeah Kaepernick played football not an important sport for Nike in terms of shoe sales hadn't played in several


years that's right it wasn't about football he was sitting there on the Nike roster getting paid there's a bunch of uh press about how they were thinking about actually cutting him and then someone internally is like whoa what are you thinking this is a huge opportunity for us but like it's hard to be a Nike athlete when you're no longer a professional athlete yeah this is like the ultimate example for me of the ad the sponsorship the campaign it's not about the shoes it's about the Halo yeah despite that going really well for them in 2018 they did just have a whole bunch of other controversies big metoo issues at the executive level the person that


everyone thought was going to be the CEO and next after Mark Parker and many of his people around him were shown the exit there was the whole Oregon Project that's their competitive running group with doping and all the alleged abuse going on there sort of these sort of like coming out of 2019 they really did kind of just need to like clean things up and write the ship and it was very fortunate that while all of this was going on they're big competitors were all kind of screwing up and especially going into covid like none of their competitors figured it out there's these smaller shoe brands and you look at on or Hoka or Brooks a lot of these Niche


players have done well in growing but Mikey hasn't had a formidable scale competitor Adidas has just been nothing but Stakes over there the last few years and so Nike has had some of these issues but has kind of been fine and after they brought in John Donahoe they've been able to clean up the organization reset for the next chapter or execute this shift to a direct and digital strategy well I think they take a little bit of a breath and say like okay what does Nike in 2030 look like and how can we make sure that we don't sort of stagnate here oh this is great I have so much to say let's officially transition to analysis and do power and


then you can update us on the business today as we go great so okay power for new listeners is part of the analysis on every episode we do a segment called Power which is based on Hamilton helmer's incredible business strategy book Seven Powers yep which is basically what is it that enables a business to achieve persistent differential returns and be more profitable than their closest competitor on a durable basis so David I think there is a trap laid for us on this episode but I'm curious oh you said you had a transition to power so I'm curious where you were


going okay so obviously we're 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 Nike's position and strategy within it so different from say an lvmh or a Porsche or any of the other somebody guess Portia has scale economies but if you look at the sneaker industry we talked about this a minute ago it's such a power law there's Nike there's Adidas that's half their size and then the third place player is well less than half of Adidas's size yes after that is Skechers then Puma then A6


Converse Under Armor but like massively declining market share curve yep okay now compare that to the rest of the apparel industry it's wild how different it is right think about fashion think about clothes think about shirts think about pants think about jackets think about whatever no other corner of the apparel industry looks like this in that there are two three four companies that make a huge share of all of the sneakers that the world wears that's wild it's totally wild it also is massively scale economies driven because the way that you acquire customers and retain


customers is with this brand Halo of sponsoring these big athletes and putting on these large very expensive branded events and competitions and small companies can't do that the primary way that you get someone to be a 20-year customer of Nike is to go and spend money on the biggest athletes in the world and the whole game just like Netflix is Nike's acquiring content Nike is acquiring the LeBrons of the world to be Nike athletes and the LeBrons of the world are going to go where there's the most dollars flowing to them and who can give them the most dollars the people with the biggest customer bases it's not just


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 your hundred thousand dollar check right there's a lineman and an incentive to be part of the biggest machine so like the Kobe situation is so illustrative of this right Kobe was with Adidas yeah maybe the Kobe 2 sucked like I don't know and he didn't like the shoe I doubt that was the issue I think the issue was what Nike could do for Kobe and thus what Kobe could participate in was exponentially higher than even what Adidas could do and like that is huge power yeah it's fascinating I mean the game is


figure out how to have the most customers that you can sell apparel to and then you get to buy the biggest Billboards and you get to align interest with the biggest Billboards it's a Content game on the customer acquisition side and you can make the best commercials that are the most inspiring I mean that I guess doesn't take as many dollars you know you can produce an incredible commercial for a hundred thousand dollars but the talent in it is gonna cost you Millions the Super Bowl slot is going to cost you Millions I think a lot of Nike's power on a go forward basis is totally the scale economy stuff yep 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 uh fundamentally much better deal correct yeah they had too much to lose yep so brand I think this is a trap on this episode I think Nike is a brand first and foremost what they do is build this incredible brand sell the dream support athletes inspire people but when you literally understand how Hamilton defines brand power and the perfect example is the Tiffany ring you


get a Tiffany Ring versus an unbranded diamond ring of the exact same caliber you're probably paying 10 to 30 000 more for the Tiffany engagement ring and there's a pureness to that brand premium concept does Nike really have a brand premium or is it the athletes that have the brand and Nike scale economies let them buy the athletes Brands right as Trend Griffin would put it wholesale transfer pricing where actually the athletes are the ones that sort of hold the power and Nike's happy to pay out for it and pass through all the profit pool to the Pinnacle athletes unquestionably that was the case in 1984 with Michael Jordan


and then again in 1987-88 when they renegotiated the deal right but let's look at an Air Force One or a dunk you know the dunk Lowe's that everyone's wearing right now they're not really generating pricing power on that maybe off of something purely unbranded but off of Adidas people are more likely to buy the dunk low SB than whatever the Adidas equivalent is but the prices are pretty equivalent yeah they're not paying more for them right now maybe again that's a intentional Choice by Nike but in this category I do think yeah if the dunks cost cost more than the Adidas Shell Toes I don't know maybe shelters would be


popular right now right for whatever reason Nike has either decided not to or can't raise the prices where their brand differentiates them and I think it's fascinating the Nike running shoes that I buy that are what are 160 180 the equivalent Adidas pair is 160 180 same with the equivalent New Balance pair and so if you assume that they do have brand power Nike's making a conscious choice not to capture that value in making all those shoes more expensive than competitors yeah but I do think despite you saying the Trap and I think there is a big trap in overestimating brand value of Nike it does definitely have brand value


and brand power yeah it shows up in a different way it shows up not in pricing it shows up in the fact that I often don't look at a competitor I will only go buy the Nike thing yup my thought exercise on this which is a little different than my usual Brand Power thought exercise which is can you kill it can you intentionally kill Nike no you can't it can't die it will be with us in a hundred years oh that's quite a take oh you don't think Maggie's gonna be here in 100 years I think you could totally kill Nike in the next 30 if you wanted to I also don't like your premise and I disagree with your Dior thing that they're really good brands or


the way you can tell if something's luxury or a durable brand is like if you couldn't kill it if you tried I think that's too squishy okay fair enough I have something way less squishy for you here though okay I think I was talking with Scout Reams about this I have no data on this whatsoever but I don't think it is a controversial statement to say that the swoosh logo is tattooed on more bodies around the globe than any other company logo I'm sure that's the case it has to be the case so if that's not brand power right there I know it doesn't fit Hamilton's definition yeah it's a sleight of hand what Nike is first and


foremost is a brand what the entity is is a brand because they don't make sneakers which we'll talk about in a second here they don't seem to charge more than their competitors yeah I'm literally looking at Adidas gross profit margins are on average higher than Nikes Nike's current rolling last four quarter gross profit margin is 44 Adidas is 46 and Adidas every single quarter for the last 10 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 Nike's part I think they absolutely could sell five hundred one thousand five thousand ten thousand dollar Nike items they absolutely could and they choose not to I think because if they did that well one thing we didn't talk about so Nike announced a few years ago that their whole marketing strategy was going to be reoriented around I think 12 cities in the world and they were gonna Focus everything they did from a marketing standpoint on thinking about what it would mean to be interesting in those cities so what's behind that and the cities are like New York Los Angeles


Tokyo Shanghai Rio Paris Etc and I think what's behind that is Nike needs to be accessible to The Taste makers in those cities and that doesn't mean wealthy people that means people on the streets that means young people that means people who can't afford five thousand dollar items but want to be participating in the Pinnacle of Nike I'm not talking about five thousand dollar items I'm talking about charging 200 instead of 180 because there's a swoosh on it when the market price for those shoes seems to be 180 no matter who makes them hmm why don't they do that is it because of what it says right at the top of their IR website which is


Nike Inc is a growth company and they care more about growth than harvesting profit dollars hmm it could be I think the thing that is so confounding here is the secondary markets there is no question that the value of many Nike items is well above their selling price right and I don't think that's the case for Adidas maybe for some items but I doubt as many as Nike yeah I don't know I don't have a clear answer here I think my best answer is they want the most swooshes out there in the world and there's some sweet spot where they're willing to trade off profit dollars for that for the sort of


continued brand presence where the swoosh feels like a ubiquitous thing and a brand people celebrate and are excited about and they just want it reinforced on everyone everywhere so they're willing to give margin dollars for that oh maybe this actually all comes back to scale economies because it's kind of the same thing with Amazon right or Netflix for a given price Netflix can offer more value or could in the past offer more value than anyone else Amazon with prime can offer way more value than anybody else this is the scale economy play yeah I don't think the rest of the powers are particularly worth talking about the most interesting thing is there's not


any switching costs there's not any network economies there's not a cornered resource I frequently switch shoe brands all the time and that would be like one of the things that I'm least excited about about any shoe or apparel company is unlike Tech businesses there's no potential for any form of lock-in and there's no potential for really any form of network effects like come on how am I going to benefit from other people wearing Nikes maybe like in the Nike run app being able to share stuff with my friends who also have the Nike run at but it's thin that's not how they make their money yep agreed so interestingly


I guess what I would conclude on power is Nike is first and foremost a brand that from a seven Powers perspective most leverages scale economies to get their outsize profitability totally agree with that nice okay I will catch us up now and give us the numbers on the business today and then we can go into Playbook so Nike is at absolutely astonishing scale they are a 51 billion dollar Revenue business growing 10 year over year as I mentioned at the top of the show they're the largest apparel company in the world except for the luxury category lvma genermez got him beat Nike


sales to women alone are bigger than all of Lululemon's Revenue wow take that in for a minute that's shocking I feel like that's an illustrative stat and Nike has really lagged in developing products for women that's exactly what I was gonna say it's just 8.6 billion of their 50 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 yep the Nike brand does 49 billion so there's some other Revenue in there Converse and I think there's some other catch-all but basically there's Nike and Converse and Nike includes Jordan so I mentioned earlier this shift to direct that Nike


has been in the midst of for bits only like a 10-year Journey about 60 percent is still wholesale is still sold through retailers and impressively forty percent of this very large business is 50 billion dollar Revenue business is now done selling products directly to Consumers either in stores or on their website I can't imagine how difficult that transition is to make when you forge these like long Partnerships with retailers come back to that in a second their gross margin profile 44 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 70 80 percent


gross margin businesses you know Nike has real costs as you would expect with materials labor Logistics cost of storing all this inventory 44 not bad let's just remember luxury lvmh is a 68 gross margin business Hermes is a 71 gross margin business so Nike is better than a car company but it ain't no luxury yep so Nike does 6.4 billion in operating income so that's their income before taxes 12 and a half percent operating margin so that's sort of what you should think about their sort of take home not a software company yeah lots of costs involved in this business they have eight and a half billion


dollars sitting in inventory which even for Nike is high hmm that's a point we'll revisit in our analysis here unlike the Nike of old they also in addition to that inventory have 10.7 billion dollars in cash and similar uh equivalents so the company is no longer constrained by how much Capital they have available to them well 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 100 of their cash all the time to go buy more inventory and reinvest that in the business and that was true for like a couple of


decades they've now had 30 consecutive quarters of increasing dividend payouts so it's a dividend stock with 11 billion of cash on hand in addition to continually paying these dividends it's funny this doesn't jive for me with the statement on the investor relations page like he's a growth company I mean I guess 10 growth at their scale is impressive 35 growth in the Jordan brand is very impressive so you might think it seems like they could reinvest more in the business to grow faster they already spend four billion dollars a year on demand creation and I assume that's like their Sports Marketing budget I think the wording on the financial statement


is interesting too they literally look at it as we're basically going out and buying media to create demand for our products yep I mean that's a 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 monetize in a different way yep Footwear is almost 3x the apparel business on a revenue basis so at least by Revenue Footwear is still their bread and butter and in part it's just selling sneakers to people that go wear sneakers every day and wear them out once or twice a year and then need to go buy some more sneakers and that's


like most people in the world it's a pretty incredible Market that they now get to address you know 150 billion dollar athletic footwear Market it's 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 adjusted as if they were all sold through our wholesale Channel men's is 51 women's is 21 kids is 12 and the Jordan brand broken out separately like all of this excludes Jordan the Jordan brand is the 6.6


billion dollar business that makes up the other 16 of that pie chart holy God yeah men's inclusive of Jordan if you just assume Jordan is three-quarters men that means that they're selling 64 of their product to men so remember 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 than it was at the same time yes in some sports specifically like just to dive into one example they have a near Monopoly in basketball shoes Nike and the Air Jordan Brand's share of performance basketball was 86 and the stats a few years old it was right before the pandemic but the


dominance was even more prevalent in the lifestyle basketball category where they have 96 share I have to wonder the other shoe companies who are still doing big deals in the NBA let's take Under Armor and Steph Curry here in San Francisco like what are they doing name another Under Armor athlete I mean they exist but I don't think I could right like why and obviously it's worth it to Steph Steph could sign with Nike tomorrow but under armor is just paying him a boatload of cash and I think also gave him tons of equity in the company and whatnot but like why I mean I just think it's a bad move for Under Armor I think this is the classic thing that


we've talked about in 11 different industries of don't get caught in the middle in the age of the Internet it's so obvious in media it's becoming obvious in universities but be the New York Times or be acquired but don't be the Cleveland Plain Dealer or be Disney or be dog de Miro or in this world be Brooks or be Nike right but don't be under armor who's not a platform brand they don't have the size and scale and everything that accrues to a Nike but they're trying to run a any Nike Playbook and they need to run a completely different Playbook yeah totally agree so Nike is just leaning into this in a


big way they're now the official uniform supplier of the MLB the NFL and the NBA and they're throwing huge dollars like the NFL deal alone is something like a 200 million dollar a year deal and David you were telling me Nike doesn't even get to sell the jerseys to customers it's literally just to get the swoosh on the game Day Jerseys this is absolutely fascinating and blew my mind when I talked to a few people in the industry about this so yes the official jerseys let's take the NBA for example Nike replaced Adidas a few years back as the official jersey maker of the NBA when most NBA jerseys are sold to buyers who pay money for them AKA fans Not the


players most of those are replica jerseys which I'd heard that term before and I never thought about what it meant most of those are made by Fanatics which has run an incredibly interesting playbook in the Sports World in the Sports Marketing world over the past few years they are replicas made and sold by Fanatics 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 it but that's probably not what you're gonna buy you're gonna buy a replica


from the team store that is made by Fanatics that has the Nike Swoosh on it which in many ways that's part of why Nike is willing to pay to sponsor the NBA is because the replica jerseys get more swooshes out there in the world even if it's not on things that they sell it's a billboard even if it's not on things that they make right that's wild it's totally wild you would think the value chain would flow the other way where you would make money from the jerseys sold because you are an apparel company but instead you're paying to put your swoosh on jerseys made by other people one final thought on this athletic shoe market being 130 billion


dollar market I mean Nike totally participated in a world change and helped to change the world that we all wear sneakers all day what an insane Market to address that there are 14 billion feet in the world and we all wear out the shoes it's just a thing we need to just keep replacing what a fantastic thing to get to sell it really is surprising to me that they haven't quite figured out price discrimination with the exception of some of these very specialized shoes which I'm probably not going to go by I'm just not a sneaker head so I'm not going to go buy any of this limited edition color this that and the other thing right something I have


to like keep in a closet in a bag it's not my bag but so if you like exempt away that part of the market there's probably some shoes that I should and would pay 500 for and yet those shoes don't seem to exist and that's very surprising to me yep okay so those are the numbers on the business today you want to go to Playbook let's do it okay Playbook the first one I know I've said it a few times on this episode I totally want to like ingrain it in the ears of listeners where Nike will come up with the most creative clever way to win and even if it's breaking a little bit of a rule it's fine the best illustration of this is breaking two did you watch that


David oh yeah so it was compelling unbelievably compelling but they said what are all the rules to competitive running if you're gonna have a Pacer on a run with you it needs to be the same Pacer the whole time so that you can't cheat and like rotate in Pacers you can't wear certain types of shoes that have ill-defined rules and so Nike stages this event with their shoes that provably make you four percent faster than you've ever been before and they drive a Tesla with a laser and a whole bunch of Pacers around this guy and they're like you know what we're gonna make this big media spectacle out of this guy setting the world record and


breaking the two hour marathon time and like he came close and it was an unbelievably entertaining event to watch and what they said was we don't care if this is legal or not in competition we're just doing a stunt you know and you guys can debate afterwards if this actually said the world record for the marathon time or not and I just thought it was like there's nothing more perfectly Nike than saying like well those rules are like quite cute but Nike is a growth company but Nike is a growth company that's the ultimate non-sequitur I hope that becomes a mean but Nike is a Growth Company it's actually better if you open it on mobile


because the sub headline goes away so it's literally just a black and white picture of Serena Williams that says Nike Inc is a Growth Company the first time I opened it on my phone I was like that is a okay all right I'm 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 hey Ben Break The Rules fight the law that's right another big one is the things that are your very strength can go too far and become your weakness and they totally


pioneered Outsource Manufacturing in Asia which is also why they got hit so hard and deserve to get hit so hard when that became an issue I always think everyone should always just be aware in your business that your greatest strength is also your greatest weakness and you just have to factor it in 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't say that yeah on the note of not a shoe company there's a great analogy here to tsmc and in fact there's a great analogy here to the Nvidia and qualcomms of the world and Nike Nike is a fabulous shoe company


yes yes I think that is ultimately the answer to Is Nike a shoe company sure this is our semiconductor episode this season they're a fabulous shoe company yes and unlike tsmc semiconductor manufacturing is wildly differentiated shoe manufacturing there's like two or three really big ones that Nike works with they're unbelievably prescriptive they Source all the materials they do lots of audits stuff like that but it runs quite differently than their apparel business which has like thousands of Manufacturers that they work with which are all custom for all the different fabrics and stuff that they need to make and so in some ways


it's like the fabulous semiconductor industry but unlike semiconductors the manufacturing isn't as capex intensive to start and there's not as much process power in it so you actually do have this like highly fragmented Foundry equivalent like manufacturing ecosystem of people who can make your stuff to the scale economy's power question to the extent in Footwear that there are limited numbers of factory operators that are the big ones that are fully audited that you want to work with being the scale player that can dominate the capacity in those factories is a huge Advantage yup that's exactly right


what we're on manufacturing is sort of a funny note Nike manufactures zero shoes but they manufacture 100 of the nitrogen filled little airbags they do it in Oregon because that's trade secret and then they ship those over to their Asian manufacturing facilities to put them in the shoes do they do that with any of the other technology like Flyknit or react I don't know I don't think so on flying it I don't know if you're gonna make the Flyknit in the US you may as well assemble it yeah I assume not so I also think it's one of these interesting things where like Nike gets hit basically all shoes are made the same way there's some companies that like to


claim credit for oh my gosh this one's made in the US well like part of it's assembled in the U.S but basically everyone you know either makes the whole shoe or the upper outside the US and I think new balance is a U.S brand but like it's not to my understanding it's not all made here it's like designed by Apple in California right the other huge theme that I think is important to take away here is for the first 15 years of Nike it was a story of Leverage every single point along the way up until 1981 they took the highest leveraged route they possibly could the whole thing was


betting the farm on top of betting the farm and we are telling Nike because it is the survivorship bias story and there are many that would have failed along the way because at any given point they would have gotten slightly ahead of their skis and 100 debt to assets ratio would have cut up with them and then poof they go out of business and Phil Knight even put up he and Penny's house to guarantee a loan if it came down it all would have come down there's no slack in the system at all it even continued through to the Jordan story right nobody else was gonna do that deal yup exactly so Phil Knight basically never took on


any Equity investors and so he took no dilution he and his management team and Bill Bowerman owned 56 at IPO him owning 46 because he just kept betting the farm all on debt and basically had no buffer at all so what that means is on IPO day he was worth 178 million and today he's worth about 40 billion when you own 46 of your company at IPO and it goes on to become a top 50 company in the world that is how you become the 25th richest person in the world he shot the moon and he kept ownership the whole way yep okay so we talked a lot about this brand Halo idea I want to put a specific fine point on what the strategy is they create Pinnacle 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 you know through their local Running Shop who has something cool and exclusive you build brand with that Niche athletic Community by being obsessed with that particular athlete's journey and designing products for them and customizing experiences for them that brand then seeps out into the broader Consciousness either through paid Media or through just organic Word of Mouth that Nike stands with athletes


they're obsessed with it they make the experience of being an athlete the best thing possible and then they extend and when I say they extend they figure out what products that need to make that fit into the universe of the consumer psyche of how could I be like that dream that I'm watching how can I participate in this feat of athleticism and show that this is like me too and the hardest thing is figuring out how to extend that audio audience and make products for them to buy without compromising that step one that belief that you make Pinnacle products and what Nike has been able to do and thread that needle and figure out how to make the 15 t-shirt


that you get at Dick's Sporting Goods with the swoosh on it and also convince me that the very best shoes to run in is the you know Nike Vapor fly next percent whatever whatever again just like our lvmh episode it's amazing that they can make a little wallet clutch for a credit card and ID and a 200 000 handbag yup only thing I would add to that is just reiterate what kind of has hit me through doing the research in this episode is that athletes are Netflix shows yeah I didn't think of that until we were actually recording here and these days especially in the beginning it was athletes are Billboards and Netflix


shows in that you know on SportsCenter or whatever like you're gonna see the swoosh now with social media and the modern world it literally is a Netflix show people are following you name it Patrick Mahomes Serena Williams they have a following who are following their lives like a reality TV show you want to hear an insane quote that dates all the way back to 1983 Rob Strasser 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 Strasser quote and I will one-up you a Phil Knight quote give it to me this is


actually about Phil Knight in just do it around the Time Michael Jordan became a Nike guy Phil Knight had finally begun to apply in full measure his hunched that if the general public could be helped to imagine great athletes as he imagined them as having implications of the very best that the human Spirit had to offer then those athletes would become like the heroes of old the heroes in books and people would come to those Heroes and listen to what they had to say yes I love it side with the athletes sell the dream people will buy products yes interestingly enough too in this Rob Strasser quote where he says individual athletes even more than the teams this


was the big takeaway from our NBA episode that is about marketing the athletes not marketing the teams now what's really interesting since we did the NFL episode earlier this year after doing the NBA episode I've really changed my thought on this the NFL is a better business as a league than the NBA no question in my mind but the amount of value created out of the leagues I think more value is created out of the MBA the NFL just captures way more value and thus is the more valuable league but this Nike episode is totally solidified for me the value coming out of the NBA Jordan


Kobe LeBron goes on and on Zion wemby Victor web and Maya the new Phenom coming out of France that was the number one pick of the Spurs he's already a Nike athlete fascinating and basketball again because it directly translates to those are the shoes that people can buy whether they buy that bottle or a different model they are buying those shoes they're not buying football cleats and it's the face of the person it's not behind a helmet it's like they're the heroes right yeah basketball is quite helpful in that there's a reason to buy those shoes just to wear them around like you don't have to invent a new


product for people to buy to participate in the Brand Story like you do with football I mean it's funny because it's the Gatorade line not the Nike line about Michael Jordan but like be like Mike if you want to be like Mike it's really easy you just buy the shoes if you want to be like Patrick Mahomes it's a little harder right I don't have any pads I don't have a helmet I have nothing in common with Pat Mahomes no shoes will change that yup I have one that I've been trying to think on and at one point in the research I wrote down when you sell Commodities brand matters a lot is Nike differentiating a commodity with


their brand or are they not in the commodity business well this gets to your question at the start of the episode this is the Crux of the question I think there's two answers The Prestige models the Jordans the Retros The Vapor flight what have you it's the prestige 150 plus dollar Nike models I don't think those are Commodities I think those are products Nike also sells a lot of 50 60 70 pairs of shoes those are probably Commodities that are helped by the brand Halo yeah bifurcating it like that does make sense someone told me that in many years the Monarch has been their best-selling shoe


which is this crazy high margin dad barbecue shoe that no athlete has ever worn for anything everyone should just Google Nike monarchs and you're like oh yeah no my parents wear that I don't know it's like the ultimate barbecue shoe and that's kind of what America buys and so they've sold enormous volumes of this thing I'm like one more kid away from becoming a Nike ironically it's actually caught on with Gen Z and so there's this weird thing now where like people are wearing monarchs ironically so the monarchs are objectively a commodity product and they're super differentiated by having the Nike brand on them whereas The Vapor


fly for the two years that it came out the next percent thing that the breaking two Marathon got ran in it was like by far the best running shoe on the market for two whole years that is actual r d product that differentiates itself so Phil Knight has the final word on this in an interview maybe eight ten years ago he said when directly asked the question are you a product company or marketing company we're a marketing company and the product is our most important marketing tool hmm I disagree I think the athletes are your most important marketing tool I think the product is a monetization method for the marketing that you do through


athletes but if you admit that then you're saying that we don't have differentiation in our product but I do think it's quite telling that they started Distributing someone else's product and yeah they do lots r d but at the end of the day they succeed because they have built the best brand in the world the most amazing distribution in the world and the most tear-jerking marketing that anyone ever watches and they have a 30-year enduring brand for 30 more years Nike will be I can't predict after that but Nike will be a brand that people look up to and are inspired by yeah totally agree and it's interesting even


like telling a little bit of the athlete story along the way here too even that story of the product is what's important that's kind of part of the myth of the marketing of the brand with the athletes right you know the Jordan 2 the Jordan three like Yeah The Jordan 2 sucked sure like everything I said probably true I think MJ probably really believes that as do many people on the other hand it's also a really convenient story or the Kobe story of oh the Kobe's you know Adidas shoes sucked right sure makes for a really good story for the soap opera that is The Athlete's life that is the Netflix show that they're selling right being a soap opera keeps them in the


spotlight and keeps the opportunity to have more impact with sponsor eyeballs yup this whole sponsor celebrity thing is both a asset if you do it well and a massive liability if you do it wrong Nike strategy has very clearly been celebrate athletes Adidas has had the strategy that seems to be like celebrate eyeballs where they'll sponsor anyone with attention it's rappers it's musicians oh boy it's some athletes it's celebrities it's do we want to talk about Kanye well this is quite interesting so I think Nike was smart I think they legitimately premeditated ooh we don't want to be associated with this person and so they drove a really hard


bargain and notoriously in 2015 Kanye walked away from Nike and so they refused to give me creative control I think Nike didn't see exactly what was coming with Kanye but I do think they realized hmm our entire brand is built on celebrating athletes and while we should be in business with celebrities in some way shape and form I mean there's these great old stories of Rob Strasser making sure that movie stars were wearing Nikes and driving around Hollywood we're here to celebrate athletes and standby athletes and like we would stand by Tiger Woods we we did and some really trying times in his life where a lot of people turned against him


would we stand by Kanye no we don't know what to celebrate about him and so I don't think they had too much foresight knew exactly what was 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 Adidas's year Adidas net income has basically evaporated and gone to zero they used to make over two billion dollars a year in profit and the last four quarters on a rolling basis they've made less than a hundred million so 2 billion down to a hundred million and they claim around 500 million dollars of this is the Yeezy write down


they posted an actual net loss last quarter it is a pretty disastrous situation over there and there's a full out slide in their deck where they admit we think we're better than this and we're not oh I didn't realize it was that bad it's bad Adidas it's really bad they're in a complete reset year when I think maybe 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 Nike placement is there in music a ton how many songs are there about Michael Jordan to this day or LeBron or


Zion or John Morant or what have you yeah there's a lot of different ways to play it and Nike seems to have played the chessboard quite intelligently quite intelligently yeah all right so here we are at the end of analysis the bear case in the ball case so there's a bear case that we haven't talked about which is Nike's in a weird place when Mark Parker retires he was supposed to have a successor the successor is out for me two reasons and a bunch of other people too they're theoretically thin on people who could take the job they bring in John Donahoe John was the CEO of servicenow was the CEO of eBay and was the CEO of Bane so


not from the sneaker business but was a board member he was a board member so he knows Nike's history from that level but different than I mean Mark Parker started as a sneaker designer very different sort of lineage coming in he designed the Pegasus which I think is the longest single running oh wow model with no pauses in Nike's history I ran in a pegasus two days ago oh that's amazing so John comes in and is sort of this external hire I get the sense I'm not sure he'll be a 20-year CEO I get the sense this is sort of like figure it out time for Nike stabilize things get him set in a good direction and then figure out who From the Bench is the


right next person I don't know how long it'll be but it's just like a vibe that I get from reading stuff well Nike is also so insular people develop up through the company and stay there forever yeah so covet happened around the same time that he's coming in to take over and they've sort of decided to do this big reorg where they used to have an org structure super focused on each sport and that meant that it was people's jobs and whole team's responsibilities to track The Athlete's Journey through their experience playing that Sport and they provided crazy amounts of support to athletes and like here's an


example at the last Olympics they wanted every single sport to have the option to be wearing Nike shoes every athlete well many sports don't require shoes and Nike said that's fine with us we just want to have a presence and we want to support those athletes they did a bunch of r d on all sorts of crazy things including like a gymnastics partial shoe for one specific gymnastics event because they're just obsessed with how do we make the athlete experience better if they end up in swooshes and people understand what we're all about they'll want to participate in our Brand Story too well this reorg was sort of intended


to realign teams at Nike with the way that they actually interface with the outside world so now it's men's women's and kids because you go into a Nike store on Fifth Avenue in New York and there's a floor for men's women's and kids and you go into a Dick's Sporting Goods and there's a men's women's and kids and so it kind of makes sense you shouldn't send 12 people from Nike one representing every sport to go meet with the one buyer at the menswear Department of that shoe store but Nike is an incredibly matrixed organization and so that's sort of the thing that was happening the bear case in this is what has kind of gotten lost is an obsession


and focus on these individual sports and the Journeys in these Sports let's look at the trainers like just a little example in running as we learned in the Brooks episode the business for them is in the trainers it's not the race day shoes it's what you're wearing to get your three mile or your Five Mile in a few mornings a week and you wear those out and then you buy another pair and it's a great business so there's some Nike running Department who needs to be sort of obsessing over that journey and growing their sales and their share in not just race day shoes with this amazing Vapor fly stuff but like the trainers but look at what's actually


happening in the running Market you've got Brooks on and Hoka all becoming billion dollar Revenue run rate companies in the last 18 months Nike fortunately their big competitors like Adidas have just been out to lunch but these little competitors who are all nipping at their heels are doing a great job focusing on their niches and when you simplify an organ the way that Nike has there's a little bit of a concern around are they still focusing on the niches and are they still focused on serving athletes in the same way in an obsessive way that they have been in the past okay I buy that as a bear case so there's a lot of nuance there but I


think that in the same way as that old Disney quotes So with Disney Animation goes the company sort of like so with running goes Nike that's a Bellwether fair enough I totally see what you're saying I think if you were to say that the equivalent Disney animation for Nike was running at the beginning I think it is unquestionably basketball today fair and I don't see them slowing in basketball well I mean that's the thing is it's like kind of hard to come up with bear case there are all these like little nitpicky like I listen to a bunch of tigas calls and I listen to the earnings calls on quarter and like in doing my like investor diligence on this


these are the sorts of things that people are concerned about a big one is like this potential reversal of strategy on d2c like they reopened Macy's and they put more inventory in Footlocker in the last couple quarters and that's sort of concerning because the whole narrative has been we're going direct but also uh oh we have too much inventory so we gotta blow it out and you know discount it through our retail channels there's lots of questions to management about if that sort of thing is happening right now big slowdown in China not just them but all the big Brands it seems like the Chinese market is Shifting to Chinese native brands or


there's a lot of signs that that might happen and so you know the China Market is a huge important set of consumers to Nike so I think them figuring out especially how their social justice stances fit in with the CCP controlled China that's a huge open question and are they going to be able to address that biggest Market in the world for feet or not you know at scale is sort of the question yep makes sense honestly that's the best I got for bearcase let me add on one more I I don't think this is really a bear case but if you're viewing this through the lens of should I buy the stock not investment advice but you know versus other companies that


could put my money into as incredible as this company is the operations the power the scale economies the brand I think the durability it's still not a software gross margin business nor is it ever going to be as always it's not a SAS company why what business model I mean look if you could put all your dollars you could put into SAS companies you could put it into Nike right I do think Nike has incredible durability yeah I mean that's the bowl case these scale economies are super real and they're in pull position to just keep spending and keep investing in building this incredibly durable brand and like


products will come and go there will be five-year stints where they have the most amazing running shoes that everyone needs to Marathon in and there 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 into all these local markets and tweak the messaging to be local appropriate in every corner of the world and manufacture at scale like it's just the Nike brand means something to billions of people and Nike knows how to make it keep meeting something to them yeah like I said earlier there are a lot of swoosh tattoos on bodies around this planet that is a bookcase right there yep in


the world of globalization and the world of the internet returns to scale are a big deal and they're in the scale position and I'm sure both hardcore basketball fans and sneaker heads would nitpick with this statement but to me Nike basketball and the sneaker head culture is the core of the driving force you know the Pinnacle of the Halo the Jordan brand and I just don't see like that feels like as strong as it's ever been to me yeah completely agree I mean you listen to these tegus calls with Adidas people and they're like our issue is how to figure out how to make the brand cool again and that does not


show up in any way shape reform in the Nike interviews yeah totally all right well that closes out bear and bull I have some fun trivia for you David love it so I saw you tweet something about some person in this episode being related to a person in a previous episode I think Daniel Eck commented on it and I was trying to figure out what you had just found and I'm wondering if this is it so I'm going to read from Wikipedia nisho ey was involved in a corruption scandal in 1979 after it passed on a 500 million dollar Yen bribe from McDonald Douglas to the director of the Japanese Defense Agency in an attempt to


influence the sale of the F4 Phantom aircraft to the Japan air self-defense Force the Scandal was uncovered only three years after a similar Scandal involving Lockheed conspiring to bribe prime minister Tanaka for anyone who didn't listen to our Lockheed episode we talked about this bribe Bringing Down the Prime Minister of Japan and oh my God it happened through nisho yeah amazing I did find that and that is an amazing connection and the deep cut is great for acquired lore but that is not what I tweeted about my tweet was actually about something slightly different which was people that we come across in the acquired Universe minor


characters who go on to be major characters and Other Stories and it was actually about Don Katz and audible oh interesting yeah that's a good one too which I love these wild career changes where like you go from being a journalist and an author to starting a technology company yeah it's pretty cool all right quick carve out I think you should go listen to Mark Andreessen on Lex Friedman and then you should listen to him again on Ben Thompson in that order he's been on a little bit of a media tour since he did the it's the entries and Horowitz strategy it's like everything we talked about on the episode with them and how they're the


most media Savvy 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 every once in a while and it's fun that he's out talking right now because his perspective on AI is also yes he's talking his book and also all of his arguments are extremely compelling he's very smart so I recommend you listen to it well it's like LeBron selling shoes you know that he's selling shoes but my God he's amazing right it's like oh listen to the venture capitalist who has 30 billion under management where a lot of it is like betting on the future that AI is


going to be this big thing that's good for the world talk about how AI is good for the world yes I can acknowledge that and listen to him and then be like and I completely agree with almost everything you're saying uh great I've listened to the Ben Thompson interview but not the Lex one yet so I'll have to do that I am breathing a huge sigh of relief over here because I was more than ever certain that we were gonna have the same carve out today can you guess what mine is no maybe not because we've been so deep in Nike research to not pay attention to current events mine is speak now Taylor's version which just


came out and I feel like speak now at least for me in my Taylor Swift experience is like the forgotten album like I just never think about it totally and uh then when it came out and I was like oh wow well hey I was surprised that she's even continuing to do the re-releases I thought so I was like she doesn't need to do this anymore she's got the leverage yeah the ultimate power move would be to stop so pleasant surprise that it came out and also pleasant surprise to ReDiscover speak now like there are some bangers on there yeah great album it's so funny listening to her now how old is Taylor now she's exactly my age 34. well she's 33 she'll


be 34. and to hear her singing songs from when she was 21. it's just such a fun juxtaposition yeah that's cool I gotta listen to it I literally haven't done anything other than read about Nike so yeah it's good there's some great songs on there I'll enter my uh three-day window right after we finish recording where I can pay attention to other things again before starting research for the next one yeah speaking of we should pick a topic there's like a thousand I want to do so after this I'll give you a call we can talk about it with that our thank you to blinkist by go one statsig and Crusoe all the links all the discounts


all the free audio content everything that we talked about are available by clicking the links in the show notes you can get notified new feature that we just launched of all new episodes launching go to email and we will include some fun Easter eggs in there in addition to just telling you the episodes live but that's the way to get on the email list many of you are already on that thank you for doing that it is awesome to be able to have that direct connection with you and not rely on a Twitter algorithm or anything um letting you know that we're live anything subject to change yes become an LTE LP acq2 is in any podcast


player Dave and I have a couple fun interviews queued up for that so acq2 should have some good stuff coming soon and join the slack Slack with that listeners thank you for going on this Blue Ribbon Journey with us and we'll see you next time in dimension seven wow you're bringing a new energy to these outros I like it it came to me in a fever dream wow there's some black Air Forces energy yep all right later all right listeners we'll see you next time is it you is it you is it you who got the truth now huh [Music]

Key Themes, Chapters & Summary

Key Themes

  • Foundational History of Nike

  • Innovative Product Development

  • Marketing Strategies and Brand Identity

  • Sponsorships and Athletic Endorsements

  • Cultural and Fashion Influence

  • Organizational Challenges and Competition

  • Global Expansion and Market Dynamics

  • Nike's Societal Impact


  • The Origins and Early Days of Nike

  • Revolutionizing Athletic Footwear

  • Iconic Advertising and Brand Building

  • The Rise of Air Jordan and Other Key Products

  • Navigating Market Challenges and Competitors

  • Expanding Globally: Strategies and Challenges

  • Nike in Sports, Fashion, and Culture

  • The Legacy and Future Outlook of Nike


The transcript from the "Acquired" podcast, hosted by Ben Gilbert and David Rosenthal, features an extensive and in-depth conversation about Nike, its history, and its evolution into a global powerhouse in athletic footwear and apparel. This comprehensive document covers multiple facets of Nike's journey, from its early days to its current status as a leading sports brand.

The narrative begins with a discussion on the origins of Nike, emphasizing its initial focus on running shoes and its roots in the athletic community. The founders' dedication to improving athletic performance through innovative footwear designs is a central theme. The transcript details how Nike's early products, driven by a deep understanding of athletes' needs, laid the foundation for the company's future success.

A significant part of the conversation is dedicated to Nike's marketing strategies and brand positioning. The hosts and their guest delve into Nike's iconic advertising campaigns, sponsorship deals with top athletes, and its ability to create a strong emotional connection with consumers. These marketing efforts played a pivotal role in establishing Nike's brand identity and driving its growth.

The evolution of Nike's product line, including the development and launch of groundbreaking products like Air Jordan, is thoroughly explored. The discussion highlights how these products not only revolutionized the athletic shoe industry but also became cultural icons, further cementing Nike's position in the market.

The transcript also touches on the challenges Nike faced, including competition, market dynamics, and internal organizational changes. These sections provide insights into how Nike navigated these challenges to maintain its leadership position.

Finally, the conversation reflects on Nike's impact on sports, fashion, and culture. The hosts discuss how Nike transcended its role as a mere manufacturer of athletic wear to become a symbol of athleticism, innovation, and style, influencing not just sports but also broader societal trends.

In summary, the transcript offers a detailed and engaging narrative of Nike's journey, emphasizing its innovative product development, impactful marketing, and cultural significance. It provides a comprehensive view of how Nike grew from a small athletic shoe company to a global brand synonymous with sports and style.