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Season 13, Episode 1

ACQ2 Episode

July 24, 2023
July 24, 2023

The Complete History & Strategy of Nike

Nike — it’s perhaps the most iconic and most prolific brand of the modern era. On any given day, swooshes adorn the feet of more people on earth than any other footwear company — by a long shot.

If you read Shoe Dog or watched Air, you may think you know its history. But Shoe Dog ends in 1980, and Air… well let’s just say it’s an enjoyable piece of fiction. And it turns out (as always) that the real story is filled with far more drama, twists and business lessons than either of those works.

We’ve been wanting to cover Nike for a long time, and thanks to our LPs who voted to choose this episode it’s finally here. So lace up your Vaporflys, Air Maxes, Dunks or Jordans (or your Monarchs, hey we don’t judge), head out for a long run or walk and enjoy!


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We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
July 24, 2023

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
July 24, 2023


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
July 24, 2023

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
July 24, 2023

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
July 24, 2023

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
July 24, 2023

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
July 24, 2023

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
July 24, 2023

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
July 24, 2023

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: 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. In the honor of bad jokes by David Rosenthal, here we go.

Welcome to season 13, episode 1 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

David: I'm David Rosenthal.

Ben: And we are your hosts. There's an age-old question in business. What is more important, a great product or great marketing? 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.

David: And because Shoe Dog is so good.

Ben: That's amazing. You got to start at the beginning. 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 in revenue when they technically don't make a single shoe? 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.

LPs, we got to thank you for voting for this episode. David and I have had it in our episode backlog for 2–3 years. When we put it up for a vote, the overwhelming majority of you selected this as our next episode. If you also want to vote for future episodes and become an acquired LP, that is acquired.fm/lp.

If you want an update every time we drop a new episode, so you don't miss it, you can sign up at acquired.fm/email. We'll be dropping little Easter eggs and hints in those emails to tease about what the next episode is going to be. That's acquired.fm/email. Don't miss a new episode.

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. Without further ado, listeners, as always, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. David Rosenthal, what is that stack of books on your desk?

David: Oh, my God. I think Amazon owes a thank you note to Acquired LPs because I bought every Nike book out there. My six-foot long desk is covered in Nike books. It's so fun to read all of them.

Ben: I thought there was just Shoe Dog. I didn't realize there was the literally over a dozen that you and I collectively read.

David: There are so many of them. I read thousands of pages. There are three books that all basically tell more or less the same story that we weave together to come up with our core Acquired Nike story here today. 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?

Ben: I do not.

David: 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.

Ben: Oh, really?

David: Isn't that crazy?

Ben: It's cool that that was founded by a journalist.

David: Yeah, just wild. He wrote kind of the canonical third-party journalists take on Nike. 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 J.B. Strasser and her sister, Laurie Becklund. J.B. Strasser is Julie Strasser, who was the wife of Rob Strasser. 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 behind Jordans, and ended up joining Adidas as CEO of Adidas America just a few short years later.

Ben: It's like an incredible betrayal.

David: This is like a Judas-level betrayal. To say he was persona non grata around Nike is understatement of the century. Here's this book that was written in real time by his wife as this was all happening. Incredible.

Ben: Strasser, we'll get into his contributions, but he is probably second only to Phil Knight in wheeling Nike into existence.

David: 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. Bill was a legendary figure, in addition to being Nike’s co-founder along with Phil Knight. The only way to describe him is he was like a descendent of the survivors of the Oregon Trail. The cowards never started in the week died along the way was one of his favorite sayings.

Bill's dad was the governor of Oregon. Bill fought in World War II as a major. 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.

The mail delivery people who would come up to his home kept knocking over his mailbox with their trucks. He rigged 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.

Ben: They do not make them like that anymore.

David: No, they do not. 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. He becomes maybe arguably the most successful track coach in American history.

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. He's a national celebrity, which is pretty crazy for Oregon in the 1940s–1950s.

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. Phil also has some interesting Oregon roots. He's the son of Bill Knight, who is another well-known University of Oregon alum. He was a former lawyer in Portland, and he's the publisher of The Oregon Journal newspaper. Phil follows in his dad's footsteps. He majors in Journalism at Oregon, and he runs for Bowerman. I would say, Phil is okay as a runner.

Ben: 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. You've got Phil Knight. The guy runs a 4-minute 13-second mile and is convinced he's okay.

David: This is exactly what I was going to say. I think at any other school, Phil would have been a star. This isn't really in Shoe Dog, but I know Phil's personality from reading so much about him over the past couple of weeks. I think he probably went to Oregon in part because he wasn't going to be a star there. He is, I think, the most introverted CEO that we have ever covered on Acquired. Rockefeller was pretty introverted, but he looks like Elon Musk compared to Phil Knight.

Ben: 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. When they're in the limelight, you can see that they can turn it on. They're bright, shiny, and they're loving working the room. That's not Phil Knight at all.

David: Not at all. I was super lucky. I owed a huge thank you in my life to Phil Knight. I went to Stanford Business School. I was one of the first classes to graduate at the Knight Management Center that he endowed there.

Ben: Didn't he give your graduation speech?

David: Exactly. It was amazing. It was the first draft of Shoe Dog that he had been working on. The book came out a couple of years later. It's so great. I remember thinking, this does not see him like the founder and CEO of Nike. Even here talking at Stanford, the most warmly receptive audience possible, he was very nervous.

Knight runs at Oregon. It's important to say, we should note about Bowerman. He was definitely a man like they don't make any more. But despite what you might think, he wasn't militaristic. He really was pretty innovative. He was the first track coach, maybe college coach of any sport, who really put a focus on rest for his runners.

Part of this famously for the Nike story, too, was technology and shoes. 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 it and shoes were part of it.

Ben: The technology that Baumann 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 and crazy stuff. His guinea pig was Phil Knight because Phil wasn't at the front of the pack, so he could afford to experiment on him. Very fortunate for Phil Knight and his future that he was not the fastest runner on the Oregon team.

David: Exactly. This is where it all comes together. 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. Nike feels like such a modern company. This was a long time ago.

In Phil's final term there at Stanford, he takes what is then the only "entrepreneurship course" at GSB. Today, there's a hundred different entrepreneurship courses. Taught by the famous Professor Frank Shallenberger, who Knight gives tons of credit to for Blue Ribbon Sports and ultimately, Nike. 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. I think he actually maybe spent some summers at college and then at GSB, working in the newsroom at the Oregon Journal. 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. At this point in time in the 50s and 60s, the Japanese are starting to enter the market. Nikon was the big Japanese entrant.

Ben: Fuji, Ricoh.

David: Exactly. They made great cameras, and they undercut Leica on prices by a huge amount. 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. Actually, the dynamics are pretty much exactly the same in the athletic goods market. There are two companies, both German, that dominate sports equipment. One, of course is Adidas.

Ben: Or Ah-dee-dahs as the Germans would say.

David: Yes, as we will get into in just a sec here. The other one, to a lesser extent, was Puma. 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. If you know Chuck Taylor, All Stars, the famous Seminole Converse shoes. Ben, if you had to guess, when do you think Chuck Taylor played basketball?

Ben: Let's see. I think if I remember our NBA episode, the NBA was really getting going post war, so the 50s. I guess he was an early 50s NBA player.

David: Yeah, you might think so. Contemporaneously, with the time we're talking about right now, no. Chuck Taylor played professional basketball in the 1920s. 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 was the leading technology manufacturer of it. Anyway, basketball shoes wasn't really the market yet. It would become much much later as we shall see.

The market was running shoes. It was an okay market, but this was not the camera market. Phil Knight's thesis here, actually didn't get any 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 end disruption to the athletic apparel market and the footwear market, but this is not a big market. The market such as it existed was track shoes.

Ben: 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.

David: It's worth maybe saying one word on the Adidas story before we move back to Phil Knight and Shoe Dog here because it's pretty crazy. It's called Ah-dee-dahs because Adidas was founded by Adolf Dassler or Adi for short, Adi-Dass.

Ben: In 1920s?

David: Yes. After World War I when Germany was totally decimated, but before World War II, he becomes a fairly well-known elite cobbler shoe purveyor, track cleat purveyor to Olympians at the time. Actually, ironically, I guess Jesse Owens wins the 1936 Olympics, the big American demonstration, literally beating Hitler in Berlin in Germany, in Adidas shoes.

Ben: Actually, that was Adi Dassler taking a big risk by sneaking a pair of Adidas shoes to someone who could get them to Jesse Owens the night before his race. Jesse Owens was like, oh, these are actually awesome. It was like a big, uh-oh, is this going to be a problem for Adi when it comes out that the American won wearing German shoes?

David: 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. One of the rumors is that Rudy went and fought in the Nazi army and Adi didn't. Maybe that, I don't know, have had something to do with it. Anyway, crazy. Rudy goes across town and starts a competing company after the war named Puma.

Ben: Craziest thing.

David: Adidas and Puma are the two brothers. They're both the Dassler brothers. It’s crazy.

Ben: Okay, take us back to Phil Knight.

David: 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. He convinces one of his buddies from GSB to go with him. They go first to Hawaii, famously, and the buddy meets a girl in Hawaii.

Ben: It's like, why would I leave Hawaii?

David: Yeah, smart guy. Phil, though, goes on to Japan. 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. He observes and decides that the Tiger brand shoes that he's seeing are the best. He looks up the company that makes Tigers. It turns out they're made by a company called Onitsuka, which is based in Kobe in the south of Japan near Osaka.

Phil, for a desperate introvert, crazily—this is how passionate he is about this idea—he gets it in his head that he's going to hop on a train from Tokyo, 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. The story goes that he shows up on the door. I can only imagine what 23-year-old Phil Knight is feeling as he's going through this.

Ben: This is the other side of Phil's personality, where he's a tortured soul. He's introverted, but he's unbelievably driven. He has a splinter in his mind, where when his buddy is like, actually this is pretty good, I'm going to stay in Hawaii. Phil's like, but I'm longing for something. 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, what to do, how to change the world, and how to build something. I think he's got a motor that's just different than the way that other humans operate.

David: 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. Phil doesn't present as a Genghis Khan, but he still is. 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.

Ben: This unbelievably competitive spirit is the founding element of Nike's culture that permeates to this day. At Nike, you play to win. 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.

You wake up every day, and you show up to go to work, and kick your competitors' asses. 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.

David: It's funny. You say Nike there as 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 going to show up at the door. He's going to say that he's an American businessman, 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. There are multiple conflicting stories about where the name comes from. The one that Phil tells is that the name Blue Ribbon Sports comes from him, thinking back to his childhood days becoming a track athlete in middle school in high school. He talks about he got cut from the baseball team, and his mom encouraged him to go out for track, and then the blue ribbons that he won at his track meets really helped define his personality.

Ben: It's a very nice story.

David: A 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. He saw a billboard or something like that, and that's where the name Blue Ribbon came from.

Ben: As with any of these stories, we'll never know, and it's probably some of both.

David: Yes. Either way, perhaps driven by this drive to succeed, Phil puts on the performance of a lifetime in this meeting. He claims that he is a US businessman from America. He's gone to Stanford Business School. He has a company called Blue Ribbon sports. He wants to import their shoes.

By the way, he ran track for the legendary Bill Bowerman, who of course, they know. He tells them that he's done market research. He thinks that the US track shoe, running shoe market could be a $1 billion market, which he totally makes up. He has no evidence to back this up, whatsoever.

Ben: He's done lots of market research.

David: Lots of market research, and it is completely wrong in both directions. The actual US market for running shoes at this point in time, there's no way it was a billion dollars, maybe a hundred million. We're talking about running was not a thing, it was the thing that athletes did.

Ben: Right. The running craze or the fitness craze hadn't really started yet. 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 US. The branded athletic shoe market all up including all sports for the whole US across all age groups, everything, $2 billion.

David: Right. 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.

Ben: Right. They had a large hand and growing, and I'll spoil it for listeners. The branded athletic shoe market in the US today is $130 billion. Obviously, not all of that is track and running, but a large part is running shoes. That's growing 5% year over year, so still a growth market even at that scale, which by the way, that number, 130 billion, just to compare it against some other things, that is bigger than the video game market.

David: Wow. Not everybody has to play video games, but everybody's got to wear shoes. Knight leaves this meeting, this performance of a lifetime. He gets an agreement from Onitsuka that if he wires them $50, they will send samples of the shoes to his office back in the States, i.e., his family home in Portland, Oregon.

The 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 $50 to the Onitsuka Corporation of Japan for purchasing these samples. He gets home, I think it's two or three months later after this.

Ben: Surely, the shoes would have arrived by now.

David: Surely, the shoes would have arrived. He rushes home and 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. A little foreshadowing in what doing business with Onitsuka is going to be like for the fledgling Blue Ribbon Sports.

Ben: This is just to get some samples to see if he can sell $50 worth of shoes that takes over a year.

David: Phil gets home, he's disappointed that he's got to start his life. He gets a job as an accountant. He's got a business school degree, studying to take the CPA exams and become a licensed CPA.

Finally, at the end of 1963, I think right around Christmas, Phil writes in Shoe Dog, the samples show up. Phil gets them. They're great. They're what he remembers. He thinks, 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.

Ben: Right, they're way cheaper.

David: Phil gets back and writes Onitsuka. He says, great, I would like to be the US distributor for track and field shoes. Onitsuka says, okay, great. You can be the distributor for the western United States. We already have somebody that we're working with on the east coast, but you can have the Western 13 states. Phil's like, great.

He quits his accounting job. He starts the company. He goes to work. He hires one of his twin younger sister, who I think was maybe still in high school to help him part-time with receiving the inventory and sending them out and stuff.

Ben: That naivete is just dripping off of Phil at this point. It's like, oh, good, I have a business. Surely, I will make enough money to be able to quit my job and hire people.

David: Yes. He doesn't have enough money to open a retail outlet, or even really to get enough inventory to sell wholesale to other retailers. 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.

Ben: Pretty awesome. That's 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.

David: 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. He thinks, oh, if I could get Bill to put his runners in Tigers, then that would be great marketing for me.

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. 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 a major line item in their budget.

Ben: Crazy. 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. The plan is to build a big business off the back of not actually making things.

David: Not exactly what GSB or any other business school would determine a recipe for success here.

Ben: 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...

David: And venture capital.

Ben: 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.

David: That's a super good point. It turned out actually that Onitsuka had already studied the US market, whether they agreed with Phil's plucked out of thin air market size or not. They wanted to enter the market, but they didn't think they could do it on their own. They actually were looking for somebody like Phil.

Phil goes down to see Bowerman. To Phil's surprise—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. Phil is floored.

Ben: And real partners, 50/50-ish. It's not like I want you to toss me a percent here or there for being an advisor or something. It's like, okay, great co-founders. Just like that.

David: Phil's like, what's the deal you have in mind? I think, originally, Bowerman says 50/50, 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.

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 like there weren't really VCs yet in this era, but when there would be VCs taking 50%, 60%, 70% of the company. On the other hand, this is a no brainer yes for Phil.

Ben: Right, he's giddy about it. He's like, oh, only half the company, great.

David: If Phil doesn't do this deal, he would have 100% of Phil Knight's Blue Ribbon Sports. But he does do the deal, and he gets 51% of Bill Bowerman's Blue Ribbon Sports, which is a completely different animal.

Ben: Yes. 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 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. I've always wondered, why was he so eager to do this?

As part of the research, I stumbled upon this guy named Scott Reames, 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 these incredible gems pointing out things in company history.

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 15-plus years before this, including Adi Dassler, directly to Adi Dassler, 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. Bowerman is sitting there and he is primed. He's like, oh, you're going to import foreign shoes and give me a deal, I'm in.

David: Just like Onitsuka was primed to receive young Phil Knight. It was Bowerman. Ben, this is so awesome. I was going to save this for a reveal later in the episode. Scott Reames is legendary. He was, as you say, Nike's corporate historian. He worked super closely with Phil on writing Shoe Dog.

Ben: Did you read his post too? I sent you as LinkedIn. Did you look through them all too?

David: Not only, I sent him a message on LinkedIn. I spent hours talking to Scott.

Ben: Really?

David: He spent a few days helping me put our version, Acquired's version of the Nike story together. We owe a huge, huge thank you to him. I was going to surprise you with this. This is super cool.

Ben: That's so awesome. It's so cool. I guess I should tell you. Listeners, we talked to nearly a dozen people to prepare for this episode. I also want to thank Eric Sprunk, who is a 27-year Nike veteran. David, you know that I chatted with him, but he was COO until a couple of years ago. Very cool to get his perspective and Scott's perspective. I'm curious if you have any other nuggets that come up, too.

David: I've got one in particular that I want to bring Scott's perspective in, but it's a little farther in the story.

Ben: Great. All right, so Bowerman.

David: Okay, we've got 51 Knight, 49 Bowerman in Blue Ribbon Sports. They each put in $500 to finance the first big shipment of inventory of Tigers from Onitsuka. Phil does what he intended to do. He drives around to track meets around the Pacific Northwest and sells them out of the back of his car.

Even with that funny sales strategy, and in Shoe Dog, Phil talks about this, while he was in Hawaii with his buddy, the way they made money was they sold encyclopedias door-to-door, and then Phil gets a job as a stockbroker trying to sell stocks. He doesn't make any sale. 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.

Ben: When you believe in something, sales are just natural.

David: It's so true. They sell out basically immediately, and then they plow all the profit that they're making back into the next orders of inventory from Onitsuka. They do $8000 in revenue in 1964. That doubles in 1965. They do $16,000 in revenue. Ben, as I think you're about to say, there's a problem here.

Ben: There are 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? If you're making $2–$3 profit or 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 a year, because where's the money coming from to get the inventory?

David: This is not a solvable problem. It's a circular issue. There's no way to do it. Phil is selling the Tigers for $6.95 a pair. It costs him and Bowerman about $3.50 to get each pair of shoes. That leaves about $3.50?

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.

Ben: Half the gross margin ends up going into sales and marketing expenses.

David: Exactly. That leaves $1.75, maybe $2, like you said, in profit per pair. How are you going to order more inventory at $3.50 a pair when you're making $2 in profit per pair? The math doesn't pencil.

Quick aside on Jeff Johnson, like we said, he is absolutely legendary. He also sells out of the back of his car. He's based in California. He met Knight at Stanford. Jeff was a Stanford undergrad who ran track and met Knight while he was at GSB.

Johnson sells out of the back of his car. He evangelizes the brand. He designs shoes. He eventually opens Nikes first retail store in LA. He sets up manufacturing. He moves back and forth across the country. He is basically 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.

Ben: He has an irrational passion for running, which basically no one else did at the time. Here's a great quote from Shoe Dog. 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 runners head." He goes on to say that Johnson had many sodas thrown at his head while he was out running.

David: This is one of the moments that just floored me rereading Shoe Dog and internalizing that running. I go for a run maybe three times a week these days.

Ben: Right, it's just normalized into life.

David: Every time I walk out in the street, basically anywhere in the world, unless I'm truly in the middle of nowhere, you see people running. The idea that motorists would throw beer and soda cans at runners is crazy.

Ben: Yeah, totally wild.

David: 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. The only way to get financing in Portland, Oregon in those days was to go to Oregon regional banks. I think, actually, there were laws in the US that corporate banking could not happen across state lines. There were only two or three banks that Knight even has the option of going to.

Ben: 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, 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.

David: Yup. 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 US, were not going to be very risk-seeking. They're going to be quite risk-averse.

Ben: There's another good passage that I grabbed from Shoe Dog that explains this. Phil Knight, "I was projecting $16,000 in my second year. 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." This is where Phil Knight's complete opposite approach comes in. He goes, “Life is growth, business is growth. You grow or you die. The banker says, that's not how we see it.”

There are a couple of important points to make in here, one of which is this equity they're referring to. We refer to equity these days, especially in startup land, as percentage points in a startup. What he's talking about here is the technical definition of equity.

David: The book value of equity.

Ben: Right. Your total assets minus your total liabilities is your equity. In many cases, you can 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 the cash in the bank. The assets you have on hand is your equity.

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. That's not terribly helpful. It's basically a cash advance.

It's like, well, the money that I have is tied up in other stuff, like inventory. 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.

David: Yeah, it's basically factoring. It's what it's known as today.

Ben: Right.

David: 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. Since growth is literally rate limited by the banks, Knight decides that he can't justify taking a salary. He goes back to being an accountant by day. He joins Price Waterhouse in the Portland office. He does that for a couple of years. It 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. Instead, he gets a job teaching accounting at Portland State, where he meets two women.

Ben: Both of which will change his life.

David: The first one is a student—things were different in the 60s—in his first class that he teaches named Penny Parks, who he sees has a great potential as an accountant. 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 of 60 years or something like that.

The other woman he meets is an art student, not an accountant, named Carolyn Davidson. Phil overhears her talking with some friends in the hallway one day talking about art classes. He stops her and he says, hey, I've got a company, we need some part-time art and design work for brochures and sponsorship collateral.

Ben: Because everyone's telling him that he needs to do advertising, Phil Knight to this point, which is hilarious given Nike today, doesn't believe in advertising. He's like, fine, I'll give into some other people who are advising me that I should make some brochures or something.

David: The way I'm going to do it is I'm going to hire a part-time student from Portland State to do my advertising collateral for $2 an hour. 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.

First, now is a great time to tell you about one of our favorite companies here at Acquired and a new sponsor this season.

Ben: 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. What sponsor are we talking about? Brand new one for us, a 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.

David: I really could have used that for research on this one.

Ben: Yes, it lets you read or listen to the summaries. It's great for people who want to read more books, but you might not have time to get to your whole dream bookshelf. We told the good people at Blinkist how we go about researching for Acquired, they had an idea, and we're running with it.

If you go to blinkist.com/nike or click the link in the show notes, you can get blinks for the Nike books that we used to research this episode. Many of them 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.

Not only that. If you use the link, you'll get the whole Nike collection for free as these books get added. 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 6500 titles in their library.

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, courses on mindfulness, or communication and history. It's awesome for teaching new skills or for the learning and development department at your company.

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 Go1 and now Blinkist.

We'll share more about Go1 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.

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.

Back to Blinkist. To join the 27 million people who use Blinkist, go to blinkist.com/nike, or click the link in the show notes to get access to what we use for research.

David: Pretty cool.

Ben: Okay, David, 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?

David: Yeah, put a pin in it, we'll come back to it. In the meantime, by hook or by crook, and maybe Onitsuka, as we will see, would argue by crook, Blue Ribbon Sports' sales do keep growing. They do keep getting just enough and just enough in time financing to finance their inventory and orders from Tiger and Onitsuka.

In 1966, they do $44,000 in revenue. In 1967, they do $84,000 in revenue, noticing a doubling theme here. It turns out even from a very low base, if you double every year for 20 years, you can still become a big company.

In 1967, remember, 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.

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. 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 runners feet aren't sweating throughout the whole race?

On the one hand, I guess nobody likes sweaty feet. On the other hand, if your feet sweat a lot in leather shoes over the course of several miles, they're going to get heavier and weighed down. Maybe this might help the shoe stay later. Bowerman is obsessed with lightweight in his shoes.

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, and we'll make the shoe. Bowerman and Phil get together. They're like, this is amazing. We're going to have our own model that we've designed, that Bowerman designed.

Ben: You should already start to get a little bit nervous here because it's like, okay, who...

David: Who owns this shoe? Exactly. That would be for the courts to decide.

Ben: Is it 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 we BRS don't own anything.

David: Yup. The relationship complicates a little bit here. It's no longer just, hey, we're the American distributor of Tigers. 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. I don't know if it's Blue Ribbon or Onitsuka decides that the Aztec is too close to that.

Legend has and knowing these men, I assume this is quite true, Bowerman is casting about for other ideas for names of the shoe. He says to Knight, what was the name of that Spanish guy that kick the you know what out of the Aztecs? Knight is like, oh, that's Cortez. Thus, the Blue Ribbon/Tiger Cortez is born. Naming aside, the nylon uppers are a huge innovation, and this becomes a big hit.

Ben: I bet someone out there is wearing Nike Cortezes right now. It's become a lifestyle shoe and less of a running shoe, because the definition of a running shoe has changed dramatically. 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.

David: Yeah. Spoiler alert, Tiger eventually became ASICS. Also in 1967, Bowerman has another just monumental contribution. His contributions, though sporadic when they happen, are enormous.

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, write a book, start and evangelize a movement. Bowerman just does this because it's what he wants to do.

He had gone on a trip to visit another international track coach in New Zealand a few years earlier. 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.

Ben: 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.

David: Right. Even Phil Knight is jogging. That's crazy. 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 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. By God, as much as anything, this book and this article is what starts the fitness movement in America.

Ben: Yup, 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? I think it was actually both.

David: Yes. Knight has this great quote about this later in life. He's asked literally this question if Nike started the fitness revolution, and his answer is so typically Phil Knight. He says, "We were at least right there, and we sure rode it for one hell of a ride."

Ben: I love it. Here's a crazy bit of trivia, David. For me when I reflect back on the birth of the jogging movement because I'm a millennial, and I wasn't there, I think of Forrest Gump. He's running across America, and all these people are running with him. That time, and that aesthetic to me is like, oh, that's when jogging really took off. He was wearing Nike Cortezes. Perfect.

David: It's so great.

Ben: 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, a trustworthiness with customers and coaches, and that thing for themselves. Not only could Bowerman write the book, 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.

David: And more than just athletes.

Ben: Yeah, or more importantly, changing the definition of athlete.

David: Yes, I like that, changing the definition. More than just people who define themselves by their occupation, whether amateur or professional as athletes. By 1970, just a short while after this, Blue Ribbon is now doing over half a million dollars in annual sales. They're a real company now. They're selling out of the Cortezes literally as fast as they can get them off the boats from Japan.

Onitsuka renews Blue Ribbon's distribution agreement in 1970 for three more years to run through 1973. When this happens, Phil then goes to the bankers in Oregon and asked for, hey, great, the Cortez is selling a great fitness, it's this new thing. We're a half a million dollar revenue company. We've got a three-year ironclad deal with our manufacturer.

Ben: Surely, you can assign some value to that contract, if not to our brand, our team, and all these other intangibles. You won't just treat us as if we're book value now. We'll have some real enterprise value because you can invest in our enterprise here, our enduring institution.

David: He asks for a line of credit of $1.2 million to finance inventory. He'd never asked for over a million dollar line of credit before.

Ben: He trips the alarms.

David: He trips the alarm system. $1.2 million. A kid off the street can literally walk down Sand Hill and raise $1.2 million today.

Ben: Inflation adjusted, it's probably $8 million or something.

David: Sure, whatever.

Ben: But a kid off the street can walk into Stanford and raise $8 million today.

David: Exactly. Just say it's an AI company. 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.

Ben: 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 it could only possibly be thought of as its assets minus liabilities.

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 immediately wiped out because your debt to assets ratio was literally a hundred.

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. It becomes this game of musical chairs, where when you're levered that hard, you need to be growing super fast because you need to get that inventory off the boat, sell it so you can as fast as possible, go and pay off the bank so that (a) the interest doesn't pile up and you don't trip a bunch of covenants, but (b) so that then you can go ask them for another loan to do the same thing again.

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. This, in addition to the competitive thing I mentioned earlier, where Nike is a competitive company, Nike is a growth company. 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 as the only possible way to continue our existence is grow so we can pay off the bankers.

David: Two things here: (1) This is so sad. That's the way it was. Thank God, the business world has evolved since then. You can decry the ridiculousness of startups, VC, tech, and all that now, but this is a way better alternative than the way things used to be. (2) 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.

Ben: Right. It's like many of the stories we tell, 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.

David: Yes. There's huge survivorship bias here, but the journey that they had to go through to survive is incredible.

Ben: Plenty of other companies maxed out their available credit and debt all the time, had a 100% liabilities to assets ratio, and went out of business

David: And went under, yes. Nike almost does. When this happens, when he gets thrown out of the banks, Phil needs to do something to raise money. He decides that the only thing he can think of is to do a small public offering like a local IPO. Remember how Ben and Jerry's was the first...

Ben: Direct listing?

David: Yeah, I think it's something like that, where Ben and Jerry sold shares in Vermont to their neighbors. This is what Phil wants to do. This is how bad it is. He changes the name of the company.

Ben: This is so good.

David: Nike isn't anywhere in the picture yet. He changes the name of the company to Sports-Tek Inc with the idea that, oh, this will make us sound like a technology company, and then people will be interested in investing.

Ben: 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. Regardless of what your current sales and assets look like, that takes your potential future growth into account and gives you capital. In exchange for that, what they want is a percent of the upside, equity investing, as we know it today in startups. 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.

David: 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 any proto venture capitalists digs into sports tech, they're going to be like, no.

Ben: What I've never been able to figure out is, did he change it to Sports-Tek Inc and then change it back to Blue Ribbon Sports? I'm trying to figure out if they ever literally changed the name on documents.

David: That's a great question for Scott Reames. We'll have to ask him. 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, this is a terrible company.

Ben: Phil Knight undersells it, too. Before he learned some of his later lessons, it's his super humble I'm not a very good runner, I'm only a 413 miler–type attitude. That's not going to sell shares in your company.

David: Yup. 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 Nikes first president, other than Phil when Phil takes a sabbatical later in the 80s. Bob has 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.

He becomes one of the Nike's and Blue Ribbon's first employees, and then becomes a huge leader. He built so many things at the company and becomes the first president other than Phil. He doesn't come from wealth and his family loans $3000 or $5000 to Blue Ribbon, a huge amount of money for them.

Ben: It's a huge amount of the family's net worth.

David: Phil would convert that into equity before the actual IPO, and they would become millionaires and change their lives.

Ben: It's amazing. The way that he was financing this was basically through convertible debt. All the pre IPO, little friends and family financings that he's doing here, are convertible notes.

David: This brings us to 1971, the Annus mirabilis or horribilis depending on how you want to think about it. I just butchered both Latin and French there. Clearly, this financing path isn't going to work for the next stage of growth.

Eventually, Knight, 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.

Ben: What they are is this very strange type of company that we don't really have, at least in the tech ecosystem today.

David: No, does not exist in America or in most countries.

Ben: It's a hybrid between a lender and a supply chain partner, where it's a company that has some primary business that they're doing.

David: /private equity firms/holding company.

Ben: Yes. It's a company that in this particular instance, has a business that they're in and generates a bunch of cash. What do you do with the company's treasury? You could do boring stuff with it, 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.

David: Yes, to do asset-based financing, exactly what Blue Ribbon needs. The company that he ends up meeting at the local branch office of it in Portland, I think they might have been the only Japanese trading company with a branch office in Portland, is Nissho Iwai, which is one of the smaller ones. Today, the company is called Sojitz.

Today, it is still a $40 billion revenue company. Back then, in 1971, it was a $100 billion annual revenue company. 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, Mitsui, or Sumitomo. These are enormous companies, especially in the 70s as Japan was really rising. We told the story on the Sony episode. Nissho Iwai was a godsend for Blue Ribbon.

Ben: And it could have gone either way. That was the thing with these Japanese trading companies. If you weren't super clear on exactly what you wanted up front, it could totally go the way of private equity where you tripped one covenant or you this, that, and the other thing. 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 take over and absorb the businesses that they were financing. 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?

David: Right, because he gets a little spooked. According to Shoe Dog, Phil walks into the office of Nissho Iwai in Portland. This is the Portland, Oregon branch office of Nissho Iwai. 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 Sumeragi. He offers, on the spot, to finance all of Nike’s inventory in a meeting in the branch office in Portland. Phil's like, woah, how do I deal with these guys?

Ben: Right. They're a little too eager. This can't be that good of a deal. What's going on here?

David: It turns out, ultimately, it's a great deal.

Ben: Why is it a great deal? The first thing you have to know is Nissho knows Japanese manufacturers. They start asking Phil Knight questions like, who do you work with in Japan? Would you ever make your own shoes? Are you looking for relationships with more factories? They start to get the sense that, maybe eventually, we could put our foot on the scale in certain ways and help this company win. If we're doing business with them as their financing partner, this can be really good for us, too.

David: Phil, in retrospect, makes the mistake of calling up Onitsuka and saying, hey, I'm in this lurch with financing. I just met Nissho Iwai. They offered to finance all my orders with you guys. Would you be okay if I do it? They immediately say, absolutely not.

The reason they say absolutely not is Ben, just like you're saying, they know what's going to happen here. Nissho is going to say to Phil, hey, this is nice that you're buying Onitsuka's inventory. Onitsuka, I think, is $20, $30, maybe $40 million revenue company in Kobe at this point in time.

Ben: Right. This could creep into us.

David: Nissho is $100 billion company. Nissho 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. That is exactly what happens.

Ben: Yes. 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, Crusoe.

David: Crusoe is honestly one of the coolest companies in the world right now. They're a cloud infrastructure provider. Just like AWS and Azure, that's purpose-built for AI training and inference.

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. Incredibly, they're actually pulling it off. For many AI workloads, you'll get significantly better cost performance trade-off from Crusoe than any traditional cloud provider.

Ben: Yeah. The way they did this is genius and insane. (1) They get better performance just by building their infrastructure specifically for AI. 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. (2) This is what's really special about Crusoe. They use wasted energy to power their data centers.

David: This is so cool.

Ben: A single NVIDIA H100 under full load consumes about the same amount of power as 10 US homes.

David: Yeah, this is crazy. Crusoe has gone out to oil fields around America and the world—think Texas, Montana, et cetera—and they have built their data centers right on top of oil and gas flares and renewable energy areas like wind farms.

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. 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.

Ben: They literally build AI data centers on top of wells that would be flared otherwise.

David: Yeah, it's crazy. The key insight that really made this possible was that Amazon, Microsoft, and Google's data centers have to be physically located close to where the "internet" happens, i.e. where internet usage is. But for 99% of AI workloads, latency doesn't matter. Crusoe can put these data centers out where energy happens in these oil fields and wind farms instead.

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 Nissho Iwai is interested, I'm sure they would be happy to work with them, too.

If you, 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 crusoecloud.com/acquired or click the link in the show notes.

Ben: Okay, Blue Ribbon is 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. They need this cash to be able to buy their next round to grow the company. Nissho enters the picture. How does it go from here?

David: This basically sets off a whole chain of events that would later get prosecuted in court. Onitsuka, as we said, they are super nervous. They know what this Nissho relationship is going to mean for Blue Ribbon, and it's not good for them.

They start looking around at working with other potential distributors in the US. They assume that Blue Ribbon, one way or another, is going to end their relationship with them here. They also, as a last ditch effort, make an offer to buy Phil out, to buy Blue Ribbon. 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.

Ben: Yes. One thing I was trying to figure out, in Shoe Dog, it doesn't give a value. Phil just says that he contacted Onitsuka, offers to buy 51% of Blue Ribbon, and keep him as a minority partner. From some other sources, what Phil Knight says in interviews, is that they offered to buy it for book value.

David: Yes, that's what I read too, which I imagine is zero.

Ben: 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?

David: It's zero.

Ben: It's zero or most generously, it's the value of the inventory. In 1971, I believe they did $1.3 million in revenue, which best estimates would be that their cost was something like $600,000–$700,000.

David: But they probably turned that inventory several times. At any given point in time, the inventory is less than that.

Ben: It's a terrible deal. It's a takeover. Phil Knight is basically just like, I don't want to piss them off by declining, so I'll just say nothing.

David: He knows at this point that he's done with Onitsuka. They're going to go with Nissho, and they're going to set up their own factory relationships 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.

Ben: 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 US, mind you, runners is not a large category yet, but runners in the US have Onitsuka shoes.

David: This is pretty important. 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.

Ben: Literally, the guy gets up to go to the bathroom or something, and Phil grabs it out of a folder and photocopies it.

David: Yeah, it's pretty bad. Even worse, Phil's the combination, as we keep saying, of Genghis Khan and extremely introverted and really naive. He writes a memo to the whole company saying that he 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 there's no way out without firing shots. Somebody has to fire a shot first, and it's Phil. Phil shoots first. He's like Khan, he shoots first. I said a Mexican standoff too because (a) that is the situation there, and (b) the first shot gets fired in Mexico.

While Phil is waiting on spinning up the Japanese factory relationships with Nissho 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. He says, 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. We'll sell them here in America as Blue Ribbon American football cleats. Technically, he thinks this won't violate his exclusivity agreement with Onitsuka because Onitsuka doesn't make football cleats. Now, that's debatable.

Ben: 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. Theoretically, he thinks as long as we're not track shoes, it's fine.

David: He goes down to the factory in Mexico. He's like, can I get the shoes? They're like, yeah, sure. What do you want to put on them? When we made them for Adidas, we had the three stripes on them, the Adidas stripes. What design do you want on your version of these shoes? By the way, what do you want to call them? Phil's like, let me get back to you.

He goes home to Portland and calls up who else? Carolyn Davidson, the part-time art department at Blue Ribbon Sports for $2 an hour. He asks her to design something like Adidas' stripes that can go on the sides of these soccer/football cleats. Huge thank you here to Scott Reames 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.

Ben: 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. People care a lot about this because obviously, what we're getting here is the origin of the swoosh and of Nike. 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. She came back with some designs. They didn't like any of them. 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 on to the outside.

David: Also, super importantly, this is not the name that we're talking about here. Point one, we're just talking about a logo to go on the shoes. All the thought of like, oh, the swoosh is the wing of the goddess of victory. No, not the case. This is before the name.

Ben: Right. It's literally not inspired by the Greek goddess of victory. 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 te swoosh yet.

David: 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?

Finally, Phil, Jeff Johnson, and Bob Woodell, are sitting around and a couple other folks. They're like, we got to pick one. They're like, well, maybe, I don't know. This one that looks like a checkmark, maybe is the best of the bunch.

Phil very famously says the line, I don't love it, but maybe it'll grow on me. That becomes the swoosh. Ultimately, they do give Carolyn stock in the company before the IPO, so she makes more than $2 an hour. But for this project, she was paid $35.

Ben: Which also, she said she spent way more than 17½ hours, but it was just coming up with some price to charge. I did the math on the IPO shares. When Nike went public, they did give her 500 shares. The stock price today is around 110, and it has split seven times. Two to the seventh times $110 a share, times her 500 shares, is worth $7 million today.

David: Nice. I heard Phil say it somewhere. I think it might have been in the GSB graduation speech. I believe he said that she held the shares.

Ben: Yes. As late as 2016–2017, he is on the record saying she has never sold a share.

David: Incredible.

Ben: Pretty cool.

David: They send the logo off. A short while later, the factory in Mexico calls them up. 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? The Cortez, the Azteca Gold, or whatever they had called them. What's the model name of the shoes?

Back at Nike Headquarters, they're all sitting around brainstorming. This is where all the famous ideas that get thrown out. Phil Knight loves dimension six. The other people are throwing out the bangle, the falcon, you know, all the naming ideas. The ideas they want to name the model of the shoes, these cleats, what are the cleats called? They're not coming up with a name for the company.

Ben: It's the idea it's going to be the Blue Ribbon Dimension Sixes.

David: Yes. Legend has it, as best as we can tell, this is actually true, in typical Phil Knight style, he can't make a decision. They're waiting towards the end. It's the same story that happened with the logo all over again.

They're batting it around. 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. In the dream, the name came to me, Nike. Everybody's like, what are you talking about?

He's like, the winged Greek goddess of victory. These are going to be the Nike football cleats. Everybody's like, all right, well, we like that better than the other stuff, ship it. But it wasn't that big of a deal. It was a big deal, but it wasn't that big of a deal. This wasn't intended to be Nike. This was intended to be the name of the model, the football cleat.

Ben: That they weren't even sure was going to work.

David: Right, and it didn't work.

Ben: It turns out that this factory, not very high quality.

David: No, I don't think that was the problem. I think the factory was fine. They made shoes for Adidas for the Olympics. The problem was it was in Guadalajara, it doesn't get very cold in Guadalajara. The shoes were great, but in freezing temperatures, they would crack. They'd never been tested in the cold.

As Americans, at least, know many American football games are played in cold temperatures. They ordered 3000 pairs. They sold them. Apparently, the Notre Dame football team wore them that year, or at least the quarterback did, then they were cracked in cold weather. It's a very auspicious start to Nike and the swoosh here.

Ben: Yeah. It's amazing that they even continued after that, or that they didn't just give up and say, okay, shoot distribution, it sounds a lot better than making shoes.

David: Yes. But again, whether it violated the letter of the agreement with Onitsuka or not, ultimately, the courts would decide it didn't. But it's game over here. The relationship is done, they have burned the bridge, it's over.

Ben: Yeah. 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.

David: Yeah. What's the Uber corporate value of toe-stepping from the Travis era?

Ben: It's very much that. We are fiercely competitive. 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 think you can't, but maybe we'll do it anyway and deal with the repercussions? That happens with Nike over and over and over again.

David: For most of these situations, this one very much included, this ends up in lawsuits. 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. The alternative was the taxi industry. It's good for the world that they stepped a toe over the line. If they didn't do this, there's no Nike.

With that, Onitsuka pulls out of the relationship. They don't send any more tigers to Blue Ribbon. Phil signs a deal finally with Nissho Iwai. The core part of the deal is Nissho will (1) finance all of Blue Ribbon's financing needs, henceforth, pretty much at a scale that goes all the way up to the moon. They're a $100 billion revenue company, certainly way more than any of the Oregon banks could do. They'll do that at market interest rates.

(2) Nissho will help Blue Ribbon set up direct manufacturing relationships in Japan, which they do. And then (3) in exchange for all that, Nissho gets a 4% royalty on every shoe that Blue Ribbon sells, which ultimately ends up being a great relationship.

Ben: And that's on top of the financing. They already owe interest on borrowing the money, but now they additionally owe a 4% royalty.

David: Yes, this is the trading company playbook.

Ben: Is that just for the inventory they finance or all sales?

David: I believe it's for all sales.

Ben: Whoa, does that still exist?

David: I don't know. I doubt if it does in the same way. I know that the relationship with Nissho Iwai continued for 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.

Ben: Wow. 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. 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. There would be checks that bounced for payroll and things like that.

When these things topple, they topple all at once. They had a day where they got called into the bank, and then the bank called the FBI, and then they got investigated for fraud. It was an insane few years there.

David: Yeah. Shoe Dog has a lot of great [...], Phil Knight's personal experience going through this, which is worth the read no matter what, but read it for that.

Ben: It's safe to say, this moment here in 1971...

David: 1971–1972.

Ben: They can 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.

David: Yup. Once this is all in place, Phil goes over to Japan and works with Nissho, goes visits lots of factories, and ends up meeting the Nippon rubber factory. He's touring with lots of folks in his test of these factories of whether they can be a good partner. He pulls out a Cortez, and he asks the factory, how long it would take them to make a version of this shoe?

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. There is an almost perfect duplicate of the Cortez sitting there on the conference room table. Phil's like, hell yeah, this is what I'm talking about.

Ben: What an amazing way to do business because he had met with all these other factories, and they're like, yeah, we'll get back to you in a few weeks. And over lunch, they built one.

David: Amazing. He is jazzed. He orders all sorts of models. He's like, can you do all the running shoes that we/Tiger were doing before, at least the ones that we and Bowerman designed? They're like, yup, no problem. Can you do tennis shoes, basketball shoes, cleats? He's like, yup, yup, yup, whatever you want.

In a very un-Phil Knight peak of confidence here, he says, great. I'll just start, right now, model names. He writes out the Wimbledon tennis shoe, the Forrest 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.

Ben: These are Nike franchises that stood the test of time. Many of these shoes are still made.

David: The Blazer, for sure. Yup. Of course, the Cortez. They're like, okay, great. Then Phil's like, one more thing, the boxes. Can you make them bright orange? I want them to stand out. Nippon Rubber is like, you got it, man, whatever you want.

Ben: It's awesome.

David: It's so great.

Ben: To this day, they're orange.

David: By the end of this trip, Phil 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.

Ben: Yup. There's this funny thing, where it is still Blue Ribbon Sports. In 1971, they do create Nike Inc. It is a wholly owned subsidiary of Blue Ribbon Sports, and it is responsible for manufacturing 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.

David: Amazing. Phil gets home, and he tells Bowerman about this. This is where yet another sporadic but incredible Bowerman stroke of genius comes to play for Blue Ribbon/Nike. Bowerman's jazz, he's like, great, I never liked the Onitsuka guys that much anyway. But he doesn't really care about that. What he cares about his 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.

That weekend, supposedly it was the weekend right after night, told Bowerman about what was happening, he goes home. Over breakfast on Sunday, Bill is sitting there. His wife Barbara is making waffles for breakfast. Honest to God, according to Scott, according to everybody, this really happened. Bill is struck with inspiration. He's like, hey, honey, can I borrow that waffle iron? That waffle iron was not coming back.

He goes out in the back in his mountain home. He had a vat of polyurethane sitting there. 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. 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. He sees the waffle iron and he's like, what if I pour polyurethane into the waffle iron?

Ben: Which has two problems. You can imagine how that could grip a track. Well, there are two problems. (1) Hot polyurethane is super toxic. The man, for many years of his life because he's been experimenting forever, is breathing all these hot terrible chemicals.

David: He's literally a mad scientist.

Ben: Yes, and (2) pouring hot polyurethane into a waffle iron is going to permanently glue the iron shut.

David: Yes, which is exactly what happens.

Ben: Apparently, the first actual waffle trainer shoe was inspired by this design, but he literally couldn't make one in a traditional waffle iron.

David: According to Scott in a really you cannot make this stuff up, everybody thought that that original waffle iron was lost history, and was this even true or apocryphal anyway? Years and years later after Bill had died, I think his kids are going through the estate, and out back his [...] up in the mountains, they didn't have real trash service, so they threw the trash in a garbage pile in the back. They're doing some renovations to the house or something. Somehow, they discover out in the trash heap, the glued shut waffle iron. It is in Nike's possession to this day.

Ben: That is awesome.

David: Isn't that awesome? 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 soles 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.

The University of Oregon football team wears them that year on their new Astroturf field. It's a huge thing. They beat Oregon State wearing their waffle trainers. This is incredible publicity for Nike.

Ben: I think the waffle trainer is starting to be worn outside of track situations. This is the first hint of a lifestyle sneaker.

David: Yes. I forget what the first colorway that they do it in is.

Ben: Look at you, you sneaker head over there, colorway.

David: Eventually, I think it's Phil who's like, oh, we should do this in blue. They'll go well with blue jeans. The canonical old school waffle trainer is blue with a yellow swoosh. I think a lot of those were sold to be lifestyle shoes going with blue jeans.

Ben: Which turns into Nikes real business, eventually.

David: That's the success on the field, on Astroturf fields. It's the success in track. That year, this is 1972, Blue Ribbon's first full year doing sales as Nike purely on their own, they do $3.2 million in revenue.

Remember just a couple of years before, their last full year with Tiger, they're doing half a million dollars in revenue. They go from all the crazy drama ending the Tiger relationship, starting up their own factory production, making the waffle trainer to be $3.2 million fully financed by Nissho. What a great spot to be in.

Ben: 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. Can we convince people to buy things from us that aren't Onitsuka Tigers?

To this point, it's still unproven if it's, hey, Blue Ribbon has great distribution, and people will buy anything from these guys because we trust the company, or if it's, people really wanted Onitsuka Tiger because they were really good shoes for runners, and I don't really want whatever this new thing you're selling is.

David: Yes, and it turned out that it was the former. People were definitely willing to buy Blue Ribbon shoes and to buy Bill Bowerman shoes regardless of Tiger and Onitsuka.

Ben: Which is amazing. That is completely opposite to what my intuition would have suggested. I would have definitely believed there are these shoes that are popular among other competitors, so I should be wearing them to be as competitive as them. If I run them myself, I'll 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.

David: This is how important Bowerman was. He started jogging. Not only was he Bill Bowerman, a legendary track coach, he also started jogging. The convergence of things, all the butterfly wing flapping that had to happen for Nike to become Nike.

Right at this time, right as Nike is being born and Blue Ribbon is going out on their own, Bowerman gets a generational runner at Oregon, Steve Prefontaine. Tragedy. Weirdly, so many people we've covered recently on Acquired dies in a car crash way too young, James Dean style, which, ironically, of course, just cements legacy.

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 2000 and 10,000 meters.

Ben: It's crazy, he died holding every single one of those records.

David: Yes, incredible. 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.

Ben: In fact, he was not allowed to take a paid endorsement due to AAU rules.

David: Yes, this is another toe-stepping that's going to happen here.

Ben: 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) make sure that he doesn't need to worry about money by finding a clever way to not do a paid endorsement but something else.

David: This is one of those things that the AAU, the amateur rules and all that, Nike was 1000% on the side of right here.

Ben: And Nike was on the side of the athlete, which is a thing that they've always been, and it's a huge part of their strategy.

David: Yes. What was happening was, Amateur Athletic rules and 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. 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. What Phil does is he decides to employ Pre as a corporate employee of Nike, as the National Director of Public Affairs for $5000 a year.

Ben: With no responsibility.

David: Yes. There's this amazing quote and Shoe Dog. Phil says, "People asked me what that meant. I said, it means he can run fast." It's so great. This is the perfect encapsulation and a 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. That's on the proto marketing front that this early Nike playbook is getting going. $5000 for the best publicity you could possibly ever get.

Ben: It feels like basically inventing sports marketing. There's a nascent idea of athlete sponsorship at the time, but this is the invention of it as we know it today. All athletic brands are defined by athletes, and this is really the first instance.

David: Yes. That's part one of just the brilliant restart up of the Nike startup playbook that Phil puts together here. Part two, equally brilliant and innovative. He comes up with an idea for what he calls the Futures Program.

The way retailing worked back then—Nike had their own stores always, but they also sold through retailers, of course—the retailer's would place orders with Nike to buy the shoes, then they would resell them at retail, and then they would pay after they got the inventory. This is how retail works. This is the law of the land, not the official law, but the way it all works.

Phil comes up with the idea because remember, he's got the Nissho Iwai partnership, but financing is still, he's scarred by this. 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 7% discount. And we're going to call this the Nike Futures Program.

He's essentially moving his financing from banks and Nissho Iwai over to his retail partners, to his customers. The retailers, of course, tell him to take a hike at first, but then the waffle trainer comes out. They can't make enough of them, and retailers can't get enough of them. 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.

Ben: This really starts Nike down a path of their distribution strategy being a wholesaler. They sell to retail chains. For decades, starting here in the early 70s. They are predominantly someone who reaches their customers through an intermediary, through retail.

David: Yes, that's the second piece. The third piece then is obvious and has happened all along. But now as Nike is making their own shoes, it's outsourcing and global outsourcing of manufacturing.

Again, Nike isn't making the shoes in their own factories. 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 buy it and run it. That was more of a stopgap measure while they were transitioning from Tiger.

Ben: A hedge too.

David: It was a hedge, yes.

Ben: And it was a secret hedge. Again, break the rules, fight the law. They use Nissho'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. Here they are today, a huge and successful company.

David: I like that. Break the rules, fight the law sounds much more inspiring than toe-stepping. 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. Right around this time, Nixon cuts the dollar peg to the yen loose, and the yen starts floating against the dollar.

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. The cost of labor is going up.

Basically, the writing's on the wall, there's no way that they're getting shoes for $3 a pair anymore anytime soon. This means that they got to go find other countries to make the shoes in. 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.

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 peers into China from Hong Kong, and his dreaming about 2 billion feet in China. Nike would be one of the very first companies and I think the first footwear company that would be allowed to sell in China.

Ben: To sell and open factories, they opened the country for the industry.

David: 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. The upside, I think you can make a strong argument in the case with many of those countries that this is part of the coming-up process in the global economy.

If you look at what happened to the Japanese economy, to the South Korean economy, to the Taiwanese economy, they went from making shoes to making chips, to making technology, to being global economic powers. It's part of the process. At the same time, people are making 70¢ a day working in these factories.

Ben: Totally. Let's flash forward to the 90s here, where this really hits a flashpoint, and then I think we'll come back to the story. While we're here, we may as well be here.

Stories hit the news of some really horrible things like child labor, stitching soccer balls on dirt floors and high temperatures, toxic glues…

David: Carcinogens.

Ben: Et cetera. Nike fans looked at this as the company really has a black mark on their otherwise great reputation, but it was the natural endpoint of an idea that had been in the company's DNA the whole time. Literally, Phil Knight Stanford paper is about arbitraging cheap labor from imported goods and selling into markets willing to pay higher prices. They should have realized this is where I could have gone if left unchecked.

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.

David, 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? Are 75 degree factories okay? Or are $3 wages fine if the local average is $2 an hour?

At the end of the day, there's a discomfort of sitting with the idea that in order to manufacture a product that you are buying from shoes to smartphones, somebody has to work in conditions you wouldn't endure, even if it's better than all of their other options. Companies need to grapple with a spectrum that they sit on.

On one end, there's making the absolute maximum margin. On the other end, there's creating labor conditions that customers would totally be fine with if they learned every single little detail. In the 90s, Nike chose to sit too far on maximizing the margin side of things. They intentionally turned a blind eye to what was going on in the factories. They were in the wrong because it led to exploiting people.

David: 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?

Ben: Yeah, but Nike started it. They're the biggest.

David: But I think it's even more than that. People had come to love Nike so much. The brand represented so much that it was 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.

I think it's really interesting that this was part of Nike from the beginning, but because of everything else that made Nike successful, it's super ironic that they didn't held themselves to the highest standard that the whole company was all about. Their customers were like, this doesn't compute.

Ben: Yeah, they 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 public opinion will find you guilty.

David: Okay, back to the mid-1970s. In 1974, these pieces of the Nike startup playbook, the inventing sports marketing, basically, “sponsoring Pre" for $5000, the outsourcing your financing to 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 $8 million in revenue in 1974.

Ben: Which is up almost 100%. They nearly doubled again in 1973–1974.

David: 1974 is also a momentous year for Blue Ribbon because they finally settled the legal battles with Onitsuka. They win in court. Ultimately, they settled for Onitsuka paying Blue Ribbon $400,000, which by this point in time is a pittance to Blue Ribbon. 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 coming into Phil Knight and the Nike orbit.

Ben: He was their lawyer on this case, right?

David: Yes. Strasser was the junior attorney at the Portland law firm that was working on the Nike case. Strasser is just off force. 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, oh, this guy is way more valuable to me as my lawyer.

Everybody else at Nike at the time, they're all former runners. Most of them ran for Bowerman. Strasser is, I think, about 6’ 2” and weighs over 300 pounds. He has an equally outsized personality as his actual size. He gets the nickname within Nike of a Rolling Thunder, and boy does he roll like thunder. He and Phil, of course, did ultimately clash. There was the terrible betrayal that happened.

Ben: For a while, they were thick as thieves.

David: Yes. The first thing that Phil puts robbing charge of is taking this really early sports marketing concept of doing sponsorship deals with athletes and blowing it out. They had already, before Rob joined, done the first official sponsorship of an athlete with Ilie Nastasi, the tennis player. They paid him $10,000 to wear Nike tennis shoes. Oh boy, how quaint.

When Strasser comes in, he starts doing sponsorships in a systematic manner. He goes out and negotiates with athletes and agents. He signs up half the NBA for peanuts, not the big stars, but the journeyman, the role players in the NBA. He just obliterates them and their agents in negotiations. They're getting—I don't even know the dollar amounts—but not a lot.

Ben: They're getting free shoes, basically.

David: And then Nike is showing up on nationally televised broadcasts every single night. This leads then to a bigger initiative that Strasser puts together. If you've watched the recent movie Air about Air Jordan, this totally gets played as a Sonny Vaccaro thing. Strasser hires Sonny Vaccaro to come in and build the college basketball program for Nike. This is another just equally brilliant move.

Strasser gets Sonny to go around the country and sign up coaches of the big basketball schools to become Nike coaches. There's nothing preventing the coaches at schools from being consultants, advisors, running Nike clinics.

Ben: No. You can pay them whatever you want.

David: You can pay them whatever you want, right?

Ben: 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 liked this shoe company, you should wear the shoes on court.

David: What do you think the players are going to do?

Ben: It's actually a team policy.

David: Exactly. Wthin a month of working on this, Strasser and Vaccaro 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.

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. These kids are being exploited. 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. Lute Olson, the coach at Iowa who's legendary, he goes on and coaches at Arizona, lots of listeners probably know who Lute Olson, 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 around this? Then they sign up Lute, Iowa, and then Arizona, and he becomes a big Nike coach. It's incredible.

Strasser then takes the same playbook to college football. He signs all the big coaches in schools, all the big powerhouses for peanuts. This is incredible. Selling football cleats is never a big business for Nike, but college football is huge, I mean still huge.

Ben: A lot of eyeballs on those swooshes.

David: A lot of eyeballs on those switches.

Ben: 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.

David: One thing that's worth mentioning—this is 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. Nike, Adidas, 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, football cleats, or soccer cleats no matter how popular those sports are. 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.

Ben: Right. The funnel is, every single one of those is a brand impression, so consider them all billboards. 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.

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 in your athletic and increasingly lifestyle journey, but you're inspired by what you see on the billboards.

David: You're buying victory.

Ben: Right. Their whole business eventually becomes figuring out this multi-sided equation of, can we create enough demand? Literally, on their income statement, it says, demand creation by doing the sponsorships, and then can we create the right product mix for people to participate in our brand by giving us their dollars?

David: I don't want to say that Strasser alone architected this grand strategy. 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 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.

Ben: Right. Keep in mind, they still only make running shoes. There's no apparel, there's no shoes for other sports, really. There are some things on the margins, but 90% plus of their revenue is running shoes.

David: Yeah. The core sales, what they are marketing, is go buy a waffle trainer and wear them with your blue jeans.

Ben: Yup. Through the late 70s, revenue just doubled year over year over a 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.

David: Yes, it was 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.

Ben: They crossed a thousand employees, so it's getting to be a real beefy organization.

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

Ben: Which Phil Knight is not a fan of when he hears about the idea.

David: 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 them out, and then Rudy's like, yeah, Adidas didn't want it either. Phil's like, oh, you said the A word. All right, let me try it. Supposedly, Phil goes for a run in the prototypes of the air soles, and he's like, yeah, actually, these are pretty great.

Ben: We should say, for anybody who doesn't know, everything that you hear of now, the Air Max, the Air Jordan, the Air Force 1, it is a literal airbag. Actually, it's a nitrogen bag that sits in the midsole. Think about the thing between the lower sole, the rubber on the bottom, and inside of the insole, basically the part of the shoe that you can't get to that's underneath your heel. Sometimes that 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.

David: Yeah. Rudy really was a genius. 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¢–20¢ royalty for each pair of air sole technology shoes that Nike sells. Eventually Nike would just buy Rudy's company, and Rudy would become an employee of Nike.

Still here in 1977, Strasser is just on fire. I don't know the full context around this. Scott Reames 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 taken for granted that Nike is winning.

Strasser gets pissed off one day. He goes to his typewriter, and he fires off a memo. He xeroxes, copies this memo and pastes it up on the walls all around the office of Nike, 10 Principles. This document is just amazing. We've tweeted it before. It's going around the Internet.

Ben: 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 Nikes principles.

Here are the things that are wrong with that statement. (1) Phil Knight did not write it, Rob Strasser did. (2) Nike's principles, also incorrect. When this was written, it was actually still Blue Ribbon sports. It was not yet the Nike Corporation. (3) The top of the document has this thin wispy swoosh. That was never the Nike swoosh. This is someone's attempt to doctor 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 Carolyn's hand-drawn version of the swoosh that looks nothing like this weird, thin, wispy thing that was doctored and added to the document.

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 not Phil Knight, but yes. Oh, my God, these principles are amazing. We're going to go through them, but first, we want to tell you about our third favorite company of the episode. David, who is it?

David: It is Statsig.

Ben: Yes, back in action with Acquired. This is their first time being a full season sponsor. Statsig empowers modern day visionaries to transform the way that they develop software. The highest performing product teams run multiple experiments every day. If you're at a company that uses Statsig and is versed in modern product development principles, you know.

Statsig provides all the tools that you need to build, measure, and learn faster as a product organization. They integrate feature flags. They have an unbelievably powerful proprietary stats engine, and they have robust analytics. They make it so that you can 10X your experimentation velocity at your company while providing near real time visibility into how these features actually impact your business metrics.

David: It's been so fun to watch Statsig's growth. Even just over the last couple of 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 hottest 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 Samooha about bringing compute into data warehouses like Snowflake, and this is a great example of that happening here with Statsig.

Ben: Yup. Acquired community members can take advantage of a special offer including five million free events per month, including white glove onboarding experience and migration support. You can visit statsig.com/acquired to learn more and 10X your product experimentation velocity.

One more thing. David and I are going to be doing an event with Statsig live in San Francisco, a product growth forum. Honestly, it's gonna 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. Vijaye Raji, the CEO and founder of Statsig, who many of you know well at this point from our ACQ2 episode with him, is also going to be there. It should be pretty great.

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?

David: All right. Nike principles according to Rob Strasser in 1977. (1) Our business is change. (2) We are on offense all the time. (3) We already alluded to, perfect results count, not a perfect process. Break the rules, fight the law. (4) This is as much about battle as about business. (5) Assume nothing. Make sure people keep their promises. Push yourselves, push others, stretch the possible. (6) Live off the land. (7) Your job isn't done until the job is done. (8) Dangers, bureaucracy, personal ambition, energy takers versus energy givers, knowing our weaknesses, don't get too many things on the platter. (9) It won't be pretty. (10) If we do the right things, we'll make money damn near automatic.

Ben: It's so good.

David: It'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.

Ben: I read these differently than I used to read them. When I didn't know Nikes journey, I would just read them and be like, yeah, that's awesome, or wow, that's so pithy. I can't believe their official corporate values are in such a pithy way. No, this is the stream of consciousness all from Rob Strasser, all into the typewriter.

Some of them are things that Nike would never say today because it shows the trade-offs inherent in their business. Live off the land, it's cringe-worthy. It's almost like, you guys have this huge labor issue, it's not good. You see where some of the stuff comes from. Break the rules, fight the law. I think there's also something very clear: dangers, bureaucracy, personal ambition. 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.

David: Developing his own personal ambition.

Ben: And developing his own personal ambition, leaving and going to Adidas. There's so much in here that when you really start to know the company's history, story, and the headspace that he was in when he punched this out, it reads entirely differently to me than I 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.

David: This is definitely one of those cases where ignorance is bliss.

Ben: But man, they're awesome. The one that is still in Nike's maxims today that they distribute to employees, and that is something you and I both hold near and dear and think of with Acquired, is we're on offense all the time.

David: You don't win by playing defense.

Ben: Nope. Okay, 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 a zillion sports. From their revenue, they're basically a running shoe company that makes shoes for men. That is where their revenue comes from.

David: Nike IPOs the second week of December in 1980, the same week as Apple.

Ben: Unbelievable.

David: It's amazing.

Ben: You get all the way through Shoe Dog, there is basically no mention of market cap at IPO. It's the craziest thing. It really underscores how much nobody believed enterprise value matter then.

David: Yup. It was about $400 million, the market cap at IPO. Apple, for comparison's sake, was $1.8 billion. 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's like, I'm going to sell my stake back to Phil. When they went public after the IPO, Phil owned 46% of the company and was overnight one of the richest people in America.

Ben: The craziest thing is, one of the richest people in America then was $178 million.

David: Quite different. He was far from the top richest person in America, but still this made national headlines. This is where Shoe Dog ends, which is 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.

Ben: Very much so, especially because right after they go public, Phil goes on sabbatical for a year. It's like, the job's done, wash my hands of it.

David: Ben, the job's not done until the job is done.

Ben: There you go. The whole company, there was a lot of hubris going on. They're on top, we're on the running shoe market. We've been in this magical secular growing trend forever. It's just surely going to continue.

The fitness boom continues, but running is not exactly the thing that keeps carrying. They 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 50% market share in an industry like this.

David: 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. 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, and aerobics are in. Nike absolutely refused to see that and refused to do aerobics on principle.

Ben: It's fascinating. In 1980, Reebok USA is founded. By 1988, Reebok eclipses Nike in sales.

David: Yes, at well over a billion dollars.

Ben: It's not like Nike fell out of favor in running. It's not like people who were running stopped running, but Nike had ridden the running boom at this insane growth rate of running. Even if running continued, its growth rate was going to massively taper off, and they weren't going to stop growing their market share. They really did need to look elsewhere. I think it was pure hubris that blinded them from finding their next market.

David: Reebok is 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 not today, but back then is a completely different animal. It's a marketing-driven company started by a guy named Paul fireman who was American.

Pretty quickly, they developed a business plan to cash in on the aerobics fad, and they made a shoe that in Nike's principled opinion, sucked, but it went really great with legwarmers. It was all white, it had soft leather that wrinkled, it looked good, women loved it. It was everything that Nike was not. 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.

Ben: Wow. 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.

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.

Nike is realizing, oh, we are not nearly as well capitalized as them. They're going to come eat our lunch on 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 going away.

David: Meanwhile, in our core consumer actual reason people buy truckloads of shoes, the fitness market, the swooshing sound you hear is that going to Reebok.

Ben: Yes.

David: Interestingly, financially, there are only a couple quarters where Nike's revenue declines. I think that's because of the Futures Program. It saves their skin again. Retailers had to commit six-plus months in advance to their orders. 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.

That brings us to 1984. Phil Knight actually wrote in the letter to shareholders that year. In 1984, like 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. 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 a fun summer blockbuster movie. Also very, very inaccurate in how it portrays everything.

Ben: Yeah. No, it's a very fun campy work of fiction.

David: It gets the broad point right. Michael Jordan saved Nike, absolutely 100%. The characters involved, how it all went down, and what the deals were, almost all wrong.

Ben: There's a lot of little dynamics that we can be mad about. It was Strasser's baby that do the deal, not Vaccaro's baby that do the deal. Vaccaro never flew to North Carolina to negotiate at Michael's house with Michael's mother. All of this doesn't actually happened. They weren't going to fire everyone in the basketball division if this didn't work. 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 God, they make Phil Knight just not at all who Phil Knight is. They make him out to be a rube. After watching every interview he's ever given and reading all this stuff about him, I just don't think that the Ben Affleck character is anything like Phil Knight. Anyway, Air is entertaining. Here's the real story.

David: The big important thing from Michael Jordan, the Air Jordan 1, and then everything it became, and 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. 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.

Ben: 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 he's not LeBron in high school.

David: Yeah, he's picked third.

Ben: Right. I remember going to see LeBron as a high school athlete because I live near Akron, Ohio, and he went to St. Vincent, St. Mary's famously. 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 dominated in the NBA at the time. Doing a big deal with Jordan really was more of a gamble for Nike than they would do with really any athlete today.

David: All right, 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. It's actually Strasser who puts this deal together, and together with Sonny Vaccaro, as portrayed in the movie goes after Jordan, but Strasser puts it all together.

The deal is a $2½ million 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 5% royalty on gross revenue from the sales of Air Jordans, the whole line, the shoes, the merchandise, everything.

Ben: It's almost like the way the book industry works. They gave him an advance on the first $500,000 a year. But once he sold through the advance, he was going to get a 5% participation on any of the shoe sales.

David: Right, and it goes even deeper than that. This structure was completely revolutionary. The way shoe deals were done at the time, 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 $100,000 a year in cash payments to wear the Converse Weapons. Ben, have you ever worn the Converse Weapons?

Ben: No, never.

David: Do you know what they are?

Ben: No, I don't.

David: 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.

Ben: 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. You get some of the upside deals. Nike had freaking nothing to lose. Of course, they can 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, cash-constrained, and under penetrated in the NBA. What strengths do we have?

David: 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.

Ben: I did not realize that.

David: This is how it works. We alluded to this earlier in the episode. It's the halo effect. Yes, the Jordans are important. We'll talk all about the Air Jordan 1s in a second here, but it's not about the Jordans. It's about the swoosh, it's about the halo effect, and the lifting up of the whole company's sales.

Ben: I had no idea that Jordan got a royalty of non-Jordan shoes

David: He did. This would eventually morph into the Jordan brand and the Jordan line. Zion Williams and Jason Tatum, they are Jordan athletes. This is part of it. 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.

Ben: There's something 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?

David: No, it's all owned by Nike because there's the minimum guaranteed payment. For $2½ million over five years, that seems like a pittance today, but that was huge. Nobody else was getting that kind of money.

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, breakdancing, tracksuits, shell toes, that was Adidas. That was what Jordan wanted.

Ben: 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. Some of that truck was in variable comp, and some of that truck was in cash. But make no mistake, that is what this is, 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.

David: Yeah. Jordan actually takes the deal and shops it to Adidas afterwards. He's like, I really don't want to go with Nike. I really want to be with Adidas. You don't have to match this. Can you just come anywhere in the ballpark close?

Adidas is like, we could give you $100,000 a year. 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.

Ben: Jordan also is on offense all the time. This is a guy who plays to win. You give him the incentives, he and Phil Knight are going to get along real well.

David: Here's what happens. In that first year, the Air Jordan 1s, this is going to be very incredible. Some of you know this, somebody's going to listen to this, you're going to 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 1s sell $126 million. That's the shoes and the associated merchandise with it.

Ben: David, do you know what their goal was?

David: $3 million over three years. It's about 15% of Nike's entire revenue for the whole year.

Ben: In the first year, they sold 1.5 million pairs in the first six weeks after releasing them.

David: Put aside the halo royalties that Jordan is getting on the rest of Nike basketball. Let's take just the 5% of that $126 million that he made in his first year. That's $6.3 million 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 over seven years.

Ben: He made the exact same amount from the Nike deal in his first year.

David: He made his entire seven-year contract with the Bulls in his first year.

Ben: 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 paid off immediately, and he had to make no trade-offs to do it. He got the cash guarantees, he got the royalty upside, it happened immediately, and it only got bigger from there.

David: Trade-offs, I think there are two things. None of this would have happened if Jordan didn't turn out to be Jordan.

Ben: Totally. In fact, that's literally true. What were the three clauses? If he didn't either win Rookie of the Year, win the NBA Finals, or win the MVP or something, there was an out in the contract.

David: Interesting. I didn't know that.

Ben: They were basically like, we will give you the entire farm or 5% of the farm if you are a phenom. And if you're not...

David: Interesting. There was some protection for Nike.

Ben: Yes. He's Michael Jordan. Whatever the thing was, he got all three of them. It wasn't the NBA Finals, it was to become an All Star.

David: Interesting, which I think he did in the first year.

Ben: Yes.

David: That's right because the other players kept the ball away from him, and they froze him out because they were so jealous. Okay. (1) Jordan had to become Jordan. (2) 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. 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.

To a certain extent, that happens to every start. 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. There was some downside.

Ben: Yeah, David, you're so right. Imagine that I come to you and I say, hey, I'm going to pay you and give you revenue upside. 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 going to use your face on $5 million of paid media in the next few months. It's like, whoa, what? That's it for any normal life that I get right out the bat.

David: Right, and he's the kid.

Ben: Yes.

David: Again, 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 this was the beginning of all of this.

Ben: Why did they sell so well? That's the interesting $126 million in the first year. Why was the demand for them crazy? Did people just love Michael Jordan? This is, I think, the first time they really flex their ability to recognize an opportunity for an incredible marketing moment.

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. He's wearing these black and red shoes that are now called the Jordan Breds. These shoes are black and red. In the NBA, you wear white and that's it.

Jordan's getting ready to play in the league with these black and red shoes, which again, he hasn't actually worn on court. To this day, no one can find footage of him wearing the black and red precursor to the Air Jordan 1, these modified airships, on the court. We're not actually sure that it happened.

David: Right, because it takes a while to actually make a new shoe. The Air Jordan 1 is still in production.

Ben: Right, but this black and red catches the league's attention. David Stern says, hey, you can't wear those, we're going to fine 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 wear the black and red shoes. It doesn't mention the Air Jordan, it doesn't mention the Air Jordan 1. It just says, those black and red shoes. This gives Nike this incredible opportunity to make a marketing moment out of it.

It would have actually been very expensive, because the way that the fine work technically after you dig into it for a while is $1000 for the first infraction, $5000 for the second infraction. It may have even been the case that it was $10,000 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.

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 AJ1 is not the Bred. The Bred is the thing that kicked up the big issue.

Anyway, Jordan, they just filmed 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. It just goes bong, bong and puts these black bars over the shoes. 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.

David: It's so great. It's such a good story.

Ben: The coda to all of 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 $5000 times an 82-game season. Some people said it was $1000 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 1s 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.

David: The thing that's so great, though, is it doesn't matter. It's the story, it's the dream. It doesn't matter.

Ben: Right. They just put it in a freaking Hollywood movie that it was 5000 times 82 games, and that's all anybody's going to remember.

David: Okay. I mentioned a minute ago about the other side of the Air Jordan 1 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 worth of Air Jordan 1 shoes and merchandise in the first year. Fact. Another fact that gets put out there is that Nike sold $150 million of Air Jordan shoes and merchandise during the first three years. If you look at that, you're like, wait a minute, what happened?

Ben: Something bad happened in years two and three.

David: Yes. Indeed, something bad did happen in years two, 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 into the Futures Program and whatnot. That's how they hit $126 million in sales. There wasn't actually $126 million of demand for Jordan products that year.

Ben: Good commercial, but not $126 million of demand commercial.

David: There probably was—I'm making this up—$50, $70, $100 million of demand. It's unprecedented for any shoe in history for a single year, but Nike also effectively took some steroids on this one.

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. (1) Jordan broke his foot early in the season of his second year, missed most of the season. (2) The Air Jordan 2s sucked. There's no other way to put it.

This was where Strasser, who again had masterminded all of this, the Jordan deal, the Jordan 1s, working with his collaborator, Peter Moore, all this stuff, they went rogue. The Air Jordan 2s cost $100, the Air Jordan 1s 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. (a) He wasn't playing. (b) He wasn't incentivized to push them. He was economically incentivized, but he didn't like the shoe. It all fell apart.

On top of that, as this is all happening, Strasser and more to along with him, but 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.

Ben: This is very Steve Jobs' Macintosh.

David: 100%. Literally, the parallels here unfortunately comes to a tragic end. He sets up a new campus, new division, away from Knight, 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 going to take control and streamline the process. The Jordan 2s 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 going to end. Either Strasser is going to become CEO of Nike, or Strasser is going to leave Nike. Strasser ain't going to become CEO of Nike because (1) Phil Knight is CEO of Nike, (2) Nike has a dual class voting structure. Phil Knight controls all the high vote shares and he controls the board. Really, this is the end for Strasser.

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. You could imagine a future where one day, Knight and Strasser might reconcile. They could be friends again and say, wow, Rob, you've had such an incredible part of the Nike journey contribution to everything, we can bury the hatchet. Sports Incorporated takes on as one of their major clients, Adidas.

Ben: And eventually their only client.

David: Eventually, Adidas buys the company, moves their North American headquarters to Portland, Oregon and makes Strasser the CEO of Adidas America. Incredibly, tragically, this is just terrible. Eight months into the job, Strasser has a massive heart attack and dies, I believe, at age 46. It's just terrible.

The betrayal that this engenders is irreversible. Ben, you talked about earlier, the Nike culture. There's a quote from Jeff Johnson, Blue Ribbon employee number one who I think had already left the company at this point.

He's asked in the book, Just Do It, about Rob becoming CEO of Adidas. He says, "I know they, Adidas, aren't what they once were, but Adidas people were the Huns. I would starve to death before I would work for Adidas." When Rob dies, Phil does not attend his funeral. It's really just heartbreaking.

Ben: 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 company and why his role feeds into history. 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 over achievements 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.

David: Still, the repercussions of this exists to this day. Adidas' American headquarters are still in Portland, Oregon.

Ben: Yup, and they poach a lot of Nike people.

David: Yup. Okay, back to Jordan. The plot thickens here. Jordan's not happy.

Ben: Strasser was his guy there.

David: Yeah. Strasser was his guy. Strasser leaves, starts this new company, starts working for Adidas, becomes the CEO of Adidas. Jordan's going to go to Adidas. The writing's on the wall here.

Ben: Jordan's deal is up in 90, right?

David: Not only is his deal up in 90, he tries to renegotiate. In year three, Jordan is so unhappy. The wheels are in motion at Adidas. Adidas with Strasser, not yet at the helm but whispering in the ear, is going to be willing to do a Jordan-type deal for Jordan. Michael always wanted to do this anyway. He's going to break the deal with Nike and go with them.

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 resign him. They're willing to do anything, renegotiate the deal, give him more economics, give him another shoe, anything. Phil goes to a bright young star within the Nike Design Group, Tinker Hatfield.

Ben: Formerly of Nike's architecture and building planning team, he wasn't even hired as a shoe designer.

David: He was an architect. This is super important. Tinker was another Bowerman guy. He ran track for Bowerman in Oregon, studied architecture, and then he comes into Nike. 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 Nikes revival on the running and training side, and competing ultimately in aerobics with the Air Trainer.

Now that Strasser and Moore are gone, Tinker is the star that he can give Jordan. He says, go fly out to Chicago, go with Howard White, Jordan's guy at Nike. Go talk to them. Come home bearing your shield or on it, essentially.

Tinker goes out. I remember he's trained as an architect and then became a shoe designer. What do architects do when they meet with their clients? They ask them questions. They say, what do you want? What are your specifications?

Tinker sits down with Jordan and he's like, tell me what you don't like about the Jordan 2. They're too tough to break in. Okay, cool. What else is wrong with them? They're high tops. That's too much weight. I'm Michael Jordan. I need likeness on my feet. I want fly. I don't want the extra weight. Okay, cool.

In an ideal world, Michael, what shoe would you want? What would it look like? Michael's like, well, I want a great basketball shoe that will also look great off the court, but it needs to be both. It can't be like the Jordan two that look great off the court, maybe, but sucked as a basketball shoe. Tinker's like, okay, noted.

He goes back to Nike, works feverishly, Jordan comes in for this last ditch pitch meeting. He shows up for hours late. Phil starts the meeting and he's like, oh, boy, here we go. Tinker, like an architect, has the shoe under a black cloth on the table, just like Steve Jobs in the keynotes many years later.

Phil hands the meeting over to Tinker and he's like, Michael, I took notes on our conversation. Here is the Jordan 3. He pulls the shroud off and hands the shoe to Jordan. 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 pièce de résistance, 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.

Ben: That's 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 hide the swoosh.

David: It's like harkening back to the beginning of Phil Knight could have had 100% of Blue Ribbon Sports, or he could have had 51% of Bill Bowerman's Blue Ribbon Sports.

Ben: It's pretty crazy because the whole point of these deals is to get swoosh impressions. 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. They were extremely right to do that.

David: Indeed. 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 logo, its own advertising, all managed standalone. Ultimately, this would take several years, but it would become Zion Williamson wears Jordans. Jason Tatum wears Jordans.

Ben: The University of Michigan, for some reason, is Jordan, not Nike, as their official uniform supplier.

David: UNC is Jordans.

Ben: Do you know what changed in that renegotiation?

David: Yes. They extend the deal for seven more years, I believe, at the same 5% royalty on gross sales, but there's the new massive, further commitment to making the Jordan sub brand much more of its own brand. They upped the total guarantee to at least $18 million. From $2½ to $18 million in three years.

Ultimately, just like the $2½ million, that's meaningless because Jordan brand sales go back up in 1988, 1989, 1990, 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.

Ben: It's got to be the shoes.

David: Wieden+Kennedy got to be the shoes. Jordan earns, over the course of this contract, easily at least $100 million.

Ben: Over the seven-year.

David: Yeah, it's just dwarfing what he's earning from the NBA.

Ben: In his total career from basketball contracts, he made something like $90 million. You even said it in that first year just from the get go. His Nike earnings were way outpacing his NBA earnings.

David: Yup. Interestingly, at retail, again, back to this halo strategy, the Jordan 3s and then all Jordan subsequently, really this is when they become the luxury brand. The Jordans are Nike's Louis Vuitton trunk. Yeah, they make a lot of revenue from them. Yeah, they sell a lot of them. But you know what? It also helps them sell a lot of wallets.

Ben: Yeah. The Jordan 3 is priced at $200 or something?

David: $100, but this is 1988–1989.

Ben: Right. Okay, that makes sense. All right. You mentioned how much he 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.

The Jordan brand is the fastest growing part of Nike. Nike grows 10% a year, the Jordan brand over the last three years keeps growing at 35%. It does billions in revenue growing at 35%. This past year, they just reported, FY22, the Jordan brand did $6.6 billion in revenue. Let's assume that the 5% figure is still accurate enough, it's accurate-ish. Jordan is making over $300 million a year from the Jordan brand at a 5%-ish royalty.

David: He retired for the last time 20 years ago.

Ben: There is no athlete making $300 million a year. Michael Jordan will make five, maybe $10 billion 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 $6-plus billion revenue scale.

David: With all the operations, distribution, and marketing of Nike.

Ben: It is unfathomable. 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 input on who they're signing to the Jordan brands. He is a vote in that. But in Michael staying out of trouble and Michael staying the dream, he builds a tremendous amount of brand equity.

Nike reaps 95% of that, so they're perfectly happy with this arrangement. They're happy to cut him $300 million checks. I would be, too, if I was earning the other side of the $6.6 billion. 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.

David: Yes, and that's the dark side for Michael. One more really critical thing I want to say about all this, Jordan, the building of the dream, and the changing of culture, before we move on to all the rest of Nike history, which we will cover here. You can't ignore, too, again, the timing in this. All of this coincided with the rise of ESPN and Sports Center. That was so important.

In the early days, when Steve Prefontaine was on the cover of Sports Illustrated, or some of the tennis players, 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. With ESPN and Sports Center, those athletes and Michael Jordan being all over that 24/7 every night, that was $20 million a night of free advertising.

Ben: That's a great point. Off the back of the rise of the Jordan brand, in 1988, they launched the Just Do It campaign. I think this is the first Wieden+Kenndy ad, right?

David: Second real big one. The first was the Revolution ad with The Beatles that they did for the Air Max, another Tinker Hatfield and Mark Parker joint.

Ben: They're finding their footing again. They're realizing that, okay, we can diversify outside of running. We can find a lot of places to sell the dream. We can make different products to monetize the dream to let people participate. Their market cap hits a billion dollars at this point in 1988, so investors are starting to wake up to like, huh, they're building something really special here. They opened their first Nike town in Portland.

The early 90s, late 80s, early 90s are just all good for Nike. I think by 1991, their market cap hit $5 billion. By 1996, their market cap hit $10 billion. 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.

That's a tough few years. Interestingly, right around the dot-com crash is also tough for them. Their market cap drops from $20 billion to $8 billion. They weren't in any way yet a tech company, but tough times right around the same time period.

David: An interesting thing from that front, losing Kobe to Adidas was big.

Ben: Yes, really big. People forget this. People forget that Kobe was an Adidas athlete first in the same way that people forget that Kanye was a Nike athlete or a Nike rapper first.

David: Those early 2000s were not a great time for Nike. Interestingly, Kobe was so unhappy at Adidas and wanted what Nike could give him that he bought Adidas out of his deal, and then move over to Nike.

Ben: Yeah, I have the numbers. Kobe was with Adidas from 1996 to 2002 and He hated the Kobe 2s so bad that it's rumored that he paid $8 million to get out of his contract so he can move over to Nike. That was a huge win for Nike and a big turnaround. 2002 is really when it started to get good again for them.

David: Yup. I'm sure part of that was the shoes. 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.

Ben: Right around the same time in 2003 is when LeBron came into the NBA, and Nike signed him out of high school. Okay, 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. They're once foe and now Nike's. The multibillion dollar market cap in Converse is a tiny fraction of that size.

In 2003, Michael Jordan retires. It's fascinating. Just to get a quick data point, the Jordan brand that year in 2003 is doing $700 million dollars a year. Today, it's doing $6.6 billion. That's been the delta since he stopped playing basketball.

David: The thing is, both of those numbers are bonkers. $700 million is bonkers, and $6 billion is bonkers.

Ben: Yeah. Jordan has completely transcended a sponsorship deal and turned into a brand. The platonic ideal of Jordan is a brand more than a human.

In 2006, another important thing happens. Most people didn't realize it at the time because keep in mind, 2006 over in Apple, Steve Jobs is still the CEO. Not a lot of people know this guy named Tim Cook's name, but Tim joins Nike's board. I believe in late 2005, he joined the board.

He immediately starts helping Nike into understanding how to use digital technology to transform their business. In 2006, they launched the Nike+iPod, which was not a terribly successful product in the market. But man, did it help Nike understand where the puck is going.

David: And this was the first corporate use of plus in a product name.

Ben: Was it really?

David: This is the moment that has led to the terribleness of the sea of digital corporate products today.

Ben: We all have this to thank?

David: 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.

Ben: I actually did not know that. It's funny.

David: That was the origin of plus.

Ben: It was interesting because it was this little thing that you would put in the insole of certain shoes. It would measure your stride length and all the metrics about running, and it would report it to your iPod because it had a little 30-pin connector thing you could put into your iPod. It was the most clunky clugy 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.

In 2006 and then again in 2013–2014, they had a new strategy start. It is really these clear moments in time where the company changed its DNA. 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 be like their Walmart brand.

David: That's right, Cole Haan.

Ben: Cole Haan, yeah. I think this aha moment happened where they realized, actually, what we want to be doing is pouring everything into the flywheel of the Nike brand. They divested a bunch of stuff, but they started acquiring capabilities from a bunch of these other companies to help them make this tech migration.

It's a two decade thing, where they have these two different strategies that are happening at the same time. One is the digitization. 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 ecommerce app to their running app.

David: Run Club, Training Club, Sneakers.

Ben: And the Nike mobile store. Huge user base, all started at this moment in time where they realized (a) we should be in technology, and (b) we should be making acquisitions not of other brands but of technologies that we can integrate to help us extend our brand and participate more in the lives of our customers.

The other thing, and this is a little bit later, this is more of the 2013–2014 era, they pulled the trigger on this big strategy shift away from what Phil Knight had pioneered with the retail relationships to go direct. 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 going to be the player at scale, that can execute a direct strategy, that can operate nike.com to sell shoes directly to customers, that can operate retail stores and all these different places to go directly to customers.

They're not all the way there, and I think there’s a lot of like we'll talk and there a bear-bull case about where they are in that transition and how successful it will be. There is this tipping point where a brand becomes the scale player.

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.

David: For context, today, Nike is 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.

Ben: Yup, it's super power law–distributed.

David: The other aspect of that is personalization. Nike, I actually think, is really at the forefront of apparel personalization with what started as Nike ID, and now is I think called Nike By Me. 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.

Ben: Okay, that's the 2014 era, where they really start to execute this digital and direct migration. Around this time, you have this very old idea of sneakerheads starting to take root in a big way, this huge growth category, where the secondary market for shoes, in most situations, you would think used shoes are worthless. I'm being tongue-in-cheek here because most secondary market shoes are not used.

David: Until recently, any mainstream person would have said of course to that statement.

Ben: There became, David, to your point, about Jordan and Nike creating culture, participating in cultural movements, 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 in for the tennis court, but you will wear 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. Shoes had become this method for self-expression.

The secondary market is huge. Some estimate $2 billion, some people estimate $6 billion category. Keep in mind, all of athletic shoes are 150-ish, 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?

David: Right. 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.

Ben: I'm fascinated by that. I think they 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.

David: The other way that Nike potentially could capture this value would be to massively increase their prices. This is really interesting. I think this is where Nike is different from the luxury brands that we've covered, the LVMHs, 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, $200, maybe $300, not a lot of money. The instant that they get purchased, you can turn around and sell them on the secondary market for $5000, some of these shoes, $10,000, maybe more. That is a very intentional decision by Nike not to capture that value.

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. They're willing to let that to $6 billion or whatever, go to secondary players, go to StockX, in order to keep the dream alive.

Ben: It's pretty crazy. I don't think there is anything that I can buy from Nike that cost $500.

David: Yeah, and yet Nike absolutely produces many items that are worth way more than $500.

Ben: And it's not even a high number. It's not like, oh, I can't buy something from Nike for $10,000. I really can't think of a single thing I could possibly purchase for them even for $500.

David: 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 $17,000 if I have that right. But (a) that was for charity, and (b) that was obviously a stunt. That's not Louis Vuitton.

Ben: Here's what I can buy for $490. I can get American and National League jerseys for the All Star game. They have some football shoes that cost $300. Curious.

David: Wow, crazy.

Ben: The point still stands. They make it up in volume.

David: Yes. I really can't think of anything else off the top of my head where a company is making such an obvious and clear choice to give value to other players in the ecosystem, whether those be companies or just people who are arbitraging.

Ben: Just like a luxury brand, they have to market the dream, but their mechanism for capturing value is entirely different.

I'm going to move us quickly here through 2018 to today so we can analyze the business and its current state. In 2018, something pretty special happened. They pulled the trigger on a Wieden+Kennedy ad with Colin Kaepernick about standing for something.

David: The Dream Crazy ad?

Ben: 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, and 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 months. This was the advertisement of the year.

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 other side of the political aisle of this particular issue that Nike was supporting. It entirely changed Nike's media plan in every geography for every sport for the rest of the year.

David: This was two years before Black Lives Matter became a really big thing with George Floyd. This actually was 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.

Ben: They would have been just like every other company.

David: Just like everyone else, yeah.

Ben: 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 and 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. 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.

There's a cynical way to take that, which is they've done the analysis, and they believe that in doing this, they're going to build more love than they're going to piss people off. Those people are worth losing because we prefer these people instead, and we think these people's disposable income is high enough, there's enough of them, or whatever.

I actually don't think that's the way that it operates. I think it is an executive and creative gut feel. This is a set of values we feel are right. 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 so we can grow within it. I really do think it's quite touchy feely.

David: Yup. Back to the Kaepernick ad, this is, to my mind, the pinnacle of the brand halo element of this. Kaepernick played football, not an important sport for Nike in terms of shoe sales, hadn't played in several years. It wasn't about football.

Ben: He was sitting there on the Nike roster getting paid. There was a bunch of press about how they were thinking about actually cutting him. Then someone internally was like, woah, what are you thinking, this is a huge opportunity for us. But it's hard to be a Nike athlete when you're no longer a professional athlete.

David: 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.

Ben: Despite that going really well for them in 2018, they did just have a whole bunch of other controversies. Big me-too issues at the executive level, the person that everyone thought was going to be the CEO and next after Mark Parker, and many of his people around him 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.

Coming out of 2019, they really did just need to clean things up and right the ship. It was very fortunate that while all of this was going on, their big competitors were all screwing up. Especially going into Covid, none of their competitors figured it out.

There's these smaller shoe brands. If you look at On, Hoka, or Brooks, a lot of these niche players have done well in growing, but Nike hasn't had a formidable scale competitor. Adidas has just been nothing but mistakes over the last few years. Nike has had some of these issues, but has been fine.

After they brought in John Donahoe, they've been able to clean up the organization, reset for the next chapter, execute this shift to a direct and digital strategy, while I think they take a little bit of a breath and say, okay, what does Nike in 2030 look like, ad how can we make sure that we don't stagnate here?

David: 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.

Ben: Great.

David: 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.

Ben: Yup, 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? David, I think there is a trap laid for us on this episode, but I'm curious. You said you had a transition to power, so I'm curious where you were going.

David: Okay. Obviously, we're going to talk about brand here in a minute, but scale economies are written all over this company in this episode, for me. 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, a Porsche, and the other.

I think Porsche has scale economies. But if you look at the sneaker industry—we talked about this a minute ago—it's such a power law. There's Nike, there's Adidas that's half their size, and then the third place player is well less than half of Adidas' size.

Ben: Yes. After that is Skechers, then Puma, then ASICS, Converse, Under Armour, but massively declining market share curve.

David: Yup. Now compare that to the rest of the apparel industry. It's wild how different it is. 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. There are two, three, four companies that make a huge share of all of the sneakers that the world wears, that's wild.

Ben: 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. 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. The whole game, just like Netflix, is Nike is acquiring content. Nike is acquiring the LeBrons of the world to be Nike athletes. 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.

David: 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 $100,000 check. There's a lineman and an incentive to be part of the biggest machine.

The Kobe situation is so illustrative of this. Kobe was with Adidas. Yeah, maybe the Kobe 2 sucked. 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. That is huge power.

Ben: That’s fascinating. The game is to 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.

You can make the best commercials that are the most inspiring. That, I guess, doesn't take as many dollars. You can produce an incredible commercial for $100,000, but the talent in it is going to cost you millions. The Superbowl slot is going to cost you millions. I think a lot of Nikes power on a go forward basis is totally the scale economy stuff.

David: Yup, totally agree.

Ben: They had lots of counter positioning in the old days. The whole Jordan thing was a pure counter positioning play.

David: And that the other companies couldn't do it because Magic and Bird would never tolerate Jordan getting a fundamentally much better deal.

Ben: Correct. Yeah, they had too much to lose. 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, 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 $10,000–$30,000 more for the Tiffany engagement ring. There's a pureness to that brand premium concept. Does Nike really have a brand premium?

David: Or is it the athletes that have the brand, and Nike scale economies let them buy the athletes brands?

Ben: Right. As Tren Griffin would put it, wholesale transfer pricing. Or actually, the athletes are the ones that hold the power, and Nike is happy to pay up for it and pass through all the profit pool to the pinnacle athletes.

David: Unquestionably, that was the case in 1984 with Michael Jordan, and then again in 1987–1988, when they renegotiated the deal.

Ben: Right. Let's look at an Air Force 1 or a Dunk, the Dunk Lows that everyone's wearing right now. They're not really generating pricing power on that, maybe off of something purely unbranded. But off of Adidas, people are more likely to buy the Dunk Low SB than whatever the Adidas equivalent is, but the prices are pretty equivalent.

David: Yeah, they're not paying more for them. Maybe again, that's an intentional choice by Nike. But in this category, I do think, yeah, if the Dunks cost more than the Adidas shell toes, maybe shell toes would be popular right now.

Ben: For whatever reason, Nike has either decided not to or can't raise the prices, where their brand differentiates them. I think it's fascinating. The Nike running shoes that I buy, that are $160–$180, the equivalent Adidas pair is $160–$180, same with the equivalent New Balance pair. If you assume that they do have brand power, Nike is making a conscious choice not to capture that value in making all those shoes more expensive than competitors.

David: Yup. But I do think, despite you saying the trap, and I think there is a big trap in over estimating brand value of Nike, it does definitely have brand value and brand power.

Ben: Yeah. It shows up in a different way. It shows up not in pricing. It shows up in the fact that I often don't look at a competitor. I will only go by the Nike thing.

David: 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 100 years.

Ben: That's quite a take.

David: You don't Nike's going to be here in 100 years?

Ben: I think you could totally kill Nike in the next 30 if you wanted to. I also don't like your premise. I disagree with your Dior thing, that the really good brands, or the way you can tell if something's luxury or a durable brand, is if you couldn't kill it if you tried. I think that's too squishy.

David: Okay, fair enough. I have something way less squishy for you here, though. I was talking with Scott Reames 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.

Ben: I'm sure that's the case.

David: It has to be the case. If that's not brand power right there, I know it doesn't fit Hamilton's definition.

Ben: Yeah, it's a sleight of hand. Nike is, first and foremost, 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. I'm literally looking at Adidas' gross profit margins are on average higher than Nike's.

Nike's current rolling last four quarter gross profit margin is 44%, Adidas has 46%. 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, don't seem to be getting a special Nike markup?

David: 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 $500, $1000, $5000, $10,000 Nike items. They absolutely could. They choose not to, I think, because if they did that, one thing we didn't talk about. Nike announced a few years ago that their whole marketing strategy was going to be reoriented around, I think, 12 cities in the world. They were going to focus everything they did from a marketing standpoint on thinking about what it would mean to be interesting in those cities.

What's behind that? The cities are New York, Los Angeles, Tokyo, Shanghai, Rio, Paris, et cetera. I think what's behind that is, Nike needs to be accessible to the tastemakers 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 $5000 items but want to be participating in the pinnacle of Nike.

Ben: I'm not talking about $5000 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. 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?

David: 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. I don't think that's the case for Adidas, maybe for some items, but I doubt as many as Nike.

Ben: I don't have a clear answer here. I think my best answer is, they want the most swooshes out there in the world. There are some sweet spot where they're willing to trade off profit dollars for that, for the continued brand presence, where the swoosh feels like a ubiquitous thing, a brand people celebrate and are excited about, and they just want it reinforced on everyone everywhere. They're willing to give margin dollars for that.

David: Maybe this actually all comes back to scale economies because it's the same thing with Amazon or Netflix. For a given price, Netflix could offer more value than anyone else. Amazon with Prime can offer way more value than anybody else. This is the scale economy play.

Ben: 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. That would be 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. Come on, how am I going to benefit from other people wearing Nikes? Maybe in the Nike Run app, being able to share stuff with my friends who also have the Nike Run app, but it's thin. That's not how they make their money.

David: Agreed.

Ben: Interestingly, I guess what I would conclude on power is, Nike is first and foremost a brand that, from a Seven Powers perspective, most leverages scale economies to get their outsized profitability.

David: Totally agree with that.

Ben: Nice. Okay. I will catch us up now and give us the numbers on the business today, and then we can go into playbook. Nike is at absolutely astonishing scale. They are a $51 billion revenue business growing 10% year over year. As I mentioned at the top of the show, they're the largest apparel company in the world except for the luxury category, LVMH and Hermes. Nike sales to women alone are bigger than all of Lululemon's revenue. Take that in for a minute.

David: That's shocking.

Ben: I feel like that's an illustrative stat. Nike has really lagged in developing products for women.

David: That's exactly what I was going to say.

Ben: It's just $8.6 billion of their $50 billion of revenue. Every corner of Nike is bigger than the brand that you associate with that space. The Nike brand does $49 billion, so there's some other revenue in there, Converse. I think there's some other catch-all, but basically there's Nike and Converse, and Nike includes Jordan.

I mentioned earlier this shift to direct that Nike has been in the midst of for basically a 10-year journey. About 60% is still wholesale, is still sold through retailers. Impressively, 40% of this very large business, this $50 billion 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 long partnerships with retailers. Come back to that in a second.

Their gross margin profile, 44%. It's interesting looking. Historically, David, we've been at tech podcast and we've looked at lots of software businesses that have these 70%–80% gross margin businesses. 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. Nike is better than a car company, but it ain't no luxury. Nike does $6.4 billion in operating income, so that's their income before taxes, 12½% operating margin. That's what you should think about, their take home.

David: Not a software company.

Ben: Yeah, lots of costs involved in this business. They have $8½ billion dollars sitting in inventory, which even for Nike is high. That's a point we'll revisit in our analysis here. Unlike the Nike have old, they also, in addition to that inventory, have $10.7 billion in cash and similar equivalents. The company is no longer constrained by how much capital they have available to them.

While it's been a growth company, they don't know what to do with the cash. It's this interesting question of, 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. That was true for a couple of decades. They've now had 30 consecutive quarters of increasing dividend payouts. It was the dividend stock with $11 billion of cash on hand, in addition to continually paying these dividends.

David: It's funny, this doesn't jive for me with the statement on the investor relations page, like here's a growth company. I guess 10% growth at their scale is impressive, 35% growth in the Jordan brand is very impressive.

Ben: You might think, it seems like they could reinvest more in the business to grow faster. They already spend $4 billion a year on demand creation. I assume that's 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.

David: Yup. That's 100% what it is. Like we're saying, it's not really that different than Netflix acquiring or producing content for Netflix.

Ben: Right, they just monetize in a different way. Footwear is almost 3S the apparel business on a revenue basis. At least by revenue, footwear is still their bread and butter. In part, it's just selling sneakers to people that go wear sneakers every day and wear them out once or twice a year. They need to go buy some more sneakers, and that's most people in the world. It's a pretty incredible market that they now get to address $150 billion 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 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. All of this excludes Jordan. The Jordan brand is the $6.6 billion business that makes up the other 16% of that pie chart. Holy God.

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. Remember when I said at IPO, they sell sneakers to men, it's the same business as it was, but a super different business that it was at the same time.

In some sports specifically 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%. The stats is 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.

David: I have to wonder, the other shoe companies who are still doing big deals in the NBA, let's take Under Armour and Steph Curry here in San Francisco, what are they doing?

Ben: Name another Under Armour athlete.

David: They exist, but I don't think I could. Why? Obviously, it's worth it to Steph. Steph could sign with Nike tomorrow, but Under Armour is just paying him a boatload of cash and I think also gave him tons of equity in the company and whatnot, but why?

Ben: I just think it's a bad move for Under Armour. I think this is the classic thing that we've talked about it 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. Be the New York Times or be Acquired, but don't be the Cleveland Plain Dealer, be Disney, or be Doug DeMuro.

David: Or in this world, be Brooks or be Nike.

Ben: But don't be Under Armour, who is not a platform brand. They don't have the size, scale, and everything that accrues to a Nike, but they're trying to run a mini Nike playbook. They need to run a completely different playbook.

David: Totally agree.

Ben: 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. They're throwing huge dollars. The NFL deal alone is something like a $200 million a year deal. 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.

David: This is absolutely fascinating and blew my mind when I talked to a few people in the industry about this. 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 paid money for them, aka fans not the players, most of those are replica jerseys. I'd heard that term before and never thought about what it meant. Most of those are made by fanatics, which has run an incredibly interesting playbook 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're paying for. But that's probably not what you're going to buy. You're going to buy a replica from the team store that is made by fanatics that has the Nike swoosh on them.

Ben: In many ways, 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.

David: It's a billboard, even if it's not on things that they make.

Ben: That's wild.

David: It's totally wild.

Ben: 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 market. Nike totally participated in a world change and helped to change the world that we all wear sneakers all day. What an insane market to address that there are 14 billion feet in the world, and we all wear out the shoes. It's just a thing we need to just keep replacing. What a fantastic thing to get to sell.

It really is surprising to me that they haven't quite figured out price discrimination. With the exception of some of these very specialized shoes, which I'm probably not going to go buy. I'm just not a sneakerhead. I'm not going to go buy any this limited edition color, this, that, and the other thing. It's something I have to keep in a closet and a bag. It's not my bag.

But if you exempt a way 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. That's very surprising to me. Okay. Those are the numbers on the business today. Do you want to go to playbook?

David: Let's do it.

Ben: Okay, playbook. The first one, I know I've said it a few times on this episode, I totally want to ingrain it in the ears of listeners, where Nike will come up with the most creative, clever way to win. Even if it's breaking a little bit of a rule, it's fine. The best illustration of this is Breaking2. Did you watch that, David?

David: Yeah. It was compelling.

Ben: Unbelievably compelling. They said, what are the rules to competitive running? If you're going to 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 rotate in pacers. You can't wear certain types of shoes that have ill-defined rules.

Nike stages this event with their shoes that provably make you 4% faster than you've ever been before. They drive a Tesla with a laser and a whole bunch of pacers around this guy. They're like, you know what? We're going to make this big media spectacle out of this guy setting the world record and breaking the two-hour marathon time. He came close. It was an unbelievably entertaining event to watch.

What they said was, we don't care if this is legal or not in competition. We're just doing a stunt. You guys can debate afterwards if this actually set the world record for the marathon time or not. I just thought, there's nothing more perfectly Nike than saying, well, those rules are quite cute. But Nike is a growth company.

David: But Nike is a growth company. That's the ultimate non sequitur. I hope that becomes a meme. But Nike is a growth company.

Ben: 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, okay, all right, making that pretty clear. So,

I don't know. I think you see some of that in the best DNA of Nike and in the crappy DNA of Nike, like the Oregon project stuff. It's important to understand that to understand the company.

David: Hey, Ben, break the rules, fight the law.

Ben: That's right. Another big one is, the things that are your very strength can go too far and become your weakness. 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.

David: You can't say that.

Ben: On the note of not a shoe company, there's a great analogy here to TSMC. In fact, there's a great analogy here to the NVIDIA and Qualcomms of the world and Nike. Nike is a fabless shoe company. I think that is ultimately the answer to, is Nike a shoe company? Sure.

David: This is our semiconductor episode this season.

Ben: They're a fabless shoe company. Unlike TSMC, semiconductor manufacturing is wildly differentiated. Shoe manufacturing, there are 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 thousands of manufacturers that they work with, which are all custom for all the different fabrics and stuff that they need to make.

In some ways, it's like the fabless semiconductor industry. But unlike semiconductors, the manufacturing isn't as capex-intensive to start, and there's not as much process power in it. You actually do have this highly fragmented foundry equivalent manufacturing ecosystem of people who can make your stuff.

David: To the scale economies power question, to the extent in footwear, that there are limited numbers of factory operators that are the big ones, that are fully audited, that you want to work with, being the scale player that can dominate the capacity in those factories is a huge advantage.

Ben: Yup, that's exactly right. While we're on manufacturing, there's a funny note. Nike manufacture zero shoes, but they manufacture 100% of the nitrogen-filled little air bags. 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.

David: Do they do that with any of the other technology like Flyknit or React?

Ben: I don't know. I don't think so on Flyknit. If you're going to make the Flyknit in the US, you may as well assemble it.

David: Yeah, I would assume not.

Ben: I also think it's one of these interesting things, where Nike gets hit. Basically, all shoes are made the same way. There are some companies that like to claim credit for, oh, my gosh, this one's made the US. Part of it is assembled in the US. But basically, everyone either makes the whole shoe or the upper outside the US. I think New Balance is a US brand, but to my understanding, it's not all made here. It's like ‘Designed by Apple in California.’

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.

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. The 100% debt to assets ratio would have caught up with them, and then poof, they go out of business. 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.

David: And even continued through to the Jordan story. Nobody else was going to do that deal.

Ben: Yup, exactly. Phil Knight basically never took on any equity investors, so he took no dilution. He, 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. What that means is on IPO day, he was worth $178 million. 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.

Okay. 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, oftentimes, without even thinking about how does this translate to something the ordinary person could buy or wear, the athletes find their way to it either through a brand deal nowadays, or in the early days, 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, 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.

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? The hardest thing is figuring out how to extend to that audience and make products for them to buy without compromising that step one, that belief that you make pinnacle products.

What Nike has been able to do, 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 convinced me that the very best shoes to run in is the Nike Vaporfly NEXT%, whatever, whatever, again, just like our LVMH episode, it's amazing that they can make a little wallet clutch for our credit card an ID and a $200,000 handbag.

David: Yup. All the thing I would add to that is to just reiterate what has hit me through doing the research in this episode. Athletes are Netflix shows.

Ben: Yeah. I didn't think of that until we were actually recording here.

David: These days, especially in the beginning, it was athletes are billboards and Netflix shows on Sports Center or whatever, like you're going to 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.

Ben: You want to hear an insane quote that dates all the way back to 1983? Rob Strasser wrote this in an internal memo. "Individual athletes, even more than teams, will be the heroes. Symbols more and more of what real people can't do anymore, risk and win."

David: Yes. I see your Rob Strasser quote, and I will one up you a Phil Knight quote.

Ben: Give it to me.

David: This is actually about Phil Knight in Just Do It. Around the time that Michael Jordan became a Nike guy, Phil Knight had finally begun to apply in full measure his hunch that if the general public could be helped to imagine great athletes as he imagined them, as having implications of the very best that the human spirit had to offer, then those athletes would become like the heroes of old, the heroes in books. And people would come to those heroes and listen to what they had to say.

Ben: Yes, I love it. Side with the athletes, sell the dream, people will buy products. 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.

David: 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 NBA. The NFL just captures way more value, and thus is the more valuable league.

This Nike episode has totally solidified, for me, the value coming out of the NBA, Jordan, Kobe, LeBron. It goes on and on, Zion, Wemby, Victor Wembanyama, the new phenom coming out of France that was the number one pick of the Spurs. He's already a Nike athlete.

Ben: Fascinating.

David: Basketball, again, because it directly translates to those are the shoes that people can buy, whether they buy that model or a different model, they're buying those shoes, they're not buying football cleats. And it's the face of the person, it's not behind the helmet. They're the heroes.

Ben: Right. Basketball is quite helpful in that there's a reason to buy those shoes just to wear them around. You don't have to invent a new product for people to buy to participate in the brand story like you do with football.

David: It's funny because it's the Gatorade line, not the Nike line about Michael Jordan, but 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.

Ben: 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.

I have one that I've been trying to think on. At one point in the research, I wrote down, when you sell commodities, brand matters a lot. Is Nike differentiating a commodity with their brand, or are they not in the commodity business?

David: This gets to your question at the start of the episode. This is the crux of the question. I think there are two answers. The Prestige models, the Jordans, the Retros, the Vaporfly, what have you, stood prestige $150-plus 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.

Ben: 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. It's like the ultimate barbecue shoe. That's what America buys, so they've sold enormous volumes of this thing.

David: I'm one more kid away from becoming a Nike Monarch.

Ben: Ironically, it's actually caught on with Gen Z. There's this weird thing now, where people are wearing Monarchs ironically. The Monarchs are objectively a commodity product. They're super differentiated by having the Nike brand on them. Whereas the Vaporfly, for the two years that it came out, the NEXT% that the Breaking2 marathon got ran in, it was by far the best running shoe on the market for two whole years. That is actual R&D product that differentiates itself.

Phil Knight has the final word on this. In an interview maybe 8–10 years ago, he said when directly asked the question, are you a product company or a marketing company? "We are a marketing company, and the product is our most important marketing tool."

I disagree. I think the athletes are your most important marketing tool. I think the product is a 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.

I do think it's quite telling that they started distributing someone else's product. They do lots of 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. They have a 30-year enduring brand. For 30 more years, I can't predict after that, but Nike will be a brand that people look up to and are inspired by.

David: Yup, totally agree. It's interesting, even 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 part of the myth of the marketing of the brand with the athletes, the Jordan 2, the Jordan 3. Yeah, the Jordan 2 sucked, sure. Everything I said, probably true. I think MJ probably really believes that as do many people.

On the other hand, it's also a really convenient story, or the Kobe story of, oh, Kobe's Adidas shoe sucked. Sure, it 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.

Ben: Being a soap opera keeps them in the spotlight and keeps the opportunity to have more impact with sponsor eyeballs. This whole sponsor celebrity thing is both an asset if you do it well and a massive liability if you do it wrong. Nike's strategy has very clearly been celebrate athletes. Adidas has had the strategy that seems to be like celebrate eyeballs, where they'll sponsor anyone with attention. It's rappers, it's musicians, it's some athletes, it's celebrities.

David: Do we want to talk about Kanye?

Ben: This is quite interesting. I think Nike was smart. I think they legitimately premeditated, ooh, we don't want to be associated with this person, so they drove a really hard bargain. Notoriously in 2015, Kanye walked away from Nike, and so they refuse to give me creative control. I think Nike didn't see exactly what was coming with Kanye, but I do think they realized, our entire brand is built on celebrating athletes.

While we should be in business with celebrities in some way, shape, and form, 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. We would stand by Tiger Woods, we did in some really trying times in his life, where a lot of people turned against him. Would we stand by Kanye? No, we don't know what to celebrate about him.

I don't think they had too much foresight and knew exactly what was going to happen, but I think they've clarified their strategy that they're athlete-focused. For anyone who hasn't been paying attention, he blew up Adidas this year. Adidas net income has basically evaporated and gone to zero. They used to make over $2 billion a year in profit.

The last four quarters on a rolling basis, they've made less than $100 million, so $2 billion down to $100 million. They claim around $500 million of this, it's the Yeezy write-down. They posted an actual net loss last quarter. It is a pretty disastrous situation over there. There's a full out slide in their deck where they admit, we think we're better than this and we're not.

David: I didn't realize it was that bad for Adidas.

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

David: 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, LeBron, Zion, Ja Morant, or what have you?

Ben: Yeah, there's a lot of different ways to play it. Nike seems to have played the chessboard quite intelligently.

David: Quite intelligently, yeah.

Ben: All right. Here we are at the end of analysis, the bear case and the bull case. There's a bear case that we haven't talked about, which is Nike is in a weird place when Mark Parker retires. He was supposed to have a successor. The successor is out for 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 Bain, so not from the sneaker business.

David: But was a board member.

Ben: He was a board member, so he knows Nike's history from that level, but different. Mark Parker started as a sneaker designer, so very different lineage coming in.

David: He designed the Pegasus, which I think is the longest single running model with no pauses in Nike's history.

Ben: I ran in a Pegasus two days ago.

David: That's amazing.

Ben: John comes in and is this external hire. I get the sense. I'm not sure he'll be a 20-year CEO. I get the sense, this is figure it out time for Nike to 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 will be, but it's just a vibe that I get from reading stuff.

David: Nike's also so insular. People develop up through the company and stay there forever.

Ben: Yeah. Covid happened around the same time that he's coming in to take over. They've decided to do this big reorg, where they used to have an org structure super focused on each sport. That meant that it was people's jobs and whole teams’ responsibilities to track the athletes' journey through their experience playing that sport. They provided crazy amounts of support to athletes.

Here's an example. At the last Olympics, they wanted every single sport to have the option to be wearing Nike shoes, every athlete. Many sports don't require shoes. Nike said, that's fine with us. We just want to have a presence, so we want to support those athletes. They did a bunch of R&D on all crazy things, including 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.

This reorg was intended to realign teams at Nike with the way that they actually interface with the outside world. 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. You go into a Dick's Sporting Goods, and there's a men's, women's, and kids. It 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. Nike's an incredibly matrixed organization, so that's the thing that was happening.

The bear case in this is, what has gotten lost is an obsession and focus on these individual sports and the journeys in the sports. Let's look at the Trainers 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, your five-mile, a few mornings a week. You wear those out, then you buy another pair, and it's a great business.

There's some Nike running department who needs to be obsessing over that journey and growing their sales and their share in not just race day shoes with this amazing Vaporfly stuff, but like the Trainers. Look at what's actually happening in the running market. You've got Brooks on and Hoka all becoming billion dollar revenue run great companies in the last 18 months.

Nike, fortunately, their big competitors like Adidas have just been out to lunch. These little competitors who are all nipping at their heels are doing a great job focusing on their niches. When you simplify an org in 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?

David: Okay, I'd buy that as a bear case.

Ben: There's a lot of nuance there in the same way as that old Disney quote with Disney animation goes to company. It's like with running goes Nike, that's a bellwether.

David: Fair enough. I totally see what you're saying. If you were to say that the equivalent Disney animation for Nike was running at the beginning, I think it is unquestionably basketball today. I don't see them slowing in basketball.

Ben: That's the thing. It's hard to come up with a bear case. They're all these little nitpicky. I listen to a bunch of Tegus calls, and I listen to the earnings calls on quarter. In doing my investor diligence on this, these are the things that people are concerned about.

A big one is this potential reversal of strategy on D2C. They reopened Macy's, and they put more inventory in Footlocker in the last couple of quarters. That's concerning because the whole narrative has been, we're going direct, but also, uh-oh, we have too much inventory, so we got to blow it out and discount it through our retail channels. There's lots of questions to management about if that 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. 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 control in China, that's a huge open question. Are they going to be able to address that biggest market in the world for feat or not? At scale, it's the question.

David: Yup, makes sense.

Ben: Honestly, that's the best I got for bear case.

David: Let me add on one more, 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, versus other companies that could put my money into, as incredible as this company is, 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.

Ben: I love it. Our complaint is always, it's not a SaaS company.

David: It's a really good business model. If you could put all your dollars, you could put it into SaaS companies, you could put it into Nike. I do think Nike has incredible durability.

Ben: That's the bull case. These scale economies are super real. They're in pole position to just keep spending and keep investing in building this incredibly durable brand.

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, their media strategy, their brand voice, the way that they deploy into all these local markets, tweak the messaging to be local, appropriate in every corner of the world, and manufacture at scale, the Nike brand means something to billions of people. Nike knows how to make it keep meeting something to them.

David: Like I said earlier, there are a lot of swoosh tattoos on bodies around this planet. That is a bull case right there.

Ben: Yup. The world of globalization and the world of the internet, returns to scale are a big deal, and they're in the scale position.

David: I'm sure both hardcore basketball fans and sneakerheads would nitpick with this statement. But to me, Nike basketball and the sneakerhead culture is the core of the driving force, the pinnacle of the halo, of the Jordan brand. It feels like it's strong as it's ever been, to me.

Ben: Yeah, completely agree. 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. That does not show up in any way, shape, or form in the Nike interviews.

David: Totally.

Ben: All right. That closes out bear and bull. I have some fun trivia for you, David.

David: Love it.

Ben: I saw you tweet something about some person in this episode being related to a person in a previous episode. I think Daniel Ek commented on it, and I was trying to figure out what you had just found. I'm wondering if this is it, so I'm going to read from Wikipedia.

“Nissho Iwai was involved in a corruption scandal in 1979 after it passed on a $500 million Yen bribe from McDonnell Douglas to the director of the Japanese Defense Agency, in an attempt to influence the sale of the F-4 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 Nissho.

David: Yeah, amazing. I did find that, and that is an amazing connection. 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. It was actually about Don Katz and Audible.

Ben: Interesting. Yeah, that's a good one, too.

David: I love these wild career changes, where you go from being a journalist and an author to starting a technology company.

Ben: Yeah, it's pretty cool. All right, quick carve out. I think you should go listen to Marc Andreessen on Lex Fridman, 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 the Andreessen Horowitz strategy.

It's 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 [...] there. But oh, my God, he's so smart. It's just a privilege to get to listen to him talk every once in a while. 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.

David: It's like LeBron selling shoes. You know that he's selling shoes. But my God, he's amazing.

Ben: Right. It's like, oh, listen to the venture capitalist who has $30 billion under management, where a lot of it is 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, listen to him, and then be like, and I completely agree with almost everything you're saying.

David: 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 going to have the same carve out today. Can you guess what mine is?

Ben: No.

David: 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. 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. When it came out, I was like, oh, wow. I was surprised that she's even continuing to do the rereleases.

Ben: I thought so. I was like, she doesn't need to do this anymore. She's got the leverage.

David: Yeah, the ultimate power move would be to stop, so a pleasant surprise that it came out. Also, a pleasant surprise to rediscover Speak Now. There are some bangers on there. Great album. It's so funny listening to her now. How old is Taylor now?

Ben: She's exactly my age, 34. She's 33, she'll be 34.

David: To hear her singing songs from when she was 21, it's just such a fun juxtaposition.

Ben: Yeah, that's cool. I got to listen to it. I literally haven't done anything other than read about Nike.

David: It's good. There are some great songs on there.

Ben: I'll enter my three-day window right after we finished recording, where I can pay attention to other things again before starting research for the next one. Speaking of, we should pick a topic. There's a thousand I want to do. After this, I'll give you a call and talk about it.

With that, our thank you to Blinkist by Go1, 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 acquire.fm/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 letting you know that we're live.

David: Anything subject to change.

Ben: Yes. Become an LP, acquired.fm/lp. ACQ2 is in any podcast player. David and I have a couple of fun interviews queued up for that. ACQ2 should have some good stuff coming soon. Join the Slack, acquired.fm/slack.

With that, listeners, thank you for going on this Blue Ribbon journey with us. We'll see you next time in dimension seven.

David: Wow, you are bringing a new energy to these outros. I like it.

Ben: It came to me in a fever dream.

David: Wow, that was some black Air Force's energy

Ben: Yup. All right, later.

David: All right, listeners, we'll see you next time.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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