Nike (Audio)

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! *Links:* Episode sources: https://www.acquired.fm/episodes/nike#sources *Carve Outs:* - Marc Andreessen on Lex Fridman: https://lexfridman.com/marc-andreessen/ - Marc Andreessen on Ben Thompson: https://stratechery.com/2023/an-interview-with-marc-andreessen-about-ai-and-how-you-change-the-world/ - Speak Now (Taylor’s Version): https://open.spotify.com/album/5AEDGbliTTfjOB8TSm1sxt *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _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._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Listeners, you should know David and I were texting before this debating, do we change this thing around? Do we play with this? Should we reorganize this section? And he texted me, let's just do it. So in the honor of Bad Jokes by David Rosenthal, here we go.

• 0:32Ben Gilbert?

  Welcome to season 13, episode one of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. There's an age old question in business. What is more important? A great product or great marketing? Well, today we have literally the perfect case study in that very question in Nike. Does breakthrough innovation drive that business? Or is their core competency really around their profound advertisements and their sponsorship deals with athletes and teams? Or their 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.

• 1:17Ben Gilbert?

  And because Shoe Dog is so good. That's amazing. You got to start at the beginning. So really, the question is, what makes this company the single largest apparel business in the world today, outside of luxury, of course? And how is it possible to be a shoe company that does over $50 billion in revenue when they technically don't make a single shoe? So you may think you know Nike from the movie Air or Shoe Dog, but what hasn't been told is how those old stories tie to the gigantic shift in strategy that Nike is really in the middle of right now. Well, LPs, we got to thank you for voting for this episode. David and I have had it sort of in our episode backlog for two, three years.

• 2:00Ben Gilbert?

  And when we put it up for a vote, the overwhelming majority of you selected this as our next episode. So if you also want to vote for future episodes and become an acquired LP, that is acquired.fm/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, and we'll be dropping little Easter eggs in hints in those emails to tease about what the next episode is going to be. So that's acquired.fm/email. Don't miss a new episode. And lastly, make sure you check out ACQ2, our second show, where we interview people who are building their companies today, available in any podcast player. And without further ado, listeners, as always, this show is not investment advice.

• 2:43Ben Gilbert?

  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?

• 2:53David Rosenthal?

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

• 3:05Ben Gilbert?

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

• 3:10David Rosenthal?

  There are so many of them. I read thousands of pages. But there are three books that all basically tell more or less the same story that we weave together to come up with our core acquired Nike story here today. And I bring it up because it's actually pretty important what these three books are. The first, of course, is Shoe Dog, the goat business memoir of all time. The second is a book called Just Do It that was written by the journalist Donald Katz. Ben, do you know who Donald Katz is?

• 3:43Ben Gilbert?

  Ooh, I do not.

• 3:45David Rosenthal?

  So Don, after he wrote this book, and I think he wrote one or two other books, he had quite the career change. He went on to found the company Audible.

• 3:55Ben Gilbert?

  Oh, really?

• 3:56David Rosenthal?

  Isn't that crazy?

• 3:58Ben Gilbert?

  It's kind of cool that that was founded by a journalist.

• 4:00David Rosenthal?

  Yeah, just wow. So he wrote kind of the canonical third-party journalist take on Nike. And then the third book is a book called Swoosh, which I bet most people have not read, but kind of like taste of luxury. I think people who are really in the know in the footwear industry have read this book. It was written by one J.B. Strasser and her sister Laurie Beckland. J.B. Strasser is Julie Strasser, who was the wife of Rob Strasser. Now, Rob, if you've seen the movie Air, the character played by Jason Bateman is Rob Strasser, Nike's legendary first head of marketing. An item, among many, that is not discussed

• 4:44David Rosenthal?

  in the movie, is that Rob, shortly after signing Jordan, had an enormous fight with Phil Knight, left the company with Peter Moore, who was the designer behind Jordan's, and ended up joining Adidas as CEO of Adidas America just a few short years later.

• 5:05Ben Gilbert?

  It's like an incredible betrayal.

• 5:07David Rosenthal?

  This is like a Judas-level betrayal. I mean, to say he was persona non grata around Nike is understatement of the century. And here is this book that was written in real time by his wife as this was all happening. Incredible.

• 5:21Ben Gilbert?

  Yeah. So Strasser, we'll get into his contributions, but he is probably second only to Phil Knight in willing Nike into existence.

• 5:30David Rosenthal?

  We start, however, with the Shoe Dog story, the origin of Blue Ribbon Sports. And actually, a little bit before Shoe Dog starts, in July 1948, when one Bill Bowerman becomes the head track coach at the University of Oregon. Now,

• 5:48David Rosenthal?

  Bill was a legendary figure. In addition to being Nike's co-founder, along with Phil Knight. I mean, kind of the only way to describe him is he was like a descendant of the survivors of the Oregon Trail. "The cowards never started and the weak died along the way" was one of his favorite sayings.

• 6:06Ben Gilbert?

  Yes.

• 6:07David Rosenthal?

  So Bill's dad was the governor of Oregon. And Bill fought in World War II as a major. And he actually negotiated at the end of the war, the stand down of a German battalion. He's also such a character. He lived in a remote mountaintop in the Oregon mountains. And the mail delivery people who would come up to his home kept knocking over his mailbox with their trucks. So he rigs the mailbox with explosives to blow up the truck the next time it happens. And he literally blew up the truck. I mean, the stuff you could get away with in the 50s.

• 6:43Ben Gilbert?

  They do not make them like that anymore.

• 6:46David Rosenthal?

  No, they do not. So when Bill comes home after the war, he first coaches high school and then he becomes the head track coach at the University of Oregon. He takes this background and character that he has and he becomes maybe arguably the most successful track coach in American history. So I believe Bill coaches the first American sub-four-minute milers. He ends up coaching several Olympic teams. He definitely turns the University of Oregon into the most prestigious track program in America. You know, he's a national celebrity, which is pretty crazy for Oregon in the 1940s, 1950s.

• 7:27Ben Gilbert?

  Right.

• 7:28David Rosenthal?

  So a few years into Bowerman's tenure as head coach, he recruits a pretty talented middle-distance runner, freshman from Portland nearby, one Phil Knight. Now, Phil also has some interesting Oregon roots. He's the son of Bill Knight, who is another well-known University of Oregon alum. He was a former lawyer in Portland. And he's the publisher of the Oregon Journal newspaper. Phil follows in his dad's footsteps. He majors in journalism at Oregon and he runs for Bowerman. And I would say Phil is okay as a runner.

• 8:05Ben Gilbert?

  Well, it's interesting. Phil Knight would describe himself in his prime as an okay runner because he was running with the best collegiate runners in the world coached by Bill Bowerman, who barely gave Phil Knight the time of day. I get the sense he was not a man of many words and certainly almost no words of encouragement, other than run faster. And so you've got Phil Knight, the guy runs a four-minute, 13-second mile and is convinced he's okay.

• 8:34David Rosenthal?

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

• 9:02Ben Gilbert?

  Yeah, and a lot of the CEOs that show up in these Acquired episodes are deeply private people, but it's mostly because they want to stay out of the limelight. And when they're in the limelight, you can see that they can turn it on and they're bright and shiny and they're sort of loving working the room. That's not Phil Knight at all.

• 9:19David Rosenthal?

  Not at all. I mean, I was super lucky. I owe 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.

• 9:32Ben Gilbert?

  Didn't he give your graduation speech?

• 9:34David Rosenthal?

  Exactly. It was amazing. It was kind of the first draft of Shoe Dog that he had been working on. The book came out a couple of years later. So great. But I remember thinking, this does not seem like the founder and CEO of Nike. You know, even here talking at Stanford, the most warmly receptive audience possible, like, he was very nervous.

• 9:54Ben Gilbert?

  Yeah. Huh.

• 9:55David Rosenthal?

  So Knight runs at Oregon. And it's important to say, we should note about Bowerman. He was definitely a person, a man like they don't make anymore. But despite what you might think, he wasn't militaristic. He really was pretty innovative. He was the first track coach, maybe college coach of any sport, who really put a focus on rest for his runners. And part of this famously for the Nike story too, was technology and was shoes. So Bowerman actually taught himself how to be a cobbler and would take athletic shoes, usually Adidas athletic shoes, and modify them or even build his own and then use his athletes as guinea pigs.

• 10:39David Rosenthal?

  To any advantage that they could have, he would be looking for and shoes were part of it.

• 10:44Ben Gilbert?

  And the technology that Bowerman was experimenting with was crazy stuff. He would rip shoes apart and he would rebuild them, this is from the Nike website, with snake skin, deer hide, or fish skin. Goofy, crazy stuff. And his guinea pig was Phil Knight because Phil wasn't at the front of the pack, so he could sort of afford to experiment on him. So very fortunate for Phil Knight and his future that he was not the fastest runner on the Oregon team.

• 11:11David Rosenthal?

  Exactly. This is where it all comes together. So after Phil graduates, he goes to business school right after undergrad to Stanford, to Stanford GSB, hence the connection. He graduates from GSB in 1962. It's also crazy. Nike feels like such a modern company. This was a long time ago. So in Phil's final term there at Stanford, he takes what is then the only quote unquote entrepreneurship course at GSB. I mean, today, there's like 100 different entrepreneurship courses. Taught by the famous professor Frank Schallenberger, who Knight gives tons of credit to for

• 11:54David Rosenthal?

  Blue Ribbon Sports and ultimately Nike. And in the course for Knight's final paper, He writes the business plan for Blue Ribbon Sports, pretty much word for word. His thesis is that he knows from growing up with his dad, and I think he actually maybe spent some summers at college and then at GSB, working in the newsroom at the Oregon Journal. And he knows from the photography department that high-end professional cameras had traditionally been the domain of the Germans. Leica was the most famous camera brand. And then at this point in time, in the 50s and 60s, the Japanese are starting to enter the market. So Nikon was the big Japanese entrant.

• 12:38Ben Gilbert?

  Fuji, Ricoh.

• 12:39David Rosenthal?

  Exactly. They made great cameras and they undercut Leica on prices by a huge amount. And he also knows about the sporting goods market from his time at Oregon and particularly being a test pilot, as they would say, for Bill's shoes. And actually, the dynamics are pretty much exactly the same in the athletic goods market. There are two companies, both German, that dominate sports equipment. One, of course, is Adidas.

• 13:11Ben Gilbert?

  Or Adidas, as the Germans would say.

• 13:14David Rosenthal?

  Yes, as we will get into in just a sec here. And the other one, to a lesser extent, was Puma. Now, there was an American athletic apparel footwear maker in Converse and others, but Converse at the time was stuck in the canvas shoe era, which was already like ancient history. So if you know Chuck Taylor All-Stars, you know, the famous Seminole Converse shoes. But if you had to guess, when do you think Chuck Taylor played basketball?

• 13:43Ben Gilbert?

  Ooh, let's see. I think if I remember our NBA episode, the NBA was really getting going like post-war, so like the 50s. I'd guess he was an early 50s NBA player.

• 13:55David Rosenthal?

  Yeah, you might think so, contemporaneously with the time we're talking about right now. No, Chuck Taylor played professional basketball in the 1920s.

• 14:04Ben Gilbert?

  Whoa.

• 14:04David Rosenthal?

  That's when the Chuck Taylor All-Star technology is from. It's a canvas shoe. By this point in time, the market had migrated to leather upper shoes, of which Adidas or Adidas was the leading technology manufacturer of it. So, anyway, basketball shoes wasn't really the market yet. It would become much, much later, as we shall see. The market was running shoes. And it was like an okay market, but this was not the camera market. So Phil Knight's thesis here, it actually didn't get any sort of notice or praise famously from his classmates or even really from the faculty

• 14:44David Rosenthal?

  because they're like, okay, this is a good idea to apply Japanese low ed 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.

• 14:59Ben Gilbert?

  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.

• 15:07David Rosenthal?

  And it's worth maybe saying one word on the Adidas or Adidas story before we move back to Phil Knight and Shoe Dog here because it's pretty crazy. So it's called Adidas because Adidas was founded by Adolf Dassler, or Adi for short, Adidas.

• 15:26Ben Gilbert?

  In like the 1920s?

• 15:28David Rosenthal?

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

• 15:59Ben Gilbert?

  And 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, like the night before his race. And Jesse Owens was like, oh, these are actually awesome. And so it was like a big sort of, uh-oh, is this going to be a problem for Adi when it comes out that the American won wearing German shoes?

• 16:19David Rosenthal?

  Interesting. I didn't know that part of the story. That makes sense because Adi's older brother Rudy worked with him in the business, as did Adi's wife and son. After World War II, though, the two brothers have a huge acrimonious split. Rudy goes off and starts a separate shoe company. It never came out what the fight was about, but one of the rumors is that Rudy went and fought in the Nazi army and Adi didn't. And maybe that might have, I don't know, but may have had something to do with it. Anyway, crazy, Rudy goes across town and starts a competing company after the war named Puma.

• 16:59Ben Gilbert?

  Craziest thing.

• 17:00David Rosenthal?

  Adidas, Adidas and Puma are the two brothers. They're both the Dassler brothers. Crazy.

• 17:06Ben Gilbert?

  Okay, so take us back to Phil Knight.

• 17:08David Rosenthal?

  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 gonna go off before he really starts life, he's gonna go take a trip around the world and he convinces one of his buddies from GSB to go with him. They go first to Hawaii famously and the buddy meets a girl in Hawaii and-

• 17:36Ben Gilbert?

  It's like, why would I leave Hawaii?

• 17:38David Rosenthal?

  Yeah, I mean, smart guy. Phil, though, goes on to Japan and he's still thinking about this idea. And when he's in Japan, he starts going to tracks in Tokyo and watching what people are wearing, running around the tracks. And he observes and he decides that the Tiger brand shoes that he's seeing are the best. So he looks up the company that makes Tigers. Turns out they're made by a company called Onitsuka, which is based in Kobe in the south of Japan, near Osaka. And Phil, for a desperate introvert, kinda crazily, this is how passionate he is about this idea. He gets it in his head that he's gonna hop on a train from Tokyo and just go knock on

• 18:20David Rosenthal?

  their door and say hi to the Onitsuka Corporation and maybe ask them if he could import some of their shoes. So the story goes that he shows up on the door and I can only imagine what 23-year-old Phil Knight is feeling as he's going through this.

• 18:38Ben Gilbert?

  Well, this is the other side of Phil's personality where he's sort of a tortured soul. He's introverted.

• 18:46Ben Gilbert?

  But he's unbelievably driven. He has a splinter in his mind where when his buddy's like, actually, this is pretty good. I'm going to stay in Hawaii. It feels like, but I'm longing for something.

• 18:56David Rosenthal?

  Yes.

• 18:57Ben Gilbert?

  There's something wrong with my existence in the world that needs to be fixed and I need to go and find out where I belong and what to do and how to change the world and how to build something. And I think he's got a motor that's just different than the way that other humans operate.

• 19:14David Rosenthal?

  I've been thinking a lot about, I think this is a David Senra saying that the CEOs and the founders of these companies that we cover, that he covers, they are the Genghis Khans of our time. And Phil doesn't present as a Genghis Khan.

• 19:29Ben Gilbert?

  Yes.

• 19:30David Rosenthal?

  But he still is.

• 19:31Ben Gilbert?

  Right.

• 19:32David Rosenthal?

  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.

• 19:41Ben Gilbert?

  And this unbelievably competitive spirit is the founding element of Nike's culture that permeates to this day. At Nike, you play to win. And I think everyone shows up to work and you wear Nike stuff and you don't ever wear any of the competitors not to, hey, I want to try out this stuff. It's like, hey, we don't do that here. That's playing for the other team. Get off the other team. You're on our team. And you wake up every day and you show up to go to work and kick your competitors asses. And sometimes that takes them to questionable places that we'll talk about later in the episode. But Nike is among the most competitive cultures in the world.

• 20:20David Rosenthal?

  It's funny you say Nike there as sort of founding principles, because Nike isn't going to come for quite a while here. While Phil is making this train trip down to Kobe, he suddenly has a realization. His plan is he's going to show up at the door. He's going to say that he's an American businessman, you know, a distributor, and he wants to distribute their shoes in America. Literally his business plan from the GSB class. He doesn't have a company, though, and he doesn't have a name for the company. So he has to think fast and come up with a name. And 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

• 21:02David Rosenthal?

  childhood days, becoming a track athlete in middle school and 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, you know, really helped define his personality. Very nice story. Very nice story. That's where the name comes from. The other story that appears in the other books is that Phil was out drinking the night before, either drinking Pabst Blue Ribbon, PBR 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 that's where the name Blue Ribbon came from. As with any of these stories, we'll never know, and it's probably some of both.

• 21:47David Rosenthal?

  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, you know, running shoe market could be a $1 billion market, which he totally makes up. He has no evidence to back this up whatsoever. He's done lots of market research.

• 22:32David Rosenthal?

  Lots of market research, and it is completely wrong in both directions. The actual US market for running shoes at this point in time, I mean, There's no way it was a billion dollars. Like, maybe 100 million, maybe? I mean, we just were talking about like, running was not a thing. It was a thing that athletes did.

• 22:52Ben Gilbert?

  Right. And the running craze or the fitness craze hadn't really started yet. So to give you a sense, David, I think you're probably spot on with that. Maybe 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.

• 23:12David Rosenthal?

  Right. So he's completely wrong on what it actually is at that point in time. He's also completely wrong on what it would become in the other direction. Thanks to Blue Ribbon and Nike.

• 23:23Ben Gilbert?

  Right. They had a large hand in growing. And I'll spoil it for listeners. The branded athletic shoe market in the US today is $130 billion. Now, obviously, not all of that is track and running, but like, a large part is running shoes, and 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 like, compare it against some other things, that is bigger than the video game market.

• 23:51David Rosenthal?

  Wow. Hey, I mean, not everybody has to play video games.

• 23:54Ben Gilbert?

  But everybody has to wear shoes.

• 23:57David Rosenthal?

  So 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. So first thing Knight does, he gets in touch with his dad. I don't know, he sends him like a telegram or something back in Portland and asks 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.

• 24:34Ben Gilbert?

  Surely the shoes would have arrived by now.

• 24:36David Rosenthal?

  Surely the shoes would have arrived. He rushes home, 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."

• 24:51Ben Gilbert?

  Wow.

• 24:52David Rosenthal?

  A little foreshadowing in what doing business with Onitsuka is going to be like for the fledgling blue ribbon sports.

• 24:59Ben Gilbert?

  And this is just to like get some samples to see if he can sell $50 worth of shoes. That takes over a year.

• 25:05David Rosenthal?

  So Phil gets home, he's disappointed. He's got to start his life. He gets a job as an accountant. He's got a business school degree. He's studying to take the CPA exams and become a licensed CPA. And then finally, at the end of 1963, I think right around Christmas, Phil writes in Shoe Dog, "The samples show up." And Phil gets them. They're great. They're what he remembers. He thinks, you know, these aren't quite maybe as good as Adidas, but they're good enough and I can sell them cheaply enough that my business plan will work.

• 25:38Ben Gilbert?

  Right. They're way cheaper.

• 25:40David Rosenthal?

  So Phil gets back and writes Onitsuka, says, "Great. I would like to be the US distributor for track and field shoes." And Onitsuka says, "Okay, great. You can be the distributor for the Western United States. We already have somebody that we're working with on the East Coast, but you can have the Western 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 sisters, who I think was maybe still in high school, to like help him part-time with receiving the inventory and sending them out and stuff.

• 26:12Ben Gilbert?

  The naivete is just dripping off of Phil at this point. It's like, "Oh, good. I have a business, so surely I will make enough money to be able to quit my job and hire people."

• 26:20David Rosenthal?

  Yes. And now, he doesn't have enough money to open a retail outlet, or even really to get enough inventory to sell wholesale to other retailers. So his genius business plan, I don't know how much of this was part of the Stanford paper or not, is he's going to drive around to track meets in Oregon and up and down the West Coast and sell the shoes out of his car.

• 26:42Ben Gilbert?

  Pretty awesome. That's like legitimately doing the shoe leather work that no one else is willing to do and getting through that hard part to get your business off the ground, establishing proprietary distribution channels.

• 26:54David Rosenthal?

  Yes. Speaking of proprietary, he also has another actually really great idea, which is that while he's driving around, he'll go down to Eugene and see his old coach, Bowerman, at the University of Oregon. And he thinks, oh, if I could get Bill to put his runners in Tigers, then that would be great marketing for me. And I know he's not always super happy with Adidas. We're going to have a better relationship. He'll be able to experiment with these shoes and I'll sell them to him for cheap. Because at this point in time, even the legendary Bill Bowerman and the University of Oregon, they bought all the shoes.

• 27:38David Rosenthal?

  Nobody was giving them shoes. It was like a major line item in their budget.

• 27:43Ben Gilbert?

  Crazy. And so let's just take a quick pause and recognize this company that would eventually become Nike, started, A, not as Nike, B, not with a swoosh, C, not making a product. It's literally just importing and reselling someone else's product. And the plan is to build a big business off the back of not actually making things.

• 28:09David Rosenthal?

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

• 28:14Ben Gilbert?

  But maybe that penciled more at the time. Being in this super globalized world that we're in now with the internet and companies with these massive resources that can scale immediately.

• 28:25David Rosenthal?

  And venture capital.

• 28:26Ben Gilbert?

  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.

• 28:48David Rosenthal?

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

• 29:05Ben Gilbert?

  Yep.

• 29:06David Rosenthal?

  So Phil goes down to see Bowerman. And to Phil's surprise, I mean, Bowerman is not a warm and fuzzy guy. He's never really shown Phil much encouragement when he ran for him or since. Bowerman says, this is a pretty good idea. Not only do I want the shoes for cheap, I want you to cut me in on the deal. I want to be partners with you in this company. And Phil is like floored.

• 29:34Ben Gilbert?

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

• 29:43David Rosenthal?

  So Phil's like, what's the deal you have in mind? I think originally Bowerman says 50/50 and then he sleeps on it and he comes back with his lawyer and he says, actually, let's do 51/49. I want you to have 51, me to be 49, because I don't really want to be involved here.

• 30:01David Rosenthal?

  Now, on the one hand, this is super exploitative of Bowerman, of his old athlete that still obviously looks up to him like a father. It's kind of like there weren't really VCs yet in this era, but when there would be like VCs taking 50, 60, 70% of the company. On the other hand, this is a no-brainer yes for Phil.

• 30:20Ben Gilbert?

  Right, he's giddy about it. He's like, oh, only half the company? Great.

• 30:24David Rosenthal?

  Well, and 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

• 30:35Ben Gilbert?

  Yes.

• 30:36David Rosenthal?

  Blue Ribbon Sports, which is a completely different animal.

• 30:39Ben Gilbert?

  Yes. So I was thinking about this. After reading Shoe Dog, I was like, hmm, because I just read it for the second time. It just feels a little weird that Bowerman would just kind of immediately be like, yes, I'll go into business with you, person who ran for me that I never had a particularly close relationship with. And so I've always wondered, like, why was he so eager to do this? And as part of the research, I stumbled upon this guy named Scott Reams, who was formerly a Nike historian. He worked in the marketing department and then for over 20 years worked at Nike and became the company historian. He has an epic set of LinkedIn posts that are really like these incredible gems pointing out things in company history.

• 31:24Ben Gilbert?

  And so he's got this post, he says, based on letters in the University of Oregon and Nike archives, Bill Bowerman corresponded directly with many footwear manufacturers in the 1950s, so like 15 plus years before this, including Adidasler, directly to Adidasler, 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 Adidasler years before. But the responses he received referred him to footwear distributors in the United States for Adidas and ignored his design offer. So Bowerman is sitting there and he is primed. He's like, oh, you're going to import foreign shoes and give me a deal? I'm in.

• 32:09David Rosenthal?

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

• 32:29Ben Gilbert?

  Oh, did you read his post too? I sent you his LinkedIn. Did you look through them all too?

• 32:32David Rosenthal?

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

• 32:37Ben Gilbert?

  Really?

• 32:38David Rosenthal?

  He spent a few days helping me put our version, acquired version of the Nike story together. We have a huge, huge thank you to him, but I was going to surprise you with this. This is super cool.

• 32:50Ben Gilbert?

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

• 33:13David Rosenthal?

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

• 33:18Ben Gilbert?

  Great. All right. So Bowerman.

• 33:19David Rosenthal?

  So, 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. And they do, they, meaning Phil, does what he intended to do. He drives around to track meets around the Pacific Northwest and sells them out over the back of his car. And Even with that funny sale 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. Like, he's the most introverted person in the world. He can't be a salesman.

• 34:04David Rosenthal?

  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.

• 34:16Ben Gilbert?

  When you believe in something, sales are just natural.

• 34:19David Rosenthal?

  It's so true. So they sell out basically immediately, and then they plow all the profit that they're making back into the next orders of inventory from Onitsuka. So they do $8,000 in revenue in 1964. That doubles in 1965. They do $16,000 in revenue. But Ben, as I think you're about to say, there's kind of a problem here.

• 34:40Ben Gilbert?

  Well, there's a few problems, one of which is they're not making that much money. It's not a great gross margin business. You have to pay to import these shoes from Japan. How much can you really mark them up to sell them? And if you're making, I don't know, two, three bucks profit, something like that, on each pair of shoes, you have to sell a lot of shoes if your only way to get money to buy more inventory is the profits from the shoes that you sold last order. I don't even know how you double year over year because where's the money coming from to get the inventory?

• 35:11David Rosenthal?

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

• 35:49Ben Gilbert?

  So half the gross margin ends up going into sales and marketing expenses.

• 35:53David Rosenthal?

  Exactly. So that leaves, what, $1.75, maybe $2, like you said, in profit per pair.

• 36:00David Rosenthal?

  How are you gonna order more inventory at $3.50 a pair when you're making $2 in profit per pair? The math doesn't pencil. Wow. Quick aside on Jeff Johnson. Like we said, he is absolutely legendary. He also sells out of the back of his car. He's based in California. He met Knight at Stanford. Jeff was a Stanford undergrad who ran track and met Knight while he was at GSB. Johnson sells out of the back of his car. He evangelizes the brand. He designs shoes. He eventually opens Nike's first retail store in LA. He sets up manufacturing. He moves back and forth across the country. He is basically like everything you would ever want in a first employee at a company.

• 36:45David Rosenthal?

  To find a Jeff Johnson is the most incredible thing that could ever happen to a startup company.

• 36:52Ben Gilbert?

  And he has an irrational passion for running, which basically no one else did at the time. Here's a great quote from Shoe Dog. So it's in Phil Knight's voice. "In 1965, running wasn't even a sport. It wasn't popular. It wasn't unpopular. It just was. To go out for a three-mile run was something weirdos did, presumably to burn off their manic energy. Running for pleasure, running for exercise, running for endorphins, running to live better and longer. These were things that were unheard of. People went out of their way to mock runners. Drivers would slow down and honk their horns. 'Get a horse!' they'd yell, throwing a beer or soda at the runner's head." And he goes on to say that Johnson had many sodas thrown at his head while he was out running.

• 37:32David Rosenthal?

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

• 37:43Ben Gilbert?

  Right. It's just normalized into life.

• 37:45David Rosenthal?

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

• 37:59Ben Gilbert?

  Yeah, totally wild.

• 38:01David Rosenthal?

  So back to this financing issue. As you can imagine, the only way to grow as a company with the set of operating constraints that Blue Ribbon Sports has is through financing. And the only way to get financing in Portland, Oregon, in those days, was to go to Oregon regional banks. I think actually there were laws in the US that corporate banking could not happen across state lines.

• 38:30Ben Gilbert?

  Correct.

• 38:30David Rosenthal?

  So there are only like two or three banks that Knight even has the option of going to.

• 38:35Ben Gilbert?

  Yep. And by the way, when you're going to get money from the bank, it's not equity capital. They're not saying like a venture capitalist would say, oh, I'll buy a piece of your business and value it at this and give you the money at that. It's just pure loan that you owe back to them at some point in time with interest.

• 38:52David Rosenthal?

  Yep. 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. They're not going to be very risk-seeking. They're going to be quite risk averse.

• 39:07Ben Gilbert?

  So 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, and according to my banker, this was a very troubling trend. A 100% increase in sales is troubling?" I asked. "Your rate of growth is too fast for your equity," he said. "Growth off your balance sheet is dangerous." And this is where Phil Knight's complete opposite approach comes in. He goes, "Life is growth. Business is growth. You grow or you die." And the banker says, "That's not how we see it." And there's a couple 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.

• 39:48Ben Gilbert?

  And what he's talking about here is the technical definition of equity.

• 39:53David Rosenthal?

  The book value of equity.

• 39:54Ben Gilbert?

  Right. Your total assets minus your total liabilities is your equity. And in many cases, you can sort of squint at this if you don't have a lot of liabilities or a lot of debt on your books and say, okay, so it's basically like the cash in the bank. It's the assets you have on hand is your equity. So what this banker is basically saying to Phil Knight is, "I will only loan you up to the amount of money that I already know you have."

• 40:16David Rosenthal?

  Yep.

• 40:17Ben Gilbert?

  Now, that's not terribly helpful. It's basically a cash advance. It's like, well, the money that I have is sort of tied up in other stuff like inventory and you're just loaning me enough money for me to make my next order, but there's not actually any real new capital. It's not like there's a post-money valuation. You're basically just saying, you can borrow these dollars, then you can give them back to me and I'm going to cap your dollar limit super low.

• 40:41David Rosenthal?

  Yeah, it's basically factoring.

• 40:43Ben Gilbert?

  Right.

• 40:43David Rosenthal?

  Is what it's known as today.

• 40:45Ben Gilbert?

  Right.

• 40:46David Rosenthal?

  So, yeah, as you can imagine, there are quite a lot of struggles with the various banks in Oregon and it's all very well chronicled in Shoe Dog. So, since growth is literally rate limited by the banks, Knight decides that he can't justify taking a salary. He goes back to being an accountant by day. He joins Pricewaterhouse in the Portland office. He does that for a couple of years. I mean, years, years. Takes a long time to grow this thing. Eventually, Blue Ribbon does become big enough and he needs to devote enough time to it that he can't be a full-time accountant. So instead, he gets a job teaching accounting at Portland State where he meets two women.

• 41:30Ben Gilbert?

  Both of which will change his life.

• 41:32David Rosenthal?

  The first one is a student, man, things were different in the 60s, a student in his first class that he teaches named Penny Parks, who he sees has a great potential as an accountant. So he hires her as a bookkeeper, part-time while she's a student, I believe, for Blue Ribbon Sports. Very shortly thereafter, she becomes Penny Knight, his wife. Now, I think of, gosh, like 60 years, maybe?

• 41:59Ben Gilbert?

  Yeah.

• 41:59David Rosenthal?

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

• 42:22Ben Gilbert?

  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. And so, he's like, "Fine, I'll give in to some other people who are advising me that I should make some brochures or something."

• 42:34David Rosenthal?

  And 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.

• 42:42Ben Gilbert?

  Yes.

• 42:44David Rosenthal?

  She says, sure, put a pin in that. We are going to come back to Carol and Davidson and the Nike art department in a minute here.

• 42:53Ben Gilbert?

  Yes. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 43:13David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 43:34Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 43:56David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 44:14Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. Okay, David. So should we share the Carolyn Davidson thing now? Or don't we need to evolve Nike a little bit more before it really comes into play?

• 44:50David Rosenthal?

  Yeah, put a pin in it. We'll come back to it. So in the meantime, by hook or by crook, and you know, maybe 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. You're noticing a doubling theme here. Turns out, even from a very low base, if you double every year for like 20 years, you can still become a big company. So then, in 1967, Bowerman, remember, you know, Bowerman's been involved.

• 45:35David Rosenthal?

  His name, his association with the company has been huge throughout all this. But like you were saying a minute ago, Ben, his real motivation is he wants R and D access. He wants to be able to make shoes. And in 1967, ahead of the 1968 Mexico City Olympics, he comes up with a new idea for an entirely new type of shoe, one that he probably can't really manufacture on his own. But now he has this relationship with Tiger, with Onitsuka. And his idea is that rather than leather on the upper parts of these track shoes, what if we instead use a breathable material like nylon? So that my runner's feet aren't sweating throughout the whole race.

• 46:21David Rosenthal?

  On the one hand, like, yes, nobody likes sweaty feet. On the other hand, if your feet sweat a lot in leather shoes over the course of several miles, well, they're going to get heavier and weighed down. And so maybe this might help the shoes stay lighter. And Bowerman is obsessed with lightweight in his shoes.

• 46:38David Rosenthal?

  So Onitsuka is very receptive to this. They think, great, we love this. We'll make the shoe. We can do that. We can source the nylon. We'll make the shoe. So Bowerman and Phil get together. They're like, this is amazing. We're going to have our own model, you know, that we've designed, that Bowerman's designed.

• 46:55Ben Gilbert?

  Which you should already start to get a little bit nervous here because it's like, well, okay, who?

• 46:59David Rosenthal?

  Who owns this shoe? Exactly. Well, that would be for the courts to decide.

• 47:03Ben Gilbert?

  Is it like the Blue Ribbon Shoes Design Company owns the design and they hired a contract manufacturer? Or is it more like, oh, we just gave you a little suggestion idea? And like, we BRS don't own anything?

• 47:14David Rosenthal?

  Yep. The relationship complicates a little bit here. It's no longer just, hey, we're the American distributor of Tigers. So Bowerman and Phil want to call the shoe, they actually want to borrow from the Adidas playbook and call the shoe the Aztec ahead of the Mexico City Olympics. Adidas has been doing this for years. They always come out with new shoe models ahead of whatever the Olympics is in the world every four years. Adidas, of course, has already beaten them to the punch. They have trademarked a shoe that they're coming out with called the Azteca Gold. And I don't know if it's Blue Ribbon or Onitsuka decides that the Aztec is too close to that. So legend has it, you know, knowing

• 47:58Ben Gilbert?

  So good.

• 47:59David Rosenthal?

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

• 48:28Ben Gilbert?

  I bet someone out there is wearing Nike Cortezes right now. It's become like a lifestyle shoe and less of a running shoe because the definition of a running shoe has changed dramatically. And so the fascinating thing is if you look down at your Nike Cortez or you Google a picture of it, it's basically exactly the same as the thing that they came out with. But when they came out, it had the Onitsuka, now Asics, design on it, not the swoosh.

• 48:54David Rosenthal?

  Yeah. Spoiler alert, Tiger eventually became Asics.

• 48:57Ben Gilbert?

  Yes.

• 48:58David Rosenthal?

  So also in 1967, Bowerman has another just monumental contribution. His contributions, though sporadic when they happen, are enormous.

• 49:09Ben Gilbert?

  Yeah.

• 49:09David Rosenthal?

  So he writes a book. I feel like some marketing agency these days would advise a startup on, oh yeah, this is how you build a market, you know, write a book, start 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. And he discovers the concept of jogging. I don't even know if the word jogging really existed in America at this point in time. The idea of running not to win, but to run for joy or for physical fitness was an entirely foreign concept.

• 49:48Ben Gilbert?

  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?"

• 50:22David Rosenthal?

  This is Phil Knight, the founder of Nike. Right. I mean, even Phil Knight is like, jogging? That's crazy. So Bowerman writes this book. It's called Jogging: A Physical Fitness Program for All Ages. He writes the book, it comes out in 1967. Life magazine, and Life magazine was huge in America at the time. They come out to Oregon and they write a profile of him and his jogging clubs that he started for the citizens of Eugene of all ages to get into jogging and physical fitness. And by God, I mean, as much as anything, this... Book and this article is what starts the fitness movement in America.

• 51:05Ben Gilbert?

  Yep, it's the craziest thing. I keep going back and forth when looking at Nike and say, did they benefit from this enormous wave that they were riding? Or did they create a wave? And I think it was actually both.

• 51:19David Rosenthal?

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

• 51:36Ben Gilbert?

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

• 51:58David Rosenthal?

  Yeah.

• 51:59Ben Gilbert?

  Perfect.

• 51:59David Rosenthal?

  So great.

• 52:01Ben Gilbert?

  And the fact that Blue Ribbon really did have, it's starting to become pretty real distribution at this point to the West Coast. They actually had built a brand and a trustworthiness with customers and coaches and that sort of thing for themselves that not only could Bowerman write the book and evangelize and have the idea, but they could actually get shoes onto the feet of people. Cause out of this budding company, they actually had a little bit of distribution.

• 52:25David Rosenthal?

  And more than just athletes.

• 52:28Ben Gilbert?

  Yeah. Or more importantly, changing the definition of athlete.

• 52:31David Rosenthal?

  Yes, I like that. Changing the definition. More than just people who define themselves by their occupation, whether amateur, professional as athletes.

• 52:40Ben Gilbert?

  Right.

• 52:41David Rosenthal?

  So by 1970, just a short while after this, Blue Ribbon is now doing over half a million dollars in annual sales. So they're like a real company now. They're selling out of the 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 asks for, hey, you know, great.

• 53:14David Rosenthal?

  The Cortez is selling out. Great. Fitness is this new thing. We're a half a million dollar revenue company. We've got a three year ironclad deal with our manufacturer.

• 53:23Ben Gilbert?

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

• 53:39David Rosenthal?

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

• 53:50Ben Gilbert?

  He trips the alarms.

• 53:51David Rosenthal?

  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.

• 54:00Ben Gilbert?

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

• 54:03David Rosenthal?

  Sure, whatever.

• 54:04Ben Gilbert?

  But a kid off the street can walk out of Stanford and raise $8 million today.

• 54:08David Rosenthal?

  Exactly. Just say it's an AI company. So the bankers, not literally, although literally, they would do this very shortly thereafter, they throw him out. They're like, no, no, no, we're done here. You can't be doing this. We're done.

• 54:21Ben Gilbert?

  I'm just fascinated by this concept of it's almost as if the idea of enterprise value didn't exist, that literally a company could only possibly be thought of as its assets minus its liabilities. So what that meant was if you want to grow your company and you want to grow it as fast as possible, then it means you can only take out as much debt as you have assets in the company. But you probably shouldn't because then if anything goes wrong, your company is like immediately wiped out because your debt to assets ratio is like literally 100. And what Phil Knight did was all of the time kept it at a 100% ratio or close to it, like a 90% ratio. He'd look and see how many assets they had and

• 55:02Ben Gilbert?

  say, great, we should have exactly that much debt too, so I can grow as fast as possible. And so it kind of becomes this game of musical chairs where when you're levered that hard, you need to be growing super fast because you need to

• 55:18Ben Gilbert?

  Get that inventory off the boat, sell it so you can as fast as possible go and pay off the bank so that A, the interest doesn't pile up and you don't trip a bunch of covenants, but B, so that then you can go ask them for another loan to do the same thing again. And you literally need growth as the only way to keep the lights on. It's not just growth as a virtue, it's growth as a necessity. And this, in addition to the competitive thing I mentioned earlier, where Nike is a competitive company, Nike is a growth company. And if you go to their investor relations page to this day, across the top in big, bold letters, it says Nike Inc. is a growth company.

• 55:58Ben Gilbert?

  They were born out of this is the only possible way to continue our existence is grow so we can pay off the bankers.

• 56:06David Rosenthal?

  Two things here. One, this is so sad. That's the way it was. And thank God, the business world has evolved since then. I mean, you can decry the ridiculousness of startups and VC and tech and all that now, but this is a way better alternative than the way things used to be. Two, though, ironically, I actually, as crazy as this sounds, think it was a critical element of Nike succeeding and becoming Nike. Because if it were too easy, there would have been a flood of other competitors. Or Onitsuka and others would have just done this themselves.

• 56:47Ben Gilbert?

  Right. It's like many of the stories we tell, that it's path dependent. The only way to have built what they built was to have endured what they endured in a system that was stacked against them.

• 56:56David Rosenthal?

  Yes. And there's huge survivorship bias here.

• 57:00Ben Gilbert?

  Yep.

• 57:00David Rosenthal?

  But the journey that they had to go through to survive is incredible.

• 57:05Ben Gilbert?

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

• 57:13David Rosenthal?

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

• 57:32Ben Gilbert?

  Direct listing?

• 57:33David Rosenthal?

  Yeah, I think it's something like that, where they sold shares, Ben & Jerry's sold shares in Vermont to like their neighbors.

• 57:38Ben Gilbert?

  Yes.

• 57:38David Rosenthal?

  This is what Phil wants to do, and this is how bad it is. So A, he changes the name of the company.

• 57:45Ben Gilbert?

  This is so good.

• 57:46David Rosenthal?

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

• 57:59Ben Gilbert?

  Cause he hears that people are getting financing for their business in the form of equity capital, where they're willing to assign a valuation to the company, and regardless of what your current sales and assets look like, that sort of takes your potential future growth into account and gives you capital in exchange for that. And what they want is a percent of the upside, you know, equity investing as we know it today in startups. And all of that is happening in Northern California into tech companies, as we chronicled on the Sequoia episode with Don Valentine. It's that era.

• 58:30David Rosenthal?

  Exactly. We are right in that era now. Don is about to start Sequoia. A lot of this is happening around Stanford. Of course, Phil up in Oregon is hearing about this. But once anybody, you know, any proto venture capitalist digs into Sports Tech, they're gonna be like, no.

• 58:46Ben Gilbert?

  So what I've never been able to figure out is, did he change it to Sports Tech Inc. and then change it back to Blue Ribbon Sports? Or did they sort of like, I'm trying to figure out if they ever literally changed the name on documents.

• 58:56David Rosenthal?

  Oh, that's a great question for Scott Reams. We'll have to ask him.

• 58:59Ben Gilbert?

  Yeah, yeah.

• 59:00David Rosenthal?

  So this is how bad it is, though. The offering fails. Nobody's interested. None of these proto VCs, none of the local business people in Portland, they're all like, oh, no, no, this is a terrible company.

• 59:11Ben Gilbert?

  Well, and Phil might undersells it, too. Before he learns some of his later lessons, it's his super humble, you know, I'm not a very good runner, I'm only a 413 miler type attitude.

• 59:22David Rosenthal?

  Right. Aw, shucks.

• 59:24Ben Gilbert?

  Yeah, and so that's not gonna sell shares in your company.

• 59:26David Rosenthal?

  Yep. So he ultimately has to raise some money from the families of some of the employees at Blue Ribbon, most famously Bob Woodell, who would become Nike's first president other than Phil when Phil takes a sabbatical later in the 80s. Bob is this amazing story. He was also a Bowerman runner, had a terrible accident in college and was confined to a wheelchair for the rest of his life, becomes one of Nike's and Blue Ribbon's first employees, and then becomes a huge leader, builds so many things at the company and becomes the first president other than Phil. But he doesn't come from wealth and his family loans, I think, $3,000 or $5,000 to Blue Ribbon,

• 1:00:10David Rosenthal?

  like a huge amount of money for them.

• 1:00:12Ben Gilbert?

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

• 1:00:15David Rosenthal?

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

• 1:00:21Ben Gilbert?

  It's amazing. Yeah. The way that he was financing this was basically through convertible debt. And so all the pre-IPO little friends and family financings that he's doing here are convertible notes.

• 1:00:31David Rosenthal?

  So this brings us to 1971. The Anus, either Mirabellus or Haribla, depending on how you want to think about it. I just butchered both Latin and French there. But clearly this financing path isn't going to work for the next stage of growth. Eventually, 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.

• 1:01:14Ben Gilbert?

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

• 1:01:23David Rosenthal?

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

• 1:01:27Ben Gilbert?

  And it's sort of a hybrid between a lender and a...

• 1:01:33Ben Gilbert?

  Supply chain partner, where it's a company that has some primary business that they're doing.

• 1:01:40David Rosenthal?

  Slash private equity firm slash holding company.

• 1:01:43Ben Gilbert?

  Yes. It's a company that, in this particular instance, has a business that they're in and generates a bunch of cash. So what do you do with the company's treasury? Well, you could do boring stuff with it, or you could make strategic investments with it, or you could operate a financing business where you leverage all of the unique relationships you have from the parent company to do diligence, to advantage your investments, to put your foot on the scale. And you're using the fact that you have a large treasury to open a competitively advantaged bank, especially in sourcing international goods.

• 1:02:20David Rosenthal?

  Yes, to do asset-based financing, exactly what Blue Ribbon needs. So the company that he ends up meeting at the local branch office of it in Portland, I think they might have been the only Japanese trading company with a branch office in Portland, is Nisho 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. And it was, I think, the sixth largest Japanese trading company. The other ones that many listeners probably will have heard of are companies like Mitsubishi,

• 1:03:03David Rosenthal?

  or Mitsui, or Sumitomo. These are enormous companies, and especially in the 70s, as Japan was really rising, and we told the story on the Sony episode, Nisho Iwai was a godsend for Blue Ribbon.

• 1:03:20Ben Gilbert?

  And it could have gone either way. That was the thing with these Japanese trading companies, is if you weren't super clear on exactly what you wanted upfront, it could totally go the way of private equity, where, oh, you tripped one coven in, or up you this, that, the other thing. And suddenly, they're able to own a controlling interest of your company, or they're able to take over management and install their own people. It was a PE-style financing, where oftentimes, they would sort of take over and absorb the businesses that they were financing. So Phil Knight was going into this, saying, okay, That really, really, really can't happen to Blue Ribbon. What can I possibly negotiate with these guys to make it so that their interests are aligned with mine, but not in a way that could compromise my control?

• 1:04:05David Rosenthal?

  Right, because he gets a little spooked. According to Shoe Dog, Phil walks into the office of Nisho Iwai in Portland. This is like the Portland, Oregon branch office of Nisho 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 Sumaragi. And he offers on the spot to finance all of Nike's inventory, on the spot, in a meeting in the branch office in Portland. So Phil's like, whoa, how do I deal with these guys?

• 1:04:38Ben Gilbert?

  Right. They're a little too eager. This can't be that good of a deal, what's going on here.

• 1:04:43David Rosenthal?

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

• 1:04:45Ben Gilbert?

  And why is it a great deal? Well, the first thing you have to know is Nisho knows Japanese manufacturers. And so they start asking Phil Knight questions like, well, who do you work with in Japan? And like, would you ever make your own shoes? And are you looking for relationships with more factories? And so they start to get the sense that like, maybe eventually we could put our foot on the scale in certain ways and help this company win. And so if we're doing business with them as their financing partner, this could be really good for us, too.

• 1:05:16David Rosenthal?

  So Phil, in retrospect, makes the mistake of calling up Onitsuka and saying, hey, you know, I'm in this lurch with financing. I just met Nisho Iwai. They offered to finance all my orders with you guys. Would you be okay if I do it? And they immediately say, absolutely not. And the reason they say absolutely not has been, just like you're saying, they know what's going to happen here, is Nisho is going to say to Phil, hey, you know, this is nice that you're buying Onitsuka's inventory. Onitsuka, I think, is like a 20, 30, maybe 40 million dollar revenue company in Kobe at this point in time.

• 1:05:56Ben Gilbert?

  Right. This could creep into us.

• 1:05:58David Rosenthal?

  Nisho is a hundred billion dollar company, right? Nisho is going to say, hey, we'll introduce you to manufacturers, to factories here in Japan. Build your own shoes. Make your own brand. Screw these Tiger guys. And that is exactly what happens.

• 1:06:14Ben Gilbert?

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• 1:06:28David Rosenthal?

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• 1:06:42Ben Gilbert?

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• 1:06:52David Rosenthal?

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• 1:07:09Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise: the workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 1:07:25David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 1:07:42Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:07:51David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 1:08:02Ben Gilbert?

  Okay, so Blue Ribbons 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. You know, they need this cash to be able to buy their next round to grow the company. Nisho enters the picture. How does it go from here?

• 1:08:23David Rosenthal?

  So this basically sets off a whole chain of events that would later get prosecuted in court. So Onitsuka, as we said, they are super nervous. They know what this Nisho relationship is going to mean for Blue Ribbon, and it's not good for them. So they start looking around at working with other potential distributors in the US. They assume that Blue Ribbon, one way or another, is going to end their relationship with them here. They also, as kind of a last ditch effort, make an offer to buy Phil out, to buy Blue Ribbon. And Phil thinks he's being smart here. He stalls. He doesn't say yes, he doesn't say no. He's like, oh, let me talk to Bowerman.

• 1:09:07Ben Gilbert?

  Yes. And one thing I was trying to figure out, so in Shoe Dog, it doesn't give a value. Phil just says that his contact at Onitsuka offers to buy 51% of Blue Ribbon and keep him as a minority partner. And from some other sources, what Phil Knight says in interviews is that they offered to buy it for book value.

• 1:09:30David Rosenthal?

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

• 1:09:34Ben Gilbert?

  So it's a pretty terrible deal because what is the book value of a company that 100% of the time has its capital tied up in inventory?

• 1:09:43David Rosenthal?

  Right, it's zero.

• 1:09:44Ben Gilbert?

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

• 1:10:05David Rosenthal?

  Right, but they probably turned that inventory several times. So at any given point in time, the inventory is less than that.

• 1:10:11Ben Gilbert?

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

• 1:10:20David Rosenthal?

  Right. He knows at this point that he's done with Onitsuka. They're going to go with Nisho 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.

• 1:10:40Ben Gilbert?

  And by the way, this relationship so far has been unbelievably fruitful. They're at the point now where because of Blue Ribbon, 70% of runners in the US, mind you, runners is not a large category yet, but runners in the US have Onitsuka shoes.

• 1:10:55David Rosenthal?

  Yeah. So this is pretty important.

• 1:10:58Ben Gilbert?

  Yeah.

• 1:10:59David Rosenthal?

  So there's a whole bunch of stuff. Phil hires a spy. There's a thing where the Onitsuka management team comes over to visit Blue Ribbon headquarters. Phil steals some documents out of the guy's briefcase.

• 1:11:12Ben Gilbert?

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

• 1:11:19David Rosenthal?

  Yeah, it's pretty bad. Even worse, Phil's a combination, as we keep saying, of Genghis Khan and like extremely introverted and really naive. He writes a memo to the whole company saying that he's hired a spy at Onitsuka. This is not the kind of stuff that you want coming up in legal discovery later. A whole bunch of this stuff happens. They end up in this literal Mexican standoff here where like, there's no way out without firing shots and somebody has to fire a shot first and it's Phil. Phil shoots first. He's like Khan, he shoots first. And I say Mexican standoff too, because A, that is the situation they're in, B, the first shot gets fired in Mexico.

• 1:12:00David Rosenthal?

  So while Phil is waiting on spinning up the Japanese factory relationships with Nisho Iwai, he remembers from back in the Mexico City Olympics in 1968, I think, that there was a factory, I believe in Guadalajara, that Adidas had used to make soccer cleats for the Olympics. And he says, you know, those soccer cleats that Adidas made were pretty good. Let me go down to that factory and see if I can get some of those cleats. And we'll sell them here in America as Blue Ribbon American Football cleats. Now technically, he thinks this won't violate his exclusivity agreement with Anizuka,

• 1:12:44David Rosenthal?

  because Anizuka doesn't make football cleats. Now, that's debatable.

• 1:12:50Ben Gilbert?

  Yeah, there's a paragraph in the written agreement that gives Phil Knight three years, or whatever it is, of exclusive distribution. In exchange, he is forbidden from importing other brands of track and field shoes. And so theoretically, he thinks as long as they're not track shoes, it's fine.

• 1:13:07David Rosenthal?

  So he goes down to the factory in Mexico. He's like, can I get the shoes? And they're like, yeah, sure. What do you want to put on them? When we made them for Adidas, you know, we had the three stripes on them, the Adidas stripes. What design do you want on your version of these shoes? And oh yeah, by the way, what do you want to call them? And Phil's like, um, let me get back to you on both of those. So he goes home to Portland and calls up who else? Carolyn Davidson.

• 1:13:33Ben Gilbert?

  Yep.

• 1:13:33David Rosenthal?

  The part-time art department at Blue Ribbon Sports for $2 an hour. And he asks her to design something like Adidas' stripes that can go on the sides of these soccer/football cleats. And huge thank you here to Scott Reams for helping us sort out exactly what the timeline is and what the details are, because it's not well understood how this all went down.

• 1:13:58Ben Gilbert?

  And you can actually hear quotes from Phil Knight in interviews and a little bit in Shoe Dog, where it disputes other records of how this all went down. And people care a lot about this, because obviously what we're getting here is the origin of the swoosh and of Nike. And so how does this end up happening? The most interesting thing is from Scott, he put this on LinkedIn. He talked to Carolyn herself about this. Her recollection is that originally, in the request to create what became the swoosh,

• 1:14:29Ben Gilbert?

  They wanted structural support as an element in the design. And she came back with some designs. They didn't like any of them. And so in the second revision, they dropped the requirement that it be supportive in any way and that it's just about having the brand sewn on to the outside.

• 1:14:50David Rosenthal?

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

• 1:15:08Ben Gilbert?

  Right. So it's literally not inspired by the Greek goddess of victory. Like I was just in France. I just stood in front of the winged victory statue. It's this beautiful, incredible thing in Paris. There's this myth running around forever and ever that the swoosh is inspired by one of those wings. The name Nike came after the design of the swoosh, which by the way, also was not called a swoosh yet.

• 1:15:29David Rosenthal?

  Okay. So as you say, she goes through two rounds of sketches. When the second round comes back, they're out of time. The factory is calling and they're like, hey, shoes are just about ready. We just got to put the sides on them. What do you want? So finally Phil and Jeff Johnson and Bob Widdell, they're sitting around and a couple of other folks. And they're like, well, we got to pick one. And they're like, well, maybe, I don't know, this one that kind of looks like a checkmark. It maybe is the best of the bunch. And Phil very famously says the line, I don't love it, but maybe it'll grow on me.

• 1:16:05David Rosenthal?

  And that becomes the swoosh. Now 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.

• 1:16:17Ben Gilbert?

  Which also, she says she spent way more than 17 and a half hours, but it was just kind of coming up with some price to charge. Fun thing about, I did the math on the IPO shares. When Nike went public, they did give her 500 shares. The stock price today is around 110 and it has split seven times. So two to the seventh times $110 a share, times her 500 shares. Is worth $7 million today.

• 1:16:44David Rosenthal?

  Nice. And I heard Phil say somewhere, I think it might have been in the GSP graduation speech, I believe he said that she held the shares.

• 1:16:53Ben Gilbert?

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

• 1:16:59David Rosenthal?

  Yeah. Wow. Incredible.

• 1:17:01Ben Gilbert?

  Pretty cool.

• 1:17:03David Rosenthal?

  So they send the logo off. So a short while later, factory in Mexico calls them up and is like, all right, shoes are done. We're ready to box them and ship them. What should the model name of these shoes be? Like the Cortez or the Aztec Gold or, you know, whatever they had called them. What's the model name of the shoes? And so back at Nike headquarters, they're all sitting around brainstorming. And this is where all the famous ideas that get thrown out, Phil Knight loves Dimension Six, the other people are throwing out the Bengal, the Falcon, you know, all the naming ideas. The idea is they want to name the model of the shoes, like these cleats. What are the cleats called? They're not coming up with a name for the company.

• 1:17:48Ben Gilbert?

  And it's the idea it's going to be the blue ribbon Dimension Sixes.

• 1:17:52David Rosenthal?

  Yes. So legend has it, and as best as we can tell, this is actually true. In typical Phil Knight style, he can't make a decision. They're waiting towards the end. It's the same story has happened with the logo all over again. They're batting it around and then the night before they need to finally drop dead, give the name of the shoes to the factory. Jeff Johnson comes in and is like, I had a dream last night.

• 1:18:19Ben Gilbert?

  Johnson.

• 1:18:20David Rosenthal?

  And in the dream, the name came to me, Nike. And everybody's like,

• 1:18:27Ben Gilbert?

  What are you talking about?

• 1:18:28David Rosenthal?

  What are you talking about? And he's like, the winged Greek goddess of victory.

• 1:18:35David Rosenthal?

  These are gonna be the Nike football cleats. And everybody's like, alright, well, we like that better than the other stuff. Ship it. But it wasn't that big a deal. Like, it was a big deal, but it wasn't that big a deal. This wasn't intended to be Nike. This was intended to be the name of the model of the football cleat.

• 1:18:54Ben Gilbert?

  That they weren't even sure it was gonna work.

• 1:18:55David Rosenthal?

  Right, and it didn't work.

• 1:18:57Ben Gilbert?

  Turns out, this factory, not very high quality.

• 1:18:59David Rosenthal?

  Well, no, I don't think that was the problem. I think the factory was fine. I mean, they made shoes for Adidas for the Olympics. The problem was, it was in Guadalajara. It doesn't get very cold in Guadalajara. So, the shoes were great, but in freezing temperatures, they would crack. They'd never been tested in the cold. And, you know, as Americans at least know, many American football games are played in cold temperatures. So, they ordered 3,000 pairs, they sold them. Apparently, the Notre Dame football team wore them that year, or at least the quarterback did. Then they would crack in cold weather. So, it was a very inauspicious start to Nike in the swoosh here.

• 1:19:36Ben Gilbert?

  Yeah, it's kind of amazing that they even continued after that, or that they didn't just give up and say, "Okay, shoe distribution sounds a lot better than making shoes."

• 1:19:44David Rosenthal?

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

• 1:19:58Ben Gilbert?

  Yeah, and this, to me, is a little bit of a thing in Nike's DNA, where they are competitive all the way up to the line, and then one toe over.

• 1:20:10David Rosenthal?

  Yeah, what's the Uber corporate value toe-stepping from the Travis era?

• 1:20:14Ben Gilbert?

  It's very much that. It's, we are fiercely competitive, and at this point in time, it was to stay alive, so I get it. But for their whole existence, it's like, is there anything we can do that other people aren't doing? Because they kind of think you can't, but maybe we'll do it anyway and deal with the repercussions. That kind of happens with Nike over and over and over again.

• 1:20:32David Rosenthal?

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

• 1:20:55Ben Gilbert?

  Yep.

• 1:20:55David Rosenthal?

  So with that, Onitsuka pulls out of the relationship. They don't send any more tigers to Blue Ribbon. Phil signs a deal finally with Nisho EY. And the core part of the deal is Nisho will A. Finance all of Blue Ribbon's financing needs henceforth. Pretty much at a scale that goes all the way up to the moon. I mean, they're a $100 billion revenue company, certainly way more than any of the Oregon banks could do. And they'll do that at market interest rates. Two, Nisho will help Blue Ribbon set up direct manufacturing relationships in Japan, which they do.

• 1:21:37David Rosenthal?

  And then three, in exchange for all that, Nisho gets a 4% royalty on every shoe that Blue Ribbon sells, which ultimately ends up being a great relationship.

• 1:21:49Ben Gilbert?

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

• 1:21:55David Rosenthal?

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

• 1:21:59Ben Gilbert?

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

• 1:22:02David Rosenthal?

  I believe it's for all sales.

• 1:22:04Ben Gilbert?

  Whoa, does that still exist?

• 1:22:06David Rosenthal?

  I don't know. I doubt if it does in the same way. I know that the relationship with Nisho EY continued for like 30, 40 years, like a very long time. If it still does exist today, I'm sure it is not the same terms. But this goes on for a very long period of time.

• 1:22:25Ben Gilbert?

  Wow. I mean, at this point in history, to have the house in order with a strong financing partner, there's crazy stuff we didn't even cover. Like he got kicked out of multiple banks. The FBI got involved. They were playing it a little bit too fast and loose where they were using every available penny to buy inventory. And so there'd be checks that bounced for payroll and things like that. When these things topple, they topple all at once. And so they had like a day where they got called into the bank and then the bank called the FBI and then they got investigated for fraud. It was an insane few years there.

• 1:23:01David Rosenthal?

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

• 1:23:10Ben Gilbert?

  But safe to say this moment here in, what is it, 1971?

• 1:23:14David Rosenthal?

  71, 72.

• 1:23:15Ben Gilbert?

  They can kind of. Take a deep breath and say, well, the business ahead is still really hard because now Onitsuka is going to be working against us. We have to figure out how to design and make shoes ourselves, but at least we have a real financing partner that has struck a deal to work with us.

• 1:23:32David Rosenthal?

  Yep. So, once this is all in place, Phil goes over to Japan and works with Nisho, goes, visits lots of factories, ends up meeting the Nippon Rubber Factory. He's touring with lots of folks and his sort of test of these factories of whether they can be a good partner is he pulls out a Cortez and he asks the factory how long it would take them to make a version of this shoe. So, he meets with Nippon Rubber in the morning. They say, hmm, let's go out to lunch. Let us borrow the shoe, inspect it a little bit. We'll come back after lunch and we'll have an answer for you. They come back after lunch and there is an almost perfect duplicate of the Cortez sitting there on the conference room table. And Phil's

• 1:24:17David Rosenthal?

  like, hell yeah. This is what I'm talking about.

• 1:24:22Ben Gilbert?

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

• 1:24:30David Rosenthal?

  Amazing. So, he is jazzed. He orders all sorts of models. He's like, can you do all the running shoes that we slash Tiger were doing before, at least the ones that we and Bowerman designed? They're like, yep, no problem. He's like, can you do tennis shoes, basketball shoes? Cleats is like, yep, yep, yep, whatever you want. So, in a kind of very un-Phil night like peak of confidence here, he says, great, well, I'll just start writing out model names. So, he writes out the Wimbledon tennis shoe, the Forest Hill tennis shoe, the Blazer basketball shoe, the Bruin basketball shoe, the Marathon, of course, the Cortez. He's like, great, let's do all of them.

• 1:25:13Ben Gilbert?

  And these are Nike franchises that stood the test of time. Many of these shoes are still made.

• 1:25:18David Rosenthal?

  The Blazer for sure. Yep. Of course, the Cortez. And they're like, okay, great. And then Phil's like, one more thing, the boxes. Can you make them bright orange? I want them to stand out. And Nippon Rubber is like, you got it, man. Whatever you want.

• 1:25:34Ben Gilbert?

  It's awesome.

• 1:25:35David Rosenthal?

  So great.

• 1:25:36Ben Gilbert?

  And to this day, they're orange.

• 1:25:38David Rosenthal?

  And 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.

• 1:25:56Ben Gilbert?

  Yep. And there's kind of this funny thing where it is still Blue Ribbon Sports. So in 1971, they do create Nike Inc. It is a wholly owned subsidiary of Blue Ribbon Sports, and it is responsible for manufacturing, well, or contracting with manufacturers to make this line of shoes, this Nike designed line of shoes owned by Blue Ribbon Sports. Of course, later on, these would flip and Nike would become the parent company. But for now, it's a subsidiary of Blue Ribbon.

• 1:26:26David Rosenthal?

  Amazing. So Phil gets home and he tells Bowerman about this. And this is where yet another sporadic but incredible Bowerman stroke of genius comes to play for Blue Ribbon slash Nike. Bowerman's jazzed. He's like, great, I never liked the Onotuka guys that much anyway. But he doesn't really care about that. What he cares about is he's like, wait, so there are factories now? We can tell them exactly what to do? You mean, I'm the new chief R and D officer of Blue Ribbon Sports? Let's get to work. So that weekend, supposedly it was the weekend right after Knight told Bowerman about what was happening. He goes home and over breakfast on Sunday,

• 1:27:11David Rosenthal?

  Bill is sitting there. His wife Barbara is making waffles for breakfast. And honest to God, I think, you know, I mean, according to Scott, according to everybody, this really happened. Bill is struck with inspiration and he's like, hey, honey, can I borrow that waffle iron? Borrow. That waffle iron was not coming back. He goes out in the back in his mountain home and he had a vat of polyurethane sitting there. And he had it because... The University of Oregon had just redone their track and made it into a polyurethane track instead of a cinder track. And Bowerman at the time was like, well, this is great. This is the future. The Olympics are going to do this and whatnot.

• 1:27:53David Rosenthal?

  But the shoes that I have, that I have my runners in, they're not gripping the track that well. And so he sees the waffle iron and he's like, what if I pour polyurethane into the waffle iron?

• 1:28:06Ben Gilbert?

  Which has two problems. Yes, the shape is, you can imagine how that could grip a track well. There's two problems. One, hot polyurethane, super toxic. The man, for many years of his life, because he's been experimenting forever, is like breathing in all these hot, terrible chemicals.

• 1:28:22David Rosenthal?

  He's literally a mad scientist.

• 1:28:23Ben Gilbert?

  Yes. And two, pouring hot polyurethane into a waffle iron is going to permanently glue the iron shut.

• 1:28:32David Rosenthal?

  Yes, which is exactly what happens.

• 1:28:34Ben Gilbert?

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

• 1:28:44David Rosenthal?

  Now, according to Scott, in a really like, you cannot make this stuff up. Everybody thought that that original waffle iron was lost to history and like, was this even true or apocryphal? Anyway, years and years later, after Bill had died, his, I think it was his kids, are going through the estate.

• 1:29:03Ben Gilbert?

  No.

• 1:29:03David Rosenthal?

  And out back, his members is up in the mountains. Like, they didn't have real trash service, so they threw the trash in like a garbage pile in the back, and they're doing some renovations of the house or something. Somehow, they discover out in the trash heap, the glued shut waffle iron.

• 1:29:21Ben Gilbert?

  No.

• 1:29:21David Rosenthal?

  And it is in Nike's possession to this day.

• 1:29:24Ben Gilbert?

  That is awesome.

• 1:29:26David Rosenthal?

  Isn't that awesome? So where, of course, this is leading is the waffle trainer, which is another one of Bowerman's genius inventions and becomes the first big hit shoe for the new Nike brand.

• 1:29:41David Rosenthal?

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

• 1:30:15Ben Gilbert?

  And I think the waffle trainer is starting to be worn outside of track situations. Like this is the first hint of a lifestyle sneaker.

• 1:30:24David Rosenthal?

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

• 1:30:28Ben Gilbert?

  Look at you, sneaker head over there, colorway.

• 1:30:30David Rosenthal?

  Colorway. Eventually, I think it's Phil who's like, oh, we should do this in a blue. That'll go well with blue jeans.

• 1:30:38Ben Gilbert?

  Ah.

• 1:30:39David Rosenthal?

  Yeah, the canonical old school waffle trainer is blue with a yellow swoosh. And I think a lot of those were sold to be lifestyle shoes going with blue jeans.

• 1:30:49Ben Gilbert?

  Which turns into Nike's real business eventually.

• 1:30:53David Rosenthal?

  But that, the success on the field, on astroturf fields, the success in track, that year, so this is 1972, Blue Ribbon's first full year doing sales as Nike purely on their own. They do $3.2 million in revenue. Remember, just a couple of years before, their last kind of full year with Tiger, they were doing half a million dollars in revenue. So to go from all the crazy drama, ending the Tiger relationship, starting up their own factory production, making the waffle trainer to be at $3.2 million, fully financed by Nisho, what a great spot to be in.

• 1:31:31Ben Gilbert?

  Nike is designing their own shoes and going direct to the manufacturer. I think the benefit to the business at this point is not margin expansion. It's purely aliveness and can we convince people to buy things from us that aren't Onitsuka Tigers? Cause to this point, it's still unproven if it's, hey, Blue Ribbon has great distribution and people will buy anything from these guys because we trust the company. Or if it's, people really wanted Onitsuka Tiger because they were really good shoes for runners and I don't really want whatever this new thing you're selling is.

• 1:32:04David Rosenthal?

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

• 1:32:17Ben Gilbert?

  Which is kind of amazing. That is completely opposite to what my intuition would have suggested. I would have definitely believed there's these shoes that are popular among other competitors, so I should be wearing them to be as competitive as them. If I run in them myself, I learn to like them. It's very strange that it ends up being the relationship that matters. Like thinking, oh, I trust whatever this running shoe distribution company is now making because they say it's good. I'm sure it's good.

• 1:32:48David Rosenthal?

  Well, this is how important Bowerman was. He started jogging. Not only was he Bill Bowerman, you know, legendary track coach, he also started jogging. So the convergence of things, all the butterfly wing flapping that had to happen for Nike to become Nike, right at this time, right as Nike is being born and Blue Ribbon is going out on their own. Bowerman gets a generational runner at Oregon. Steve Prefontaine, tragedy. Like weirdly, so many people we've covered recently on Acquired dies in a car crash way too young, you know, James Dean style, which ironically, of course, just cements his legacy.

• 1:33:34David Rosenthal?

  But Prefontaine 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 2,000 and 10,000 meters.

• 1:33:53Ben Gilbert?

  It's crazy. He died holding every single one of those records.

• 1:33:56David Rosenthal?

  Yes, incredible. And he did this at Oregon and then later as a professional, but still for Bowerman and his Olympic teams. In Nikes, right as Nike was starting. You can't script this any better.

• 1:34:11Ben Gilbert?

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

• 1:34:16David Rosenthal?

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

• 1:34:19Ben Gilbert?

  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.

• 1:34:38David Rosenthal?

  And this is one of those things that the AAU and the amateur rules and all that, like Nike was 1,000% on the side of right here.

• 1:34:46Ben Gilbert?

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

• 1:34:52David Rosenthal?

  Yes. So 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. So after he graduated and wasn't at the university anymore, he literally had to bartend to make money while he's simultaneously holding the American records in every major distance event. This is criminal. So what Phil does is he decides to employ Pre as a corporate employee of Nike as the National Director of Public Affairs for $5,000 a year.

• 1:35:34Ben Gilbert?

  With no responsibility.

• 1:35:35David Rosenthal?

  Yes. And there's this amazing quote in Shoe Dog. Phil says, "People asked me what that meant. I said, 'It means he can run fast.'"

• 1:35:46Ben Gilbert?

  So great.

• 1:35:47David Rosenthal?

  So great. Huh. This is the perfect encapsulation, I'm gonna foreshadow just a little bit here, of the later number three in the later Nike document of the 10 principles of Nike that we will talk about in a bit. Number three is so great. Perfect results count, not a perfect process. Break the rules, fight the law. That's exactly what Phil and Nike are doing here.

• 1:36:14Ben Gilbert?

  Yep, you bet.

• 1:36:15David Rosenthal?

  So that's on the sort of proto-marketing front that this early Nike playbook is getting going. You know, $5,000 for the best publicity you could possibly ever get.

• 1:36:26Ben Gilbert?

  It's Phil like basically inventing sports marketing. I mean, there was a sort of nascent idea of athlete sponsorship at the time, but it really, this is the invention of it as we know it today. And all athletic brands are defined by athletes. And this is really the first instance.

• 1:36:41David Rosenthal?

  Yes, that's part one of just the brilliant kind of restart-up of the Nike startup playbook that Phil puts together here. Part two, equally brilliant and innovative. He comes up with an idea for what he calls the Futures Program. So the way retailing worked back then, and Nike had their own stores always, but they also sold through retailers, of course. The retailers would place orders with Nike to buy the shoes and then they would resell them at retail. And then they would pay after they got the inventory. This is how retail works. This is like the law of the land, not the official law, but the way it all works.

• 1:37:24Ben Gilbert?

  Yep.

• 1:37:25David Rosenthal?

  Phil comes up with the idea because remember, he's got the Nisho UI partnership, but financing is still like he's scarred by this. So he goes to the retailers and says, if you commit and pay for your orders six months in advance, Blue Ribbon will give you a 7% discount. And we're going to call this the Nike Futures Program. So he's essentially moving his financing from banks and Nisho UI over to his retail partners, to his customers. And the retailers, of course, tell them to take a hike at first. But then the waffle trainer comes out and they can't make enough of them. And retailers can't get enough of them. And the only way that they can get the waffle trainer,

• 1:38:10David Rosenthal?

  sweet, sweet inventory, those delicious waffles that they want is to sign up for the Futures Program.

• 1:38:17Ben Gilbert?

  And this really starts Nike down a path of their Distribution strategy being a wholesaler. They sell to retail chains. And for decades, starting here in the early 70s, they are predominantly someone who reaches their customers through an intermediary, through retail.

• 1:38:38David Rosenthal?

  Yes. So that's the second piece. The third piece then is sort of obvious and has happened all along. But now, as Nike is making their own shoes, is outsourcing and global outsourcing of manufacturing. So again, Nike isn't making the shoes in their own factories. Now, they did actually buy a factory in New Hampshire along the way, which is a little bit of a detour. Phil sent Jeff Johnson out to like buy it and run it. That was more of a stopgap measure while they were transitioning from Tiger.

• 1:39:07Ben Gilbert?

  Kind of a hedge, too.

• 1:39:08David Rosenthal?

  It was a hedge, yes.

• 1:39:10Ben Gilbert?

  And it was a secret hedge. Again, break the rules, fight the law. They use Nisho's money, which was supposed to be to buy inventory, instead to plow it into CapEx of buying and rehabbing a factory. And then they were secretly operating their own factory with money that was not supposed to be used for that purpose. But again, Nike, break the rules, fight the law. And here they are today, a huge and successful company.

• 1:39:32David Rosenthal?

  I like that. Break the rules, fight the law. Sounds much more inspiring than toe stepping. So global outsourcing, though. At first, this, of course, is in Japan with Nippon Rubber. But as we were saying, Japan is coming up in the global economy. And right around this time, Nixon cuts the dollar peg to the yen loose and the yen starts floating against the dollar. So up until this point, from after World War II until the mid 70s, the yen was pegged to the dollar. Once the currency floats, and the Japanese economy, of course, has come up hugely over these decades. Now, currency issues become a big problem for Nike in terms of importing from Japan. And the cost of labor is going up. So basically, the writing's on the wall.

• 1:40:16David Rosenthal?

  There's no way that they're getting shoes for $3 a pair anymore anytime soon. This means that they gotta go find other countries to make the shoes in.

• 1:40:26Ben Gilbert?

  Yep.

• 1:40:26David Rosenthal?

  So Phil and a bunch of the management team starts flying around Asia. They go to Taiwan. They go to South Korea. Ultimately, they go to China. They go to Indonesia. They go to Vietnam. And this is where the Nike global production machine is born. And at first, it's primarily Taiwan and then South Korea that they go to. Then the big move is into China, both in terms of production and for selling. I think there's a scene in Shoe Dog, even when he's on the trip around the world in 1963, that he like peers into China from Hong Kong and is dreaming about 2 billion feet in China. Nike would be one of the very first companies, and I think the first footwear company that would be allowed to sell in China.

• 1:41:09Ben Gilbert?

  To sell and open factories. They sort of opened the country for the industry.

• 1:41:13David Rosenthal?

  So this, we would certainly be remiss in doing a Nike episode if we didn't talk about the downside of this. The upside, of course, is cheap shoes. And the upside, I think you can make a strong argument in the case with many of those countries, that this is part of the coming up process in the global economy. If you look at what happened to the Japanese economy, to the South Korean economy, to the Taiwanese economy, they went from making shoes to making chips, to making technology, to being global economic powers. It's part of the process. At the same time, people are making like 70 cents a day working in these factories.

• 1:41:55Ben Gilbert?

  Totally. Well, 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. So stories hit the news of some really horrible things like child labor, stitching soccer balls on dirt floors in high temperatures, toxic glues.

• 1:42:12David Rosenthal?

  Carcinogens.

• 1:42:14Ben Gilbert?

  Et cetera. Nike fans looked at this as, oof, the company really has a black mark on their otherwise great reputation. But it kind of was the natural endpoint of an idea that had been in the company's DNA the whole time. I mean, literally Phil Knight's Stanford paper is about arbitraging cheap labor from imported goods and selling into markets willing to pay higher prices. They should have realized this is where it could have gone if left unchecked. So to add insult to injury, Nike wildly mishandled this. They tried to act like it wasn't their problem. They literally said to the press, "Oh, we don't make shoes." Mark Parker later walked this back with a stance where he said ignorance is not bliss. You have to understand the systemic issues and work with factory partners to solve them. They did do a huge

• 1:42:58Ben Gilbert?

  amount of work to clean up their act. They created new standards for factory partners. They published supplier lists. They have third-party audits of factories. They do huge investments in R&D and invented things like new types of glue that weren't toxic, which they then went on to share with their competitors. But David, I don't know, there is still this interesting and more theoretical question. What is the line of acceptability? And who should determine it? Obviously, when a company trips a clear, bright line like child labor, there is 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

• 1:43:39Ben Gilbert?

  in order to manufacture a product that you are buying, from shoes to smartphones, somebody has to work in conditions you wouldn't endure, even if it's better than all of their other options. And companies need to grapple with a spectrum that they sit on. On one end, there's making the absolute maximum margin. And on the other end, there's creating labor conditions that customers would totally be fine with if they learned every single little detail. And in the 90s, Nike chose to sit too far on maximizing the margin side of things, and they intentionally turned a blind eye to what was going on in the factories. And they were in the wrong because it led to exploiting people.

• 1:44:15David Rosenthal?

  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?

• 1:44:28Ben Gilbert?

  Yeah, but Nike started it and they're the biggest.

• 1:44:31David Rosenthal?

  But I think it's even more than that. People had come to love Nike so much and the brand represented so much that it was like a huge betrayal. It was a disappointment. It was like, oh, I thought you were better than that. You are about inspiring greatness and this is not greatness. And I think that's really interesting. They're like, yeah, this was part of Nike from the beginning. But because of everything else that made Nike successful, it's super ironic that they didn't hold themselves to the high standard that the whole company was all about. And then their customers were like, yo, this doesn't compute.

• 1:45:11Ben Gilbert?

  Yeah, they sort of discovered they couldn't have their cake and eat it too of saying, we are the brand that inspires you. Oh, but by the way, anytime there's an issue, oh, that's one of our suppliers' problems. We simply don't make shoes. Even though it is technically correct, the court of a public opinion will find you guilty.

• 1:45:27David Rosenthal?

  So, okay, back to the mid 1970s. In 1974, these pieces of the Nike startup playbook, the inventing sports marketing, basically sponsoring quote unquote, pre for $5,000, the outsourcing your financing to your retail partners, and then the global outsourcing of manufacturing. All of this combines in 1974 for just an explosive year. I can't remember exactly the phrase, but in Shoe Dog, Phil says something like, the limiters were off, the governors were off. We could run. They do $8 million in revenue in 1974.

• 1:46:11Ben Gilbert?

  Which is up almost 100%. They nearly doubled again in 1973 to 1974.

• 1:46:17David Rosenthal?

  1974 is also a momentous year for Blue Ribbon because they finally settle the legal battles with Anitsuka and they win in court.

• 1:46:27Ben Gilbert?

  Amazingly.

• 1:46:28David Rosenthal?

  Ultimately, they settle for Anitsuka paying Blue Ribbon $400,000, which by this point in time is a pittance to Blue Ribbon. But the actual butterfly flaps its wings hugely important outcome of this for the Nike journey. Is that the court case with Onitsuka leads to one Rob Strasser. Yes. Coming into Phil Knight and the Nike orbit. He was their lawyer on this case, right? Yes. Strasser was the junior attorney at the Portland law firm that was working on the Nike

• 1:47:05David Rosenthal?

  case. And Strasser is just a force. I mean, this guy was not cut out to be a corporate lawyer. He actually comes in after the case is settled to Blue Ribbon as in-house counsel, but then Phil quickly realizes like, oh, this guy is way more valuable to me than as my lawyer. You know, everybody else at Nike at the time, they're all former runners. Most of them ran for Bowerman. Strasser is, I think, about six foot two and weighs over 300 pounds. And he has an equally outsized personality as his actual size. He gets the nickname

• 1:47:44David Rosenthal?

  within Nike of Rolling Thunder. And boy, does he roll like thunder. And while he and Phil, of course, did ultimately clash, and there was the terrible betrayal that happened. For a while, they were thick as thieves. Yes. So the first thing that Phil puts Rob in charge of is taking this really early sports marketing concept of doing sponsorship deals with athletes and blowing it out. So they had already, before Rob joined, done the first official sponsorship of an athlete with Illy Nastasi, the tennis player. They paid him $10,000 to wear Nike tennis shoes.

• 1:48:27David Rosenthal?

  Oh, boy, how quaint. When Strasser comes in, he starts doing sponsorships in a systematic manner. So he goes out and negotiates with athletes and agents. He signs up like half the NBA for peanuts. Now, not the big stars, but the journeymen, the role players in the NBA. He just obliterates them and their agents in negotiations. I mean, they're getting like, I don't even know the dollar amounts, but not a lot. They're getting free shoes, basically. And then Nike is showing up on nationally televised broadcasts every single night. Yep. This leads then to a bigger initiative that Strasser puts together. And if you've watched the recent movie, Air, about Air Jordan.

• 1:49:10David Rosenthal?

  This totally gets played as like a Sonny Vaccaro thing. Strasser hires Sonny Vaccaro to come in and build the college basketball program for Nike. And this is another just equally brilliant move. So Strasser gets Sonny to go around the country and sign up coaches of the big basketball schools to become Nike coaches. Now, there's nothing preventing the coaches at schools from being consultants, advisors, running Nike clinics.

• 1:49:45Ben Gilbert?

  No, you can pay them whatever you want.

• 1:49:46David Rosenthal?

  You can pay them whatever you want, right?

• 1:49:47Ben Gilbert?

  And they can tell their teams to do whatever they want. There's no contract between the team and the coach about wearing shoes. But if the coach says, hey, I really like this shoe company. You should wear the shoes on court.

• 1:49:57David Rosenthal?

  What do you think the players are gonna do?

• 1:49:58Ben Gilbert?

  It's actually a team policy.

• 1:50:00David Rosenthal?

  Yeah, exactly. So within 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. And this is hilarious. So all this is happening. The Washington Post gets word of this. They run a real pearl clutchy article saying that this is shameful. Nike is commercializing the purity of college athletics. Like, oh, my God, give me a break. Like, these kids are being exploited. Like, at least they're getting free shoes here now.

• 1:50:40David Rosenthal?

  In the article, the Post mistakenly says that Iowa is one of the colleges that Nike has signed up, not Iona. So Lute Olsen, the coach at Iowa, who's legendary. He goes on and coaches at Arizona. Lots of listeners probably know who Lute Olsen is. He's in the Hall of Fame now. Instead of being pissed off that he was included in this shameful article with the Post, he calls up Nike and he's like, yo, can I get in on this?

• 1:51:07David Rosenthal?

  So then they sign up, looted Iowa and then Arizona, and he becomes a big Nike coach. It's incredible. Strasser then takes the same playbook to college football. Signs all the big coaches in schools, all the big powerhouses for peanuts. This is incredible. Now, selling football cleats is never a big business for Nike, but college football is huge. I mean, it's still huge.

• 1:51:30Ben Gilbert?

  Lot of eyeballs on those swooshes.

• 1:51:31David Rosenthal?

  Lot of eyeballs on those swooshes.

• 1:51:34Ben Gilbert?

  And this is so clarifying of what their sports marketing strategy is. These endorsement deals are not about the sneakers that that basketball player is going to sell. Or, oh, I want to buy the cleats that my favorite college football team is wearing on the field. No one else plays football other than college football students and the very few NFL players that exist. So there's really nothing to buy, but what you do see are these swooshes. And it's cementing that brand in your head of this is what real athletes wear.

• 1:52:04David Rosenthal?

  So one thing that's worth mentioning, this is sort of obvious, but didn't click for me until really getting pretty deep in the research here for Nike. There are actually only three sports that matter. So Nike, Adidas, you know, Reebok, they sponsor lots of sports. But running, basketball and tennis are the only sports that matter because those are the only shoes that normal people can wear. Normal people don't wear baseball cleats or football cleats or soccer cleats, no matter how popular those sports are.

• 1:52:37Ben Gilbert?

  Yep.

• 1:52:38David Rosenthal?

  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.

• 1:52:55Ben Gilbert?

  Right. The funnel is, every single one of those is a brand impression. So consider them all billboards. And then they just need to manufacture enough products to meet needs in your life that you can go and participate in the brand story by buying things that you need in your life. And you're in. 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.

• 1:53:35David Rosenthal?

  You're buying victory.

• 1:53:37Ben Gilbert?

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

• 1:53:56David Rosenthal?

  Yes. Now, I don't want to say that Strasser alone architected this grand strategy, or even I'm not really sure that Phil or anybody at Nike understood this at this time, but certainly Strasser executes this in just an incredible way. Nobody else was doing this. The college coaches, they ran the table and it was just an incredible run in the late seventies. All the while, the jogging movement is just getting bigger and bigger and bigger.

• 1:54:29Ben Gilbert?

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

• 1:54:39David Rosenthal?

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

• 1:54:45Ben Gilbert?

  Yep. So through the late seventies, revenue just doubles year over year over year. They go from 14 million in sales to 29 million in sales to 71 million in sales, finishing out in 1979 with 150 million in sales.

• 1:54:59David Rosenthal?

  Yes. It was 1976 when they officially changed the actual name of the company to Nike. Then 1977 was a huge year, as you say, they do 70 million in revenue that year. They signed John McEnroe.

• 1:55:12Ben Gilbert?

  They crossed 1,000 employees. So it's getting to be a real beefy organization.

• 1:55:16David Rosenthal?

  Two other things. They bring one former NASA engineer and true mad scientist, Frank Rudy into the fold, the inventor of Air Soul Technology.

• 1:55:33Ben Gilbert?

  Which Phil Knight is not a fan of. We hear about the idea.

• 1:55:36David Rosenthal?

  Well, he thinks it's a crazy idea at first. Phil's meeting with Rudy. He's like, I don't even know how Rudy got into my office. Who is this crazy dude? He's about to kick him out and then Rudy's like, yeah, Adidas didn't want it either. And Phil's like, oh, you said the A word. All right, let me try it. So supposedly Phil goes for a run in the prototypes of the air soles. And he's like, yeah, actually, these are pretty great.

• 1:55:58Ben Gilbert?

  And we should say, for anybody who doesn't know, everything that you hear of now, the Air Max, the Air Jordan, the Air Force One, it is a literal airbag, actually, it's a nitrogen bag that sits in the midsole. So think about the thing between the lower sole, the rubber on the bottom and inside of the insole, the basically the part of the shoe that you can't get to, that's underneath your heel, and sometimes 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.

• 1:56:30David Rosenthal?

  Yeah, I mean, Rudy really was a genius. So Phil's like, all right, let's do it. He tasks, who else? Rob Strasser with going and doing a deal with Rudy. They do a deal Rudy gets between 10 to 20 cent royalty for each pair of air sole technology shoes that Nike sells. Eventually Nike would just buy Rudy's company and Rudy would become an employee of Nike. So still here in 1977, Strasser is just on fire. I don't know the full context around this. Scott Reams has a great LinkedIn post, but as best as we can tell, Ben, as you said, the company was growing hugely. There are all these new employees there who are just kind of taken for granted that Nike is winning.

• 1:57:16David Rosenthal?

  Strasser gets kind of pissed off one day and he goes to his typewriter and he fires off a memo. He Xeroxes, he copies this memo and pasted up on the walls all around the office of Nike. 10 principles. And this document is just amazing. We've tweeted it before. It's going around the internet.

• 1:57:40Ben Gilbert?

  Yeah, it's going around the internet, but it's going around the internet described in the following way. Here is the document that Phil Knight wrote articulating Nike's principles. Here are the things that are wrong with that statement. One, Phil Knight did not write it. Rob Strasser did. Two, Nike's principles, also incorrect. When this was written, it was actually still Blue Ribbon Sports, so that it was not yet the Nike Corporation.

• 1:58:08Ben Gilbert?

  Three, the top of the document has this like thin wispy swoosh. That was never the Nike swoosh. This is someone's attempt, who doctored this at some point, to make it look like some old version of the swoosh. There is an old version of the swoosh, which we will link to in our sources. It is still in the USPTO for the swoosh trademark. It is a hand drawn version, Carolyn's hand drawn version of the swoosh, that looks nothing like this weird thin wispy thing that was like doctored and added to the document. So not Nike Inc., not the swoosh, there was never a swoosh on the document. It was done on a typewriter. How are you going to do that? And three, not Phil Knight. But yes, oh my God, these principles are amazing and we're going to go through them.

• 1:58:51Ben Gilbert?

  All right, listeners, now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:59:04David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:59:21Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:59:36David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 2:00:00Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 2:00:19David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 2:00:49Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you. Okay, David, what are these principles?

• 2:01:17David Rosenthal?

  All right. Nike principles, according to Rob Strasser in 1977. One, our business is change. Two, oh, this is so good. We are on offense all the time. Three, we already alluded to, perfect results count, not a perfect process. Break the rules, fight the law. Number four, this is as much about battle as about business. Five, assume nothing. Make sure people keep their promises. Push yourselves, push others, stretch the possible. Number six, live off the land. Number seven, your job isn't done until the job is done. Eight, dangers, with a underline as a heading.

• 2:02:01David Rosenthal?

  Bureaucracy, personal ambition, energy takers versus energy givers. Knowing our weaknesses, don't get too many things on the platter. Number nine, it won't be pretty. And then number 10, if we do the right things, we'll make money damn near automatic.

• 2:02:20Ben Gilbert?

  It's so good.

• 2:02:21David Rosenthal?

  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.

• 2:02:37Ben Gilbert?

  So I read these differently than I used to read them because when I didn't know Nike's journey, I sort of would just read them and be like, yeah, that's awesome. Or like, wow, that's so pithy. I can't believe their official corporate values are in such a pithy way. No, this is stream of consciousness, all from Rob Strasser, all into the typewriter. And like, some of them are things that Nike would never say today because it shows the trade offs inherent in their business. I mean, live off the land, it's cringe worthy, right? It's almost like, you guys, you had this huge labor issue, it's not good. So you sort of see where some of this stuff comes from, break the rules, fight the law. I think

• 2:03:18Ben Gilbert?

  there's also something very clear, dangers, bureaucracy, personal ambition. Like, this is a foreshadow of Rob Strasser hating the bureaucracy at Nike after its IPO that we'll talk about in a second, clashing with Phil Knight.

• 2:03:31David Rosenthal?

  Developing his own personal ambition.

• 2:03:34Ben Gilbert?

  And developing his own personal ambition, leaving and going to Adidas. So there's like so much in here that when you really start to know the company's history and story and the headspace that he was in when he punched this out, it reads entirely differently to me than I sort of used to just read it as a, hey, I love Nike, a brand, wow, so cool. I wish I could work at a company that had these pithy punchy values.

• 2:03:54David Rosenthal?

  Yeah, this is definitely one of those cases where ignorance is bliss.

• 2:03:58Ben Gilbert?

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

• 2:04:10David Rosenthal?

  You don't win by playing defense.

• 2:04:12Ben Gilbert?

  Nope. Okay, so we're approaching 1980, they're about to go public, and they are entirely a running shoe company. Still no sign of the Nike that they are today, where they have apparel, where they're diversified across a zillion sports. And from their revenue, they're basically a running shoe company that makes shoes for men. That is where their revenue comes from.

• 2:04:33David Rosenthal?

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

• 2:04:39Ben Gilbert?

  Unbelievable.

• 2:04:39David Rosenthal?

  It's amazing.

• 2:04:41Ben Gilbert?

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

• 2:04:51David Rosenthal?

  Yep. It was about $400 million, the market cap at IPO. Apple, for comparison's sake, was $1.8 billion. Now, interestingly, before they went public, Bowerman sold most of his stake back to Phil Knight. Actually, this was related to some of the financings earlier, but as Nike got bigger, he just didn't want to be a major listed shareholder in a highly visible public company. Certainly, he was in retirement age towards the end of his life. He was like, "I'm gonna sell my stake back to Phil." So when they went public, after the IPO, Phil owned 46% of the company and was overnight one of the richest people in America.

• 2:05:29Ben Gilbert?

  And the craziest thing is, like, one of the richest people in America then was $178 million.

• 2:05:36David Rosenthal?

  Yes, quite different. Now, he was far from the top richest person in America, but still, this made national headlines.

• 2:05:43Ben Gilbert?

  Yeah.

• 2:05:44David Rosenthal?

  So this is where Shoe Dog ends, which is kind of crazy. I had forgotten this before I went back and reread it. There's no Jordan, there's no huge fall from grace that is about to happen for Nike, basically right after they go public. Phil picked an interesting time to end the story.

• 2:06:05Ben Gilbert?

  Very much so, especially because right after they go public, Phil goes on sabbatical for a year. It's sort of like, you know, "The job's done, wash my hands of it."

• 2:06:13David Rosenthal?

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

• 2:06:16Ben Gilbert?

  There you go. But like, the whole company... There was a lot of hubris going on. They're on top. We own the running shoe market. We've been in this magical, secular, growing trend forever, and it's just surely going to continue, right? And the fitness boom continues, but running is not exactly the thing that keeps carrying. I mean, they have 50% market share in running shoes at this point in America, and yet their growth in the future is going to be dictated by where they go from there, because it's really hard to have more than, you know, 50% market share in an industry like this.

• 2:06:52David Rosenthal?

  Early Nike did so many things right, but they made one critical mistake. They mistook the running and the jogging boom for the broader fitness boom. The broader fitness boom was a massive secular trend that continues through to this day. The running boom was a cyclical trend that was part of the fad-driven fitness cycle. And by the early 80s, as we're heading into everything that the 80s was and that the 70s were not, running and jogging is out, and aerobics are in. And Nike absolutely refused to see that and refused to do aerobics like on principle.

• 2:07:37Ben Gilbert?

  It's fascinating. I mean, in 1980, Reebok USA is founded, and by 1988, Reebok eclipses Nike in sales.

• 2:07:46David Rosenthal?

  Yes, at well over $1 billion.

• 2:07:49Ben Gilbert?

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

• 2:08:14David Rosenthal?

  So Reebok, funny, originally a British company, started as Foster and Sons. They were the company that made the track shoes for the 1924 British Olympic team that was the basis for the movie Chariots of Fire. The Reebok we all know, well, not today, but back then, is a completely different animal. It's a marketing-driven company started by a guy named Paul Fireman, who was American. And pretty quickly, they developed a business plan to cash in on the aerobics fad and they made a shoe that in Nike's principled opinion sucked, but it went really great with leg warmers, you know? It was all white, it had soft leather that wrinkled, it looked good, women loved it. It was everything that Nike was not.

• 2:08:58David Rosenthal?

  And their rise, like you said, Ben, was even steeper and faster than Nike's. Ironically, Reebok would end up much later getting acquired by Adidas and then spun back out to private equity recently.

• 2:09:11Ben Gilbert?

  Wow. So financially, they're sitting pretty, pretty. They've just raised 22 million in the IPO, which then was a lot of money. They basically wouldn't need any more money after that. They raised one smaller pipe later in their history, but the company was basically built on debt financing and this 22 million in the bank from IPO. And you can see how they got fat and lazy. Their whole life, they were starved for capital. Finally, they had it. Their whole life, they were the underdog. They're not the underdog. They've got half the running market and this dominant brand where they just steamrolled the competition to get into all these sports deals. But right at the same time as the aerobics boom is coming up, Adidas is becoming a very real competitor in the sports marketing deals, too.

• 2:09:56Ben Gilbert?

  And so Nike is kind of realizing like, ooh, we are not nearly as well capitalized as them and they're kind of going to come eat our lunch in all these deals where we just figured out that you can pay people and they'll wear your stuff. So our cheap brand advertising is kind of going away.

• 2:10:13David Rosenthal?

  And meanwhile, in our core, like, consumer, actual reason people buy truckloads of shoes, the fitness market, the swooshing sound you hear is that going to Reebok?

• 2:10:24Ben Gilbert?

  Yes.

• 2:10:25David Rosenthal?

  So interestingly, financially.

• 2:10:28David Rosenthal?

  There only are a couple of quarters where Nike's revenue declines. I think that's because of the futures program. Kind of saves their skin again. Retailers had to commit six plus months in advance to their orders. And yeah, Nike was able to at least maintain revenue through a lot of this. But the actual underlying dynamics of the business are ugly at this point in time. The market, like I said, is swooshing away. So that brings us to 1984. Phil Knight actually wrote in the letter to shareholders that year. 1984, like Georgia well predicted, was not a good year for Nike.

• 2:11:13David Rosenthal?

  Everything that we talked about is happening. But 1984 was also the seed of something pretty incredible. That would make everything that happened before in Nike look like child's play. And that would be a young kid from North Carolina. Michael Jordan, who walks in the door. This is such a fun time to do the Nike episode because the movie Air just came out, which really is like a fun kind of summer blockbuster movie. Also, very, very inaccurate in how it portrays everything.

• 2:11:48Ben Gilbert?

  Oh, yeah. No, it's a very fun, campy work of fiction.

• 2:11:51David Rosenthal?

  I mean, it gets the broad point right. Michael Jordan saved Nike absolutely 100%. The characters involved in how it all went down and what the deals were.

• 2:12:03Ben Gilbert?

  No.

• 2:12:03David Rosenthal?

  Almost all wrong.

• 2:12:05Ben Gilbert?

  There's a lot of little dynamics that we can be mad about. Like it was kind of Strasser's baby to do the deal, not Vaccaro's baby to do the deal. You know, Vaccaro never flew to North Carolina to negotiate at Michael's house with Michael's mother. Like all of this doesn't actually happen. They weren't going to fire everyone in the basketball division if this didn't work. But again, factual inaccuracies are fine. It's the characters that they messed up that really bothered me. I know I'm doing a review of a movie that maybe not all of you have seen. So spoilers, but like, God, they make Phil Knight just not at all who Phil Knight is. They make him out to be kind of a rube. And after watching every interview he's ever given and reading all this stuff about him. And I just don't think that the Ben Affleck character is anything like Phil Knight.

• 2:12:48Ben Gilbert?

  Anyway, Air is entertaining. Here's the real story.

• 2:12:52David Rosenthal?

  The big important thing from Michael Jordan, the Air Jordan one, and then everything it became in the Jordan Brand, is that it didn't just save Nike, it changed the world. That's a super campy thing to say, but it is 100% true. If you walk down any street, pretty much anywhere in the world today, or you go into any event, building, venue, whatever, and you look at what people are wearing, they are wearing sneakers. And they are mostly wearing basketball shoes and running shoes. That was not the case before Air Jordans.

• 2:13:33David Rosenthal?

  Air Jordans and Michael Jordan made sneakers into culture.

• 2:13:39Ben Gilbert?

  So Nike takes a chance. There's a kid out of North Carolina. He's picked third in the draft. He's really good. He just took the game winning shot to win the NCAA Final Four. But, you know, he's not LeBron in high school.

• 2:13:51David Rosenthal?

  Yeah, he was picked third.

• 2:13:53Ben Gilbert?

  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. And like, he was very obviously one of the best NBA players as a freshman in high school. Jordan wasn't quite that. He was a different type of player. He was not as big and as physical as a lot of the guys dominating the NBA at the time. And so doing a big deal with Jordan really was more of a gamble for Nike than they would do with really any athlete today.

• 2:14:24David Rosenthal?

  All right, so let's talk about what that deal was and why it was so different. Nike, like we just said, their back's against the wall. They need to do something to save the company. And it's actually Strasser who puts this deal together. And together with Sonny Vaccaro, as portrayed in the movie, goes after Jordan, but Strasser puts it all together. So the deal is a $2.5 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.

• 2:15:08Ben Gilbert?

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

• 2:15:19David Rosenthal?

  Right, and it goes even deeper than that. This structure was completely revolutionary. So the way shoe deals were done at the time, so Magic Johnson and Larry Bird were the biggest stars in the NBA at the time. They were both signed with Converse. Their deals were roughly $100,000 a year in cash payments to wear the Converse weapons. Ben, have you ever worn the Converse weapons?

• 2:15:42Ben Gilbert?

  No, never.

• 2:15:43David Rosenthal?

  Do you know what they are?

• 2:15:44Ben Gilbert?

  No. No, I don't.

• 2:15:45David Rosenthal?

  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."

• 2:16:06Ben Gilbert?

  And it's brilliant counter positioning because all their competitors basically couldn't do it. Converse has too many stars to go all around signing these, A, you get some of the upside deals. Like Nike had friggin' nothing to lose, so of course they could give away some of the upside. If Converse is going to do this, or Adidas is going to do this, they actually do have quite a bit to lose by giving away upside. Of course Nike, it turns out, it was a big paycheck that they cut Jordan for years and years and years. But Nike was truly doing something here that their competitors could not, and it was smart to figure out what are the things that by being small and cash constrained and underpenetrated in the NBA, what strengths do we have?

• 2:16:43David Rosenthal?

  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.

• 2:17:06Ben Gilbert?

  I did not realize that.

• 2:17:07David Rosenthal?

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

• 2:17:26Ben Gilbert?

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

• 2:17:30David Rosenthal?

  He did. And this would eventually morph into the Jordan brand and the Jordan line, and Zion Williams and Jason Tatum, and like, they are Jordan athletes. This is part of it. So Nike also guarantees a minimum ad spend to promote the Jordan line. They're all in here. They also give Jordan stock options in the company. This is a hell of a deal, and it's smart for Nike.

• 2:17:56Ben Gilbert?

  So there's something kind of interesting here, which is, I was trying to figure out if I would describe this as a partnership. David, you and I are partners and acquired. We together benefit from the upside and the downside. That is what makes a partnership. Is this a partnership? Is there any scenario where Jordan has any downside, or is all of the downside owned by Nike?

• 2:18:20David Rosenthal?

  No, it's all owned by Nike because there's the minimum guaranteed payment.

• 2:18:23Ben Gilbert?

  Right.

• 2:18:23David Rosenthal?

  For $2.5 million over five years. That seems like a pittance today, but that was huge. Nobody else was getting that kind of money. So here's the thing, and this was chronicled in the movie. This is absolutely true. Jordan didn't want to work with Nike. Nike was for the second-rate pro players. Jordan wanted Adidas. Jordan was a kid in the 80s, like a teenager. To the extent that sneakers had started to transcend into culture, it was Adidas. Hip hop, breakdancing, tracksuits, shell toes. That was Adidas. That was what Jordan wanted.

• 2:18:57Ben Gilbert?

  And so to put a finer point on this here, Jordan didn't want to be Nike's partner. So he basically wasn't and they backed up the truck for him. And some of that truck was in variable comp and some of that truck was in cash. But make no mistake, that is what this is, is Nike having no leverage, Jordan having all the leverage and getting a landmark unbelievable deal, still to this day unmatched in terms of the amount of dollar outflows that has gone to an athlete because of it.

• 2:19:27David Rosenthal?

  Yeah. So Jordan actually takes the deal and shops it to Adidas afterwards. And he's like, I really don't want to go with Nike. Like, I really want to be with Adidas. You don't have to match this. Can you just come anywhere in the ballpark close? And Adidas is like, we could give you $100,000 a year. And so reluctantly, Jordan goes with Nike. But you're so right, and it's so important. It sets up the incentives, even though Jordan has no downside. He's like, well.

• 2:19:55Ben Gilbert?

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

• 2:20:03David Rosenthal?

  So here's what happens. In that first year, the Air Jordan Ones, this is going to be very incredible. Some of you know this, some of you are 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 Ones sell $126 million. That's the shoes and the associated merchandise with it.

• 2:20:27Ben Gilbert?

  David, do you know what their goal was?

• 2:20:29David Rosenthal?

  $3 million over three years.

• 2:20:33David Rosenthal?

  So it's about 15% of Nike's entire revenue for the whole year.

• 2:20:38Ben Gilbert?

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

• 2:20:45David Rosenthal?

  So 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.

• 2:20:59David Rosenthal?

  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.

• 2:21:12Ben Gilbert?

  So he made the exact same amount from the Nike deal in his first year.

• 2:21:17David Rosenthal?

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

• 2:21:22Ben Gilbert?

  Wow. I always wanted to think of the story as like, wow, Jordan took some risk and it paid off big on the back end. It's like, it paid off immediately and he had to make no trade-offs to do it. He got the cash guarantees and he got the royalty upside and it happened immediately and it only got bigger from there.

• 2:21:40David Rosenthal?

  Well, trade-offs. I think there are two things. One, none of this would have happened if Jordan didn't turn out to be Jordan.

• 2:21:47Ben Gilbert?

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

• 2:22:00David Rosenthal?

  Oh, interesting. I didn't know that.

• 2:22:01Ben Gilbert?

  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.

• 2:22:08David Rosenthal?

  Interesting. So there was some protection for Nike.

• 2:22:11Ben Gilbert?

  Yes. And I think he's Michael Jordan, so whatever the thing was, he got all three of them. Oh, it wasn't the NBA Finals, it was to become an All-Star.

• 2:22:19David Rosenthal?

  Ah, interesting, which I think he did in the first year.

• 2:22:21Ben Gilbert?

  Yes, yeah.

• 2:22:22David Rosenthal?

  Yes, that's right, because the other players kept the ball away from him and they froze him out because they were so jealous. Okay. One, Jordan had to become Jordan. Two, though, he sacrificed a huge amount. There's this great quote from Jordan when he retired for the first time. He said, "Phil Knight and Nike have made me into a dream." And that's very sweet on the surface, but that's very dark underneath of it. Michael Jordan's life was no longer the life of a normal person or anything close to it. And now, to a certain extent, that happens to every star. But like today, you're like, duh. But back then, this was the first time this happened. Jordan became a dream.

• 2:23:07David Rosenthal?

  And that's very hard to live with as an actual human being. So there was some downside.

• 2:23:13Ben Gilbert?

  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. And, you know, all you have to do is do the thing that you're already good at and work hard at the thing you're already passionate about. By the way, I'm going to use your face on $5 million of media, of paid media in the next few months. It's like, whoa, what? But that's it for any normal life that I get, like right out the bat.

• 2:23:39David Rosenthal?

  Right. And he's a kid.

• 2:23:40Ben Gilbert?

  Yes.

• 2:23:41David Rosenthal?

  So again, like this is all normal today. Everybody understands this. LeBron knew exactly what he was getting into when he signed with Nike out of high school and went to the NBA. But like, this was the beginning of all of this.

• 2:23:54Ben Gilbert?

  So why did they sell so well? That's sort of this interesting $126 million in the first year. Like, why was the demand for them crazy? Did people just love Michael Jordan? Nike, this is, I think, the first time they really flex their ability to recognize an opportunity for an incredible marketing moment. So back in 84, Jordan starts wearing in preseason and in warmups, some modified airships. Because Nike is actually not done making the Air Jordan 1 yet. And so he's wearing these black and red shoes that are now called the Jordan breads, B-R-E-D. And these shoes are black and red. And in the NBA, you wear white, and that's it.

• 2:24:38Ben Gilbert?

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

• 2:24:58David Rosenthal?

  Right. Because it takes a while to actually make a new shoe. So the Air Jordan 1 is still in production.

• 2:25:02Ben Gilbert?

  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. And this gives Nike this incredible opportunity to make a marketing moment out of it. Now, it would have actually been very expensive because the way that the fine worked technically, after you dig into it for a while, is $1,000 for the first infraction, $5,000 for the second infraction. It may have even been the case that it was $10,000 for the third.

• 2:25:45Ben Gilbert?

  Over an 82-game season and facing possible ejection, it's a big tab for Nike and it's a big problem for Jordan. And before he could even wear these black and red shoes in a game or have the opportunity to, they switched. The Air Jordan 1, they made white and red. The one that is iconic, that you can go buy and then they make all the remakes out of. The AJ1 is not the bread. And the bread is the thing that kicked up the big issue. Anyway, so 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. And it just goes bong, bong, and puts these black bars over the shoes.

• 2:26:27Ben Gilbert?

  And they make a whole big deal out of the fact that these shoes are so great, they are banned in the NBA and you can go buy them at your local retailer. And people go nuts.

• 2:26:40David Rosenthal?

  So great. Such a good story.

• 2:26:42Ben Gilbert?

  And the coda to all this is even after reading all these books and watching all these videos and these interviews, I actually don't know what dollars ever changed hands. Some people said it was $5,000 times an 82-game season. Some people said it was $1,000 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.

• 2:27:20David Rosenthal?

  The thing that's so great, though, Nike, right? Like, it doesn't matter. It's the story. It's the dream. Like, it doesn't matter.

• 2:27:27Ben Gilbert?

  Right. They just put it in a freaking Hollywood movie that it was 5,000 times 82 games, and that's all anybody's gonna remember.

• 2:27:34David Rosenthal?

  Oh, man. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 2:27:43Ben Gilbert?

  Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:27:53David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you ship next.

• 2:28:14Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system, so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:28:26David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started. Okay, so 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. Now, if you look at that, you're like, wait a minute.

• 2:29:09Ben Gilbert?

  Huh.

• 2:29:10David Rosenthal?

  What happened?

• 2:29:10Ben Gilbert?

  Something bad happened in years two and three.

• 2:29:13David Rosenthal?

  Yes. And indeed, something bad did happen in years two and three, and in year one. Nike needed that first year of the Jordan deal to be a huge hit. So they stuffed the channel. They pushed so much product on retailers and through the futures program and whatnot, that that's how they hit the $126 million in sales. There wasn't actually $126 million of demand for Jordan products that year.

• 2:29:40Ben Gilbert?

  Hmm, so good commercial, but not $126 million of demand commercial?

• 2:29:45David Rosenthal?

  I mean, there probably was, I'm making this up, 50, 70, 100 million dollars of demand, like unprecedented for any shoe in history for a single year. But Nike also effectively took some steroids on this one.

• 2:29:58Ben Gilbert?

  Yep.

• 2:29:59David Rosenthal?

  That turned into a huge problem because the retailers and the buying public had a huge hangover the next year in year two. That was compounded by two issues. One, Jordan broke his foot early in the season of his second year, missed most of the season. Two, the Air Jordan 2s sucked. There's kind of no other way to put it. This was where Strasser, who again, had masterminded all of this, the Jordan deal, the Jordan 1s, working with his collaborator, Peter Moore, all this stuff, they kind of 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.

• 2:30:44David Rosenthal?

  This doesn't sound like the Nike playbook. This also doesn't sound like a good basketball shoe. Do you want to play basketball in Gucci leather? Probably not. Jordan didn't like the shoes. They were not good to play basketball in. They were super stiff. They were hard to break in. They didn't fit his style, right? So A, he wasn't playing. B, he wasn't incentivized to push them. I mean, he was economically incentivized, but he didn't like the shoe. It all kind of fell apart. On top of that, as this is all happening, Strasser and Moore too along with him, but really Strasser is becoming increasingly rogue within Nike. He breaks away.

• 2:31:29David Rosenthal?

  He starts a new division in a separate office complex from the rest of the company called the new products division. Dude, this is like very Steve Jobs, Macintosh. 100%. I mean, literally like the parallels here unfortunately comes to a tragic end. He sets up his new campus, new division, you know, away from Knight, away from the rest of the company. He mandates that all new product launches have to go through him and this new group and that they're gonna take control and streamline the process. And the Jordan 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 gonna end.

• 2:32:12David Rosenthal?

  Either Strasser is gonna become CEO of Nike or Strasser is gonna leave Nike. Yep. And Strasser ain't gonna become CEO of Nike. Cause one, Phil Knight is CEO of Nike. Two, Nike has a dual class voting structure. Phil Knight controls all the high vote shares and he controls the board. So really, this is the end for Strasser. They get in a huge fight in 1987. Strasser leaves the company. He goes off and takes Moore with him, Peter Moore, and they start a consulting firm in Portland called Sports Incorporated. All of which is fine.

• 2:32:53David Rosenthal?

  And you could imagine a future where one day Knight and Strasser might reconcile and they could be friends again and say, wow, Rob, you've had such incredible part of the Nike journey, contribution to everything. We can bury the hatchet.

• 2:33:08David Rosenthal?

  Well, Sports Incorporated takes on as one of their major clients Adidas.

• 2:33:13Ben Gilbert?

  And eventually their only client.

• 2:33:15David Rosenthal?

  And then eventually Adidas buys the company, moves their North American headquarters to Portland, Oregon and makes Strasser the CEO of Adidas America.

• 2:33:27Ben Gilbert?

  Oof.

• 2:33:28David Rosenthal?

  And then incredibly tragically, this is just terrible. Eight months into the job, Strasser has a massive heart attack and dies, I believe at age 46. Oh, it's just terrible.

• 2:33:41Ben Gilbert?

  Yeah.

• 2:33:42David Rosenthal?

  But the betrayal that this engenders, it's irreversible. Ben, you talked about earlier, the Nike culture. There's a quote from Jeff Johnson, Blue Ribbon employee number one, who I think had already left the company at this point. He's asked in the book, Just Do It, about Rob becoming CEO of Adidas. And he says, "I know they Adidas aren't what they once were, but Adidas people were the huns. I would starve to death before I would work for Adidas."

• 2:34:09Ben Gilbert?

  Wow.

• 2:34:11David Rosenthal?

  And then when Rob dies, Phil does not attend his funeral. It's really just heartbreaking.

• 2:34:16Ben Gilbert?

  There's a quote that sums it up in this Portland Monthly article that talks about why Strasser isn't known to many people outside the companies and why his role sort of fades into history. And they say, "Why? Because his work was vital to both, which makes it incredibly difficult to neatly write him into the mythology of either one. For Adidas, it was a brand revival conceived and executed by a fat, American, ex-Nike guy and his artsy partner. For Nike, Strasser's overachievements are overshadowed, if not severely tarnished, because he was a traitor." From Phil Knight, "It might have been okay if he had just quit, but he went to work for Adidas. An intolerable betrayal I never forgave him."

• 2:34:58David Rosenthal?

  Yeah. Oof. And still, the repercussions of this exist to this day. Adidas' American headquarters are still in Portland, Oregon.

• 2:35:07Ben Gilbert?

  Yep, and they poach a lot of Nike people.

• 2:35:10David Rosenthal?

  Yep. So, okay, back to Jordan. The plot thickens here. Jordan's not happy.

• 2:35:18Ben Gilbert?

  Strasser was his guy there?

• 2:35:20David Rosenthal?

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

• 2:35:34Ben Gilbert?

  I mean, Jordan's deal is up in 90, right?

• 2:35:38David Rosenthal?

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

• 2:36:04Ben Gilbert?

  Yep.

• 2:36:05David Rosenthal?

  So, back to Nike and Phil. This is serious wartime mode. They schedule a pitch meeting with Jordan. This is, I think, towards the end of year three of the deal to try and save him, to try and re-sign him. They're willing to do anything. Renegotiate the deal, give him more economics, give him another shoe, anything. Phil goes to a bright young star within the Nike Design Group. Tinker Hatfield.

• 2:36:37Ben Gilbert?

  Formerly of Nike's architecture and building planning team? He wasn't even hired as a shoe designer?

• 2:36:43David Rosenthal?

  He was an architect. This is super important. Tinker was another Bowerman guy. He ran track for Bowerman at Oregon and studied architecture. And then he comes into Nike and together with Mark Parker, who would become the CEO of Nike, they designed the Air Max, they designed the Air Trainer. They're part of Nike's revival on the running and training side and competing ultimately in aerobics with 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 him. Come home like bearing your shield or on it, essentially." So Tinker goes out. And remember, he's trained as an architect and then became a shoe designer.

• 2:37:27David Rosenthal?

  What do architects do when they meet with their clients? They ask them questions. They say, "What do you want? What are your specifications?" Tinker sits down with Jordan and he's like, "Tell me what you don't like about the Jordan 2. They're too tough to break in." "Okay, cool. What else is wrong with them?" "They're high tops. You know, that's too much weight. I'm Michael Jordan. I need lightness on my feet. I want to fly. I don't want the extra weight." "Okay, cool. In an ideal world, Michael, what shoe would you want? What would it look like?" And Michael's like, "Well, I want a great basketball shoe that will also look great off the court, but it needs to be both. It can't be like the Jordan 2 that look great off the court, maybe, but sucked as a basketball shoe." Tinker's like, "Okay, noted."

• 2:38:11David Rosenthal?

  So he goes back to Nike, works feverishly. Jordan comes in for this last ditch pitch meeting. He shows up four hours late. Phil starts the meeting and is 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." And he pulls the shroud off and hands the shoe to Jordan. And he's like, "It's the shoe you asked for." He goes right down the checklist. "Soft leather that doesn't need to be broken in. You can wear a new pair in every single game.

• 2:38:57David Rosenthal?

  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 piece de resistance, no swoosh. There's a little swoosh on the back tab. The main logo is the Jordan Jumpman logo on the tongue. The Jumpman logo did exist beforehand. Peter Moore had actually designed it, but it was never in the prime position. It was always the swoosh and then the Jumpman.

• 2:39:33Ben Gilbert?

  That's like heretical at Nike at this point to not have the swoosh be the main character. But Michael Jordan didn't really want to be a Nike. So the only way to keep him is to kind of hide the swoosh.

• 2:39:44David Rosenthal?

  It's kind of like harkening back to the beginning of like Phil Knight could have had 100% of blue ribbon sports, or he could have had 51% of Bill Bowerman's blue ribbon sports.

• 2:39:54Ben Gilbert?

  Yeah, it's pretty crazy because the whole point of these deals is to get swoosh impressions. And they were willing to say, we think it's going to be profitable enough in the long run to be in business with you, that we will not put the swoosh on the side of these shoes. And they were extremely right to do that.

• 2:40:11David Rosenthal?

  Indeed. So as part of that, they renegotiate the deal. Jordan agrees to stay with Nike. The Jordan brand becomes its own subsegment within Nike, its own shoes, its own clothes, its own colors, its own logo, its own advertising, all managed standalone. And then ultimately, this would take several years, but it would become Zion Williamson, where's Jordans? Jason Tatum, where's Jordans?

• 2:40:37Ben Gilbert?

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

• 2:40:43David Rosenthal?

  UNC is Jordans.

• 2:40:45Ben Gilbert?

  And so do you know what changed in that renegotiation?

• 2:40:49David Rosenthal?

  Yes. So 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 subbrand much more of its own brand. And they up the total guarantee to at least $18 million. So from two and a half to 18 in three years. Wow. Ultimately, just like the two and a half, that's meaningless because Jordan brand sales go back up in 88, 89, 90, on and on and on. 200 million, 300 million, 400 million, 500 million in sales.

• 2:41:31David Rosenthal?

  This is when they do the Spike and Mike ads with Spike Lee.

• 2:41:35Ben Gilbert?

  It's gotta be the shoes.

• 2:41:36David Rosenthal?

  And Wyden Kennedy, gotta be the shoes. Jordan earns over the course of this contract, easily at least $100 million, easily.

• 2:41:46Ben Gilbert?

  Over the seven year.

• 2:41:47David Rosenthal?

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

• 2:41:50Ben Gilbert?

  In his total career from basketball contracts, he made something like $90 million. So, I mean, you even said it in that first year, just from the get go with his Nike earnings were way outpacing his NBA earnings.

• 2:42:03David Rosenthal?

  Yep. Now, interestingly, at retail, again, back to this halo strategy, the Jordan 3s and then all Jordans subsequently, really, this is when they become the luxury brand. The Jordans are 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.

• 2:42:26Ben Gilbert?

  Yeah. So the Jordan 3 is priced at like $200 or something?

• 2:42:30David Rosenthal?

  $100. But this is 1988, 1989.

• 2:42:34Ben Gilbert?

  Right, okay, that makes sense. All right, so you mentioned how much he made at the end of that seven year contract. There's something mind blowing going on today in 2023 with the Jordan brand, and I don't think people quite have a handle on what has happened in the last three years. So the Jordan brand is the fastest growing part of Nike. Nike grows like 10% a year. The Jordan brand over the last three years keeps growing at like 35%. And it does billions in revenue, growing at 35%. So this past year, they just reported FY22, the Jordan brand did $6.6 billion in revenue.

• 2:43:18Ben Gilbert?

  Let's assume that the 5% figure is still accurate enough. It's accurate-ish. Jordan's making over $300 million a year from the Jordan brand at a 5-ish% royalty.

• 2:43:30David Rosenthal?

  He retired for the last time 20 years ago.

• 2:43:34Ben Gilbert?

  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.

• 2:43:55David Rosenthal?

  With all the operations and distribution and marketing of Nike.

• 2:44:00Ben Gilbert?

  It is unfathomable. So he did active work for many years in order to build the brand equity, but he does passive work now to keep it alive. Of course, he has sort of input on who they're signing to the Jordan brand. He is sort of a vote in that. But in Michael staying out of trouble and Michael staying the dream, he builds a tremendous amount of brand equity and Nike reaps 95% of that. So like, they're perfectly happy with this arrangement. They're happy to cut him $300 million checks. I would be too, if I was earning the other side of the $6.6 billion.

• 2:44:38Ben Gilbert?

  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.

• 2:44:53David Rosenthal?

  Yes, and that's the dark side for Michael. One more really critical thing I want to say about all this, Jordan and the building of the dream and the changing of culture, before we move on to all the rest of Nike history, which we will cover here. You can't ignore too, again, the timing in this. All of this coincided with the rise of ESPN and SportsCenter, and that was so important. In the early days, like when Steve Prefontaine was on the cover of Sports Illustrated or some of the tennis players, it was like, there was a Nike line of, "Oh, we could spend X million dollars in advertising, but if we get our shoes on the cover of Sports Illustrated, that's worth $20 million."

• 2:45:35David Rosenthal?

  With ESPN and SportsCenter, those athletes and Michael Jordan being all over that 24/7 every night, that was $20 million a night of free advertising.

• 2:45:45Ben Gilbert?

  That's a great point. So off the back of the rise of the Jordan brand, in 1988, they launched the Just Do It campaign with the very first, I think this is the first Wyden and Kennedy ad, right?

• 2:45:57David Rosenthal?

  A second real big one. The first was the Revolution ad with the Beatles that they did for the Air Max.

• 2:46:02Ben Gilbert?

  Okay.

• 2:46:02David Rosenthal?

  Another ticker Hatfield and Mark Parker joint.

• 2:46:05Ben Gilbert?

  And so they're kind of finding their footing again. They're realizing that, okay, we can diversify outside of running. We can find a lot of places to sell the dream. We can make different products to monetize the dream, to let people participate. Their market cap hits $1 billion 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 91, their market cap hit $5 billion. By 96, their market cap hit $10 billion. And they're really just executing the strategy that we talked about, but at

• 2:46:45Ben Gilbert?

  scale, until they get hit with everything we already talked about on the labor challenges and that controversy.

• 2:46:53David Rosenthal?

  Yep.

• 2:46:54Ben Gilbert?

  So that's a tough few years. Interestingly, like right around the dot com crash is also kind of 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.

• 2:47:09David Rosenthal?

  An interesting thing from that front, losing Kobe to Adidas.

• 2:47:13Ben Gilbert?

  Yes.

• 2:47:14David Rosenthal?

  Was big.

• 2:47:15Ben Gilbert?

  Really big. And people forget this. People forget that Kobe was an Adidas athlete first.

• 2:47:20David Rosenthal?

  Yes.

• 2:47:21Ben Gilbert?

  In the same way that people forget that Kanye was a Nike athlete or a Nike.

• 2:47:25David Rosenthal?

  Rapper.

• 2:47:26Ben Gilbert?

  Rapper first.

• 2:47:27David Rosenthal?

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

• 2:47:41Ben Gilbert?

  Oh, yeah, I have the numbers. So Kobe was with Adidas from 96 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 could move over to Nike.

• 2:47:55David Rosenthal?

  Yeah.

• 2:47:56Ben Gilbert?

  That was a huge win for Nike and a big turnaround. Like, 2002 is really when it started to get good again for them.

• 2:48:02David Rosenthal?

  Yep. I'm sure part of that was the shoes and, yeah, by all accounts, the Kobe 2s sucked. I do think there is, and this will get to analysis in a little bit. Nike can do something for athletes, for the big superstars, that the other companies can't.

• 2:48:18Ben Gilbert?

  Oh, and right around the same time, in 2003, is when LeBron came into the NBA and Nike signed him out of high school.

• 2:48:25David Rosenthal?

  Yep.

• 2:48:25Ben Gilbert?

  Okay, so 2002, they get Kobe, 2003, they get LeBron. They've cleaned up their image, they're cleaning up their factories, they're cleaning up their supply chain. In 2003, they acquire Converse for $309 million. They're once foe, and now Nike's in the multi-billion dollar market cap, and Converse is a tiny fraction of that size. 2003, Michael Jordan retires. And it's fascinating, just to get a quick data point. The Jordan brand, that year in 2003, is doing $700 million a year, and today it's doing 6.6 billion. And that's been the delta since he stopped playing basketball.

• 2:49:06David Rosenthal?

  I mean, the thing is, both of those numbers are bonkers.

• 2:49:09Ben Gilbert?

  Right.

• 2:49:10David Rosenthal?

  $700 million is bonkers, and $6 billion is bonkers.

• 2:49:16Ben Gilbert?

  Yeah, Jordan has completely transcended a sponsorship deal and turned into a brand. The notion, the platonic ideal of Jordan is a brand more than a human. So in 2006, another important thing happens. And most people didn't realize it at the time because, keep in mind, 2006 over in Apple, Steve Jobs is still the CEO. So not a lot of people know this guy named Tim Cook's name, but Tim joins Nike's board. I believe in like late 2005, he joined the board. He immediately starts helping Nike into understanding how to use digital technology to transform their business.

• 2:49:59Ben Gilbert?

  And in 2006, they launched the Nike Plus iPod.

• 2:50:03David Rosenthal?

  Yes, yes.

• 2:50:05Ben Gilbert?

  Which was not a terribly successful product in the market, but man, did it help Nike understand where the puck is going.

• 2:50:15David Rosenthal?

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

• 2:50:22Ben Gilbert?

  Oh, was it really?

• 2:50:23David Rosenthal?

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

• 2:50:31Ben Gilbert?

  We all have this to thank.

• 2:50:33David Rosenthal?

  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 a brand.

• 2:50:40Ben Gilbert?

  I actually did not know that's funny.

• 2:50:41David Rosenthal?

  That was the origin of plus.

• 2:50:43Ben Gilbert?

  It was interesting because it was this little like thing that you would put in the insole of certain shoes and it would measure your stride length and your, you know, all the metrics about running and it would report it to your iPod because it had a little like 30-pin connector thing you could put into your iPod. It was the most clunky, kludgy thing ever, but as that evolved into the Fuel Band and then as the Fuel Band evolved into apps on your iPhone, Nike started really building a way to have a relationship with their customers directly and not just through their products, but with this sort of suite of services. And 2006, and then again in like 2013, 14, they'd had a sort of a new strategy start. There's really these clear moments in time where the company changed its DNA.

• 2:51:28Ben Gilbert?

  And I go all the way back to 2006 on the technology one. It also completely changed their acquisition strategy because up until then, they had been acquiring brands. They bought Converse, they had bought Starter. Starter was going to kind of be their like Walmart brand. Oh, that's right, Cole Han. Cole Han, yeah. And I think this sort of aha moment happened where they realized, actually, what we want to be doing is pouring everything into the flywheel of the Nike brand. So they divested a bunch of stuff, but they started acquiring capabilities from a bunch of these other companies to help them make this tech migration. It's like a two decade thing where they have these two different strategies that are happening at the same time. One is the digitization.

• 2:52:13Ben Gilbert?

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

• 2:52:56Ben Gilbert?

  pull the trigger on this big strategy shift away from what Phil Knight had sort of pioneered with the retail relationships to go direct. And Nike started to realize, in this new era, this internet era, this global era where you have to be at scale to execute certain strategies, they're gonna be the player at scale that can execute a direct strategy, that can operate Nike.com to sell shoes directly to customers, that can operate retail stores and all these different places to go directly to customers. And they're not all the way there. And I think there's a lot of, like, we'll talk in their sort of bare bull case about where they are in that transition and how successful it will be. But there is this tipping point where a brand becomes the scale player.

• 2:53:41Ben Gilbert?

  Like, think about Disney in media. They've become the scale player. They can run a different playbook and go directly to customers in a way where other places that make content need to integrate with the existing distribution channels. Disney can make a 10, 15 year transition, especially with the right technology to go direct. Nike's basically betting that they're also one of these hero brands that can run that playbook.

• 2:54:04David Rosenthal?

  For context, today Nike is, what, more than twice the size of Adidas?

• 2:54:08Ben Gilbert?

  Yeah.

• 2:54:08David Rosenthal?

  Who is more than three times, I think, the size of the number three player, which is Skechers, maybe?

• 2:54:15Ben Gilbert?

  Yep, it's super power law distributed.

• 2:54:17David Rosenthal?

  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. But anybody can make their own Nike shoes in their own colors with their own designs on them. To be able to do that at scale with their customer base and produce the standard lines, that requires a level of scale economies that nobody else can really match.

• 2:54:48Ben Gilbert?

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

• 2:55:16David Rosenthal?

  Well, until recently, any mainstream person would have said, of course, to that statement.

• 2:55:22Ben Gilbert?

  Right. But there became, David, to your point about Jordan and Nike creating culture and participating in cultural movements and changing the way that people move around in the world and having a sneaker as a thing that defines you rather than a sneaker as a thing you throw on for the tennis court, but you would wear, you know, proper shoes anytime you go somewhere else. They really have figured out how to reach an audience and tap into their identity in a way that the original Phil Knight tracksuit thing never could have dreamed. And shoes have become this method for self-expression. And the secondary market is huge. It's like a, some estimate $2 billion, some people estimate $6 billion.

• 2:56:03Ben Gilbert?

  Billion dollar category. Keep in mind, all of athletic shoes are what? What did I say? 150 ish, you know, somewhere around there. So still a tiny fraction compared to the athletic sneaker market broadly. But who would have thought that used special edition shoes or secondary sales of shoes could possibly be a single digit billion dollar ecosystem?

• 2:56:26David Rosenthal?

  Right. I mean, this is companies like GOAT and StockX. And we'll talk about this more in analysis, but Nike has made the, I think, very conscious decision not to capture any of that value.

• 2:56:39Ben Gilbert?

  Yeah, I'm fascinated by that. I think they've figured out clever ways to make a bunch of money on limited edition sneakers without having to be the marketplace for all the secondary sales.

• 2:56:52David Rosenthal?

  The other way that Nike potentially could capture this value would be to massively increase their prices. And this is really interesting. I think this is where Nike is different from the luxury brands that we've covered. The 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 bucks, 200 bucks, maybe 300 bucks. Like not a lot of money. The instant that they get purchased, you can turn around and sell them on the secondary market for $5,000.

• 2:57:36David Rosenthal?

  Some of these shoes, $10,000, maybe more. That is a very intentional decision by Nike not to capture that value. And I think the reason they do it is to make all of this work, to make the dream work in a way that is applicable to everybody on the planet and not just Louis Vuitton's market. Is they have to keep it attainable. And so they're willing to let that two, $6 billion or whatever, go to secondary players, go to stock X in order to keep the dream alive.

• 2:58:08Ben Gilbert?

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

• 2:58:15David Rosenthal?

  Yeah. And yet Nike absolutely produces many items that are worth way more than $500.

• 2:58:23Ben Gilbert?

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

• 2:58:33David Rosenthal?

  Right. The one product that I know of was the Mags, the Back to the Future shoes that they actually produced. But those were for Michael J. Fox's charity. I think they made 50 of them and sold them for $17,000, if I have that right. But A, that was for charity. B, that was like, obviously a stunt. That's not Louis Vuitton.

• 2:58:53Ben Gilbert?

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

• 2:59:05David Rosenthal?

  Wow. Crazy.

• 2:59:08Ben Gilbert?

  But the point still stands. They make it up in volume.

• 2:59:14David Rosenthal?

  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.

• 2:59:26Ben Gilbert?

  Yeah.

• 2:59:27David Rosenthal?

  Whether those be companies or just people who are arbitraging.

• 2:59:30Ben Gilbert?

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

• 2:59:39David Rosenthal?

  Yep.

• 2:59:39Ben Gilbert?

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

• 2:59:58David Rosenthal?

  The Dream Crazy ad?

• 2:59:59Ben Gilbert?

  Yep. The text of which obviously was just Colin Kaepernick's face and says, "Believe in something, even if it means sacrificing everything." They accompanied it with a commercial. It launched online. Kaepernick tweeted it. Then they did these big billboards in every major city. I remember the first time I saw it and I was like, whoa. Nike executed perfectly on exactly what they were trying to do here. It strikes you emotionally, much like many of the Nike commercials. It was at a particular moment in time where they saw an opportunity to do something that they felt was right and become the center of media conversation for like months. Like this was the advertisement of the year.

• 3:00:43Ben Gilbert?

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

• 3:01:16David Rosenthal?

  Yeah. This was two years before Black Lives Matter became a really, you know, big thing with George Floyd. This actually was like a big risk. If this had been done two years later, it would have played out very differently. It would have been way less of a risk.

• 3:01:32Ben Gilbert?

  They would have been just like every other company.

• 3:01:34David Rosenthal?

  Just like everyone else. Yeah.

• 3:01:35Ben Gilbert?

  And it's quite illustrative that we aren't really talking about anything that Kaepernick did. We just assume that the whole audience has seen this ad, understands the power of this ad. That says a lot about the ad itself, the meta-context around how we're talking about it. I do think this is a good place to open up, what is Nike's media strategy? Because it's very clear, especially over the last 20 years, that they pick a social issue that they feel strongly about and they drive a truck through it in the American media market and say, hey, we want to prioritize this and we want to say we stand for this and we want to say we stand for and support something. And there's a cynical way to take that, which is like they've done the analysis and they believe that in doing this, they're going to build more love than they're going to

• 3:02:20Ben Gilbert?

  piss people off from, you know, those people are worth losing because we prefer these people instead and we think these people's disposable income is high enough or there's enough of them or whatever. I actually don't think that's the way that it operates. I think it is like an executive and creative gut feel, this is a set of values we feel are right and we're going to continue to bet the company on the people that identify with that set of values are a great customer segment for us and we can grow within it. I really do think it's quite touchy feely.

• 3:02:48David Rosenthal?

  Yup. And this is also, you know, back to the Kaepernick ad. This is, to my mind, the pinnacle of the brand halo element of this.

• 3:02:58Ben Gilbert?

  Yeah.

• 3:02:59David Rosenthal?

  Kaepernick played football, not an important sport for Nike in terms of shoe sales. Hadn't played in several years.

• 3:03:08Ben Gilbert?

  That's right.

• 3:03:08David Rosenthal?

  It wasn't about football.

• 3:03:10Ben Gilbert?

  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. And then someone internally was like, whoa, what are you thinking? This is a huge opportunity for us. But like, it's hard to be a Nike athlete when you're no longer a professional athlete.

• 3:03:24David Rosenthal?

  Yeah. This is like the ultimate example for me of the ad, the sponsorship, the campaign. It's not about the shoes. It's about the halo.

• 3:03:34Ben Gilbert?

  Yeah. 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. So it is sort of like coming out of 2019, they really did kind of just need to like clean things up and right the ship. And it was very fortunate that while all of this was going on, their big competitors were all kind of screwing up. And especially going into COVID, like none of their competitors figured it out.

• 3:04:19Ben Gilbert?

  There's these smaller shoe brands and you look at On or Hoka or Brooks. A lot of these niche players have done well in growing, but Nike hasn't had a formidable scale competitor. Adidas has just been nothing but mistakes over there the last few years. And so Nike has had some of these issues, but. Has kind of been fine. And after they brought in John Donahoe, they've been able to clean up the organization, reset for the next chapter, execute this shift to a direct and digital strategy. Well, I think they take a little bit of a breath and say like, okay, what does Nike in 2030 look like? And how can we make sure that we don't sort of stagnate here?

• 3:05:01David Rosenthal?

  Oh, this is great. I have so much to say. Let's officially transition to analysis and do power. And then you can update us on the business today as we go.

• 3:05:09Ben Gilbert?

  Great.

• 3:05:10David Rosenthal?

  So, okay, power for new listeners. As part of the analysis on every episode, we do a segment called Power, which is based on Hamilton Helmer's incredible business strategy book, Seven Powers.

• 3:05:20Ben Gilbert?

  Yep. Which is basically what is it that enables a business to achieve persistent differential returns and be more profitable than their closest competitor on a durable basis? So David, I think there is a trap laid for us on this episode. But I'm curious.

• 3:05:40David Rosenthal?

  Oh.

• 3:05:40Ben Gilbert?

  You said you had a transition to power. So I'm curious where you were going.

• 3:05:44David Rosenthal?

  Okay, so obviously we're going to talk about brand here in a minute. But.

• 3:05:50Ben Gilbert?

  But.

• 3:05:51David Rosenthal?

  Scale economies.

• 3:05:52Ben Gilbert?

  Yes.

• 3:05:54David Rosenthal?

  Are written all over this company in this episode for me. And this is the clearest thing in my mind that makes this industry and Nike's position and strategy within it so different from say, an LVMH or a Porsche or any of the others. Somebody gets Porsche has scale economies. But if you look at the sneaker industry, we talked about this a minute ago. It's such a power law. There's Nike, there's Adidas that's half their size. And then the third place player is well less than half of Adidas's size.

• 3:06:28Ben Gilbert?

  Yes. After that is Skechers, then Puma, then ASICS, Converse, Under Armour. But like massively declining market share curve.

• 3:06:37David Rosenthal?

  Yep. Okay, now compare that to the rest of the apparel industry. It's wild how different it is, right? Think about fashion, think about clothes, think about shirts, think about pants, think about jackets, think about whatever. No other corner of the apparel industry looks like this. In that there are two, three, four companies that make a huge share of all of the sneakers that the world wears. That's wild.

• 3:07:11Ben Gilbert?

  It's totally wild. It also is massively scale economies driven because the way that you acquire customers and retain customers is with this brand halo of sponsoring these big athletes and putting on these large, very expensive branded events and competitions. And small companies can't do that. The primary way that you get someone to be a 20-year customer of Nike is to go and spend money on the biggest athletes in the world. And the whole game, just like Netflix, is Nike's acquiring content. Nike is acquiring the

• 3:07:53Ben Gilbert?

  LeBrons of the world to be Nike athletes. And the LeBrons of the world are going to go where there's the most dollars flowing to them. And who can give them the most dollars? The people with the biggest customer bases.

• 3:08:06David Rosenthal?

  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, right? There's alignment and an incentive to be part of the biggest machine. So like, the Kobe situation is so illustrative of this, right? Kobe was with Adidas. Yeah, maybe the Kobe 2 sucked. Like, I don't know, and he didn't like the shoe. I doubt that was the issue. I think the issue was what Nike could do for Kobe, and thus what Kobe could participate in, was exponentially higher than even what Adidas could do. And like, that is huge power.

• 3:08:47Ben Gilbert?

  Yeah, it's fascinating. I mean, the game is figure out how to have the most customers that you can sell apparel to, and then you get to buy the biggest billboards. And you get to align interests with the biggest billboards. It's a content game on the customer acquisition side. And you can make the best commercials that are the most inspiring. I mean, that I guess doesn't take as many dollars. You know, you can produce an incredible commercial for $100,000, but the talent in it is going to cost you millions. The Super Bowl slot is going to cost you millions. I think a lot of Nike's power on a go-forward basis is totally the scale economy stuff.

• 3:09:25David Rosenthal?

  Yep, totally agree.

• 3:09:27Ben Gilbert?

  And they had lots of counter positioning in the old days. Like, the whole Jordan thing was a pure counter positioning play.

• 3:09:32David Rosenthal?

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

• 3:09:42Ben Gilbert?

  Correct. Yeah, they had too much to lose.

• 3:09:44David Rosenthal?

  Yep.

• 3:09:45Ben Gilbert?

  So, brand, I think this is a trap on this episode. I think Nike is a brand. First and foremost, what they do is build this incredible brand, sell the dream, support athletes, inspire people. But when you literally understand how Hamilton defines brand power, and the perfect example is the Tiffany ring. You get a Tiffany ring versus an unbranded diamond ring of the exact same caliber, you're probably paying $10,000 to $30,000 more for the Tiffany engagement ring. And there's a pureness to that brand premium concept.

• 3:10:29David Rosenthal?

  Mm-hmm.

• 3:10:30Ben Gilbert?

  Does Nike really have a brand premium?

• 3:10:33David Rosenthal?

  Hmm, or is it the athletes that have the brand? And Nike's scale economies let them buy the athletes' brands?

• 3:10:40Ben Gilbert?

  Right, as Trent Griffin would put it, wholesale transfer pricing. Or actually, the athletes are the ones that sort of hold the power, and Nike's happy to pay up for it and pass through all the profit pool to the pinnacle athletes.

• 3:10:52David Rosenthal?

  Unquestionably, that was the case in 1984 with Michael Jordan. And then again in 1987, 88, when they renegotiated the deal.

• 3:11:01Ben Gilbert?

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

• 3:11:24David Rosenthal?

  Yeah, they're not paying more for them.

• 3:11:26Ben Gilbert?

  Right.

• 3:11:26David Rosenthal?

  Now, 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 Sheltos, I don't know, maybe Sheltos would be popular right now.

• 3:11:38Ben Gilbert?

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

• 3:12:10David Rosenthal?

  Yeah. But I do think, despite you saying the trap, and I think there is a big trap in overestimating brand value of Nike, it does definitely have brand value and brand power.

• 3:12:22Ben Gilbert?

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

• 3:12:32David Rosenthal?

  Yep. My thought exercise on this, which is a little different than my usual brand power thought exercise, which is, can you kill it? Can you intentionally kill Nike? No, you can't. It can't die. It will be with us in 100 years.

• 3:12:45Ben Gilbert?

  Ooh, that's quite a take.

• 3:12:47David Rosenthal?

  Oh, you don't think Nike's going to be here in 100 years?

• 3:12:49Ben Gilbert?

  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 like if you couldn't kill it if you tried. I think that's too squishy.

• 3:13:04David Rosenthal?

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

• 3:13:09Ben Gilbert?

  Okay.

• 3:13:09David Rosenthal?

  I think, I was talking with Scott Reams about this. I have no data on this whatsoever, but I don't think it is a controversial statement to say that the Swoosh logo is tattooed on more bodies around the globe than any other company logo.

• 3:13:27Ben Gilbert?

  I'm sure that's the case.

• 3:13:28David Rosenthal?

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

• 3:13:36Ben Gilbert?

  Yeah, it's a sleight of hand. What Nike is first and foremost is a brand. What the entity is, is a brand, because they don't make sneakers, which we'll talk about in a second here. They don't seem to charge more than their competitors. 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 is 46%. And Adidas, every single quarter for the last 10 years, has had a higher gross margin. What is going on here? Why isn't Nike, with a better brand than anyone else in their space and one of the hero brands in the entire world, they don't seem to be getting a special Nike markup?

• 3:14:18David Rosenthal?

  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, 1,000, 5,000, $10,000 Nike items. They absolutely could. And they choose not to, I think, because if they did that... Well, one thing we didn't talk about. So Nike announced a few years ago that their whole marketing strategy was going to be reoriented around, I think, 12 cities in the world. And they were going to focus everything they did from a marketing standpoint on thinking about what it would mean to be interesting in

• 3:14:59David Rosenthal?

  those cities. So what's behind that? And the cities are like New York, Los Angeles, Tokyo, Shanghai, Rio, Paris, et cetera.

• 3:15:10David Rosenthal?

  And 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 $5,000 items, but want to be participating in the pinnacle of Nike.

• 3:15:33Ben Gilbert?

  I'm not talking about $5,000 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.

• 3:15:44David Rosenthal?

  Hmm.

• 3:15:44Ben Gilbert?

  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?

• 3:15:58David Rosenthal?

  Hmm. It could be. I think the thing that is so confounding here is the secondary markets. There is no question that the value of many Nike items is well above their selling price.

• 3:16:12Ben Gilbert?

  Right.

• 3:16:13David Rosenthal?

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

• 3:16:19Ben Gilbert?

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

• 3:16:46David Rosenthal?

  Oh, maybe this actually all comes back to scale economies because it's kind of the same thing with Amazon, right? Or Netflix. For a given price, Netflix can offer more value, or could in the past, offer more value than anyone else. Amazon with Prime can offer way more value than anybody else. This is the scale economy play.

• 3:17:11Ben Gilbert?

  Yeah. I don't think the rest of the powers are particularly worth talking about. The most interesting thing is there's not any switching costs. There's not any network economies. There's not a cornered resource. I frequently switch shoe brands all the time. And that would be like, one of the things that I'm least excited about, about any shoe or apparel company is unlike tech businesses, there's no potential for any form of lock-in. And there's no potential for really any form of network effects. Like, come on, how am I going to benefit from other people wearing Nikes? Maybe like in the Nike Run app, being able to share stuff with my friends who also have the Nike Run app, but it's thin. That's not how they make their money.

• 3:17:48David Rosenthal?

  Yep, agreed.

• 3:17:50Ben Gilbert?

  So interestingly, I guess what I would conclude on power is Nike is first and foremost a brand that, from a seven powers perspective, most leverages scale economies to get their outsized profitability.

• 3:18:06David Rosenthal?

  Totally agree with that.

• 3:18:07Ben Gilbert?

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

• 3:18:37David Rosenthal?

  Wow.

• 3:18:38Ben Gilbert?

  Take that in for a minute.

• 3:18:39David Rosenthal?

  That's shocking.

• 3:18:40Ben Gilbert?

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

• 3:18:45David Rosenthal?

  That's exactly what I was gonna say.

• 3:18:47Ben Gilbert?

  It's just 8.6 billion of their $50 billion of revenue.

• 3:18:51David Rosenthal?

  Wow.

• 3:18:52Ben Gilbert?

  It's like every corner of Nike is bigger than the brand that you associate with that space, you know?

• 3:19:00David Rosenthal?

  Yep.

• 3:19:01Ben Gilbert?

  The Nike brand does 49 billion. So there's some other revenue in there, Converse, and I think there's some other catchall. But basically, there's Nike and Converse, and Nike includes Jordan. So I mentioned earlier this shift to direct that Nike has been in the midst of for, it's basically like a 10-year journey. About 60% is still wholesale, is still sold through retailers. And 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

• 3:19:42Ben Gilbert?

  like long partnerships with retailers. Come back to that in a second. Their gross margin profile, 44%. So it's sort of interesting looking historically, David, we've been a tech podcast and we've looked at lots of software businesses that have these 70, 80% 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. So Nike is better than a car company, but it ain't no luxury.

• 3:20:24David Rosenthal?

  Yep.

• 3:20:25Ben Gilbert?

  So Nike does 6.4 billion in operating income. So that's their income before taxes. 12.5% operating margin. So that's sort of what you should think about their sort of take home.

• 3:20:35David Rosenthal?

  Not a software company.

• 3:20:36Ben Gilbert?

  Yeah, lots of costs involved in this business. They have $8.5 billion sitting in inventory, which even for Nike is high. Hmm. That's a point we'll revisit in our analysis here. Unlike the Nike of old, they also, in addition to that inventory, have $10.7 billion in cash and similar equivalents. So the company is no longer constrained by how much capital they have available to them. While it's been a growth company, they kind of don't know what to do with the cash. It's sort of this interesting question of, well, the way they started is that they could use 100% of their cash all the time to go buy

• 3:21:18Ben Gilbert?

  more inventory and reinvest that in the business. And that was true for like a couple of decades. They've now had 30 consecutive quarters of increasing dividend payouts. So it's a dividend stock with 11 billion of cash on hand, in addition to continually paying these dividends.

• 3:21:34David Rosenthal?

  It's funny, this doesn't jibe for me with the statement on the investor relations page, Nike is a growth company. I mean, I guess 10% growth at their scale is impressive. 35% growth in the Jordan Brand is very impressive.

• 3:21:46Ben Gilbert?

  So 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. And I assume that's like their sports marketing budget. I think the wording on the financial statement is interesting, too. They literally look at it as We're basically going out and buying media to create demand for our products.

• 3:22:10David Rosenthal?

  Yep. I mean, that's 100% what it is.

• 3:22:13Ben Gilbert?

  Yes.

• 3:22:13David Rosenthal?

  Like we were saying, it's not really that different than Netflix acquiring or producing content for Netflix.

• 3:22:19Ben Gilbert?

  Right. They just monetize in a different way.

• 3:22:21David Rosenthal?

  Yep.

• 3:22:22Ben Gilbert?

  Footwear is almost 3X the apparel business on a revenue basis. So at least by revenue, footwear is still their bread and butter. And in part, it's just selling sneakers to people that go wear sneakers every day and wear them out once or twice a year, then need to go buy some more sneakers. And that's like most people in the world. It's a pretty incredible market that they now get to address, you know, $150 billion athletic footwear market. It's crazy. When you look at this pretty interesting thing that they list, which is their wholesale equivalent revenue breakdown, which is basically saying, yeah, we sell some of this direct, but we want to put apples to apples and make these unit sales sort of adjusted as if they were all sold through our wholesale channel. Men's

• 3:23:04Ben Gilbert?

  is 51%. Women's is 21%. Kids is 12%. And the Jordan brand, broken out separately, like all of this excludes Jordan. The Jordan brand is the $6.6 billion business that makes up the other 16% of that pie chart. Holy God.

• 3:23:24David Rosenthal?

  Yeah.

• 3:23:25Ben Gilbert?

  Men's inclusive of Jordan, if you just assume Jordan is three quarters men, that means that they're selling 64% of their product to men. So remember when I said at IPO, they sell sneakers to men? It's like kind of the same business as it was, but a super different business than it was at the same time.

• 3:23:42David Rosenthal?

  Yes.

• 3:23:43Ben Gilbert?

  In some sports specifically, like just to dive into one example, they have a near monopoly in basketball shoes. Nike and the Air Jordan brands' share of performance basketball was 86%. And this stat's a few years old. It was right before the pandemic. But the dominance was even more prevalent in the lifestyle basketball category where they have 96% share. I have to wonder.

• 3:24:09David Rosenthal?

  The other shoe companies who are still doing big deals in the NBA, let's take Under Armour and Steph Curry here in San Francisco. Like, what are they doing?

• 3:24:20Ben Gilbert?

  Name another Under Armour athlete.

• 3:24:22David Rosenthal?

  I mean, they exist, but I don't think I could, right? Like, why? And obviously, it's worth it to Steph. Steph could sign with Nike tomorrow, but Under Armour is just paying him a boatload of cash. And I think also gave him tons of equity in the company and whatnot. But like, why?

• 3:24:38Ben Gilbert?

  I mean, I just think it's a bad move for Under Armour. I think this is the classic thing that we've talked about in 11 different industries of don't get caught in the middle in the age of the internet. It's so obvious in media. It's becoming obvious in universities. But be the New York Times or be acquired, but don't be the Cleveland Plain Dealer. Or be Disney or be Doug Demiro.

• 3:24:57David Rosenthal?

  Or in this world, be Brooks or be Nike.

• 3:25:00Ben Gilbert?

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

• 3:25:13David Rosenthal?

  Yep. Totally agree.

• 3:25:15Ben Gilbert?

  So Nike is just leaning into this in a big way. They're now the official uniform supplier of the MLB, the NFL and the NBA. And they're throwing huge dollars. Like, the NFL deal alone is something like a $200 million a year deal. And David, you were telling me Nike doesn't even get to sell the jerseys to customers. It's literally just to get the swoosh on the game day jerseys.

• 3:25:43David Rosenthal?

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

• 3:26:09David Rosenthal?

  Most of those are replica jerseys, which I'd heard that term before and I never thought about what it meant. Most of those are made by Fanatics, which has run an incredibly interesting playbook in the sports world and the sports marketing world over the past few years. They are replicas made and sold by Fanatics in conjunction with the teams of the jerseys that the players wear. Nike pays to make the jerseys that the players wear. It is a billboard. It is a sponsorship. That is what they are paying for. But that's probably not what you're gonna buy. You're gonna buy a replica from the team store that is made by Fanatics that has the Nike swoosh on it.

• 3:26:50Ben Gilbert?

  Which in many ways, that's part of why Nike is willing to pay to sponsor the NBA is because the replica jerseys get more swooshes out there in the world, even if it's not on things that they sell.

• 3:27:00David Rosenthal?

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

• 3:27:02Ben Gilbert?

  Right. That's wild.

• 3:27:04David Rosenthal?

  It's totally wild.

• 3:27:06Ben Gilbert?

  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. I mean, Nike totally participated in a world change and helped to change the world that we all wear sneakers all day. What an insane market to address, that there are 14 billion feet in the world and we all wear out the shoes. It's just a thing we need to just keep replacing. What a fantastic thing to get to sell. It really is surprising to me that they haven't quite figured out price discrimination. With the exception of some of these very specialized shoes,

• 3:27:49Ben Gilbert?

  which I'm probably not going to go buy. I'm just not a sneaker head. So I'm not gonna go buy any of this limited edition color, this, that, and the other thing, or something I have to like keep in a closet in a bag. It's not my bag. But, so if you exempt away that part of the market, there's probably some shoes that I should and would pay $500 for. And yet, those shoes don't seem to exist. And that's very surprising to me.

• 3:28:12David Rosenthal?

  Yep.

• 3:28:13Ben Gilbert?

  Okay, so those are the numbers on the business today. You wanna go to playbook?

• 3:28:16David Rosenthal?

  Let's do it.

• 3:28:18Ben Gilbert?

  Okay, playbook. The first one, I know I've said it a few times on this episode. I totally want to like engrain it in the ears of listeners where Nike will come up with the most creative clever way to win. And even if it's breaking a little bit of a rule, it's fine. The best illustration of this is Breaking 2. Did you watch that, David?

• 3:28:39David Rosenthal?

  Oh, yeah. So good. It was compelling.

• 3:28:40Ben Gilbert?

  Unbelievably compelling. But they said, what are all the rules to competitive running? If you're gonna have a pacer on a run with you, it needs to be the same pacer the whole time so that you can't cheat and like rotate in pacers. You can't wear certain types of shoes that have ill-defined rules. And so Nike stages this event with their shoes that provably make you 4% faster than you've ever been before. And they drive a Tesla with a laser and a whole bunch of pacers around this guy. And they're like, you know what? We're gonna make this big media spectacle out of this guy setting the world record and breaking the two-hour marathon time. And like, he came close, and it was an unbelievably

• 3:29:22Ben Gilbert?

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

• 3:29:43David Rosenthal?

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

• 3:29:50Ben Gilbert?

  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. It says Nike Inc. is a growth company. The first time I opened it on my phone, I was like, that is a, okay, all right, making that pretty clear. So, I don't know. I think you sort of see some of that in the best DNA of Nike and in the crappy DNA of Nike, like the Oregon Project stuff. So it's important to understand that to understand the company.

• 3:30:13David Rosenthal?

  Hey, Ben. Break the rules, fight the law.

• 3:30:15Ben Gilbert?

  That's right. Another big one is the things that are your very strength can go too far and become your weakness. And they totally pioneered outsourced manufacturing in Asia, which is also why they got hit so hard and deserved 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.

• 3:30:49David Rosenthal?

  Can't say that. Yeah.

• 3:30:50Ben Gilbert?

  On the note of not a shoe company, there's a great analogy here to TSMC. And in fact, there's a great analogy here to the Nvidia and Qualcomm's of the world and Nike. Nike is a fabulous shoe company.

• 3:31:06David Rosenthal?

  Yes. Yes.

• 3:31:08Ben Gilbert?

  I think that is ultimately the answer to is Nike a shoe company?

• 3:31:12David Rosenthal?

  Sure. This is our semiconductor episode this season.

• 3:31:14Ben Gilbert?

  They're a fabulous shoe company.

• 3:31:16David Rosenthal?

  Yes.

• 3:31:17Ben Gilbert?

  And unlike TSMC, semiconductor manufacturing is wildly differentiated. Shoe manufacturing, there's like two or three really big ones that Nike works with. They're unbelievably prescriptive. They source all the materials. They do lots of audits, stuff like that. But it runs quite differently than their apparel business, which has like thousands of manufacturers that they work with, which are all custom for all the different fabrics and stuff that they need to make. And so in some ways, it's like the fabulous semiconductor industry, but unlike semiconductors, the manufacturing isn't as CapEx intensive to start and there's not as much process power in it. So you actually do have this like

• 3:31:57Ben Gilbert?

  highly fragmented foundry equivalent, like manufacturing ecosystem of people who can make your stuff.

• 3:32:04David Rosenthal?

  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.

• 3:32:25Ben Gilbert?

  Yep, that's exactly right. While we're on manufacturing, a sort of a funny note. Nike manufactures zero shoes, but they manufacture 100% of the nitrogen-filled little airbags. They do it in Oregon because that's trade secret. And then they ship those over to their Asian manufacturing facilities to put them in the shoes.

• 3:32:46David Rosenthal?

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

• 3:32:51Ben Gilbert?

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

• 3:32:57David Rosenthal?

  Yeah, I would assume not.

• 3:32:59Ben Gilbert?

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

• 3:33:24David Rosenthal?

  Right.

• 3:33:26Ben Gilbert?

  The other huge theme that I think is important to take away here is for the first 15 years of Nike, it was a story of leverage. Every single point along the way, up until 1981, they took the highest leveraged route they possibly could. The whole thing was betting the farm on top of betting the farm. And we are telling Nike because it is the survivorship bias story. And there are many that would have failed along the way because at any given point, they would have gotten slightly ahead of their skis. And the 100% debt to assets ratio would have caught up with them. And then, poof, they go out of business. And Phil Knight even put up he and Penny's house to guarantee a loan.

• 3:34:09Ben Gilbert?

  If it came down, it all would have come down. There's no slack in the system at all.

• 3:34:16David Rosenthal?

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

• 3:34:21Ben Gilbert?

  Yep, exactly.

• 3:34:24Ben Gilbert?

  So Phil Knight basically never took on any equity investors and so he took no dilution. He and his management team and Bill Bowerman owned 56% at IPO, him owning 46% because he just kept betting the farm all on debt and basically had no buffer at all. So what that means is on IPO day, he was worth 178 million and today he's worth about 40 billion. When you own 46% of your company at IPO and it goes on to become a top 50 company in the world, that is how you become the 25th richest person in the world. He shot the moon and he kept ownership the whole way. Yup. Okay, so we talked a lot about this brand halo idea.

• 3:35:06Ben Gilbert?

  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, you know, through their local running shop who has something cool and exclusive. You build brand with that niche athletic community by being obsessed with that particular athlete's journey and designing products for them and customizing experiences for them. That brand then seeps out into the broader consciousness, either through paid media

• 3:35:51Ben Gilbert?

  or through just organic word of mouth, that Nike stands with athletes. They're obsessed with it. They make the experience of being an athlete the best thing possible and then they extend. And when I say they extend, they figure out what products that need to make that fit into the universe of the consumer psyche of how could I be like that dream that I'm watching? How can I participate in this feat of athleticism and show that this is like me too? And the hardest thing is figuring out how to extend to that audience and make products for them to buy without compromising that step one, that belief that you make pinnacle products. And what

• 3:36:33Ben Gilbert?

  What Nike has been able to do and thread that needle and figure out how to make the $15 t-shirt that you get at Dick's Sporting Goods with the swoosh on it, and also convince me that the very best shoes to run in is the Nike Vaporfly Next Percent, whatever, whatever. Again, just like our LVMH episode, it's amazing that they can make a little wallet clutch for a credit card and ID and a $200,000 handbag.

• 3:37:00David Rosenthal?

  Yep. Only thing I would add to that is just reiterate what kind of has hit me through doing the research in this episode is that athletes are Netflix shows.

• 3:37:10Ben Gilbert?

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

• 3:37:13David Rosenthal?

  And these days especially, in the beginning, it was athletes are billboards and Netflix shows in that on SportsCenter 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.

• 3:37:41Ben Gilbert?

  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.

• 3:37:58David Rosenthal?

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

• 3:38:05Ben Gilbert?

  Give it to me.

• 3:38:06David Rosenthal?

  This is actually about Phil Knight in Just Do It. Around the time Michael Jordan became a Nike guy, Phil Knight had finally begun to apply in full measure his 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.

• 3:38:37Ben Gilbert?

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

• 3:38:43David Rosenthal?

  Yes.

• 3:38:44Ben Gilbert?

  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.

• 3:38:56David Rosenthal?

  Now, what's really interesting, since we did the NFL episode earlier this year after doing the NBA episode.

• 3:39:04David Rosenthal?

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

• 3:39:46Ben Gilbert?

  Fascinating.

• 3:39:47David Rosenthal?

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

• 3:40:05Ben Gilbert?

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

• 3:40:17David Rosenthal?

  I mean, it's funny because it's the Gatorade line, not the Nike line about Michael Jordan, but like, be like Mike. If you want to be like Mike, it's really easy. You just buy the shoes. If you want to be like Patrick Mahomes, it's a little harder.

• 3:40:29Ben Gilbert?

  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.

• 3:40:35David Rosenthal?

  Yep.

• 3:40:36Ben Gilbert?

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

• 3:40:49David Rosenthal?

  Well, this gets to your question at the start of the episode. This is the crux of the question. I think there's two answers. The prestige models, the Jordans, the retros, the Vaporfly, what have you. The prestige 150 plus dollar Nike models. I don't think those are commodities. I think those are products. Nike also sells a lot of 50, 60, 70 dollar pairs of shoes. Those are probably commodities that are helped by the brand halo.

• 3:41:20Ben Gilbert?

  Yeah. Bifurcating it like that does make sense. Someone told me that in many years, the Monarch has been their best selling shoe, which is this crazy, high margin dad barbecue shoe that no athlete has ever worn for anything. Everyone should just Google Nike Monarchs and you're like, oh yeah, no, my parents wear that. I don't know. It's like the ultimate barbecue shoe. And that's kind of what America buys. And so they've sold enormous volumes of this thing.

• 3:41:46David Rosenthal?

  Man, I'm like one more kid away from becoming a Nike Monarch customer.

• 3:41:50Ben Gilbert?

  Ironically, it's actually caught on with Gen Z. And so there's this weird thing now where like people are wearing Monarchs ironically. So the Monarchs are objectively a commodity product and they're super differentiated by having the Nike brand on them. Whereas the Vaporfly, for the two years that it came out, the next percent thing that the Breaking Two marathon got ran in, it was like by far the best running shoe on the market for two whole years. That is actual R and D product that differentiates itself. So Phil Knight has the final word on this. In an interview, maybe eight, 10 years ago, he said, when directly asked the question, are you a product company or a marketing company? We're a marketing company and the product is our most important marketing tool.

• 3:42:35David Rosenthal?

  Hmm.

• 3:42:36Ben Gilbert?

  I disagree. I think the athletes are your most important marketing tool. I think the product is a monetization method for the marketing that you do through athletes. But if you admit that, then you're saying that we don't have differentiation in our product. But I do think it's quite telling that they started distributing someone else's product. And yeah, they do lots of R and D. But at the end of the day, they succeed because they have built the best brand in the world, the most amazing distribution in the world, and the most tear jerking marketing that anyone ever watches. And they have a 30-year enduring brand. For 30 more years, Nike will be, I can't predict after that, but Nike will be a brand that people look up to and are inspired by.

• 3:43:17David Rosenthal?

  Yep. Totally agree. And it's interesting, even like telling a little bit of the athlete's story along the way here, too. Even that story of the product is what's important. That's kind of part of the myth of the marketing of the brand with the athletes, right? You know, the Jordan 2, the Jordan 3. Like, yeah, the Jordan 2 sucked. Sure. Like, everything I said, probably true. I think MJ probably really believes that, as do many people. On the other hand, it's also a really convenient story, or the Kobe story of, ah, Kobe's Adidas shoes sucked.

• 3:43:50Ben Gilbert?

  Right.

• 3:43:51David Rosenthal?

  Sure. Makes for a really good story for the soap opera that is the athlete's life that is the Netflix show that they're selling.

• 3:43:58Ben Gilbert?

  Right. Being a soap opera keeps them in the spotlight and keeps the opportunity to have more impact with sponsor eyeballs.

• 3:44:04David Rosenthal?

  Yep.

• 3:44:05Ben Gilbert?

  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 this strategy that seems to be like celebrate eyeballs, where they'll sponsor anyone with attention. It's rappers, it's musicians.

• 3:44:24David Rosenthal?

  Oh, boy.

• 3:44:25Ben Gilbert?

  It's some athletes, it's celebrities, it's...

• 3:44:28David Rosenthal?

  Do we want to talk about Kanye?

• 3:44:30Ben Gilbert?

  Well, this is quite interesting. So I think Nike was smart. I think they legitimately premeditated, ooh, we don't want to be associated with this person. And so they drove a really hard bargain. And notoriously, in 2015, Kanye walked away from Nike and said, 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, hmm, our entire brand is built on celebrating athletes. And while we should be in business with celebrities in some way, shape, and form, I mean, there's these great old stories. Of Rob Strasser, making sure that movie stars were wearing Nikes and driving around Hollywood. We're here to celebrate athletes and stand by athletes and like we would stand by Tiger Woods. We did in some really trying times in his life where a lot of people turned against him.

• 3:45:14Ben Gilbert?

  Would we stand by Kanye? No, we don't know what to celebrate about him. And so I don't think they had too much foresight, knew exactly what was going to happen. But I think they've clarified their strategy that they're athlete focused. And for anyone who hasn't been paying attention, he blew up Adidas' year. Adidas' net income has basically evaporated and gone to zero. They used to make over $2 billion a year in profit. And the last four quarters on a rolling basis, they've made less than 100 million. So 2 billion down to 100 million. And they claim around $500 million of this is the easy write down. They posted an actual net loss last quarter. It is a pretty disastrous situation over there.

• 3:45:57Ben Gilbert?

  And there's a full out slide in their deck where they admit, we think we're better than this and we're not.

• 3:46:03David Rosenthal?

  Oh, I didn't realize it was that bad.

• 3:46:05Ben Gilbert?

  It's bad.

• 3:46:05David Rosenthal?

  For Adidas.

• 3:46:06Ben Gilbert?

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

• 3:46:09David Rosenthal?

  Well, I think maybe part of this, what has happened is Nike can participate in getting their billboards in these other aspects of popular culture, music being the biggest example of it, without having to have rappers be sponsors. Because how much Nike placement is there in music? A ton. How many songs are there about Michael Jordan to this day? Or LeBron, or Zion, or Ja Morant, or what have you?

• 3:46:43Ben Gilbert?

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

• 3:46:48David Rosenthal?

  Quite intelligently, yeah.

• 3:46:50Ben Gilbert?

  All right, so here we are at the end of analysis, the bear case and the ball case. So there's a bear case that we haven't talked about, which is Nike's in a weird place when Mark Parker retires. He was supposed to have a successor. The successor is out for me too 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.

• 3:47:24David Rosenthal?

  But was a board member.

• 3:47:25Ben Gilbert?

  He was a board member, so he knows Nike's history from that level, but different than, I mean, Mark Parker started as a sneaker designer. Very different sort of lineage coming in.

• 3:47:33David Rosenthal?

  He designed the Pegasus, which I think is the longest single running

• 3:47:38Ben Gilbert?

  Oh, wow.

• 3:47:39David Rosenthal?

  model with no pauses in Nike's history.

• 3:47:41Ben Gilbert?

  I ran in a Pegasus two days ago.

• 3:47:44David Rosenthal?

  Oh, that's amazing.

• 3:47:45Ben Gilbert?

  So John comes in and is sort of this external hire. I get the sense, I'm not sure he'll be a 20-year CEO. I get the sense this is sort of like figure it out time for Nike, stabilize things, get them set in a good direction, and then figure out who from the bench is the right next person. I don't know how long it'll be, but it's just like a vibe that I get from reading stuff.

• 3:48:06David Rosenthal?

  Well, Nike is also so insular. People develop up through the company and stay there forever.

• 3:48:13Ben Gilbert?

  Yeah. So COVID happened around the same time that he's coming in to take over, and they've sort of decided to do this big reorg where they used to have an org structure super focused on each sport. And that meant that it was people's jobs and whole team's responsibilities to track the athlete's journey through their experience playing that sport. And they provided crazy amounts of support to athletes. And like, here's an example. At the last Olympics, they wanted every single sport to have the option to be wearing Nike shoes, every athlete. Well, many sports don't require shoes. And Nike said, that's fine with us. We just want to have a presence and we want to support

• 3:48:57Ben Gilbert?

  those athletes. They did a bunch of R and D on all sorts of crazy things, including like a gymnastics partial shoe for one specific gymnastics event, because they're just obsessed with how do we make the athlete experience better? If they end up in swooshes and people understand what we're all about, they'll want to participate in our brand story, too. Well, this reorg was sort of intended to realign teams at Nike with the way that they actually interface with the outside world. So now it's men's, women's and kids. Because you go into a Nike store on Fifth Avenue in New York and there's a floor for men's, women's and kids. And you go into a Dick's Sporting Goods and there's a men's,

• 3:49:40Ben Gilbert?

  women's and kids. And so it kind of makes sense. You shouldn't send 12 people from Nike, one representing every sport, to go meet with the one buyer at the menswear department of that shoe store. But Nike's an incredibly matrixed organization. And so that's sort of the thing that was happening. The bear case in this is what has kind of gotten lost is an obsession and focus on these individual sports and the journeys in these sports. Let's look at the trainers, like just a little example in running. As we learned in the Brooks episode, the business for them is in the trainers. It's not the race day shoes. It's what you're wearing to get your three mile or your five mile in a few mornings a week. And you wear those out and then you buy another pair and it's a great business.

• 3:50:24Ben Gilbert?

  So there's some Nike running department who needs to be sort of obsessing over that journey and growing their sales and their share in not just race day shoes with this amazing Vaporfly stuff, but like the trainers. But look at what's actually happening in the running market. You've got Brooks, On and Hoka all becoming billion dollar revenue run rate companies in the last 18 months. Nike, fortunately, their big competitors like Adidas have just been out to lunch. But these little competitors who are all nipping at their heels are doing a great job focusing on their niches. And when you simplify an org in the way that Nike has, there's a little bit of a concern around,

• 3:51:08Ben Gilbert?

  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?

• 3:51:16David Rosenthal?

  Okay. I buy that as a bear case.

• 3:51:19Ben Gilbert?

  So there's a lot of nuance there, but I think that in the same way as that old Disney quote, so with Disney Animation goes the company, sort of like so with running goes Nike, that's a bellwether.

• 3:51:30David Rosenthal?

  Fair enough. I totally see what you're saying. I think if you were to say that the equivalent Disney animation for Nike... Was running at the beginning. I think it is unquestionably basketball today.

• 3:51:42Ben Gilbert?

  Fair.

• 3:51:42David Rosenthal?

  And I don't see them slowing in basketball.

• 3:51:45Ben Gilbert?

  Well, I mean, that's the thing is it's like, kind of hard to come up with a bear case. There are all these like little nitpicky, like I listen to a bunch of Tegus calls and I listen to the earnings calls on quarter. And like in doing my like investor diligence on this, these are the sorts of things that people are concerned about. A big one is like this potential reversal of strategy on D to C. Like they reopened Macy's and they put more inventory in Foot Locker in the last couple of quarters. And that's sort of concerning because the whole narrative has been, we're going direct. But also, uh oh, we have too much inventory, so we gotta blow it out and, you know, discount it through our retail channels. There's lots of questions to management about if that sort of thing is happening right now. Big slowdown in China, not just them, but all the big brands.

• 3:52:30Ben Gilbert?

  It seems like the Chinese market is shifting to Chinese native brands, or there's a lot of signs that that might happen. And so, you know, the China market is a huge, important set of consumers to Nike. So I think them figuring out, especially how their social justice stances fit in with the CCP controlled China. That's a huge open question and are they going to be able to address that biggest market in the world for feet? Or not, you know, at scale is sort of the question.

• 3:52:59David Rosenthal?

  Yep. Makes sense.

• 3:53:01Ben Gilbert?

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

• 3:53:03David Rosenthal?

  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, but you know, versus other companies I could put my money into. As incredible as this company is, the operations, the power, the scale economies, the brand, I think the durability. It's still not a software gross margin business, nor is it ever going to be.

• 3:53:31Ben Gilbert?

  I love that our complaint is always it's not a SaaS company.

• 3:53:34David Rosenthal?

  Well, it's a really good business model. I mean, look, if you could put all your dollars, you could put it into SaaS companies, you could put it into Nike.

• 3:53:41Ben Gilbert?

  Right.

• 3:53:42David Rosenthal?

  I do think Nike has incredible durability.

• 3:53:45Ben Gilbert?

  Yeah. I mean, that's the bull case. These scale economies are super real and they're in pole position to just keep spending and keep investing in building this incredibly durable brand. And like, products will come and go. There will be five-year stints where they have the most amazing running shoes that everyone needs to marathon in, and there'll be years where they don't. But the Nike brand and their media strategy and their brand voice and the way that they deploy into all these local markets and tweak the messaging to be local appropriate in every corner of the world and manufacture at scale, like,

• 3:54:24Ben Gilbert?

  it's just, the Nike brand means something to billions of people and Nike knows how to make it keep meaning something to them.

• 3:54:34David Rosenthal?

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

• 3:54:41Ben Gilbert?

  Yep. In the world of globalization and the world of the internet, returns to scale are a big deal and they're in the scale position.

• 3:54:49David Rosenthal?

  And I'm sure both hardcore basketball fans and sneaker heads would nitpick with this statement, but to me, Nike basketball and the sneaker head culture is the core of the driving force, you know, the pinnacle of the halo, the Jordan brand. And I just don't see, like, that feels like as strong as it's ever been to me.

• 3:55:12Ben Gilbert?

  Yeah, completely agree. I mean, you listen to these Tegus calls with Adidas people and they're like, our issue is how to figure out how to make the brand cool again. And that does not show up in any way, shape or form in the Nike interviews.

• 3:55:24David Rosenthal?

  Yeah, totally.

• 3:55:26Ben Gilbert?

  All right. Well, that closes out Baron Ball. I have some fun trivia for you, David.

• 3:55:31David Rosenthal?

  Love it.

• 3:55:32Ben Gilbert?

  So 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. And I'm wondering if this is it. So I'm going to read from Wikipedia. Nisho 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.

• 3:56:15Ben Gilbert?

  For anyone who didn't listen to our Lockheed episode, we talked about this bribe bringing down the Prime Minister of Japan, and oh my God, it happened through Nisho.

• 3:56:23David Rosenthal?

  Yeah, amazing. I did find that, and that is an amazing connection, and the deep cut is great for acquired lore. But that is not what I tweeted about. My tweet was actually about something slightly different, which was people that we come across in the acquired universe, minor characters who go on to be major characters in other stories. And it was actually about Don Katz and Audible.

• 3:56:45Ben Gilbert?

  Ah, interesting. Yeah, that's a good one, too.

• 3:56:47David Rosenthal?

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

• 3:56:57Ben Gilbert?

  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 he did the, it's the Andreessen Horowitz Strategy. It's like everything we talked about on the episode with them and how they're the most media savvy in the game, in part because of working with Marguerite there. But like, oh my God, he's so smart. And it's just a privilege to get to listen to him talk every once in a while, and it's fun that he's out talking right now because his perspective on AI is also, yes, he's talking his book, and also, all of his arguments are extremely compelling. He's very smart, so I recommend you listen to it.

• 3:57:36David Rosenthal?

  Well, it's like LeBron selling shoes. You know that he's selling shoes, but my God, he's amazing.

• 3:57:42Ben Gilbert?

  Right. It's like, oh, listen to the venture capitalist who has $30 billion under management, where a lot of it is like betting on the future that AI is going to be this big thing that's good for the world. Talk about how AI is good for the world. Yes, I can acknowledge that and listen to him and then be like, and I completely agree with almost everything you're saying.

• 3:58:00David Rosenthal?

  Uh, great. I've listened to the Ben Thompson interview, but not the Lex one yet, so I'll have to do that. I am breathing a huge sigh of relief over here because I was more than ever certain that we were gonna have the same carve out today. Can you guess what mine is?

• 3:58:17Ben Gilbert?

  No.

• 3:58:18David Rosenthal?

  Maybe not, because we've been so deep in Nike research to not pay attention to current events. Mine is Speak Now Taylor's version, which just came out. And I feel like Speak Now, at least for me, in my Taylor Swift experience, is like the forgotten album. Like, I just never think about it.

• 3:58:38Ben Gilbert?

  Totally.

• 3:58:39David Rosenthal?

  And then when it came out, and I was like, oh, wow. Well, A, I was surprised that she's even continuing to do the re-releases.

• 3:58:46Ben Gilbert?

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

• 3:58:49David Rosenthal?

  Yeah, the ultimate power move would be to stop. So pleasant surprise that it came out. And also pleasant surprise to rediscover Speak Now. Like, there are some bangers on there.

• 3:59:02David Rosenthal?

  Great album. It's so funny, listening to her now. How old is Taylor now?

• 3:59:06Ben Gilbert?

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

• 3:59:09David Rosenthal?

  And to hear her singing songs from when she was 21. It's just such a fun juxtaposition.

• 3:59:16Ben Gilbert?

  Yeah. That's cool. I gotta listen to it. I literally haven't done anything other than read about Nike, so.

• 3:59:21David Rosenthal?

  Yeah. It's good. There's some great songs on there.

• 3:59:24Ben Gilbert?

  I'll enter my three-day window right after we finish recording, where I can pay attention to other things again before we're starting research for the next one.

• 3:59:31David Rosenthal?

  Yeah.

• 3:59:32Ben Gilbert?

  Speaking of, we should pick a topic. There's like a thousand I want to do. So after this, I'll give you a call and we can talk about it. With that, you can get notified, new feature that we just launched, of all new episodes launching. Go to acquired.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.

• 4:00:03David Rosenthal?

  Anything subject to change.

• 4:00:05Ben Gilbert?

  Yes. Become an LP, acquired.fm/lp. ACQ2 is in any podcast player. Dave and I have a couple of fun interviews queued up for that, so ACQ2 should have some good stuff coming soon. And join the Slack, acquired.fm/slash-slash. With that, listeners, thank you for going on this blue ribbon journey with us, and we'll see you next time in Dimension Seven.

• 4:00:30David Rosenthal?

  Wow, you are bringing a new energy to these outros. I like it. It came to me in a fever dream. Wow, that is some Black Air Forces energy. Yep.

• 4:00:40David Rosenthal?

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