Nike (Audio)

1. 0:00 – 2:50

   Nike as the ultimate product-vs-marketing case study

   1. BGBen Gilbert0:00

      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.

   2. SPSpeaker0:15

      Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth?

   3. BGBen Gilbert0:32

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

   4. DRDavid Rosenthal0:41

      I'm David Rosenthal.

   5. BGBen Gilbert0:43

      And we are your hosts. There's an age-old question in business: What is more important, a great product or great marketing? Well, today, we have literally the perfect case study in that very question in Nike. Does breakthrough innovation drive that business, or is their core competency really around their profound advertisements and their sponsorship deals with athletes and teams, or their probably best-in-the-world brand positioning? To understand it, we have to examine Nike's entire sixty-year history, of course, because this is Acquired.

   6. DRDavid Rosenthal1:18

      And because Shoe Dog is so good.

   7. BGBen Gilbert1:20

      It's amazing. You've 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 fifty billion dollars in revenue when they technically don't make a single shoe? So you may think you know Nike from the movie Air or Shoe Dog, but what hasn't been told is how those old stories tie to the gigantic shift in strategy that Nike is really in the middle of right now. Well, 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, 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 and hints in those emails to tease about what the next episode is gonna 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. Dave and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. David

2. 2:50 – 5:30

   The Nike research canon: Shoe Dog, Just Do It, Swoosh—and the Strasser drama

   1. BGBen Gilbert2:50

      Rosenthal, what is that stack of books on your desk?

   2. DRDavid Rosenthal2:53

      Oh, my God, I think Amazon owes a thank you note to Acquired LPs-

   3. BGBen Gilbert2:56

      [laughing]

   4. DRDavid Rosenthal2:56

      -because I bought every Nike book out there. I mean, my six-foot-long desk is covered in Nike books. So fun to read all of them.

   5. BGBen Gilbert3:05

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

   6. DRDavid Rosenthal3:11

      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?

   7. BGBen Gilbert3:43

      Ooh, I do not.

   8. DRDavid Rosenthal3:45

      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.

   9. BGBen Gilbert3:56

      Oh, really?

   10. DRDavid Rosenthal3:57

       Isn't that crazy?

   11. BGBen Gilbert3:58

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

   12. DRDavid Rosenthal4:00

       Yeah, just wild. So he wrote kind of the canonical third-party journalist take on Nike. And then the third book is a book called Swoosh, which I bet most people have not read, but kind of like Taste of Luxury, I think people who are really in the know in the footwear industry have read this book. It was written by one J.B. Strasser and her sister, Laurie Becklund. J.B. Strasser is Julie Strasser, who was the wife of Rob Strasser. Now, Rob, if you've seen the movie Air, the character played by Jason Bateman is Rob Strasser, Nike's legendary first head of marketing. An item, among many, that is not discussed in the movie is that Rob, shortly after signing Jordan, had an enormous fight with Phil Knight, left the company with Peter Moore, who was the designer behind Jordans, and ended up joining Adidas as CEO of Adidas America just a few short years later.

   13. BGBen Gilbert5:05

       It's like an incredible betrayal.

   14. DRDavid Rosenthal5:07

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

   15. BGBen Gilbert5:21

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

3. 5:30 – 7:28

   Bill Bowerman: mad-scientist coach and the seed of Nike’s product obsession

   1. DRDavid Rosenthal5:30

      We start, however, with the Shoe Dog story, the origin of Blue Ribbon Sports, and actually a little bit before Shoe Dog starts, in July 1948, when one Bill Bowerman becomes the head track coach at the University of Oregon. Now, Bill was a legendary figure, in addition to being Nike's co-founder, along with Phil Knight. I mean, kind of the only way to describe him is he was like a descendant of the survivors of the Oregon Trail.... the cowards never started, and the weak died along the way, was one of his favorite sayings. [chuckles]

   2. BGBen Gilbert6:06

      Yes.

   3. DRDavid Rosenthal6:07

      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 [chuckles] 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 [chuckles] 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, the '50s.

   4. BGBen Gilbert6:44

      They do not make them like that anymore.

   5. DRDavid Rosenthal6:46

      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.

   6. BGBen Gilbert7:27

      Right.

4. 7:28 – 11:12

   Phil Knight’s origin: introvert with a Genghis Khan drive

   1. DRDavid Rosenthal7:28

      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.

   2. BGBen Gilbert8:05

      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.

   3. DRDavid Rosenthal8:34

      This is exactly what I was gonna say. I think at any other school, Phil would have been a star. This isn't really in Shoe Dog, but I know Phil's personality from reading so much about him over the past couple weeks. I think he probably went to Oregon in part because he wasn't 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.

   4. BGBen Gilbert9:02

      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.

   5. DRDavid Rosenthal9:19

      Not at all. I mean, I, um, 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.

   6. BGBen Gilbert9:32

      Didn't he give your graduation speech?

   7. DRDavid Rosenthal9:34

      Exactly. It was amazing. It was kind of the first draft of Shoe Dog that he had been working on.

   8. BGBen Gilbert9:39

      Ah.

   9. DRDavid Rosenthal9:39

      The book came out a couple years later, so great. But I remember thinking, "This does not seem like the founder and CEO of Nike." You know, even here talking at Stanford, the most warmly receptive audience possible, like, he was very nervous. [chuckles]

   10. BGBen Gilbert9:54

       Yeah. Huh.

   11. DRDavid Rosenthal9:56

       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 [chuckles] and would take athletic shoes, usually Adidas athletic shoes, and modify them or even build his own and then use his athletes as guinea pigs. To any advantage that they could have, he would be looking for, and shoes were part of it.

   12. BGBen Gilbert10:44

       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 snakeskin, deer hide, or fish skin.

   13. DRDavid Rosenthal10:57

       [laughing]

   14. BGBen Gilbert10:58

       Goofy and crazy stuff, and his guinea pig was Phil Knight because Phil wasn't at the front of the pack, so he could sort of afford to experiment on him. So very fortunate for Phil Knight and his future that he was not the fastest runner on the Oregon team.

5. 11:12 – 17:08

   Stanford business plan: Japanese disruption of German-dominated running shoes

   1. DRDavid Rosenthal11:12

      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, a hundred different entrepreneurship courses, taught by the famous professor Frank Shallenberger, who Knight gives tons of credit to for Blue Ribbon Sports and ultimately Nike. 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.

   2. BGBen Gilbert12:38

      Fuji, Ricoh.

   3. DRDavid Rosenthal12:40

      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-

   4. BGBen Gilbert13:12

      Or Adidas, as the Germans would say.

   5. DRDavid Rosenthal13:15

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

   6. BGBen Gilbert13:44

      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.

   7. DRDavid Rosenthal13:55

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

   8. BGBen Gilbert14:04

      Whoa!

   9. DRDavid Rosenthal14:05

      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.

   10. BGBen Gilbert14:22

       Hmm.

   11. DRDavid Rosenthal14:22

       So anyway, basketball shoes wasn't really the market yet. It would become much, much later, as we shall see. The market was running shoes, and it was like an okay market, but this was not the camera market. So Phil Knight's thesis here, it actually didn't get any sort of notice or praise famously from his classmates or even really from the faculty 'cause they're like, "Okay, this is a good idea to apply Japanese low 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.

   12. BGBen Gilbert15:00

       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.

   13. DRDavid Rosenthal15:07

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

   14. BGBen Gilbert15:26

       In, like, the 1920s?

   15. DRDavid Rosenthal15:29

       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.

   16. BGBen Gilbert16:00

       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 gonna be a problem for Adi when it comes out that the American won wearing German shoes?

   17. DRDavid Rosenthal16:19

       Interesting. I didn't know that part of the story. That makes sense because Adi's older brother, Rudi, 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. Rudi goes off and starts a separate shoe company. It never came out what the fight was about, but one of the rumors is that Rudi went and fought in the Nazi army, and Adi didn't.

   18. BGBen Gilbert16:48

       Oh.

   19. DRDavid Rosenthal16:48

       And maybe that might have... I don't know, but may have had something to do with it. Anyway, crazy, Rudi goes across town and starts a competing company after the war named Puma.

   20. BGBen Gilbert17:00

       Craziest thing.

   21. DRDavid Rosenthal17:01

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

   22. BGBen Gilbert17:06

       Okay, so take us back to Phil Knight.

6. 17:08 – 25:40

   Japan trip and the Onitsuka Tiger deal: Blue Ribbon Sports is born

   1. DRDavid Rosenthal17:08

      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-

   2. BGBen Gilbert17:36

      He's like: "Why would I leave Hawaii?" [chuckles]

   3. DRDavid Rosenthal17:38

      Yeah, I mean, smart guy.

   4. BGBen Gilbert17:39

      [laughing]

   5. DRDavid Rosenthal17:40

      Phil, though, goes on to Japan, and he's still thinking about this idea. When he's in Japan, he starts going to tracks in Tokyo and watching what people are wearing, running around the tracks, and he observes, and he decides that the Tiger brand shoes that he's seeing are the best. So he looks up the company that makes Tigers. Turns out they're made by a company called Onitsuka, which is based in Kobe, in the south of Japan, near Osaka. And Phil, for a desperate introvert, kinda crazily, this is how passionate he is about this idea, he gets it in his head that he's gonna hop on a train from Tokyo-... and just go knock on their door [laughs] and say hi to the Onitsuka Corporation, and, uh, maybe ask them if he could import some of their shoes. So the story goes that he shows up on the door, and I can only imagine what 23-year-old Phil Knight is feeling as he's going through this.

   6. BGBen Gilbert18:38

      Well, this is the other side of Phil's personality, where he's sort of a tortured soul. He's introverted, but he's unbelievably driven. He has a splinter in his mind where when his buddy's like, "Actually, this is pretty good, I'm gonna stay in Hawaii," Phil's like, "But I'm longing for something."

   7. DRDavid Rosenthal18:56

      Yes.

   8. BGBen Gilbert18:57

      "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.

   9. DRDavid Rosenthal19:14

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

   10. BGBen Gilbert19:29

       Yes

   11. DRDavid Rosenthal19:30

       ... but he still is. [chuckles]

   12. BGBen Gilbert19:31

       Right.

   13. DRDavid Rosenthal19:32

       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.

   14. BGBen Gilbert19:41

       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 wanna 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.

   15. DRDavid Rosenthal20:20

       It's funny you say Nike there as sort of founding principles, [chuckles] because Nike isn't gonna come for quite a while here. While Phil is making this train trip down to Kobe, he suddenly has a realization. His plan is, he's gonna show up at the door, he's gonna say that he's an American businessman, you know, a distributor, and he wants to distribute 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 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.

   16. BGBen Gilbert21:17

       It's a very nice story.

   17. DRDavid Rosenthal21:18

       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.

   18. BGBen Gilbert21:44

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

   19. DRDavid Rosenthal21:47

       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-

   20. BGBen Gilbert22:20

       [chuckles]

   21. DRDavid Rosenthal22:20

       ... you know, running shoe market could be a $1 billion market-

   22. BGBen Gilbert22:24

       [chuckles]

   23. DRDavid Rosenthal22:24

       ... which he totally makes up. [laughing]

   24. BGBen Gilbert22:26

       [laughing]

   25. DRDavid Rosenthal22:26

       He has no evidence to back this up whatsoever.

   26. BGBen Gilbert22:29

       He's done lots of market research.

   27. DRDavid Rosenthal22:32

       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. [chuckles] Like, maybe 100 million, maybe? I mean, we just... We're talking about, like, running was not a thing. It was a thing that athletes did.

   28. BGBen Gilbert22:52

       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.

   29. DRDavid Rosenthal23:12

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

   30. BGBen Gilbert23:23

       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.
7. 25:40 – 33:20

   Selling shoes out of a car + Bowerman becomes cofounder (51/49)

   1. DRDavid Rosenthal25:40

      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 thirteen 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.

   2. BGBen Gilbert26:12

      The naiveté 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."

   3. DRDavid Rosenthal26:20

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

   4. BGBen Gilbert26:42

      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.

   5. DRDavid Rosenthal26:54

      Yes. Speaking of proprietary, he also has another actually really great idea, which is that while he's driving around, he'll go down to Eugene and see his old coach, Bowerman, at the University of Oregon, and he thinks, "Oh, if I could get Bill to put his runners in Tigers, then that would be great marketing for me. And I know he's not always super happy with Adidas. We're gonna have a better relationship. He'll be able to experiment with these shoes, and I'll sell them to him for cheap." 'Cause at this point in time, even the legendary Bill Bowerman and the University of Oregon, they bought all the shoes. Nobody was giving them shoes. It was like a major line item in their budget.

   6. BGBen Gilbert27:43

      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.

   7. DRDavid Rosenthal28:10

      Not exactly what GSB or any other business school would determine a recipe for success here. [chuckles]

   8. BGBen Gilbert28:15

      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-

   9. DRDavid Rosenthal28:25

      And venture capital.

   10. BGBen Gilbert28:27

       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.

   11. DRDavid Rosenthal28:49

       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.

   12. BGBen Gilbert28:59

       [chuckles]

   13. DRDavid Rosenthal28:59

       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.

   14. BGBen Gilbert29:05

       Yep.

   15. DRDavid Rosenthal29:06

       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.

   16. BGBen Gilbert29:34

       And like real partners, fifty-fifty-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.

   17. DRDavid Rosenthal29:43

       So Phil's like, "What's the deal you have in mind?" Uh, I think originally Bowerman says fifty-fifty, and then he sleeps on it, and he comes back with his lawyer, and he says, "Actually, let's do fifty-one, forty-nine. I want you to have fifty-one, me to be forty-nine-

   18. BGBen Gilbert29:57

       [chuckles]

   19. DRDavid Rosenthal29:57

       ... 'cause I don't really want to be involved here." [laughing] 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 fifty, sixty, seventy percent of the company. On the other hand, this is a no-brainer yes for Phil.

   20. BGBen Gilbert30:20

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

   21. DRDavid Rosenthal30:24

       Well, and if Phil doesn't do this deal, he would have a hundred percent of Phil Knight's Blue Ribbon Sports, but he does do the deal, and he gets fifty-one percent of-... Bill Bowerman's-

   22. BGBen Gilbert30:35

       Yes

   23. DRDavid Rosenthal30:36

       -Blue Ribbon Sports, which is a completely different animal.

   24. BGBen Gilbert30:39

       Yes. So I was thinking about this. After reading Shoe Dog, I was like, "Hmm," 'cause I just read it for the second time, it just feels a little weird that Bowerman would just kind of immediately be like, "Yes, I'll go into business with you, person who ran for me, that I never had a particularly close relationship with." And so I've always wondered, like, why was he so eager to do this? And as part of the research, I stumbled upon this guy named Scott Reames, who was formerly a Nike historian. He worked in the marketing department, and then for over 20 years, worked at Nike and became the company historian. He has an epic set of LinkedIn posts that are really like these incredible gems pointing out things in company history. And so he's got this post. He says, "Based on letters in the University of Oregon and Nike archives, Bill Bowerman corresponded directly with many footwear manufacturers in the 1950s," so, like, 15-plus years before this, "including Adi Dassler," directly to Adi Dassler, "trying to purchase shoes for his runners directly to avoid retail markup. He made it clear he had ideas on how to make running shoes better." Remember, these are in letters to Adi Dassler years before. "But the responses he received referred him to footwear distributors in the United States for Adidas and ignored his design offer." So Bowerman is sitting there, and he is primed. He's like: "Oh, you're gonna import foreign shoes and give me a deal? I'm in!"

   25. DRDavid Rosenthal32:09

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

   26. BGBen Gilbert32:29

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

   27. DRDavid Rosenthal32:32

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

   28. BGBen Gilbert32:37

       Really?

   29. DRDavid Rosenthal32:38

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

   30. BGBen Gilbert32:50

       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 wanna thank Eric Sprunk, [chuckles] who is a 27-year Nike veteran, and David, you know that I chatted with him, but he was COO until a couple years ago, and very cool to get his perspective and Scott's perspective. I'm curious if you have any other nuggets that come up, too.
8. 33:20 – 45:52

   The growth trap: thin margins, Jeff Johnson, and banks that fear success

   1. DRDavid Rosenthal33:20

      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, um, sells them out of the back of his car. And even with that funny sales strategy, and in Shoe Dog, Phil talks about this, while he was in Hawaii with his buddy, the way they made money was they sold encyclopedias door to door, and then Phil gets a job as a, um, stockbroker trying to sell stocks. He doesn't make any sale. Like, he's the most introverted person in the world. He can't be a salesman, but for some reason, when he's selling shoes, when he's doing his crazy idea, he can literally just go to track meets and convince kids and their parents to buy these shoes out of the back of his car.

   2. BGBen Gilbert34:16

      When you believe in something, sales are just natural.

   3. DRDavid Rosenthal34:19

      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. [chuckles]

   4. BGBen Gilbert34:40

      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 is the money coming from to get the inventory?

   5. DRDavid Rosenthal35:11

      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.

   6. BGBen Gilbert35:49

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

   7. DRDavid Rosenthal35:53

      Exactly, so that leaves, what? $1.75, maybe $2, like you said, in profit per pair. How are you gonna order more inventory at $3.50 a pair when you're making $2 in profit per pair? [chuckles] The math doesn't pencil.

   8. BGBen Gilbert36:10

      Wow.

   9. DRDavid Rosenthal36:11

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

   10. BGBen Gilbert36:52

       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.

   11. DRDavid Rosenthal37:32

       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.

   12. BGBen Gilbert37:43

       Right, it's just normalized into life.

   13. DRDavid Rosenthal37:46

       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- [chuckles]

   14. BGBen Gilbert37:56

       ... [chuckles]

   15. DRDavid Rosenthal37:56

       -at runners is crazy.

   16. BGBen Gilbert37:59

       Yeah, totally wild.

   17. DRDavid Rosenthal38:01

       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.

   18. BGBen Gilbert38:30

       Correct.

   19. DRDavid Rosenthal38:30

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

   20. BGBen Gilbert38:35

       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.

   21. DRDavid Rosenthal38:52

       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 gonna be very risk-seeking. [chuckles] They're gonna be quite risk-averse.

   22. BGBen Gilbert39:07

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

   23. DRDavid Rosenthal39:53

       The book value of equity.

   24. BGBen Gilbert39:54

       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."

   25. DRDavid Rosenthal40:17

       Yep.

   26. BGBen Gilbert40:17

       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 gonna cap your dollar limit super low."

   27. DRDavid Rosenthal40:41

       Yeah, it's basically factoring-

   28. BGBen Gilbert40:43

       Right

   29. DRDavid Rosenthal40:43

       ... is what it's known as today.

   30. BGBen Gilbert40:45

       Right.
9. 45:52 – 53:43

   Creating the market: Cortez innovation and Bowerman’s Jogging revolution

   1. DRDavid Rosenthal45:52

      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 [chuckles] 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 forty-four thousand dollars in revenue. In 1967, they do eighty-four thousand dollars in revenue. You're noticing a doubling theme here. Turns out, even from a very low base, if you double every year for like [chuckles] twenty years, you can still become a big company. So then, in 1967, Bowerman... Remember, you know, Bowerman's been involved, his name, his association with the company has been huge throughout all this, but like you were saying a minute ago, Ben, his real motivation is he wants R&D access. He wants to be able to make shoes. And in 1967, ahead of the 1968 Mexico City Olympics, he comes up with a new idea for an entirely new type of shoe, one that he probably can't really manufacture on his own, but now he has this relationship with Tiger, with Onitsuka, and his idea is that rather than leather on the upper parts of these track shoes, what if we instead use a breathable material, like nylon, so that my runners' feet aren't sweating throughout the whole race? On the one hand, like, yes, nobody likes sweaty feet. On the other hand, if your feet sweat a lot in leather shoes over the course of several miles, well, they're gonna get heavier and weigh down, and so maybe this might help the shoes stay lighter, and Bowerman is obsessed with lightweight in his shoes. So Onitsuka is very receptive to this. They think, "Great, we love this. We'll make the shoe. We can do that. We can source the nylon. We'll make the shoe." So Bowerman and Phil get together. They're like: This is amazing. We're gonna have our own model, you know, that we've designed, that Bowerman's designed.

   2. BGBen Gilbert47:57

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

   3. DRDavid Rosenthal48:01

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

   4. BGBen Gilbert48:05

      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?"

   5. DRDavid Rosenthal48:16

      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 wanna 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, and, you know, knowing-

   6. BGBen Gilbert49:00

      So good

   7. DRDavid Rosenthal49:01

      -these men, I assume this is quite true, Bowerman is casting about for other ideas for names of the shoe, and [chuckles] 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, uh, thus, the Blue Ribbon/Tiger Cortez is born. Naming aside, the nylon uppers are a huge innovation, and this becomes a big hit.

   8. BGBen Gilbert49:31

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

   9. DRDavid Rosenthal49:56

      Yeah, spoiler alert, Tiger eventually became ASICS.

   10. BGBen Gilbert50:00

       Yes.

   11. DRDavid Rosenthal50:01

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

   12. BGBen Gilbert50:11

       Yeah.

   13. DRDavid Rosenthal50:12

       So he writes a book. I feel like some marketing agency these days would advise a startup on, "Oh, yeah, this is how you build a market, you know, write a book, start an-- evangelize a movement." Bowerman just does this 'cause 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.

   14. BGBen Gilbert50:50

       All right, I'm gonna read a paragraph from Shoe Dog here. This is Phil Knight: "He told me, on top of everything else, he was also writing a book. 'A book?' I said. 'About jogging,' he said gruffly. Bowerman was forever griping that people make the mistake of thinking only elite Olympians are athletes. 'But everyone's an athlete,' he said, 'If you have a body, then you're an athlete.' Now he was determined to get this point across to a larger audience, the reading public. 'Sounds interesting,' I said, but I thought my old coach had popped out a screw. Who the heck would want to read a book about jogging?" This is Phil Knight, the founder of Nike!

   15. DRDavid Rosenthal51:27

       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.

   16. BGBen Gilbert52:08

       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.

   17. DRDavid Rosenthal52:21

       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." [chuckles]

   18. BGBen Gilbert52:38

       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.

   19. DRDavid Rosenthal53:00

       Yeah.

   20. BGBen Gilbert53:01

       Perfect.

   21. DRDavid Rosenthal53:02

       So great.

   22. BGBen Gilbert53:03

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

   23. DRDavid Rosenthal53:27

       And more than just athletes.

   24. BGBen Gilbert53:30

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

   25. DRDavid Rosenthal53:33

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

   26. BGBen Gilbert53:42

       Right.

10. 53:43 – 1:26:13

    1971 crisis: banks reject them, Onitsuka turns hostile, and Nike gets created (Swoosh + name)

    1. DRDavid Rosenthal53:43

       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, 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."

    2. BGBen Gilbert54:25

       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.

    3. DRDavid Rosenthal54:41

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

    4. BGBen Gilbert54:52

       He trips the alarms. [chuckles]

    5. DRDavid Rosenthal54:53

       He trips the alarm system. [chuckles] $1.2 million, a kid off the street can literally walk down Sand Hill and raise-

    6. BGBen Gilbert55:01

       [chuckles]

    7. DRDavid Rosenthal55:01

       ... $1.2 million today.

    8. BGBen Gilbert55:02

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

    9. DRDavid Rosenthal55:05

       Sure, whatever.

    10. BGBen Gilbert55:06

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

    11. DRDavid Rosenthal55:10

        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."

    12. BGBen Gilbert55:23

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

    13. DRDavid Rosenthal57:08

        Two things here: One, this is so sad. That's the way it was, and thank God [chuckles] 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 [chuckles] 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've been a flood of other competitors, or Onitsuka and others would've just done this themselves.

    14. BGBen Gilbert57:49

        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.

    15. DRDavid Rosenthal57:59

        Yes, and there's huge survivorship bias here.

    16. BGBen Gilbert58:02

        Yep.

    17. DRDavid Rosenthal58:02

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

    18. BGBen Gilbert58:07

        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.

    19. DRDavid Rosenthal58:15

        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-

    20. BGBen Gilbert58:34

        Direct listing?

    21. DRDavid Rosenthal58:35

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

    22. BGBen Gilbert58:40

        Yes.

    23. DRDavid Rosenthal58:41

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

    24. BGBen Gilbert58:46

        [laughs] This is so good.

    25. DRDavid Rosenthal58:48

        Nike isn't anywhere in the picture yet. He changes the name of the company to Sports-Tek, T-E-K, Inc.-

    26. BGBen Gilbert58:56

        Yes

    27. DRDavid Rosenthal58:56

        ... with the idea that, "Oh, this will make us sound like a technology company, and then people will be interested in investing." [chuckles]

    28. BGBen Gilbert59:01

        '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.

    29. DRDavid Rosenthal59:32

        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-

    30. BGBen Gilbert59:44

        [chuckles]
11. 1:26:13 – 1:39:22

    Going fully independent: Japanese factories, orange boxes, waffle soles, and Prefontaine marketing

    1. DRDavid Rosenthal1:26:13

       Yep. So once this is all in place, Phil goes over to Japan and works with Nissho, goes visits lots of factories, ends up meeting the Nippon Rubber Factory. He's touring with lots of folks, and his sorta 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, "Mm, let's go out to lunch. Let us borrow the shoe, inspect it a little bit. We'll come back after lunch, and we'll have an answer for you." They come back after lunch, and there is an almost perfect duplicate of the Cortez sitting there on the conference room table, and Phil's like, "Hell, yeah! [laughing] This is what I'm talking about."

    2. BGBen Gilbert1:27:03

       What an amazing way to do business. 'Cause he had met with all these other factories that are like, "Yeah, oh, we'll get back to you in a few weeks," and, like, over lunch, they built one.

    3. DRDavid Rosenthal1:27:12

       Amazing. So he is jazzed. He orders all sorts of models. He's like: Can you do all the running shoes that we/Tiger were doing before, at least the ones that we and Bowerman designed? They're like: Yep, no problem. He's like: Can you do tennis shoes, basketball shoes, cleats? He's like: "Yep, yep, yep, whatever you want." So, um, in a kind of very un-Phil Knight-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."

    4. BGBen Gilbert1:27:54

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

    5. DRDavid Rosenthal1:27:59

       The Blazer, for sure. Yep, of course, the Cortez, and, uh, they're like: "Okay, great." And then Phil's like, "One more thing, the boxes, can you make them bright orange? I want them to stand out." And Nippon Rubber's like: "You got it, man. Whatever you want."

    6. BGBen Gilbert1:28:15

       It's awesome.

    7. DRDavid Rosenthal1:28:16

       So great.

    8. BGBen Gilbert1:28:17

       And to this day, they're orange.

    9. DRDavid Rosenthal1:28:19

       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.

    10. BGBen Gilbert1:28:37

        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.

    11. DRDavid Rosenthal1:29:08

        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/Nike. Bowerman's jazzed. He's like, "Great, I never liked the Onitsuka guys that much anyway." [laughing]

    12. BGBen Gilbert1:29:28

        [laughing]

    13. DRDavid Rosenthal1:29:28

        Hey, but he doesn't really care about that. What he cares about is, he's like: "Wait, so there are factories now? We can tell them exactly what to do? You mean I'm the new chief R&D officer of Blue Ribbon Sports? Let's get to work." So that weekend, supposedly it was the weekend right after Knight told Bowerman about what was happening. He goes home, and over breakfast on Sunday, Bill is sitting there. His wife, Barbara, is making waffles for breakfast, and honest to God, I think, you know, I 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?" [chuckles] Borrow.

    14. BGBen Gilbert1:30:09

        [chuckles]

    15. DRDavid Rosenthal1:30:09

        That waffle iron was not coming back. He goes out in the back in his mountain home, and, uh, he had a vat of polyurethane sitting there, and he had it because the University of Oregon had just redone their track and made it into a polyurethane track instead of a cinder track. And Bowerman, at the time, was like: Well, this is great. This is the future. The Olympics are gonna do this and whatnot. But the shoes that I have, that I have my runners in, they're not gripping the track that well. And so he sees the waffle iron, and he's like: What if I pour polyurethane into the waffle iron?

    16. BGBen Gilbert1:30:47

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

    17. DRDavid Rosenthal1:31:03

        He's literally a mad scientist.

    18. BGBen Gilbert1:31:04

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

    19. DRDavid Rosenthal1:31:13

        Yes, which is exactly what happens. [chuckles]

    20. BGBen Gilbert1:31:15

        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.

    21. DRDavid Rosenthal1:31:25

        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.

    22. BGBen Gilbert1:31:44

        No!

    23. DRDavid Rosenthal1:31:44

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

    24. BGBen Gilbert1:32:02

        No.

    25. DRDavid Rosenthal1:32:02

        -and it is in Nike's possession to this day.

    26. BGBen Gilbert1:32:05

        That is awesome.

    27. DRDavid Rosenthal1:32:07

        Isn't that awesome? So where, of course, this is leading is the Waffle Trainer, which is another one of Bowerman's genius inventions and becomes the first big hit shoe for the new Nike brand. He would eventually, after gluing the first waffle iron shut, then create a mold out of plaster in the waffle iron, pour polyurethane into that, and then make the waffle 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.

    28. BGBen Gilbert1:32:56

        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.

    29. DRDavid Rosenthal1:33:05

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

    30. BGBen Gilbert1:33:09

        Look at you, you sneakerhead over there, colorway.
12. 1:39:22 – 1:49:09

    Nike’s early growth machine: Futures Program, global outsourcing, and the labor reckoning preview

    1. DRDavid Rosenthal1:39:22

       Yes. That's part one of just the brilliant kind of restartup 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.

    2. BGBen Gilbert1:40:06

       Yep.

    3. DRDavid Rosenthal1:40:06

       Phil comes up with the idea, 'cause remember, he's got the Nissho Iwai partnership, but financing is still ... Like, he's scarred by this. So he goes to the retailers and says, "If you commit and pay for your orders six months in advance, Blue Ribbon will give you a seven percent discount, and we're gonna call this the Nike Futures Program." [chuckles] So he's essentially moving his financing from banks and Nissho Iwai over to his retail partners, to his customers, and the retailers, of course, tell him to take a hike at first, but then the Waffle Trainer comes out, and they can't make enough of them, and retailers can't get enough of them, and the only way that they can get the Waffle Trainer sweet, sweet inventory, those delicious waffles that they want, [chuckles]

    4. BGBen Gilbert1:40:56

       [chuckles]

    5. DRDavid Rosenthal1:40:56

       is to sign up for the Futures Program.

    6. BGBen Gilbert1:40:58

       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.

    7. DRDavid Rosenthal1:41:19

       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 [chuckles]

    8. BGBen Gilbert1:41:38

       [chuckles]

    9. DRDavid Rosenthal1:41:39

       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.

    10. BGBen Gilbert1:41:48

        Kind of a hedge, too.

    11. DRDavid Rosenthal1:41:49

        It was a hedge, yes.

    12. BGBen Gilbert1:41:51

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

    13. DRDavid Rosenthal1:42:13

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

    14. BGBen Gilbert1:43:07

        Yep.

    15. DRDavid Rosenthal1:43:08

        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. [chuckles] 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 two billion feet in China. Uh, Nike would be one of the very first companies, and I think the first footwear company, that would be allowed to sell in China.

    16. BGBen Gilbert1:43:50

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

    17. DRDavid Rosenthal1:43:54

        ... So this, we would certainly be remiss in doing a Nike episode if we didn't talk about the downside [chuckles] 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, seventy cents a day working [chuckles] in these factories.

    18. BGBen Gilbert1:44:37

        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-

    19. DRDavid Rosenthal1:44:54

        Carcinogens.

    20. BGBen Gilbert1:44:55

        Et cetera. Nike fans looked at this as, oof, the company really has a black mark on their otherwise great reputation. But it kinda was the natural endpoint of an idea that had been in the company's DNA the whole time. I mean, literally, Phil Knight's Stanford paper is about arbitraging cheap labor from imported goods and selling into markets willing to pay higher prices. They should have realized this is where it could have gone if left unchecked. So to add insult to injury, Nike wildly mishandled this. They tried to act like it wasn't their problem. They literally said to the press, "Oh, we don't make shoes." Mark Parker later walked this back with a stance where he said, "Ignorance is not bliss. You have to understand the systemic issues and work with factory partners to solve them." They did do a huge amount of work to clean up their act. They created new standards for factory partners. They published supplier lists. They have third-party audits of factories. They do huge investments in R&D and invented things like new types of glue that weren't toxic, which they then went on to share with their competitors. But, David, I don't know, there is still this interesting and more theoretical question: What is the line of acceptability, and who should determine it? Obviously, when a company trips a clear, bright line like child labor, there is appropriately public outcry, but what about when the lines are blurrier? Are seventy-five-degree factories okay, or are three-dollar wages fine if the local average is two dollars an hour? At the end of the day, there's a discomfort of sitting with the idea that in order to manufacture a product that you are buying, from shoes to smartphones, somebody has to work in conditions you wouldn't endure, even if it's better than all of their other options, and companies need to grapple 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.

    21. DRDavid Rosenthal1:46:56

        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?"

    22. BGBen Gilbert1:47:09

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

    23. DRDavid Rosenthal1:47:12

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

    24. BGBen Gilbert1:47:52

        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.

    25. DRDavid Rosenthal1:48:08

        So okay, back to the mid-1970s. In 1974, these pieces of the Nike startup playbook, the inventing sports marketing, basically [chuckles] sponsoring, quote, unquote, Pre for five thousand dollars, the outsourcing your financing to your retail partners, and then the global outsourcing of manufacturing, all of this combines in 1974 for just an explosive year. I can't remember exactly the phrase, but in Shoe Dog, Phil says something like, "The limiters were off. The governors were off. We could run." They do eight million dollars in revenue in 1974.

    26. BGBen Gilbert1:48:52

        Which is up almost a hundred percent. They nearly doubled again in 1973 to 1974.

    27. DRDavid Rosenthal1:48:58

        1974 is also a momentous year for Blue Ribbon because they finally settle the legal battles with Onitsuka, [chuckles] and they win in court.

    28. BGBen Gilbert1:49:08

        Amazingly.

13. 1:49:09 – 2:07:25

    Rob Strasser era: systematizing endorsements, college ‘coach marketing,’ and Nike’s internal principles

    1. DRDavid Rosenthal1:49:09

       Ultimately, they settle for Onitsuka paying Blue Ribbon four hundred thousand dollars, which, by this point in time, is a pittance to Blue Ribbon. But the actual butterfly flaps its wings, hugely important outcome of this for the Nike journey is that the court case with Onitsuka leads to one Rob Strasser-

    2. BGBen Gilbert1:49:32

       Yes

    3. DRDavid Rosenthal1:49:33

       ... coming into Phil Knight and the Nike orbit.

    4. BGBen Gilbert1:49:38

       He was their lawyer on this case, right?

    5. DRDavid Rosenthal1:49:40

       Yes. Strasser was the junior attorney at the Portland law firm that was working on the Nike case, and Strasser is just a force. I mean, this guy was not cut out to be [chuckles] 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."

    6. BGBen Gilbert1:50:06

       Hmm.

    7. DRDavid Rosenthal1:50:07

       You know, everybody else at Nike at the time, they're all former runners. Most of them ran for Bowerman. Strasser is, I think, about six foot two and weighs over 300 pounds, and he has an equally outsized personality as his actual size. He gets the nickname within Nike of Rolling Thunder, and boy, does he roll like thunder. And while he and Phil, of course, did ultimately clash, and there was the terrible betrayal that happened-

    8. BGBen Gilbert1:50:39

       For a while, they were thick as thieves.

    9. DRDavid Rosenthal1:50:41

       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 Illie Nastase, the tennis player. They paid him $10,000 to wear Nike tennis shoes. [chuckles] 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.

    10. BGBen Gilbert1:51:33

        They're getting free shoes, basically.

    11. DRDavid Rosenthal1:51:35

        And then Nike is showing up on nationally televised broadcasts every single night.

    12. BGBen Gilbert1:51:41

        Yep.

    13. DRDavid Rosenthal1:51:41

        This leads then to a bigger initiative that Strasser puts together, and if you've watched the recent movie, Air, about Air Jordan, this totally gets played as, like, a 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.

    14. BGBen Gilbert1:52:26

        No, you can pay them whatever you want.

    15. DRDavid Rosenthal1:52:27

        You pay them whatever you want, right?

    16. BGBen Gilbert1:52:29

        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"-

    17. DRDavid Rosenthal1:52:38

        What do you think the players are gonna do?

    18. BGBen Gilbert1:52:40

        "It's actually a team policy!"

    19. DRDavid Rosenthal1:52:41

        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.

    20. BGBen Gilbert1:53:17

        [laughing]

    21. DRDavid Rosenthal1:53:17

        Like, these kids are being exploited. Like, at least they're getting free shoes here now. In the article, the Post mistakenly says that Iowa is one of the colleges that Nike has signed up, not Iona. So Lute Olson, the coach at Iowa, who's legendary, he goes on and coaches at Arizona. Lots of listeners probably know who Lute Olson is. He's in the Hall of Fame now. Instead of being pissed off that he was included in this shameful article with the Post, he calls up Nike, and he's like: "Yo, can I get in on this?" [laughing]

    22. BGBen Gilbert1:53:47

        [laughing]

    23. DRDavid Rosenthal1:53:48

        So then they sign up Lute at 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 and 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.

    24. BGBen Gilbert1:54:11

        Lot of eyeballs on those Swooshes.

    25. DRDavid Rosenthal1:54:13

        Lot of eyeballs on those Swooshes.

    26. BGBen Gilbert1:54:15

        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."

    27. DRDavid Rosenthal1:54:46

        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. [chuckles] Normal people don't wear baseball cleats or football cleats or soccer cleats, no matter how popular those sports are.

    28. BGBen Gilbert1:55:18

        Yep.

    29. DRDavid Rosenthal1:55:19

        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.

    30. BGBen Gilbert1:55:36

        Right. The funnel is, every single one of those is a brand impression, so consider them all billboards, and then they just need to manufacture enough products to meet needs in your life that you can go and participate in the brand story by buying things that you need in your life. And you're inspired to do that because what you saw on those moving billboards, on all the players running around... But the products that the players are wearing are made for them and their athletic journey, and the products that you're buying at the store are things that are made for you and your athletic and increasingly lifestyle journey.... but you're inspired by what you see on the billboards.
14. 2:07:25 – 2:16:06

    IPO and the 1980s stumble: confusing the running boom for the fitness boom (Reebok wins aerobics)

    1. BGBen Gilbert2:07:25

       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. DRDavid Rosenthal2:07:46

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

    3. BGBen Gilbert2:07:52

       Unbelievable.

    4. DRDavid Rosenthal2:07:53

       It's amazing.

    5. BGBen Gilbert2:07:54

       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.

    6. DRDavid Rosenthal2:08:04

       Yep. It was about four hundred million dollars, 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 wanna be a major-listed shareholder in a highly visible public company. Certainly, he was in retirement age towards the end of his life. He's like-... I'm gonna sell my stake back to Phil. So when they went public, after the IPO, Phil owned forty-six percent of the company and was overnight one of the richest people in America.

    7. BGBen Gilbert2:08:42

       And the craziest thing is, like, one of the richest people in America then was a hundred and seventy-eight million dollars.

    8. DRDavid Rosenthal2:08:49

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

    9. BGBen Gilbert2:08:57

       Yeah.

    10. DRDavid Rosenthal2:08:58

        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.

    11. BGBen Gilbert2:09:18

        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."

    12. DRDavid Rosenthal2:09:26

        Ben, the job's not done until the job is done. [chuckles]

    13. BGBen Gilbert2:09:29

        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 gonna continue, right? And the fitness boom continues, but running is not exactly the thing that keeps carrying... I mean, they have fifty percent market share in running shoes at this point in America, and yet their growth in the future is gonna be dictated by where they go from there, 'cause it's really hard to have more than, you know, fifty percent market share in an industry like this.

    14. DRDavid Rosenthal2:10:05

        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 [chuckles] 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. [chuckles] And Nike absolutely refused to see that and refused to do aerobics, like, on principle.

    15. BGBen Gilbert2:10:50

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

    16. DRDavid Rosenthal2:11:00

        Yes, at well over a billion dollars. [chuckles]

    17. BGBen Gilbert2:11:02

        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 gonna massively taper off, and they were gonna 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.

    18. DRDavid Rosenthal2:11:27

        So Reebok, funny, originally a British company, started as Foster & 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. [laughing]

    19. BGBen Gilbert2:11:39

        Ah.

    20. DRDavid Rosenthal2:11:40

        The Reebok we all know, well, not today, but back then, is a completely different animal. It's a marketing-driven company started by a guy named Paul Fireman, who is American, and pretty quickly, they developed a business plan to cash in on the aerobics fad, and they made a shoe that, in Nike's principled opinion, sucked, but it went really great with leg warmers, you know? [laughing]

    21. BGBen Gilbert2:12:04

        [laughing]

    22. DRDavid Rosenthal2:12:04

        It was all white. It had soft leather that wrinkled. It looked good. Women loved it. It was everything that Nike was not, and their rise, like you said, Ben, was even steeper and faster than Nike's. Ironically, Reebok would end up much later getting acquired by Adidas and then spun back out to private equity recently.

    23. BGBen Gilbert2:12:24

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

    24. DRDavid Rosenthal2:13:26

        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.

    25. BGBen Gilbert2:13:37

        Yes.

    26. DRDavid Rosenthal2:13:38

        So interestingly, financially, there only are a couple quarters where Nike's revenue declines. I think that's because of the Futures Program. Kinda 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 George Orwell predicted, was not a good year for Nike." Everything that we talked about is happening, but 1984 was also the seed of something-... pretty incredible, that would make everything that happened before in Nike look like child's play, and that would be a young kid from North Carolina, Michael Jordan, who walks in the door. This is such a fun time to do the Nike episode, because the movie Air just came out, which really is, like, a fun, kind of, summer blockbuster movie. Also, very, very inaccurate [chuckles] in how it portrays everything.

    27. BGBen Gilbert2:15:01

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

    28. DRDavid Rosenthal2:15:04

        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-

    29. BGBen Gilbert2:15:16

        No.

    30. DRDavid Rosenthal2:15:17

        Almost all wrong. [chuckles]
15. 2:16:06 – 2:30:48

    Michael Jordan and the birth of sneaker culture: Air Jordan 1 deal mechanics + ‘banned’ marketing

    1. DRDavid Rosenthal2:16:06

       The big, important thing from Michael Jordan, the Air Jordan 1, and then everything it became in the Jordan brand, is that it didn't just save Nike, [chuckles] it changed the world. That's a super campy thing to say, but it is 100% true. If you walk down any street pretty much anywhere in the world today, or you go into any event, building, venue, whatever, and you look at what people are wearing, they are wearing sneakers, and they are mostly wearing basketball shoes and running shoes. That was not the case before Air Jordans. Air Jordans and Michael Jordan made sneakers into culture.

    2. BGBen Gilbert2:16:52

       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.

    3. DRDavid Rosenthal2:17:05

       Yeah, he was picked third.

    4. BGBen Gilbert2:17:06

       Right. I remember going to see LeBron as a high school athlete, 'cause 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.

    5. DRDavid Rosenthal2:17:38

       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 two-and-a-half million dollar minimum guaranteed payout over five years, but that's not actually how the economics work. The revolutionary aspect of the deal was the payouts were calculated as a 5% royalty on gross revenue from the sales of Air Jordans, the whole line, the shoes, the merchandise, everything.

    6. BGBen Gilbert2:18:21

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

    7. DRDavid Rosenthal2:18:32

       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?

    8. BGBen Gilbert2:18:55

       No, never.

    9. DRDavid Rosenthal2:18:56

       Do you know what they are? No.

    10. BGBen Gilbert2:18:57

        No, I don't.

    11. DRDavid Rosenthal2:18:58

        These are not Air Birds. They weren't signature shoes. Nike says, "We are gonna make you a signature shoe, and then you are gonna participate in the upside from that." They did that intentionally. It wasn't Jordan who asked for that. Nike wanted it that way. They thought, "We need to incentivize Jordan to build the dream here. We need to tie this all together."

    12. BGBen Gilbert2:19:20

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

    13. DRDavid Rosenthal2:19:57

        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-

    14. BGBen Gilbert2:20:18

        No!

    15. DRDavid Rosenthal2:20:18

        ... basketball line.

    16. BGBen Gilbert2:20:19

        I did not realize that.

    17. DRDavid Rosenthal2:20:20

        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 1s in a second here, but it's not about the Jordans. It's about the Swoosh, [chuckles] and it's about the halo effect and the lifting up of the whole company's sales.

    18. BGBen Gilbert2:20:40

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

    19. DRDavid Rosenthal2:20:44

        He did, and this would eventually morph into the Jordan brand and the Jordan line, and Zion Williams and Jayson 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. [chuckles]

    20. BGBen Gilbert2:21:10

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

    21. DRDavid Rosenthal2:21:33

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

    22. BGBen Gilbert2:21:36

        Right.

    23. DRDavid Rosenthal2:21:36

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

    24. BGBen Gilbert2:22:10

        And so to put a finer point on this here, Jordan didn't wanna 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.

    25. DRDavid Rosenthal2:22:40

        Yeah, so Jordan actually takes the deal [chuckles] and shops it to Adidas afterwards, and he's like, "I really don't wanna go with Nike. Like, I really wanna 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," [laughing] you know?

    26. BGBen Gilbert2:22:58

        [laughs]

    27. DRDavid Rosenthal2:22:58

        And, uh, and so reluctantly, Jordan goes with Nike, but you're so right, and it's so important. It sets up the incentives. Even though Jordan has no downside, he's like, [inhales] "Well..."

    28. BGBen Gilbert2:23:08

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

    29. DRDavid Rosenthal2:23:16

        So here's what happens: in that first year, the Air Jordan 1s... This is gonna be very incredible. Some of you know this. Some of you are gonna listen to this, you're gonna be blown away. Hang on, because there is a second part to this story that is not what you expect. In the first year, Air Jordan 1s sell $126 million. That's the shoes and the associated merchandise with it.

    30. BGBen Gilbert2:23:40

        David, do you know what their goal was?
16. 2:30:48 – 2:47:05

    Strasser’s break and the Jordan crisis: channel stuffing, the Jordan 2 flop, and Tinker saves the partnership with Jordan 3

    1. DRDavid Rosenthal2:30:48

       Oh, man. 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. BGBen Gilbert2:31:21

       Huh!

    3. DRDavid Rosenthal2:31:22

       ... what happened?"

    4. BGBen Gilbert2:31:23

       Something bad happened in years two and three. [chuckles]

    5. DRDavid Rosenthal2:31:25

       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 [chuckles] for Jordan products that year.

    6. BGBen Gilbert2:31:53

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

    7. DRDavid Rosenthal2:31:57

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

    8. BGBen Gilbert2:32:10

       Yep.

    9. DRDavid Rosenthal2:32:11

       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 kinda 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 kinda went rogue. The Air Jordan 2s cost $100. The Air Jordan 1s cost $65. The Air Jordan 2s were made in Italy out of premium Italian leather. This doesn't sound like the Nike playbook. This also doesn't sound like a good basketball shoe. Do you wanna play basketball in Gucci leather? Probably not.... Jordan didn't like the shoes. They were not good to play basketball in. They were super stiff, they were hard to break in, they didn't fit his style right. So, A, he wasn't playing, B, he wasn't incentivized to push them. I mean, he was economically incentivized, but he didn't like the shoe. It all kinda fell apart. On top of that, as this is all happening, Strasser, and Moore, too, along with him, but, you know, really Strasser, is becoming increasingly rogue within Nike. He breaks away. He starts a new division in a separate office complex from the rest of the company, called the New Products Division.

    10. BGBen Gilbert2:33:50

        Dude, this is, like, very Steve Jobs Macintosh.

    11. DRDavid Rosenthal2:33:54

        One hundred percent. I mean, literally, like, the parallels here unfortunately comes to a tragic end. He sets up his new campus, new division, you know, away from Knight, away from the rest of the company. He mandates that all new product launches have to go through him and this new group, and that they're gonna take control and streamline the process, and the Jordan 2's come out of this. Obviously, it's not a very good shoe. This becomes a big problem. Obviously, there's only one way that this is gonna end. Either Strasser is gonna become CEO of Nike, or Strasser is gonna leave Nike.

    12. BGBen Gilbert2:34:30

        Yep.

    13. DRDavid Rosenthal2:34:31

        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, 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, you know, incredible part of the Nike journey, contribution to everything. We can bury the hatchet." Well, Sports Incorporated takes on as one of their major clients, Adidas.

    14. BGBen Gilbert2:35:25

        And eventually, their only client.

    15. DRDavid Rosenthal2:35:27

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

    16. BGBen Gilbert2:35:40

        Oof!

    17. DRDavid Rosenthal2:35:41

        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 forty-six. Oh, it's just terrible.

    18. BGBen Gilbert2:35:54

        Yeah.

    19. DRDavid Rosenthal2:35:55

        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."

    20. BGBen Gilbert2:36:22

        Wow!

    21. DRDavid Rosenthal2:36:23

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

    22. BGBen Gilbert2:36:29

        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.'"

    23. DRDavid Rosenthal2:37:10

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

    24. BGBen Gilbert2:37:20

        Yep, and they poach a lot of Nike people.

    25. DRDavid Rosenthal2:37:22

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

    26. BGBen Gilbert2:37:31

        Strasser was his guy there?

    27. DRDavid Rosenthal2:37:32

        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.

    28. BGBen Gilbert2:37:46

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

    29. DRDavid Rosenthal2:37:50

        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.

    30. BGBen Gilbert2:38:16

        Yep.
17. 2:47:05 – 2:53:56

    Modern Nike: digital + direct strategy, sneaker resale economics, values marketing, and today’s scale

    1. DRDavid Rosenthal2:47:05

       Yes, and that's the dark side for Michael. One more really critical thing I wanna say about all this, and Jordan, and the building of the dream, and the changing of culture, before we move on to all the rest of Nike history, which we will cover here. You can't ignore, 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 twenty million dollars." With ESPN and SportsCenter, those athletes and Michael Jordan being all over that twenty-four/seven every night, that was twenty million dollars a night of free advertising.

    2. BGBen Gilbert2:47:57

       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 Wieden+Kennedy ad, right?

    3. DRDavid Rosenthal2:48:09

       Uh, second real big one. The first was the Revolution ad with The Beatles-

    4. BGBen Gilbert2:48:13

       Ah.

    5. DRDavid Rosenthal2:48:13

       -that they did for the Air Max.

    6. BGBen Gilbert2:48:14

       Okay.

    7. DRDavid Rosenthal2:48:14

       Another Tinker Hatfield and Mark Parker joint.

    8. BGBen Gilbert2:48:17

       And so they're kind of finding their footing again. They're realizing that, okay, we can diversify outside of running. We can find a lot of places to sell the dream. We can make different products to monetize the dream, to let people participate. Their market cap hits a billion dollars at this point in 1988, so investors are starting to wake up to, like, "Huh, they're building something really special here." They open their first Nike Town in Portland. The early '90s, late '80s, early '90s, are just all good for Nike. I think by '91, their market cap hit five billion. By '96, their market cap hit ten billion, and they're really just executing the strategy that we talked about, but at scale, until they get hit with everything we already talked about on the labor challenges and that controversy.

    9. DRDavid Rosenthal2:49:05

       Yep.

    10. BGBen Gilbert2:49:06

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

    11. DRDavid Rosenthal2:49:22

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

    12. BGBen Gilbert2:49:26

        Yes

    13. DRDavid Rosenthal2:49:26

        ... was big.

    14. BGBen Gilbert2:49:27

        Really big, and people forget this. People forget that Kobe was an Adidas athlete first-

    15. DRDavid Rosenthal2:49:32

        Yes

    16. BGBen Gilbert2:49:33

        ... in the same way that people forget that Kanye was a Nike athlete or a Nike, uh- [chuckles]

    17. DRDavid Rosenthal2:49:37

        Right. [chuckles] Rapper.

    18. BGBen Gilbert2:49:38

        Rapper first.

    19. DRDavid Rosenthal2:49:39

        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.

    20. BGBen Gilbert2:49:54

        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 eight million dollars to get out of his contract so he could move over to Nike.

    21. DRDavid Rosenthal2:50:08

        Yeah.

    22. BGBen Gilbert2:50:08

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

    23. DRDavid Rosenthal2:50:14

        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.

    24. BGBen Gilbert2:50:31

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

    25. DRDavid Rosenthal2:50:37

        Yep.

    26. BGBen Gilbert2:50:38

        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 three hundred and nine million dollars, their once foe, and, you know, now Nike is 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 seven hundred million dollars a year, and today, it's doing six point six billion, and that's been the delta since he stopped playing basketball.

    27. DRDavid Rosenthal2:51:19

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

    28. BGBen Gilbert2:51:22

        Right!

    29. DRDavid Rosenthal2:51:22

        Seven hundred million dollars is bonkers.... and six billion dollars is bonkers. [chuckles]

    30. BGBen Gilbert2:51:28

        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, and in 2006, they launched the Nike+ iPod.

Episode duration: 4:03:28