Nike (Audio)

Ben Gilbert 0:00 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.

Speaker 0:15 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?

Ben Gilbert 0:32 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.

David Rosenthal 0:41 I'm David Rosenthal.

Ben Gilbert 0:43 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.

David Rosenthal 1:18 And because Shoe Dog is so good.

Ben Gilbert 1:20 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

Ben Gilbert 2:50 Rosenthal, what is that stack of books on your desk?

David Rosenthal 2:53 Oh, my God, I think Amazon owes a thank you note to Acquired LPs-

Ben Gilbert 2:56 [laughing]

David Rosenthal 2:56 -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.

Ben Gilbert 3:05 I thought there was just Shoe Dog. I didn't realize there was the literally over a dozen that you and I collectively read.

David Rosenthal 3:11 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?

Ben Gilbert 3:43 Ooh, I do not.

David Rosenthal 3:45 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.

Ben Gilbert 3:56 Oh, really?

David Rosenthal 3:57 Isn't that crazy?

Ben Gilbert 3:58 It's kind of cool that that was founded by a journalist.

David Rosenthal 4:00 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.

Ben Gilbert 5:05 It's like an incredible betrayal.

David Rosenthal 5:07 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.

Ben Gilbert 5:21 Yeah. So Strasser, we'll get into his contributions, but he is probably second only to Phil Knight in willing Nike into existence.

David Rosenthal 5:30 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]

Ben Gilbert 6:06 Yes.

David Rosenthal 6:07 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.

Ben Gilbert 6:44 They do not make them like that anymore.

David Rosenthal 6:46 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.

Ben Gilbert 7:27 Right.

David Rosenthal 7:28 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.

Ben Gilbert 8:05 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.

David Rosenthal 8:34 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.

Ben Gilbert 9:02 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.

David Rosenthal 9:19 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.

Ben Gilbert 9:32 Didn't he give your graduation speech?

David Rosenthal 9:34 Exactly. It was amazing. It was kind of the first draft of Shoe Dog that he had been working on.

Ben Gilbert 9:39 Ah.

David Rosenthal 9:39 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]

Ben Gilbert 9:54 Yeah. Huh.

David Rosenthal 9:56 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.

Ben Gilbert 10:44 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.

David Rosenthal 10:57 [laughing]

Ben Gilbert 10:58 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.

David Rosenthal 11:12 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.

Ben Gilbert 12:38 Fuji, Ricoh.

David Rosenthal 12:40 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-

Ben Gilbert 13:12 Or Adidas, as the Germans would say.

David Rosenthal 13:15 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?

Ben Gilbert 13:44 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.

David Rosenthal 13:55 Yeah, you might think so, contemporaneously with the time we're talking about right now. No, Chuck Taylor played professional basketball in the 1920s.

Ben Gilbert 14:04 Whoa!

David Rosenthal 14:05 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.

Ben Gilbert 14:22 Hmm.

David Rosenthal 14:22 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.

Ben Gilbert 15:00 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.

David Rosenthal 15:07 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.

Ben Gilbert 15:26 In, like, the 1920s?

David Rosenthal 15:29 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.

Ben Gilbert 16:00 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?

David Rosenthal 16:19 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.

Ben Gilbert 16:48 Oh.

David Rosenthal 16:48 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.

Ben Gilbert 17:00 Craziest thing.

David Rosenthal 17:01 Adidas, Adidas, and Puma are the two brothers. They're both the Dassler brothers. Crazy.

Ben Gilbert 17:06 Okay, so take us back to Phil Knight.

David Rosenthal 17:08 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-

Ben Gilbert 17:36 He's like: "Why would I leave Hawaii?" [chuckles]

David Rosenthal 17:38 Yeah, I mean, smart guy.

Ben Gilbert 17:39 [laughing]

David Rosenthal 17:40 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.

Ben Gilbert 18:38 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."

David Rosenthal 18:56 Yes.

Ben Gilbert 18:57 "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.

David Rosenthal 19:14 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-

Ben Gilbert 19:29 Yes

David Rosenthal 19:30 ... but he still is. [chuckles]

Ben Gilbert 19:31 Right.

David Rosenthal 19:32 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.

Ben Gilbert 19:41 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.

David Rosenthal 20:20 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.

Ben Gilbert 21:17 It's a very nice story.

David Rosenthal 21:18 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.

Ben Gilbert 21:44 As with any of these stories, we'll never know, and it's probably some of both.

David Rosenthal 21:47 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-

Ben Gilbert 22:20 [chuckles]

David Rosenthal 22:20 ... you know, running shoe market could be a $1 billion market-

Ben Gilbert 22:24 [chuckles]

David Rosenthal 22:24 ... which he totally makes up. [laughing]

Ben Gilbert 22:26 [laughing]

David Rosenthal 22:26 He has no evidence to back this up whatsoever.

Ben Gilbert 22:29 He's done lots of market research.

David Rosenthal 22:32 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.

Ben Gilbert 22:52 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.

David Rosenthal 23:12 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.

Ben Gilbert 23:23 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.

David Rosenthal 23:51 Wow! Hey, I mean, not everybody has to play video games-

Ben Gilbert 23:54 But everybody's gotta wear shoes.

David Rosenthal 23:57 But everybody's gotta wear shoes. So Knight leaves this meeting, this performance of a lifetime. He gets an agreement from Onitsuka that if he wires them $50, they will send samples of the shoes to his office back in the States, i.e., his family home in Portland, Oregon. [chuckles] So first thing Knight does, he gets in touch with his dad, I don't know, he sends him, like, a telegram or something back in Portland, and asks him to wire $50 to the Onitsuka Corporation of Japan for-... purchasing these samples. He gets home, I think it's two or three months later after this.

Ben Gilbert 24:34 Surely the shoes would have arrived by now.

David Rosenthal 24:36 Surely the shoes [chuckles] would have arrived. He rushes home, says, "Hi, Mom. Hi, Dad. Did the shoes arrive?" His dad's like, "What shoes?" The shoes did not arrive. The shoes would not arrive for almost another year. [chuckles]

Ben Gilbert 24:52 Wow!

David Rosenthal 24:53 A little foreshadowing in, uh, what doing business with Onitsuka is gonna be like for the fledgling Blue Ribbon Sports.

Ben Gilbert 24:59 And this is just to, like, get some samples to see if he can sell fifty dollars' worth of shoes. That takes over a year.

David Rosenthal 25:06 So Phil gets home, he's disappointed, and he's got to start his life. He gets a job as an accountant. He's got a business school degree. He's studying to take the CPA exams and become a licensed CPA. And then finally, at the end of 1963, I think right around Christmas, Phil writes in Shoe Dog, "The samples show up," and Phil gets them. You know, they're great. They're what he remembers. He thinks, "You know, these aren't quite maybe as good as Adidas, but they're good enough, and I can sell them cheaply enough that my business plan will work."

Ben Gilbert 25:38 Right, they're way cheaper.

David Rosenthal 25:40 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.

Ben Gilbert 26:12 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."

David Rosenthal 26:20 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.

Ben Gilbert 26:42 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.

David Rosenthal 26:54 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.

Ben Gilbert 27:43 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.

David Rosenthal 28:10 Not exactly what GSB or any other business school would determine a recipe for success here. [chuckles]

Ben Gilbert 28:15 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-

David Rosenthal 28:25 And venture capital.

Ben Gilbert 28:27 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.

David Rosenthal 28:49 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.

Ben Gilbert 28:59 [chuckles]

David Rosenthal 28:59 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.

Ben Gilbert 29:05 Yep.

David Rosenthal 29:06 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.

Ben Gilbert 29:34 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.

David Rosenthal 29:43 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-

Ben Gilbert 29:57 [chuckles]

David Rosenthal 29:57 ... '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.

Ben Gilbert 30:20 Right, he's giddy about it. He's like, "Oh, only half the company? Great!"

David Rosenthal 30:24 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-

Ben Gilbert 30:35 Yes

David Rosenthal 30:36 -Blue Ribbon Sports, which is a completely different animal.

Ben Gilbert 30:39 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!"

David Rosenthal 32:09 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.

Ben Gilbert 32:29 Oh, did you read his post, too? I sent you his LinkedIn. Did you look through them all, too?

David Rosenthal 32:32 Not only... I sent him a message on LinkedIn. I talked to him. I spent hours talking to Scott.

Ben Gilbert 32:37 Really?

David Rosenthal 32:38 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.

Ben Gilbert 32:50 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.

David Rosenthal 33:14 Oh, I've got one in particular that I wanna bring Scott's perspective in, but it's a little farther in the story.

Ben Gilbert 33:18 Great. All right, so Bowerman.

David Rosenthal 33:20 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.

Ben Gilbert 34:16 When you believe in something, sales are just natural.

David Rosenthal 34:19 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]

Ben Gilbert 34:40 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?

David Rosenthal 35:11 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.

Ben Gilbert 35:49 So half the gross margin ends up going into sales and marketing expenses.

David Rosenthal 35:53 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.

Ben Gilbert 36:10 Wow.

David Rosenthal 36:11 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.

Ben Gilbert 36:52 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.

David Rosenthal 37:32 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.

Ben Gilbert 37:43 Right, it's just normalized into life.

David Rosenthal 37:46 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]

Ben Gilbert 37:56 ... [chuckles]

David Rosenthal 37:56 -at runners is crazy.

Ben Gilbert 37:59 Yeah, totally wild.

David Rosenthal 38:01 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.

Ben Gilbert 38:30 Correct.

David Rosenthal 38:30 So there are only, like, two or three banks that Knight even has the option of going to. [chuckles]

Ben Gilbert 38:35 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.

David Rosenthal 38:52 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.

Ben Gilbert 39:07 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.

David Rosenthal 39:53 The book value of equity.

Ben Gilbert 39:54 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."

David Rosenthal 40:17 Yep.

Ben Gilbert 40:17 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."

David Rosenthal 40:41 Yeah, it's basically factoring-

Ben Gilbert 40:43 Right

David Rosenthal 40:43 ... is what it's known as today.

Ben Gilbert 40:45 Right.

David Rosenthal 40:46 So yeah, as you can imagine, there are quite a lot of struggles with the various banks in Oregon, and it's all very well chronicled in Shoe Dog. So since growth is literally rate limited by the banks, Knight decides that he can't justify taking a salary. He goes back to being an accountant by day. He joins Pricewaterhouse in the Portland office. He does that for a couple years. I mean, years, years, takes a long time to grow this thing. Eventually, Blue Ribbon does become big enough, and he needs to devote enough time to it that he can't be a full-time accountant. So instead, he gets a job teaching accounting at Portland State, where he meets two women.

Ben Gilbert 41:30 Both of which will change his life.

David Rosenthal 41:32 The first one is a student. Man, things were different in the '60s. A student in, um, his first class that he teaches named Penny Parks, who, uh, he sees has, uh, great potential as an accountant, so he hires her as a bookkeeper part-time while she's a student, I believe, for Blue Ribbon Sports. Very shortly thereafter, she becomes Penny Knight, his wife, now, I think of, gosh, like 60 years maybe?

Ben Gilbert 41:59 Yeah.

David Rosenthal 41:59 Something like that. The other woman he meets is an art student, not an accountant, an art student named Carolyn Davidson, and Phil overhears her talking with some friends in the hallway one day, talking about art classes, and he stops her and he says, "Hey, I've got a company. We need some part-time art and design work for, like, brochures and sponsorship collateral."

Ben Gilbert 42:22 'Cause everyone's telling him that he needs to do advertising. Phil Knight, to this point, which is hilarious given Nike today, doesn't believe in advertising, and so he's like, "Fine, I'll give in to some other people who are advising me that I should make some brochures or something."

David Rosenthal 42:34 "And the way I'm gonna do it is I'm gonna hire a part-time student from Portland State to do my advertising collateral for $2 an hour." [chuckles]

Ben Gilbert 42:43 Yes. [chuckles]

David Rosenthal 42:44 She says, "Sure!"... Put a pin in that. We are gonna come back to Carolyn Davidson and the, um, Nike art department in a minute here.

Ben Gilbert 42:53 Yes.

David Rosenthal 42:54 But first, now is a great time to tell you about one of our favorite companies here at Acquired, and a new sponsor this season.

Ben Gilbert 43:01 Ooh, David, you teaser. What else could anyone possibly design for Nike that would change Phil Knight's life? It's a great story, and there's more to it than I think you've heard before. So what sponsor are we talking about? Brand new one for us, a company called Blinkist. We are doing something pretty special with them here at Acquired. Blinkist, as you might know, takes books and condenses them into the most important points.

David Rosenthal 43:26 I really could have used that for research on this one. [chuckles]

Ben Gilbert 43:28 Yes. It lets you read or listen to the summaries, so it's great for people who wanna read more books, but you might not have time to get to your whole dream bookshelf. Now, we told the good people at Blinkist how we go about researching for Acquired, and they had an idea, and we're running with it. So if you go to blinkist.com/nike or click the link in the show notes, you can get Blinks for the Nike books that we used to research this episode. And many of them, they are making custom for you guys in real time, so expect more Nike books to be showing up as they're literally making these for the Acquired audience. And not only that, if you use the link, you'll get the whole Nike collection for free as these books get added. And Blinkist has told us anyone who signs up through that link or uses the coupon code Nike will then get an additional fifty percent off a premium subscription to all sixty-five hundred titles in their library. So for those of you who lead companies and organizations, I know there's a lot of founders and executives listening, Blinkist also lets your company become a customer with Blinkist for Business. So fifteen hundred different organizations use this worldwide. This gives you not only access to condensed books, but also courses and coaching pathways, like leadership from Simon Sinek or courses on mindfulness or communication and history. It's awesome for teaching new skills or for the learning and development department at your company. So a fun way this came about, a little Acquired behind the scenes, Blinkist was just acquired by Go1, which is a friend of the show, where the founder and the leadership team have been longtime Acquired listeners. David and I are both investors in Go1, and now Blinkist, and we'll share more about Go1 later this season, but know that they are an amazing one-stop shop to get all the content that you need for your company, like for your whole workforce, from HR trainings to specific skill development classes, and they get that content from the best places in the world to produce that content. It's not like they're making something you've never heard of. They probably have awesome content that you're looking for, just bundled into one easy subscription. So back to Blinkist. To join the twenty-seven million people who use Blinkist, go to blinkist.com/nike, or click the link in the show notes to get access to what we use for research.

David Rosenthal 45:43 Pretty cool.

Ben Gilbert 45:44 Okay, David, so should we share the Carolyn Davidson thing now, or don't we need to evolve Nike a little bit more before it really comes into play?

David Rosenthal 45:52 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.

Ben Gilbert 47:57 Which you should already start to get a little bit nervous here, 'cause it's like, well, okay, who-

David Rosenthal 48:01 Who owns this shoe? Exactly. Well, that would be for the courts to decide.

Ben Gilbert 48:05 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?"

David Rosenthal 48:16 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-

Ben Gilbert 49:00 So good

David Rosenthal 49:01 -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.

Ben Gilbert 49:31 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.

David Rosenthal 49:56 Yeah, spoiler alert, Tiger eventually became ASICS.

Ben Gilbert 50:00 Yes.

David Rosenthal 50:01 So also in 1967, Bowerman has another just monumental contribution. His contributions, though sporadic, when they happen, are enormous.

Ben Gilbert 50:11 Yeah.

David Rosenthal 50:12 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.

Ben Gilbert 50:50 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!

David Rosenthal 51:27 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.

Ben Gilbert 52:08 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.

David Rosenthal 52:21 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]

Ben Gilbert 52:38 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.

David Rosenthal 53:00 Yeah.

Ben Gilbert 53:01 Perfect.

David Rosenthal 53:02 So great.

Ben Gilbert 53:03 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.

David Rosenthal 53:27 And more than just athletes.

Ben Gilbert 53:30 Yeah, or more importantly, changing the definition of athlete.

David Rosenthal 53:33 Yes, I like that, changing the definition. More than just people who define themselves by their occupation, whether amateur or professional, as athletes.

Ben Gilbert 53:42 Right.

David Rosenthal 53:43 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."

Ben Gilbert 54:25 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.

David Rosenthal 54:41 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.

Ben Gilbert 54:52 He trips the alarms. [chuckles]

David Rosenthal 54:53 He trips the alarm system. [chuckles] $1.2 million, a kid off the street can literally walk down Sand Hill and raise-

Ben Gilbert 55:01 [chuckles]

David Rosenthal 55:01 ... $1.2 million today.

Ben Gilbert 55:02 Inflation adjusted, it's probably, like, $8 million or something.

David Rosenthal 55:05 Sure, whatever.

Ben Gilbert 55:06 But a kid off the street can walk into Stanford and raise $8 million today.

David Rosenthal 55:10 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."

Ben Gilbert 55:23 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."

David Rosenthal 57:08 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.

Ben Gilbert 57:49 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.

David Rosenthal 57:59 Yes, and there's huge survivorship bias here.

Ben Gilbert 58:02 Yep.

David Rosenthal 58:02 But the journey that they had to go through to survive is incredible.

Ben Gilbert 58:07 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.

David Rosenthal 58:15 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-

Ben Gilbert 58:34 Direct listing?

David Rosenthal 58:35 Yeah, I think it's something like that, where they sold shares, Ben & Jerry's sold shares in Vermont to, like, their neighbors.

Ben Gilbert 58:40 Yes.

David Rosenthal 58:41 This is what [chuckles] Phil wants to do, and this is how bad it is. So, A, he changes the name of the company.

Ben Gilbert 58:46 [laughs] This is so good.

David Rosenthal 58:48 Nike isn't anywhere in the picture yet. He changes the name of the company to Sports-Tek, T-E-K, Inc.-

Ben Gilbert 58:56 Yes

David Rosenthal 58:56 ... with the idea that, "Oh, this will make us sound like a technology company, and then people will be interested in investing." [chuckles]

Ben Gilbert 59:01 '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.

David Rosenthal 59:32 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-

Ben Gilbert 59:44 [chuckles]

David Rosenthal 59:44 ... digs into sports tech, they're gonna be like, "No." [laughs]

Ben Gilbert 59:48 So what I've never been able to figure out is, did he change it to Sports-Tek, Inc. and then change it back to Blue Ribbon Sports, or did they sort of like... I'm trying to figure out if they ever literally changed the name on documents.

David Rosenthal 59:58 Oh, that's a great question for Scott Reams. We'll have to ask him.

Ben Gilbert 1:00:00 Yeah, yeah.

David Rosenthal 1:00:01 So this is how bad it is, though. The offering fails. Nobody's interested, none of these proto VCs, none of the local business people in Portland. They're all like, "Oh, no, no, this is a terrible company." [chuckles]

Ben Gilbert 1:00:13 Well, and Phil Knight undersells it, too. Before he learns some of his later lessons, it's his super humble, "You know, I'm not a very good runner, I'm only a 413 miler" type attitude.

David Rosenthal 1:00:24 Right. "Oh, sucks."

Ben Gilbert 1:00:26 Yeah, and so that's not gonna sell shares in your company.

David Rosenthal 1:00:29 Yep. So he ultimately has to raise some money from the families of some of the employees at Blue Ribbon, most famously Bob Woodell, who would become Nike's first president, other than Phil, when Phil takes a sabbatical later in the '80s. Bob is this amazing story. He was also a Bowerman runner, had a terrible accident in college, and was confined to a wheelchair for the rest of his life.... becomes one of Nike's and Blue Ribbon's first employees, and then becomes a huge leader, builds so many things at the company, and becomes the first president other than Phil. But he doesn't come from wealth, and his family loans, I think, three or $5,000 to Blue Ribbon, like, a huge amount of money for them.

Ben Gilbert 1:01:14 It's, like, a huge amount of the family's net worth.

David Rosenthal 1:01:17 Phil would convert that into equity before the actual IPO, and they would become millionaires and change their lives.

Ben Gilbert 1:01:23 It's amazing. Yeah, the way that he was financing this was basically through convertible debt, and so all the pre-IPO little friends and family financings that he's doing here are convertible notes.

David Rosenthal 1:01:33 So this brings us to 1971, the annus either mirabilis or horribilis, [chuckles] depending on how you want to think about it. I just butchered both Latin and French there, but clearly, this financing path isn't gonna work for the next stage of growth. Eventually, Knight, I think he reads in either a magazine or a newspaper article about Japanese trading companies. How he had never heard of Japanese trading companies before then, given the amount of business he was doing in Japan, is crazy. Although, it was in Onitsuka's strong interest for Phil and Blue Ribbon not to find out about Japanese trading companies, as we shall see.

Ben Gilbert 1:02:17 And what they are is this very strange type of company that we don't really have, at least in the tech ecosystem today.

David Rosenthal 1:02:26 No, does not exist in America or in most countries.

Ben Gilbert 1:02:29 And it's sort of a hybrid between a lender and a supply chain partner, where it's a company that has some primary business that they're doing-

David Rosenthal 1:02:42 Slash private equity firm slash holding company.

Ben Gilbert 1:02:45 Yes. It's a company that, in this particular instance, has a business that they're in and generates a bunch of cash, so what do you do with the company's treasury? Well, you could do boring stuff with it, or you could make strategic investments with it, or you could operate a financing business, where you leverage all of the unique relationships you have from the parent company to due diligence, to advantage your investments, to put your foot on the scale, and you're using the fact that you have a large treasury to open a competitively advantaged bank, especially in sourcing international goods.

David Rosenthal 1:03:23 Yes, to do asset-based financing, exactly what Blue Ribbon needs. So the company that he ends up meeting at the local branch office of it in Portland, I think they might have been the only Japanese trading company with a branch office in Portland, is Nissho Iwai, which is one of the smaller ones. Today, the company is called Sojitz. Today, it is still a $40 billion revenue company. Back then, in 1971, it was a $100 billion annual revenue company, and it was, I think, the sixth-largest Japanese trading company. The other ones that many listeners probably will have heard of are companies like Mitsubishi or Mitsui or Sumitomo. These are enormous companies, and especially in the '70s, as Japan was really rising, we told the story on the Sony episode, Nissho Iwai was a godsend for Blue Ribbon.

Ben Gilbert 1:04:22 And it could have gone either way. That was the thing with these Japanese trading companies is, if you weren't super clear on exactly what you wanted up front, it could totally go the way of private equity, where, "Oh, you tripped one covenant," or, "Oh, you this, that, or the other thing," and suddenly, they're able to own a controlling interest of your company, or they're able to take over management and install their own people. It was a PE-style financing, where oftentimes they would sort of take over and absorb the businesses that they were financing. So Phil Knight was going into this saying, "Okay, that really, really, really can't happen to Blue Ribbon. What can I possibly negotiate with these guys to make it so that their interests are aligned with mine, but not in a way that could compromise my control?"

David Rosenthal 1:05:08 Right, 'cause he gets a little spooked. According to Shoe Dog, Phil walks into the office of Nissho Iwai in Portland. This is, like, the Portland, Oregon [chuckles] branch office of Nissho Iwai, meets with one of the officers there, who would go on to become an incredible personal relationship for Nike and for Phil, a guy named Tom Sumeragi, and he offers on the spot to finance all of Nike's inventory. On the spot, in a meeting in the branch office in Portland. So Phil's like, "Whoa, how do I deal with these guys?"

Ben Gilbert 1:05:40 Right. They're a little too eager. This can't be that good of a deal. What's going on here?

David Rosenthal 1:05:45 It turns out, ultimately, it's a great deal.

Ben Gilbert 1:05:47 And why is it a great deal? Well, the first thing you have to know is Nissho knows Japanese manufacturers, and so they start asking Phil Knight questions like, "Well, who do you work with in Japan?" And like, "Would you ever make your own shoes?" And, "Are you looking for relationships with more factories?" And so they start to get the sense that, like, "Hmm, maybe eventually, we could put our foot on the scale in certain ways and help this company win. And so if we're doing business with them as their financing partner, this could be really good for us, too."

David Rosenthal 1:06:18 So Phil, in retrospect, makes the mistake of calling up Onitsuka and saying, "Hey, [chuckles] you know, I'm in this lurch with financing. I just met Nissho Iwai. They offered to finance all my orders with you guys. Would you be okay if I do it?" And they immediately say, "Absolutely not." [laughing] And the reason they say absolutely not is, Ben, just like you're saying, they know what's gonna happen here is Nissho is gonna say to Phil, "Hey, [chuckles] you know, this is nice that you're buying Onitsuka's inventory." Onitsuka, I think, is, like, a twenty, thirty, maybe forty million dollar revenue company in Kobe at this point in time.

Ben Gilbert 1:06:58 Right. This could creep into us.

David Rosenthal 1:07:00 Nissho is a hundred billion dollar company, right? Nissho is gonna say, "Hey, we'll introduce you to manufacturers, to factories here in Japan-... build your own shoes, make your own brand, screw these Tiger guys, and that is exactly what happens.

Ben Gilbert 1:07:16 Yes, and before we get into exactly how this all plays out, and effectively, the real founding of Nike, creating their own shoes, and how that all goes down, with this financing as a key part of it, this is a great time to tell you about our next brand-new sponsor of Acquired, Crusoe.

David Rosenthal 1:07:33 Crusoe is honestly one of the coolest companies in the world right now. They are a cloud infrastructure provider, so just like AWS and Azure, that's purpose-built for AI training and inference. So just like Phil Knight had the crazy idea of taking on Adidas with Blue Ribbon, Crusoe and its founders, Chase and Cully, had the crazy idea a few years ago that they could take on AWS and Azure, and incredibly, they're actually pulling it off! And for many AI workloads, you'll get significantly better cost-performance trade-off from Crusoe than any traditional cloud provider.

Ben Gilbert 1:08:08 Yeah, so the way they did this is genius and kind of [chuckles] insane. So one, they get better performance just by building their infrastructure specifically for AI, so, like, literally, their entire data centers are nothing but rows and rows of NVIDIA A100s and H100s, so they have the benefit of focus and specialization. And two, this is what's really special about Crusoe, they use wasted energy to power their data centers.

David Rosenthal 1:08:35 This is so cool.

Ben Gilbert 1:08:36 A single NVIDIA H100 under full load consumes about the same amount of power as 10 US homes.

David Rosenthal 1:08:43 Yeah, so this is crazy. Crusoe has gone out to oil fields around America and the world, think, like, Texas, Montana, et cetera, and they have built their data centers right on top of oil and gas flares and renewable energy areas like wind farms. So as some of you might know, oil and gas production often has a process called flaring, where they have to burn off excess product. It's an enormous waste of energy, and as you can imagine, it's also a huge greenhouse gas problem. It depletes the ozone, it increases carbon footprint. You get it. Crusoe helps to reduce this by instead converting those flaring emissions into powering your AI workloads.

Ben Gilbert 1:09:24 They literally build AI data centers on top of wells that would be flared otherwise.

David Rosenthal 1:09:29 Yeah, it's crazy, and the key insight that really made this possible was that Amazon and Microsoft and Google's data centers have to be physically located close to where the, quote-unquote, "internet happens," i.e., where internet usage is, but for ninety-nine percent of AI workloads, latency doesn't matter. So Crusoe can put these data centers out where energy happens in these oil fields and wind farms instead.

Ben Gilbert 1:09:56 Yep.

David Rosenthal 1:09:56 And as an aside, while we're here talking about Nike's asset-backed financing strategy, what Crusoe is doing also requires billions in capital funding. They finance the build-out of these data centers, not through venture capital, but through similar structures as Nike, just from large endowments and foundations instead of Japanese trading companies, although if Nissho Iwai is interested, I'm sure they would be happy to work with them, too. So if you or your company or your portfolio companies have AI workloads that you could use lower cost and more performant infrastructure for, and I'm pretty sure that's everybody listening to this podcast right now, go to crusocloud.com. That's C-R-U-S-O-E cloud.com/acquired, or click the link in the show notes.

Ben Gilbert 1:10:43 Okay, so Blue Ribbon's in this interesting situation where they've been kicked out of their bank from a lending perspective. They can still keep their money there, they still have the operating accounts, but they can't get any more debt there to finance their inventory, which they need to buy. You know, they need this cash to be able to buy their next round to grow the company. Nissho enters the picture. How does it go from here?

David Rosenthal 1:11:04 So this basically sets off a whole chain of events that would later get prosecuted in court. So Onitsuka, as we said, they are super nervous. They know what this Nissho relationship is gonna mean for Blue Ribbon, and it's not good for them. So they start looking around at working with other potential distributors in the US. They assume that Blue Ribbon, one way or another, is gonna end their relationship with them here. They also, as kind of a last-ditch effort, make an offer to buy Phil out, to buy Blue Ribbon. [chuckles] And Phil thinks he's being smart here. He stalls. He doesn't say yes, he doesn't say no. He's like, "Uh, let me talk to Bowerman."

Ben Gilbert 1:11:48 Yes, and one thing I was trying to figure out, so in Shoe Dog, it doesn't give a value. Phil just says that his contact at Onitsuka offers to buy fifty-one percent of Blue Ribbon and keep him as a minority partner, and from some other sources, what Phil Knight says in interviews is that they offered to buy it for book value.

David Rosenthal 1:12:11 Yes, that's what I read, too, which I imagine is, like, zero.

Ben Gilbert 1:12:15 So it's a pretty terrible deal, 'cause what is the book value of a company that one hundred percent of the time has its capital tied up in inventory?

David Rosenthal 1:12:25 Right, it's zero. [chuckles]

Ben Gilbert 1:12:26 So it's zero, or most generously, it's the value of the inventory. So in 1971, I believe they did one point three million in revenue, which best estimates would be that their cost was something like six, seven hundred thousand.

David Rosenthal 1:12:46 Right, but they probably turned that inventory several times, so at any given point in time, the inventory is less than that.

Ben Gilbert 1:12:53 Right. So it's a terrible deal. It's a takeover, and so Phil Knight's basically just like, "I don't wanna piss them off by declining, so I'll just say nothing."

David Rosenthal 1:13:01 Right. He knows at this point that he's done with Onitsuka. They're gonna go with Nissho, and they're gonna set up their own factory relationships and make their own shoes. But he can't just shut off-... Tiger, it's gonna take time to spin this stuff up. He needs the Tiger shoes in the interim, so he stalls.

Ben Gilbert 1:13:22 And by the way, this relationship so far has been unbelievably fruitful. They're at the point now where, because of Blue Ribbon, 70% of runners in the US, mind you, runners is not a large category yet, but runners in the US have Onitsuka shoes.

David Rosenthal 1:13:37 Yeah, so this is pretty important.

Ben Gilbert 1:13:39 Yeah.

David Rosenthal 1:13:40 So there's a whole bunch of stuff. Phil hires a spy, and there's a thing where the Onitsuka management team comes over to visit Blue Ribbon headquarters. Phil steals some documents out of the guy's briefcase.

Ben Gilbert 1:13:53 Literally, the guy gets up to go to the bathroom or something, and Phil grabs it out of a folder and photocopies it.

David Rosenthal 1:14:00 Yeah, it's pretty bad. Even worse, Phil is a combination, as we keep saying, of Genghis Khan and, like, extremely introverted and really naive. He writes a memo to the whole company saying that he's hired [chuckles] a spy at Onitsuka. This is not the kind of stuff that you want coming up in legal discovery later. A whole bunch of this stuff happens. They end up in this literal Mexican standoff here, where, like, there's no way out without firing shots, and somebody has to fire a shot first, and it's Phil. [chuckles] Phil shoots first. He's like, "Han, he shoots first." And I say Mexican standoff, too, 'cause, A, that is the situation they're in, B, the first shot gets fired in Mexico. So while Phil is waiting on spinning up the Japanese factory relationships with Nissho Iwai, he remembers from back in the Mexico City Olympics in 1968, I think, that there was a factory, I believe in Guadalajara, that Adidas had used to make soccer cleats for the Olympics. And he says, "You know, those soccer cleats that Adidas made were pretty good. Let me go down to that factory and see if I can get some of those cleats, and we'll sell them here in America as Blue Ribbon American football cleats." Now, technically, he thinks this won't violate his exclusivity agreement with Onitsuka because Onitsuka doesn't make football cleats. Now, that's debatable.

Ben Gilbert 1:15:31 Yeah. There's a paragraph in the written agreement that gives Phil Knight three years, or whatever it is, of exclusive distribution. In exchange, he is forbidden from importing other brands of track and field shoes. And so theoretically, he thinks as long as they're not track shoes, it's fine.

David Rosenthal 1:15:49 So he goes down to the factory in Mexico. He's like: "Can I get the shoes?" And they're like: "Yeah, sure. What do you wanna put on them? When we made them for Adidas, you know, we had the three stripes on them, the Adidas stripes. What design do you want on your version of these shoes? And oh, yeah, by the way, what do you wanna call them?" [chuckles] And Phil's like, "Um, let me get back to you- [chuckles] ... on both of those." So he goes home to Portland and calls up, who else? Carolyn Davidson.

Ben Gilbert 1:16:14 Yep.

David Rosenthal 1:16:14 [chuckles] The part-time art department at Blue Ribbon Sports for $2 an hour, and he asks her to design something like Adidas's stripes that can go on the sides of these soccer/football cleats. And huge thank you here to Scott Reames for helping us sort out exactly what the timeline is and what the details are, 'cause it's not well understood how this all went down.

Ben Gilbert 1:16:39 And you can actually hear quotes from Phil Knight in interviews and a little bit in Shoe Dog, where it disputes other records of how this all went down. And people care a lot about this because, obviously, what we're getting here is the origin of the Swoosh and of Nike! And so how does this end up happening? The most interesting thing is from Scott, he put this on LinkedIn. He talked to Carolyn herself about this. Her recollection is that originally, in the request to create what became the Swoosh, they wanted structural support as an element in the design, and she came back with some designs. They didn't like any of them, and so in the second revision, they dropped the requirement that it be supportive in any way, and that it's just about having the brand sewn onto the outside.

David Rosenthal 1:17:31 Also, super importantly, this is not the name that we're talking about here. So point one, we're just talking about a logo to go on the shoes. So all the thought of, like, oh, the Swoosh is like the wing of the goddess of victory, no, not the case. This is before the name.

Ben Gilbert 1:17:49 Right. So it's literally not inspired by the Greek goddess of victory. Like, I was just in France. I just stood in front of the Winged Victory statue. It's this beautiful, incredible thing in Paris. There's this myth running around forever and ever that the Swoosh is inspired by one of those wings. The name Nike came after the design of the Swoosh, which, by the way, also was not called a Swoosh yet.

David Rosenthal 1:18:10 Okay, so as you say, she goes through two rounds of sketches. When the second round comes back, they're out of time. The factory is calling, and they're like: "Hey, shoes are just about ready. We just gotta put the sides on them. What do you want?" So finally, Phil and Jeff Johnson and Bob Woodell, they're sitting around, and a couple other folks, and they're like: "Well, we gotta pick one." And they're like, "Well, maybe, I don't know, this one that kinda looks like a check mark. It maybe is the best of the bunch." And Phil very famously says the line, "I don't love it, but maybe it'll grow on me." [chuckles]

Ben Gilbert 1:18:45 [chuckles]

David Rosenthal 1:18:46 And that becomes the Swoosh. Now, ultimately, they do give Carolyn stock in the company before the IPO, so she makes more than $2 an hour. But [chuckles] for this project, she was paid $35.

Ben Gilbert 1:18:59 Which also, she says she spent way more than 17 and a half hours, but it was just kind of coming up with some price to charge. Fun thing about... I did the math on the IPO shares. When Nike went public, they did give her 500 shares. The stock price today is around 110, and it has split seven times, so two to the seventh times $110 a share times her 500 shares.... is worth $7 million today.

David Rosenthal 1:19:25 Nice. And I heard Phil say somewhere, I think it might have been in the GSB graduation speech, I believe he said that she held the shares. [chuckles]

Ben Gilbert 1:19:34 Yes, as late as 2016, 2017, he is on the record saying she has never sold a share.

David Rosenthal 1:19:41 Yeah. Wow, incredible.

Ben Gilbert 1:19:43 Pretty cool.

David Rosenthal 1:19:44 So they send the logo off. So a short while later, factory in Mexico calls them up, and it's like, "All right, shoes are done. We're ready to box them and ship them." What should the model name of these shoes be? Like, the Cortez or the Azteca Gold, or, you know, whatever they had called them. What's the model name of the shoes? And so back at Nike headquarters, they're all sitting around brainstorming, and this is where all the famous ideas that get thrown out, Phil Knight loves Dimension Six. The other people are throwing out the Bengal, the Falcon, you know, all the naming ideas. The idea is they want to name the model of the shoes, like these cleats. What are the cleats called? [chuckles] They're not coming up with a name for the company.

Ben Gilbert 1:20:29 And it's the idea it's gonna be the Blue Ribbon Dimension Sixes.

David Rosenthal 1:20:33 Yes. So legend has it, and as best as we can tell, this is actually true, in typical Phil Knight style, he can't make a decision. They're waiting towards the end. It's the same story as happened with the logo all over again. They're batting it around, and then the night before, they need to finally drop dead, give the name of the shoes to the factory. Jeff Johnson comes in and is like, "I had a dream last night."

Ben Gilbert 1:20:59 [laughing] Johnson.

David Rosenthal 1:21:01 "And in the dream, the name came to me: Nike." And everybody's like...

Ben Gilbert 1:21:08 "What are you talking about?"

David Rosenthal 1:21:10 "What are you talking about?" And he's like, "The winged Greek goddess of victory. These are gonna be the Nike football cleats." And everybody's like, "All right, well, we like that better than the other stuff. Ship it." But it wasn't that big a deal. Like, it was a big deal, but it wasn't that big a deal. This wasn't intended to be Nike. This was intended to be the name of the model of the football cleat.

Ben Gilbert 1:21:35 That they weren't even sure was gonna work.

David Rosenthal 1:21:36 Right, and it didn't work!

Ben Gilbert 1:21:38 Turns out this factory, not very high quality.

David Rosenthal 1:21:41 Well, no, I don't think that was the problem. I think the factory was fine. I mean, they made shoes for Adidas for the Olympics. The problem was it was in Guadalajara. It doesn't get very cold in Guadalajara, so the shoes were great, but in freezing temperatures, they would crack. They'd never been tested in the cold. And, you know, as Americans at least know, many American football games are played in cold temperatures. So they ordered 3,000 pairs. They sold them. Apparently, the Notre Dame football team wore them that year, or at least the quarterback did, then they would crack in cold weather. [chuckles] So it's a very inauspicious start to, uh, Nike and the Swoosh here.

Ben Gilbert 1:22:17 Yeah, it's kind of amazing that they even continued after that, or that they didn't just give up and say, "Okay, shoe distribution sounds a lot better than making shoes."

David Rosenthal 1:22:25 Yes, but again, whether it violated the letter of the agreement with Onitsuka or not, ultimately, the courts would decide it didn't, but it's game over here. Like, the relationship is done. They have burned the bridge. It's over.

Ben Gilbert 1:22:39 Yeah, and this, to me, is a little bit of a thing in Nike's DNA, where they are competitive all the way up to the line and then one toe over.

David Rosenthal 1:22:51 Yeah. What's the Uber corporate value, toe-stepping, from the Travis era?

Ben Gilbert 1:22:55 It's very much that. It's, "We are fiercely competitive," and at this point in time, it was to stay alive, so I get it. But for their whole existence, it's like, "Is there anything we can do that other people aren't doing 'cause they kinda think you can't, but maybe we'll do it anyway and deal with the repercussions?" That kind of happens with Nike over and over and over again.

David Rosenthal 1:23:13 And for most of these situations, this one very much included, yeah, like, this ends up in lawsuits, and, yeah, it's probably a toe over the line. On the other hand, it's also a little bit like Uber in the early days with toe-stepping. Like, the alternative was the taxi industry. It's good for the world that they stepped a toe over the line. [chuckles] Like, they didn't do this, there's no Nike.

Ben Gilbert 1:23:36 Yep.

David Rosenthal 1:23:37 So with that, Onitsuka pulls out of the relationship. They don't send any more Tigers to Blue Ribbon. Phil signs a deal finally with Nissho Iwai, and the core part of the deal is Nissho will, A, finance all of Blue Ribbon's financing needs henceforth, pretty much at a scale that goes all the way up to the moon. I mean, they're a $100 billion revenue company, certainly way more than any of the Oregon banks could do, and they'll do that at market interest rates. Two, Nissho will help Blue Ribbon set up direct manufacturing relationships in Japan, which they do. And then three, in exchange for all that, Nissho gets a 4% royalty on every shoe that Blue Ribbon sells, which ultimately ends up being a great relationship.

Ben Gilbert 1:24:30 And that's on top of the financing, so they already owe interest on borrowing the money, but now they additionally owe a 4% royalty.

David Rosenthal 1:24:36 Yes, this is sort of like the trading company playbook.

Ben Gilbert 1:24:40 And is that just for the inventory they finance or all sales?

David Rosenthal 1:24:43 I believe it's for all sales.

Ben Gilbert 1:24:45 Whoa! Does that still exist?

David Rosenthal 1:24:47 I don't know. I doubt if it does in the same way. I know that the relationship with Nissho Iwai continued for, like, 30, 40 years, like, a very long time. If it still does exist today, I, I'm sure it is not the same terms, but this goes on for a very long period of time.

Ben Gilbert 1:25:06 Wow, I mean, at this point in history, to have the house in order with a strong financing partner, there's crazy stuff we didn't even cover. Like, he got kicked out of multiple banks. The FBI got involved. They were playing it a little bit too fast and loose, where they were using every available penny to buy inventory, and so there'd be checks that bounced for payroll and things like that. When these things-... topple, they topple all at once. And so they had, like, a day where they got called into the bank, and then the bank called the FBI, and then they got investigated for fraud. It was an insane few years there. [chuckles]

David Rosenthal 1:25:42 Yeah. Shoe Dog has a lot of great, like, Phil Knight's personal experience going through this, which is-- I mean, it's worth the read no matter what, but read it for that.

Ben Gilbert 1:25:51 But safe to say, this moment here in, what is it, nineteen seventy-one?

David Rosenthal 1:25:55 Seventy-one, seventy-two.

Ben Gilbert 1:25:56 They can kind of take a deep breath and say: Well, the business ahead is still really hard, 'cause now Onitsuka is gonna be working against us. We have to figure out how to design and make shoes ourselves, but at least we have a real financing partner that has struck a deal to work with us.

David Rosenthal 1:26:13 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."

Ben Gilbert 1:27:03 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.

David Rosenthal 1:27:12 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."

Ben Gilbert 1:27:54 And these are Nike franchises that stood the test of time. Many of these shoes are still made.

David Rosenthal 1:27:59 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."

Ben Gilbert 1:28:15 It's awesome.

David Rosenthal 1:28:16 So great.

Ben Gilbert 1:28:17 And to this day, they're orange.

David Rosenthal 1:28:19 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.

Ben Gilbert 1:28:37 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.

David Rosenthal 1:29:08 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]

Ben Gilbert 1:29:28 [laughing]

David Rosenthal 1:29:28 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.

Ben Gilbert 1:30:09 [chuckles]

David Rosenthal 1:30:09 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?

Ben Gilbert 1:30:47 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.

David Rosenthal 1:31:03 He's literally a mad scientist.

Ben Gilbert 1:31:04 Yes, and two, pouring hot polyurethane into a waffle iron is going to permanently glue the iron shut.

David Rosenthal 1:31:13 Yes, which is exactly what happens. [chuckles]

Ben Gilbert 1:31:15 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.

David Rosenthal 1:31:25 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.

Ben Gilbert 1:31:44 No!

David Rosenthal 1:31:44 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-

Ben Gilbert 1:32:02 No.

David Rosenthal 1:32:02 -and it is in Nike's possession to this day.

Ben Gilbert 1:32:05 That is awesome.

David Rosenthal 1:32:07 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.

Ben Gilbert 1:32:56 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.

David Rosenthal 1:33:05 Yes. I forget what the first colorway that they do it in is.

Ben Gilbert 1:33:09 Look at you, you sneakerhead over there, colorway.

David Rosenthal 1:33:11 Yeah, colorway. [laughing] Eventually, I think it's Phil who's like: "Oh, we should do this in a blue that'll go well with blue jeans."

Ben Gilbert 1:33:19 Ah.

David Rosenthal 1:33:20 Yeah. The canonical old school Waffle Trainer is blue with a yellow Swoosh, and I think a lot of those were sold to be lifestyle shoes going with blue jeans.

Ben Gilbert 1:33:31 Which turns into Nike's real business eventually.

David Rosenthal 1:33:34 But that, the success on the field, on AstroTurf fields, the success in track that year, so this is 1972, Blue Ribbon's first full year doing sales as Nike purely on their own, they do $3.2 million in revenue. Remember, just a couple years before, their last kinda full year with Tiger, they were doing half a million dollars in revenue. So to go from all the crazy drama, ending the Tiger relationship, starting up their own factory production, making the Waffle Trainer, to be at $3.2 million, fully financed by Nissho, what a great spot to be in.

Ben Gilbert 1:34:12 Nike is designing their own shoes and going direct to the manufacturer. I think the benefit to the business at this point is not margin expansion, it's purely aliveness, and can we convince people to buy things from us that aren't Onitsuka Tigers? 'Cause to this point, it's still unproven if it's, "Hey, Blue Ribbon has great distribution, and people will buy anything from these guys because we trust the company," or if it's, "People really wanted Onitsuka Tiger, 'cause they were really good shoes for runners, and I don't really want whatever this new thing you're selling is."

David Rosenthal 1:34:45 Yes, and it turned out that it was the former. People were willing, definitely willing, to buy Blue Ribbon shoes and to buy Bill Bowerman shoes, regardless of Tiger and Onitsuka.

Ben Gilbert 1:34:59 Which is kind of amazing. That is completely opposite to what my intuition would've suggested. I would've definitely believed there's these shoes that are popular among other competitors, so I should be wearing them to be as competitive as them. If I run in them myself, I learn to like them. It's very strange that it ends up being the relationship that matters. Like, thinking, "Oh, I trust whatever this running shoe distribution company is now making because they say it's good. I'm sure it's good!"

David Rosenthal 1:35:29 Well, this is how important Bowerman was. He started jogging. Not only was he Bill Bowerman, you know, legendary track coach, he also started jogging. So the convergence of things, all the butterfly wing flapping that had to happen for Nike to become Nike, right at this time, right as Nike is being born and Blue Ribbon is going out on their own, Bowerman gets a generational runner at Oregon, Steve Prefontaine. Tragedy, like weirdly, so many people we've covered recently [chuckles] on Acquired, dies in a car crash way too young, you know, James Dean style, which ironically, of course, just cements his legacy. But Pre was the American runner. He was on the cover of Sports Illustrated while he was a runner at Oregon for Bowerman. He simultaneously held every American record for every distance between 2,000 and 10,000 meters.

Ben Gilbert 1:36:34 It's crazy, he died holding every single one of those records.

David Rosenthal 1:36:37 Yes, incredible, and he did this at Oregon and then later as a professional, but still for Bowerman and his Olympic teams in Nikes, right as Nike was starting. You can't script this any better.

Ben Gilbert 1:36:52 And in fact, he was not allowed to take a paid endorsement due to AAU rules.

David Rosenthal 1:36:57 Yes, this is another toe-stepping that's gonna happen here. [chuckles]

Ben Gilbert 1:37:00 Just like snatching the document out of the briefcase, whatever it takes to win, Phil Knight figures out a way to, A, make sure that he's running in Nikes, and B, make sure that he doesn't need to worry about money by finding a clever way to not do a paid endorsement, but something else.

David Rosenthal 1:37:19 And this is one of those things that the AAU and the amateur rules and all that, like, Nike was 1,000% on the side of right here.

Ben Gilbert 1:37:28 And Nike was on the side of the athlete, which is a thing that they've always been and is a huge part of their strategy.

David Rosenthal 1:37:34 Yes. So what was happening was amateur athletic rules and the Olympic organizing committee's rules were that you had to be an amateur. You couldn't be a professional athlete. You couldn't take endorsements or take money.... to race. Pre was this poor kid from Oregon. [chuckles] So after he graduated and wasn't at the university anymore, he literally had to bartend to make money while he's simultaneously holding the American records in every major distance event. This is criminal! So what Phil does is he decides to employ Pre as a corporate employee of Nike, as the National Director of Public Affairs, for five thousand dollars a year.

Ben Gilbert 1:38:15 With no responsibility. [chuckles]

David Rosenthal 1:38:17 Yes, and there's this amazing quote in Shoe Dog. Phil says, "People asked me what that meant. I said, 'It means he can run fast.'" [laughing]

Ben Gilbert 1:38:25 [laughing] So great.

David Rosenthal 1:38:28 So great. Ha! This is the perfect encapsulation, I'm gonna foreshadow just a little bit here, of the later number three in the later Nike document of the ten principles of Nike, that we will talk about in a bit. Number three is so great: "Perfect results count, not a perfect process. Break the rules. Fight the law." That's exactly what Phil and Nike are doing here. [chuckles]

Ben Gilbert 1:38:55 Yep, you bet.

David Rosenthal 1:38:56 So that's on the sort of proto-marketing front that this early Nike playbook is getting going. You know, five thousand dollars for the best publicity you could possibly ever get.

Ben Gilbert 1:39:07 It's Phil Knight basically inventing sports marketing. I mean, there was a sort of nascent idea of athlete sponsorship at the time, but it really-- this is the invention of it as we know it today, and all athletic brands are defined by athletes, and this is really the first instance.

David Rosenthal 1:39:22 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.

Ben Gilbert 1:40:06 Yep.

David Rosenthal 1:40:06 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]

Ben Gilbert 1:40:56 [chuckles]

David Rosenthal 1:40:56 is to sign up for the Futures Program.

Ben Gilbert 1:40:58 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.

David Rosenthal 1:41:19 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]

Ben Gilbert 1:41:38 [chuckles]

David Rosenthal 1:41:39 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.

Ben Gilbert 1:41:48 Kind of a hedge, too.

David Rosenthal 1:41:49 It was a hedge, yes.

Ben Gilbert 1:41:51 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.

David Rosenthal 1:42:13 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.

Ben Gilbert 1:43:07 Yep.

David Rosenthal 1:43:08 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.

Ben Gilbert 1:43:50 To sell and open factories. They sort of opened the country for the industry.

David Rosenthal 1:43:54 ... 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.

Ben Gilbert 1:44:37 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-

David Rosenthal 1:44:54 Carcinogens.

Ben Gilbert 1:44:55 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.

David Rosenthal 1:46:56 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?"

Ben Gilbert 1:47:09 Yeah, but Nike started it, and they're the biggest.

David Rosenthal 1:47:12 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."

Ben Gilbert 1:47:52 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.

David Rosenthal 1:48:08 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.

Ben Gilbert 1:48:52 Which is up almost a hundred percent. They nearly doubled again in 1973 to 1974.

David Rosenthal 1:48:58 1974 is also a momentous year for Blue Ribbon because they finally settle the legal battles with Onitsuka, [chuckles] and they win in court.

Ben Gilbert 1:49:08 Amazingly.

David Rosenthal 1:49:09 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-

Ben Gilbert 1:49:32 Yes

David Rosenthal 1:49:33 ... coming into Phil Knight and the Nike orbit.

Ben Gilbert 1:49:38 He was their lawyer on this case, right?

David Rosenthal 1:49:40 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."

Ben Gilbert 1:50:06 Hmm.

David Rosenthal 1:50:07 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-

Ben Gilbert 1:50:39 For a while, they were thick as thieves.

David Rosenthal 1:50:41 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.

Ben Gilbert 1:51:33 They're getting free shoes, basically.

David Rosenthal 1:51:35 And then Nike is showing up on nationally televised broadcasts every single night.

Ben Gilbert 1:51:41 Yep.

David Rosenthal 1:51:41 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.

Ben Gilbert 1:52:26 No, you can pay them whatever you want.

David Rosenthal 1:52:27 You pay them whatever you want, right?

Ben Gilbert 1:52:29 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"-

David Rosenthal 1:52:38 What do you think the players are gonna do?

Ben Gilbert 1:52:40 "It's actually a team policy!"

David Rosenthal 1:52:41 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.

Ben Gilbert 1:53:17 [laughing]

David Rosenthal 1:53:17 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]

Ben Gilbert 1:53:47 [laughing]

David Rosenthal 1:53:48 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.

Ben Gilbert 1:54:11 Lot of eyeballs on those Swooshes.

David Rosenthal 1:54:13 Lot of eyeballs on those Swooshes.

Ben Gilbert 1:54:15 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."

David Rosenthal 1:54:46 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.

Ben Gilbert 1:55:18 Yep.

David Rosenthal 1:55:19 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.

Ben Gilbert 1:55:36 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.

David Rosenthal 1:56:16 You're buying victory.

Ben Gilbert 1:56:18 Right. And so their whole business eventually becomes figuring out this multi-sided equation of, can we create enough demand? Like, it literally on their income statement says, "Demand creation," by doing these sponsorships, and then, can we create the right product mix for people to participate in our brand by giving us their dollars?

David Rosenthal 1:56:37 Yes. Now, I don't wanna say that Strasser alone architected this grand strategy, or even I'm not really sure that Phil or anybody at Nike understood this at this time, but certainly Strasser executes this in just an incredible way. Nobody else was doing this. The college coaches, they ran the table, and it was just an incredible run in the late '70s. All the while, the jogging movement is just getting bigger and bigger and bigger. [chuckles]

Ben Gilbert 1:57:10 Right. Keep in mind, they still only make running shoes. There's no apparel, there's no shoes for other sports, really. There's, like, some things on the margins, but ninety-plus percent of their revenue is running shoes.

David Rosenthal 1:57:20 Yeah, the core sales, what they are marketing is, "Go buy a Waffle Trainer [chuckles] and wear them with your blue jeans."

Ben Gilbert 1:57:27 Yep. So through the late '70s, revenue just doubles year over year over year. They go from fourteen million in sales to twenty-nine million in sales to seventy-one million in sales, finishing out in 1979 with a hundred and fifty million in sales.

David Rosenthal 1:57:41 Yes. It was 1976 when they officially changed the actual name of the company to Nike. Then 1977 was a huge year. As you say, they do seventy million in revenue that year. They signed John McEnroe.

Ben Gilbert 1:57:53 They crossed 1,000 employees, so it's getting to be a real beefy organization.

David Rosenthal 1:57:57 Two other things: They bring one former NASA engineer and true mad scientist, Frank Rudy, into the fold, the inventor of Air Sole technology.

Ben Gilbert 1:58:14 Which Phil Knight is not a fan of, when he hears about the idea. [chuckles]

David Rosenthal 1:58:17 Well, he thinks it's a crazy idea at first. Phil's meeting with Rudy. He's like: I don't even know how Rudy got into my office. Who is this crazy dude?

Ben Gilbert 1:58:24 [laughing]

David Rosenthal 1:58:25 He's about to kick him out, and then Rudy's like, "Yeah, Adidas didn't want it either." And Phil's like, "Oop, you said the A word. [chuckles] All right, let me try it." [laughing]

Ben Gilbert 1:58:33 [laughing]

David Rosenthal 1:58:33 So supposedly, Phil goes for a run in the prototypes of the Air Soles, and he's like, "Yeah, actually, these are pretty great."

Ben Gilbert 1:58:39 And we should say, for anybody who doesn't know, everything that you hear of now, the Air Max, the Air Jordan, the Air Force 1, it is a literal airbag, actually, it's a nitrogen bag, that sits in the midsole. So think about the thing between the lower sole, the rubber on the bottom, and inside of the insole, the basically, the part of the shoe that you can't get to that's underneath your heel, and sometimes that runs all the way across, all the way up to the toe, that replaces foam cushioning, instead using a little airbag that magically doesn't pop.

David Rosenthal 1:59:12 Yeah, I mean, Rudy really was a genius. So Phil's like: All right, let's do it. He tasks, who else? Rob Strasser with going and doing a deal with Rudy. They do a deal. Rudy gets between ten to twenty cent royalty for each pair of Air Sole technology shoes that Nike sells. Eventually, Nike would just buy Rudy's company, and Rudy would become an employee of Nike. So still here in 1977, Strasser is just on fire. I don't know the full context around this. Scott Reams has a great LinkedIn post, but as best as we can tell, Ben, as you said, the company was growing hugely. There are all these new employees there who are just kinda taking for granted that Nike is winning. Strasser gets kind of pissed off one day, and he goes to his typewriter, and he fires off a memo. He Xeroxes, he copies this memo, and pastes it up on the walls all around the office of Nike. Ten principles, and this document is just amazing. We've tweeted it before. It's going around the internet.

Ben Gilbert 2:00:21 Yeah. It's going around the internet, but it's going around the internet described in the following way: "Here is the document that Phil Knight wrote articulating Nike's principles." Here are the things that are wrong with that statement. One, Phil Knight did not write it, Rob Strasser did. Two, Nike's principles, also incorrect. When this was written, it was actually still Blue Ribbon Sports, so it was not yet the Nike Corporation. Three, the top of the document has this, like, thin, wispy swoosh. That was never the Nike Swoosh. This is someone's attempt, who doctored this at some point, to make it look like some old version of the Swoosh. There is an old version of the Swoosh, which we will link to in our sources. It is still in the USPTO for the Swoosh trademark. It is a hand-drawn version, Carolyn's hand-drawn version of the Swoosh, that looks nothing like this weird, thin, wispy thing that was, like, doctored and added to the document. So not Nike Inc, not the Swoosh, there was never a Swoosh on the document. It was done on a typewriter, how are you gonna do that? And three, not Phil Knight. But yes, oh, my God, these principles are amazing, and we're gonna go through them. But first, we wanna tell you about our third favorite company of the episode. David, who is it?

David Rosenthal 2:01:39 It is StatSig.

Ben Gilbert 2:01:41 Yes, back in action with Acquire. This is their first time being a full-season sponsor. StatSig empowers modern-day visionaries to transform the way that they develop software. The highest-performing product teams run multiple experiments every day. If you're at a company that uses StatSig and is sort of versed in modern product development principles, you know this. StatSig provides all the tools that you need to build, measure, and learn faster as a product organization. They integrate feature flags, they have an unbelievably powerful proprietary stats engine, and they have robust analytics. They make it so that you can 10X your experimentation velocity at your company, while providing near real-time visibility into how these features actually impact your business metrics.

David Rosenthal 2:02:29 ... Yeah, it's been so fun to watch Statsig's growth, even just over the last couple months. The market was clearly hungry. Most companies today are working with expensive, clunky, and disjointed point solutions, or under-resourced with internal product experimentation tools. Statsig works with large enterprises. They have a startup program. They're powering some of the hottest and fastest growing brands in AI as well. One quote I particularly love, this is from a data scientist at one of their customers: "We're operating like a large experimentation organization at an enterprise tech company, organizing, tracking, and analyzing multiple experiments, providing intuitive visualizations that even enable non-technical users to make informed business decisions." What's really cool is that the company that this data scientist is from, BlackCrow, which is an AI startup, is running Statsig natively in their Snowflake data warehouse. We talked on our ACQ2 episode with Kamakshi from Samuhá about bringing compute into data warehouses like Snowflake, and this is a great example of that happening here with Statsig.

Ben Gilbert 2:03:29 Yep. Acquired community members can take advantage of a special offer, including five million free events per month, including white glove onboarding experience, and migration support. So you can visit statsig.com/acquired to learn more, and 10X your product experimentation velocity. Oh, and one more thing: David and I are gonna be doing an event with Statsig live in San Francisco, a product growth forum. Honestly, it's gonna be an amazing speaker lineup. The chief product officer from Brex, the chief marketing officer from Instacart, and the CTO of Figma are all gonna be there. Vijay Raji, the CEO and founder of Statsig, who many of you know well at this point from our ACQ2 episode with him, also gonna be there, and it should be pretty great. So if you wanna hang out with David and I, August 10th in San Francisco, you can click the link in the show notes to register. It is selling out fast, so make sure to grab a spot. We'd love to see you at the Statsig event. Okay, David, what are these principles?

David Rosenthal 2:04:31 All right. Nike principles, according to Rob Strasser in 1977. One, our business is change. Two... Oh, this is so good. We are on offense all the time. [chuckles] Three, we already alluded to, perfect results count, not a perfect process. Break the rules, fight the law. Number four, this is as much about battle as about business. Five, assume nothing. Make sure people keep their promises. Push yourselves, push others, stretch the possible. Number six, live off the land. Number seven, your job isn't done until the job is done. Eight, dangers, with a underline as a heading, bureaucracy, personal ambition, energy takers versus energy givers, knowing our weaknesses, don't get too many things on the platter. Number nine, it won't be pretty. [chuckles] And then number ten, if we do the right things, we'll make money damn near automatic.

Ben Gilbert 2:05:33 It's so good.

David Rosenthal 2:05:34 It's so good. That last one is so spot on for any business, through to this day. It's so easy to get wrapped up on all the other crap. You do the right things, you make product that customers love, you market it right, you build a brand, you will make money damn near automatic.

Ben Gilbert 2:05:51 So I read these differently than I used to read them, because when I didn't know Nike's journey, I sort of would just read them and be like: "Yeah, that's awesome," or like, "Wow, that's so pithy. I can't believe their official corporate values are in such a pithy way." No, this is stream of consciousness, all from Rob Strasser, all into the typewriter, and, like, some of them are things that Nike would never say today because it shows the trade-offs inherent in their business. I mean, live off the land, it's cringe-worthy, right? It's almost like, "You guys, you had this huge labor issue. It's not good." So you sort of see where some of this stuff comes from. Break the rules, fight the law. I think there's also something very clear: dangers, bureaucracy, personal ambition. Like, this is a foreshadow of Rob Strasser hating the bureaucracy at Nike after its IPO, that we'll talk about in a second, clashing with Phil Knight-

David Rosenthal 2:06:45 Developing his own personal ambition. [chuckles]

Ben Gilbert 2:06:47 ... And developing his own personal ambition, leaving and going to Adidas. So there's, like, so much in here that when you really start to know the company's history and story and the head space that he was in when he punched this out, it reads entirely differently to me than I sort of used to just read it as a, "Hey, I love Nike, a brand. Wow, so cool! I wish I could work at a company that had these pithy, punchy values."

David Rosenthal 2:07:08 Yeah, this is definitely one of those cases where ignorance is bliss. [chuckles]

Ben Gilbert 2:07:11 Yeah, but man, they're awesome. The one that is still in Nike's maxims today, that they distribute to employees, that is, David, something you and I both hold near and dear, and think of with Acquired, is: we're on offense all the time.

David Rosenthal 2:07:24 You don't win by playing defense.

Ben Gilbert 2:07:25 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.

David Rosenthal 2:07:46 So Nike IPOs the second week of December in 1980, the same week as Apple. [chuckles]

Ben Gilbert 2:07:52 Unbelievable.

David Rosenthal 2:07:53 It's amazing.

Ben Gilbert 2:07:54 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.

David Rosenthal 2:08:04 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.

Ben Gilbert 2:08:42 And the craziest thing is, like, one of the richest people in America then was a hundred and seventy-eight million dollars.

David Rosenthal 2:08:49 Yes, quite different. Now, he was far from the top richest person in America, but still, this made national headlines.

Ben Gilbert 2:08:57 Yeah.

David Rosenthal 2:08:58 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.

Ben Gilbert 2:09:18 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."

David Rosenthal 2:09:26 Ben, the job's not done until the job is done. [chuckles]

Ben Gilbert 2:09:29 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.

David Rosenthal 2:10:05 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.

Ben Gilbert 2:10:50 It's fascinating. I mean, in 1980, Reebok USA is founded, and by 1988, Reebok eclipses Nike in sales.

David Rosenthal 2:11:00 Yes, at well over a billion dollars. [chuckles]

Ben Gilbert 2:11:02 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.

David Rosenthal 2:11:27 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]

Ben Gilbert 2:11:39 Ah.

David Rosenthal 2:11:40 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]

Ben Gilbert 2:12:04 [laughing]

David Rosenthal 2:12:04 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.

Ben Gilbert 2:12:24 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."

David Rosenthal 2:13:26 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.

Ben Gilbert 2:13:37 Yes.

David Rosenthal 2:13:38 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.

Ben Gilbert 2:15:01 Oh, yeah. No, it's a very fun, campy work of fiction.

David Rosenthal 2:15:04 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-

Ben Gilbert 2:15:16 No.

David Rosenthal 2:15:17 Almost all wrong. [chuckles]

Ben Gilbert 2:15:18 There's a lot of little dynamics that we can be mad about. Like, it was kind of Strasser's baby to do the deal, not Vaccaro's baby to do the deal. You know, Vaccaro never flew to North Carolina to negotiate at Michael's house with Michael's mother, or, like, all of this doesn't actually happen. They weren't gonna fire everyone in the basketball division if this didn't work. But again, factual inaccuracies are fine. It's the characters that they messed up that really bothered me. I know I'm doing a review of a movie that maybe not all of you have seen, so spoilers, but, like, God, they make Phil Knight just not at all who Phil Knight is. They make him out to be kind of a rube, and after watching every interview he's ever given and reading all this stuff about him, and I just don't think that the Ben Affleck character is anything like Phil Knight. Anyway, Air is entertaining. Here's the real story.

David Rosenthal 2:16:06 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.

Ben Gilbert 2:16:52 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.

David Rosenthal 2:17:05 Yeah, he was picked third.

Ben Gilbert 2:17:06 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.

David Rosenthal 2:17:38 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.

Ben Gilbert 2:18:21 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.

David Rosenthal 2:18:32 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?

Ben Gilbert 2:18:55 No, never.

David Rosenthal 2:18:56 Do you know what they are? No.

Ben Gilbert 2:18:57 No, I don't.

David Rosenthal 2:18:58 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."

Ben Gilbert 2:19:20 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?

David Rosenthal 2:19:57 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-

Ben Gilbert 2:20:18 No!

David Rosenthal 2:20:18 ... basketball line.

Ben Gilbert 2:20:19 I did not realize that.

David Rosenthal 2:20:20 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.

Ben Gilbert 2:20:40 I had no idea that Jordan got a royalty of non-Jordan shoes.

David Rosenthal 2:20:44 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]

Ben Gilbert 2:21:10 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?

David Rosenthal 2:21:33 No, it's all owned by Nike 'cause there's the minimum guaranteed payment.

Ben Gilbert 2:21:36 Right.

David Rosenthal 2:21:36 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.

Ben Gilbert 2:22:10 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.

David Rosenthal 2:22:40 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?

Ben Gilbert 2:22:58 [laughs]

David Rosenthal 2:22:58 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..."

Ben Gilbert 2:23:08 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.

David Rosenthal 2:23:16 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.

Ben Gilbert 2:23:40 David, do you know what their goal was?

David Rosenthal 2:23:43 Three million dollars over three years. [laughing]

Ben Gilbert 2:23:46 [laughing]

David Rosenthal 2:23:46 So it's about 15% of Nike's entire revenue for the whole year.

Ben Gilbert 2:23:51 In the first year, they sold 1.5 million pair in the first six weeks after releasing them.

David Rosenthal 2:23:59 So put aside the halo royalties that Jordan is getting on the rest of Nike Basketball. Let's take just the 5% of that $126 million that he made in his first year. That's $6.3 million that Jordan got from Nike in 1985. Do you know what Jordan's contract with the Bulls was? It's too perfect, $6.3 million over seven years.

Ben Gilbert 2:24:26 So he made the exact same amount from the Nike deal in his first year.

David Rosenthal 2:24:31 He made his entire seven-year contract with the Bulls in his first year.

Ben Gilbert 2:24:35 Wow! I always wanted to think of this story as like, wow, Jordan took some risk, and it paid off big on the back end. It's like it paid off immediately, and he had to make no trade-offs to do it. He got the cash guarantees, and he got the royalty upside, and it happened immediately, and it only got bigger from there.

David Rosenthal 2:24:54 Well, trade-offs, I think there are two things. One, none of this would've happened if Jordan didn't turn out to be Jordan.

Ben Gilbert 2:25:00 Totally, and in fact, that's literally true. If he wasn't... What were the three clauses? If he didn't either win Rookie of the Year or win the NBA Finals or win the MVP or something, there was an out in the contract.

David Rosenthal 2:25:13 Oh, interesting! I didn't know that.

Ben Gilbert 2:25:15 They were basically like, "We will give you the entire farm, or 5% of the farm, if you are a phenom, and if you're not-

David Rosenthal 2:25:22 Interesting, so there was some protection for Nike.

Ben Gilbert 2:25:25 Yes, and I think he's Michael Jordan, so whatever the thing was, he got all three of them. Oh, it wasn't the NBA Finals. It was to become an All-Star.

David Rosenthal 2:25:33 Ah, interesting, which I think he did in the first year.

Ben Gilbert 2:25:35 Yes, yeah.

David Rosenthal 2:25:36 Yes, that's right because the other players kept the ball away from him, uh- [chuckles]

Ben Gilbert 2:25:39 [laughs]

David Rosenthal 2:25:39 ... and they froze him out 'cause they were so jealous. Okay, one, Jordan had to become Jordan. Two, though, he sacrificed a huge amount. There's this great quote from Jordan when he retired for the first time. He said, "Phil Knight and Nike have made me into a dream," and that's very sweet on the surface, but that's very dark underneath of it. Michael Jordan's life was no longer the life of a normal person or anything close to it, and now, to a certain extent, that happens to every star, but, like, today you're like, "Duh," but back then, this was the first time this happened. Jordan became a dream, [chuckles] and that's very hard to live with as an actual human being. So there was some downside.

Ben Gilbert 2:26:27 Yeah, David, you're so right. Imagine that I come to you, and I say, "Hey, I'm gonna pay you and give you revenue upside, and, you know, all you have to do is do the thing that you're already good at and work hard at the thing you're already passionate about. By the way, I'm gonna use your face on $5 million of media, of paid media in the next few months." It's like, "Whoa, what? But that's it for any normal life that I get, like, right out the bat."

David Rosenthal 2:26:52 Right, and he's a kid.

Ben Gilbert 2:26:54 Yes.

David Rosenthal 2:26:54 So again, like, this is all normal today. Everybody understands this. LeBron knew exactly what he was getting into when he signed with Nike out of high school and went to the NBA, but, like-... this was the beginning of all of this.

Ben Gilbert 2:27:07 So why did they sell so well? That's sort of this interesting, $126 million in the first year. Like, why was the demand for them crazy? Did people just love Michael Jordan? Nike, this is, I think, the first time they really flex their ability to recognize an opportunity for an incredible marketing moment. So back in '84, Jordan starts wearing, in preseason and in warm-ups, some modified Air Ships, 'cause Nike's actually not done making the Air Jordan 1 yet. And so he's wearing these black and red shoes that are now called the Jordan Breds, B-R-E-D. And these shoes are black and red, and in the NBA, you wear white, and that's it. And so Jordan's getting ready to play in the league with these black and red shoes, which again, he hasn't actually worn on court, and to this day, no one can find footage of him wearing the black and red precursor to the Air Jordan 1, these modified Air Ships, on the court. So we're not actually sure that it happened.

David Rosenthal 2:28:11 Right, 'cause it takes a while to actually make a new shoe. So the Air Jordan 1 is still in production.

Ben Gilbert 2:28:15 Right. But this black and red catches the league's attention. David Stern says, "Hey, you can't wear those. We're gonna fine you if you do." In fact, this results in literally writing a letter that doesn't state the dollar amount, but does say, "Hey, it's against league policy to wear the black and red shoes." It doesn't mention the Air Jordan, it doesn't mention the Air Jordan 1, it just says, "Those black and red shoes." And this gives Nike this incredible opportunity to make a marketing moment out of it. Now, it would have actually been very expensive, because the way that the fine worked technically, after you dig into it for a while, is $1,000 for the first infraction, $5,000 for the second infraction. It may have even been the case that it was $10,000 for the third. Over an 82-game season and facing possible ejection, it's a big tab for Nike, and it's a big problem for Jordan. And before he could even wear these black and red shoes in a game or have the opportunity to, they switched. The Air Jordan 1, they made white and red, the one that is iconic, that you can go buy, and then they make all the remakes out of. The AJ1 is not the Bred, and the Bred is the thing that kicked up the big issue. Anyway, so Jordan, they just film him in this incredible commercial where he's just standing there, and the camera pans down from his head to his feet, where he's wearing the black and red, and it just goes, bong, bong, and puts these black bars over the shoes. And they make a whole big deal out of the fact that these shoes are so great, they are banned in the NBA, and you can go buy them at your local retailer. And people go nuts.

David Rosenthal 2:29:54 So great. Such a good story.

Ben Gilbert 2:29:56 And the coda to all this is, even after reading all these books and watching all these videos and these interviews, I actually don't know what dollars ever changed hands. Some people said it was $5,000 times an 82-game season. Some people said it was $1,000 ever, and then nothing after that. I have even heard that no dollars ever exchanged between Nike and the NBA or Nike and Michael Jordan because the fine was never levied. It was a threat that then Nike made the Air Jordan 1s before anything could be enforced. If anybody knows, please join the Slack and shoot us a DM or put it in the general channel. I'm very curious.

David Rosenthal 2:30:33 The thing that's so great, though, Nike, right? Like, it doesn't matter. It's the story, it's the dream. [chuckles] Like, it doesn't matter.

Ben Gilbert 2:30:40 Right. They just put it in a freaking Hollywood movie that it was 5,000 times 82 games, and that's all anybody's gonna remember.

David Rosenthal 2:30:48 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-

Ben Gilbert 2:31:21 Huh!

David Rosenthal 2:31:22 ... what happened?"

Ben Gilbert 2:31:23 Something bad happened in years two and three. [chuckles]

David Rosenthal 2:31:25 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.

Ben Gilbert 2:31:53 Hmm, so good commercial, but not $126 million of demand commercial.

David Rosenthal 2:31:57 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.

Ben Gilbert 2:32:10 Yep.

David Rosenthal 2:32:11 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.

Ben Gilbert 2:33:50 Dude, this is, like, very Steve Jobs Macintosh.

David Rosenthal 2:33:54 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.

Ben Gilbert 2:34:30 Yep.

David Rosenthal 2:34:31 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.

Ben Gilbert 2:35:25 And eventually, their only client.

David Rosenthal 2:35:27 And then eventually, Adidas buys the company, moves their North American headquarters to Portland, Oregon, and makes Strasser the CEO of Adidas America. [chuckles]

Ben Gilbert 2:35:40 Oof!

David Rosenthal 2:35:41 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.

Ben Gilbert 2:35:54 Yeah.

David Rosenthal 2:35:55 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."

Ben Gilbert 2:36:22 Wow!

David Rosenthal 2:36:23 And then when Rob dies, Phil does not attend his funeral. It's really just heartbreaking.

Ben Gilbert 2:36:29 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.'"

David Rosenthal 2:37:10 Yeah. Oof! And still, the repercussions of this exist to this day. Adidas' American headquarters are still in Portland, Oregon.

Ben Gilbert 2:37:20 Yep, and they poach a lot of Nike people.

David Rosenthal 2:37:22 Yep. So, okay, back to Jordan. The plot thickens here. Jordan's not happy.

Ben Gilbert 2:37:31 Strasser was his guy there?

David Rosenthal 2:37:32 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.

Ben Gilbert 2:37:46 I mean, Jordan's deal is up in '90, right?

David Rosenthal 2:37:50 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.

Ben Gilbert 2:38:16 Yep.

David Rosenthal 2:38:17 So back to Nike and Phil. This is serious wartime mode. They schedule a pitch meeting with Jordan. This is, I think, towards the end of year three of the deal, to try and save him, to try and re-sign him. They're willing to do anything, renegotiate the deal, give him more economics, give him another shoe, anything. Phil goes to a bright young star within the Nike design group, Tinker Hatfield.

Ben Gilbert 2:38:49 Formerly of Nike's architecture and building planning team. He wasn't even a, hired as a shoe designer?

David Rosenthal 2:38:55 He was an architect. This is super important. Tinker was another Bowerman guy. He ran track for Bowerman at Oregon and studied architecture, and then he comes into Nike, and together with Mark Parker, who would become the CEO of Nike, they design the Air Max, they design the Air Trainer. They're part of Nike's revival on the running and training side, and competing ultimately in aerobics with the Air Trainer.... Now that Strasser and Moore are gone, Tinker is the star that he can give Jordan. He says, "Go fly out to Chicago. Go with Howard White, Jordan's guy at Nike. Go talk to him. Come home, like, bearing your shield or on it, essentially." [chuckles] So Tinker goes out, and remember, he's trained as an architect and then became a shoe designer. What do architects do when they meet with their clients? They ask them questions. They say, "What do you want? What are your specifications?" Tinker sits down with Jordan, and he's like, "Tell me what you don't like about the Jordan 2." "They're too tough to break in." "Okay, cool, what else is wrong with them?" "They're high tops. You know, that's too much weight. I'm Michael Jordan. I need lightness on my feet. I wanna fly. I don't want the extra weight." "Okay, cool. In an ideal world, Michael, what shoe would you want? What would it look like?" And Michael's like, "Well, I want a great basketball shoe that will also look great off the court, but it needs to be both. It can't be like the Jordan 2 that looked great off the court, maybe, but sucked as a basketball shoe." Tinker's like, "Okay, noted." So he goes back to Nike, works feverishly. Jordan comes in for this last-ditch pitch meeting. He shows up four hours late.

Ben Gilbert 2:40:31 [chuckles]

David Rosenthal 2:40:32 Phil starts the meeting, and it's like, "Oh, boy, here we go." Tinker, like an architect, has the shoe under a black cloth on the table, just like Steve Jobs in the keynotes many years later. Phil hands the meeting over to Tinker, and he's like, "Michael, I took notes on our conversation. Here is the Jordan 3." And he pulls the shroud off and hands the shoe to Jordan, and he's like, "It's the shoe you asked for." He goes right down the checklist: "Soft leather that doesn't need to be broken in. You can wear a new pair in every single game. Mid-cut height, not a high top, not a low top, the support you need without the weight of a high top. Elephant print leather for style off the court that won't detract from performance on the court." And then the pièce de résistance, no Swoosh. There's a little Swoosh on the back tab. The main logo is the Jordan Jumpman-

Ben Gilbert 2:41:33 Jumpman.

David Rosenthal 2:41:33 -logo on the tongue. The Jumpman logo did exist beforehand. Peter Moore had actually designed it, but it was never in the prime position. It was always the Swoosh and then the Jumpman.

Ben Gilbert 2:41:46 That's, like, heretical at Nike at this point, to not have the Swoosh be the main character. But Michael Jordan didn't really wanna be a Nike, so the only way to keep him is to kinda hide the Swoosh.

David Rosenthal 2:41:56 It's kinda like hearkening back to the beginning of, like, Phil Knight could have had a hundred percent of Blue Ribbon Sports, or he could have had fifty-one percent of Bill Bowerman's Blue Ribbon Sports. [chuckles]

Ben Gilbert 2:42:06 Yeah, it's pretty crazy 'cause the whole point of these deals is to get Swoosh impressions, and they were willing to say, "We think it's gonna be profitable enough in the long run to be in business with you, that we will not put the Swoosh on the side of these shoes," and they were extremely right to do that.

David Rosenthal 2:42:23 Indeed. So as part of that, they renegotiate the deal. Jordan agrees to stay with Nike. The Jordan brand becomes its own subsegment within Nike, its own shoes, its own clothes, its own colors, its own logo, its own advertising, all managed standalone. And then ultimately, this would take several years, but it would become Zion Williamson wears Jordans, Jayson Tatum wears Jordans.

Ben Gilbert 2:42:49 The University of Michigan, for some reason, is Jordan, not Nike, [chuckles] as their official uniform supplier.

David Rosenthal 2:42:55 UNC is Jordans.

Ben Gilbert 2:42:57 Jordans. And so do you know what changed in that renegotiation?

David Rosenthal 2:43:01 Yes. So they extend the deal for seven more years, I believe, at the same five percent royalty on gross sales. But there's the new massive further commitment to making the Jordan sub-brand much more of its own brand, and they up the total guarantee to at least eighteen million dollars. So from two and a half to eighteen [chuckles] in three years.

Ben Gilbert 2:43:27 Wow!

David Rosenthal 2:43:28 Ultimately, just like the two and a half, that's meaningless because Jordan brand sales go back up in 'eighty-eight, 'eighty-nine, 'ninety, on and on and on, two hundred million, three hundred million, four hundred million, five hundred million in sales. This is when they do the Spike and Mike ads with Spike Lee-

Ben Gilbert 2:43:47 "It's gotta be the shoes!"

David Rosenthal 2:43:48 ... and Wyden Kennedy, "Gotta be the shoes." Jordan earns, over the course of this contract, easily at least a hundred million dollars, easily.

Ben Gilbert 2:43:58 Over the seven year.

David Rosenthal 2:43:59 Yeah, it's just dwarfing what he's earning from the NBA.

Ben Gilbert 2:44:02 In his total career from basketball contracts, he made something like ninety million dollars. So I mean, you even said it, in that first year, just from the get-go, his Nike earnings were way outpacing his NBA earnings.

David Rosenthal 2:44:15 Yep. Now, interestingly, at retail... Again, back to this halo strategy, the Jordan 3s and then all Jordans subsequently, really, this is when they become the luxury brand. The Jordans are Nike's Louis Vuitton trunk. Yeah, they make a lot of revenue from them. Yeah, they sell a lot of them, but you know what? It also helps them sell a lot of wallets.

Ben Gilbert 2:44:38 Yeah. So the Jordan 3 is priced at, like, two hundred dollars or something?

David Rosenthal 2:44:43 Oh, one hundred dollars, but this is 1988, 1989.

Ben Gilbert 2:44:47 Right. Okay, that makes sense. All right, so you mentioned how much he made at the end of that seven-year contract. There's something mind-blowing going on today in 2023 with the Jordan brand, and I don't think people quite have a handle on what has happened in the last three years. So the Jordan brand is the fastest-growing part of Nike. Nike grows, like, ten percent a year. The Jordan brand, over the last three years, keeps growing at, like, thirty-five percent, and it does billions in revenue growing at thirty-five percent. So this past year, they just reported FY '22.... the Jordan brand did six point six billion dollars in revenue. Let's assume that the five percent figure is still accurate enough, it's accurate-ish. Jordan's making over three hundred million dollars a year from the Jordan brand at a five-ish percent royalty.

David Rosenthal 2:45:43 He retired for the last time twenty years ago. [chuckles]

Ben Gilbert 2:45:47 There is no athlete making three hundred million dollars a year. Michael Jordan will make five, maybe ten billion dollars over his lifetime from the Jordan brand. Absolutely unprecedented for an athlete. He's effectively a founder of a brand that is growing thirty-five percent at six-plus billion dollar revenue scale.

David Rosenthal 2:46:07 With all the operations, and distribution, and marketing of Nike. [chuckles]

Ben Gilbert 2:46:12 It is unfathomable. So he did active work for many years in order to build the brand equity, but he does passive work now to keep it alive. Of course, he has sort of input on who they're signing to the Jordan brand. He has sort of a vote in that, but in Michael staying out of trouble, and Michael staying the dream, he builds a tremendous amount of brand equity, and Nike reaps ninety-five percent of that. So, like, they're perfectly happy with this arrangement. They're happy to cut him three hundred million dollar checks. I would be, too, if I was earning the other side of the six point six billion dollars! But Jordan totally has had to shape his life in order to be the dream Michael, and continue to be that. He is so synonymous with the brand, that he has to be perfect to keep the brand doing what it's doing.

David Rosenthal 2:47:05 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.

Ben Gilbert 2:47:57 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?

David Rosenthal 2:48:09 Uh, second real big one. The first was the Revolution ad with The Beatles-

Ben Gilbert 2:48:13 Ah.

David Rosenthal 2:48:13 -that they did for the Air Max.

Ben Gilbert 2:48:14 Okay.

David Rosenthal 2:48:14 Another Tinker Hatfield and Mark Parker joint.

Ben Gilbert 2:48:17 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.

David Rosenthal 2:49:05 Yep.

Ben Gilbert 2:49:06 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.

David Rosenthal 2:49:22 An interesting thing from that front, losing Kobe to Adidas-

Ben Gilbert 2:49:26 Yes

David Rosenthal 2:49:26 ... was big.

Ben Gilbert 2:49:27 Really big, and people forget this. People forget that Kobe was an Adidas athlete first-

David Rosenthal 2:49:32 Yes

Ben Gilbert 2:49:33 ... in the same way that people forget that Kanye was a Nike athlete or a Nike, uh- [chuckles]

David Rosenthal 2:49:37 Right. [chuckles] Rapper.

Ben Gilbert 2:49:38 Rapper first.

David Rosenthal 2:49:39 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.

Ben Gilbert 2:49:54 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.

David Rosenthal 2:50:08 Yeah.

Ben Gilbert 2:50:08 That was a huge win for Nike and a big turnaround. Like, 2002 is really when it started to get good again for them.

David Rosenthal 2:50:14 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.

Ben Gilbert 2:50:31 Oh, and right around the same time, in 2003, is when LeBron came into the NBA, and Nike signed him out of high school.

David Rosenthal 2:50:37 Yep.

Ben Gilbert 2:50:38 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.

David Rosenthal 2:51:19 I mean, the thing is, both of those numbers are bonkers.

Ben Gilbert 2:51:22 Right!

David Rosenthal 2:51:22 Seven hundred million dollars is bonkers.... and six billion dollars is bonkers. [chuckles]

Ben Gilbert 2:51:28 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.

David Rosenthal 2:52:15 Yes. Yes!

Ben Gilbert 2:52:17 Which was not a terribly successful product in the market, but man, did it help Nike understand where the puck is going.

David Rosenthal 2:52:27 And this was the first corporate use of plus in a product name.

Ben Gilbert 2:52:34 Oh, was it really?

David Rosenthal 2:52:35 This is the moment that has led to the terribleness [chuckles] of the sea of digital corporate products today.

Ben Gilbert 2:52:44 We all have this to thank?

David Rosenthal 2:52:45 Plus this, plus that, plus blah, blah, blah. I'm surprised there's not a Jordan+ out there. No, there's not, because Jordan is too well-managed a brand. [chuckles]

Ben Gilbert 2:52:52 I actually did not know that. That's funny.

David Rosenthal 2:52:54 That was the origin of plus.

Ben Gilbert 2:52:56 It was interesting, 'cause it was this little, like, thing that you would put in the insole of certain shoes, and it would measure your stride length and your... You know, all the metrics about running, and it would report it to your iPod, 'cause it had a little, like, thirty-pin connector thing you could put into your iPod. It was the most clunky, kludgy thing ever, but as that evolved into the FuelBand, and then as the FuelBand evolved into apps on your iPhone, Nike started really building a way to have a relationship with their customers directly, and not just through their products, but with this sort of suite of services. And 2006, and