Knight Ridder/Tribune Business News
May 29--The best basketball player and sneaker salesman on the planet stands in the corner of the Rose Garden arena locker room, patiently answering questions long after his Chicago Bulls teammates have left for the hotel.
The subject is the increasing fan resentment toward NBA athletes. 'Sure, it's a concern,' Michael Jordan says. 'It's the drugs, it's the high ticket prices, it's a lot of things.'
A man enters the room, appearing almost frail next to Jordan's chiseled frame. It is Nike Inc. Chairman Phil Knight, come to pay tribute to his company's most potent marketing weapon.
They embrace -- two self-made titans, whose long, symbiotic relationship built one of the best-known brands in the world and helped transform sports.
Knight's vision for selling shoes helped make Jordan the world's most recognized athlete. Jordan's combination of talent and personality lent Knight's company a patina of athletic greatness no competitor could approach.
Despite their warm smiles and obvious affection, the locker room meeting came at an uncertain time, with Jordan publicly contemplating retirement.
'I just hope this is not his last time in this locker room,' Knight said after the Bulls beat the Trail Blazers in late January.
If Jordan hangs up his shoes when the NBA playoffs end next month, Nike will have one more reason to examine the way it uses athletes to sell shoes.
Professional athletes, the cornerstone of Nike's marketing, have seen their image tarnished by a long series of scrapes with the law. Already, Nike's business has stalled, forcing it to lay off 1,300 employees in March -- the most in company history. And some athletic-shoe companies have cut the amount of money they spend on endorsements.
Nike and its competitors face a decision as crucial as any a business can make: Should they alter a strategy that has been wildly successful to adapt to changing times and a changing audience?
'The industry is in a quandary,' said Jim Gorman, chief executive officer at Puma America in Boston. 'We're struggling with this huge endorsement overload. Today, there's less of a payback. People are saying, 'Hey, it's just not penciling out.' '
Reebok International Ltd. has taken the lead in slashing endorsement spending, reducing its number of NBA players under contract from 70 to 20.
Nike executives say their endorsement spending will continue at or near current levels, despite a 69 percent drop in profits in the company's most recent quarter. But the recent departure of four key sports marketing executives and Nike's quiet decision to drop some athletes on its endorsement roster speak to the tension at Nike's sleek world headquarters in Beaverton.
Gorman, a respected industry veteran who's worked at both Nike and Adidas, said if anyone can find a new direction for the business, it's Phil Knight. 'Nike is always the leader in reinventing itself and reinventing the industry,' he said.
Competitors, suppliers, athletes and just about anyone who makes money from the fusion of sports and commerce wait anxiously to see what Nike's next move will be.
THE BEGINNING OF AN ERA: Few would have envisioned Nike in this position in 1984.
When Jordan first took to the court in fire-engine red Nike high-tops, the company was far from the omnipresent force that it is today. It was battling neck-and-neck for market share against Reebok and a handful of other companies.
It was a big gamble for the company when it agreed to the then-unusual demands from Jordan's powerful agent, David Falk. In exchange for endorsing Nike shoes, Jordan wanted a guaranteed base plus a royalty of 25 cents for every pair of Jordan shoes and a smaller amount for every pair of basketball shoes Nike sold.
The royalty agreement made Jordan the highest paid athlete on Nike's endorsement roster. But the sales volume was so large, 'no one had any complaints,' recalled a former Nike employee.
Nike's stunning success with Jordan set off a torrent of endorsement spending by athletic-shoe makers, all the companies trying to replicate the magic. No one knows exactly how much Nike and its competitors have paid athletes, coaches and leagues since then, but it easily tops $1 billion.
Nike alone paid out between $300 and $400 million last year for sports marketing, according to several former employees.
The flow of money has altered the balance of power in sports.
Sneaker money helped boost athletes' finances and allowed a generation of minor sports competitors to stick with their training. It helped college administrators balance soaring athletic department budgets. The sneaker money also gave players and coaches a measure of independence from sports' traditional authority figures and, in some cases, influenced where they competed. Today, athletes, schools, leagues and even entire sports look to the shoe companies' promotional prowess to raise their profile.
Thousands of athletes across the world are under contract to wear one brand of athletic shoe or another. Nike alone outfits more than 200 players in the NBA, eight teams in the NFL, more than half of the Major League Soccer teams, approximately 80 Division I college athletic programs, and even elite high school and youth sports teams.
Nike started refining its endorsement strategy before Jordan even became a starter on his high school team. Expanding on a model first used by Adidas founder Adi Dassler decades earlier, Nike integrated its elite athletes into entertaining ad campaigns. Knight also upped the ante, offering more and richer endorsement contracts.
THE ROLE OF COACHES: Nike swept into the college basketball scene in 1978, six years before Jordan left college for the Bulls.
University of Nevada at Las Vegas coach Jerry Tarkanian, who the year before had taken a little-known team to the semifinals of the NCAA basketball tournament, was getting a two-for-one deal from Converse -- buy one pair of shoes, get another pair free. Tarkanian leapt at Nike's offer of free shoes and warmups for the entire team and staff plus $2,500 in cash.
Nike's timing was perfect. College basketball -- and particularly the season-ending NCAA championship tournament -- was about to explode in popularity. Nike's national prominence surged as Nike coaches went on to success, such as Tarkanian, who led his Runnin' Rebels to the national championship in 1990.
By the early 1990s, footwear companies routinely were paying basketball coaches $100,000 a year for the right to shod their teams. Nike paid Duke University's Mike Krzyzewski a $1 million stock bonus in 1993.
Shoe money became an integral part of coaches' compensation, complicating their relationship with their bosses in university athletic departments. Take the case of Rick Majerus, like Tarkanian a personable coach who took an unlikely team to the Final Four of the NCAA tournament.
Arizona State University's quest to hire Majerus away from the University of Utah was undone in part by conflicting shoe company allegiances. Majerus is under contract with Reebok. ASU is a Nike school.
Majerus claimed money was not a factor in his decision to stay at Utah. But ASU officials say they were hampered by their inability to match Majerus' $500,000 a year from Reebok.
Said Betsy Mosher, ASU athletic department senior associate: 'Who has more control of the coach, the institution or the shoe companies? That's a huge issue.'
THE INFLUENCE ON MINOR SPORTS: In some sports, the endorsement contracts significantly changed the competitive landscape.
Shoe-company money allowed thousands of talented athletes in minor sports to stick with their sport and train full time. 'It's created a new class of professional athlete,' said Mark Wetmore, an agent with Global Athletics & Marketing in Boston.
This is particularly true in Olympic sports such as track and field.
Until the 1980s, '22-year-old athletes who hadn't peaked were quitting their sports to get real jobs,' said Brad Hunt, a prominent agent based in Boulder, Colo. 'Now, you have 35-year-old men lining up for the start of the Olympic 100-meter dash.'
Track and field athletes have received more than their share of Nike dollars, probably because Knight, Nike President Tom Clarke and a host of other senior managers were collegiate runners. In the 1980s, the company formed Athletics West, a Nike-financed club based in Eugene that assisted more than 80 top U.S. athletes with coaching, health care, even employment assistance and education stipends.
'What Nike did with Athletics West was noble,' said Dick Brown, a Eugene-based coach who once led Athletics West.
The company's might has grown to the point that it can help determine which sports thrive and which sports struggle.
There was so little interest in the NBA in the late 1970s, the league couldn't persuade a single television network to carry its championship series live. Today, every playoff game is on live TV, with the championship series played in prime time on NBC.
Rick Welts, NBA executive vice president and marketing chief, said no single factor has contributed more to the league's growth than Nike and other corporations promoting individual NBA players. 'Before Michael and Nike, our other sponsors really didn't see our athletes as endorsers,' Welts said.
Once Nike illustrated the possibilities, McDonald's, Pepsi and a host of other consumer products companies jumped on the NBA bandwagon. Today, every time Kobe Bryant appears in a Sprite commercial or David Robinson does a spot for Oreo cookies, Welts smiles as his league gets a free plug.
THE RUSH TO SIGN EVERYONE: It wasn't enough for Nike to sign a single top athlete in each sport. The company went after volume, a strategy that overwhelmed competitors and launched Nike's rise to a household name.
Nike's tennis strategy is a classic case of the company's strength-in-numbers approach. Nike has outfitted Pete Sampras, the long-time dominant men's player, since 1993. In subsequent years, Nike also signed handsome contracts with third-ranked Marcelo Rios, fifth-ranked Greg Rusedski, seventh-ranked Jonahs Bjorkman, ninth-ranked Karol Kucera and 10th-ranked Richard Krajicek. It also has Andre Agassi and three other players in the top 20 of tennis' world rankings.
The volume approach allowed Nike to hedge its bets. The company signed nine of the top 10 NFL draft picks in 1995. None have been overwhelming successes on the field or in the marketing sweepstakes. But Nike had the resources to also sign a nearly overlooked second-round pick, Kordell Stewart, the young Pittsburg Steelers quarterback who arguably has emerged as the most potent marketer out of that year's draft.
None of Nike's competitors could match its pocketbook.
Nike and Reebok battled fiercely for supremacy through the late 1980s. The race was still neck-and-neck in 1990 with Nike's sales at $2.23 billion to Reebok's $2.15 billion. But by 1995, Nike's slight edge had become a formidable lead. Nike reached $4.7 billion in its 1995 fiscal year, Reebok $3.4 billion.
The spending spree was as beneficial to the athletes as it was to Nike.
Nike positioned itself as the 'athletes' company,' eschewing traditional official event sponsorships in favor of steering money directly to the participants. Nike prides itself on never having been an official Olympic sponsor, unlike Reebok, which paid $40 million to be a top-tier sponsor of the 1996 Summer Games in Atlanta.
'Nike promotional contracts have been the main source of income for hundreds, perhaps thousands, of athletes for years, in some cases decades,' Knight wrote in his letter to shareholders in the company's 1996 annual report.
THE POWER OF A KINGMAKER: At a jubilant news conference in July 1994, U.S. Soccer Federation officials boasted that after years of struggle, their sport finally had arrived in the United States. Their proof: Nike had agreed to become U.S. Soccer's chief apparel sponsor, for a heady sum said to be between $5 million and $7.5 million a year.
'Not only is this the largest sponsorship package in U.S. soccer history, it is one of the largest sponsorship packages ever procured by any national (sports) governing body,' said Alan Rothenberg, president of the federation.
Among other things, the federation is using the money to finance Project 40, an ambitious developmental program for the country's best junior players aimed at making the U.S. competitive with the world's best.
The news conference marked the beginning of a new, more aggressive era in Nike's endorsement history. Already dominant in its core categories of basketball, training and running, Nike pointed its unrivaled financial firepower at the rest of the sports world.
The company found a more-than-willing partner in U.S. Soccer. The federation extended its sponsorship with Nike last fall for a reported $120 million over 10 years. Then in April, the federation put nearly all marketing and promotional responsibilities in the hands of Nike and International Management Group, which will sell other sponsorships, television packages and licensing rights.
Nike and IMG will take a cut of the proceeds.
THE SPOILS OF VICTORY: Nike's free-spending ways blew away smaller rivals. The company's bid for U.S. Soccer was three times what Adidas had been paying.
'It was like Ronald Reagan and Star Wars,' Puma's Gorman said. 'It was all about who could outspend the other. Strategically, it was brilliant. No one could match Nike.'
Competitors began to take for granted the formidable Nike counteroffer. 'Over the last three years, if I talked to anyone, they'd call back with a competing bid (from Nike) one-and-a-half to two times higher,' said Robert Erb, Adidas' director of sports marketing.
Nike's 'Star Wars' strategy pushed the company to such a dominant position that it seemed invulnerable. In its 1997 fiscal year, Nike sales topped $9.1 billion; Reebok's reached just $3.68 billion.
The deals kept coming at a feverish pitch, an increasing number of them designed to increase Nike's appeal to international audiences. Nike signed the Chinese national basketball team, cricket players in India and Pakistan, and the national rugby teams of England and South Africa.
The buildup raised Nike's profile across the globe. But it also drew the ire and envy of the sports establishment.
Administrators at FIFA, the international soccer federation, gnash their teeth about Nike's brash entry into the sport and particularly its contract with Brazil's national soccer federation.
The pact, dubbed by one Nike insider 'the shot heard round the world,' gives the company the right to stage 50 Brazil exhibition games over 10 years, a shift of power from federation to sponsor that shocked soccer traditionalists.
The European soccer establishment extracted a bit of revenge in December when it forced Brazil to play without its best players in a Nike-staged exhibition game against South Africa.
With FIFA's backing, piqued executives of the Italian and Spanish soccer clubs that employ Ronaldo (who uses only one name) and several other marquee Brazilians forbid the players from traveling to Johannesburg.
The Brazilian team was forced to hurriedly fly in replacement players.
THE CASE OF KORLEONE YOUNG: Nike and Adidas also have come under fire for pushing their endorsement battle to high school and even junior high school kids. The sneaker companies today outfit dozens, perhaps hundreds, of elite high school and Amateur Athletic Union youth sports programs.
Korleone Young, one of the most talented high school basketball players in the nation, announced to the media late last summer that he was transferring from his hometown Wichita East High School in Wichita, Kan., to Hargrave Military Academy in Chatham, Va. The 6-foot-8, rail-thin youngster said he was motivated partly by loyalty to Nike.
Nike had been outfitting The Kansas City Rebels, an AAU team Young played for. Young's AAU coach, Myron Piggie, calls himself a Nike consultant. Shortly before Young announced his transfer, Nike agreed to provide Hargrave with free gear.
The escalation of the endorsement wars to the schoolkid level strikes even some industry insiders as repugnant.
'When you have companies going after junior high kids, I don't think that's good for the kids,' said Kevin Poston, a prominent agent who counts Anfernee Hardaway, one of Nike's most prominent endorsers, among his clients.
'You have people, these street hustlers, pushing money into the hands of coaches and high school programs,' said George Glymph, an assistant coach with the NBA Portland Trail Blazers and a former high school and AAU coach in Columbia, S.C.
But two words explain why neither Nike nor Adidas will turn away from youth basketball: Kobe Bryant.
Bryant is one of the new breed of hoop stars who opted to skip college ball in favor of the NBA. The young Lakers star is lauded as the one NBA player who might have the ability and charisma to one day rival Jordan in marketing clout.
Adidas latched onto Bryant when he was in high school.
Like Bryant, Korleone Young will forgo college in favor of the NBA. Few agents expect a bidding war to break out. Young's loyalties are well known.
'Korleone's a Nike guy,' said agent Aaron Goodwin.
(c) 1998, The Oregonian, Portland, Ore. Distributed by Knight Ridder/Tribune Business News.
