- Darren Rovell, ESPN.com Sports Business reporter
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As day turned to night, the pressure was mounting. Nike and Reebok officials were battling back and forth to land soon-to-be No. 1 draft pick LeBron James, and the numbers on the table were approaching $100 million. By the time morning had come, news circulated around the business world that Nike agreed to a seven-year, $90 million deal.
And just as Nike official did when they signed a young Tiger Woods to a five-year, $40 million deal in 1996, many analysts criticized the spending spree. Almost nine months later -- with James averaging 20.4 points and almost six assists per game and his Cavaliers trailing the Boston Celtics by only 2½ games for the final playoff spot in the Eastern Conference -- the cynics have been momentarily quieted.
"There is a very clear feeling out there that Nike has done it again," said Ralph Greene, the company's global director of basketball. "As if we had once again found the right athlete and done the right things to make (the cost of doing business) worth it."
The release of James's shoe was the company's most successful shoe launch in two years, surpassing that of the Jordan XVII and XVIII. At Finish Line, which has 541 stores across the country, 75 percent of their total nationwide allotment of James' Air Zoom Generations were sold out in the first week of sales in late December, according to company spokesperson Elise Hasbrook.
The initial release of James' shoe, in the black and white, has sold more than 93,000 pairs to date, according to Neil Schwartz, president of SportsScanINFO, a sports retail market tracking firm. That's almost double the amount of shoes sold by Orlando Magic forward Tracy McGrady (Adidas' T-Mac III's have sold a disappointing 49,000 pairs, according to Schwartz) and more than twice as much as Philadelphia 76ers guard Allen Iverson's 2003-2004 model (Reebok's Answer 7's have sold about 41,000 pairs according to Schwartz). Both McGrady and Iverson have deals with their respective companies that extend to the end of their playing careers.
James is somehow coming close to matching the tremendous hype that accompanied him into the league and, for the present, that means good business for Nike. As of close on Wednesday, Nike stock was valued at $72.36 a share, less than $4 off the company's all-time high.
"Obviously he's an on-the-court star and media star since we can't escape him," said David Bond, director of global basketball for adidas and a former Nike executive. "But it's way to early to tell how this will translate into sales of product. For LeBron to be worth $10 million to $15 million a year, he's going to have to annually generate at least $200 million for them."
The early returns are impressive considering that sources tell ESPN.com that Nike only made a worldwide total of 140,000 pairs of the Air Zoom's in the first color. Nike officials never disclose output numbers, aside from limited edition releases, so as not to reveal the method to their madness or devalue the customer's esteem over the uniqueness of their purchase.
"We've sold a lot of shoes," said Greene, citing unprecedented sales numbers in kid's sizes. "I don't know if we could have anticipated any better."
But the true test is ahead to see if James will be able to earn back his payday for Nike. At $110 a pair -- $40 to $90 less than the markup for recent Jordan releases -- total gross revenue from the James' shoe sales has surpassed $10 million. But since Nike sells the shoes to the shoe stores at about half of the retail price, the shoe giant's cut is sliced in half. Following industry analyst estimates that quote large athletic shoe companies making between $7 and $10 a pair, Nike hasn't even earned $1 million in James' shoe sales yet.
That's with Nike doling out more than $20 million to James this season alone. The company agreed to pay him more than $11 million for each year of the seven-year deal, combined with the $10 million signing bonus he earned when he signed in mid-May, and possible additional royalties as a reward for surpassing sales targets.
"It's simply about selling volume over time," said Reebok chairman Paul Fireman. "It's very tough to assess if it will work on a shoe-by-shoe basis. As of now, his shoe isn't exactly setting the world on fire. But along with the shoes come a lot of intangibles that are very hard to factor into the equation."
Nike's initial start-up cost on James' products in Season 1 could rise to more than $40 million when considering advertising and production costs. Greene would not specifically quote how much Nike was spending on advertising, but he did note that spending was commensurate with the budget of other major campaigns the company has unveiled in recent years.
One inside source says those campaigns have typically cost between $15 million and $20 million. Nike has thus far unveiled two commercials -- one that makes fun of the hype associated with James, the other making light of his special basketball powers as "The Chosen One." One more commercial featuring James could appear by season's end, Greene said.
James' personality is underestimated in the evaluation of his marketing potential. Aside from giving good interviews at the ripe age of 19, James is also one of the most savvy athletes for commercials.
"He has that magic, and it's on a level that I've seen with only two others -- Gary Payton and Charles Barkley," Greene said. "He's so gifted that he can probably make the transition to actor one day."
Other advertising -- which appeared in major sports and lifestyle magazines -- includes an ad with James sitting on a throne in royal garb, surrounding by lions. The ad is meant to play off his nickname, "King James."
Despite the price, Nike officials say there's a feeling of overwhelming optimism about James on the company's main campus in Beaverton, Ore.
"When we decided to sign him, there was definitely bean counting," Greene said. "But it wasn't like there were 10 accountants sitting around the table crunching numbers. That's not the way Nike works. We have very distinct ideas of our market size and of growth forecasts and (Nike chairman and CEO) Phil (Knight) and I internalized these factors, came up with a very clear out of bounds with what we couldn't pay and we allowed ourselves to go with our gut reaction to some extent."
"People are being short-sighted if they think that all we are trying to do with this relationship is sell shoes," said James' agent, Aaron Goodwin. "This isn't just about shoes. It's about selling shoes, apparel, equipment and selling Nike as a brand. Nike's not looking for an immediate payday; they are looking for their return over the course of the entire relationship."
This month, Nike is rolling out two more models of Air Zoom Generations. One in red and white will have an approximate run of about 50,000 pairs, and a wheat-colored shoe -- expected to turn a lot of heads when James wears it at Friday's NBA rookie challenge -- will be limited to slightly more than 20,000 pairs, industry sources said. Another version of the Air Zoom Generation, in all black, will launch at the end of the regular season.
The original calculations for making the James equation work also included projections for James' line of apparel and lifestyle items. "King James" jersey shirts rolled out in December, as did some hats, headbands, wristbands, T-shirts and a black and red warm-up featuring James' Nike logo. More apparel will roll out during the second half of the season.
"When this first deal is done, everyone who was in the race for LeBron and didn't win is going to wish they offered twice as much," said Sonny Vaccaro, Reebok's director of global basketball who led a 2 ½-year long adidas campaign to win over James but came up short.
But there are still questionable areas relating to LeBron's selling power.
Perhaps the greatest uncertainty revolves around Nike's ability to sell James'-branded lifestyle products that aren't associated with the basketball court. Nike has previously done this with its other icons, including Michael Jordan and Tiger Woods. James' watch, limited to 2,323 pieces, sells for $129 and hits stores on Saturday. And sunglasses and boots could be on the way, depending on the internal reaction in Nike's offices combined with feedback from James himself.
"The off-the-court stuff you have to pace a little slower," Greene said. "LeBron's good for us in that he is one of many in our core audience -- teen males who love basketball. We propose some things and try to gauge the business opportunity. Do we know that people will buy LeBron items in this category? We hope they will, but we're not completely sure. That's why you haven't seen much on this front as of yet."
There's another intangible around Nike that is known as the "Brand Halo Effect." The buzzword is used when discussing how some people support a company because their favorite player has an endorsement deal with that company.
"I couldn't tell you how many women's cross trainers LeBron has helped us sell since he's been at Nike," Greene said. "We don't even make LeBron James' women shoes, but some women will buy our shoes in part because we're associated with him."
Another intangible, Greene said, is the renewed spirit on the Nike campus, as James' success has helped dull the pain of Michael Jordan retiring.
The impact of this month's Air Zoom releases could be somewhat dulled by the fact that James' only All-Star appearance is in the rookie challenge. He was fourth in fan voting among guards in the Eastern Conference and didn't get voted in by the coaches. James elected not to participate in the Slam Dunk Contest, which ruffled some feathers with league officials and had some wondering what James' endorsers, especially Nike, thought of the decision.
"We understand his decision," Greene said. "If he enters the contest, he's being labeled as a dunker and he's not really that kind of dunker."
Greene contends that if James did enter the contest and lost, the company's marketing of him would not take a hit.
"He cooperates with some things we want to do, but we don't control him," Greene said. "And we don't conspire with the NBA, though sometimes I wish we could."
James' sales might stay strong, though, with continued good play. Nike also doesn't have any other basketball endorser, other than Jordan's brand, competing for market share. Nike signed Denver Nuggets rookie forward Carmelo Anthony to a six-year deal worth about $18 million, but Anthony's Jordan line shoe doesn't come out until next season.
Plans for the signature shoe of Los Angeles Lakers guard Kobe Bryant, who signed a five-year deal worth $40 million in June, have been shelved due to his highly publicized sexual assault case in Colorado.
"We are still supporting him and waiting to see what happens when (the trial) is over," Greene said. "But plans for him are in cryonics. They are deeply frozen. Many people say, 'No matter what happens, he is still a great basketball player and will still have plenty of appeal,' but we're going to have to make a final assessment when the time comes about his ability to endorse our products."
Although having an endorser on a winning team is usually cited as a key factor for any sponsor, Greene says the Cavaliers' immediate success isn't as important to Nike's immediate gains with LeBron as some marketers have projected. May and June are typically down times in the shoe buying cycle, Greene said.
Some of Greene's competitors beg to differ.
"Winning is very critical," Bond said. "The playoffs is the peak time of the year when everyone is watching basketball. Without getting into the playoffs and winning the championships the way he and the Bulls did, Michael Jordan would have been Dominique Wilkins."
Darren Rovell, who covers sports business for ESPN.com, can be reached at firstname.lastname@example.org.
34mEthan Sherwood Strauss
1dMatt Walks, ESPN.com