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Good Thursday Morning. Here’s the rundown of this week’s Sports Business Playbook:

• This week’s deep dive focuses on NBA shoe contracts and the deal that started them all: Nike’s industry-breaking agreement with Michael Jordan in 1984.

• New this week: Want to show off your sports knowledge in a public setting but don’t have time to read the full analysis? Check out the “Impress Your Friends at Cocktail Party” section below the deep dive for a CliffsNotes of this week’s topic

• “Whoa of the Week”

• Reminders that sports are awesome

Hey team,

The girlfriend and I recently went to see the movie Air, which chronicles Nike’s successful longshot campaign to sign a shoe contract with an NBA rookie who would go on to become the greatest of all time: Michael Jordan.

Coupled with an 80’s classics-laden soundtrack and Ben Affleck’s awesomely terrible sartorial choices, the movie does an excellent job of portraying the uncertainties, anxieties, and gambles of a then-underdog Nike going all in to take on the goliaths of the space (adidas, Converse) and win Jordan’s favor.

It seems obvious now almost 40 years later given what Jordan did on the court, but at the time, betting an entire division of a public company on one player took some serious chutzpah and ended up becoming probably one of the best business deals of all time, regardless of industry.

Equally as important, though, the film also details how the agreement the two parties struck revolutionized modern sports culture:

• Launched Nike to its current place as tastemaker of basketball and lifestyle culture

• Created much of the “sneaker head” culture that is ubiquitous with today’s fashion

• Empowered athletes to take ownership positions in their endorsements and truly monetize their talent/likeness

It also created the industry standard for NBA shoe deals, which we’ll examine in more detail.

Sole Focus

Nike and its Jordan brand subsidiary dominate the current NBA shoe market, now holding over 75% market share. The rest is split between other smaller but established basketball brands like adidas and Under Armour and a few other players who are trying to gain a foothold in the market — Puma, New Balance, and other international brands.

The current NBA shoe deals they offer can be broken into three sponsorship tiers:

• Free stuff

• Monetary

• Signature shoe

Free Stuff

Over half of NBA players fall into this category — think of reserves and non-starting guys like Lakers guard (and noted Warriors killer) Lonnie Walker IV.

What do the players get: Players receive free shoes to wear in-game and an annual stipend (can be $25k or higher depending on the player) that they can use on the brand’s merchandise.

What does the brand get: The brand gets relatively low cost exposure with the player wearing their shoes and the beginning of a relationship that they can choose to expand if the player improves.

Monetary

The next level up is what’s known as a cash deal. This is for roughly 30% of the league, and it’s made up of B to B+ players who are good but not top-20 level or have not made it there yet — think Heat guard Tyler Herro or Timberwolves forward Karl-Anthony Towns.

What do the players get: Players are a “[insert brand here]-sponsored athlete” and receive anywhere between $200k to $3 million annually plus performance bonuses and marketing appearances. While there is not a specific shoe named for them and designed by them, the upper echelon of this group can create a unique spin on the specific shoe they wear in-game, including custom colorways and their personal logo if they have one.

What does the brand get: The brand gets deeper exposure via better players and often signs a group of rookies and young players in the hopes that one or two really explode and ascend to the top level, the signature shoe.

Signature Shoe

The original deal that was struck between Jordan and Nike. Signature deals are usually reserved for the 20 or so A-list players and are the most desired by both the player and the brand — we’re talking perennial all-stars like LeBron, Steph Curry, Kevin Durant, Jayson Tatum, and Luka Dončić.

What do the players get: As you can expect from the title, they get a shoe! The player will work with a brand to design and market their own exclusive shoe (and sometimes merchandise) to the public. The player will get $5-$15 million annually, usually around 5% royalty on all sales of their signature line, and the opportunity to partner with the brand on sponsored youth camps and other philanthropic causes.

In very rare instances where there’s a once-in-a-lifetime talent like Jordan, these signature players can also receive “lifetime contracts” where an entire lifestyle brand will be created around them and they’ll continue to be compensated to work with the brand well after they retire.

LeBron was the first active player to get one when he signed his lifetime extension with Nike a few years ago, and this year alone both Steph Curry (Under Armour) and Kevin Durant (Nike) have inked similar contracts.

What do the brands get: The brands are partnering with the best of the best in order to tap into both the on-court and streetwear cultures in order to drive new shoe sales. No different than what Nike did with Jordan in 1984, the hope is that consumers love the player and want to be associated with him by purchasing his merchandise.

There have been a couple of interesting developments in this tier as of late. First, Nike has now become the hunted. While it has not relinquished much of its 75+% market share, a number of brands (adidas, Puma, New Balance) are re-emphasizing basketball as a way to tap into the mainstream culture and are trying to follow the Nike 1984 playbook and pick a guy to build their brand around (Puma and LaMelo Ball; New Balance and Kawhi Leonard). The goal is to create something unique that catches lightning in a bottle and elevates the brand’s basketball division.

To further this point, prominent Asian brands like Li-Ning and Anta that are looking to establish a foothold in America but more importantly rev up their Asian market sales due to the NBA’s popularity there have paid a significant amount of money for stars like Jimmy Butler and Klay Thompson to join their brand. These players most likely would not receive a signature deal with the traditional American heavyweights, so this is an opportunity for them to get their signature shoe and be well-compensated through both a contract and royalties in a high-growth market.

Jordan brand did this to some extent as well with Japanese-born Rui Hachimura, who is a fine player on the court but is beloved in his homeland and accounted for 25% of all jersey sales in his rookie year. The expectation is that a signature shoe with Hachimura targeted at these Japanese consumers will be better than trying to bring a marquee US-born star overseas.

Lastly, as the WNBA continues to rise, its players are starting to get in on the action. With Sabrina Ionescu’s signature shoe drop this spring, the WNBA has three signature shoe deals right now with more expected to come as the league continues its ascent.

Laces Out?

In closing, there have been rumblings in the industry that there will be a consolidation of the cash and signature shoe deals in the future.

There are myriad reasons for this shift, but it ultimately comes down to the ROI for the shoe companies, particularly with the economic turmoil of the last few years and uncertainty about the future, and a resetting of expectations for why they do these deals.

The basketball performance shoe (actual on-court basketball shoes) market is about only 3% of the overall athletic shoe market, so continuing to invest in these deals may not make economic sense when you’re competing for a small slice of the overall pie and there are more attractive ROI drivers like fashion or influencer collaborations.

That being said, I’m not sure the shoe companies are ready to give up on this approach fully yet. Part of it is due to a prisoner’s dilemma where “if we don’t spend, someone else will,” and part of it is that these companies are still holding out hope for the next Jordan.

To this point, I’d argue that there will never be another messianic figure like Michael Jordan who captivated the broad consumer base and single handedly changed the industry.

It’s not because there may not be a player of his caliber to come along again — in fact, there’s one playing right now in LeBron (don’t @ me) — but the way we consume content and make purchasing decisions has shifted dramatically since Jordan. This incredible amount of choice has created fragmentation, and it’s hard to see how one figure can galvanize a culture like Jordan did.

So, what do I think the companies will do? My expectation is that there will be less speculative cash thrown around, and more players will start or be moved down to the lower tiers and they will need to prove they can earn that higher level of deal.

When a player does become one of the select few to get a signature shoe, the expectation is that they will not just be a great player, but they will have other key characteristics (i.e., big social media following, popularity abroad) that make them a market force. The companies will then channel this force into a larger brand that tries to tap into lifestyle, culture, and other areas of the business.

Are they going to become the next Jordan? Who knows. But the players and the companies will continue to strive for the potentially unreachable and try to embody something greater.

While the game and world have changed since then, the same mantra from 1984 holds true for this industry: “A shoe is just a shoe until someone steps into it.”

Impress Your Friends at a Cocktail Party

Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? This section is the CliffsNotes of this week’s topic

• Air = very good movie

• Nike-Jordan deal in 1984 revolutionized sports marketing and set up the current NBA shoe deal structure. It also catapulted Nike to market dominance, holding roughly 75% of the current NBA market share

• 3 tiers of shoe deals: free stuff from the brand (reserve players), paid to be a brand athlete (tier 2 stars — Anthony Davis), and signature shoes designed for players and they earn royalties (A-listers — LeBron, Steph). Certain players (Steph, KD, LeBron) have gotten lifetime contracts where they’ll work with the brand after they retire.

• New market entrants are starting to give signature shoe deals away in the hopes of taking market share both domestically and, sometimes more importantly, abroad

• It may be a challenge to replicate the success of Jordan, but shoe companies are expected to still follow the same model. The difference is that there will be less high end deals and the companies will double down on those that have the potential to be a force multiplier.

“Whoa” of the Week

Insane, mind-blowing things constantly happen in the sports business world. Here were my favorites of the past week.

1. F1’s boss spoke last week in Miami about the the growth of the sport and reaching new fans — thanks, Netflix!

2. The business impact of a generational talent entering the NHL

Weekly Reminder that Sports are Awesome

This newsletter is, of course, mostly centered on the business side of sports and the things that happen off the field. That being said, it’s important to remember why we fell in love with sports in the first place, though.

This section is meant to highlight the amazing things that happened in sports this week that serve as that reminder.

1. Say what you want about Draymond, but we can all appreciate his perspective on this

2. Lauren Holiday, the former US Women’s National Team star who overcame a brain tumor while pregnant with her daughter in 2016, was inducted into the US National Soccer Hall of Fame this past weekend. If you’re not familiar with her story, you can read more about it here.

3. Lastly, to my home state of South Carolina. The student who wears the University of South Carolina’s mascot suit (Cocky) is a secret until that student graduates, and they reveal themselves by wearing the bird feet during the graduation ceremony. Love this!

Thanks for reading! Let me know what feedback you have.

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Until next time, sports fans!

-Alex