The Economics of the Basketball Sneaker Industry

  • $5b in sales this past year. 60% of that (3b) is from Jordan. 35.5% (~1.8b) is from Nike. Adidas/Reebok have a net 3.5% share (125m) and Under Armour has the last 1% (50m). Which players have the best deals and what chance do Jordan/Nike competitors have in at least bridging the gap in market share?

    Let's start with today's players.

    Durant - in many respects he has the best shoe deal. He did not sell his soul to Nike, just 10 years. If he stays healthy, Nike will give him 30m annually until 2025. That's more per year than anybody in the NBA...including LeBron and Steph. So he will have banked 300m from this ten year deal which ends when he's 36. The problem? When his contract ends he will be in the twilight of his career. It would be foolish to expect Nike to sell KD sneakers when he's retired, he's not even number one in sales today. But considering time value of money and business acumen, this has the potential to be better than any lifetime deal.

    Lebron - Nike's first and only lifetime deal. LeBron is 31. Nike says it's worth 500m. Maverick Carter claims it's worth 1b. The real number is irrelevant. LeBrons are not the most popular shoe in the NBA...Currys are. So if people actually care about LeBron's shoes after he's retired (highly unlikely) and assuming he lives for another 50 years, his deal is worth between 10 and 20m annually. But if his sales drop after he retires (which you would expect for anyone in the world not named MJ), Nike can cut him. This is what happens when you have your best friend from childhood running your enterprise. The lifetime deal places a limit on how much he can make.

    Curry - where do I begin. This is the most fascinating of all deals. He is probably the second most transcendent player since MJ. #1 is Kobe. Can Steph eclipse Kobe? If he can stay healthy, and have at least one hand full of rings, the answer is yes. The pros: no lifetime deal, just 10 years. And his compensation isn't salary, but equity ownership. Nike has never done this. UA has a market cap of ~16b. Curry, at best, was given a 2% stake. Realistically, it is probably closer to 1% and probably even less than that. But this is Steph Curry, so let's give him the benefit of the doubt and say he got 2%. That translates into 320m of equity, most of which probably has a lockup period until his contract expires in 2024. If UA stock triples by the end of his contract, his earnings would approach 1b. It would take Curry just 8 years to earn as much as LeBron will in the next 50 years (assuming LeBron stays relevant after he retires). Here's the problem. UA split 2:1 in April, and since class A shareholders were given class C shares, any existing shareholder just lost half of his/her voting rights, which is a huge loss for shareholders. Who wants class C shares when all the potential is in class A? UA did this for two ensure control remains with the founders, and to ensure whatever future profits come about stays primarily within the company, at the expense of public shareholders receiving a much smaller allocation. Problem 2: UA's 2015 revenue was 4b...but only 2% of this came from Curry's shoes. And outside of Jordan he has the best-selling sneakers on the planet. They are an apparel company, as of today sneakers represent a fraction of their business. Problem 3: Curry-mania has wreaked havoc on UA's future. Their debt-to-equity is .85, so any concern about the company going underwater cannot be dismissed. Their PE ratio is over 70. You have to be pretty bold if you're willing to pay $70 for 1$ of earnings. For UA to grow into this valuation not only does Curry have to stay healthy and become even better than he is now, management somehow has to buy back the class C shares while fighting off bankruptcy. So to summarize, Steph's deal is a calculated risk. In a black swan scenario, he earns nothing over 10 years. In the fantasy world, he can make almost 1b in 10 years. We can guess all we want, but nobody will have a clue until 2024.

    Now to MJ. He's 53, generations removed from his playing days. Curry, even if you believe this past year wasn't leptokurtic, only generated 50m in sales, which by itself is misleading, since he by far has the most popular shoes of anyone playing today. Jordan right now generates 3b a year and that is projected to grow to over 5b a year by 2020. He makes more money in one year from his sneakers (~120m) than he did from his combined salary from the NBA over his entire career (~94m). One would think Brand Jordan would be dead by now, yet it's bigger than ever and still growing over 20% a year. By 2020 at age 56 he'll be taking home 250m a year, just from sneakers. That excludes every other endorsement he has, the Hornets, his investments and all the other businesses he owns. The unique thing about MJ is his legend gets bigger and bigger as the years pass by. If that holds true over the next two decades, Air Jordans are going to bring him another 5b or 6b easily. Nike cannot cap how much more money he can make from shoes. This is because Jordan technically does not even have a contract, let alone a lifetime deal. He has a "de facto" agreement with Nike which essentially gives him all the power. He could walk away right now and relaunch the brand on his own and Nike would lose tens of billions of dollars while Jordan's profits could be 5x bigger than they are already. LeBron on the other hand is locked in for life (unless they drop him) and he'll be lucky if he gets more than 600m from Nike before he dies.

    Conclusion: Durant's deal has the potential to be the best between him LeBron and Curry since it's all salary and takes only 10 years to accumulate. If Durant is a nobody after he retires and doesn't properly reinvest his money, LeBron will come out of it better since he should get paid until he dies. If you believe what we saw from Curry this year is sustainable, not just for a few months but for the rest of his career, and you have faith in UA long term despite it's poor financial health, then Curry's deal blows away Durant and LeBron combined. But even if everything fell in Curry's favor, it's literally impossible to ever measure up to what Jordan has achieved. Still, give him credit for believing in himself and taking the risk vs LeBron taking the easy way out, just like he hopped around the league searching for the easiest path to championships.

  • @BenoitMandelbrot very very insightful post. When jordan was playing that was a different time of the game. What also contributed to his success was the movie classic movie Space Jam.

  • Solid thoughts man.

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