Is Kevin Durant Worth $325 Million to Nike?
The endorsement of professional athletes by sporting goods brands is a classic case of the rich helping the rich get richer. The benefit for the athlete is obvious, but why do sporting goods manufacturers like Nike, Adidas, and Under Armour, spend so much money advertising and endorsing athletes? In business you have to spend money to make money, but can these large companies justify their spending? Currently, there is a dearth of research related to how sporting goods brands evaluate the success of their investments. This article explores the rationales these brands have for spending exorbitant sums of money to endorse pro athletes.
History of Celebrity/Athlete Endorsement
Celebrity endorsements can be traced back as far as the 1800’s, when Queen Victoria’s laundress was used to endorse Glenfield Starch, and Mark Twain was used to sell flour and cigars. However, it was the 1980’s where the trend of celebrity endorsements began to explode. Michael Jackson signed a $50 million deal with Pepsi, Bill Cosby earned $1.5 million for deals with Coca-Cola and Jello, and James Garner received $3 million for promoting Polaroid Camera. The rise of celebrity endorsements in the 1980’s led to the athlete mega-endorsement boom of the mid-1980’s and 1990’s. Nike signed its first endorsement deal with an athlete in 1972 (Romanian tennis player Ilie Natase), but the sizes of the contracts were kept quite low until the following decade.
In 1984, arguably the most important endorsement deal of all time was signed by Michael Jordan during his rookie season in the NBA. He signed a five-year endorsement deal with Nike for $500,000 annually plus royalties. It was an unprecedented amount for a rookie shoe deal at the time, but it helped Nike cement itself as the number one athletic shoe manufacturer in the world. Even a decade after leaving the NBA, the Jordan brand of products brings in over $2 billion dollars of revenue for Nike each year (Arshad, 2014). Other sporting good manufacturers like Reebok, Adidas, and Puma, have tried to find their Jordan, but to this day no one has come close.
This article looks at two cases of Nike athletes to better understand how this company rationalizes their astronomical endorsement deals. The athletes were chosen, because they each illustrate a distinctive Nike strategy. The first athlete is Tiger Woods, who represents a positive economic return. The second athlete is Kevin Durant, who represents a competitive advantage through blocking of a competitor.
Tiger Woods, Nike, and Economic Impact
Tiger Woods’ relationship with Nike began at the age of 19 when he was signed to $40 million, five-year endorsement contract. Tiger Woods and Nike Golf quickly became synonymous. Following the completion of his first contract, Nike resigned Woods to two successive five-year contracts in 2000, this time at the cost of $91 million each. Tiger Woods’ deals with Nike included his appearance in advertisements, his use of Nike equipment, as well as the creation of a Tiger Woods line of Nike Golf products (Chung et al., 2013). However, it was not until the start of his second contract in 2000, that Woods began to use and promote Nike golf balls (Fonesca, 2014).
Tiger Woods obviously had an extremely large effect on Nike Golf, but could his $181 million contract be considered profitable? In their 2013 paper, Chung, Derdenger, and Srinivasan, attempted to answer that exact question. By comparing the sales of Nike golf balls (while controlling for a number of other variables) in the United States before and after Woods began using their product, the authors concluded that the Nike golf ball division reaped an additional profit of $103 million between 2000-2010 (Chung et al., 2013). This accounts for roughly 57% of Nike’s endorsement investment in Woods. If you were to take into account the worldwide sales of Tiger Wood’s additional branded Nike products, it is easy to assume that the contract was justified. The researchers found that this increase in sales is caused by two variables. Firstly, existing consumers will switch to a more effectively endorsed brand. Secondly, additional sales will come from new consumers who would have otherwise not bought the product if it weren’t for the endorsement.
Kevin Durant, Nike, and Competitive Advantage
This past summer Kevin Durant’s previous seven-year, $60 million endorsement deal with Nike was expired. This meant that he could choose to either re-sign with Nike, or choose to sign with another brand for more money. Durant was coming off a season in which he was named MVP and was the league’s scoring champion. Under Armour saw this as a great opportunity to obtain a superstar brand ambassador which could help them chip away at Nike’s estimated 96% control of the basketball footwear market; by comparison Under Armour currently maintains a 1% stake in the market (Riccobono, 2014). To convince Durant to make the switch, it is believed that they offered between $265 million and $285 million over 10 years, along with stock options (Rovell, 2014). Nike, in an attempt to block Under Armour in the basketball market decided to match the offer (Riccobono, 2014). Nike was not going to lose the second-best player in the NBA to a quickly growing sporting goods competitor (Davidson, 2014). This deal is still in its infancy, and is therefore difficult to assess. If over the next ten years Nike’s share of the basketball market stays within the 90% range, it will be easy to argue that Durant was well worth the money.
The key question from a firm’s point of view is whether or not athlete endorsements generate sufficient value to offset their considerable cost. However, after looking through the research, it seems as though sporting goods brands are not concerned with evaluating the direct profitability of these deals. Most of what the brands gain is intangible and cannot be explicitly measured. Brands are first and foremost trying to increase their brand image by associating with these celebrity athletes, and are attempting to use them to gain a competitive advantage. If brands can directly gain a return on investment through sales, as Nike did with Tiger Woods, it is an added bonus. The trend of multi-million dollar endorsement deals is showing no signs of slowing, which means that a model for evaluation of endorsement will be of value to all major sporting goods companies in the future.
Arshad, S. (2014). Nike’s top 10 highest paid endorsement deals to sport players. Retrieved on November 16, 2014, from http://www.tsmplug.com/richlist/nike-highest-paid-endorsement-deals/
Chung, K.Y., Derdenger, T.P., & Srinivasan, K. (2013). Economic value of celebrity endorsements: Tiger Woods impact on sales of Nike golf balls. Management Science, 32(2), 271-293.
Davidson, J. (2014). 3 career lessons from Kevin Durant’s blockbuster Nike deal. Retrieved November 15, 2014, from http://time.com/money/3256676/kevin-durant-nike-under-armour/
Fonesca, A. (2014). Tiger Woods and Nike: A look back. Retrieved November 15, 2014, from http://www.back9network.com/article/tiger-woods-and-nike-a-look-back/
Riccobono, A. (2014). Kevin Durant shoe deal: Why did Nike match Under Armour’s contract offer? Retrieved November 15, 2014, from http://www.ibtimes.com/kevin-durant-shoe-deal-why-did-nike-match-under-armours-contract-offer-1677474
Rovell, D. (2014). Ball in Nike’s court for Kevin Durant. Retrieved November 16, 2014, from http://espn.go.com/nba/story/_/id/11384303/kevin-durant-offered-massive-deal-armour-nike-right-match