Lebron’s Lifetime Warranty with Nike

Nike recently announced that they had inked a lifetime sponsorship deal with LeBron James that some estimate could be worth as much as $400-$500 million (how’s that for lifetime value).  With shoe sales of Nike’s Jordan brand exceeding $2.6 billion in 2014 alone (per Forbes), this might actually be a wise investment, especially if James lives up his billing as the next Michael Jordan, although Stephen Curry (an Under Armour-sponsored athlete) is waiting in the wings for that title now too.  Is this the new precedent for future sponsorships, or a unique one-time deal for a very special athlete?  Somewhat unfortunately (at least for those doing the sponsoring), I predict that it’s the former.  With increased competition in the athlete sponsorship arena, especially from Under Armour, brands will take on even greater risks with the athletes that they sponsor, while the athletes cash bigger and bigger checks.

A new precedent

Similar to the dynamics in professional sports contracts where new precedents are set every time an athlete signs “the biggest contract ever” (see David Price’s recent $31 million per year deal with the Red Sox, the most ever for a pitcher), athletes and agents will likely use James’ deal with Nike as the new baseline in order to get longer and more lucrative sponsorship contracts.  “Lifetime deal” will become more common vernacular for agents, and allow them more leverage when talking with current and potential sponsors.  The James deal, along with Price’s, not only creates new starting points, but also makes smaller, shorter term contracts look that much more insignificant – it’s all relative.  Product brands will have to continue to pony up more cash, and over more years, just to keep up.

Locking out competition…namely Under Armour

In my opinion, a significant driver of this new precedent has been the emergence of Under Armour in the sponsorship space.  With a powerful brand and a rapidly growing business (Under Armour now holds #2 spot in US sales of footwear and apparel behind Nike, surpassing Adidas in 2014), Nike and Adidas have been forced to dig deep into their pockets and make bigger bets on the future.  I would guess that Curry’s deal with Under Armour, which will keep Curry with the brand through the 2024 season, was no doubt on Nike’s mind when signing James for life.   Conversely, it was also likely on James’ and his agent’s minds when structuring their deal with Nike too.  With more brands vying for athlete sponsorship across more sports, and often waiting in the wings for contracts to expire (Under Armour was quick to sign Andy Murray when his deal with Adidas ended at the start of 2015, giving them a foothold in tennis), contract terms will continue to grow in amount and in length, as no one will want to get locked out or left behind.  Suring up your own assets is critical, but spending more to keep competition out will likely have a greater influence on sponsorships contracts going forward.

Risky investments

Unfortunately, signing athletes to longer/lifetime deals poses even greater risk for product brands.  There is always the chance that “something happens”, which can significantly dilute an athlete’s equity while potentially harming the product brand as well.  Obviously, putting together massive lifetime deals only enhances that risk.  I would think that there would (and I’d recommend that there should) be clauses in these longer term contracts that at least provides brands some protection to the product brands should things take a turn for the worse.  I’d be curious to peruse James’ actual contract language to better understand Nike’s “ways out” or recompense clauses.  Measuring, quantifying, and addressing this long term risk will inevitably become increasingly important, as the more risk that is quantified, the more likely a product brand might be to stay away, or at least use it for bargaining power.

On the athlete side, there is the consideration of marrying yourself to a product brand for the rest of your life.  While Nike is a relatively safe bet, looking at the history of Reebok and how the brand has changed and reinvented itself over the years (aerobics, basketball – remember the Pump?, some hockey, some football, and now back to fitness) might give athletes pause regarding their desire to partner in perpetuity.  Athletes will need to carefully consider both their, and the sponsoring brand’s, long term future.  While lifetime contracts are risky propositions for product brands, it can be somewhat risky for athletes too.

Brand building – together

But it’s not all bad news for product brands.  Many athletes, in and of themselves, have incredibly strong brands.  Partnering with the right ones, and building equity together over time, can benefit both the athletes and the product brands.  Nike has been incredibly successful at creating and amplifying brands like Jordan, CP3, CR7, and Melo, which drive sales and equity for both the products and the athletes.  Committing to James for life gives Nike the opportunity to further build, cultivate, and activate the LeBron brand and potentially create a broader franchise along the lines of the Jordan brand (interestingly, Nike’s CP3, Melo, and Westbrook brands all sit within the Jordan brand franchise, but Nike’s brand architecture/hierarchy is a topic for another day).  Product brands may get a little negotiating power back as athletes realize how beneficial partnering and brand building together can be for their own personal brand…but just a little.

So with this potential new precedent set, look for even longer term or even lifetime deals that include risk related clauses, as brands seek to lock out competition, manage their liability, and build lasting brand equity (and sometime even new brands) right alongside the athlete brand.  Whether the James deal and the subsequent deals that it might spawn end up paying out is still unknown.  Regardless, it will be interesting to see if the lifetime contract is an anomaly or just the beginning.

 

*Image courtesy of Nike

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