The economics of sneakers, and LeBron James

LeBron James, basketball player for the Cleveland Cavaliers, and just out of high school, signed a $90 million contract to promote Nike shoes. Given his debut performances, this now appears to be a bargain.

Consider the following facts, taken from yesterday’s Financial Times (registration and subscription required):

1. The U.S. market for branded athletic shoes is about $7.8 billion a year.

2. Nike commands 39 percent of this market, although this is down from 48 percent in 1997.

3. The older Air Jordan shoes sold for $175 a pair, but are now unacceptably out of date. Jordan, of course, has retired, and for the third and probably final time in his career.

4. Market competition is growing. Brands such as New Balance emphasize the substance of the shoe, rather than any famous endorser. Nike requires some means of product differentiation.

5. Kobe Bryant, another Nike endorser, has seen his star fall as of late.

6. LeBron has played only a few games, but so far his performance is far ahead of other basketball high school phenoms, such as Kevin Garnett or Kobe Bryant. Cleveland has been one of the worst teams in recent basketball history, but most NBA teams are including Cleveland, that is LeBron, in their specialty packages of the best games of the season.

7. The deal itself has generated enormous publicity for Nike, it is mentioned in most articles about James.

Nike pays LeBron only $10 million upfront, the rest comes over seven years. Right now, Nike appears to have made a steal. And remember, they laughed when Nike paid Michael Jordan $2.5 million in 1985.