Overview

Theotis Wiley has played one year in the NBA. Due to a series of personal and legal

problems while in college, Wiley is viewed by corporate sponsors and many NBA teams

as too high-risk. Nevertheless, during his first season, Wiley played amazingly, showing

promise of future NBA superstardom. Drive Corp. is a small sporting goods company

rolling out its first basketball shoe line.

The following definitions may be useful:

All-Rookie Team: Making the All-Rookie Team is, for present purposes, functionally

equivalent to making the All-Star Team. Only the best first-year players at each position

make the All Rookie Team.

All Star Team: Among all of the teams in the NBA, the best players at each of the five

basketball positions are annually selected to the All Star Team.

Draft: Each year, the NBA conducts a draft for the amateur basketball players seeking

to enter the NBA. A draft has seven rounds. In each round, each NBA team selects

players in a preset order. Typically, the best players are selected in the first round of the

draft. Undrafted players may deal privately with NBA teams once the draft is complete.

Usually, such players are able to command a salary that is only a fraction of what

drafted players receive.

NBA: The National Basketball Association, or NBA, is a league of 30 basketball teams

manned by paid, professional athletes.

Rookie: A rookie is a player in his first year as a professional.

Confidential Instructions for Erive's Vice-President of Business Development

You have been Vice President of Business Development at Erive Corp. for only six

months now. You were brought on to oversee the launch of a new basketball footwear

line. To this point, things have not gone particularly well, but your upcoming negotiation

with Theotis Wiley's agent has the potential to reverse the tide.

Your employer, Erive Corp., is a 25-year old, privately-owned sporting goods company

based in Boulder, Colorado. Erive sells sporting gear, equipment, and apparel for two

sporting disciplines: soccer and outdoorsmanship. Though not large relative to the

major diversified sporting goods companies, within these markets Erive maintains

significant market share and has a reputation for offering extremely high quality and

durable products. In recent years, Erive has been more than pleased to see its products

- particularly its footwear - make significant inroads into the urban casualwear market.

Erive attributes this phenomenon to a number of factors: the quality, comfort, and

aesthetic appeal of its products; its cult-like aura in the outdoorsman and soccer

segments; and the general increasing popularity of casual sportswear among America's

youth.

Erive also believes that its public-spirited image has contributed significantly to its

inroads into the urban casualwear market. Erive's founder and your boss, Patricia Peak,

is a huge believer in the practical and spiritual virtues of sport and the outdoors. As a

result, she has taken it as a crusade to provide under-privileged children with

opportunities to participate in sport. Among other things, Erive sponsors youth summer

camps and inner-city youth soccer leagues. Through Erive, Peak is always looking for

new ways to bring children in touch with sport, and to serve the public generally.

In view of Erive's increasing popularity, Peak decided last year to create a division

dedicated to basketball footwear. This is what brought you to Erive. Though the market

is dominated by two huge companies, Keni and Sadida, Peak believes that Erive can

thrive. Erive already has significant brand-name appeal among urban youth, who

represent the largest segment of the basketball products market. Peak also believes

that the major basketball gear companies unconscionably gouge their consumers,

charging, for example, upwards of $100 per pair of basketball shoes that cost a fraction

of the price to develop, manufacture, and market. Peak is convinced that Erive can offer

products of comparable quality and cultural appeal at half the prices currently offered by

the major players, thereby capturing significant market share. Finally, Peak feels that

Erive can successfully leverage its youth sporting efforts to advertise and market its

basketball line.

Based on your efforts, Peak, though initially resistant, has also come to appreciate the

importance of NBA player endorsements in marketing basketball footwear. The history

of branded basketball footwear confirms the pivotal role of high-profile, reputable NBA

stars in the success of the brand. However, it is in this capacity that Erive's size vis--vis

its competitors is most stark, and most distressing. For starters, virtually every major

young NBA player with legitimate prospects has already signed a shoe deal with one of

the established industry competitors. Moreover, whereas the major companies annually

allocate tens, if not hundreds, of millions of dollars to marketing and endorsement deals,

Erive has earmarked $15 million to be spent over the next two years on the initial launch

and marketing effort. Of that, close to $11 million is required to execute the actual

campaign - i.e., buy advertising space, pay the creative development team, fund the

support infrastructure, etc. This leaves $4 million for a player endorsement and, if any

remains, for Erive's basketball-related community efforts and for internal capital needs.

Up until two weeks ago, you thought you had pulled off the marketing coup of the

century. Prior to this year's college draft, you were able to come to terms with the

college sensation out of Duke University, Shane Nottanae, regarding a two-year

endorsement deal worth $3 million. Based on his indication of commitment, you went

ahead and laid the groundwork for the marketing campaign to commence with the

beginning of this year's NBA season, which happens to be four short weeks away.

Everything was set, and all that remained was for Shane to shoot the print and TV

advertisements. Unfortunately, you never got Shane to sign on the dotted line, and just

two weeks ago he backed out of your arrangement, claiming that Keni had made him a

deal that he and his family "couldn't refuse." You were devastated. You had already

made advance payments for much of the advertising time and space, and for the artistic

and production talent.

You fear that if you can't land a replacement soon, the money will be completely wasted,

and your career with Erive, if not within the industry, will be doomed. Through your

contacts among sports agents, you learned this week that Harvey Harmony had

recently terminated his relationship with Sadida and was searching for a new

endorsement deal. Harmony is entering his 7th year as an NBA professional. Early in his

career he was a stand-out player, making the All Star team in his first four seasons. But

in the last couple of years he has been plagued by injuries, and his performance level

has suffered considerably. Though he is still recognized as a fine NBA talent, you are

skeptical of his worth as an endorsement candidate, particularly for your nascent, youthfocused

basketball division. Nevertheless, Harmony has broad-based name recognition

and a blue chip reputation. The marketing department determined that Erive should be

willing to offer Harmony up to $1.6 million for a two-year endorsement contract, but the

consensus is that a younger and more talented player would be vastly preferable.

Yesterday, as you were about to call Harmony's agent to inquire into a potential deal,

Peak appeared in your office to tell you about an "intriguing" young NBA player she had

just met at a youth basketball clinic in Denver, Theotis Wiley. Peak suggested that Wiley

might be the ideal endorsement candidate, particularly given the time pressure the

company is under. At first, you couldn't believe your ears. Wiley, about to enter his

second year in the NBA, had a truly exceptional year last season - he was named to the

NBA All Rookie Team - but his reputation is about as unexceptional as it gets. In fact,

most major sponsors, and many NBA teams, consider him too risky to bother with at all.

Wiley's bad image is a product of his antics as a college player. Wiley flunked out of the

University of North Carolina after his freshman year, during which he played extremely

well but was rumored to get along poorly with his teammates and his coach, the

legendary Dan Smithfield. After that, he spent the next two years at three schools,

cultivating a reputation as a fantastic athlete with a very bad attitude by regularly

skipping practices and quarreling with teammates and coaches. Along the way, he also

had his share of run-ins with the law, including a shoplifting conviction and a marijuana

possession charge that was ultimately dropped. When Wiley finished at Buckeye State

Junior College and declared himself eligible for the draft, most NBA teams considered

him untouchable. Not surprisingly, he wasn't drafted by any team, but was eventually

signed to a two-year deal by the New Jersey Hoops, a perennially poor NBA team that

figured it would take a chance on him. To a large extent, in view of Wiley's sensational

rookie season, it appears to have paid off. Today, he is widely regarded as a player

with the skills and physical abilities to be one of the league's premier superstars,

provided he can shake his bad reputation.

Though you have your doubts about Wiley, there is reason to believe that a deal with

Wiley could be a success. Four years ago, an upstart basketball shoe manufacturer,

NoLimit, signed a first round draft pick with a checkered past, Stevie Madison, to a twoyear

endorsement contract. The deal proved to be wildly fortuitous for both parties;

Madison became a consistent All Star point guard, and NoLimit has grown into a

formidable presence in the footwear industry (though Erive feels that NoLimit is

mismanaged and, like the big players, can be outwitted in the marketplace). Today,

Madison has a much more lucrative contract with NoLimit, and the company sponsors a

number of NBA players. A few months back, you had lunch with a colleague from

NoLimit who wondered aloud whether NoLimit should attempt to sign Wiley in

light of his spectacular year.

Figuring out what to offer Wiley will prove to be no simple matter. However, you feel

pretty certain that Erive should stick with a two-year contract. Contracts of this length

are virtually standard in endorsement deals for NBA players in their first two seasons in

the league: sponsors don't want to be tied to a player who might not pan out; and

players don't want to be locked into a contract that underpays them when they blossom

into mature players.

Four years ago, NoLimit gave Madison, early in his rookie season, a two-year contract

paying him $2 million. At the time, many thought NoLimit overpaid. Generally speaking,

endorsement contracts are very idiosyncratic. However, your office has managed to

collect the following market data on sneaker endorsement contracts for rookie NBA

players who were selected in the first round of the college draft, and for All Star players

in their 3rd through 5th years:

Average per year endorsement amount ($)

1st Round Draft Picks / 3rd - 5th Year All Stars

Last year 1,625,000 / 3,000,000

Two years ago 1,400,000 / 2,525,000

Three years ago 1,115,000 / 2,135,000

Four years ago 850,000 / 1,700,000

NOTE: A later round draft pick will typically make 50% to 75% what a first round pick

might make. An undrafted player, if he signs an endorsement deal at all, usually

fetches 25% of what the average first rounder makes.

Of course, Wiley is neither a rookie nor an established fourth year All Star player. Nor

does he currently have the cachet and perceived marketability that both marquee

rookies and established All Stars possess. In fact, many still consider him untouchable.

Last year, in your previous position at one of the major sneaker companies, your

marketing department determined that they "wouldn't touch Wiley for more than 5 cents

on the dollar." However, he has since proven himself to be a phenomenal player, and,

according to Peak, he is committed to behaving like a professional.

For a lead endorsement deal of the type Erive is seeking, the company will need to sell

200,000 pairs of sneakers to break-even. Erive plans to price its shoes at about $50 per

pair. Of that $10 per pair will be spent on manufacturing and shipping, and another $10

per pair will be allocated to administrative expenses. The remainder represents funds

available to cover future research & development and profit. Selling 200,000 pairs of

shoes in a year is no small task. However, shoes associated with All Star NBA players

have been known to sell at rates in excess of 500,000 per year. Superstar players can

consistently sell 800,000 to 1,000,000 pairs per year.

Peak thinks that if everything works out, Wiley's shoe line should sell just as an All Star

player's would. In any event, notwithstanding your guarded optimism around Harmony,

she is convinced that Wiley is the only unendorsed player with the wherewithal to sell

the requisite number of shoes and to launch the Erive line into mass appeal. In keeping

with her wishes, yesterday you scheduled a meeting with Wiley's agent to discuss a

two-year basketball shoe deal. Peak has authorized you to offer up to the entire twoyear

marketing budget surplus, $4 million, should that be necessary. In no event, she

has reminded you, should the total value of the contract exceed $4 million: all future

payments will be debited against the current budget. However, delaying payments on

the endorsement contract will free up capital to fund the manufacturing and marketing

effort. Any remaining surplus in the budget will be used to fund youth and community

programs and internal capital needs.

Prepare for your negotiation with Wiley's agent.