In 2015, LeBron James signed a lifetime deal with Nike — the largest single athlete sponsorship in company history. This is the first time Nike has ever signed a lifetime deal with an athlete, so what does such a long term — and potentially risky — deal offer both parties? For Nike, there is a huge financial upside, but the success of the partnership comes down to their ability to sync on audiences and image, use LeBron’s real life to humanize the brand; and employ prudent risk management.

A Record-Setting Lifetime Deal

James’ lifetime deal with Nike — negotiated by Main Street Advisors’ Paul Watcher — will potentially provide James with $60 million per year in earnings while providing Nike with $400 million per year in revenue from the sale of James’ shoe line alone.

Nike has a twelve year history with this star athlete, dating back to 2003 when LeBron James went pro right out of high school. In 2003 the company signed him for a seven year contract after a $90 million bidding war between Nike, Reebok, and Adidas. James was subsequently signed in 2010 for another nine years before the 2015 lifetime deal. The same year that Nike struck LeBron’s lifetime deal, the brand told investors that it’s aiming for $50 billion in annual sales by 2020 — a tremendous goal that doubtlessly accounts for LeBron’s impact.

In addition, the LeBron lifetime deal may be able to build upon Nike’s existed de-facto lifetime sponsorship with Michael Jordan, who’s Air-Jordans shoe line has generated over $2.2 billion in sales since it’s inception in 1985.

Partnerships with the two athletes alone provided Nike with almost 10% of it’s annual revenue in 2015 — Michael Jordan providing 8.5% and LeBron James providing 1.1%. With Nike’s track-record of creating revenue-generating sponsorships, it appears that Nike is doing something right when it comes to building brand identity through their athletes.

What is it that Nike does so well that makes the brand’s athletic sponsorships so lucrative?

LeBron as Both Medium and Message

Let’s start with the basic definitions of athletic sponsorship and why a brand may want invest in an athlete.

Athletic sponsorships provide brands with new advertising channels targeting specific audiences. Brands are able to identify a target audience, then partner with an athlete that reaches that target audience — thus creating brand audience alignment.

For example, Nike’s customer base for sneakers is typically a late teen who spends 20% more on shoes than an adult counterpart; — this happens to be a large segment of LeBron fans.

Athletic sponsorship also incorporates aligning an athlete with its brand image — brand image alignment. This happens when the athlete embodies the values that a brand’s identity is based on. Sponsorships thus can elevate a brand’s image because it puts a real-world face on those values.

Lastly, brands must strategically activate their sponsorships, not just slapping a “proudly sponsored by” label on their athletes. Brands must tap into the spirit of the athlete they are sponsoring, creating campaigns that drive a sense of enthusiasm for the sport not dependant on their sponsored athlete winning every game.

Thus, athletic sponsorships are yet another channel for marketers — a kind of media purchase of their own accord — because athletes come with their own intrinsic audiences. However it’s important to remember that because athletic sponsorship is a marketing channel like any other, it still requires creative development to optimize the channel.

Campaigns That Go Beyond the Court

When a brand sponsors an athlete, they naturally cannot bank on a respective athlete winning every game. Part of Nike’s mission statement is to “bring inspiration and innovation to every athlete in the world” and Nike asserts that “if you have a body, you are an athlete.” If we look at Nike’s portfolio of sponsored athletes in addition to their youth outreach initiatives, we can see that Nike caters to “athletes” of all skill levels — be they the U.S. Women’s National Soccer Team or elementary school kids shooting hoops on the playground.

Nike also transcends the notion that success as an athlete is dependant upon the number of wins, and their campaigns reflect this.

For example, after LeBron James lost the NBA finals Nike launched their “Nothing is given. Everything is earned” campaign. This campaign captured the storytelling aspect of sports. It effectively humanized a loss and therefore reinforced Nike’s brand message.

The LeBron Megaphone

In the past few years, Nike has been moving away from television and print advertising in order to focus on new advertising channels. Nike’s spending on TV and print ads dropped 40% from 2009 to 2012, with a move towards digital.

Adding a sponsored athlete who has a large fan base creates even more advertising channels. For example, as of 2016 the Nike brand has 3.9 million followers on Twitter, 34.4 million followers on Instagram, and 23 million “likes” on its Facebook fan page. LeBron James has 27 million followers on Twitter, 17.5 million followers on Instagram, and 22 million likes on his Facebook fan page. That means their reach is amplified, in some cases by almost 600%; each of James’ followers are exposed to the Nike brand image and its message.

As LeBron James’ fan base grows, Nike will continue to increase the communication of its brand message to consumers.

Success in Risk Mitigation

It’s important to keep in mind that when a brand ties itself to an athlete, they are tying themselves to a person — effectively, that athlete’s personal behavior. This relationship exposes a brand to certain risks.

When the Tiger Woods scandal broke in 2009 researchers at the University of California, Davis estimated that his sponsors lost a collective $5 to $12 billion. Researchers calculated these losses based on the stock prices of Accenture, AT&T, Electronic Arts, Gilette, Nike, Gatorade, TLC Laser Eye Centers, and Golf Digest. Based upon these figures, they concluded that the scandal reduced shareholder value by a collective 2.3%.

Woods was among the highest paid athletes in the world at the time the scandal broke, but he’s not alone. There’s a long list of athletes — from Michael Vick, to Bret Farve, to Michael Phelps who all lost endorsements due to personal behavior. These examples demonstrate how brand image is jeopardized when athletes are involved in anything from sex scandals to steroid use.

Thankfully, there are ways that brands can mitigate these risks. These techniques include:

  • The inclusion of a morals clause: A provision within a contract that permits the company to dissolve the link between a brand and the athlete in the event of such negative and damaging publicity.
  • The inclusion of a purpose clause: A provision within a contract that states the purpose/objective of the sponsorship for both parties.
  • Acquiring endorsement insurance: A way to financially recoup in the event that an athlete causes a scandal/generates negative publicity.

Very few details are known about specifics of the lifetime contract between Nike and LeBron James, but the contract likely includes a morals clause. So, in a worst-case scenario, Nike may have given itself a way out.

Nike and LeBron James’ Happily Ever After

Nike is leading the pack when it comes to athletic sponsorships because they have chosen to endorse an athlete who aligns with their brand image and reinforces their brand message. As of now, the deal between LeBron James and Nike promises to be profitable for both parties for the foreseeable future — just so long as LeBron keeps up his positive image and Nike knows how to mitigate risk.