The CEO put a $10 million cheque on the table.
18-year-old LeBron, his mother, and his agent – all shocked.
The CEO of Reebok – the sports and fitness company.
The deal?
LeBron would wear Reebok branded apparel, be part of Reebok’s advertising campaigns, collaborate on products, and a few others.
For this, he was offered $100 million over 10 years.
$10 million of that, he would get immediately.
LeBron was shocked. He had never dealt with an amount this big.
His mother felt like accepting the deal.
But their agent cautioned them. He reminded them: that the plan was to talk to all parties before deciding.
He listened to the agent.
In a few days, LeBron got offers from the other parties – Adidas and Nike.
Adidas offered $70 million with a few conditions.
Nike offered $70 million without such conditions.
Adidas was out.
LeBron had to decide between Reebok and Nike.
Reebok was offering $100 million. Nike was at $70 million.
Then Reebok raised their offer to $115 million. Nike raised their offer to $90 million.
LeBron – only 18 years old – had to choose.
Nike had a history of signing deals with sports legends – Michael Jordan, Bo Jackson, Tiger Woods, and more.
LeBron wanted to be associated with a brand that had a history like Nike’s.
Reebok did not have that kind of a prestigious history.
But, Reebok’s offer was higher.
LeBron had come from a poor background.
He was born when his mother was only 16 years old. His father was an ex-convict and absent from their lives.
LeBron grew up in dangerous neighborhoods where fights were common.
His mother changed homes often – unable to pay rent.
As he got into high school, he started competing in school-level basketball.
This is where he stood out. He was magnificent.
Many who followed basketball felt he was a once-in-a-generation player.
He kept rising.
After finishing school, he could go to college. Or he could join the NBA draft.
The NBA draft is where the USA’s national-level basketball teams get their players from.
LeBron chose to go for the draft.
LeBron was so good that he was offered deals by Reebok, Adidas, and Nike.
Keep in mind, that he had not even played his first national-level basketball game yet.
He eventually chose to sign the deal with Nike.
This entire episode is covered in great detail in an article by Jeff Benedict for the Esquire magazine.
Another Sportsperson
Around the same time as LeBron’s birth year, another athlete was born: Michael Phelps.
This energetic young boy first stepped into a swimming pool at the age of 7.
He did exceptionally well.
A few years later, Bob Bowman (swimming coach) noticed him.
Bob told Michael’s parents that the boy had the potential to be an Olympic athlete.
Bob became his coach.
At the age of 16, Michael broke his first world record.
In the 2004 Olympics, he won 8 medals. 6 of them were gold.
Beijing Olympics, 2008: he won 8 gold medals.
London Olympics, 2012: he won 6 gold medals.
Rio Olympics, 2016: he won 5 gold medals.
With a record this splendid, Michael Phelps became the most decorated athlete of all time.
Nobody has won as many medals as Michael Phelps: 28 medals.
Both Michael Phelps and LeBron James have brand endorsements.
But LeBron James got a $90 million deal from Nike even before he played his first national match.
Michale Phelps reportedly got his first brand endorsement in 2009 – long after he started swimming in the Olympics.
Why?
Total Addressable Market or TAM.
Sports TAM
TAM is the total size of the opportunity.
Both LeBron James and Michael Phelps are fantastic athletes.
But LeBron is a basketball player.
And basketball is watched by a lot more people.
How does that matter?
Sports earn money mainly from advertisements and brand endorsements.
If more people watch a sport, companies spend more money on advertising and endorsements.
Being in a high TAM sport means LeBron James is a billionaire today.
Michael Phelps is rich, but not as rich as LeBron – despite being a world number 1 swimmer.
Swimming’s TAM is just not as high as basketball.
We can see this effect even in India: cricketers are paid much better than hockey players.
TAM of Companies
This brings us to the corporate world.
Warren Buffett’s partner, Charlie Munger, is famous for saying, “fish where the fish are”.
If you want to catch fish, you have to go to the lake that has fish in it.
If you go to a lake that does not have any fish, you will never catch anything.
No matter how well run a company is, if the total amount of money in an industry is less, the company will never become large.
But in an industry where there is a lot of money, even mediocre companies can grow huge.
And it is not just about the industry. It is also about the locations the company operates in.
Some of the biggest companies in the world – Apple, Google, Facebook, Microsoft – sell their products in almost all countries in the world.
Pivots for TAM
Many companies saturate their market – they have sold their products to as many people as possible.
Apple was in this situation about 20 years ago.
They were selling enough computers.
Their fortunes changed when they expanded; when they started operating in a new space altogether; when they launched a smartphone – iPhone.
They entered a space with a higher TAM than computers.
ITC’s main product was cigarettes.
Now, their revenue is hugely dependent on non-tobacco products like soap, shampoo, biscuits, etc.
Once they dominated the cigarette market, they could not grow much more in that space.
So they chose a new market to start working in.
Whenever we look at companies – we must ask ourselves about their TAM.
If the company does everything right, how big can it become?
How much growth is left in the space?
Which company’s TAM is greater?
Many times, the industry a company operates in is more important than how well it operates.
Naval Ravikant once tweeted: ‘which games you play is more important than how well you play them’.
The illustrations used above are made using an AI tool (DALL-E).
Quick Takes
+RBI’s Monetary Policy Committee (MPC) has kept the repo rate the same: 6.5%.
+RBI has allowed cash deposit through UPI at cash-deposit machines.
+Government has increased the windfall tax on crude oil from Rs 4,900/tonne to Rs 6,800/tonne.
+More than 1.85 lakh companies and LLPs were incorporated in 2023-24. It is the highest-ever number in a single financial year: Corporate Affairs Ministry.
+HDFC Mutual Fund will stop accepting lump sum investments into its HDFC Nifty Realty Index Fund from 8 April. SIP and top-ups in the scheme have been limited to Rs 1 lakh.
+NSE has reduced the market lot of derivative contracts of Nifty 50, Nifty Financial Services, and Nifty Midcap Select indices with effect from 26 April. The market lot for Nifty 50 has been reduced to 25 from 50.
+Bharat Biotech has partnered with Serum Institute for production and supply of oral polio vaccines.
+India’s manufacturing output was at a 16-year high in March 2024: HSBC India Manufacturing PMI data.
+7,180 kms of Indian railway tracks were electrified in 2023-24, highest ever.
+Indian govt recorded the 2nd highest monthly GST revenue in March 2024 (at Rs 1.78 lakh cr).
+Oil companies have reduced the prices of 19 kg cylinder (by Rs 30.50) and 5 kg free trade cylinder (by Rs 7.50) in Delhi.
+A new Rs 500 cr government scheme (EMPS 2024) has been launched to increase EV vehicles in India.
+Aditya Birla Fashion will demerge its fast fashion business Madura Fashion & Lifestyle. It will list on the stock markets as a seperate company.
6-Day-Course
Theme of the week: mutual fund misconceptions
We’ve reached the end of this week’s course that started on Monday.
Here’s a test you should take. Get pen and paper!
Question 1:
The rating of a mutual fund has changed from 5-star to 4-star. What will you do?
-Change mutual fund
-Keep an eye but keep investing in it
Question 2:
-Person A: stops investing whenever the markets are doing poorly
-Person B: keeps investing when the markets are doing poorly
If the mutual fund does well in the long run, which person will be richer?
-Person A
-Person B
Question 3:
Last 1 year returns of 2 mutual funds:
-Mutual fund ABC: 22%
-Mutual fund XYZ: 18%
Which one to invest in for the long term?
-Mutual fund ABC
-Mutual fund XYZ
-Can’t say. Not enough info given
Question 4:
Long term mutual fund investors should pay attention to short term market conditions.
-True
-False
Question 5:
Which is more important for an investor to know?
-NAV
-Last 10 year returns
Answers:
Q1: Keep an eye but keep investing in it
Q2: Person B
Q3: Can’t say. Not enough info given
Q4: False
Q5: Last 10 year returns
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest