Shaq attacks Net with new shoe bizPublished February 7, 2000
Armed with tens of millions of dollars in venture capital, NBA star Shaquille O'Neal and his agent, Leonard Armato, are launching a high-end athletic footwear and apparel e-business, with ambitions to take on industry giants such as Nike.
Dunk.net will begin to sell the same basketball shoes O'Neal wears on the court over the Internet this month. The Web store plans later this year to add other athletic products and allow Web users to customize their shoes.
Mike Piazza of MLB's New York Mets and Rebecca Lobo of the WNBA New York Liberty have signed on as investors and spokespersons for the new sports brand, and the company is in discussions with other high-profile athletes.
"The upside here is enormous," said Mike Linnert, general partner of TCV, a $2 billion Palo Alto, Calif.-based venture capital firm that is Dunk.net's biggest investor. "We are trying to build a brand that will mean more than Nike or Reebok."
TCV plans a private placement for Dunk.net in the next six to 12 months, Linnert said. Ultimately, TCV plans to take Dunk.net public.
O'Neal, all-star center for the Los Angeles Lakers, and Armato have been working on the idea of selling performance athletic footwear over the Internet since failing to come to terms with Reebok on renewing O'Neal's $5 million-a-year shoe contract in 1998.
At that time, stock prices of publicly traded footwear companies were plummeting and the high-flying athlete endorsement market was crashing. Instead of shopping O'Neal's endorsement skills in a down market, Armato and his client decided to start their own company.
"We looked at the state of the footwear and apparel industry and thought there had to be a better business model," Armato said. "We developed a new paradigm based on Internet technologies."
Armato, who will be chairman of Dunk.net, and O'Neal, who is a shareholder, started the company with their own funds but signed up TCV and CBS SportsLine as investors last year.
The company has set up its headquarters in a 40,000-square-foot building in trendy Santa Monica, Calif., and has hired veteran athletic footwear executives, including Christopher Walsh, one of Nike's first employees, as its chief operating officer.
Lee Clow, chief creative officer of TBWA/Chiat/Day, worked with Armato on the company's brand and logo, which incorporates symbols meaning heart, peace, power and game.
Armato declined to reveal the equity percentages of any investors or the amounts invested but said tens of millions of dollars have been pumped into Dunk.net thus far.
Mike Levy, CEO of SportsLine.com Inc., also declined to reveal the amount of his investment, but said it involved cash as well as in-kind advertising and an Internet link on the company's CBS SportsLine site. O'Neal has been a spokesman for SportsLine since 1996.
"We think it has a great chance at becoming the next great shoe company," Levy said.
Linnert noted that Dunk.net has two main advantages: its star athlete investors/spokespersons and its business plan, which will allow customers to build their own shoes. The site will also be a place for sports fans to get original content about O'Neal and Piazza, as well as athletic advice from a medical doctor.
"We are not telling people, 'Wear the shoes that Shaq wears and Mike Piazza wears,'" Linnert said. "Our message is, 'Build your shoes at the place where Shaq builds his shoes and Piazza builds his shoes.'"
Executives at TCV, which counts companies like C/NET Inc. and iVillage.com as investments and Netscape co-founder Marc Andreesen as a partner, thought Dunk.net was different from other Internet companies, Linnert said.
"They are really building the next generation of retailing over the Internet," Linnert said.
Armato said that one advantage of selling over the Internet is eliminating the middleman, which boosts profit margins. Dunk.net officials estimate its profit margin will be as high as 70 percent, compared with 30 percent for other athletic shoemakers that use traditional retail networks.
Dunk plans to sell shoes priced about $80 and $90 over the Internet that could be sold for more than $100 at retail outlets, Armato said.
One challenge facing Dunk.net is that some potential customers may not have access to the Internet, Armato acknowledged. But Dunk.net plans to combat that with interactive kiosks where computer-less customers can order shoes, as well as get their feet electronically scanned. The first kiosk is set to open at Staples Center this month.
Armato said all the athletes involved will be shareholders, not just endorsers. He declined to reveal other athletes whom the company is talking to but noted that Toronto Raptor Vince Carter, who is in a dispute with his shoe company, Puma, scored 47 points in a game while wearing Dunk shoes.
Dan Lozano, agent for Piazza, said one thing that attracted the baseball star to the business was that the company plans to be selective in signing up athletes. "They don't just want to sign every player," Lozano said.
Piazza, like O'Neal, was also looking for a new business model after he did not renew his shoe contract with Nike in 1998. "We wanted something bigger and better than just wearing a company's shoes," Lozano said. "We wanted to be part of a shoe company."
Lozano acknowledged the potential risk in Dunk.net. "But this could be a grand slam and we got in on the ground floor," Lozano said. "If it takes off, who knows, it could exceed what Mike's player salary contract is worth."
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