How Nike could kill the Nikebots, and why it doesn't

In the war of Nike versus the Nikebots, Nike has just waved the white flag of surrender. Or, has it?

A bit of background: if you look at Nike’s official communications, the sneaker company has been engaged for many years in a losing game of whack-a-mole; the winners have been the evil Nikebots. Limited-edition sneakers, you see, are a bit like Taylor Swift tickets (or San Francisco restaurant reservations): when they go on sale, they get snapped up by bots rather than humans. Sometimes, the bots are controlled by humans who really want the product in question; other times, the bots are controlled by arbitrageurs who simply turn around and try to make an instant profit on StubHub or eBay or Craigslist.

In Nike’s case, after trying various techniques to try to get buyers to prove that they’re human, the company has now decided that none of those techniques work. As a result, instead of selling the Air Jordan I Pinnacle and Air Jordan I High OG Varsity Red online, as originally planned, they’ll just distribute the shoes the old-fashioned way, in stores, out of the reach of the bots.

But the reality is that Nike, if it wanted to, could both have its cake and eat it. The company has multiple ways to put the bots out of business, while making sure that its shoes are available to everybody, rather than just to people who happen to live near a top-tier Nike store.

After all, Nike has control over many more things than just the technology used to sell shoes on the internet.

An economist, looking at any of these cases, will quickly diagnose the same underlying problem: the product in question is underpriced. Price is the mechanism that we use to bring supply and demand into alignment with each other, and if demand massively exceeds supply, as it seems to do in these cases, that’s a clear indication that Nike is charging too little for its shoes. If a sneaker sells for $150 on the primary market and then immediately fetches $300 on eBay, for instance, then Nike could have made twice as much money by just charging $300 in the first place.

But that’s not all that Nike could do. Indeed, when a company like Nike starts complaining loudly about bots, that’s a pretty good indication that it is doing something a little bit sneaky itself. For instance, consider the loud complaints about bots from LCD Soundsystem frontman James Murphy, after tickets to his final show seemingly sold out in seconds. In the subsequent days and weeks, it started to become clear that few if any tickets had actually been sold at all: it’s pretty standard practice, in the music industry, for artists and venues to sell very, very few tickets at face value, and to quietly sell most of them to various backchannel brokers.

The Nike equivalent would be to sell very few shoes through official channels, and then sell most shoes at a markup in the grey market. And no one’s accusing Nike of doing that. But there is one way in which Nike is doing the same thing that the music acts and venues do: it’s artificially constraining the amount of product sold at face value. After all, there’s absolutely no reason why Nike, when faced with greater demand than there is supply, shouldn’t just sell more shoes.

Indeed, if Nike increased the size of its editions, nobody would know. Here’s a weird fact about limited-edition Nikes: Nike very rarely bothers to reveal the edition size for these things. You wouldn’t buy a limited-edition artwork without knowing the edition size, but sneakerheads will buy up a new Nike shoe without any idea how many of them are being made. Even a reasonably definitive listicle of “the 23 rarest Air Jordan releases”, for instance, has no edition size at all for many of the shoes — and the ones which do have an edition size can range from a couple of dozen to well into the thousands. And Nike nearly always retains the right to “restock” a sold-out shoe, which effectively means that those editions aren’t really limited at all. They just sell out, sometimes.

When Nike releases a sneaker online, they have a very good idea how many people are going to go online trying to buy the shoes. So here’s the easy thing for Nike to do: if they want to just get these editions into the hands of the super-fan sneakerheads, without forcing thousands of people to pay a massive premium to sneaker-scalpers, then they should just increase the edition size so that most of those people will manage to snag a pair. At that point, demand will start falling dramatically (since the sneakerheads who wanted a pair will already have got one), and the opportunity to flip the shoes at a profit will naturally disappear.

Instead of that, however, Nike is not increasing the number of shoes that it sells, preferring to make ominous statements about how it doesn’t “authorize the use of automation or scripting methods intended to offer any shopper an unfair advantage”, and threatening to “refuse or cancel” any order which it finds out was placed by a bot.

Which is a bit silly, because Nike knows better than anybody that use of bots is a sign of fandom. Show me a fan who managed to get his hands on one of these sneakers at launch, directly from the website, and I’ll show you a fan who used a bot. The bots are easily available online — NikeShoeBot2 can be bought for $85, for instance, or $125 in a bundle with Sneakerbot — and anybody who doesn’t use one is more or less guaranteeing that they’ll end up empty-handed. Nikebots are a ridiculous way for coders to extract rents from sneakerheads, and the amount of those rents is entirely under Nike’s control. Nike could put the bots out of business tomorrow, if it wanted — and so when it attacks them with mere words, that’s a clear sign that the company is actually OK with their existence.

Conversely, if Nike is weirdly wedded to its opaque edition sizes, it could simply auction off the shoes, like it did with 1,500 pairs of the Nike MAG in 2011. That auction went very smoothly, with 150 pairs being auctioned every day for ten days, and in the end the total amount raised was $5,695,190.53, or $3,796.79 per pair.

Now, that was a charity auction, of a sneaker with unique pop-culture bona fides, and a non-charity auction would not generate nearly as much money. But it would be entirely transparent, and it would keep out the bots.

So, what’s really going on here? The first thing to note is that most big sneaker companies don’t play this silly game. Adidas might have one limited-edition shoe from Kanye West, but they haven’t turned release dates and artificially-constrained supply into a nationwide industry, in the way that Nike has. (If you look at the Campless top 50 sneakers, all but that one Yeezy Boost are by Nike, and Campless calculates that 96% of the eBay sneakerhead market is Nike.)

What that means is that Nike has not only created a multi-billion-dollar market in collectible shoes; it has also created a billion-dollar secondary market, where eBay alone is selling some 2.5 million pairs per year for a total of $334 million. (I’ll save you the math: that works out to an average of $133.60 per pair.)

A lot of effort goes into developing this market: Nike will tell LeBron James to wear ten different shoes over the course of a single season, plus a completely different model for the post season. And then there’s equal amounts of effort on the buy-side, too: Campless is named after the common practice of camping out in front of sneaker stores in order to be first in line for a new release. (Think of the pup tent as the IRL equivalent of the Nikebot.)

The fact is that so long as Nike systematically underprices shoes and artificially constrains supply, there will always be attempts to game the system. For instance: when stores just hand out lottery tickets on a one-ticket-per-customer (rather than on a first-come-first-served) basis, sneakerheads respond by turning up with large quantities of extended family members (father, uncle, cousin) just to maximize their chances of snagging the pair they want.

Who reaps the benefit from all of this effort? Nike both puts the most into the market (in terms of designing new shoes, paying athletes to wear them, and providing the sneakerheads with a steady stream of new product) and gets the most out of it (in terms of sales it would not otherwise have achieved). I’m sure that the limited-edition business is profitable for Nike, but then again Nike has total revenues of $30 billion a year, on which it makes a gross profit of some $12.5 billion per year. The sneakerhead market is big, but it’s not that big, and I doubt its profits on their own would make it worth the effort.

But there are two other important considerations at stake here. The first is the anchoring effect. If you show people a $100 rice cooker, none of them are likely to be interested in buying it — until you put it next to a $200 rice cooker. At that point, the $100 rice cooker starts looking almost reasonable in comparison, and many more people will buy it. Similarly, if there’s a whole world out there of people paying $190 for a pair of Air Jordans and then turning around and selling them for a $500 profit, that makes the $190 retail price for the non-limited edition look much more reasonable. In that way, the limited editions help to sell the mass-market shoes. (And they probably help to sell Adidas gear almost as much as they help to sell Nike. Adidas, therefore, doesn’t need to be part of the sneakerhead market in order to be able to free-ride on Nike’s efforts.)

Finally, there’s the elephant in the room: Michael Jordan. The sneakerhead market is, overwhelmingly, a market in Air Jordans. The Air Jordan franchise is massive for Nike, singlehandedly accounting for more than half of all basketball shoes sold in America. Cultivating sneakerheads is one of the key ways in which Nike manages the multi-billion-dollar Air Jordan brand, ensuring that Jordan’s shoes remain the most coveted sneakers in the world decade after decade.

When you look at Nikebots, then, or at the people camping in line outside Nike stores, or even at $5,000 Air Yeezy 2 Red Octobers, what you’re looking at is essentially a largely unanticipated outgrowth of the marketing phenomenon that is Michael Jordan and his eponymous footwear.

Nike puts up with all the craziness mostly because it’s a key part of the unique alchemy that is Air Jordan — and also because, at the margin, it can make a bit of money from it. But mostly, it’s Jordan. If and when the power of the Air Jordan brand ever peters out, nothing else is going to replace it. Which means that the Nikebots are going to fade away only when and if Michael Jordan does.