Nike In Michigan Colors

Nike's logo in the blue and yellow colors of the University of Michigan. Photo: U. of Michigan.

Nike (NYSE:NKE) agreed in June to pay $169 million to outfit the University of Michigan's varsity athletic teams. It's paying $12 million up front, nearly $77 million spread over the 11-year contract, and providing over $80 million worth of apparel starting in August 2016.

Scoring this contract with Michigan is huge for the amount of exposure it could bring. The Michigan Wolverines men's basketball team consistently ranks near the top, the football team has won more than any other team in the country, Michigan boasts a men's swimming and diving team with 19 national championships, and it can also claim many other high-ranking sports teams.

Still, including the $1 billion NBA deal that Nike signed in June, the company currently has over $7 billion in total sponsorship commitments. Is all of this money spent on sponsorships worth it to the company's bottom line?  

Sponsorships are getting expensive
The University of Michigan deal is one example of just how expensive sports are getting. The transaction broke the record as the most expensive college sports deal in history, nearly doubling the estimated $90 million Under Armour (NYSE:UAA) spent to sign Notre Dame in 2014, which had been the most expensive college endorsement deal until now. 

Altogether, Nike's sponsorship costs are ballooning. In its most recent fiscal year (ending May 31) the company increased its sponsorship commitments by 32% year over year. That doesn't even include the $1 billion NBA deal signed in June, because that fell in the current fiscal year. As a result, sponsorship costs will rise significantly further in 2016. 

Nike is outpacing competitors
Under Armour's increased sponsorship efforts are paying off. Under Armour has gained huge exposure recently on the success of Jordan Spieth, Stephen Curry, Misty Copeland, and others who rose quickly from outside the spotlight to dominate their respective sports. Just in the past year, Under Armour has gained incredible attention from its athletes. In its recent quarterly earnings report, CEO Kevin Plank called out these sponsorships as a key driver of Under Armour's excellent performance.

Still, Under Armour's nearly $400 million in sponsorship commitments pales in comparison with Nike's $7.1 billion. Because Nike spends so much to get the biggest and best teams, it has been the sponsor for all but one of the past 15 college football champions. It sponsors around 70% of the biggest 65 college sports programs, and pretty much dominates each of the five top professional sports in the United States. 

Both Nike and Under Armour are making major gains because of their willingness to spend money on important sponsorships. On the other side of the coin is Adidas, which was the outfitter of University of Michigan but lost out to Nike on re-signing the school. It was also Notre Dame's sponsor before Under Armour outbid it.

The inability to make and keep important sponsorships seems to be correlated to Adidas' falling market share in the U.S. In 2014, Adidas dropped to third place behind Under Armour and Nike in total U.S. sports-apparel market share.  

But is Nike paying too much?
Nike's fiscal 2015 10-K filing states: "If we are unable to maintain our current associations with professional athletes, sports teams, and leagues, or to do so at a reasonable cost, we could lose the on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses, and profitability could be harmed."

Yet Nike still has one of the highest profit margins in the industry at nearly 11%, compared with around 6% for Under Armour and only about 3.5% for Adidas. That, along with increasing market share (both in the U.S. and abroad), has allowed Nike to continue posting double-digit income gains each year.

So yes, these sponsorship contracts are getting expensive. However, the strategy seems be working, as evidenced by Nike and Under Armour's success over Adidas. Therefore, being the best at this sponsorship game is one more reason why Nike looks like a great long-term play.   

Bradley Seth McNew owns shares of Nike and Under Armour. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.