Kicks: @Nike Is Drafting A New Playbook For the Digital Era.

Nike doubles down on digital
Nike’s Digital Sport division is gathering personal data from its youthful consumer base to revise its marketing strategy. The company’s use of traditional media is in sharp decline as it runs after consumers more comfortable with the social and digital conversation and less interested in sports celebrity idolization and big TV campaigns. Check out more on this story after the jump…

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This article is from the February 27, 2012 issue of Fortune. 

FORTUNE — Few outsiders have visited the third floor of the Jerry Rice Building at Nike’s headquarters. Even most Nike employees know little about just what the staffers working here, on the north side of the company’s 192-acre campus in Beaverton, Ore., actually do. A sign on the main entrance reads RESTRICTED AREA: WE HEAR YOU KNOCKING, WE CAN’T LET YOU IN, and it’s only partly in jest. Inside, clusters of five or six employees huddle in side conference rooms where equations cover whiteboard walls. There are engineers and scientists with pedigrees from MIT and Apple. Leaks are tightly controlled; a public relations man jumps in front of a visitor who gazes at the computer screens for a little too long.

Once upon a time, the hush-hush plans and special-access security clearance would have been about some cutting-edge sneaker technology: the discovery of a new kind of foam-blown polyurethane, say, or some other breakthrough in cushioning science. But the employees in this lab aren’t making shoes or clothes. They’re quietly engineering a revolution in marketing.

This hive is the home of Nike Digital Sport, a new division the company launched in 2010. On one level, it aims to develop devices and technologies that allow users to track their personal statistics in any sport in which they participate. Its best-known product is the Nike+ running sensor, the blockbuster performance-tracking tool developed with Apple (AAPL). Some 5 million runners now log on to Nike (NKE) to check their performance. Last month Digital Sport released its first major follow-up product, a wristband that tracks energy output called the FuelBand.

But Digital Sport is not just about creating must-have sports gadgets. Getting so close to its consumers’ data holds exceptional promise for one of the world’s greatest marketers: It means it can follow them, build an online community for them, and forge a tighter relationship with them than ever before. It’s part of a bigger, broader effort to shift the bulk of Nike’s marketing efforts into the digital realm — and it marks the biggest change in Beaverton since the creation of just do it, or even since a graphic design student at Portland State University put pen to paper and created the Swoosh.

Nike’s new digital hook: the Nike+ logo; the new Nike FuelBand; and the Nike+ SportWatch GPS

Just try to recall the last couple of Nike commercials you saw on television. Don’t be surprised when you can’t. Nike’s spending on TV and print advertising in the U.S. has dropped by 40% in just three years, even as its total marketing budget has steadily climbed upward to hit a record $2.4 billion last year. “There’s barely any media advertising these days for Nike,” says Brian Collins, a brand consultant and longtime Madison Avenue creative executive.

Gone is the reliance on top-down campaigns celebrating a single hit — whether a star like Tiger Woods, a signature shoe like the Air Force 1, or send-ups like Bo Jackson’s ‘Bo Knows’ commercials from the late ’80s that sold the entire brand in one fell Swoosh. In their place is a whole new repertoire of interactive elements that let Nike communicate directly with its consumers, whether it’s a performance-tracking wristband, a 30-story billboard in Johannesburg that posts fan headlines from Twitter, or a major commercial shot by an Oscar-nominated director that makes its debut not on primetime television but on Facebook. Says Jon Bond, co-founder of Kirshenbaum Bond Senecal & Partners who now runs a social media agency: “Clearly they think they can get by without big television campaigns anymore.”

The reason for the shift is simple: Nike is going where its customer is. And its core customer, a 17-year-old who spends 20% more on shoes than his adult counterparts, has given up television to skip across myriad online communities. Not only does Nike think it can do without the mega-TV campaigns of old, it says the digital world allows the brand to interact even more closely with its consumers — maybe as closely as it did in its early days, when founder Phil Knight sold track shoes out of his car in the 1960s. That’s a major change, Nike CEO Mark Parker explained to Fortune during a recent interview in his tchotchke-filled office in Beaverton. “Connecting used to be, ‘Here’s some product, and here’s some advertising. We hope you like it,’ ” he says. “Connecting today is a dialogue.”

Of course, it’s impossible these days to find a Fortune 500 company without an app or a social media strategy. But Nike has been lapping other blue-chip marketers in this domain: It spent nearly $800 million on ‘nontraditional’ advertising in 2010, according to Advertising Age estimates, a greater percentage of its U.S. advertising budget than any other top 100 U.S. advertiser. (And Nike’s latest filings indicate that that figure will grow in 2011.) It’s hired scores of new engineers to make technology for online communities (Digital Sport has grown from 100 to 200 employees in the past six months and has moved into a larger space on the outskirts of campus). And the brand has overhauled its $100 million-plus campaigns around major events like the World Cup and Olympics to focus on online campaigns first. The result? Before, the biggest audience Nike had on any given day was when 200 million tuned in to the Super Bowl. Now, across all its sites and social media communities, it can hit that figure any day.

That’s all the more impressive given that Nike shouldn’t be good at this. After a decade of growth, its sales have reached $21 billion, making it the world’s largest sports company, a full 30% bigger than closest rival Adidas. But biggest is rarely best in the brand game, where niche players routinely run circles around lumbering giants, especially in the new digital world. Hot upstarts like Under Armour (UA) and Lululemon (LULU) have established fast-growing, cultlike followings, while smaller players like Quiksilver (ZQK) and Vans are already going after next-generation tweens. Even Adidas’s 2006 merger with Reebok has created a new formidable global foe.

None of this is lost on Parker. “My fear was that we would be this big blood bank of a company that was dabbling across all these areas and wasn’t seen as cool, as interesting, as relevant, as innovative,” he says. Not too long ago Parker sketched a big Swoosh being eaten by a dozen Pac-Men to demonstrate how easily competitors could overtake Nike.

Just market it: 7 of Nike’s notable campaigns

Like almost every large company, Nike stumbled early in the digital world. In the late ’90s it celebrated the start of NCAA March Madness on its home page in every country. Europeans had no idea what was going on. But it improved over the years. Around 2005 its then-revolutionary Nike iD online store, where customers could design their own shoes, became a surprise hit, reaching $100 million in sales within a few years.

In 2006 it started experimenting with social networking and online communities, partnering with Google (GOOG) for a World Cup-related social network called Joga. Then came Nike+. After Nike engineers started noticing everyone on the Oregon campus using iPods, teams at Nike and Apple met to hash out a simple idea: synchronize jogging data with an iPod. Steve Jobs loved the idea (Apple CEO Tim Cook serves on Nike’s board, but Parker also had a good relationship with Jobs). Powered by a sensor inside running shoes, the service both monitors a runner’s performance and provides digital coaching. A voice lets runners know how much farther they have to go; the PowerSong function generates a musical blast for extra motivation. At the end, it logs details of the workout onto Nikeplus.com, where users can store and analyze the data, get training tips, and share workouts with friends. Whereas Nike’s digital campaigns communicate the brand image, the Nike+ platform creates an intimate conversation and a laboratory that lets the company study its customers’ behaviors and patterns. The company won’t offer financial details about Nike+, but analysts say the 55% growth in membership last year was important in driving sales in its running division up 30%, to $2.8 billion.

Two years ago a group including Stefan Olander, 44, a longtime marketing executive (and Matthew McConaughey look-alike) formally pitched Parker on the idea for Digital Sport, a cross-category division that would take the Nike+ idea — chip-enabled customer loyalty — into other sports. Up and running a month later, the Digital Sport division now works across all of Nike’s major sports.

A massive digital billboard in Johannesburg asked fans to submit messages.

For all its success, though, a follow-up blockbuster to Nike+ has been elusive. The company has high hopes for the FuelBand, a $149 wristband that measures movement and calculates its user’s exertion levels throughout the course of the day. Like Nike+, users sync to the Nike platform online to analyze their results. At the FuelBand’s official unveiling in Manhattan — a splashy event emceed by Jimmy Fallon — Parker compared it to the launch of Nike Air or the first Air Jordan shoe.

While Digital Sport is crafting gizmos, Nike has also been revamping its giant advertising bursts around major events like the World Cup and Olympics. The highlight of its 2010 World Cup campaign, for instance, was a commercial produced by Nike ad agency Wieden + Kennedy and shot by Babel director Alejandro González Iñárritu. Called “Write the Future,” the ad featured Nike soccer stars Wayne Rooney and Christano Ronaldo imagining the riches that come with winning the cup. But instead of making its debut on-air, the ad launched on Nike Football’s Facebook page. Wieden and other agencies spent months cultivating a base of 1 million “fans” and teasing the ad’s debut. When it aired, it whizzed around blogs and wall posts at warp speed, gathering 8 million views in a week to set a viral-video record.

For decades Nike’s closest partner in reaching the masses was Wieden + Kennedy, the famously hip place whose 30-year collaboration with Nike is one of advertising’s longest and most prolific. But Nike’s digital shift has had reverberations here too. In 2000, Wieden handled all of Nike’s estimated $350 million in U.S. billings. Now those campaigns are increasingly split between Wieden and a host of other agencies that specialize in social media and new technologies. In a closely followed dustup in 2007, Nike dropped Wieden from its running account reportedly because the agency was behind in digital efforts. Wieden has added more digital positions to its Nike “platoon.” (Wieden reclaimed the running account just 13 months after losing it.) But it now splits billings with agencies like R/GA, AKQA, and Mindshare. “Collaboration is the new thing,” says Dan Sheniak, Wieden’s global communications planning director on Nike, maybe trying to look on the bright side.

Perhaps the biggest impact of Nike’s shift falls to the people whose names adorn every building on its campus: superstar athletes. Consider the controversies that Tiger Woods, Michael Vick, Lance Armstrong, and LeBron James — Nike endorsers all — have sparked over the past five years. Industry insiders say the effect is difficult to measure in the short term. But as the marketing mix becomes less about hero worship and more about consumer-driven conversation, they say, Nike is insulating itself from an era of athlete endorsements gone wrong. “Everybody’s realized there’s not the same one-to-one relationship as in the past: When Jordan’s hot, his shoes are hot,” says a former Nike executive. “I don’t know if hero worship is the same as it used to be.”

To be sure, marquee athletes haven’t disappeared: Kobe Bryant is arguably the biggest sports celebrity in China, Nike’s second-largest market, and Michael Jordan’s brand remains one of the company’s most powerful franchises. But for the first time in its history, Nike isn’t wholly reliant on a handful of superstars to move merchandise.

So is it working? Is Nike’s massive digital push a true replacement for its marketing past? Its unconventional approaches have won accolades from insiders. “They have their finger on the pulse of what their customer is looking for,” says David Carter, executive director of USC’s Sports Business Institute. Institutional investors who pay close heed to Nike’s subtlest moves have voted in favor of the changes: The company’s stock has returned 120% over the past five years as the S&P 500 index (SPX) has returned just 2.5%.

That’s not to say everything has been a slam dunk. Nike shut down its Joga network after the last World Cup game in 2006, confusing the million-plus members who’d signed up for it. Its Ballers Network, meanwhile — launched in 2008 as an app that let basketball players organize street games — recently had less than 300 users in the U.S.; a recent wall post was a teenager complaining he couldn’t get it to work. And critics say products like the FuelBand and Nike+, while dazzling, are more about keeping Nike’s retail prices high than innovating.

In public Nike executives will protest this characterization. But if running shoes continue flying off the shelves, they won’t blink at the criticism. That’s exactly the kind of shrewd marketing attitude that drove Nike’s past success. After perfecting the art of big branding, it’s moving on to a world in which its consumers want to be told less and just do more. Which, when you think about it that way, might not be such a big change after all.