Behind the NFT: the real challenges and opportunities for sports organisations
“NFTs”, known as Digital collectibles, have exploded in popularity lately. From art to sports, people are spending millions of dollars/euros on these new types of digital assets. But why this hype? Why do NFTs matter? We have read so many articles, listened to so many talks and experts’ comments but to us, it is not really about NFTs, which are only the top of the iceberg. More importantly, it’s about the technology behind it. And so NFTs should remind sports organisations about:
the redefinition of a business model through new assets and monetisation models;
a new level of fan engagement on the medium-term.
Starting with the basic - What is an NFT?
What is an NFT?
A NFT is a “non-fungible token”. It is usually a digital file whose unique identity and ownership are verified on blockchain.
What is blockchain and what is crypto?
According to Wikipedia, Blockchain is the technology that enables the existence of cryptocurrency (among other things). A blockchain is a digital record of transactions. The name comes from its structure, in which individual records, called blocks, are linked together in a single list, called a chain. Each transaction added to a blockchain is validated by multiple computers on the Internet. It is important to point out that while every transaction is tracked and public, the actual identity of the human who holds the wallet is not public, as most blockchains use numerical codes or usernames to identify each user. We will see the implications of this later in this article, and how it can be used by sport organizations to leverage first-party data as part of a loyalty programme.
Still according to Wikipedia, a cryptocurrency is a medium of exchange, such as the US dollar or the Euro, but it is digital and uses encryption techniques to control the creation of monetary units and to verify the transfer of funds. This digital currency lives on top of a blockchain and can be used for a variety of purchases and transactions. The most common one is Bitcoin, but there are many others.
Most NFTs today use Ethereum as their crypto currency of choice. NFT’s reliance on crypto currencies for sales is one of the key barriers to entry as most consumers do not have or know how to use crypto currency.
How do NFTs work?
These digital assets are released by their creator on a selected Marketplace, in “drops” of a defined quantity, tied to a public blockchain (Ethereum, WAX, Flow). Then, these digital assets can be sold for defined prices, given away or auctioned off to the highest bidder. Once the initial “drop” happens, whoever has purchased the asset can then hold the asset in a digital wallet, or they can resell it on a variety of public marketplaces. Often holding the asset on a defined date provides some benefit to the holder for example the right to concert tickets or limited availability merchandise.
This is a NFT sneaker that dropped in March 2021 and sold for 1500$, now sells for $6-9k in secondary market.
Getting into the Why - Why are NFTs so popular now?
Pandemic context & technology maturity
The coronavirus pandemic played a big role in the NFT boom. Last year, the total value of NFT transactions quadrupled to $250 million, according to a study from NonFungible and BNP Paribas-affiliated research firm L’Atelier. That’s in no small part because of stay-at-home restrictions that resulted in people spending a lot more of their time on the internet and saving cash. NFTs started in 2017. A lot of it was about speculation. What we saw in 2020 is that the market is maturing. NFTs are more and more adopted by many industries since leading organisations like the NBA created marketplaces that boomed. And you can expect top european clubs or players to follow this trend in the coming weeks.
(New) profound behaviors - Gen Z behaviors, all anchored in one element: “this generation's search for truth."
A study from McKinsey found that, "Gen Z behaviors, all anchored in one element: this generation's search for truth." Non-fungible tokens are a step towards the truth in fashion or sport, not just to ensure the source of the garment, but makeup and value as something in this world. The digital identity of an item "gets transferred through Blockchain technology, which in turn makes it impossible to counterfeit the design." Thus, creating uniqueness and desirability. Crucible has a consortium called BluePrints for the metaverse with the goal of allowing people to use the same avatar and virtual identities across platforms. They have tools for builders and creators so they can be part of building the open metaverse, and understand that the Direct-to-Avatar market as "digital property market for skins, avatars, digital fashion, and collectibles is predicted to be the largest digital economy in history, topping $1T this decade." NFTs are simply an entry door to this new world, to the gaming world that sports organisations need to partner with to ensure they do not lose one generation.
The Metaverse is no longer a concept – People spend time and money to building their alter egos in these digital worlds
We would encourage any reader that does not know anything or very little about the concept of Metaverse to start reading about it, especially with this article from Matthew Ball. In the NFTs world, we would quote twice Sam Englebardt to understand why it matters and what it can bring to this industry: “People over the last 20 years have become incredibly comfortable with the idea that digital objects have value.” “I think it all prepares you to accept the possibility that we’re living in a simulation now and certainly to understand why people could and do spend so much time building their alter egos in these digital worlds and even the possibility that the alter egos they build are as much them as the physical bodies that they inhabit.”
Direct-to-Avatar economy – The Future of Virtual Fashion, Retail, Art and Sport is now
Humans are constantly evolving and creating. The desire to explore the unknown and live out our dreams leads us into the digital expanse. Our identities become split and enhanced by digital mediums. Online, people can tune into the sort of person they want to be. It's an escape, a place of wonder, and an opportunity for brands, rights owners and celebrities/athletes to expand their vision and goods. No longer being held to reality is a good thing when it means reaching more customers by creating new and innovative products. This is the Direct-to-Avatar economy and the emergence of digital goods’ future. This future has arrived sooner than many brands and rights owners expected, and this part of many industries will only continue to move forward as it continues to increase monetisation and retention.
In conclusion and based on all the above, we are at the convergence of the physical (or real) world and the digital world. And sports - just like any other IP in other industries - need to adapt to this new reality and its new business models. However, one should not be afraid of this trend. Sports organisations have what is becoming very valuable for everyone, and we have seen it recently with the increasing number of acquisitions and SPACs in sport: fans. They are actively engaged on daily basis with your brand/platform that you can monetise.
Refocusing on the matter - Why does the Technology behind matter even more?
NFTs rely on blockchain technology which contains highly trustworthy documentation of their history and origin. This means that anyone can verify the ID of the owner and the uniqueness of the digital asset. According to Chris Dixon, there are 3 ways blockchain and NFTs revolutionizes the creator and attention economy:
The first is by removing rent-seeking intermediaries. The logic of blockchains is once you purchase an NFT it is yours to fully control, just like when you buy books or sneakers in the real world. NFT platforms and marketplaces will always be constrained in what they can charge because creators and users are the ones able to fix the prices. This constitutes a shift of power compared to real world marketplaces.
The second way NFTs change creator economics is by enabling granular price tiering. In ad-based models, revenue is generated more or less uniformly regardless of the fan’s enthusiasm level. Conversely, NFTs allow the creator to “cream skim” the most passionate users by offering them special items which cost more. NFTs go farther than non-crypto products in that they are easily sliced and diced into a descending series of pricing tiers. The NBA NFT platform - Top Shot - offers cards that range from over $100K to a few dollars. Crypto’s fine-grained granularity lets creators capture a much larger area under the demand curve.
The third and most important way NFTs change creator economics is by making users owners, thereby reducing customer acquisition costs to near zero. Open any tech S-1 filing and you’ll see massive user/customer acquisition costs, usually going to online ads or sales staff. Crypto, by contrast, has grown to over a trillion dollars in aggregate market capitalization with almost no marketing spend. Bitcoin and Ethereum don’t have organizations behind them let alone marketing budgets, yet are used, owned, and loved by tens of millions of people.”
The highest revenue NFT project to date, NBA Top Shot, has generated more than $250M in gross sales in just the past month while spending very little on marketing. It’s been able to grow so efficiently because users feel like owners — they have skin in the game. It’s true peer-to-peer marketing, fueled by community, excitement, and ownership.
Getting concrete for sports organisations - What does it mean for them? What do they need to look at? What is the current state of the industry?
Agreements in place and NFTs - Is there an overlap?
Many sports organizations already have agreements in place with a dedicated partner. The products covered by these agreements do not currently feature NFT technology, but every sport organisation needs to have a close look at them first. Specifically, it needs to look at the rights granted that could be used for NFTs. One may mention Topps as one of the established companies with current partnerships around digital trading player cards. But beyond such partnership, sports organisations need to look for other partners such as EA Sports in the gaming industry. They already have certain card- and player- based sections on their sports video games but there is a potential to create a blockchain integration to enable specific NFT on players or on cards. There is a thin line between traditional rights granted under the name of “digital cards”, or “fantasy partnerships” and what could become a new asset category around NFTs. This needs to be carefully reviewed and discussed with partners to leverage the opportunity together. The questions for legal review we approach below are key in that regard.
Players rights - How to include them?
Obviously, any sport organisation needs to think about the players rights around such agreements. The NBA PA (Player Association) and other US leagues PAs have agreements with service providers like Topps and Sorare for trading cards and digital collectibles to allow for the use of players' names and images rights. They are interested in exploring new as long as it can be fully backed legally. This concern around players rights is trickier in Europe between the leagues, the clubs and the players themselves considering that players’ unions do not necessarily centralise all players’ rights. Finally, the question around retired players also needs to be addressed. Archives could be turned into NFTs by rights owners, especially iconic moments; but the challenge is unique for rights holders as there is no existing mechanism to acquire such collective rights from former players'.
Questions for legal specialists - With no precedent, sports organisations will need to make a bet
The difficulty today is there are no precedents around NFTs and there are no ongoing legal actions. As sports organisations are looking into NFTs and are trying to find ways to make them a new asset category, lawyers will need to step in supporting the business side of the organisation. Our take is that they will need to address the following questions, which seem to be the most important ones today:
How do we best define product categories including NFT/Blockchain technology?
Are highlights considered a “Digital Collectible” when used in conjunction with blockchain technology?
How can right holders include former players in the NFTs portfolio?
How do right holders protect their IP in the current “wild west” environment of NFT?
Usually, in NFT terms, the owner gets the full rights exclusivity and ownership, which means that fans/consumers will fully own it. This is completely different from right holders traditional and long-time standing footage rights sell, for which sports organisations keep full ownership and control. Therefore, are right holders confident in such terms brought by NFTs? Are they willing to lose this control and ownership when releasing NFTs highlights?
Be Aware – Pitfalls and Limits of NFTs
The success for NFTs is not as straightforward as one can pretend. Today, everybody speaks about NBA Top Shot but tends to forget about other initiatives that failed. First, be aware of the following pitfalls:
Speculation and Money Laundering: sports organisations need to ensure their NFT platform provider is on top of the risks and legal protection especially in relation to money laundering.
Environmental issues: the energy and resources used to create, protect and exchange NFTs are huge. This would be more acceptable if NFTs were used to solve some of the world's most pressing issues, which is arguably not the case.
Crypto is confusing: one of the key reasons why Top Shot and the technology developed by Dapper Labs is successful today is because it does not only accept transactions in crypto currency but it does allow FIAT (traditional currency) within their payment system via Credit Card. The vast majority of fans do not have a clue on how to open a crypto account and manage their crypto wallet.
Second, launching a product on NFTs does not guarantee its success. Launched in 2018, the MLB crypto collectible baseball game struggled to gain relevancy and in 2019, it removed its reliance on the blockchain and crypto in an effort to build a bigger audience. Currently dormant, it is not clear what the future holds for this product.
A combination of the right partner that has developed the right tech with the right products seems to be the key and from that perspective, very few partners could be considered for any sport organisation despite all the start-ups and companies existing today. In conclusion, for sports organisations to navigate this world, they need to understand that NFTs are still in their early days and that this world is still “wild west”.
Putting a Game Plan for sports organisations - What are the opportunities for them? Which approach is to be considered?
NFTs are still early, and will evolve. Their utility will increase as digital experiences are built around them, including marketplaces, social networks, showcases, games, and virtual worlds. It’s also likely that other consumer-facing crypto products emerge that pair with NFTs. Modern video games like Fortnite contain sophisticated economies that mix fungible tokens like V-Bucks with NFTs/virtual goods like skins.
For now, sports organisations need to identify and position themselves around NFTs’ opportunities. The easy way to start with is to put together a NFT platform to provide and sell exclusive collectibles, replicating to a certain extent the NBA Top Shot model.
However, the key is while doing this and getting first-hands learnings on it, any sport organisation needs to come up with a bigger plan and a medium-term strategy. They should explore further opportunities as outlined below around fans reward token space with a new loyalty programme for which you can redeem physical reward, activate new partnerships in the digital worlds and start using NFTs as an entry gate into gaming where sports IP are not (yet) existing (especially towards younger audiences). Sports organisations need also to look at blockchain for other purposes such as ticketing solutions (on blockchain), regulatory matters, and smart contracts opportunities.
NFTs and digital collectibles – Short-term:
Build fan engagement products and drops to drive hype, interest, and increased consumption of right holders events and advocates
Drive revenue opportunities for right holders: the leagues, the clubs, their players, etc.
Create breakthrough branding moments to differentiate from other IPs and build an interest in sports for larger audiences.
Sports organisations could engage in many ways, and could start with 4 early products as follows: NFT Trading cards, NFT Highlights, NFT Fantasy and NFT Art/Culture/Experience Moments (jerseys, boots, tifos, etc. made by the fans directly or with sponsors artists).
Broader blockchain opportunities – Medium-Term:
Fans reward token space – New loyalty programme mixing digital and physical rewards allowing to increase and improve data collection on fans; engage directly with the fans; and reward them for behaviors sport organisations also stand for (going to stadium, practicing the sport, etc.). This is fully part of a CRM strategy and first party data, with active fans.
Drive new partnerships and revenue opportunities, especially around gaming as NFTs are an entry-door into this industry.
Allow organisations’ IP to live in other properties where Gen-Z and Gen-Alpha are spending time in or imagining cross-over with the sport organisation App/product dedicated to young audiences to ensure you don’t lose a generation
Leverage blockchain technology on multiple cases such as: to improve regulatory matters like transfers of players with effectiveness on training compensation and redistribution schemes to clubs developing players, or as part of a new ticketing solution to get better fan data and fight black market while potentially leveraging the opportunity to get a share of the secondary market, smart contracts, etc.
Despite the NBA Top Shot popularity and buzz around NFTs; these digital collectibles are still messy, complex and operating in a “wild west” world. Nevertheless, sports organisations need to identify and position themselves around NFTs opportunities today, not so much for the quick wins around revenue increase but rather because it’s an opportunity for their business transformation towards business models of the future.
There are no straightforward paths and there is no guaranteed win.This opportunity needs to be properly assessed, discussed, and potentially leveraged by any sport organisation. Not only are we talking about potential new income and a certain revenue diversification in the short-term; but this technology could prepare any sports organisation to better collect fan data, better understand their fans, while also better rewarding and engaging with them.
NFTs need to be understood as part of a bigger trend - coupled with gaming where social connected experiences are being created - where new and existing generations are looking for more and expect to be rewarded for the time they spend on sports properties and expect to be given the opportunity to co-create the sport of tomorrow. Using this technology as part of a new 360 Fan Loyalty Programme backed on a true Data Hub/CRM strategy is a unique opportunity for sports organisations to look beyond their current business model, while securing long-term engagement and participation - in the benefits of the entire ecosystem.