From trading cards to digital video: Sports NFTs kick sports memorabilia into the digital age
The chance for fans to acquire, not just view, licensed digital media of their favorite sports moments will likely cement non-fungible tokens’ place in the sports content marketplace
What fan wouldn’t want to buy an unforgettable sports moment? Nonfungible tokens (NFTs), unique digital identifiers that use blockchain to record ownership of media, are now letting them do just that. Deloitte Global predicts that NFTs for sports media will generate more than US$2 billion in transactions in 2022, about double the figure for 2021.1 By the end of 2022, we expect that 4–5 million sports fans globally will have purchased or been gifted an NFT sports collectible. Interest in sports NFTs is likely to be spurred by activity in the wider NFT market, including that for digital art, the top five most valuable sales of which had generated over US$100 million by August 2021.2
NFTs will likely create significant new revenue streams
NFTs allow ownership and use rights to be demonstrated for any piece of digital content by assigning the content a specific, nonduplicable identifier that is recorded on a distributed database, or blockchain, typically Flow or Ethereum. Ownership of an NFT may include ownership of the underlying digital asset, though most sports NFTs sold to date have no ownership or use rights in the underlying media. Each NFT includes a smart contract whose terms are applicable indefinitely and that executes immediately and irrevocably with each trade.
Each NFT is unique in the same way that each limited run of a physical print is individually numbered, yet otherwise identical. In this way, NFTs bring predefined scarcity to digital content. They’re the digital equivalent of printed sports trading cards—which were selling for up to millions of dollars each in 20213and which have long been a major revenue source for teams and leagues, especially in the US market. NFTs effectively address the same needs as cards, but swap still images with digital stills or video, cardboard with pixels, binders with digital displays (mostly smartphones), collectors’ fairs with online trading platforms, and third-party authentication agencies with blockchain.4
It may appear illogical that someone would pay for an NFT version of the same video clip that anyone in the world could watch for free.5 But it is arguably also irrational for a printed card to sell for seven-figure sums when the intrinsic value of the card is zero.6 Value in each case is a function of demand and scarcity, and it should also be noted that demand can wax and wane, and is subject to multiple factors, both endogenous and exogenous.
In 2022, platforms and rights creators are likely to continue testing different ownership models to determine the optimal balance of stoking consumer demand and maintaining intellectual property rights (IPR) that respect existing third-party rights over the underlying digital assets. So far, the offer of limited IPR within sports NFTs has not dampened appetite, suggesting that demand may well be driven by the ability to demonstrate status: Scarcity drives inherent value in and of itself.
NFTs can bring additional revenue to sports leagues, teams, and individual athletes whose income has declined during lockdown:10 The largest football (soccer) NFT platform enabled US$128 million in sales in the first nine months of 2021.11 An NFT contract may stipulate that a commission on each transaction be paid to the owner of the platform that sold the NFT, and a share of that commission may then flow back to the aforementioned rights holder(s). Further, if the smart contracts enabling the NFTs are accessed via crypto, they may enable real-time remuneration to the current owners of the preprogrammed rights. This is particularly valuable given the frequently complicated rights management associated with sports.
NFTs are also an opportunity to enhance relationships with fans. Rights holders should consider how best they could apply NFTs to enhance the fan experience by enabling them to acquire and display NFTs of their team, as well as to contribute to decisions such as player of the month (in Japan), or even which songs are played during game intervals (in Italy).12 In some cases, NFTs can also be used within fantasy sports league applications, with each NFT representing a player who could be part of a team entered into season-long competitions.
As NFTs’ scope evolves, an additional category may include athlete-designed or -branded digital versions of physical world objects, such as sneakers, that only exist digitally. As an example, the Gucci Virtual 25 is a digital shoe design that can only be worn using augmented reality.13 Again, some may question the logic behind this, but others may be equally perplexed by the sale of a pair of physical shoes for US$1.8 million, or the purchase of digital skins by tens of thousands of video game players.14
Paying for digital-only content may feel unfamiliar to some. A decade ago, this behavior was niche. But the evolution of spending within video games points to a burgeoning, now mainstream acceptance of the concept. In 2022, gamers will likely spend tens of billions of dollars on virtual currencies that they then use to purchase game-related artifacts and capabilities that only exist virtually, for which there is infinite stock, which is only displayed on a screen, and for which the marginal cost of “manufacturing” is close to zero.15
The bottom line
Most sports-related NFT activity in 2022 is likely to take place in those sports with the largest fan bases and revenues, namely, football (soccer),16 basketball, baseball, American football, and ice hockey. Over time, however, all sports are likely to have some form of NFT offering. These can be to commemorate a single event, be it a Formula 1 driver attaining a record number of world championships or a football player scoring their hundredth international goal. A major initial consideration will be whether NFT activities are best carried out at the league, team, or athlete level.
Creating an NFT-based sports collectible platform will likely remain a complex, challenging exercise in 2022. Ten key steps to help create a successful platform include:
- Confer a specific set of rights for content that could be sold as video clips and associated metadata within an NFT.17
- Build or work with an online platform that can cope with surges in transaction volume and global demand.
- Identify a partner that can mint content into an NFT, noting that costs for minting vary considerably.18
- Generate a scalable process, assisted by artificial intelligence, to identify and grade clips that could be sold as a set.19
- Incorporate a robust “know your customer” process, as any tradable asset could become a vector for money laundering. Don’t overlook the unique compliance considerations such as VAT, sales tax, withholding taxes, and accounting principles that may apply to the issuer or holder of the NFTs. Implement procedures to thwart insider trading.
- Make the service as attractive to those on pocket-money budgets as to high-net-worth individuals looking for long-term investments. The price of entry should start at a few dollars, but occasional high-value trades will add sizzle to the service.
- Iterate tirelessly, experimenting with ways to keep different types of collectors engaged, such as team-building sprints, sports betting, and other challenges.20
- Consider complementary activities such as fantasy team-building competitions, an activity that could also be used to collect data about fans, with their permission.
- Have a zero-carbon plan. As transactions are recorded on blockchain, which as of 2021 was renowned for being carbon-intensive, sports entities should identify approaches that are energy-efficient—for example, by using a proof-of-stake consensus model such as Flow, as used in the NBA’s Top Shot platform—rather than proof-of-work approaches such as Ethereum.21
- Finally, consider video clips as just the beginning of an NFT strategy. NFTs can also be applied to other sports products such as tickets to a game and physical collectibles. NFT tickets can include a smart contract that directs a percentage of any resale of the ticket back to the issuing club.22 Additionally, NFTs could be applied to physical collectibles such as autographed baseballs or cyclist jerseys, further increasing the technology’s ability to generate revenues for sports entities. Finally, sports entities should also consider other blockchain applications, such as currencies.
The 2021–2022 season could be the first in which NFTs start to make a major mark from a revenue perspective. If the experience of early adopters proves positive, the market should continue to grow and be an important part of the digitization, globalization, and commercialization of the fan experience.
Consulting (Human Capital)
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