Every Media Company Needs an NFT Strategy — Now
NFTs are Not Art, They Are the Ownership Layer of the Internet
[Note that this essay was originally published on Medium]
Tl;dr:
Initially, I was as skeptical as anyone of the current NFT “craze.” I’m not anymore. I now strongly believe that NFTs are not only a thing, but they will likely be the killer app that drives crypto mass adoption.
The key is that NFTs are not just digital collectibles, they are the “ownership layer” of the Internet.
Mobility is a good analogy. In 1995, most people thought of cell phones as devices that would let you make calls away from home. They were. But the combination of mobility plus a host of additional technologies, ecosystems, consumer behaviors and business models resulted in an explosion of innovation that has changed the way most of the planet lives.
Like mobility, NFTs have the potential to unleash tremendous innovation, all built on the foundation of portable, authenticatable digital property rights. What this means in practice will take years to become clear, but early examples of the utility of NFTs that are particularly relevant to media companies include membership/exclusive access/governance, play-to-earn gaming and virtual worlds (aka the “metaverse”).
Also like mobility, a lot will need to fall into place, but technological prerequisites to mass adoption, including new scaling technologies and seamless fiat-to-crypto on/off ramps, are rapidly emerging.
So far, most traditional media companies have almost no presence in NFTs. The most successful NFT applications, with the exception of NBA Top Shot, all feature NFT-native IP (Figure 1). This reflects both a lack of attention by big media and the pro-decentralization (and anti-establishment) ethos of the crypto community, which naturally gravitates toward NFT-native/crypto-native projects.
In this essay, I argue that NFTs represent both a massive financial and strategic opportunity for traditional media companies.
The financial opportunity seems easily to be measured in the billions of dollars. And strategically, NFTs hold the potential for media companies to re-capture lost consumer surplus; disintermediate the dominant Internet platforms; turbocharge fandom; provide a toehold into the burgeoning metaverse; and create a bridge to the future of blockchain-based media distribution.
For big media, the risk of inaction is greater than the risk of action. They should be allocating resources now.
If you spend most of your time in the BAYC Discord server, wax on about cross-chain liquidity or have a tabby named Vitalik, you aren’t the target audience for this essay. But if you’re a normie like me who’s intrigued about what this NFT thing is all about — and the implications for media companies — hopefully it will jog your thinking.
Figure 1. Top NFT Collections
Source: DappRadar.
(The Obligatory) What’s an NFT? (Section)*
*Feel free to skip ahead if you already know the answer.
Crypto is an intimidating subject. Among emerging technologies (AI/ML, cloud computing, virtual reality, “big (unstructured) data,” 5G, robotics, autonomous vehicles, you name it) crypto is not necessarily more technical, but it is a lot harder to describe in one sentence.
Autonomous vehicle: A car that drives itself.
AI/ML: Computers that can learn on their own.
5G: High-speed wireless technology.
Robotics: Things done by a robot.
Crypto: A decentralized ledger with a built-in economic incentive. Wait, let me start over. Alright, first you have a database replicated on a bunch of computers, then there is a way to make sure the database stays consistent, and the way that’s achieved is through this token…
It is also moving extraordinarily fast. Unlike technologies that are confined to universities and corporate labs, it is open source, with a very large, economically-incentivized and almost evangelical community that is continually developing new protocols and new applications and building on top of old ones. So, it is easy to get bogged down and hard to stay current, even for those that are focused on crypto full time. Here’s my attempt to provide enough information to understand NFTs.
Let’s start with blockchain. A public blockchain has three basic elements.
It is a distributed ledger, which just means a database that has identical copies sitting on multiple computers (or “nodes”). (The Bitcoin network has ~13,000 nodes and Ethereum has ~3,000.) This is why blockchains are decentralized. Any one node (or 10 or 1,000) can go down and the database persists. This data can include any kind of information that can be digitized, including executable code.
It has some sort of consensus mechanism that enables all those computers to agree on changes to the database. Consensus mechanisms are engineered to prevent any one party from being able to unilaterally change the database (although it doesn’t stop some groups from trying). Public blockchains are often referred to as “trustless,” since it isn’t necessary to trust a centralized entity. (Although trust is still necessary — it is just shifted to the network and the code itself.)
It has a token that often serves multiple purposes, such as creating economic incentives for the participants (including the nodes that maintain consensus), determining governance of the network and/or providing some other utility, such as serving as in-network currency. Usually, those tokens, or cryptocurrencies, trade on exchanges that make it (relatively) easy to buy and sell them and trade them for “fiat” currency (i.e., money backed by a sovereign nation, like the U.S. dollar) or other cryptocurrencies.
Assets that are interchangeable — such as all fiat and cryptocurrencies — are fungible. By contrast, you would probably consider most of your possessions to be non-fungible. Fungibility is subjective, but you are (probably) not indifferent between all houses and your house, or all leather jackets and your favorite.
NFT stands for non-fungible token. The original protocol for NFTs was written for the Ethereum network. (Although, as discussed below, alternative blockchains have since emerged to support NFTs.) This protocol (ERC 721) stipulates that each NFT has a unique identifier, with metadata recorded in a public ledger, including who originally minted the NFT and who owns it. As a result, both authenticity and ownership are independently and publicly verifiable. Just like you can take the title of your car with you from town to town or state to state, you can port your ownership of an NFT to any software environment capable of reading the ledger.
An NFT could be associated with a physical asset, such as anything with a complicated supply chain, or for which the provenance is important (like this effort for wine or this one for luxury goods), but for our purposes let’s stick with digital assets. These could be any file format: text, an image, a video, audio, programming code or any proprietary format you can imagine, like an in-game item. A digital asset may be associated with one NFT or it could be carved up into a limited-edition series (i.e., an NFT is #37 of 100), like a lithograph. The file itself may be stored on the blockchain, or the metadata within the block could just record the location of the file, such as a URL pointing to a server or an IPFS address (which is a way of storing data on a distributed basis, replicated on many nodes).
One additional important attribute of some blockchains, such as Ethereum, is what is known as composability. As mentioned before, any data can be stored inside the blockchain, including executable code, which is referred to as smart contracts. These smart contracts are public, so that it is possible for other smart contracts to access them — that is what is meant by composability. The significance is that it is possible for developers to build upon and leverage existing functionality in other contracts. As explained in this post, for instance, a game publisher could mint in-game items as NFTs and then, via smart contracts, access an existing NFT marketplace to enable the trading of these NFTs without creating its own market.
So what? The significance of NFTs is that they represent the first verifiable, portable, immutable way to prove ownership of a unique digital asset.
A good question to raise anytime blockchain comes up is: do you need it for this use case? Theoretically, you do not. A central authority could issue you a digital certificate that conveys ownership of a unique digital asset. But this would have a few (very significant) drawbacks relative to an NFT: you would be dependent on the entity staying in business and/or not altering the terms of service; your ownership may or may not be auditable and independently verifiable; you may not be able to transfer, sell or port that ownership somewhere else; and third-party developers would not likely have the same ability to add utility to your ownership of the asset.
Hold On — What Does it Mean to “Own” an NFT?
One of the key questions that continually arises with NFTs (often in a dismissive tone) is: when you own an NFT, what do you actually own? A central insight that many will need to wrap their heads around, particularly media executives, is that it depends. As a result, we may need to re-think our definition of ownership.
Ownership is already a fluid concept, whether we think of it this way or not. In general, property rights include the rights of consumption and use, commercialization and transferability (including the right to sell, lease, rent, trade, barter, loan, gift or collateralize), among others (like the ability to alter or destroy). But “owning” something doesn’t always mean you get all these rights. You probably can’t build whatever you want on a piece of land due to zoning laws; you can’t drive your car as fast as you want; in some cases, you may not even have the right to destroy something you own if it is deemed to have cultural significance. In media, it is common to unbundle property rights. If you “own” a DVD, for example, you can watch it, but not copy, exhibit or otherwise commercialize it.
The reason this question keeps coming up is that some of the first NFT applications convey very limited rights. Owners of collectible NFTs do not usually control “consumption” of the associated media — anyone can snip, paste and distribute a jpeg of a Pudgy Penguin as much as they want. NFT collectibles also may or may not include the underlying copyright. While owners of Bored Apes can commercialize their apes or derivatives products, owners of CryptoPunks and NBA Top Shot moments cannot. So, what do you get? In the case of NBA Top Shot, you basically get limited rights of transferability (you can sell a moment) and what we might call the right to flex, meaning you can prove your ownership, and not much else. From the NBA Top Shot terms of service:
For the sake of clarity, you understand and agree: …(b) that you do not have the right, except as otherwise set forth in these Terms, to reproduce, distribute, or otherwise commercialize any elements of the App Materials (including, without limitation, any Art)…
The key thing to keep in mind is that NFTs do not inherently carry limited rights, but rather that NFTs have almost unlimited flexibility in unbundling and assigning property rights because these rights can be precisely delineated, enforced and executed by smart contracts. The idea — for some collectible NFTs — that ownership does not prevent other people from viewing or distributing the associated file is just a specific example of the inherent flexibility of NFTs, facilitated by the fact that they are digital. All physical assets degrade over time, so ownership and right to consume are inextricably linked. Digital assets are infinitely replicable and infinitely consumable without any degradation of the source file. That makes it possible to unbundle ownership and exclusive right to consume.
It’s critically important for media companies to understand that it is possible to customize the rights conveyed by NFTs to avoid jeopardizing existing revenue streams.
In media, historically a right or license almost always has meant the right to consume something or commercialize it. NFTs do not have to include these rights. This may not be an important distinction for new, NFT-native IP that has no pre-existing commercial value, but it is critically important for established IP that does, because it means that it is possible to customize NFTs to avoid jeopardizing existing revenue streams.
A Starting Point for Understanding the Value: NFTs as Digital Art
After considering the relatively limited rights conveyed by some of the most popular NFT collections — and seeing the prices at which they’re trading — the next logical question is: why would anyone want one? It’s a fair question. On the face of it, that anyone would pay millions of dollars for proof that they own a digital file, but without necessarily owning rights to commercialize or control consumption of that file, may seem preposterous.
The simplest starting point for understanding the appeal of NFTs is to think of them as a digital version of art or any other kind of collectible (with heavy emphasis on starting point, for reasons described below). All goods include some combination of functional and emotional value. The reasons anyone would want to own a collectible NFT are the same reasons anyone would want to own any collectible, driven largely by emotional value:
Bragging Rights
Status is a critical component of the emotional value of art. Why does anyone own a Picasso or a de Kooning or a dead shark suspended in formaldehyde? (Or, for that matter, any luxury good?) Clearly, a key part of the value to the owner is the perception that the good conveys information about his or her status.
Ownership of a good only signals status to those in the know. Today, NFTs only convey status to a relatively small community of crypto enthusiasts. But the size of that community, and therefore the “status value,” will only grow as NFTs become more mainstream. Plus, it’s much easier to show off your NFT than your dead shark. Proud owners of CryptoPunks are using them as their Twitter profile pictures. It is already possible to use your NFTs to decorate the walls of your home(s) or public space in virtual worlds, like The Sandbox and Decentraland, as shown here and here. Over time, it may become common for people to include their gallery (or a link to it) in their social media profile.
Fandom
Other critical components of emotional value are self-expression and community. Several years ago consultancy Troika published The Power of Fandom, reporting that 78% of people consider themselves a “fan” of something and, of those, 49% considered themselves “as avid as a fan can be.” That fandom may be directed at a professional or amateur sports team, a specific athlete, a sport (either as a viewer or participant), a musician, a genre of music, a TV show, specific characters on that show, actors, artists, films, film franchises, film directors, video games, video game publishers, video game franchises, digital publishers, individual creators, fashion designers, architects, authors, journalists, TV networks, consumer product (especially luxury) brands, cars, business personalities, even technologies. There is almost no limit to the things about which people can be passionate. The Internet, and both the accompanying explosion in access to information and the ability to form communities around shared passions, has fueled this fandom. There is probably no reason to digress into the psychology around fandom; the prevalence of fandom-inspired tattoos speaks volumes. For many people, they regard their fandom as a key part of their very identities.
Patronage
Benevolence is yet another possible component of emotional value. Sometimes fans simply want to support artists they like. This is especially true of emerging artists that they believe will become more popular. Which brings us to…
Speculation
This the key functional value of art. Since NFTs can be sold, just like any collectible, one may want to own one simply as a bet that someone else will want to pay more for it in the future.
Much More than Art: The Ownership Layer of the Internet
Today, relatively few people own cryptocurrencies. Estimates range from 8% to 23%, although the latter seems very high (as of 2019, less than 20% of U.S. households directly owned stocks). The average person on the street isn’t likely to care about Bitcoin as a store of value or DeFi as an alternative marketplace for financial services. By contrast, as the utility of NFTs become clearer, they could be the killer app that drives crypto mass adoption.
To understand the potential, it is necessary to look past the “NFTs as digital art” analogy. NFTs are not just digital collectibles, they are the “ownership layer” of the Internet.
Right now it’s hard to grasp the full implications of what this means. Above, I drew the analogy between NFTs and mobility. Twenty years ago, it was hard to conceptualize what it meant to “carry a networked supercomputer in my pocket.” Many new technologies, ecosystems, consumer behaviors and business models had to fall into place. (With no smartphones, no apps, no 4G, no GPS in the phone and no one accustomed to climbing into a stranger’s car, no one would’ve predicted Uber in 2001.) The analogous question for NFTs is “what can I do with portable, verifiable digital ownership?” Or, put another way, “as technologies, ecosystems, consumer behaviors and business models evolve, what will be the functional utility of unique digital goods with property rights?”
It is early days and what this means in practice will become clearer over years, if not decades. But here are a couple of early applications with particular relevance to media companies:
Exclusive Access/Membership/Influence
Official fan clubs, which provide some type of exclusive or early access to content, live performances or even the celebrity/creator themselves, have been around for decades. A more modern version is Patreon. According to Graphtreon, Patreon has 200,000 creators who collectively have almost 13 million patrons. For a monthly fee, these patrons receive benefits, like early or exclusive access to content, access to a community Discord server, the ability to participate in a Q&A with the creator, personalized shout outs and maybe even input into the creative process. Another version of “monetized exclusivity” is Cameo, which last year sold 1.3 million personalized videos from celebrities, up 350% from the prior year.
It is easy to see how IP rightsholders and creators could provide these kinds of benefits to NFT owners, albeit with the additional utility that comes with property rights, most importantly salability. Socios works with professional sports teams (mostly European football clubs so far) to create fan tokens that give token holders an influence on team decisions and exclusive access to experiences and merchandise. Lionel Messi, who just transferred from Barcelona to Paris St. Germain, is reportedly receiving some of his compensation in PSG fan tokens. Similarly, ownership of a Bored Ape NFT acts as a membership card that unlocks access to member-only message boards and merchandise.
An illustrative (if somewhat extreme) example is the latest Kings of Leon album, When You See Yourself, which it released as a collection of NFTs in February. It made the album available on streaming services and for digital download, but it also sold 6,500 NFTs that included a digital download and limited edition vinyl print. More interesting, it sold six “golden tickets” NFTs that guarantee each owner four front-row tickets to one show during each concert tour for life, a driver to the show, a concierge, time with the band beforehand and merchandise. The auction raised about $2.2 million, including $157,000 for the highest-priced golden ticket. (Since then, Golden Ticket: Bandit #2 has sold for ~$300,000, at the time of this writing.) And all this was conducted in ETH, limiting the addressable market.
Play-to-Earn Gaming
If you’re a gamer, or have gamers in your house, you know first-hand the vast amounts of time and money gamers invest in Fortnite, FIFA, League of Legends, GTA, Roblox, etc., to level up and buy in-game assets like specific athletes, skins, weapons and vehicles. But ultimately all this value is stranded in the game — when you move on to the next game, it is all sunk cost. You also know that there is limited value to discovering a game early, other than bragging rights.
Play-to-earn gaming, by contrast, rewards players for time spent and skill and early players can also benefit as a game becomes more popular. Axie Infinity is a blockchain-based game in which players can breed, trade and battle Axies (Pokemon-type characters), each of which are unique and minted as NFTs, to earn tokens that are exchangeable for fiat currency. The platform has almost 1 million DAUs and is expected to generate $1 billion in revenue this year. A great deep dive is here — but most striking is that in the Philippines, people have reportedly quit their jobs to play because the game is more lucrative. Zed Run is a similar (and even easier to grasp) idea, but for horseracing. Sorare is a fantasy soccer game that enables players to collect limited edition and unique player cards (which are saleable, of course), assemble fantasy teams and win ETH. The sector is exploding, with dozens of new RPGs, card trading, racing, strategy and puzzle games launching in just the last few months.
Whether games like Axie Infinity will be able to sustain such attractive economics for gamers will depend on whether they can attract revenue from outside the game (such as from advertising, sponsorships, licensing, etc.). Otherwise, as user growth slows, the average gamer will only pull out what she puts in. Even so, traditional game publishers are rightfully on high alert. Once gamers get wind of the idea that they can earn (or at least partially recoup) money by playing and build asset value in their in-game items, publishers will likely be forced to respond. They may be able to do so technically, but since the premise underlying P2E gaming is that the bulk of the value is shared with players, it is not just a technical challenge, it is a fundamentally different business model.
The Metaverse
Just as property rights are the foundation of modern economies, for the “metaverse” to blossom into a fully functioning economy, it will require ownership. Ownership of what? Identity, avatars, land, vehicles, weapons, armor, magical artifacts (why not?), NPCs (non-player characters, whether humanoid or not), clothing and accessories, art, raw materials, inventory, businesses, and who knows what else. In addition, while some corporate giants, like Facebook, would probably like the metaverse to evolve into a closed system (with sinister echoes of Innovative Online Industries from Ready Player One), given the growing distrust of the massive centralized platforms that emerged during Web 2.0, there will be a lot of forces aligned against that recurring. An open, interoperable metaverse will require that ownership be independently verifiable and portable among them. NFTs look like the most likely, if not the only, way to achieve this.
Clearly crypto enthusiasts are willing to pay real money for avatars and virtual goods. Meebits are an NFT collection specifically intended to act as avatars in virtual worlds. As of this writing, the top Meebit sold for $2.7 million. The most popular virtual worlds, like The Sandbox and Decentraland, mentioned above, enable users to buy and develop plots of virtual land. In both cases, the number of plots is fixed, and therefore land is scarce, and owners can use in-game development tools to monetize their properties by hosting events and games or by renting or selling properties. In June, a “digital real estate firm” purchased 259 parcels on Decentraland for almost $1 million.
Will this activity become mainstream? It already is. Consider Fortnite. Essentially all of Fortnite’s revenue comes from players buying V-bucks, which they use solely to buy cosmetic items, like outfits, pickaxes, gliders and emotes (dances). In other words, Fortnite is not a “pay-to-win” game; you can’t use V-bucks to improve your chances of winning. As shown here, in 2018, at the height of its popularity, Epic generated $5.5 billion in revenue by converting 22% of its monthly active users to paying players, and these players were spending almost $32 per month, on average — just to look cool in the game.
Gamers are already spending a lot of money on virtual goods that only have cosmetic value.
What’s Next?
We’re still just scratching the surface of what it means to have digital property rights. And because of composability, mentioned above, the innovation in NFTs may happen even faster than occurred in Web 2.0 because third-party developers will be able to easily bolt on utility to NFTs.
Loot was a recent NFT drop that was simply a unique list of items for some unstipulated fantasy world. That might not sound that exciting, but it subverted the whole concept of an NFT; rather than convert IP to an NFT, it minted NFTs that requires the community to create the IP. Check out Charged Particles (h/t to Lou Kerner), which is seeking to bring DeFi to NFTs. It has developed a protocol to enable users to embed other tokens into an NFT (including other NFTs), with possible applications like renting out NFTs, lending them, collateralizing them, or creating an “index fund” of a basket of NFTs. Or read this amazing post about intelligent NFTs, or iNFTs, that embed a GPT-3 prompt in their code and therefore appear intelligent and can interact with humans or each other.
What Needs to Fall Into Place?
There are a few key technical hurdles that need to fall for all this to be feasible at mass scale. It’s beyond the scope of this essay to delve in too deeply, but the short answer is that those hurdles are falling more rapidly than many expected.
The Scaling Problem is Being Solved
Since Ethereum was the first blockchain to establish a protocol for NFTs, not surprisingly until recently most NFT transactions occurred on Ethereum. But it has several inherent scaling challenges due to the nature of its (current) consensus mechanism. First, currently Ethereum can only handle about 15–20 transactions per second (tps). Second, it can take 15 seconds or longer for a transaction to settle. And, third, Ethereum can have relatively high transaction or “gas” fees depending on the congestion on the network — in the spring, these fees jumped to as high as $50 per transaction. These kinds of limitations are fine if you are trading $3,000+ ETH or occasionally selling a Beeple or a CryptoPunk for millions of dollars, but they won’t work when trading $10 moments on NBA Top Shot or minting thousands or hundreds of thousands of NFTs each day in a blockchain-based game.
While the crypto community has been focused on scaling for years, as both DeFi applications and NFTs have exploded in popularity over the past year, even more resources have funneled toward resolving these challenges. These efforts can be grouped in a few categories:
Layer 2 solutions: These are technical solutions that benefit from the security and network effects of Ethereum but also reduce the load on the “mainnet” (i.e., the Ethereum network) by moving some functions off chain. For instance, rollups, which can accommodate ~2,000 tps, aggregate and execute transactions off chain and then post proof of the aggregated transaction back to the mainnet.
Sidechains: Sidechains are similar to layer 2 solutions in the sense that they also conduct transactions off the mainnet, but with the difference that they have their own consensus mechanism and therefore an additional layer of security. One of the most popular is Polygon, which now supports over 400 crypto applications (or Dapps). It has reportedly processed 7,000 tps on one sidechain and can theoretically support 65,000 tps.
Alternative blockchains: Some developers have decided to sidestep Ethereum altogether and deploy competing Layer 1 blockchains. Despite some recent growing pains, one of the most promising of these is Solana, which uses a different consensus mechanism that enables it to support up to 50,000 tps, with a cost of $0.00025 per transaction. It is also currently supporting more than 400 blockchain projects. Others include Avalanche, Binance Smart Chain and Terra. Several others have created blockchains purpose-built for NFTs, such as Flow (created by Dapper Labs, parent of NBA Top Shot), which is targeting 10,000 tps at a cost of fractions of a cent per transaction.
Ethereum 2.0. Ethereum is currently undergoing an upgrade intended to enhance both security and scalability, the most significant component of which is a change in the consensus mechanism. It will reportedly enable 100,000 tps when fully implemented.
It’s Getting Easier to “Abstract Away the Crypto”
It’s remarkable how much attention NFTs have received even though relatively few people can participate. If you traffic in crypto Twitter it may seem like everyone owns cryptocurrencies, but based on the surveys mentioned above, probably only somewhere between 2–6% of U.S. adults own ETH today. And, in many cases, you need to own ETH (and manage your holdings through a non-custodial wallet), to buy NFTs or play blockchain-based games.
Reducing consumer friction by enabling people to simply plug in their credit card number could dramatically expand the market for NFT applications. This hurdle is also falling, thanks to a few companies working to create a seamless fiat-to-crypto bridge. In partnership with Circle, Dapper Labs enables the use of a credit card to buy NBA Top Shot moments and also offers a Dapper wallet to enable this feature on third party platforms, like OpenSea. Other companies, like Wyre (another h/t to Lou Kerner), go even further by providing APIs that enable Dapps to directly accept credit cards, pushing the crypto-fiat conversion further into the background.
These early efforts will probably see some hiccups — for instance, NBA Top Shot has had some well-publicized issues enabling people to quickly transfer funds back to their bank accounts — but there is no technical reason this won’t get smoother over time.
NFTs are Potentially a Massive Financial Opportunity for Media Companies…
There are a lot of heated debates in crypto, but the unifying philosophical foundation is that decentralization will upend established power structures. Not surprisingly, the community has gravitated to NFT-native/crypto-native IP. And many discuss NFTs as a tool to empower the creator class, enabling them to break the yoke of the centralized platforms that extract high rents and mediate the relationship between creator and fan.
Nevertheless, I believe the next 100 million NFT users are more likely to be attracted by well-known film, TV, music and sports stars and franchises than by punks, apes or rocks. To capitalize, every media company should be mapping out an NFT strategy, right now. Part of the reason is just money.
The Collectible Opportunity Alone is Enormous
It is hard to size the potential market, but here are a few data points that suggest the NFT entertainment collectibles market is easily measured in the billions:
According to this, the global collectibles market, excluding classic cars, is greater than $200 billion annually.
The sports collectibles market alone is estimated to be greater than $5 billion each year, according to Collectable.com.
According to DappRadar, total NFT sales (across several blockchains) totaled about $2.5 billion in the first half of 2021 (including both primary and secondary market sales).
After a wave of “the NFT bubble has popped articles,” like this, this and this, the market appears to be back, with prices for key collections and volume on marketplaces (like OpenSea and Rarible) soaring recently.
In May, the CEO of NBA Top Shot parent Dapper Labs disclosed $700 million in primary and secondary sales over the prior year, with 150,000–200,000 users logging in daily. (Note that this data is captured in the DappRadar figures I just mentioned.) Keep in mind that NBA Top Shot has only released moments from the ’19-’20 and ’20-‘21 seasons. Where is Jordan from the “flu” game, or the shrug, or The Shot over Craig Ehlo or the closed-eye free throw? Kobe? Reggie Miller scoring 8 points in 9 seconds? Rookie Lebron? Rookie Steph? Rookie Luka? Shaq and Barkley? Clyde Frazier? Wilt Chamberlain? Kareem? Bird? Even Daryl Dawkins breaking a backboard or two? The NBA and Dapper Labs should release these kinds of moments judiciously, but if there has already been $700 million in sales of highlights from two weird seasons, it gives a sense of the potential.
Media companies are creating IP out of thin air. In March, Bleacher Report auctioned off limited edition basketballs, with associated NFTs, designed by 2Chainz, Quavo, Lil Baby and Jack Harlow, for $800,000. The whole effort took a couple of days. If this has value, what is the value of the existing library?
With these figures as context, it is almost mind boggling to consider the breadth of possibility here for media companies, even for just the simple application of NFT collectibles. Consider the most iconic moments in the Disney library. What is the value of the first images of Steamboat Willie? Or the moment when Cinderella fits her foot into the glass slipper? What would someone pay to own the moment in which Darth Vader discloses that he is Luke’s father? Or when Thanos snaps his fingers? Or the opening scene of Up? Or even when Troy Bolton and Gabriella Montez first kiss?
But these are just the obvious ones. True superfans will be willing to go deep into obscura — partially as a way of signaling the depth of their fandom. For instance, my son is a huge fan of The Office. If NBCU sliced and diced up The Office into NFTs, we’d be mortgaging a few years of his allowance to bid on the cold open when Kevin brings his chili to work or the moment when Gabe proudly declares that his middle name is Susan. Most major media companies have vast libraries that, if done thoughtfully, could be mined for years.
Most major media companies have vast libraries that, if done thoughtfully, could be mined for years.
Collectibles are Just the Start
The collectibles idea is first order thinking. For a moment, let’s ignore the inconvenient truth that most media companies’ forays into gaming have been disastrous. What could you do by combining collecting, community, portability and gaming — particularly for IP with rich mythology? Think of what Warner Bros. could do with Harry Potter. A drop of Harry Potter NFTs, featuring different characters at different points in their development (Harry at different ages; Voldemort as Tom Riddle and at various points in his return to power) and artifacts (cloaks, wands, horcruxes, the pensieve from Dumbledore’s office, etc., etc.). Now imagine that you can port these avatars and artifacts to multiple worlds. Now think about a Harry Potter world in which a game takes place, with both public and private property, commerce and battles? The MCU? DC? LOTR? GOT? The possibilities are vast.
…And the Strategic Rationale May be Even More Important
The strategic reasons to delve into NFTs may be even more important than the potential financial windfall.
NFTs Reintroduce Scarcity in Media
The biggest problem for traditional media over the last 20 years, in one word, is abundance. A set of related, disruptive technologies — digitization, networking and mobility — collapsed the barriers to entry to both distribute and create content. While content was once relatively scarce and therefore there was relatively little value in curating that content, today content is abundant and curation is scarce. This has resulted in two big problems for content rights owners: 1) devaluation of content; and 2) revaluation of curation and the rise of extraordinarily powerful platforms that control it. NFTs can help alleviate both problems.
1.) NFTs are a tool to recoup lost consumer surplus. I’ve written about consumer surplus before. For every good with a downward-sloping demand curve, by definition there are people who would pay more than the market clearing price. Consumer surplus is the difference between the revenue generated at the market clearing price and the aggregate revenue that would be generated if everyone paid what they were willing to pay.
Figure 2. When Price Goes Down, Consumer Surplus Goes Up
In media, consumer surplus has been going up for the past two decades, shifting value from media companies to consumers. That’s partly because prices have gone down (Figure 2). In print, for instance, today many who once subscribed to newspapers or magazines simply get their information for free. In pay TV, consumers who once paid $80 or $100 per month for a pay TV package are now substituting a virtual bundle of a handful of streaming services for less than half per month.
At the same time, the traditional ways of extracting consumer surplus through price discrimination models — charging different prices to different people — have become ineffective, thanks to streaming. In music, consumers who once bought singles and albums now get all-you-can eat access from Spotify or Apple music. The film business used to extract consumer surplus through windowing (consumers paid one price to see a movie in the theaters, another price to buy the DVD a few months later, yet another price to watch on HBO a few months after that, etc.). With universal access on streaming services, those windows are going away.
One solution to this problem for rights owners is to create derivative products to sell to avid fans. But this is easier said than done. When I was at Turner, I (briefly) oversaw an effort to create a centralized “360-degree” monetization group that would help our cable networks develop new business lines in areas like events, merchandise and gaming. But these are not the core competencies of most media companies and pose significant challenges. Events are difficult to scale; merchandise generates only a small royalty and requires close oversight of product quality; and successful gaming needs compelling gameplay. NFTs are a much more organic product extension.
NFTs enable rights owners to sell scarce, derivative products to the most avid fans at higher prices, recapturing some of this lost consumer surplus.
2). NFTs can disintermediate the disintermediators. Many of the largest Web 2.0 platforms rose to prominence because network effects made them the best option for a specific approach to curating virtually limitless information. Google is the best way to curate information algorithmically. Facebook, Linked In, Pinterest and Twitter are the best way to outsource curation to your friends, professional network, favorite tastemakers and chosen panel of experts, respectively. All these platforms, and others like them, help you pick out the rare needles from an almost infinite number of haystacks.
Since NFTs are associated with unique digital assets, however, they are inherently scarce and curation therefore has much less value. And because NFTs are publicly auditable, they won’t be captive to closed systems. It will be much more difficult for one entity to establish itself as the dominant platform for trading, displaying or otherwise curating NFTs. It isn’t impossible, but it’s less likely.
NFTs Can Turbocharge Fandom
NFTs are more than a mechanism to monetize fandom, they can also enhance it. Because NFTs are saleable assets, they provide fans a financial stake in the success of the brand or IP. Giving fans an economic incentive will turn them into even more passionate evangelizers.
NFTs are a Foothold in the Metaverse
Ready Player One was eerily prescient, depicting a future in which the real world becomes increasingly unlivable due to climate change and large proportions of the population spend most of their lives online. One area in which it may not prove as prescient is that most of the novel’s virtual worlds in the fictional OASIS were based on popular books, TV shows, movies and music from the creator’s youth. In reality, so far the early metaverse is being dominated by entirely new IP. Media companies should be working now to make sure that their IP is ultimately just as prominent in the metaverse as it is in the *real* world.
Blockchain May be (Part of) the Future of Media Distribution
This may sound out there, but bear with me. It is possible that blockchain plays an important role in the future of media distribution, for a few reasons, and NFTs could be the bridge.
1). Blockchain can commoditize distribution, once and for all. In most media, there is a continual struggle for bargaining leverage between content and distribution. As Sumner Redstone frequently said in his New England drawl, “content is king.” By that, he meant that since content is a highly differentiated product often with a strong consumer brand, it has the upper hand — unless distributors become sufficiently dominant. So, content owners are continually working to commoditize distributors and distributors are constantly working to establish quasi-monopolies. Prior to the Internet, it was difficult for distributors to establish monopolistic positions. Even in pay TV, the most capital-intensive distribution business (and therefore the most inclined to become a natural monopoly), satellite TV, telecom providers and the occasional overbuilder kept the incumbent cable systems operators in check. The Internet, and the advent of multi-sided platforms with incredibly strong network effects, changed that by enabling the rise of distributors with unprecedented power.
In print, the fight has been lost to the gatekeepers. Most print outlets are heavily reliant on social media, particularly Facebook, for much of their traffic. Last year, Facebook generated ~$35 billion in domestic ad revenue, substantially more than all newspapers, magazines and digital publishers combined.
The TV networks are on the ropes. They foolishly licensed exclusive rights to Netflix, enabling it to become the largest streaming provider, which created a virtuous circle for Netflix and a vicious cycle for the TV networks: as it grew, Netflix invested more in product quality and original content, further cementing its dominance and increasing its pricing power, fueling yet more investment. Today, the largest TV rights owners are all pouring billions of dollars into developing their own streaming services (Disney+, HBO Max, Paramount Plus, etc.) just to combat Netflix’s dominance. This is incredibly inefficient as they all replicate streaming, customer support, billing and other infrastructure costs.
In music, the labels have wisely refused to license content exclusively to streaming services and have so far successfully pitted Spotify against Apple and Amazon, so they are able to extract the bulk of the economic rents (~65 cents of every retail $1 is shared by the labels and creators). But there is a risk that one provider eventually becomes sufficiently powerful — for instance, if Spotify’s push into exclusive podcasts is successful — to alter the balance of power.
One way for content rights owners to end this eternal struggle once and for all would be to make all content available on a blockchain (or all content metadata, more precisely), that enabled anyone to curate it and anyone to consume it, with the transaction (and therefore monetization) executed through smart contracts. It could permanently commoditize distribution.
2). It could enable a better consumer experience. Consumers are sometimes the collateral damage in the jostling between content and distribution. In streaming TV, for instance, the need to transit between apps to find content makes for a lousy customer experience. A lot of library content isn’t available on streaming services at all. Consumers also effectively pay to subsidize the middlemen who package and distribute content. Democratizing curation by having all content available “in the clear” would enable a much better experience, possibly at a lower price.
3). It could be a much more efficient distribution system in smaller territories. Distributing content outside of the largest territories — the US, Canada, Western Europe, Australia and Japan — can be a byzantine and inefficient process, with prohibitive transactional costs. Again, making content available subject to the terms outlined in smart contracts could be far more efficient.
4). It could streamline participations and royalties. The calculation and distribution of royalty payments and talent participations is also a complex and sometimes contentious process. Building these structures directly into smart contracts could also yield greater efficiencies.
5). It could also streamline the content delivery tech stack. Fox recently invested $100 million in Eluvio, which enables blockchain-based distribution of video content. According to Eluvio, its Eluvio Content Fabric can replace traditional ingest, transcoding, content delivery and rights management technologies at lower cost and latency.
Admittedly, it is a long way from current content licensing practices to blockchain-based distribution. But there are already weak signals popping up, such as the Fox investment in Eluvio. Or Audius, which is a blockchain-based competitor to Spotify, Apple Music and Soundcloud that permits anyone to curate its library and enables creators to forge direct relationships with their fans. This idea is also not all-or-nothing; rights owners may find that a hybrid model, in which some content is still licensed to closed platforms and some is distributed via blockchain, is the optimal approach. Traditional media companies would be well served to start developing these muscles now.
Big Media Should be Allocating Resources Now
Whether the NFT market is in boom or bust from one week to the next (yes, the linked articles are a week apart) is both a distraction and beside the point. The point is that as the mechanism to bring property rights to unique digital assets, NFTs are already catalyzing a head-spinning amount of innovation. And it isn’t even the first inning — we’re still singing the national anthem.
The bad news is that there’s a fair chance that traditional media companies won’t focus here soon enough and, even if they do, they won’t get it right. Media’s almost complete failure to break into gaming is a cautionary tale. If NFTs take off among mainstream consumers, as seems highly likely, failing could carry a high cost. As mentioned above, if media companies don’t ensure that their content is relevant in the metaverse, they will lose even more share of time and attention as consumer usage grows. And, over time, not minting NFTs could become a competitive disadvantage. Imagine if TikTok and YouTube enabled creators to seamlessly mint every video as an NFT when uploaded? (A startup called Melon intends to let creators do just that.) How might it affect fandom, usage and attention if consumers had the opportunity to take an economic stake in every creator and every video? One of the biggest risks to any incumbent is when the consumer definition of quality changes, something I wrote about here. “Investability” could become one of the new dimensions of quality.
The good news, however, is that it’s not too late. Big media companies should be allocating resources now.
Thanks to Shilpa Bisaria for reviewing an early draft of this essay.