Commercialisation in Web3 Sports: The Drivers, and Ihibitors, of Revenue

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Introduction 🔌🔧

Every now and then when I have some downtime, on a long haul flight for example, or in this case recovering from a cold, I like to look at things beyond the headlines.

What are the tailwinds that are driving the Web3 industry in sports?

The last one of these was an essay of sorts titled: The State of the Web3 Sports Market

This time around, I look at the commercialisation opportunities during a bear market, and what may be inhibiting this at the moment.

P.S. 👋 Thanks for everyone who attended Sporting Crypto Social IV in London last week! Great to see so many of you, and meet so many new subscribers. 

P.P.S. I have bad brain fog from this cold, so if I’ve gotten anything wrong in this newsletter 1) take pity on me and 2) please let me know!

Before you read the newsletter…

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Commercialisation in Web3 Sports: The Drivers, and Ihibitors, of Revenue

The Sporting Crypto Newsletter is supported by The HBAR Foundation.

I’ve had the pleasure and fortunate of speaking to dozens of rights holders, sponsors, blockchains and startups that are working in the intersection of Web3 and sports.

Be it friendly introductions, advisors and investor intros, being a mentor in an accelerator program — I’ve had exposure to a broad spectrum of people and projects in this niche.

The exuberance we saw between 2020 and 2022 when the Web3 market was *hot* is (generally) no longer present from a mainstream audience. And whilst there is still investment, partnerships, and sponsorships, there is a pressure to monetise or have a path to monetisation in a market that demands more substance.

So why write this now?

Looking at the crypto market has gone sideways for almost 18 months now, which is almost identical to how long the previous bear market lasted.

Now, there’s no guarantees this market will go vertical again and reach all time highs, especially considering the macro environment, but during a ‘bottoming’ period there is usually a lot happening from a infrastructural perspective. People like building stuff when it’s quite.

It’s a good time to dissect where we are market wise and why most organisations are focusing on their bottom line, or a path to protecting it.Discussed in this Newsletter:

⚽ Web3 sports success stories & licensing🧠 Consultancies and tech vendors🏠 Incumbent business model friction⛓️⚽Blockchains and Sports Rights holders

Not only are we 18 month into bear market, we’re 12-24 months on from a point when many companies raised funds, either at the Seed or Series A mark, during the last crypto hype cycle.

This is the point at which many of these startups (or startups generally) begin to look at raising more capital.

This is either to accelerate growth for companies who have found product market fit or have a core idea that has started to gain traction, or to increase their runway in hope of getting to that very point.

Some of these startups have pivoted multiple times, to try and find that market fit, and many have folded all together.

That’s mostly because the market has been incredibly turbulent and tough, but it’s also because it’s difficult to build a MOAT in Web3. 

The decentralisation aspect of the tech means that consumers can lift and shift their assets, whereas traditionally walled gardens would keep those assets, users and data where companies want them.

The easiest way to explain this is with digital marketplaces.

You can take your digital assets from one marketplace to another, at the click of the button. This is similar to what you can do with physical goods. Moving memorabilia from eBay to Amazon, or another marketplace and selling it.

Another good example is blockchain data products. This data is on-chain and could be queried by anyone. But some companies have packaged this data up, or connected it to off-chain data to make it more valuable, or they have cornered a niche in the market. But the fact that the data is not proprietary, means it’s difficult to protect your USP.

This is why, largely, to date, the most successful Web3 stories we’ve seen in sport have retained Web2 principles from a business perspective.

Web2.5, some like to call it. ⚽ Web3 sports success stories & licensing

Some of the more successful companies in this niche have used Web3 technology, but perhaps not leaned into the ‘Web3 business model’, as much.

Sorare and Dapper Labs are two of the unicorns created in the sports Web3 market, and both of these companies are reliant on licensing deals with partners.

And there’s absolutely nothing wrong with that, because dozens of companies have built incredibly successful businesses leveraging licenses in the past, and this won’t stop in the future.

What Sorare and Dapper Labs have done from a business perspective is digitised what Fanatics, Topps and Panini have done over the last several years, or decades, in the sports card market.

They have license agreements with rights holders and then they sell products using the licenses they’ve acrued to consumers.

Of course, I’m massively simplifying things here, but just for the sake of this section, whichever way this market develops or their propositions change, the truth is that this market is to some extent ‘cornered’ by these big, well capitalised startups.

Again, there’s nothing wrong with this at all. There aren’t 30 companies competing in the sports card market, so why would this be different when looking at segments of NFT rights?

This has created a situation however, where many of the businesses competing for licenses in this area are able to renegotiate with rights holders because there’s a lack of competition.

The NBA isn’t selling their Top Shot license to anybody else, unless Apple, Amazon, eBay or someone similar to that decide they’re in the video moments NFT market.

During the last hype cycle, I saw many companies trying to raise funds in order to compete with these companies, or to try and corner a specific sport with a fast follower strategy.

99% of these failed, because they overestimated how much they’d sell, they underestimated how long it would take to build a product and underestimated how hard it is to get licenses.

Some even tried to go the route of non-exclusive licensing deals (as crazy as that sounds) — which was obviously only going to end up one way.

We’re now at a point where these Web3 sports unicorns have remained, and cornered the market for their specific subset of NFT rights. And I don’t see this changing any time soon.

🧠 Consultancies and tech vendors

Many consultancies, services businesses and tech vendors have sprouted in the last 18 months — all trying to help rights holders with anything related to crypto.

At this point in time, most of them are trying to create something more substantial in their offering than simply a services business.

This is because their margins are smaller and it’s very labour intensive, compared to revenues driven and labour required to sell the actual assets they are consulting on.

As Nigel Eccles on the latest Sporting Crypto Podcast puts it:

This was in relation to the creation of consumer crypto products, but it’s also true in this context, also.

Creating products or applications that consumers, or businesses, use, is for the most part going to drive bigger revenues that consulting.

Whether it be off-the-shelf SAAS solutions, consumer applications or white label marketplaces — a lot these services driven businesses are starting, or have already started, to pursue something that is more scalable.

Some of the companies who raised money to do exactly that from the very start, rather than pivot, missed the mark.

Many of them were looking to raise a lot of money after successful Web2 ventures to create products or marketplaces that involve Web3 technology. Whether it be Fan-to-athlete Web3 marketplaces, Web3 sports platforms for specific sports, ticketing startups and such, there was an abundance of these startups.

Many of them:

1. Massively overestimated the market size they were going after

2. Overestimated the demand for their product in another region when raising

3. Created their own token when there was no need

4. Did not understand the business of sport, or crypto, or sometimes both.

5. Were not lean enough and had huge teams

Ticketing is a great example.

There’s been over 140+ blockchain ticketing startups over the years, and many think it’s going to be a huge unlock.

While that is probably true from a technical perspective and utilising blockchain tech, there’s a commercial hurdle that hasn’t been cleared yet. That commercial hurdle is big ticketing incumbents who have huge deals with rights holders or venues, that blockchain ticketing startups will not match.

And this is *still* happening. Not just with ticketing, but with a lot of startups in the space who simply do not understand the market they’re going after, or the budgets play with when it comes to Web3.

🏠 Incumbent business model friction

Whenever somebody says “this is how NFTs change the game for [insert industry]” they’re either wrong, have miscalculated something massively, or they’re just way too optimistic. Sometimes they’re right, and will be proven to be in time, but most of the time you hear this, it’s largely incorrect.

The example I like to give relates to FIFA (now EA FC) Ultimate Team.

Some well meaning analysts wrote a section of a crypto report which outlined how much money EA were leaving on the table because their Ultimate Team product had NFTs, instead of in-game digital football cards.

They failed to outline one very key thing however — EA sell the game on a seasonal basis (yearly), and the Ultimate Team product starts over again every season. This is essentially how EA are able to make so much money from the Ultimate Team product.

And they’ll continue to do that, until consumers are no longer obsessed with the game.

EA would not kill the golden goose, for obvious reasons. Their model works for their business.

Will it work forever? Probably not. But EA are not going to be the ones who knowingly disrupt their model at the hope they make a slightly bigger margin, with the downside of making significantly less amounts of money.

This is the same for a number of other Web2 business models.

Walled gardens aren’t an accident, they’re a feature of business models that rely on controlling as many variables as possible to ensure their customers stay within those walls, or hand over as much of their data as willingly as possible for as long as possible.

With Web3, there is less control.

NFTs, crypto assets and such — when they are on third party marketplaces — that control is gone.

The immutable nature of a decentralised database open to anyone is much scarier than the confines of your private server.

For that lack of control, the commercials have to be monstrous for successful Web2 businesses to turn to this technology. That path, a sponsored path, or a very generous R&D/Innovation budget, are the ways that incumbent organisations are developing within this space.

⛓️⚽Blockchains and Sports Rights holders

The starting point, and end point, for this entire niche.

The infrastructure providers and the gatekeepers of IP.

Blockchains are spending less, as they usually do in bear markets.

But when they do spend, they’re increasingly looking at the return on investment.

Blockchains want partnerships that are no longer simply branding and awareness, they want ownership of the whole stack (or most of it) when a rights holder engages in Web3. At this point in time, some of the offers that are coming to the table are very low in dollar terms, have high revenue splits or are an exchange of value. Some of the times, rights holders are comfortable with this as long as they don’t pay a penny in development costs. This directly impacts the agencies and vendors referenced earlier, as many of these blockchains likely keep a lot of the strategic and development costs in-house, making these types of deals less resource intensive. That however, does mean these blockchains can’t scale from a people perspective as well as they'd like, because their BD team, tech team and marketing department are supporting some of their biggest clients.

There are fewer huge dollar deals happening here, and those that are big, are happening between tier 1 entities and newer blockchains that are freshly capitalised and want market attention.

My prediction is that the meat in the middle of rights holders and blockchains goes from chunky, tough steak to wafer thin turkey slices.

Some of these deals are being brokered by agencies, of course, but the execution layer is cutting out the middleman significantly.

Whether you look at legal, risk, accounting, tech, creative — blockchains are much better equipped to work with rights holders than they were 3 years ago.

And whilst they’re forgoing scale in terms of how many partnerships they can execute at once, many of these blockchains are themselves building off the shelf solutions for rights holders. Be it free-to-mint campaigns or standing up your own marketplace — some of this happening direct from the blockchains themselves.

🧠 Concluding Thoughts and Analysis

Crypto is cyclical, but it’s hard to imagine that the next cycle will bring with it more crazy and speculative investments, startups and partnerships in sport.

Everyone in the industry now knows what crypto is, to some extent.

Every potential fan and consumer knows what it is also.

And we now have more regulation and guards around what crypto firms can and can’t do.

The tailwinds here feel like they make for a future full of more substance and fewer crazy short-termist strategies. Who picks up the check, will shift slightly. I think blockchains and crypto companies will continue to spend, and rights holders will never want to spend their own money on fan engagement strategies that involve Web3.

But the case studies showcased from Reddit, Nike, Starbucks and many others means that there is a blueprint emerging — and one that sports brands are actively looking at. And if those blueprints are successful enough, and engage millions rather than thousands of fans, sports brands will be focused to invest time and resource into this space, rather than bolting it on to a sponsorship activation.

They have passionate fanbases in the millions who want to engage with their league or team, more so than a consumer does with their favourite supermarket, coffee shop or airline.

Right now, there isn’t the facilities nor commercial packages to do that, especially when involving Web3 technology, but that will no doubt change as more successful case studies come to the fore.

💡 Sporting Crypto Spotlight - Ep. 7 of the Podcast!

In this episode, I was joined by Nigel Eccles, Co-Founder of BetDEX, Vault and FanDuel Nigel Eccles to discuss Web3 in Sports & Entertainment.

Watch the episode below on YouTube!

Or your podcast player of choice… if you’d prefer not to see our faces!

🍎 Find us on Apple Podcasts here [Link] ✅ or on Spotify here [Link]

More Sports & Web3 Stories

• Zilliqa and Racing League Strike Fan Engagement Partnership (Read more here)

• Nike & RTFKT launch ‘What the RTFKT’ (Read more here)

• Floki Inu announces a strategic marketing partnership with World Table Tennis (Read more here)

• NEAR & the ICC have created a case study explainer video for ‘Captain’s Call’ (Read more here)

• Fanton parnter with Cointelegraph Accelerator (Read more here)

• HAVAS Singapore Launches Bespoke HAVAS Play (Read more here)

General ‘Stuff’ that Could Impact You

• GAM3 Awards return to showcase the best in web3 gaming (Read more here)

• How major German firms like Mercedes and Lufthansa are using NFTs (Read more here)

• Can a FanDuel Co-Founder's 'Fantasy Music' Game Help Discover the Next Taylor Swift? (Read more here)

• FaZe Firesale Reflects Reality Esports Teams Fighting for Scraps (Read more here)

• Neon Machine raises $20M to make Shrapnel extraction shooter (Read more here)

• Circle Joins Forces with BitoGroup, Taiwan FamilyMart to Launch ‘Points-to-Crypto’ Service (Read more here)

• Mastercard Teams Up With MoonPay for Web3 Push (Read more here)

• Animoca Brands to drive Web3 initiatives in Saudi Arabia’s NEOM City (Read more here)

Thanks for reading the latest edition of the Sporting Crypto newsletter. I’m happy to see so many people enjoying and sharing it with their networks.

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