The business of sport and how NFTs are about to change the game

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Sports business revenue today is typically categorised into matchday, broadcasting and commercial. Clubs have continuously innovated and created new streams within these segments.

The business of sport and how NFTs are about to change the game
An ever-evolving business model
Sports business revenue today is typically categorised into matchday, broadcasting and commercial. Clubs have continuously innovated and created new streams within these segments. In Matchday, for example, some stadiums now include dining options rivalling Michelin star outlets whilst Scuderia Ferrari F1’s tie-up with Amazon Web Services has led to a range of new content offerings for race day. These include virtual access to the car set-up within the Ferrari garage and even augmented reality experiences throughout the race.
In broadcasting, the NFL’s Thursday night football deal with the streaming platform Twitch introduced gamification features promoting fan interaction and the associated revenue opportunities. This is likely to be an increasing trend as tech companies try to further break into the space. The upcoming IPL media rights auction where audiences can reach up to 200m for a single match is anticipated to mark another significant step in content curation. Such is the anticipated growth in auxiliary revenue within the sport that the involvement of private equity firms and the use of financial instruments and structures such as derivatives and SPACs are now common practice.
The commercial income segment can further be broken down into merchandising, licensing rights, and sponsorships. At the time of writing, Manchester United has over 60 partners but perhaps the most notable development within this area was the landmark legal case involving Liverpool FC in 2019. Despite the then existing kit sponsor New Balance having a matching right clause enabling it to equal any competitor offer to continue its sponsorship, the court determined that Nike’s ability to use rapper Drake and basketball king LeBron James to promote Liverpool merchandise could not be matched on a potential commission of sales given Nike’s global reach in marketing.
However, it could be argued that despite the growth in innovation, earnings and re-engineering of its core business, NFT’s can have an even more profound impact on the business of sport. Many clubs have doubled in value over the past decade, yet the NFT opportunity is unparalleled to any previous innovation. They offer speed and scale to market with the scope to skyrocket revenue and thus the Net Present Value of the enterprise.
What are NFT’s and how do their economics break out
A non-fungible token (NFT) is a unit of data stored on a digital ledger, typically on the Ethereum blockchain. NFT’s can consist of photos, videos, audio and even real estate and is coupled with an associated license of use for a specified purpose. This, in turn, can be sold and traded on digital markets. NFT’s functions like cryptographic tokens, but unlike cryptocurrencies, they are not mutually interchangeable.
The unit economics of NFT’s make them an incredibly lucrative revenue line from a sports business perspective. The variable cost per each additional unit sold is arguably negligible; designs are usually digital with no manufacturing, supply chain or delivery costs. Furthermore, sports teams can capitalise on in-demand moments or trends due to a minimal time to market from concept initiation to product sale.
Reaching first base: Digital collectables
Dapper Labs’ NFT platform NBA Top Shot has grossed over $700 million in less than a year. Constructed on the Flow blockchain, the marketplace for NBA highlight reels provides individuals with NBA-licensed digital items, otherwise known as “moments.”. Some NFT’s convey more rights than others. Owners of Top Shots for example do not have the legal right to reproduce or profit off the clips owned, but instead, as is typical with most NFTs today, own a license to use, copy and display the highlight reel. MLB’s deal with Candy Digital works on a similar basis.
Also within the Digital Collectables segment is the trading cards platform Sorare. The company raised $48 million earlier this year from some of Europe’s most prominent VCs, holding license agreements with 142 clubs and have amassing over $75 million in sales as of May 2021. Sorare lets users buy digital sports cards that can be used in game, as well as traded with other players. The better your team (better players are more expensive to buy) the better your chances of winning the game and earning prizes.
The most expensive card traded is a one-of-a-kind Cristiano Ronaldo NFT, now standing at $290,000. PSG has recently launched their own eSports academy whilst Formula One has partnered with Animoca Brands to develop F1 Delta Time, a game in which users trade tokens representing cars, drivers and even tracks. The first in-game NFT F1 car sold for what was then the equivalent of $113,000, or 415.9 ether. The subsequent increase in the price of the digital currency means the car was once worth more than $1 million.
Ticketing
NFT’s can represent any form of unique information, including an event ticket that can be sold and transferred to customers digitally and stored on a phone. Moreover, NFTs put tickets into the realm of programmable money, opening up unlimited potential for new revenue opportunities. These could include ticket auctions, resales, as a gateway for food and beverage promotions, and affiliate sales for commercial partners.
As programmable digital assets, NFTs can have built-in rules for merchandise, content and royalty splits. This means that any sports team can determine profit sharing percentages for any sale, or capitalise on downstream creative content on secondary markets. Additionally, clubs can improve matchday revenue margins as the cost associated with minting and selling NFTs are negligible in comparison to traditional ticketing infrastructure.
Virtual Real Estate and gaming
NFT’s make possible the prospect of owning a seat within a team’s stadium, enabling access to watch exclusive in-stadium events in virtual worlds such as Decentraland. As crazy as it may sound, through using avatars people display NFT art collections, walk around with friends, attend events and can even order a Domino’s pizza. In a recent Sotheby's NFT art sale for instance, the auction house opened a replica of its London building within the virtual world attracting more than 3,000 visitors.
Atari on the other hand announced the opening of a casino through a 2-year lease constructed within the “Vegas City” area of Decentraland and have projected bets in the millions to take place. Interestingly most Premiership football clubs already hold official partnerships with bookmakers so this could be one area for strong growth. Since Decentraland launched in 2017, land prices have increased by an average of 14x.
Fan tokens
Another application of blockchain technology whilst fungible are fan tokens. These allow fans to influence certain decisions, obtain special access, VIP rewards and promotions related to their team. In the summer of 2020, FC Barcelona launched its $BAR fan token and generated $1.3 million in less than two hours of the sale. The tokens were sold in 106 different countries and began giving fans the opportunity to vote on many different decisions including the design of a Muriel in the first team’s locker room.
Other teams such as A.C Milan have had similarly spectacular results generating $6 million in revenue by collaborating with the cryptocurrency Chiliz. Not only are fan tokens a great way of engaging and building an exclusive community, they also help clubs enhance their relationships with sponsors. Blockchain’s transparent nature and immutability act as an assurance of the integrity of the metrics and insights gathered from fan interactions, helping sponsors generate a better ROI.
Business operations, player transfers and image rights
NFT technology may also see use cases extend to smart contracts. Player transfers could therefore include medical records, performance data and image rights. Moreover, in April 2015, FIFA prohibited clubs and players from contracting third-party investors for economic rights agreements, yet an NFT contract does not infringe on this regulation. Through this technology companies can divide one comprehensive NFT sports contract into fractions and connect investors, brands, and sponsors with them in a secure, efficient, and innovative way. Similarly, smart contracts could have a significant impact on the use of image rights by sponsors for affiliate sales, paving the way for revenue-sharing agreements. Some sporting teams have a reachable fan base or community of over 100m across diverse, customizable and global markets.
—Shiv Morjaria is a derivatives lawyer for an investment bank and tech entrepreneur. The views expressed are personal and do not constitute advice

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