Deep Value Networks in Professional Sports.
2020-06-03 9:11 by Thomas
Originally on Substack. Posting it here to as to move all my web3 writing to my own platform (powered by , the web3 CMS my startup Liquiditeam is building).
In our , Jonas and I discussed some important sports business trends with Michael Clohisy. One point we touched upon when discussing the applications of blockchain and tokenization in the sports industry: new ways of organizing the network that is the sports ecosystem.
It’s a subject :
In , like the professional sports ecosystem, it is most likely impossible to completely eliminate friction, especially for extended periods of time. We will always have to make tradeoffs. However, in many cases it is still possible to reduce friction. Very often this can be achieved by better aligning the incentives of the different actors.
And that’s exactly where tokenized ecosystems provide a unique utility. Once the rights and values that matter within an ecosystem are digitally represented, it becomes possible to design and program rules and even automate their execution.
Tokenization is a tool kit. It contains automatically executable incentive schemes (financial and non-financial), transparent rules, the means to distribute governance among actors, as well as the digital representation of value, the tokens. Using best-practices from a range of academic disciplines — most notably game theory, economics, computer science, and mathematics — we can use tokenization to design dedicated mechanisms that align incentives and thereby reduce friction between different actors.
But there’s more to tokenization than just reducing friction. Decentralized Consensus Technology - the tech stack that powers tokenization - can also be a handy tool to create new types of value-creating organizations. In , I introduced the concept of deep value networks:
These networks are designed to create, distribute, and exchange value (value networks) while tackling increasingly complex problems, markets, and ecosystems (deep networks). So far, the most successful networks have been consumer technology with a business model that relies on maximal adoption. Deep networks, in contrast, target smaller addressable markets which, however, provide a significantly higher value for and per participant (e.g. in terms of ARPU). These deep value networks can be consumer- as well as industry-focused — the latter presents a particularly interesting, high-upside playing field.
Decentralized Consensus Technology (DCT) will be a key building stone for deep value networks and unlock their wealth-generation potential. The different components of DCT — particularly distributed ledgers, scarce & cryptographically secured digital assets, token-based incentive systems, and cryptocurrencies — will enable us to digitize more complex, real-world networks and to eventually build new networks in environments which are defined by a lack of trust and security.
I believe that professional sports are a domain extremely well-suited for the development of deep value networks.
Let me explain why.
The sports business model will require an update
Popular sports, to this day, live and die by the broadcasting money they can generate. Luckily for them, the TV deals continued to net them significant - in many cases even increasing - amounts of money. You might be tempted to say: and this even though the TV industry at large was hurting from cord-cutting and digitization more broadly. However, the correct way to look at it is exactly the other way around: sports has turned into one of the few options for TV companies that were both able to draw large audiences and had to be watched live. Hence, sports almost turned into a lifeline for an entire economy built on the existence of mass media.
In his insightful piece , Ben Thompson writes:
I would argue sports are the linchpin holding the entire post-war economic order together. Because sports are consumed live, with significantly higher advertising load and viewer retention, sports are increasingly the only viable place for mass-market consumer companies to reach customers at scale and fight off niche e-commerce companies slicing off their customer base. That in turn helps preserve retailers, themselves both big advertisers and big targets for internet-based companies, particularly Amazon, and so on down the line. This effect is magnified by sports’ role in preserving the cable bundle, which keeps more channels — and thus more inventory — viable (not to mention that some of TV’s biggest advertisers — entertainment companies — also own the cable channels).
Over the past decade+, popular professional sports benefitted immensely from this development. It also shielded them from the pressures of digitization that were mounting in many other industries. Yet, even this highly “moated” business model isn’t protected forever.
As all new generations of potential consumers are digital-first by default - thus growing up in a world of essentially unlimited entertainment and content options - even the most popular sports will eventually have to adapt and learn how to attract, maintain, and monetize audiences in the digital realm.
Slightly adjusted business-as-usual, i.e. simply selling your rights to streaming services¹ a la DAZN, will only get you so far. As will league-wide direct-to-consumer live offerings (think NBA League Pass). Both will certainly be part of most sports’ future revenue models. But both are geared towards the hardcore sports fans while more marginal fans - i.e. the majority of fans who are mostly interested in a single team or athlete - will be harder to capture this way. And, on the flip side, the deeply emotionally invested hardcore fan wants more than just games. They have a lot of passion and, hence, attention to give - and sports businesses will have to find new, natively digital ways to monetize it.
Passion-driven business models
M.G. Siegler the way to build successful networks in a niche “highly targeted passion”. Sport is a marketplace with lots of passion and emotional involvement that most industries can only dream about.
Currently, the main bottom-line driver in popular sports is broad popularity aka reach. But as the number of entertainment options increases - each one readily available with the tap of a finger on a screen in everybody’s pocket at all times - audiences increasingly fragment. Sports will suffer from this as well (), both because non-sport entertainment options detract from their audience and because other sports options are available conveniently. Sports, whether you like it or not, have to compete in our .
Therefore, I argue that going forward business models built on and driven by passion will be critical. Not only will they be important for sustaining the top line, but they will also be the most sustainable and defensible. In the quantity-driven world of advertising and reach, popular sports require hype, virality, and news value to maintain their relevance with the largest possible audience. Passion-driven business models, on the other hand, are capable of emphasizing the quality and depth of relationships. If you look around in the digital world, there are many examples of such business models, such as:
- Membership models/subscriptions to individual creators and small publishers
- Tipping, as known from the live streaming world
- Digital goods, such as skins for avatars in games/virtual worlds
If they want to compete successfully in the attention economy, sports businesses will have to find and implement their own passion-driven business models². (Disclosure: I might be biased. At Liquiditeam we work on tools that allow sports clubs and athletes to do just that.)
Sports, Membership, and Deep Value Networks
In several European countries, the sports system has its foundation in not-for-profit membership organizations. In Spanish, Portuguese and South-American football (soccer), fans can become members (“soci”) of their favorite club. In Germany, they can join an “eingetragener Verein (e.V.)”, i.e. a registered association. Until not so long ago, most professional football teams operated as such an e.V. legal entity. A few still are, for example, Schalke 04 (currently in about a potential change) and Mainz 05.
And even in those countries that organize their sports in a more traditional for-profit business and legal construct, fans have a strong emotional sense of belonging. They feel like a part of their team - very often fans will say something along the lines of “we won a title” or “we suffered a horrible loss!”.
Moreover, fans can be incredibly giving and willing to contribute to their favorite team - if only you give them the opportunity to be more than merely passive consumers, they will likely be happy to make meaningful contributions. Fans of the German football club Union Berlin famously . The Green Bay Packers are . There are many examples of across the globe. In short, sports present perfect grounds for thriving membership organizations.
That’s why I expect to see more and more professional sports teams experiment with new digital membership models that play off their fans’ passion. That is, they will aim to create networks (or: digitize their existing ones) that appeal to their supporter community and provide real value and opportunity to them. And of course, these networks will generate value, including financial value. Hence, deep value networks.
¹ The fact that the most frequently used industry slang term for streaming services is still OTT - early 2000’s marketing/media lingo from the times when most regarded the web as an oddity at best - shows how little of a digital mindset the industry still has to this day.
² This also presents an interesting opportunity for the smaller sports/leagues who, too, have very passionate and engaged fans - only fewer of them than the top dogs. While they are screwed in a reach-driven world, they may open up interesting new avenues with passion-driven business models.
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