2022 Web3 Prediction: Digital Goods with High Consumer Utility Will Rise to the Top
Background Context
2021 was quite the year for digital goods; we saw a groundswell of consumer and brand interest in metaverse applications, augmented reality fashion wearables, and non-fungible tokens (NFTs). NFTs were the breakout star of the show, generating $25 billion in total sales volume. And while we’re incredibly bullish on the outlook of the digital goods market, we anticipate that this year the market will shift towards providing outsized rewards to digital goods projects who provide consumers with demonstrable utility – which in turn will move the asset class towards mass market appeal
Prediction #1: Art & Collectibles NFT Prices Currently Reflect Cost of Cultural Capital. In 2022 Utility Will Move Beyond Just Social Value
Important to note that for the purposes of this article, when we say “utility”, we are referring to value created by NFTs that is outside of their purely hedonic value as any piece of art would have
Art / collectibles NFTs are particularly en vogue. They accounted for ~90% of total 2021 NFT gross transaction volume (GTV), with landmark collections like Bored Ape Yacht Club (“BAYC”) drawing mainstream attention. Average value per transaction also increased with popularity – jumping to over $3,000 by the end of 2021, which was up from sub $1,000 at the beginning of the year. But while the hype is exciting, we expect valuations across the art / collectibles NFT category will largely come back down to earth as the market stabilizes
Art / collectibles NFTs made up 23% of total art / collectibles / antiques e-commerce sales in 2021, yet only made up 2.3% of total transaction volume. This implies that the average NFT being sold is 10x more valuable than the average piece of physical art being sold – which is why the bears see NFTs as the new Tulip Mania. But are the bears correct?
Well partly…the bear analysis assumes collectible NFTs are being valued as digital art that will be displayed in a buyer’s digital gallery (and eventually across socials as integrations roll out). This analysis posits that the only value-add NFTs provide is increased visibility, which is valued at 10x that of comparable traditional art pieces like paintings, sculptures, baseball cards, etc.
However, this analysis misses that there are emerging crops of NFTs which offer their owners unique utility. For example, BAYC’s NFT gives its owners access to an exclusive chat server and IRL parties that will be attended by industry movers and shakers. In effect, BAYC NFT’s function as tickets to a digital Soho House, where the NFTs provide proof of membership. Fundamentally, BYAC owners are spending $200,000 to buy the NFT for the same reasons business magnates spend $600,000 to attend Davos – networking, clout, and access. Meaning NFTs can effectively function as a more formalized version of ‘Pay to Play’
Utility can also come from access to exclusive IRL assets. Where consumer brands can grant differentiated product selections to their 1k true fans with NFTs serving as proof of fandom. Take for instance Hermes, which sells its coveted Birkin handbag to only a select few of its highest valued customers. Hermes relies on local sales associates at its stores to handpick who is worthy of a Birkin bag, which in theory makes it a highly selective process to reward only the most avid and deserving Hermes shoppers. However, in practice the selection process is notoriously ripe with corruption where sales associates accept kickbacks from Hermes shoppers to cut the line. NFTs offer a much more transparent and efficient avenue for brands to award their 1,000 true fans. For instance, Balmain minted two NFTs which grant owners access to behind the scenes events at Balmain’s fashion shows and opportunities to meet and greet with Balmain’s top designers
NFTs can also be used by brands to easily give consumers equity in the projects that the brand is rolling out. And rewarding consumers for the enterprise value that they build for brands is smart business. Take for instance Blau, who has been releasing his new songs in recent months as fractionalized NFTs, where NFT owners receive royalties for the song’s streaming revenue. What better way to create brand evangelists for his music than to give die-hard fans a piece of ownership?
All these examples have something in common; they’re offering utility via access and / or ownership to tangible goods and experiences. NFTs are a sellers’ market right now, and the amount of secondary transactions has gone up exponentially because not enough “legitimate” projects are being minted. Correspondingly the market has been flooded with inauthentic cash grab products from brands; while they might be valued highly now, they won’t stand the test of time. After the peak of inflated expectations passes, NFT collections will need to offer their owners differentiated utility to maintain their valuation premium
Prediction #2: Utility Shift will Push Nextgen Companies To Adopt “X-to-Earn” (X2E) Models
2021 showed an emergence of Web3 models that I’ve dubbed “X-to-Earn” (X2E). These varied from Listen-to-Earn, Play-to-Earn, Watch-to-Earn, and [insert any other consumption method here]-to-Earn. Each of these models empower companies to leverage blockchain products to acquire users at negative marginal cost from day 1. This is orthogonal from the prevailing Web2 models, where VCs would subsidize user growth at all costs, with the hope that one day a company would gain enough market leverage to increase rake fees at such a point where they could finally achieve profitability. In other words, a J-curve business model that requires massive cash commitment to actually build demand for the underlying product. The subsidized acquisition philosophy spanned the lion’s share of Web2 companies from social media platforms and e-commerce marketplaces to direct-to-consumer (“DTC”) companies. There were a select number of companies that made it to the hockey stick slope of the J and into profitability – however most found it impossible to sustain revenue when trying to stabilize prices into the ranges that create sustainable margins (see – Casper (DTC), Doordash – (Marketplace), or Snap – (Social Media)). This Web2 dynamic actually created a Silicon Valley meme, where companies would be anxious about becoming profitable, because it would signal to investors that it was time to overhaul the existing customer acquisition model (easier said than done). Once consumers come to expect goods or services for an artificially low price, raising them to sustainable levels once the company becomes profitable can create huge user churn, and business model disruption
In essence, the moat Web2 companies built for themselves is very shallow – beyond the accumulated user base their footing is shaky. For example, DoorDash built a three-sided marketplace between consumers (demand), restaurants (supply), and drivers (fulfillment). Speak to consumers and they have a generally favorable opinion of DoorDash – competitive prices, convenient, sign-up bonuses for joining. However, speak to any driver or their partner restaurants and you’ll get a different story – depressed wages for drivers and exploitative rake fees for restaurants. In effect, this is a three sided marketplace designed for an optimized experience of only one party; and even with that imbalance it still remains unprofitable. And when two parties in a three-sided marketplace are unhappy, that’s the opportunity ambitious start-ups look for. This is not to say DoorDash is unique – many successful Web2 companies are susceptible to this dynamic. Just ask YouTube creators how they feel about algorithm changes impacting their organic discovery. However it does indicate that Web2 companies are highly poised for low end disruption; and X2E presents a compelling opportunity for new companies to do just that
X2E flips the Web2 dynamic on its head, where instead of subsidizing user / seller / creator acquisition through direct cash payments, it subsidizes acquisition by meritocratically rewarding the parties with equity in the underlying platform. This isn’t equity as investors would traditionally conceptualize, but instead it’s digital goods in the form of NFTs or cryptocurrencies, that represent underlying economic value in the platform. Equity issuances encourage the right types of behaviors for users / sellers / creators – like brand evangelism (refer a friend), positive sum thinking (each party has vested interest in the platforms growth / longevity), long term loyalty, etc.
Think back to DoorDash’s three-sided marketplace of consumers, restaurants and drivers. It’s not that DoorDash’s leadership lacks the ingenuity to satisfy each party, but instead that many Web2 business models can fundamentally constrain the platform into a zero sum game between each party it sets out to delight. For DoorDash specifically, the more it subsidizes users → the higher rake it needs to take from restaurants and drivers to stay afloat, while conversely if it were to stop subsidizing user acquisition, the demand falls for restaurants steeply falls off and the whole marketplace collapses in on itself. This is a classic zero sum game, where the underlying unit economics are unsustainable
Where Web3 solves this dilemma is by offering equity for participation in the platform, the more the platform grows the more all stakeholders benefit. Think of the billions of dollars of enterprise value that consumers like you and I have collectively created for Instagram (not to mention all of the content creators). Yet we’ll never see any compensation for that enterprise value – X2E solves this value distribution mismatch
We saw P2E companies like Axie Infinity unicorn in 2021 and a plethora of new P2E gaming funds emerge, ready to deploy over $1 billion of capital into the markets in 2022. Traditional companies have been adopting X2E models as well, like Fox Corp launching its $100 million Blockchain Creative Lab fund to build NFT assets to support marquee show releases. Where for certain engagement thresholds (participating in polls, follow on social media, tuning in) viewers are given NFTs of Fox’s shows that can be sold for a profit on secondary markets. In 2022 we’ll see more X2E pureplays receive unicorn valuations and existing IP owners / platforms / brands / marketplaces experiment with adding X2E to their existing business models – from gaming and film to music and podcasts
Podcasts are a particularly interesting domain for X2E. We have yet to see mainstream podcast networks roll out a “Listen to Earn” type of strategy that rewards user engagement for listening to podcasts with tokenized equity in the podcast. In reality, this would look very similar to what Blockchain Creative Labs is doing with TV shows, just replace TV with podcasts. Podcasts tend to be a very experimental space due to low barrier of entry relative to other media channels, so this could be a big growth area for X2E in 2022
Prediction #3: Surging Investment into Sports, Metaverse, and Gaming NFT Market
Sports and gaming NFTs are a relatively small portion of the overall NFT market (3% and 2% respectively), and have ample room to grow
The global video game market was estimated at $160 billion in 2020, 85% of which was generated from in-game purchases in free-to-play games (shout out the mobile game business model for successfully disrupting the whole industry). Play-to-Earn (P2E) NFTs totaled $2 billion GTV across in 2021, making up only 1.5% of 2020 free-to-play gaming revenue — thus making P2E NFTs significantly less overvalued than the art and collectibles NFT market. The gaming market rapidly grew in 2021, fueled by COVID lockdowns, and is forecasted to reach $258 billion by 2025. If P2E NFTs can capture 5% of free-to-play transaction volumes, then that implies$11 billion GTV by 2025. Many P2E game publishers unicorned in the past 12 months (Animoca Brands: $5 billion, Sky Mavis: $3 billion, Mythical Games: $1 billion) – meaning there’s a lot of capital moving towards building mass market P2E adoption… 5% market share by 2025 feels very doable
Separately, the global sports market was estimated at $458 billion in 2020, down 15% YoY due to COVID crippling attendance revenue. But despite the large addressable market, sports NFTs totaled only $83 million GTV last year on Ethereum, or 0.18% of the total sports market value. Dapper Labs FLOW blockchain had a bit more activity at over $1 billion in sales for NBA Top Shot, but the lack of sales on Ethereum which hosts Open Sea and some of the other largest NFT marketplaces is stark. The Sports industry is projected to grow to $600 billion by 2025, and if sport NFTs capture just 1% of this market, they’ll be at ~$6 billion GTV. Again, this feels doable when considering the investments leagues and teams are making into digital goods. For example, Tom Brady’s NFT startup Autograph just raised $165 million from A16Z in early January. Meanwhile NFT native leagues like the Fan Controlled Football League (which just closed $40 million) are popping up, which let fans buy NFTs which give them votes on team play calling, roster construction, game time line ups, substitutions, and more. The future of sports is already upon us
Prediction #4: DAOs Will Enable Community Ownership of Legitimate Assets
Decentralized Autonomous Organizations (DAOs) are essentially companies that IPO on day one with highly defined governance structures. DAOs form by building a collective capital pool from investors (aka: the treasury) and then manage that treasury against a predefined charter. Every DAO’s express goal is simple: leverage treasury to create best-possible ROI for its owners
Treasury management can take a few forms. It can look like a traditional investment fund structure, like Red DAO, which exclusively invests its treasury in digital fashion items. The return profile for an investor is straightforward; if Red DAO invests the treasury well, investors can liquidate their shares of the DAO on secondary markets for a profit. There are much more complicated structures, where DAOs can be constructed to look like brand incubation labs, but I’ll save that for a future blog post 😉
ConstitutionDAO has been the buzziest DAO to date, which at the end of last year crowdsourced $47 million to buy one of the original copies of the US constitution. While ConstitutionDAO was ultimately outbid, it proved that there’s an increasing appetite for hard asset-backed DAOs by retail crypto investors. This is similar to the hype that was bubbling around NFTs in 2020 and then exploded in 2021
I predict that DAOs will start buying household name assets in media and consumer products, and there will be a subsequent surge of retail investment. There are many household name companies for sale at attainable price points – take for instance TMZ that sold to Fox Entertainment last year for $50 million. Once a few DAOs make splashy investments in well known brands, there will be a groundswell of interest as an alternative investment vehicle (reminiscent of what we saw in SPAC-mania)
Prediction #5: Chief Metaverse Officer Will Be the Hot New Title
Metaverse has become a household word (albeit often misused to the chagrin of myself and Matthew Ball), and for good reason. There’s an inordinate amount of time being spent there by consumers, particularly GenZ and Gen Alpha. Some staggering stats on metaverse consumption:
- Roblox:
- 200 million est. MAUs, over 50M est. DAUs
- Daily active users spend 156 Minutes per day on the platform
- $308 million of in-platform user spending in Q3 2020
- 123% increase of in-platform user spending in past 12 months
- 54% of Roblox users are under age 12
- Fortnite:
- 75 million estimated monthly active users
- Avg user plays more than 1 hour every day
- $122 average total amount parents have spent on Fortnite for their kids
- 38% of kids ask their parents to buy something in Fortnite
- Minecraft:
- 140 million estimated monthly active users
- $415 million in total revenue in 2020
- YouTube views of Minecraft content topped 201B in 2020
There’s also an enormous amount of VC money pouring into any company that pitches it as a metaverse ecosystem player. In fact “Metaverse” was the most used word for VC pitch decks in 2021
Brands are also taking note and using metaverse activations as a new avenue for their omnichannel ecommerce experience. We’ve seen Nerf activate on Roblox; Gucci activate on Zepetto; Burberry activate on Blankos Block Party; Marvel activate on Minecraft; the NFL and Ferrari both activate on Fortnite; Dior Beauty activate on Animal Crossing, and many, many more. An obvious through line to observe here is that this is an industry agnostic trend – consumer products companies spanning from Fashion, CPG, Food & Beverage, Media, Beauty, Toys, Auto, Media, etc all look at the metaverse and see dollar signs
There are three key reasons we see for brand excitement around the metaverse:
- Acquiring younger audiences is incalculably valuable and increasingly hard to do via targeted ads due to COPPA and GDPR regulations. Fish where the fish are – brands are astutely realizing metaverses provide a lucrative sales channel for digital goods, while helping them build cachet with one of the most important demos
- Building digital products is simpler than physical products. Producing a digital skin is relatively simple, it primarily requires a designer and a software developer. On the other hand, physical goods require build-out of a full supply chain: procurement, production, fulfillment, inventory management, shipping, and returns. And the recent supply chain crisis highlights that even the biggest brands with the most sophisticated infrastructure aren’t immune from the logistics issues of scaled physical production
- It’s a low cost way to hedge against disruption. The cost of investing experimental resources into the metaverse is a rounding error on a brand’s P&L. If the metaverse does expand beyond niche demo and become ubiquitous with social interaction, such was the case with social media a decade ago, first movers will be rewarded handsomely
Similar to what we saw in the social media boom of the late aughts, brands need to start developing a metaverse strategy immediately. Bespoke budget, resources, and human capital are a must for metaverse strategies to succeed. That is to say, many of the brands who are ahead of the game and have already launched metaverse activations have not yet established the internal infrastructure to make this endeavor scalable. The working groups who greenlight metaverse initiatives on the brand level fall into some mix of marketing, corp strategy, and social media depts. Meaning that companies are cobbling together budgets across their org structures to make their metaverse vision a reality – however this lacks inherent scalability
I saw this a lot when I was working at a VR exhibition for Hollywood films. Sony was the only major studio to have a dedicated VR dept, and as a result Sony accelerated past their peers in the space. Having a dedicated team with a P&L plus clearly defined KPIs does wonders for helping a business nurture a new growth initiative , and we are yet to see brands taking metaverse that seriously. As such, we predict metaverse to become a bespoke part of nextgen brands’ org structures. We saw a bit of a sneak peak with this dynamic in 2021, with Nike acquiring RTFKT Studios as its bespoke metaverse sub-org within the broader organization. More to come!
In closing, 2022 will be a year of massive growth for the Web3 and digital goods economy, which will continue building on the momentum from key consumer on-ramps that picked up steam in 2021, like arts / collectibles NFTs and the metaverse. 2022 will also usher in more awareness of the emergent concepts of tomorrow like DAOs, X2E, and Sports and Gaming NFTs. Early adopter nextgen consumer brands will continue cementing their lead, and receive outsized rewards once the market has settled. Those slow to follow will spend the latter half of this decade playing catch up
The RockWater team is consulting multiple nextgen consumer brands on their Web3 roadmap – shoot us a message if you’re an operator thinking through your 2022 Web3 plans. We’re always down to riff on ideas.
