Innovations / sports business

Why sport is an ecosystem tailormade for blockchain-based innovation. The realm of professional sports lends itself perfectly to an innovative approach to distributing rights and incentivizing desirable actions: tokenization. Toke… what? Glad you asked. Tokenization is a concept that became popularized in the world of blockchain, crypto assets, and decentralized networks. It describes the act of representing all kinds of rights in the form of a digital, unique and cryptographically secured token. On an elementary level, we are talking about the certification of rights in a digital way rather than, say, in paper documents. To understand why that is interesting, let’s look at the kind of rights that may (theoretically) be tokenized:ownership rights to an asset, e.g. a tokenized equity in a companycontractual rights e.g. a tokenized claim to be paid by an insurance company in case of certain eventsprofit participation rights e.g. a tokenized financial instrument that grants holders a certain percentage of the issuers net revenuesgovernance rights e.g. tokenized votes in an organization’s governance bodyrights to be paid e.g. tokenized debt instruments like bondsand many more Tokens are most commonly implemented by using a certain type of distributed ledger, a so-called blockchain, that comes with some desirable attributes such as being tamper-proof, independently verifiable, and enabling the creation of digital assets that cannot be reproduced (most data can be copied indefinitely, think PDFs or MP3s; this would be extremely undesirable when it comes to digitized rights, particularly financial rights). By turning rights into digital tokens, their utility increases. You can implement new features that otherwise wouldn’t have been feasible in a convenient manner. You can get them to market much easier because you can distribute them online directly. And they can drive the creation of entirely new markets as they are easily transferable and tradeable. To understand why tokenization and professional sports are a very good fit, we first have to understand professional sports as an ecosystem. Thus, we will first establish that perspective in this article. After this, we will take a look at the different actors and their key interactions. On that basis, we will identify several critical points of friction that currently exist in the ecosystem and will then examine how tokenization could be used to reduce said friction. Professional Sports as an Ecosystem When we talk about “professional sports”, we effectively talk about a heterogenous ecosystem consisting of various actors¹. That is, there are many different players that create the modern world of professional sports, for example, sports clubs, athletes, fans, leagues, sports media, and sponsors & advertisers.² These actors all have their own — often conflicting — goals and interests. To reach them, they will sometimes collaborate and sometimes compete. Let me point out that examining these dynamics in a comprehensive piece such as this one comes with certain limitations. Every professional sport forms a unique ecosystem with specific actors, rules, traditions, and dynamics between them. Hence, all of them have their own set of challenges and points of friction. Take, for instance, European football (aka soccer): it is based on national leagues, there are various governing bodies on the national and European level, there is a relatively open transfer market, it is built on top of a strong system of amateur/associated club sports, there are relegation systems and pan-European competitions. Now compare this to US-type sports leagues, say the NBA: there, teams are dubbed franchises. Their owners (nowadays called “governors”) govern the league and its rules, the player-team-relationship is clearly regulated in the CBA, college sports are the main talent pipeline. There is no relegation, thus the league is a mostly closed system. Sure enough, both sports have quite different dynamics. Yet besides all this, we still observe some overarching trends that can be witnessed in many professional sports ecosystems. In this piece, I will focus on those. In future pieces, we will be looking at specific sports in higher resolution. Key Actors in the Professional Sports Ecosystem Clubs/Teams Professional sports clubs (“franchises” in the US) are for-profit organizations that employ or contract athletes. Commercially, they are at the center of all team sports as well as some individual sports (e.g. Formula 1). They usually obtain (or hold) licenses from professional leagues in order to compete with the other teams in it. As a result, clubs are in some sense gatekeepers: any athlete who wants to compete in a given league needs to have a contractual relationship with a club that holds a license. Key interactions with other actors:Clubs pay athletes for their performancesClubs offer a “competitive entertainment product” to attract fans and sponsorsClubs generate revenue from sports media, fans, and sponsorsClubs acquire licenses from professional leagues to be eligible to competeClubs assign professional leagues the right to market, sell & distribute their content (= TV & streaming rights plus potentially other, e.g. gaming) Important dynamics at play: Bigger success usually translates to increased fan support which increases the revenue potential, both from fan-related sources and sponsors. Professional Athletes Professional athletes are individuals who excel at a certain sport and earn a living by competing in it. They are either employed by a team or — in individual sports like golf or tennis — freelancers. Besides the rational motive of income creation, they often have a strong emotional driver too: winning. Key interactions with other actors:Athletes sell their performance to ClubsAthletes sell their image/reputation (and increasingly their reach too) to sponsors and advertisersAthletes operate or enable direct-to-consumer businesses that sell to their fansAthletes entertain their fans on social media Important dynamics at play: The more successful an athlete, the higher her earning potential. The geographical market in which an athlete plays also has a significant influence on popularity and earning potential. Hence, many athletes favor clubs in attractive markets. At the same time, athletes rely less and less on their clubs to monetize their performance. They own direct fan relationships via the internet/social media. They monetize this with both, sponsoring deals and direct-to-consumer businesses. Fans Fans are at the heart of professional sports. Their deep emotional investment and strong interest are the fuel that drives any pro sport’s development. They spend money directly in the ecosystem — making an important contribution to any sport’s economy. Moreover, the fans’ collective purchasing power is what attracts sponsors & advertisers to the ecosystem. Key interactions with other actors:Fans spend their attention on sports media, including live broadcastsFans follow their favorite athletes online/on social mediaFans pay sports media to access their content, particularly TV and increasingly streamingFans buy merchandising from clubs and athletesFans buy tickets for matches Important dynamics at play: Historically, fan attention was focused on clubs. Clubs controlled media access in the era of mass media. But in the internet age, fan attention shifts increasingly towards athletes, thanks to social and athlete-owned/controlled media. People are naturally more interested in people than in brands and the internet makes it feasible to follow even the biggest stars much more closely than ever before. This shift in attention also leads to changing power dynamics. Leagues (≙ Rights Owners) Professional leagues create marketable bundles. They package players and clubs into a neat entertainment product. To that end, they create and govern the realm of competition: they act as gatekeepers (i.e. they decide which clubs are allowed in), set the rules of the game, and govern the rules of engagement between the different actor groups by defining standards such as transfer windows, trading periods, salary caps, revenue sharing, etc. Leagues also market and distribute the final product and are responsible — to different degrees depending on the particular league — for selling broadcasting rights and other licensing deals. Key interactions with other actors:Leagues sell broadcasting (and other) rights to sports mediaLeagues sell licenses for use of their IP to sponsors and advertisers (and others)Leagues sell licenses/participation rights to clubsLeagues distribute revenues among clubsLeagues define standards for clubs and athletes Important dynamics at play: Leagues generally benefit from — or even rely on — the brands of their clubs and athletes. The most notable leagues, however, managed to build a powerful brand in their own right. In these cases, such as the Premier League or the NBA, there is a significant number of people identifying as fans of the league. Digital means of direct-to-consumer distribution, including streaming, present interesting opportunities for those forceful leagues. Sports Media Sports media, and broadcasters specifically, represent the major revenue source for most professional sports ecosystems. They are also the main vehicle for today’s fans to experience sports. The variety of sports media offerings has significantly increased over the last decade-plus: live broadcasts are no longer limited to TV as streaming offers became increasingly popular; thanks to online media, the amount of available content has skyrocketed; social media added a layer of ongoing discussion, accessible to everyone at any time. For many fans, they have turned into the primary way to experience sports. Some relatively recent McKinsey data on sports fan media usage. Key interactions with other actors: Sports media acquires rights to show/use content from leagues and/or clubsSports media creates content about clubs and athletes to get the fans’ attentionSports media monetizes the fans’ attention — either directly (e.g. subscriptions) and/or via advertisers paying for the reach Important dynamics at play: The internet enabled the 24/7, non-stop news cycle. This turned sports into an around-the-clock, highly immersive entertainment experience. In the filter-bubble-era, sports are a very popular and fun bubble to follow and engage with. As attention equals money in the media business, sports media is incentivized to continue this development. Sponsors & Advertisers Sponsors and advertisers are companies that use sports as a means to reach their target audiences. Both make significant contributions to professional sports ecosystems, although in different ways. Sponsors have long-term relationships with either a league, a club or an athlete and directly pay them for promotional opportunities. We use the term sponsor in a broad sense, i.e. all companies that have financial arrangements with athletes, clubs, or leagues. Besides traditional brand sponsorships, this notably includes deal types that just became popular in recent years such as startups exchanging equity for exposure and reach. Sponsors are a major (and in some cases the main) revenue source for professional sports ecosystems. Advertisers, on the other hand, use sports media to, well, advertise. The audiences that sports can draw are an important opportunity for them to get large-scale exposure. Their money enters the sports ecosystem via the sports media, most importantly by way of purchasing broadcasting rights. Key interactions with other actors:Sponsors pay professional leagues, clubs, or athletes for exposureAdvertisers pay sports media for reach Important dynamics at play: In our days of hyper-fragmented niche media consumption, many big advertisers — usually brands producing products for the mass market — struggle to reach the big audiences from the bygone era of mass media (audiences that are vital for their business model as I should point out). As Ben Thompson points out perfectly in this piece, sports is one of the few programming options that still draws significant TV audiences and, therefore, is vital for both broadcast media and advertisers. As long as sports viewership numbers remain on today’s levels, broadcasting rights will remain an extremely coveted and hence valuable asset. Points of Friction Friction arises whenever incentives between two or more groups of actors are misaligned. The more complicated or complex a system is, the more likely you will find points of friction. This holds true in sports as well. We identified several points of friction in the professional sports ecosystem, three of which I want to elaborate on. Interestingly, Clubs/Teams are at the center of them all. Clubs vs. Athletes: Player Empowerment There is a big buzzword currently making its rounds in the NBA: player empowerment. Putting aside some NBA-specific phenomena like superstars leveraging their CBA-induced power over executives in “pre-agency” (™ by Bill Simmons), the term perfectly summarizes some overarching developments we see in many sports. The trend can be summarized as a struggle for power, influence, and of course money between athletes and clubs. One key factor in this: the internet and the attention economy it has created. Athletes, particularly the superstar-level ones, know that they are valuable global brands. They understand that they can easily build their own platform to reach fans directly. And they are discovering how to leverage this power into income and influence alike. As a result, they are less reliant upon clubs than ever before (again, this applies to top stars first and foremost). A pithy illustration of this development: many athletes have more Instagram followers than the clubs they play for. This manifests in different ways. First of all, athletes can generate significant revenues that are not (directly) related to their performance on the pitch, court, or field. Four of the current 10 highest-paid athletes in the world earn more from endorsements than from their clubs/what they book in winnings (and five if you consider boxing star Saul “Canelo” Álvarez’s streaming deal with DAZN as an endorsement). Another signal of the friction between clubs and athletes: player movement is likely at an all-time high. The ideal of any romantic fan is a player who spends his or her entire career with a club. But for the most part, those days are over (even FC Bayern lifer Thomas Müller is allegedly looking to leave the club he spent the last 19 years with). Top players make use of the new independence that is granted by owning the fan relationship directly: they move from market to market as they see fit. While great for players, this definitely creates new challenges for clubs — and even might have an impact on the very nature of fandom. Fans vs. Clubs: Unhealthy Relationships Many fans are increasingly frustrated with the clubs they support. In the face of an increasingly commercialized sports world, more and more fans feel as if they were merely the product in the sports economy (which, to be fair, they are). Thus, many commercialized teams have a more distanced relationship with their supporter base than ever before. Case in point, a recent thorough study of German Bundesliga fans, Situationsanalyse Profifußball 2017, found that a staggering 51% of fans were considering to quit following professional football in case its commercialization would continue. And there are many situations of fans who are vocally unhappy with their club’s management for business decisions, from Oakland to Turin. In light of the fans’ growing discontent, many clubs are putting an increased emphasis on innovative fan engagement activities to improve the relationships with their fan bases. Leagues vs. Clubs Across the globe, clubs are fighting with their league for more control over the governance — in most cases, of course, related to money. An incomplete list of current situations:In European football, there’s a big battle raging about the future of Champions League, which involves infighting between national leagues, UEFA and the biggest European clubs.Formula 1’s top teams are fighting with FIA about new rules regarding car design and default parts that would likely decrease the top teams competitive advantageThe top clubs of Germany’s Bundesliga are fighting with the league — where smaller clubs have more influence than ever before — about proposed changes to the revenue distribution system that would benefit smaller and middle-class teams. As governing bodies that have to manage the interests of several competing entities, such conflicts are to be expected and likely unavoidable, in particular when money is involved. However, it appears as if these conflicts over influence and money are becoming more commonplace in the commercialized sports landscape of the 21st century. The question is: can leagues find a new state of equilibrium? Better Systems Thanks to Tokenization? In complex systems, 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. And thanks to the nature of blockchains, all involved parties are able to verify that the rules are being applied consistently. It’s a tool kit almost tailormade for environments where many entities are competing continuously, yet consensus needs to be found regularly. In such cases, tokenization can reduce friction and help us to create healthier ecosystems. What Tokenization Could Look Like in Professional Sports Let’s get specific. What types of tokenization have a lot of promise for the professional sports ecosystem? Below, I briefly sketch out five different tokenization scenarios that we at Liquiditeam expect to see in the future. The indicated timelines are educated guesses rather than precise predictions. We will delve deeper into the different scenarios in future pieces (so make sure you subscribe to our newsletter if you don’t want to miss out). Short-term Scenarios (approx. next 1–2 years) Tokenized clubs: Fans, sponsors and other investors can buy tokens issued by a club. These may even represent certain securities such as bonds or stocks (“security tokens”) that come with financial upside and risk. Economically motivated decisions by the club would be beneficial for “fanvestors” too. Loyal supporters could be rewarded with tokens. Tokens might even grant some kind of governance rights to holders. They could also be granted to athletes to incentivize loyalty. With all this, club tokenization could reduce friction between clubs and fans as well as between clubs and athletes. Tokenized athletes: Athletes tokenize (future) revenues in exchange for instant liquidity, allowing them to hedge against injury and other career-ending risks while establishing a new asset class for fans and investors. NBA player Spender Dinwiddie is trying just this at the time of writing. Mid-term Scenarios (approx. next 2–5 years) Tokenized revenue distribution schemes: Revenues between league, clubs, and potentially athletes are automatically distributed based on data that measures each entity’s contributions (e.g. generated attention, revenues) as well as other factors (e.g. competitive success, support for smaller markets). The distribution algorithm is transparent for and governed by all parties. May be utilized to reduce friction between leagues and clubs. Tokenized IP rights and licensing systems: Tokenization of IP rights could lead to increased efficiency in the licensing business as well as enable entirely new business models and markets. Imagine, for example, tradeable micro-licenses of highlight clips with automated royalty collection whenever shown or streamed. Long-term Scenarios (some time) Tokenized leagues: The entire construct that constitutes a modern league is tokenized, i.e. the relationships between all entities participating in the competition are defined in smart contracts. Clubs and athletes are completely tokenized. Fans, investors and other ecosystem stakeholders can easily invest in (bet on) them and execute governance rights. Clubs might look more like virtualized, distributed and fluid organizations, governed by athletes and fans. All IP & licensing rights are tokenized too. Therefore, leagues are much leaner organizations, primarily a branding & marketing vehicle. A vivid ecosystem of third-party applications allows stakeholders to interact with the tokenized league in various forms. It would take a long time and be rather difficult to develop a big, established league to this stage. Thus, we anticipate that such models first emerge in newly founded leagues that start on the green field. Thus, we believe esports could very well be the first environment to witness such models in action. Summing it up aka tl;dr When looking at professional sports through the lens of systems thinking and ecosystem development, it quickly becomes evident that it is a fairly complex environment. Various actors continuously struggle for attention, influence, power, and money. At the same time, they must cooperate in order to maintain at least a functional and ideally attractive, sought-after product. In that process, friction naturally occurs. While friction cannot be eliminated entirely, there are tools to reduce it, thereby improving overall ecosystem performance. Tokenization is a tool ideally suited to do exactly this in environments characterized by coopetition. Taken as a whole, we see a great fit between professional sports and tokenization. Hence we are confident that, beginning in the not-so-distant future, professional sports ecosystems around the globe will implement tokenization in various models and to different degrees. In the latest stages of tokenization, we expect to see fully tokenized leagues. About Liquiditeam At Liquiditeam, we develop token-based financing and fan engagement solutions for professional sports clubs and athletes. If you want to learn more, subscribe to our newsletter, send us an email to hello 'at' liquidi.team, or follow us on Twitter. Liquiditeam is an Untitled INC venture. ¹ The term actor, as used here, origins from the lingo of systems theory, where an actor is any entity (e.g. a person, an organization, a system) that acts within a certain system. ² In this article, we focus on these actor groups. Be aware, though, that the list is not conclusive as some actors are missing, e.g. player agents. Similarly, it would be possible to zoom into every group to get an even more nuanced understanding, e.g. differentiate between club management and coaching or between star players and role players. For the purposes of this article, though, we are prioritizing accessibility over completeness.