The NFT market ballooned into a $41 billion market in 2021, nearing the global conventional fine art market which was about $50 billion in 2020. Traditional auction houses like Christie’s and Sotheby’s are selling NFTs at auction. NFTs are still an emerging market facing extreme volatility. As of May 2022, NFT transactions are down 92%. Yet, the NFT trading volume is up 45%. As this new digital collectible market finds its footing, there is still excitement among developers and fans.
When we first wrote about NFTs in Exploring NFT: How non-fungible tokens are changing the content world, the most expensive NFT was the jpg file “Everydays — The First 5000 Days” by the artist known as Beeple which sold at a Christie’s auction for $69 million. In the few months since that blog post, digital artist Pak’s The Merge has become the most expensive NFT. It sold for $91.8 million with almost 30,000 collectors grabbing the 312,686 NFTs. There is debate whether this should be considered a single piece or a series of pieces.
In May 2022, Japanese developer Square Enix sold their Tomb Raider video game franchise and three of its game development studies to focus on the blockchain (the technology behind NFTs). As NFTs become more prevalent, more and more brand owners and licensing agents are looking to license them. It has become a new product category. Major brands like Disney, Manchester United, DC Comics, and Budweiser have all licensed NFTs.
NFTs provide fan engagement like little else. When someone buys a t-shirt you most likely won’t know who purchased it unless they scan a QR code. With NFTs, you know exactly who purchased it. You have their information. And when it’s resold, you know exactly who purchased it. All of this information is public and can be used by the brand owners to upsell additional items to that exact fan. And not only that fan but also the fans who follow the NFT.
For example, Red Bull Racing (a division of Red Bull) released rare NFT collectibles on Sweet.io. While they released 35 rare NFTS, they had over 4500 fans following these NFTs. One NFT started at $15K and sold for $34K because it was super rare. Within one week there were nine bids. Due to the public nature of NFTs, it’s public knowledge to see everyone who bid on the NFT and what their bid was. For brand owners, not only does this provide information on superfans it also makes online audits easier.
While NFTs take a lot of work, they also bring in a lot of information and fan engagement. Like all good collectibles, fans will hold onto the ones they love, trade for ones they’re missing, and sell the ones they no longer need. And brand owners will know who has the NFT at each step along the way.
Dipping your toe into a new market can be a challenge. Some brand owners have found success while others have learned valuable lessons. When Disney launched its Pixar Pals NFT collection in March 2022, all 54,995 pieces sold out in 24 hours selling for the equivalent of $3.3 million. Warner Bros. Consumer Products recently launched their DC Comics Bat Cowl NFT collection in May 2022 with 200,000 unique NFTs and the possibility of $60 million in sales. When the sale was over, it appears only 10,644 NFTs got minted by 2,327 users.
Each user purchased about two or three NFTs. WBCP made around $3 million for the collection with a lot of unpurchased assets. Another example is White Castle. They have a huge fan base. An NFT deal was managed and developed by their licensing agent Brandgenuity. They teamed up with popular Japanese artist Che-Yu Wu to create a collection for White Castle’s 100th birthday. While the NFT had good use of well-known artists and a loyal fan base, it didn’t sell out. It was simply due to the price point. The NFTs were released in the metaverse priced at .01 Ethereum which at the time was about $325. To capitalize on the collectability market, NFTs need to sell out.
If the initial release doesn’t sell out in a week or two from the release, it’s hard to trade. With time, brand owners will become more accustomed to licensing NFTs with the ins and outs of its unique collectability marketplace.
With digital collectible fans becoming more comfortable buying NFTs and brands becoming more deeply involved in this new product category, the devil (as always) is in the details.
The key to remember is that NFTs are a product category like art, video games, software, or music. Yet, with licensing deals, there are more details to be aware of when dealing with NFTs than there are with traditional licensing deals.
Everything from updated contract details to specific artwork to handling royalty collection needs to be addressed. Key questions need to be laid out like what rights to grant, what assets will need to be created, which marketplaces can they be sold on, how to deal with infringers, and how to track both initial royalties and secondary royalties.
As NFTs are unique, many assets will need to be created and usually in short time frames. And creating assets that are collectible and tradeable is key. Different art assets will be used for a common NFT versus an extremely rare NFT.
When getting into NFTs, there are new retail marketplaces as well as new financial structures to learn. Cryptocurrencies are easy to pay into but hard to convert back into dollars or other traditional currencies. Understanding the payment structure is necessary and not just for currencies like Bitcoin and Ethereum. For example, there are minting and gas transaction fees. These are the fees charged to certify that an NFT is legitimate and get it into the marketplace. These fees are currently not consistent.
OpenSea is NFT’s biggest marketplace. It’s an open marketplace that’s not regulated. There are no fees. With an open marketplace, there’s less control. Most brand owners prefer a closed marketplace like Veve. me based out of New Zealand which has tighter control. Recur and Sweet are also popular closed marketplaces.
Manchester United released on the Tezos marketplace as they wanted fans to be on that closed metaverse to trade online. Liverpool went on Polygon as they are more eco-friendly and could trade on Sotheby’s Metaverse. A lot of licensed NFTs are on the metaverse as you can change things even though the NFTs are minted. For example, you can change the payout distribution in the future. Can change in the future. One of the reasons they chose this platform.
As of April 2022, these were some of the fees for the major players in the NFT marketplace:
- OpenSea’s listing of a digital asset is free, as compensation, they charge 2.5% minting fees. They also take 2.5% of every final sale price.
- Rarible charges 2.5% of the sale as a minting fee.
- Nifty Gateway charges 2.5% of the sale as a minting fee.
- SuperRare charges 3% of all fees paid by buyers of an NFT.
- foundation app – 1+ NFT minting: 15% of the final sales price.
In addition to new currencies, brand owners need to look at term limits in a new way. Unlike traditional licensing deals that have a term of three to five years, NFTs have the potential to live on forever and can be sold again and again and again creating future royalties and ongoing sources of income. Crafting NFT-specific contract terms and tracking royalties for longer periods needs to be addressed.
While there are more hurdles to overcome, NFTs offer a new form of engagement.
Unlike traditional products, you’ll know exactly who the consumer is who bought your licensed NFT. This information is public. It provides a great way to engage with a brand’s superfans while also providing a unique way to connect with potential new fans.
For example, at Comic-Con companies gave away NFTs to fans who attended events. The fans got a nice surprise while the companies could keep track of the fans who attended the events. And you’ll know who future fans are when they are traded or resold. Trading and holding NFTs is part of the collectability. The more rare the NFT the better the trading value.
The more common the NFT is simply for bragging rights and collector’s won’t see an uptick in value.
There are several types of NFTs. Everyone uses different names, but they all boil down to the same types of categories:
- Secret Rare
In addition to sales, NFTs are also being used for marketing and charitable collaborations. To have a successful promotion, you have to tell a story and engage the fans. Collectors have to have something more than buying an NFT just to buy an NFT. If you have a good story it sells out. If not, it’ll go nowhere.
A charitable twist is nice as it adds the story of benefiting someone else. Events and experiences bring collectible reminders of a specific time. Storytelling is critical when it comes to NFTs.
The National Football League did this when it gave away an NFT to every attendee of Super Bowl LVI. Each fan got a customized NFT that provided a digital keepsake that featured their section, row, and seat numbers. “We first began offering virtual commemorative ticket NFTs to fans during the regular season,” says Bobby Gallo, senior vice president, club business development, NFL.
“We witnessed great success with this one-of-a-kind fan experience, which provided the momentum to continue this program throughout the postseason and ultimately at Super Bowl LVI in Los Angeles. Collecting ticket stubs has always been something our fans love to do, especially for the season’s biggest game, and offering customized Super Bowl NFTs allows us to enhance the gameday experience, while also enabling us to further evaluate the NFT space for future ticketing and event engagement opportunities.”
Collaborating with the Keith Haring Foundation, the collaboration created three NFTs of varying rarity and price to maximize their impact on youth living with or affected by HIV/AIDS. Each NFT featured a MAC lipstick with Keith Haring visuals.
Tier one was the most common, Keith Haring Red. Five thousand NFTs were available for $25 each. Tier two was Keith Haring Blue where 250 NFTs were available for $150 each. This tier also included a digital face chat tutorial of a Keith Haring-inspired makeup look created by a MAC Senior Artist. The most rare was Keith Haring Yellow. Only 25 NFTs were available for $1,000 each.
In addition to the NFT, owners were also provided access to a 30-minute personalized MAC Artist consultation and complementary physical product. MAC was able to use NFTs to effectively accentuate their product categories and raise money for a worthy cause.
Anheuser-Busch created Budweiser Royalty NFTs which collaborated with 22 emerging music artists for one of their NFT drops. Owners of core rookie cards “can celebrate artists and show off their early support with these collectibles.” Rare card owners received access to their artist’s virtual listening party.
Ultra Rare card owners got access to the virtual listening party plus a one-on-one video call with the artist. The artists were able to gain greater exposure through Budweiser’s NFT release while Budweiser was able to mix its brand with music and NFTs.
NFTs do have downsides. The industry is only a year or two old so a lot of best practices have not been established yet. NFT lead times may be compressed to meet a rapidly shifting market and demand which leads to a condensed approvals process.
In addition, the volatility of the market can be extremely unpredictable as the “crypto crash” of 2022 showed. NFTs are also bad for the environment as they consume a lot of energy. The World Wildlife Foundation had to quickly cancel the sale of its NFTs to raise funds for conservation work due to a huge backlash. Environmentalists have concerns that will need to be addressed as NFTs move forward.
Currently, companies are buying energy credits to counter the emissions they make. NFTs will need to make a switch to geothermal and solar-powered to get away from the stigma of not being eco-friendly. There are a lot of infringers and counterfeiting can easily happen. Some services that help thwart infringers that have no permission to release NFTs like Counterfind out of Texas and Brandshield out of Israel.
Companies like REV3AL offer protection through digital authentication, and the digital watermark to put on your NFT. With this authentication, you’ll be able to track real artwork and NFTs and see which are fakes. Of course, all of these services have fees involved.
There are also a lot of legal considerations around NFTs as the agreements will last longer than a typical licensing agreement of 3-5 years. Control needs to reside with the brand owner as the marketplace is still volatile and we don’t who the main players will be in the coming years. NFTs could last forever on the blockchain. Be concerned and pay attention as events unfold to ensure your brand is protected.
NFTs may require licensing contract changes. Terms like the length of time, price, the royalty rate on secondary sale vs. primary sale, gas fees, transaction fees, can the digital items created come to physical merchandise, etc. will need to be added into any addendum.
It’s a new frontier that’s being forged and will have changes ahead. NFT deals are not one and done. They hang around. Policing contract terms and ongoing maintenance are the concern and have to be addressed in contract terminology.
While many brands have taken the NFT leap others are waiting to gather more information and waiting for the laws to catch up. Sega only has one NFT out there. NFTs are currently not overseen by the licensing team but by the company in Japan. They are holding off on doing more “until it is certain ‘what will be accepted and what will not be by the users.’”
When it comes to information, NFTs require a lot of information but they’ll also provide a lot of valuable data. And Dependable Solutions has the suite of solutions to help you sift through it all.
From providing digital assets through online style guides to tracking multiple granted rights for each NFT type and tracking royalties including secondary sales data tracking infringers and legal considerations to distributing participation payments to multiple parties and converting cryptocurrencies to USD-based currency and more, Dependable Solutions provides the licensing software solution to make licensing NFTs simple. Learn more at www.dependablesolutions.com or follow us on Twitter, Facebook, or LinkedIn.