Tokenization in sports: how can tokenization improve the sports industry?
The sports industry is a complex ecosystem. Fan engagement and its capitalization is the biggest trend in the sports industry right now. Tokenization through its true peer-to-peer nature and technical flexibility offers a way to increase the level of engagement and also offers the potential to change the way professional athletes are sponsored. Tokens with full legal compliance are now possible with Amazing Blocks. This would be a great step towards full digital integration and complete transformation of the professional sports industry. — Authors: Bilguudei Enkhbaatar, Nicolas Weber
Ever since the dawn of man, humanity was involved in physical activity. First, as a means to sustain ourselves by hunting game and defending our own from rivaling tribes, physical activity has been an essential part of our survival. Since at least from the start of civilization, humans have participated in sporting competitions from cuju — an ancestor of modern football (soccer) — to the first-ever recorded organized sporting event, the first Olympic Games, in Greece.
Over the millennia, the sports industry has grown from a leisurely activity to a multi-billion dollar industry. Today, the sports market consists of sales of sports services and related goods by entities that offer spectator sports and participatory sports. Of the category spectator sports, professional sports make up around 75% (Business Research Company 2019).
The revenue of professional sports primarily consists of broadcasting fees, sponsorship fees, and income from ticketing, hospitality, and other spending by fans at the sporting events. A Business Research Company study (2019), estimated the value of the global sports industry at about $458 billion in 2019. After years of consistent growth and expansion, the sports industry faced the COVID-19 pandemic in 2020, which Simon Denyer, the then-CEO of DAZN referred to as “the biggest disaster to hit the sports world in 75 years (Stefano 2020).” A complete halt in every major sport around the world followed, leading to staff layoffs, decreased revenues, and in some cases, even bankruptcy of teams (Zilina) and leagues (XFL).
Figure 1 shows the estimated growth rate of the sports market in the upcoming 5 years, according to a survey conducted by PricewaterhouseCoopers where they surveyed 780 industry leaders. After a high growth rate of 8% in the past 5 years, the global sports industry growth is expected to slow due to the COVID-19 pandemic. As of writing, the fans are still largely prohibited from attending sporting events with no date of a full return to pre-pandemic levels. Therefore, it is too early to estimate the full damage of the pandemic to the sport industry as a whole.
However, what is clear is the need to modernize current business models of sports. In the same study, the industry leaders highlighted the potential digital assets pose to alleviate the dependency on live events and to introduce additional revenue streams. It also stressed the need to integrate digital assets into the business model in stages to drive up fan engagement and boost the commercial value of sports teams.
An innovative approach like tokenization can be the driving force in the process of digital integration in the professional sports industry. The outcome of such transformation would not only be limited to providing an alternative approach to boost fan engagement, therefore increasing revenue, but it can bring drastic and lasting changes in the industry at every level. In this article, I will outline some of the possibilities of tokenization for clubs and leagues to engage fans in an innovative way as well as how tokenization can revolutionize athletes and the governance and ownership of teams.
Before we begin, it is important to understand what tokenization is. With the Token Container Model, Liechtenstein has introduced a modern approach to defining what a token is. Under the Liechtenstein Blockchain Act, a token is defined as a technical container that contains a legal right or a claim to any asset on the blockchain.
The ability to generate any type of tokens at a low cost with little effort has created an exciting possibility for players in the sports industry to offer tokens with not only ownership rights but also additional features not available through traditional means. The production, distribution, and consumption of tokenized goods and services, therefore, provide a foundation for a token economy.
How can tokenization improve the sports industry
Before the existence of social media and 24/7 news cycles, the sports industry by enlarging could be thought of as cyclical. A usual European football season starts in late August and crowns the champions by the end of May. The most popular motorsport series, Formula 1 organizes races between March and November. Sports like boxing and tennis have a number of events during a calendar year with “downtime” between each event.
However, since the boom of social media, year-round news coverage, and the ubiquitous presence of athletes and clubs online, there is no off-season. Fans are likely to spend the break between seasons enjoying content about their favorite sport. A survey conducted by Deloitte (2020) found that 95% of fans today have some form of interaction with their favorite team or league in the off-season. The same study found that fans who are engaged year-round are more likely to spend on tickets and merchandise.
In today’s globalizing world, it is not uncommon to see athletes and clubs have a global outreach. Earlier, the fanbase of a club consisted mostly of fans who live in the physical vicinity of the stadium. According to a report by KPMG Football Benchmark (2018), Real Madrid CF has around 2.6 million Facebook followers in Spain, which paled in comparison to the 6.5 million and 10.4 million Facebook followers it has in Mexico and Indonesia, respectively.
The sports industry has already started utilizing token-based systems to improve fan engagement. Borussia Dortmund, a football team in Germany, has recently announced its partnership with Liquiditeam to launch a blockchain-based application where fans can directly interact with other fans around the world as well as the team. The platform allows fans to participate by voting on certain issues and suggesting new ideas.
In Italy, AC Milan, one of the most successful football teams in Italy, has partnered with Chiliz, to launch its own fan tokens on the Socios platform. The fans will be able to purchase and trade tokens as well as participate in fan-exclusive events. Although the platform was recently developed, football giants like Juventus have already engaged their fans on it by organizing votes for their token-holders. The biggest mixed martial arts organization, Ultimate Fighting Championship has also partnered with Chiliz to launch tokens as well.
In the fierce competition for fans’ attention, the aforementioned tokenized solutions can offer additional features like participation rights and would enable clubs to delegate authority to fans. An important benefit of using a digital medium, namely a tokenized solution to increase outreach is its availability to fans around the world and empower them to participate no matter where they are physically located.
Professional athletes are an integral part of the sports industry. The path to becoming a professional athlete is rigorous and unfortunately, not everyone makes it. Less than 2% of American football athletes play professionally in the National Football League (Farmer, 2019). It takes an incredible amount of effort, dedication, luck, and financial resources to become a professional athlete.
Figure 2 shows the average annual cost of raising a professional athlete categorized by sport. Almost 600 thousand pounds annually is the estimated cost of becoming a Formula 1 driver; whereas pursuing basketball and American football can cost the family anything between 10 to 30 thousand pounds per annum. Most of the costs associated funds the training. A financially well-off child will therefore have a higher chance of making it into the professional level. It is an incredibly difficult task for those from poor backgrounds to be able to afford or compete on such an uneven playing field.
This is where tokenization comes in. As the token can “contain” any right or claim, a fractional claim on the future contract can be tokenized. Any additional revenue an athlete creates can significantly impact the chances of future success. Tokenization can, therefore, democratize peer-to-peer investing in the future of young athletes and turn an illiquid asset into a liquid asset that investors (fan + investor) can buy and trade.
A similar concept has already been tried. In 2019, NBA star and Brooklyn Nets player, Spencer Dinwiddie announced that fans will be able to invest in him by purchasing a tokenized share of his contract with the Nets. The offering first attracted scrutiny from the league and went on to sell only 9 tokens of the 90 on offer.
Although not completely successful, projects like this help raise awareness of the possibilities of tokenization and showcase its potential to be a disruptive force in the sports industry.
Future outlook and conclusion
The current COVID-19 pandemic has put incredible strain on the industry. Leagues and teams are seeking new ways to capitalize on unprecedented levels of fan engagement even in the midst of the pandemic. Tokenization can be the tool to revolutionize the sports industry from not only a fan engagement perspective but by introducing additional capital.
There have already been exciting developments in the field of tokenization and professional sports. From the participation rights tokens of football clubs to an entire esports league adopting tokenization, there is a budding interest in the market for an innovative approach to modernize the industry. These are crucial efforts to better understand the complex ecosystem while optimizing the model for a token economy in the future.
As the interest and understanding of the technology grow, more investment opportunities will arise in the field of blockchain and professional sports synergy, leading to even bigger possibilities in the future.
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Stefano, M. (2020, April 5). Can the sports industry survive the coronavirus shutdown? Financial Times. https://www.ft.com/content/fd7e58ec-7438-11ea-95fe-fcd274e920ca
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PricewaterhouseCoopers. (2020). Sports Industry: System Rebooting. PwC. https://www.pwc.ch/en/publications/2020/pwcs-sports-survey-2020.pdf
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Farmer, A. (2019, April 24). Let’s get real with college athletes about their chances of going pro. The Conversation. https://theconversation.com/lets-get-real-with-college-athletes-about-their-chances-of-going-pro-110837#:%7E:text=Fewer%20than%202%25%20of%20college,for%20any%20amount%20of%20time.
The Cost of Raising A Pro. (n.d.). The Cost of Raising A Pro. Retrieved January 23, 2021, from https://www.cost-of-raising-a-pro.com/