Cultivating Culture Through Commoditisation: Why NFTs Present An Unparalleled Opportunity For The Sports Sector

In 2019, the National Basketball Association (NBA) and the National Basketball Players Association (NBPA) partnered with Dapper Labs, a production studio specialising in blockchain technology.  At that stage, few could have anticipated the impact the partnership would have on both the rightsholder’s brand and the wider sports sector.  Fast-forward to the present, the ground-breaking non-fungible token (NFT) marketplace, NBA Top Shot, which allows fans to purchase and trade digital highlight clips, leads the market in digital sports collectibles.  In April this year, it was reported that NBA Top Shots had seen $500m in sales and had registered 800,000 users since being made available to the public in October 2020.[1]

Despite a recent dampening in expectations following a decline in key metrics (namely, the value and volume of trades, and number of unique users registering to the platform),[2] wider developments in the sports sector indicate that the commoditisation of scarce, digital assets is here to stay. Unsurprisingly, it appears that rightsholders remain intrigued by the potential in exploiting NFTs; namely, that the creation and sale of unique, digital assets can simultaneously generate a diversified revenue stream and also drive fan engagement.  Just last month (September 2021), the platform behind NBA Top Shot, Dapper Labs, raised a further $250m in its latest funding round, reportedly valuing the firm at $7.6 billion.  Similarly, Sorare, the French-based company that offers a fantasy football game utilising NFTs, raised $680m in an investment round led by the Japanese investment giant, Softbank.[3]

This introductory article, the first in a series related to NFTs in the sports sector, will:

1. breakdown what constitutes an NFT;
2. explore why they represent a valuable opportunity for the sports sector; and
3. identify the key legal and commercial considerations for rightsholders looking to enter the NFT market.

Understanding NFTs: the terminology

Before exploring the opportunities for sports rightsholders in relation to NFTs and the relevant legal and commercial considerations, it is important to be clear on what exactly an NFT is:

• “Non-fungible token” essentially means a unique digital asset.
• “Non-fungible” relates to the non-interchangeable nature of the asset.  The code and metadata attributed to each NFT can be used to verify the token’s uniqueness.  This differs to, for example, bitcoins on the Bitcoin network (or indeed other cryptocurrencies or fiat currencies), which are readily interchangeable given that each coin is identical and holds the same value as any other. NFTs are usually, therefore, one-of-a-kind (or limited edition) assets.
• “Token” identifies the asset as a digital commodity that can be traded within a blockchain ecosystem.  Subject to any restrictions imposed by the creator, NFTs are therefore capable of being transferred.
• “Blockchain” is a form of distributed ledger technology. Effectively, a blockchain is a data structure that records transactions (or changes to the ledger over time) in blocks of code that are linked together in such a way that protects the information contain therein from alteration.

In summary, an NFT is a unique digital token, which serves as a digital certificate of ownership, that is “minted” (read: created) on a blockchain and is comprised of computer code.  Within this code are the rules that determine how the NFT can be dealt with, such as the conditions for transfer and the limitations that will be imposed on the buyer.  This computer code is commonly referred to as a “smart contract”.

This reliance on smart contract functionality is why NFTs are often minted on the Ethereum blockchain, which supports smart contract functionality.[4] 

Distinction between NFTs and the underlying digital asset

The glaring omission from the preceding section is a lack of any reference to digital artwork, highlight clips, or any other creative digital works that may belong to a creator or rightsholder.  Given the incredible sums being reported in respect of NFT sales over the past 12 months, the seemingly interchangeable references to NFTs and the digital creative works that the assets represent has generated a common misconception: that the NFT and the linked digital work are one of the same thing.  More accurately, NFTs are a mechanism for exploiting artistic creations, special moments or even ideas, which are often (but not always) digital in nature, without the need to assign or otherwise transfer ownership of the intellectual property subsisting in the same.[5] 

Technically, the token that is minted to the blockchain contains the metadata relating to the digital asset, including a unique URL that will point to where the digital asset is actually stored. Given that storing digital images on a blockchain can be expensive and require intensive computing power, they are usually stored elsewhere (hence: ‘off-chain’).  This technical quirk not only perpetuates confusion about NFTs but also contributes to other issues such as those relating to security (as considered in more detail, below), given that it is only the metadata (i.e. the data that effectively describes the digital asset), which benefits from the cryptographically secure blockchain.

This has contributed not only to confusion over what a buyer of an NFT actually acquires (which is considered in further detail below) but also to rightsholders inadvertently licensing exclusive rights in the overall NFT category, contrary to the intention to only licence NFT-related rights in respect of a particular category of works (for example, a specific selection of archive content).

Understanding NFTs: the opportunity

So, what does all this have to do with the sport sector?

NFTs allow rightsholders to engage with their communities in an unprecedented way: by giving fans – wherever they may be - the opportunity to connect with their chosen sport through means that transcend the traditional rules of engagement.  Effectively, NFTs represent the chance for rightsholders to innovate beyond the cornerstones of its core commercial strategy, such as collaborations with sponsors and the sale of tangible merchandise, by reaching out to the communities within the evolving audience of sports fans and inviting those individuals to claim ownership over a specific part of sporting culture which resonates with them.  Whether this be the digital commemoration of a crowning moment in the sports history, such as footage of Andy Murray winning The Championships, Wimbledon in 2013,[6] or symbolic digital artwork that includes associated benefits for the buyer, such as 'Lineal by Tyson Fury’,[7] the scope for creativity and prospect of considerable revenue presents a compelling case for greater attention.

To further pique curiosity, it is not necessary (and is in fact unusual) for rightsholders in the sports industry to sell or otherwise transfer any of the IP rights in that asset.  This offers rightsholders a greater degree of flexibility when selecting which asset is most suitable for ‘sale’ as an NFT.  Similarly to other creative sectors, such as music or art, the smart contract functionality utilised by NFTs gives creators and rightsholders the tools required to exercise greater control over how their digital creative works are made available and under what conditions, whether that be the price, limitations on transferability, or some other stipulation that is important to the rightsholder/original creator.

By limiting the availability of NFTs, rightsholders can create demand for its content from sources that extend beyond its foreseeable audience, appealing to those that perceive the assets, whether representative of sporting culture or not, as coveted commodities that are subject to price speculation.

With the above in mind, NFTs have the potential to be the most significant, technological development in recent times to disrupt the commercial activities of the sports industry.

Asymmetric upside?

In considering the benefits of NFTs from a rightsholder perspective, one could be forgiven for initially overlooking the myriad legal and commercial issues that exist when implementing any NFT content strategy.  The lifecycle of an NFT, ranging from asset selection and rights clearance in the first instance, to ensuring the continued security of the server hosting the digital asset once the NFT has been minted, will necessitate a meticulous approach to implementation of any such NFT strategy.

Without careful consideration from the outset, a rightsholder runs the risk of devaluing its assets/intellectual property, damaging its brand reputation and exposing itself to potential liability.

We will briefly consider some of the key commercial and legal issues here, and further explore related considerations later in the series.

Understanding NFTs: legal and commercial considerations

Exploitation: asset assessment for the evolving audience

The sale of NFTs in the sports market has often been referred to as a potential new revenue stream for rightsholders.  This is because the novel mechanism for commoditising content is likely to open up new opportunities in respect of both archive content and newly curated content, providing that existing commercial partnerships (and the rights granted pursuant to such partnerships) are unaffected (see below).  This gives rightsholders a creative remit to scrutinise its library of content, and examine the further opportunities for content creation, that would appeal to an audience eager to own digital assets.  At a time where rightsholders and stakeholders are still recovering from the financial toll taken by the COVID-19 pandemic, which saw revenue generated from matchdays and in-person attendance at events plummet,[8] as well as discussions taking place with sponsors with regard to rebates owed under existing commercial arrangements,[9] the rise to prominence of a new revenue stream that is not reliant on the live experience will be a welcome development in the market.

Incidentally, this coincides with concerns over how to engage with an evolving generation of younger sports fans that are digitally native and increasingly desiring greater flexibility regarding when and how to consume sporting content.[10]  Recent market analysis has shown that part of the reason why NFTs are heralded as a welcome opportunity for the sports market is that it is a powerful tool for driving fan engagement, particularly as NFTs appeal to a broad and eclectic group of sports fans.  Specifically, a recent study found that those engaging in the sports NFT market are likely to identify with one of various groups characterised by the motivation for their interest in the assets, including speculators/traders of NFTs, those interested in the technology underpinning the assets, those who view sports NFTs as collectible items, and those who are keen to engage with the sporting community.[11]  From these various groups, it is perhaps only the latter that closely resembles the traditional sports fan. Rightsholders may therefore have an instrument to increase fan engagement with an ever-evolving audience of sports fans, and may already have a catalogue of under-utilised assets that they can commoditise. 

Moreover, although the current focus of NFTs in the sports market has been on engaging with the sporting community through the sale of content, whether that be digital trading cards or artwork, the market has indicated that there are more utilitarian use cases for NFTs on the horizon.  For example, NFTs have been cited as a potential game-changer for ticketing at live events;[12] features such as proof of authenticity of a limited number of one-of-a-kind assets, verification of ownership, and royalties for rightsholders in respect of secondary sales combine to present an attractive proposition to the ticketing industry. 

By extension, the benefits of NFTs can extend to the protection of physical assets, where digital certificates proving ownership are minted as NFTs.  Within the fashion industry, luxury goods manufacturers are already making use of blockchain technology to provide consumers with ‘digital passports’[13] that will serve as proof of ownership as well as a transparent record of trade history.

Exploitation: intellectual property and related rights

As mentioned above, the inconsistent use of terminology in the NFT market has compounded confusion as to:

1. exactly which asset is being sold; and
2. what rights are acquired by the purchaser in an NFT transaction. 

Although news reports often conflate NFTs and the underlying digital asset, the token and the asset are often distinct.  The sale of an NFT is therefore unlikely to transfer the same ownership rights as may be expected in a separate sale of the underlying digital asset.[14]  This is partly why NFTs are referred to as a digital certificate of ownership; as the IP rights in the underlying digital asset will often remain with the rightsholder, it is more accurate to characterise the rights obtained on the acquisition of an NFT as a licence to a unique copy of the content that conveys limited rights, such as the right to display or transfer the content but not to commercially exploit it.

From the rightsholder perspective, it is important to ensure that the rights in the digital asset it intends to exploit by way of sale as an NFT are available for such exploitation.  For example, even though it may be clear that a rightsholder owns the copyright in a highlight clip from the broadcast film of a game, such clips are likely subject to licensing restrictions under its contractual agreements with its broadcast partners.  Whether such licensing restrictions, particularly those relating to exclusivity, extend to content that is being modified for sale as an NFT, will depend on the specific wording of the restriction.  In any event, rightsholders should be prepared to review their existing agreements and navigate the contractual matrix with respect to its licensed content in order to ensure that it does not impinge upon any rights previously granted.  Failure to do so may expose rightsholders to contractual liability.

Further, rightsholders will need to be mindful of the risk of infringing on the image rights of those athletes and personalities appearing in the digital asset.  Although there is no uniform approach regarding the protection of image rights in the UK,[15] if an athlete features prominently in the digital asset then there is a risk that the athlete may have a claim against the rightsholder in passing off[16] (i.e. in the event that the asset depicts an athlete with considerable goodwill to such an extent that it misrepresents a false endorsement of the athlete of in the transaction).[17]  The need to assess the risk of infringing image rights is also heighted in other jurisdictions, such as continental Europe and the United States, where such rights are more clearly established through the recognition of personality rights and the rights to publicity, respectively.  In this connection, for event organisers, entry terms and conditions will need to be scrutinised to ascertain which rights the event participants have assigned to the organiser, or have waived.

To navigate this complex issue, we may see a proliferation of collective bargaining agreements between athletes and governing bodies/event owners, which detail the commission rates that the athletes will receive if their image, likeness, and/or name features in digital assets sold as NFTs.  With the heightening tension between athletes and stakeholders in relation to the use of images in commercial activities already palpable in some sports,[18] innovative use of content in developing technology may indeed accelerate the need to for athletes and rightsholders to come to a clear position as to the terms of use of one’s image.

Exploitation: the promise of profits in perpetuity

One of the defining features of blockchain technology is that it provides for an immutable record of transactions.  Combined with the smart contract functionality of an appropriate ecosystem, the original creator of an NFT can be identified and rewarded for sales made in the secondary market through the payment of royalties.  Given that distributed digital ledgers aim to make tampering incredibly difficult, the technology provides that the chain of ownership will remain intact and can be independently verified without the need of a third-party intermediary.  This functionality means that rightsholders can be rewarded for each onward sale of their NFTs.[19]  This core feature of the NFT mechanism is why the creative sectors have been at the forefront of the NFT market ever since its exponential rise in popularity – it can be used to empower creators and give them a greater degree of control over their original content.  The music industry is already progressing as far as seeking to offer royalty rights in music as separate NFTs, where fans will acquire rights to be remunerated in respect of music they have invested in.[20]

Despite the promise of profits in perpetuity, rightsholders are encouraged to be mindful of the nascent nature of the technology and its current limitations.  Regarding the application of royalties, the standard currently utilised in NFT smart contracts is not harmonised across all NFT marketplace platforms.  Simply, technological restrictions often prevent royalties tracking back to the original creator if the NFT is resold on a different platform to that which originally minted the NFT.[21]  Although the technology continues to develop apace, with the introduction of a new programming standard offering hope of a standardised royalty mechanism across different platforms,[22] it is prudent for rightsholders to seek contractual assurances from platform operators on any claims made in relation to expected remuneration from secondary market sales.

Execution: partnering with the correct platform

Given the level of technological complexity involved in executing an NFT strategy, both in terms of infrastructure and know-how, the route to market for rightsholders acting independently is complicated and high-risk. By collaborating with a marketplace partner, sports rightsholders will effectively be able to outsource aspects of its NFT content strategy, such as the provision of the front-end platform that users will engage with and facilitating the the back-end blockchain integration, to a partner with considerable expertise and experience. Some marketplace partners, such as Dapper Labs, can already boast considerable experience of collaborating with sports rightsholders in relation to launching NFT projects.

In relation to the above, should a rightsholders be intent on collaborating with marketplace partner in its NFT endeavours, it will be imperative that the rightsholder ensures that the prospective partner accurately represents what a purchaser of the NFT will obtain.  Specifically, the conditions of sale in the marketplace partner’s terms and conditions should clearly reflect the basis on which the rightsholder is selling the NFT.  As set out above, the IP rights subsisting within the underlying digital asset should (in usual circumstances) be expressly excluded and not form part of any transaction.  For example, NBA Top Shot provides comprehensive terms of service that clearly sets out what a user of the platform will obtain when purchasing a ‘Moment’; namely, a user will only acquire a limited licence to use any ‘Art’ associated with the Moment.[23] 

Further, the rightsholder needs to have confidence in the platform to mint the NFTs to the blockchain, make them available to the public, and provide the functionality for the NFTs to subsequently trade on the secondary market.  Given the technical complexity involved, a high degree of trust between the rightsholder and the NFT platform is imperative. 

For the rightsholder, this is of particular importance as it will effectively be licensing its content to the platform operator in the first instance.  Of course, such a relationship should also be reflected in the relevant agreements between the rightsholder and the platform, whether this be a revenue share agreement or some other contractual arrangement which is commensurate with the respective levels of commitment that each party is making to the project, such as the rights they own (i.e. the content and technology), the level of expertise, and the extent of their ongoing obligations. For example, with NBA Top Shots, revenue is shared between the NBA, NBPA and Dapper Labs.[24]

Execution: security concerns and reputational risk

An additional but by no means peripheral consideration for rightsholders will be the various risks associated with relying on the technology used to execute NFT sales. 

Although comprehensive terms and conditions and contractual agreements can go some way towards managing such risk, the sustainability of an NFTs rests largely on the infallibility of the technology.  Given that NFTs will usually link to digital assets via a unique URL (with the content stored off-chain), that digital asset will be hosted on a web server and therefore be susceptible to outages.  If a web server hosting relevant digital content goes down and is irrecoverable, the NFT proving ownership of such asset is arguably worthless.  Further, combined with the dynamic nature of the marketplace and the complexity of the back-end solution, unscrupulous individuals can seek out opportunities to circumvent safeguards and take advantage of unsuspecting consumers.  Although troubling, such stories are not uncommon;[25] however, with the NFT market continuing to evolve, potential solutions to these concerning issues are already being touted.  Protocol Labs’ InterPlanetary File System (IPFS), which utilises a network of multiple hosts to offer a more secure storage solution, is cited as a significant development to mitigate against the risk of content going missing as a result of being hosted on a particular domain or server.[26]

Other risks for rightsholders, such as the potential backlash from engaging with technology that is reported as being infamously inefficient when it comes to energy consumption,[27] or from appearing to promote the use of cryptocurrencies, generally, by relying on technology which is predicated upon its use,[28] may also be of notable concern.  Sports rightsholders that have invested significant resources into building a valuable brand will need to carefully balance such considerations and do its own due diligence on the both the claims against utilising blockchain technology for NFTs in its current form and the perception that its fans may have.

Conclusion: an unrelenting development in the sports market

Despite the risks associated with engaging with relatively novel technology, which should not be overlooked, sports rightsholder interest in NFTs remains buoyant.  In September 2021, the National Football League announced a partnership with Dapper Labs for the launch of ‘digital video collectibles’[29] following the success of NBA Top Shot.  Although uptake in the UK has been slower, the Premier League have indicated that they are keeping their finger on the pulse as far as NFT opportunities are concerned.[30]  Either way, continued developments of both the technology and the market for NFTs, and a subsequent increase in adoption, emanate an air of inevitability.

As things do continue to develop, rightsholders are encouraged to be mindful of the key issues, as set out in the article, which include:

• Selecting the right asset for the NFT market to capitalise on the demand for unique, digital content;
• Clearing rights prior to proceeding to market to ensure that exclusivity granted pursuant to other agreements is not impinged;
• Being clear about how any IP rights that subsist in the relevant digital assets will be treated on sale of an NFT linking to such assets;
• Ensuring that image rights and potential claims related to the same are dealt with accordingly;
• Ensuring that the conditions of sale accurately represent the terms on which an NFT is being sold;
• Partnering with the best platform to execute the specific NFT project;
• Seeking relevant contractual assurances from the platform operator as to any concerns related to bringing the NFTs to market; and
• PR risks associated with the security of hosted assets, environmental impact, and apparent endorsement of cryptocurrencies.

In further articles, we will explore alternative use cases of NFTs, as well as the knock-on effect that the development has had on the wider sports sector.

Resources

• Read at lawinsport.com (subscription required)