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Sporting Crypto - July 11th 2022: What if FIFA Ultimate Team Had NFTs?
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Intro Notes, Plugs & Amendments 🔌🔧
A good friend of mine Joon, whom I work with on our soon-to-air audio documentary, often says to me:
I’ll sleep in the next bear market
But as markets have gone down, I’ve had more, high quality individuals and companies reach out to me than ever before.
Whether that be for speaking, consultancy or content production engagements — it seems as though many have been waiting for the hysteria to calm down before thinking about Web3 seriously.
There’s usually a 12-month-ish lag before things get boring.
With the late ‘17 — early 18’ crash it took about that long. In 2019 things felt boring and ‘nothingy’ but very interesting things were being built behind the scenes, that then gained mass use in 2020.
I think that lag will feel longer this time around. We actually peaked in November and have been on a downward trajectory since, price-wise. So we’re basically at the 9-month mark now of a bear market that many people didn’t think was one.
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This Week’s Deep Dive: What if FIFA Ultimate Team Had NFTs?
Last week I wrote about DAOs (Decentralised Autonomous Organisations) in a sports context.
The inspiration for that came from a Chainalysis report on the ‘State of Web3’ which I thought was overall, very good.
There was one section, on page 75, that my good friend Simon Taylor pointed out to me titled:
A blockchain gaming thought experiment: EA Sports on the blockchain
It was super interesting.
It was actually one of the first times I’d seen someone methodically write out their take on a game actually using NFTs for the betterment of their users and themselves.
I’ve written about EA and FIFA Ultimate Team before in the newsletter.
And I do really think that gaming is going to be a big part of this future world I talk about weekly. It’s the largest industry in entertainment at this current point in time whichever metric you look at.
So let’s work through this thought experiment bit by bit.
In fiscal year 2021, Electronic Arts (EA) generated $1.62 billion from its FIFA, Madden, and NHL Ultimate Team offerings. In Ultimate Team (UT), players assemble, trade, and compete against one another with a squad of athletes, each of which are represented by a trading card. Players can buy packs of 12 to 30 of these trading cards with either points, which can be purchased with real money, or coins, which can be collected for free by playing. Players can then sell the cards they’ve drawn to other players in exchange for coins – but they can never convert these coins into points or real money.
At least in theory. In practice, despite EA’s best efforts, there’s a gray market for these coins that undercuts EAs pricing. For example, to buy an Ultimate Pack – EA’s highest-tier and most expensive pack – players must spend either 2,500 points or 125,000 coins. Bought from EA, the pack costs $23; bought from the gray market, it costs $6.50.
Chainalysis begin by setting the context, explaining what the Ultimate Team game mode is and just how big a business this is for EA. It also discusses the friction around in game coins and real life money. This is huge business inbound for EA in monetary terms, as users can buy the coins with real life money, but the reverse of that transaction is not offered by the company.
In other words, this gray market both threatens EA’s main revenue stream and makes “good citizen” players worse off. When third parties sell these coins for real currency, EA gets nothing – but players get three times the value for money. But what if, instead of maintaining a closed-loop economy and forgoing this revenue leakage, EA minted their trading cards as NFTs, which could then be sold between players on a secondary market? How would this alter their revenue – and create new ways for players to make money?
Here comes the interesting part.
Currently, there is this closed in game economy created by EA that is threatened by OTC (over the counter) coin-for-fiat exchanges.
What if they liberated that system and created NFTs?
For one thing, it would introduce a new revenue stream for EA. Usually, when an item is minted as an NFT, a portion of every sale is passed back to its creator as a royalty. UT already features a 5% transaction fee on its player-toplayer market – so this is hardly unprecedented– but today it’s not an actual revenue stream. Instead, it’s a “gold sink” – a way to prevent coins from hyperinflating.
For another, it would heighten the concept of rarity. While no cards in today’s UT economy have a predefined supply, this is the de facto standard for NFTs – and a key reason why they can fetch such high prices.
Lastly, it would give UT players the ability to make money. This is a win-win: if players can sell their cards for cryptocurrency, they can earn back some or all or even multiples of their original spending; if EA enables these trades, they can collect a small slice of every sale price
The report goes on to give 3 key points that make this brain experiment interesting
There is a new revenue stream here, potentially, on the secondary market for EA.
There isn’t a current, pre-determined supply of cards on Ultimate Team
Players could actually make money
I think point 3) is easier said than done.
Creating a sustainable economy in blockchain based gaming is incredibly difficult.
Most play-to-earn gaming models have boomed then busted, hard.
Their native tokens, the ones you earn and the ones that govern the protocols, have both also bombed.
But perhaps, hypothetically, EA could find a way to ensure that the very best players, and ones that play a lot, could create some sort of margin for themselves by contributing to the game.
Now for the fun stuff - the numbers.
What does this actually look like hypothetically?
With NFTs, We now construct a simple financial model for both EA’s revenue and Ultimate Team players’ earnings in a game mode reimagined with NFTs.
25 million active players. Ballpark estimate based on EA statements.
$65 annual player spend. Ultimate Team revenue ($1.62 billion) divided by active players.
5% resale royalties. A common rate for NFTs.
NFT primary sale price = secondary sale price. Some cards will surely rise in value following their primary sale while others will fall, so for simplicity’s sake, our model assumes that in aggregate, all cards’ secondary sale prices will equal primary sale prices.
Annual resales: Our model projects NFT sales revenue for both EA Sports and its UT players at three different possible levels of annual NFT resale volume: 100%, 300%, and 500%. 100% resale volume would mean that for every $1 of annual player spend on primary NFT sales, there is $1 of secondary market sales. 300% would assume $3 of secondary market sales, while 500% would assume $5.
You can see that with some pretty simple modelling, there are potentially 100s of millions here in difference between EA’s current revenue from Ultimate Team.
One assumption here, that I think Chainalysis have missed, however, is that secondary royalties and new revenue streams will mean that rights holders will demand more money, driving down EA’s net profit down.
There are also more licensing complications, here. Would an NFT based license infringe on any exclusive deals that leagues, clubs and players have with anyone else? It’s not as cut as dry as simply snapping your fingers and making this into an NFT based game. The technical requirements and logistical ones are immense here.
There is also the need for liquidity provision for the in game currency. If that is not redeemable for cash at any point, the whole system topples over. Market makers can provide this liquidity but you’d t think that EA would have to prop that market up to some extent, further eating into their margin.
You can see that under the hood, it’s a lot more difficult to actually do this type of thing than to model it.
What was Chainanalysis’ interpretation?
Interpretation: Introducing NFT player cards could generate significant additional revenue for EA Sports. Under our lowest resale volume model (100%), in which players spend $65 on NFTs and engage in $65 worth of secondary market activity, EA generates $1.7 billion in annual revenue – $81 million more than they do today. At 300% resale volume, EA generates $1.87 billion – $244 million in additional revenue. And at 500% resale volume, EA generates over $2 billion in annual revenue – $406 million more than today
And what about the players, in this equation?
“Interpretation: Introducing NFTs could create a first-of-its-kind market for players to profit. Under our lowest resale volume model, players collectively realize $1.54 billion in annual earnings – none of which they realize today. At 300% resale volume, players’ earnings fall to $1.38 billion. And at 500% resale volume, players’ earnings rest at roughly $1.22 billion. In this model, players’ total earnings fall as resale volume rises because more resales mean more fees, and our model assumes no increase in card value upon resale on average — again, some cards will rise in value, while some will fall. However, total player earnings could increase if the average card price rose over time, as is the case with many NFT collections generally”
Here’s where I think this experiment runs into problems.
FIFA and FUT (FIFA Ultime Team) are seasonal in their nature.
For a player to make $100, someone will have to pay $100.
That’s just simple maths.
But what you would find with this model, is on a seasonal basis, these NFTs are basically ticking down to being worth far less toward the end of the season as players gear up for the next game. The players you have in your previous game, don’t carry forward.
That’s probably where this falls down.
The thought experiment finishes with:
Discussion: It’s worth noting that in this model, primary sales would still be EA’s main revenue driver. But the secondary sales, while accounting for only a fraction of EA’s $1.87 billion in revenue, would benefit players immensely. Even if we relax the assumption that the NFTs hold their original value, players of Ultimate Team could still walk away with hundreds of millions in earnings collectively – a far cry from the $0 they earn as “good citizens” today. Furthermore, because in this model players recognize that they have a chance to resell their cards for a profit, it may attract an even higher annual player spend than our original $65 assumption.
This discussion is predicated on the fact that EA would still be able to create a set amount of NFTs, or playing cards, on a yearly basis and book them as primary sales.
But in the seasonal nature of their game, it’d be difficult to see how high the prices on primary and secondary would go as players know they cannot carry the NFTs into the next game.
To make this work, EA would have to revamp the entire ultimate team model — which would be very difficult.
Will EA continue to innovate?
With EA divorcing FIFA, you could see the company become less conservative in approach now that a very rigid incumbent is no longer licensing the name ‘FIFA’.
If you combine that with the fact that EA innovated from within once with Ultimate Team over a decade ago, with it fast becoming one of their biggest revenue drivers, this is clearly a company with an innovative mindset where you can’t rule anything out.
Whilst the thought experiment from Chainalysis had good fundamentals based on the assumptions that primary sales would be retained year on year, in practice, due to FIFA’s seasonal game releases, this is not feasible with their current model.
It’s enough to stir up many ideas, however, In how EA could turn their soccer game into a less seasonal based, and more ongoing economy and game. But that type of pivot takes a lot of time. And adding NFTs to that equation only creates more to do and you’re walking into the unknown.
I’m sure many mainstream game publishers and sports games will create NFT offerings in the future that are sustainable and are genuinely things users enjoy, are better than current offerings, and where leveraging blockchains is a must and not a marketing gimmick.
But working through this thought experiment made me fairly certain that something adjacent to this is further away than many think.
More sports crypto stories & things to put your radar
Australian Baseball League’s most successful club, the Perth Heat, will integrate Bitcoin’s Lightning Network into its operations in a bid to improve the fans’ experience.
Adidas Football and WAGMI United have teamed up to create cobranded NFTs, at 0.35 ETH each (about $400 right now).
PSG are selling tickets for their tour in Japan as NFTs. That price point though...wow.
UVA Football’s Jack Camper, have founded a company helping college athletes create their own NFTs.
Manchester City have signed a training ground kit sponsorship deal with crypto exchange OKX.
Voyager, sponsors of the NSWL, are bankrupt. They’re also being investigated by the FDIC for possibly claiming that investor losses would be covered up to a certain amount (like a bank) which is not the case.
Great reads, great tweeting and more general ‘stuff’ that could impact you
Meta and Zuck are going to be part of this new world whether we like it or not. And they’re dominating the hardware game when it comes to VR.
NFTs are innovative for many reasons. Perpetual royalties might just be the best one.
I like this from Jess.
Unreal thread by Raoul Pal. He is so, so good.
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This newsletter is for informational purposes only and is not financial or business advice. These are my thoughts & opinions and do not represent the opinions of any other business or entity.