Why the Professional Sports Ecosystem will Benefit from Tokenization

In this article, I present a systemic analysis of professional sports, show some critical points-of-friction in the sports ecosystem, and eventually outline why tokenization presents a promising toolkit to minimize the friction.

When we talk about “professional sports”, we effectively talk about a heterogeneous ecosystem consisting of various actors¹. Many different actor groups together make up the modern world of professional sports: sports clubs, athletes, fans, leagues, sports media, sponsors & advertisers, among others.² These actors all have their own — often conflicting — goals and interests. To reach them, they will sometimes collaborate and sometimes compete.

Of course, every single sport has a different ecosystem with specific actors, rules, traditions, and dynamics. Hence, all sport ecosystems have their own 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 relatively closed system. Sure enough, both systems create different dynamics. Yet besides all this, there are some overarching trends that can be witnessed in many sports.

Key Actors in the Professional Sports Ecosystem

When analyzing a system, it's useful to start by looking at the individual actor groups and their behavior patterns, goals, and their key interactions with the other actors.

So, allow me to quickly walk you through the critical actor groups in professional sports.

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 performances
• Clubs offer a “competitive entertainment product” to attract fans and sponsors
• Clubs generate revenue from sports media, fans, and sponsors
• Clubs acquire licenses from professional leagues to be eligible to compete
• Clubs 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 Clubs
• Athletes sell their image/reputation (and increasingly their reach too) to sponsors and advertisers
• Athletes operate or enable direct-to-consumer businesses that sell to their fans
• Athletes 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. The money they spend directly in the ecosystem is an important contribution to any sport’s economy. Moreover, the fans’ collective purchasing power is also what attracts sponsors & advertisers to the ecosystem.

Key interactions with other actors:

• Fans spend their attention on sports media, including live broadcasts,
• Fans follow their favorite athletes online/on social media
• Fans pay sports media to access their content, particularly TV and increasingly streaming
• Fans buy merchandising and tickets from clubs and athletes

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, as I explained in here. People are naturally more interested in people than in brands and the internet makes it feasible to follow the biggest stars much more closely than ever before. This shift in attention also leads to changing power dynamics.

Leagues

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 media
• Leagues sell licenses for use of their IP to sponsors and advertisers (and others)
• Leagues sell licenses/participation rights to clubs
• Leagues distribute revenues among clubs
• Leagues 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.

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 clubs
• Sports media creates content about clubs and athletes to get the fans’ attention
• Sports 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 exposure
• Advertisers pay sports media for reach

Important dynamics at play: In the time 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 his great piece, sports is one of the few programming options that still draws significant TV audiences. Therefore, it 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 in the Sports Ecosystem

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, about which I wrote here in detail, 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/field. Four of the current 10 highest-paid athletes in the world earn more from endorsements than from their clubs/winnings (and even five do so 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. 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 have been fighting with FIA about new rules regarding car design and default parts that would likely decrease the top teams' competitive advantage

• The 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 rights among actors, as well as the digital representation of value, all bundled in the form of a token. 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.

Tokenization is 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. As I illustrated before, the professional sports ecosystem fits this description very well - therefore it is reasonable to expect that tokenization will continue to pique the curiosity of sports industry professionals around the globe.

This article is an edited excerpt of my piece "Professional Sports Need To Be Tokenized"

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, or follow us on Twitter.

¹ The term actor, as used here, originates 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.