January 15, 2022

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How NFTs and the metaverse could solve holiday supply chain issues

Funko’s holiday gift guide promotes bobble-headed tchotchkes for all fandoms—Marvel, Star Wars, “Rick and Morty,” Harry Potter, Fortnite and “The Office,” to name just a few. Any pop-cultural phenomenon can be Funko-fied, it seems, but there is one caveat that Funko makes clear in its 2021 gift guide: “Due to shipping delays, some of these may not yet be available for purchase.”

It’s a message consumers are hearing a lot these days, as supply chain problems mean many goods may not be available to ship in time for Christmas. 

Fortunately for Funko, it has a new product line that doesn’t need to be produced in a factory or need a spot on a cargo ship: NFTs. In the land of supply chain crunches, digital goods are golden, and Funko is one of dozens of popular brands that have made investments in non-fungible tokens this year. NFT enthusiasts say that this holiday could be the moment this obscure new technology takes its first real steps into the mainstream.

In Funko’s case, the company opened a new digital marketplace in the third quarter called Droppp.io, in partnership with TokenWave, a cryptocurrency and NFT tracking app, to sell digital products. This is a whole new revenue stream that just happened to coincide with the moment the company rammed into the global supply chain challenge. 

“As we look to the balance of this fiscal year, we are confident in our ability to execute effectively against our core operating strategies to drive continued growth while continuing to adapt quickly to any ongoing supply chain challenges,” said Brian Mariotti, Funko’s CEO, in an earnings statement earlier this month. “As a credit to our brand, we are continuing to expand our product categories and fan base, increasing fan engagement and bringing innovative new products to market.”

Funko declined to make an executive available for an interview about how NFTs could play a role in the company’s future, but a spokesperson said by email: “We’re very new to the NFT market, we do not see our sporadic virtual good drops as a retail opportunity this holiday season.”

See Ad Age’s 2021 Social Commerce Guide here.
•  How NFTs and the Metaverse could solve supply chain issues
•  All the social commerce capabilities introduced in 2021
•  How retail chains are using social commerce this holiday
•  Influencers impacted by supply chain shortages

Dropping in

Like so many consumer goods companies, Funko is dabbling in NFTs, but the technology is not quite ready to replace physical gifts for the holidays. Instead, industry experts say the holidays will be an important test run for brands’ future in the “metaverse.”

“If brands want to stay connected with their fans and have a dialogue with them on a cultural level, brands need to be in this space,” said Matt Edelman, chief commercial officer of Super League Gaming, a community of gamers and creators. Super League recently acquired Bloxbiz, an ad platform that serves digital ads in gaming metaverses like Roblox. Edelman said to prepare for ads in games to be a big part of how brands get their marketing messages out during the holidays.

What makes NFTs and virtual goods so compelling is that they aren’t made in factories or shipped. There is no inflation in Robux, the digital currency used in Roblox, the popular online gaming platform where players buy digital swag. Gucci, Hasbro, Hyundai, Warner Bros. and many other brands have sold virtual goods in Roblox.

Edelman outlines a digital universe where gamers run into billboards in Roblox and those ads promote virtual goods and NFTs from major brands. All those Robux gift cards being sent over the holidays could turn into revenue opportunities for brands that advertise items that could be instantly unlocked in the games, Edelman said.

“I don’t want to overstate it, but the pace of activity around advertising and sponsorship in metaverse environments has accelerated materially over the past couple of months,” Edelman said. “[We are] looking at Q4 as a critical time when brands need to be in front of the consumer demographic playing these games.”

There are practical reasons why retailers would float products inside games before introducing them to the real world, especially during these difficult times. It’s easier to test the market in the virtual world, according to Christina Wootton, VP of brand partnerships at Roblox.

“We hear from brands closely looking at offering virtual goods and gifts for their holiday activations,” Wootton said in an email to Ad Age. “This is definitely top of mind for them, and the market is there for it. We often see Gen Z valuing digital goods, clothing and accessories even more than physical goods, and that’s because they play a hugely important role in people’s creative expression in the metaverse.”

NFTs and digital goods could be easy replacements for physical gifts, said Donnie Dinch, CEO of Bitski, an NFT platform that is trying to spur broader adoption of the technology. “That’s totally reasonable, and you’re going to see a lot more NFT giving probably this holiday season. Certainly, with the economic supply chain issues, ports being clogged, it is probably going to lead people to new ideas.”

Decrypting crypto

NFTs, or non-fungible tokens, are based on the same technology that creates cryptocurrencies like Bitcoin and Ethereum. Like cryptocurrency, NFTs are minted on the blockchain, which is a virtual ledger that records all transactions in unaltered perpetuity. For NFTs, that means they can be authenticated as digital goods that can’t be replicated, which confers a sense of ownership over the digital items. 

Consumers can show off their NFTs in the virtual worlds they inhabit, like on NFT marketplaces such as OpenSea and Rarible, and increasingly in the wider web, where companies like Facebook and Twitter see whole new worlds of growth in what’s known as the “metaverse.”

In fact, Facebook, chasing the future, just renamed itself Meta in a rebrand that showed how the trillion-dollar social media company is banking on the fact that the metaverse is a world of infinite possibilities.

However, NFTs are still such a niche form of ownership and transaction, reserved for a small subset of core fans. It’s still too early for them to fully take off in time for Christmas, but brands are at least starting to make the transition, and the supply chain crunch could be a change agent.

“I don’t think enough people are in NFT land, enough yet, for it to be as obvious or explosive as let’s say if the same thing was happening with the supply chain in two years,” said Gary Vaynerchuk, CEO of VaynerMedia, an ad agency with an NFT division that works with brands like Anheuser-Busch InBev’s Budweiser. Vaynerchuk noted how the COVID-19 pandemic has been a catalyst for radical consumer shifts, speeding up adoption of direct-to-consumer sales and online grocery shopping. 

Now, there are new challenges in the global economy including supply chain disruptions. Almost every major corporation has had problems securing raw materials, manufacturing and shipping goods. The physical world has also seen the highest inflation in decades. In October, the U.S. consumer price index rose 6.2% year over year, the largest increase in 31 years.

“I do think we will see the first dozens, hundreds and thousands of people waking up Christmas morning and their friend or relative is saying, ‘check your Metamask or your OpenSea account,’ and boom there’s the gift,” Vaynerchuk said.

NFTs do come with their own hassles, too, that keep the concept from attracting an even wider audience. Most NFT owners need to be familiar with, and own, cryptocurrencies like Ethereum. They need crypto wallets, which store the NFTs. If a person wants to give someone else an NFT, they have to know that recipient’s unique wallet address. There can also be steep fees associated with “minting” NFTs, and there are “gas” taxes to transfer them from marketplaces into personal crypto wallets.

Just this month, Discord, the communication platform that is deeply associated with the concept of Web 3.0, the next-gen layer of the internet and gaming, ran into a backlash when it broached the concept of integrating with NFT wallets and cryptocurrency technology. Discord CEO Jason Citron faced an uproar, and backpedaled, because users protested over how much energy is consumed by trading NFTs and mining Bitcoin.

But these hurdles haven’t prevented companies from testing the market. The NBA was one of the first mainstream brands to see the potential for NFT ownership when it launched Top Shot virtual trading cards in late 2020. Then earlier this year, the art world saw the value in NFTs, when Beeple auctioned a piece of digital artwork for $69 million. Since then brands including Taco Bell, Pizza Hut, Bacardi, State Farm and Warner Bros. jumped into NFTs.

NBA Top Shot is a success story in the world of NFT collecting. The digital trading cards depict famous in-game moments, and they often command big bucks in resale markets. But the NBA NFT collectibles also are an example of how the technology can be abused. There have been cases where fans were frustrated by bots and other inauthentic behavior, when suspected swarms of coordinated accounts gobble up scarce Top Shot drops. Earlier this year, to discourage inauthentic activity, Top Shot disallowed “gifting,” which is when one account transfers an NFT to another account. Top Shot was dealing with a common problem with NFTs, and really any online market, where it is possible to manipulate the value of digital goods and services. However, in time for the holidays, at the end of October, Top Shot made new rules that will allow “eligible collectors” to gift NFT moments.

Simply profitable

Even the queen of holiday festivities, Martha Stewart, is an NFT entrepreneur. Stewart sold Halloween-themed NFTs and developed a new direct-to-consumer website that sells NFT art pieces, which are based on some of her past holiday projects. 

Stewart’s fan base might not seem like a crypto-savvy group, but she teamed up with a company called Tokns to help simplify the process. 

“What we saw with purchasing patterns for Martha’s drop, 90% were sold via fiat currency,” said Jamie Tedford, CEO of Tokns, an NFT startup that’s working to make transacting and transferring NFTs simpler. (“Drops” are how NFTs are released, and “fiat currency” is nerd-speak for normal dollars.) “We’re seeing more and more of the mainstreaming of NFTs,” Tedford said.

Bitski, another such startup, is developing what it calls “claimable NFTs,” which won’t be ready by Christmas, but is an early concept in how to transfer NFTs as gifts. “The challenge with gifting an NFT, in order to send someone an NFT, you generally need to know what the address is of their wallet, so you know where to send it. In a lot of cases you don’t know what that person’s address is,” Dinch said. 

“Claimable NFTs” would come in the form of links that the recipient can open without necessarily giving the sender their wallet code, he added. 

Bitski has worked on NFTs with major retailers like American Eagle, Levi’s, and Pleasures, a popular streetwear brand. Pleasures released NFTs of hoodies, caps and dog tags this month. “We’re seeing brands take deeper dives looking at [NFTs] as a potential new revenue channel,” Dinch said. One other benefit of the digital world, aside from no shipping delays, is that profit margins can be much higher, Dinch said.

“The idea of having a Pleasures NFT hoodie or hat or any sort of digital good that you can truly own. The interesting thing is the emotional value is very strong, if not stronger than maybe the emotional value to some physical goods … people are willing to pay tremendous margins on digital goods as well,” he said. 

Anyone over 30 years old might wonder where someone would even wear a digital hoodie or a bespoke designer virtual sneaker dropped by Atari and RTFKT, a creator of virtual sneakers and collectibles. In some instances, the virtual goods are only useful in select metaverse worlds and are non-transferrable. For instance, a gamer can’t use Roblox Robux to buy digital gear in Fortnite, which uses a digital currency called “V-Bucks.” But the future that most tech-seekers predict is one in which ownership in the real world and digital are seamless and crossover in a decentralized metaverse. This month, when McDonald’s brought back its McRib, it also gave out McRib NFTs to select fans.

“People under the age of 25 think there is no distinction, there is no physical versus digital, it’s all one life,” said Super League Gaming’s Edelman. “Their life is connected physically and digitally as if it’s all one and the same. So the melding of physical and digital feels maybe to a brand like a strategy. It’s not a strategy to a consumer, it’s just their reality.”

See Ad Age’s complete 2021 Social Commerce Guide here