THIS BUSINESS ISN’T IN KANSAS ANYMORE…
The challenge (and opportunity) of new ownership rules in the decentralised space
This is an edited copy of a talk that digital consultant Conor McNicholas did for our Marketing Hive Audio Event on LinkedIn. You can join them every Thursday at 8am EST / 1pm GMT / 5pm GST.
I was recently asked by an agency CEO to explain what the hell’s going on with this NFT thing. I went through the basics and he immediately said, “I understand, I can see how a business could make a lot of money from that.” Which meant he hadn’t really understood at all. If NFTs make sense fast, then you’re almost certainly missing something.
The reason for this is they cut across established ideas in radical ways and to fully understand them you have to re-wire your brain a little bit. That’s how you get the full value.
As humans, we have a natural, understandable, tendency to extrapolate the future based on what we see around us in the present. When you’re a hunter-gatherer this gives you consistency. But in the fast-developing space of digital business it can leave you on the back foot.
A lesson from music
The best example of this is the music industry of the last 30 years. In the mid-90’s some smart academics invented a new file format called MP3. They designed it to make audio recordings smaller without compromising the sound. They didn’t design it to upend the industry, but that’s what it did. A smart compressed file format plus increased internet speeds in homes and offices plus peer-to-peer networking suddenly made the world of physical music retailing very, very leaky.
The music industry through they were smart when they cracked down on piracy and started selling the MP3s. They had the systems to sell things after all, and here was a new sort of thing to sell. They’d seen the changes in music formats from vinyl to cassette to CD so they understood this, they thought.
But the MP3 was different in kind and it eventually proved it needed to be handled differently. People didn’t want to buy individual MP3s like CDs, they liked the ubiquity of the online file clouds like Lime Wire they’d browsed and they didn’t want to go back.
Now, the popularisation of digitised music has taken us to a place where people access near infinite clouds of music on demand. They’re willing to pay for that service delivered well, but the money now moves around the industry in fundamentally different ways.
What is an NFT?
NFTs offer the same challenge and opportunity. It’s not a new file format, but generally it’s easiest to think of it as one. It’s like a regular file but with superpowers. As well as being a core thing – an image, an audio track, a certificate, anything… – it allows you to establish rules for that thing, rules like ownership, use, value, transfer of any value it creates. These rules can be baked that into the very nature of the file in a secure way through what’s called a smart contract. Rather than having a dumb files and smart systems t manage them, part of the system is effectively in the file itself.
With all the NFT noise right now, people often think NFTs are just about flogging Jpegs. But that’s simply a blip as the new technology gets started. The million dollar sales of cute cartoon sketches are the initial dribble through the hole in the dyke. But that dribble is rapidly getting bigger and huge things are coming.
In June last year there was a rush of early capital into the NFT image market. In September there was a crash. In the recovery in October people started to ask about the long-term value growth plans for these NFTs, seeing them more as an investment with a return. They wanted a ‘Road Map’, what we would call a business plan. By December last year, people were establishing new businesses based on NFT tech and started to use it in new ways. In pretty much one year, a new multi-billion dollar industry was established. What will years two and three look like??
The connection curve
NFTs have many disruptive implications but here I want to look at one area – business ownership. The key thing here is to look at the general trajectory.
Ownership in a business is a function of relationships, and relationships are a function of connectivity. Connections in the analogue world were hard work so centralisation happened for efficiency, such as newspapers for messaging and supermarkets for availability. This centralisation tended towards scale. The increased connectivity and platforms of Web 2.0 – Facebook, Instagram, Amazon, etc – made connection much easier and spawned a raft of DTC businesses that connected creators directly with consumers creating a boom in diversity and speed of brand development. The emerging world of Web 3.0 tech, of which NFTs are part, will draw everything even closer together, this time blurring the lines between who creates and who owns.
This is a big part of what makes NFTs a radical new thing. In a way, the delivery system is built into the file itself. We’ve not had a tool quite like this before, one that can link roles and value chains in a totally new, smart, hyper-connected way.
NFTs are a thing but can also operate a bit like a share, a bit like a Kickstarter pledge and a bit like a club membership card. It’s all these things and more. (I told you you’d need to rewire your brain.) Because it’s essentially all these things, it’s able to create much closer, connected, collaborative relationships.
New generation attitudes
The key reason why this matters is that the new capabilities of the new technology are timed perfectly to match the new attitude of the generation coming through. For many societal reasons, both Millennials and Generation Z have much less trust in the structures of society, the inherited institutions of Government or business. They see less point in investing in the legacy structures that have delivered inequality, the climate crisis and rampant mental health issues.
This attitudinal shift is creating a behavioural shift and, as is usually the case, the creatives are moving first. The emerging generation of creatives do not aspire to sign away their creative rights to big record labels, they crave ownership and direct fan relationships. They do not want to dedicate their whole careers to a big company, they want balance and personal fulfilment. They want to do things differently, in a way that’s more equitable, connected, flexible and sustainable. And emerging NFT technology is offering them a highly relevant new tool to be able to do that.
With an NFT-powered business, ownership becomes more fuzzy. It has a lot more in common with a co-operative rather than a share-based company. The owners are part of the creation and the business is the community. This fuzziness is what’s appealing. Am I an owner or a customer? Or both? Or a new sort of thing entirely?
What it means for you
Here’s why all this matters for you as a marketing leader. Historically, if a new successful business sprang up in your sector you could compete with it or buy it. That was possible because you knew it had been established on the same operating system as you, a quantified system of ownership through shares. You both spoke the same language.
With an NFT-powered business, the operating system is different. You can’t absorb these businesses because their ownership isn’t structured the way yours is and their relationship with their customers isn’t delineated into ‘us’ and ‘them’ like yours is. It’s fuzzy, foggy, blurry, and that’s exciting. But it means it’s operating in a way you can’t match and can’t absorb. It’s a business from Oz and you’re still in Kansas.
Get ahead of the wave
There are, without doubt, lots of challenges ahead for NFT-based businesses and it’s going to be a bumpy ride. No-one has properly worked it out yet. There are significant legal and tax implications to be sorted. But lots of people are experimenting very fast and it’s maturing incredibly rapidly.
Is there a guarantee for what this new technology is going to do to us, what it’s going to look like? No. But what is guaranteed is that it will disrupt, that change is coming. A new way of working is being built now, and we need to start thinking about getting ahead of the wave while we can.
I’d start by asking yourself these questions… Are there initiatives you could launch that would force your business to share the value of what you do directly with customers rather than shareholders? What would a radical version of that look like? What would make you uncomfortable or seem impossible at the moment? What would a radical future model look like in your sector? What would scare your business if it was launched?
Because if you don’t do it, someone else will. And this time, you won’t be able to simply buy them off in the way you have in the past. Because the new generation of enterprises will be built on a fundamentally new operating system.
