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Why the Sports Collectibles Industry is Ripe for Disruption: Part II

Why the Sports Collectibles Industry is Ripe for Disruption: Part II


March 30, 2022

The non-fungible token, or “NFT”, arguably the biggest buzzword of the last two years, has become a symbol of disruption. With record-breaking prices, historic scarcity, and the high profile of NFTs as a frequent part of the news cycle, the sports collectibles industry in particular is ripe for disruption.

While sports memorabilia has long been a thriving industry amongst category enthusiasts, it has experienced a new influx of interest from a wider audience. With high-profile collectors such as Gary Vaynerchuk and assorted sports stars publicly touting their collections, attention towards the once-niche hobby is now larger than ever. However, despite recent media buzz, the traditional collectibles market still faces a host of challenges. And NFTs are poised to address them.

High Fees

Until recently, the traditional auction houses, such as Goldin, Heritage, Sotheby’s, and Christie’s, have dominated the sports collectible market. Their combination of history, credibility, and an established customer base has made them the default option for most collectors. Doing business with those companies, however, is not without costs, since both buyer and seller have to ante up a portion of their proceeds to the auction houses. The buyer can expect to pay an additional 20–25% to the auction house on top of the sale price in the form of a buyer’s premium, and the seller typically pays fees of up to 20% of the sale price, which means the auction house nets nearly 50% of the value of the collectibles it handles.

The general public often isn’t aware of the considerable additional fees involved with auctions, because the price at the close of the auction (called the “hammer price” because the final offered price is signified by the banging of a ceremonial hammer) doesn’t include all the fees that the buyer ends up paying. In addition to the hammer price, the buyer must also usually pay a so-called “buyer’s premium”, which is a commission on the sale that generally goes entirely to the auction house. This premium is what typically brings the actual selling price up to 20–25% over the hammer price. While the auction houses realize most of this additional profit, savvy sellers sometimes have the ability to create leverage and negotiate with auction houses to claw back some of the money lost to fees. By waiting until the time is just right to part with a highly desirable item or collection, they can use market knowledge to time their offerings in a way that takes maximal advantage of bidder interest and demand, and then negotiate a part of the buyer’s premium for themselves, thereby sharing in the profits of the auction house. Knowing this aspect of the market’s dynamics, an experienced seller with the leverage of a great collection can sometimes eke out an additional 10% above the “sold to” hammer price. Still, the big winners in the traditional sports collectible market are the auction houses.

One way buyers and sellers may seek to avoid the high fees associated with traditional auction houses is by using online auction sites. EBay, for example, often features a wide variety of sports collectibles on its platform, and their fee structure is usually less extreme than at traditional auctions. An additional advantage eBay offers sellers is that they can sell their collectibles either via personal eBay stores, or by engaging consignment sellers with large followings to do the work for them. When selling via their own stores, collection owners pay a fee of about 12–13% to the platform (up to the first $7500, and then 2.35% for all value beyond that), which is quite a bit less than what auction houses charge, but still not a pittance. In addition, eBay charges monthly fees to individual sellers, and can levy penalties if minimum sales levels aren’t met, which can further chip away at any profits from the sale of their items.

Selling using a consignment seller can provide additional benefits to the owners of collectibles. When using a consignment seller, the collection’s owner will insure and ship their items to the consignment operation, where the items are documented, cataloged, and photographed for sale. The consignment seller then takes care of the actual promotion and sale of the item, and pays the collection’s original owner once the final deals are made and the funds received. Consignment sellers tend to pay lower fees to the platform due to their high sales volume, which allows them to offer a competitive fee structure to asset owners. This means that even with the cost of promotion and handling the sale and transfer of the items, many consignment operations only charge fees of 6–15%, making them a very attractive option for collection owners. In this case, the buyer pays no premium and the seller incurs the fees charged by the consignment seller, creating an overall lower fee structure than the auction world offers.

In addition to selling through auction houses or on eBay, engaging a collectibles broker is another option available to owners of collectibles. And they can offer quite a few advantages and efficiencies. But just like with the other options, the required brokerage fees, shipping fees and insurance fees can add considerable cost to the process. As one might expect, brokers in this business have access to intelligence and resources that most retail sellers do not have. And they often are not hesitant to charge for them. As such, fee structures are loosely based on what the broker thinks the market will bear, rather than what is in the best interest of the buyer or seller. Fees may range from 3% at the very low end, up to as high as 30% at times. But in cases where interests are aligned, this helps maximize profits for the broker and seller, and all parties end up winners.

Regardless of whether a seller uses auction houses, online auction platforms like eBay, or brokers, high fees can be hard to escape. However, the emergence of NFTs provides a unique opportunity to make the sports collectible market not only more secure, but also potentially less costly. In an NFT-driven sports collectible market, digital marketplaces could provide a haven for sports collectible mavens. When based on one of the less expensive blockchains, they could potentially drive fees down into the 1–3% range currently used for basic financial transactions, offering a major cost benefit to both buyers and sellers. Even the more widely used blockchain, Ethereum might still offer significantly lower costs than some of the traditional channels. In addition to this cost benefit, an NFT-based collectible marketplace would offer several other disrupting benefits. The speed of both the asset transfer and the transaction could be greatly increased, making the marketplace more attractive to a wider range of investors, and increasing activity in the category. The greater the number of participants, the greater the efficiency and transaction volume, which translates into lower fee structures.

Asset Hoarding

One of the other challenging aspects of the current sports collectible market is the problem of asset hoarding. Whether it is done by profit-minded large-scale collectors to force prices up, or by hobbyists and enthusiasts who simply don’t want to part with their favorite items, asset hoarding means that many potentially appealing items aren’t available for sale at any given time. As with many types of alternative assets, sports collectibles are attractive as both a means of wealth creation and as a goal-based pastime or diversion, especially for high-net-worth individuals. Big players in the trading card hobby might seek to accumulate inventories associated with a specific year, a distinctive set, or even a particular player. For example, obtaining every 1969 Topps card in the highest grade might be both an exciting challenge, and a way to make the collection more valuable. For the hobbyist who loves Steph Curry, building a collection of as many Chrome Rookie Refractor cards (of which there are only 500 in existence) as possible may be the ultimate goal. Regardless of motivation, this type of behavior definitely affects the market.

As a collector decides to start buying up a particular type of card or other asset, they tend to begin slowly, with little initial impact on the overall market dynamics. And since examples of the card regularly hit the market, no one notices the supply diminishing.

But after acquiring 25% of the existing supply, the price of the card is directly impacted, as demand has not changed but availability is much lower. With other Steph Curry rookies tucked away in private collections, while others are in unopened packs, finding one for sale becomes more and more of a challenge. Little by little, enthusiasts continue to buy up that card over a multiyear period, and when a single owner has a significant portion of a highly desirable card, hobbyists no longer have any access, or must pay outrageous prices just to acquire one.

While many of these dynamics are in the hands of the buyers themselves, this is once again an area where the emergence of NFTs could be useful. Strategic collectors seeking to corner the market on an item would still be able to exert considerable control over the items readily available for sale, just as in the current system. But collectibles that are currently in the hands of potential sellers who simply don’t know how to get them into the marketplace could find their way to interested buyers more easily. By providing decentralized marketplaces for sports collectibles, sellers anywhere in the world with an asset that might be of interest to someone somewhere, could peddle their items to a much wider group, thus increasing the available supply of a given item. The NFT marketplace would effectively help get some of these elusive collectibles out of “cold storage”. Further, the nature of blockchain technology adds a level of transparency, making it possible to get a clearer picture of which wallets own or control various assets. So while this doesn’t prevent hoarding, it at least gives a clearer picture of why some assets are less available, and whether it makes sense to pursue them.

Poor Discoverability

As with the art world, there is a strong emotional connection to sports memorabilia for many collectors, in addition to any financial lure. Sports play such a significant role in many fans’ lives that many high-value collector’s items are purchased purely for enjoyment and pride of ownership, rather than as an investment. Growing up watching a player and going to games creates a sentimental value that is even greater than the monetary value for many enthusiasts. For those collectors, market price doesn’t matter, even if selling their collection could bring them many times more than they paid.

Nolan Ryan’s Topps rookie card first hit the market in 1968. At the time, the card was found in unopened packs that cost just $0.05. Fans lucky enough to find one in a pack usually kept that card because they could afford it, they loved it, and it was exactly what they wanted in their collection. By 2009, that same raw card, if graded PSA 8 NM-MT, had appreciated to $1,200. Today, it’s even more valuable, selling for between $8,000 and $10,000. Collectors who acquired the card 10 years ago, despite having made a significant return, are not likely to be sellers. For those diehard Ryan fans, the sentiment is worth far more than the dollars the card may fetch at sale. However, because of the low cost at the time of issue, and the relative ease of finding one compared to today, there are also presumably a number of Ryan rookie cards out there in the hands of people who are unaware of its value, and less attached to it as a keepsake. With the arrival of NFT marketplaces, some of those potential sellers might finally be able to bring those cards to the marketplace, making eager collectors very happy. The NFT-based selling process removes a lot of the perceived hassle and intimidation for those less versed in selling collectibles, and democratizes the process for them. Rather than having to seek out a broker, auction house, or consignment seller, they can simply make the card available from the comfort of their homes, and find out what they can get for it. Since NFT-based sales would be recorded on a public registry, sellers could make their cards available publicly and receive offers without even having to make contact with outside parties. They could even set minimums automatically. And the assets would be available 24 hours a day around the world. This increase in discoverability could be a game-changer in terms of finding little troves of great items that previously were not available to the market.

Lack of Recurring Revenue

Unlike many other alternative assets, there is nothing in the current sports collectible market that allows for asset holders to collect recurring revenue from their collections. Once an item is sold it’s gone, and the asset can’t generate any ongoing income while it is held. All of the profits from a sale come from the appreciation of the asset over time. But NFTs are poised to change this dynamic. As the collectibles model shifts to allow for the creation and seamless transacting of digital objects connected to real-world physical counterparts, value can be assigned and royalty structures can be created that allow asset owners to earn recurring revenue on digital assets from a collection. Artists have enjoyed this benefit for many years as a master work is sold which represents the original, and print runs based upon the master can be produced and sold. As platforms such as Open Sea, Rarible, and Mintable gain popularity as efficient marketplaces, creators can take part in a stream of recurring revenue opportunities as sports collectible assets are bought and sold. In addition to these benefits that make the collectible more valuable, there is an additional potential benefit to pairing physical collectibles to a digital token. In some cases, the NFT itself may offer staking and loan opportunities to the holder or holders. This means that the asset could essentially be earning passive income for its owner in addition to any appreciation in value.

New Benefits

Beyond the improvements to the current sports collectible market model already mentioned, NFTs also offer a number of benefits that hadn’t been previously exercised in the category. The digital structure of the new NFT-based model of the future would allow for the creation of points systems to reward the best or most active purchasers and collectors. As many industries, such as travel and retail, have demonstrated, points systems can be very appealing to consumers, and can enliven almost any category they’re employed in. Using leaderboards can amplify this effect even more, as we’ve seen in the existing NFT marketplaces. Further, the NFT model also enables sellers to create bonus benefits or even additional assets to accompany their offerings, increasing their overall value. A piece of memorabilia is a great keepsake, But pairing it with a piece of NFT-based artwork or footage, or a token that can be redeemed for additional access or experiences, makes the asset more complete and more fun for the collector.

Conclusion

Industry change is inevitable in all categories, as technology shifts and younger generations impose their own desires and priorities on the marketplace. With the advent of digital experiences and assets that complement existing physical ones, today’s hobbyists are experiencing their sports heroes and favorite teams in new and more immersive ways. The advent of NFTs, and the digital experiences associated with them, will allow sports collectible owners to unlock more value from their items in a myriad of ways.

As NFTs and NFT marketplaces become a more prominent part of the sports collectible world, they’ll allow asset holders the potential to unlock increased savings, greater availability, enhanced and immersive experiences, recurring revenue, greater market transparency, more reliable confirmation of authenticity, and an unprecedented ease and speed of transaction. In short, the future of collectibles is definitely digital, and NFTs are ready to change the game.

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