Marc Andreessen is fond of telling a story that describes his front-row seat to the Internet’s “original sin”. Back when he was running Netscape in the 1990s, he approached a variety of payment vendors to integrate that utility into the browser. No one, not Visa, MasterCard or any bank, had even a remote interest in working with him. The Net was relatively new at the time and no one “got it”. There were sites like Amazon where you could make a transaction, but that happened in a secure place on their website. You could not, and still cannot, simply click to buy something you see online with browser-enabled functionality.
That meant the Internet developed around advertising rather than direct commerce. This started with relatively benign banner ads but grew into a surveillance system to optimize the ads you see based around your search and website visit history. Throw in social media algorithms, which know what your entire social graph is doing, and it’s easy to think your smartphone mic is listening to your conversations. All for the sake of showing you ever more targeted ads …
We bring this up because Chris Dixon, an Andreessen Horowitz general partner, recently penned a piece called “NFTs and a Thousand True Fans”. NFTs are “non-fungible tokens”, a blockchain technology that gives buyers real and secure ownership rights to a digital asset. The “thousand true fans” bit is the idea that content creators don’t need millions of followers to make a living. They need 1,000 people who love their work and will pay any reasonable price to acquire or experience it. A thousand true fans who pay $100/month, for example, is worth $1.2 mm/year.
His basic points are as follows:
#1: Blockchain-based sales and ownership are more efficient than current models. We checked Amazon’s website and found publishing a new work there will cost you 30 percent of every sale. But if there were blockchain based solutions that specialized in your sort of writing, they would compete away most of that 30 percent and allow a writer to keep more of the purchase price. Potential “fans” would know to go to these sites to find writers like you.
#2: NFTs allow for more granular pricing. Dixon mentions NBA Top Shot cards, which sells virtual trading cards online for anything from a quarter million dollars down to almost free. The advantage here is the potential for sub-penny pricing if the NBA wanted to sell or promote these digital products at large scale. Dixon points out that many online currencies allow for very small transactions, and this does help with engagement.
#3: NFTs “make users owners, thereby reducing customer acquisition costs to near zero”. The NBA is a good example, generating $200 mm in sales over the last month while spending very little on marketing the Top Shot initiative. Online currencies are another case study, generating billions in market cap with essentially no marketing.
Our take: NFTs are certainly the hot new thing in disruptive innovation, but their real significance has more to do with a nascent move to decentralizing technology than the novelty factor driving up virtual NBA trading card prices. This is a topic Marc Andreessen and Ben Horowitz spent considerable time discussing in their recent Clubhouse meetup. They see Apple and Google’s App stores, Amazon, Facebook/Google’s control of the ad market and other centralized nodes on the Internet as ripe for disruption. They describe Parler’s recent de-platforming up and down the stack as a wakeup call for them and other technologists. This isn’t just about capturing margin, Bezos style. Decentralizing the Internet and washing away that original sin is their goal.
In terms of how we make money from the NFT concept, three points:
First, DO NOT think NFTs are about to re-write Big Tech business models. The NBA’s offering worked because millions of people already love basketball. Google and Facebook are still relevant to advertising and building brand awareness. Apple still controls what apps end up on an iPhone. Amazon is still the central nervous system of ecommerce. NFTs are interesting experiments, to be sure, but Big Tech has plenty of time to figure out how to get their slice of this pie. Their track record says they will.
Second, DO consider what sorts of public companies can leverage the NFT craze because this could easily be the hottest fad in 2021 and we’ve seen how markets latch on to old companies doing new things with disruptive tech. Basically, any business which creates a product that millions of people are passionate about can make money here. The entertainment industry has a huge library of content to sell. My old sector – the auto industry – has a strong fan base as well. How much is a proprietary video of the 1953 Corvette launch at the Waldorf in NYC worth to a Vette collector? The answer is not zero. Will GM do that? We doubt it, but it’s a decent illustrative example.
Lastly, DO maintain perspective and realize investor enthusiasm around blockchain technologies has always run either white hot or ice cold. Markets don’t reward one-off revenue sources with high multiples, even if they always overshoot temporarily to the upside when a “new new thing” comes along.
The bottom line here: NFTs have all the makings of 2021’s biggest tech fad, but let’s not lose sight of the fact that erasing the Internet’s original sin is still many, many years away.
Andreessen Horowitz blog post on NFTs: https://a16z.com/2021/02/27/nfts-and-a-thousand-true-fans/
NBA Top Shot website (worth a look, if only for the astronomical prices): https://www.nbatopshot.com