The NBA’s Web 3 Innovation Dilemma

The pro basketball league led the way with NBA Top Shot. But is it ready for the bigger implications of Web 3 for fan engagement and ownership?

By Magdalena KalaLayer 2
AccessTimeIconMar 9, 2022 at 5:49 p.m. UTC
By Magdalena KalaLayer 2
AccessTimeIconMar 9, 2022 at 5:49 p.m. UTC

Magdalena "Mags" Kala is a cross-stage investor in consumer web 3 startups. She is passionate about consumer behavior, brand building, and the mainstream future of web 3.

Under Commissioner Adam Silver’s leadership the National Basketball Association (NBA) has been the most innovative major professional sports league in the United States. It is thus no surprise it has also been the most crypto forward, most notably inking the partnership with Dapper Labs to create NBA Top Shot. In its first weeks, NBA Top Shot swept mainstream consumers in a way no crypto product has before, and arguably kicked off the non-fungible token (NFT) craze.

While the NBA x Dapper partnership has only scratched the surface of opportunities around digital collectibles and fan engagement, the NBA must now grapple with how to progress its relationship with crypto and Web 3. Is the league ready to embrace not just selective profit-maximizing technologies (like collectible NFT drops) but also the Web 3 ethos of democratized ownership, governance and financial upside. If so, that ethos is seemingly at odds with the interests of its 30 team owners.

Becoming a more Web 3-native league will not be easy and will require the NBA to re-examine its long-held beliefs about its business to maintain its cultural relevance. On the other hand, failing to progress along the Web 3 curve – most notably by allowing the ultimate fan ownership in the team’s themselves – will not have any immediate consequences. But it might threaten the league’s long-term cultural and consumer appeal.

NBA vs. Web 3 mindset

As a business, the NBA – the collective of 30 teams and the league office – seeks to maximize dual objectives of business growth today (revenue) and in the future (increasing fan engagement across generations and geographies) while minimizing the amount of control it needs to give up to achieve these goals. NBA Top Shot has perfectly slotted into this strategy: It has become an attractive new revenue generation tool and a fan engagement tool – a win-win that required no sacrifice on the league’s part.

This optimization lens, however, creates a natural innovation ceiling for the league when it comes to Web 3: NBA’s tight control of its brand, product, and business model is directly at odds with the Web 3 mindset of yielding that control to fans and players – the stakeholders who make the product work.

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NBA Top Shot (Dapper Labs)

ConstitutionDAO might have failed at acquiring an original copy of the U.S. Constitution but it succeeded at expanding the realm of what’s possible when it comes to collective purchasing power for even the loftiest and most expensive of things. The idea of a DAO owning a sports team immediately came up next. Fans have whetted their appetites for fan ownership of a sports team. But is the NBA ready?

For years, the NBA disallowed private equity fund investment in teams’ minority positions. Then, in early 2021, the league changed its position, developing a framework for private equity ownership that allows funds to own up to 20% of a single NBA franchise and teams to accept up to 30% of ownership from institutional investors. With those guardrails in place, the league opened itself to new ownership structure in exchange for benefits such as greater liquidity for minority owners in the era of ever-increasing franchise valuations.

Read more: What Is a DAO?

Today, the notion of accepting a team investment from a DAO still sounds preposterous to NBA lifers (partially, to be fair, due to the legal gray area that DAOs currently stand in) but it does not have to be meaningfully different from the prior access opening to institutional capital. The league can, and should thoughtfully design its parameters around an acceptable level of fan involvement through novel ownership structures like DAOs.

What do fans want?

The NBA’s future success depends on fans continuing to watch and spend – the league is nothing without the eyeballs and the wallets. That is why any strategy for long term growth must begin with a question: What do fans really want? The Web 3 rallying cry is decentralized ownership, but is that what fans care really about?

Humans don’t desire ownership per se, but what that ownership enables us to do and feel. Ownership of any asset, including a sports team, is about four fundamental benefits/motivations:

  • Love/pride: intrinsic satisfaction (“I love this team and so I want to own a piece of it.”)
  • Status: external signaling (“I want to flex being a team owner.”)
  • Control: governance and decision-making (“I want to have a say about team’s direction.”)
  • Greed: financial returns (“I want to benefit from the team value appreciation.”)

Different fans have different motivations, but ultimately at least a couple of these have to be met to generate real fan engagement. Fan tokens like those from Socios have sprung onto the scene to serve those desires with a promise of synthetic team ownership and fan impact on decision-making. Fan reception has been lukewarm at best, and for a good reason. The fan tokens represent innovation incrementally that fails to deliver on their issuers’ lofty promises.

Just DAO it

In theory, companies like Socios present a win-win situation of fan tokens as shadow team ownership, creating an additional revenue stream from token sales for the teams and giving fans a say in certain aspects of team decision-making.

In practice, most if not all fan token programs to date have disappointed, with teams too scared to yield any meaningful decision-making to fans. Asinine polls on topics such as “Who was the player of the month?” could be equally well served by an Instagram poll.

As a result, fan tokens fail to deliver on all four of consumer motivations for ownership:

  • Love/pride: Emotional benefits require real connection that fan tokens have not yet meaningfully provided. Thus far they’ve been monopoly money but without the board to play on or friends to play with.
  • Status: Easily accessible on an open market (and with teams’ ability to issue more tokens at will), fan tokens no longer allow for flexing. No one flexes “I own Amazon stock” because anyone can own Amazon (AMZN) stock. Fan tokens are no different.
  • Control: Given teams’ reluctance to offer meaningful decisions up to a fan vote, fan tokens fail on the primary promise of enabling fans to have a say in team decision-making.
  • Greed: Fan tokens value is fully divorced from franchise value and as such has been a volatile asset driven entirely by short-term demand and crypto sentiment, more aligned with speculators than long term value appreciation holders.

In short, fan tokens (as currently issued) are just an incremental solution that’s more an illusion of Web 3 innovation than real change in the relationship between fans and teams/leagues.

Minority ownership DAOs can better deliver what fan tokens have promised to the fans, while also better serving the league’s long-term goals (because they serve each of the four core ownership motivations). From love/pride to status signaling to governance to financial returns, DAOs deliver a product to fans that’s superior to fan tokens and virtually indistinguishable from minority ownership by an individual, save for a couple of courtside seats (at best!).

In fact, the league can elect to give additional governance input to a DAO vs. an individual minority owner (who truly has no impact on any team decision-making) by treating the DAO as a focus group of incentive-aligned superfans.

Humans don’t care about governance for governance’s sake – governance rights are just a delivery mechanism for what we truly care about, like feeling heard, making an impact, or protecting your investment. As long as expectations are aligned up front that the DAO has no fewer (but also no more) governance rights than any other minority owner, but also that the league genuinely desires the DAO’s advisory input, all parties will be better off than in status quo or a fan token equivalent.

Allowing a DAO to hold a minority ownership position and collaborate with the league can then additionally create a relatively low-stakes learning opportunity for both parties to consider more substantial, control ownership by a community in the future, and the conditions necessary to make it a success.

…Or else?

The NBA is in the spotlight because of its status as the most pro-crypto league today, but it is weighed down by its legacy vested interests from existing stakeholders. It has resources and brand power, but with that it loses its ability to move quickly and experiment without repercussions. This creates an opening for upstarts to take a hold of fan minds, hearts and wallets. Startup leagues like Fan Controlled Football have no long-standing vested interest. They can design incentives and control and money flows from ground up. Under-monetized leagues like Major League Soccer (MLS) or the Women's National Basketball Association (WNBA) that have smaller but deeper fan bases are also well suited for Web 3 business models. Nothing to lose means an asymmetric upside potential.

Just as in a corporate context, less-resourced but more nimble upstarts have opportunity to innovate and disrupt from below. If, or rather when, one league cracks the code on delivering an exciting Web 3-native product that turns fans into incentive-aligned shareholders, it will have substantial repercussions on the appeal of every other league lagging in making that shift. The next generation of fans is too tech-native and too demanding to be satisfied with legacy approaches.

Dear Adam Silver

The NBA is a top-notch product with global appeal and a younger fan base than the other major pro sports leagues in the United States. It does not need to innovate immediately to stay relevant today, but it is in this enviable position compared to leagues such as Major League Baseball or the National Hockey League precisely because it has not been afraid to embrace new technologies and take bold initiatives under Adam Silver’s stewardship. Web 3 is in its infancy and calls on everyone to experiment and learn-by-doing. The NBA should be no different.

The approach needs to begin with fans – understanding current NBA and WNBA fans across the core fandom segmentations, from demographics (age, willingness to spend) to type (team-first versus player-first) to intensity (casual to superfan) with respect to their deeper engagement needs and wants, then crafting experiments and solutions that seek to serve them.

For years, the WNBA has been treated as the immature sister – now it’s time to shine as the more nimble, energetic sibling that understands and implements technology faster. It’s no secret the WNBA remains a cost center for the NBA. There is no reason not to turn that into an opportunity as NBA’s de facto Web 3 innovation lab.

The league office first broached the topic of institutional minority investments with the team owners in 2019 and didn’t implement it until two years later – changes for such prized brands as NBA take time, which is why it’s important to begin considerations around fan ownership right now.

The innovator’s dilemma is scary because it requires some sacrifice in the present in exchange for survival and/or growth in the future. In the grand scheme of things, though, allowing minority ownership by fans is not a huge sacrifice at all. It’s one that can redefine and elevate the league’s relationship with its fans. If any of the major leagues in the U.S. can do it, it’s the NBA.

NBA DAO wen?

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Magdalena "Mags" Kala is a cross-stage investor in consumer web 3 startups. She is passionate about consumer behavior, brand building, and the mainstream future of web 3.

Magdalena "Mags" Kala is a cross-stage investor in consumer web 3 startups. She is passionate about consumer behavior, brand building, and the mainstream future of web 3.

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