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Key takeaways:
Products become more valuable as more people use them, like Instagram and Uber.
In entertainment, value goes to the IP itself, not the platform, as with characters like Moana.
IP value increases when connected to a larger network, such as Disney's extensive brand network.
NFTs allow fan ownership and participation, increasing the value of entertainment IP.
Successful franchises will use NFTs to deepen fan engagement and create long-term value.
Network effects rule the world. A product has network effects when it becomes more valuable to its users as more people use it, which encourages more people to join. Instagram wouldn’t be particularly exciting if you were the only one there. You wouldn’t use Uber if it only had one driver in your city. And so on.
Network effects are prevalent in the entertainment industry, though they are not widely discussed. What makes them particularly interesting is how they overlap with the network effects of NFTs. This connection is rarely discussed, but it’s timely as the entertainment industry finds itself in a period of change and opportunity.
IP and Network Effects
The rise of social networks offered content creators a way to distribute content and grow audiences. Creators, consumers, and content all contribute to the very strong network effects of these platforms. For creators, there is only one problem: the value of network effects accrues solely to the owner of the network. Only residual value is (sometimes) shared with creators through revenue splits.
For entertainment IP (branded content with recognizable characters and stories), this rule doesn’t apply. Here, value accrues to the asset, not the platform. This makes entertainment IP special and very valuable – when utilized right. When consumers experience Moana across different channels and touchpoints, the attention value accrues to the character. It may be that Disney posted about Moana on Instagram. They can’t take that unit of content out of the platform, but it doesn’t matter. The value of the post is the character, and Moana transcends the bounds of Instagram and Meta.
Layered Network Effects in IP
The network effect of IP grows far more powerful when the IP itself is part of a network of assets. Disney is the most prominent example of this. A character like Moana is connected to a story universe (the movie) which is connected to the brand (Disney). This works both ways:
“I love Moana → Disney is great!” and
“I love Disney, so their new movie, Moana, must be great”
Creating network effects in entertainment IP is difficult. This is the reason why, once they reach escape velocity, they can maintain a high status for a long time. For Disney, all the network value of the “nodes” enabled the brand itself to reach escape velocity. When a new movie comes out with the Disney brand, it inherits value because it becomes a node in the Disney network of IP. It benefits from the success of previous nodes. As long as the movie is on par, cements its own set of memorable characters, and so on, it feeds new attention and value back to the network.
NFTs and Their Network Effects
NFTs (unique, ownable digital assets) overlap nicely with what we’ve discussed so far. They are a technology that gives digital assets similar capabilities as entertainment IP: they create network effects, these network effects can be layered, and the value of the network effects accrues to the asset(s), not the platform(s).
Emerging NFT-first, community-powered entertainment franchises like Doodles, Pudgy Penguins and Bored Ape Yacht Club let’s fans take ownership of core IP assets and both market and evolve them at their own discretion. As the owner of a Pudgy Penguins NFT displays it across her social profiles, it captures attention value that accrues to the network of NFT assets.
Another feature of NFTs is the tangible way the network can be measured, monitored and utilised.
Bonding IP and NFTs
Combining the network effects of IP with those of NFTs creates a powerful synergy. We can view IP network effects as asset-first, and NFT network effects as people-first, given that the community can own (some of) the assets.
NFTs enable participatory experiences and ownership in entertainment, deepening fan engagement. Ownership and financial incentives through NFTs enhance community belonging and network effects. Successful franchises of the future will integrate participation and ownership into the fan experiences, and utilise NFTs as the bonding mechanism.
The smartest entertainment franchises will leverage the combined network effects of IP and NFTs to create deeper fan engagement, participatory experiences, and long-term value. Both IP and NFTs are driven by network effects and accrue value independent of distribution platforms. Together, they form a powerful combination that enhances the value of entertainment assets in the digital age.
As always, reach out on Farcaster if you want to chat, and remember to subscribe to catch the next essay!
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