Digital Fashion x Gaming v1 - mary

Report from August 2021.

Overview

Digital fashion presents a new medium of exchange for commerce, content, and culture. Partnering with gaming platforms allows fashion brands to increase engagement, attract new customers and collaborate with different designers and creators. For consumers, digital fashion offers discovery, experimentation, and self-expression.

The fashion and gaming industries share common ground as first-movers and category engineers. Both have created massive markets and achieved success as a result of experimenting with emerging technologies to create new forms of expression and entertainment. Beyond software and hardware, gaming platforms have taken an innovative approach to architecting new business models, democratizing development, engaging with culture, and embracing diverse partnerships.

Digital fashion originated within gaming in the form of character “skins,” outfits, and weapons that decorate in-game avatars. Continued experimentation in digital fashion has created the opportunity for brands to collaborate with gamers and gaming platforms, effectively translating virtual space to real estate and wardrobes, and skins to garments. The skins market is expected to exceed $50B by 2026.

Gaming platforms profit from in-game purchases, selling digital goods to more than 2.5 billion people who spend an estimated $100B on virtual goods. In recent years, gaming revenue has shifted from premium game purchases to microtransactions and virtual currencies, representing 50%, 75%, and 95% of revenue in 2015, 2020, and 2025E.

Industry Trends: Metaverse and NFTs

The metaverse is a series of interconnected digital worlds developed collectively by individuals, brands, technology companies, government, and non-governmental organizations. Experiences in the physical world can be mirrored in the metaverse and provide opportunities for revenue growth that do not exist today. While it’s still early days, the future of commerce will engage brands, creators, and consumers across multiverses.

Gaming platforms such as Roblox represent some of the best metaverse microcosms to date. This ecosystem represents thousands of user-generated 3D worlds that users portal their character/avatar between and engage in cross-play. Hardware and software tool kits are used as entry points (and for computational power) and comms infrastructure, advertising, and payments/purchases are integrated within the platform.

However, because these platforms are still proprietary, they are not considered “true metaverses.” These “walled garden” game environments are comparable to countries with hard borders – a Roblox avatar can’t cross into the Fortnite universe, and vice versa. The true metaverse that developers are working towards has less friction, and will allow realistic avatars to transcend experiences seamlessly, and include features such as payments (similar to crypto wallets). This functionality will allow users to buy, wear and sell NFT items – not just in one digital property, but across the entire metaverse.

Economic Value Creation: NFTs

In the physical world, the value of an object is governed by authenticity, scarcity, and ownership. By design, the internet is boundless in dimension and limitless in its supply of digital content – which has commoditized most digital products. The internet was born as a means of file sharing, not file buying.

Blockchain and NFTs allow the same value tenants to be applied to digital assets, an evolution of commerce, technology, and ownership. Using a blockchain ledger, the authenticity, rarity, and rights of exclusive ownership can be conveyed and verified. NFTs will shift from being collectibles to being utilities and will unlock access to the digital economy of the metaverse for a mass market of consumers. Over time, these user-generated virtual worlds are expected to have their own virtual economies, virtual events, and virtual experiences.

Monetization opportunities in the digital space are being driven by business model innovation. Web1 and Web2 companies make money through advertising. For Web3, a decentralized evolution of the internet, the internet is shifting from ad-based business models to commerce-based business models. The global advertising market was $647B in 2020, and ~50% is online. The global commerce market is $25T, with only ~20% online – representing a large opportunity for virtual and physical fashion.

The category for virtual apparel is expanding fast as companies look to capitalize on digital garments within gaming, metaverses, and AR. NFT fashion is in its infancy compared to NFT art, which has already been auctioned for millions of dollars. For people who’ve spent large portions of their lives playing video games online, there’s little distinction between buying a skin in Fortnite and buying an NFT jacket that’s only wearable in AR. Proponents believe NFTs will be the next evolution of digital fashion skins and many brands believe they can bring digital fashion closer to real fashion.

Use Cases: Luxury Fashion x NFTs

Sneakers: The potential for sneakers in the NFT market is massive and already beginning to take shape. Users are able to interact with sneakers in a variety of different ways - such as in-app try-on tools or wearing them around in games. With the continued adoption of AR, VR, and crypto fashion, sneakers will become a popular way for the masses to interact with NFTs.
- In 2019, Nike patented the tokenization of real-life shoe purchases, with a token called Cryptokicks. In April 2020, Nike then launched Aglet, an app that lets users buy digital shoes that wear out over time similar to how they would in real life. In December 2021, Nike drew more attention to the metaverse with its acquisition of RTFKT.
Apparel: Luxury brands resisted e-commerce adoption, however have been eager to experiment with blockchain, cryptocurrencies and NFTs. Demand is increasing within the virtual fashion market, as NFTs have propelled interest from brands and designers who want to create garments and sell to consumers.
- In May 2019, the world’s first digital couture dress was sold by the Fabricant on the Ethereum blockchain for $9,500.
- In 2021, Burberry launched its first NFT, and brands including Balenciaga and Gucci, launched projects within gaming and other virtual activations.
- Smaller brands and retailers have started selling fashion NFTs in various creative ways on marketplaces like OpenSea, Nifty Gateway, and KnownOrigin.
Magazines: NFTs provide a new canvas for storytelling, culture creation, and consumer experience. Selling NFTs of magazine content creates a way for commissioned artwork to build value beyond the pages. As the value of goods in the metaverse increases, fashion magazines can benefit as brokers between fashion, technologists, and collectors.

Business Model Observations

Web3 companies are experimenting with monetization through subscription fees, microtransactions, and virtual currencies - or a combination of the three. Platforms are looking to capture more of their own value, empower creators with income, build sustainable communities, and foster unique digital consumer experiences.

The Fabricant, a virtual fashion house, designer, and manufacturer of virtual items, leverages a partnership model as a way to build brand relationships, brand name, and service revenue. The Fabricant is using this model to acquire interest and grow with brands as they explore digital fashion. The brand has seen high conversion potential after partners engage and forecasts the majority of revenue will be driven by branded assets (licensing/NFTs). Other monetization opportunities in the space include cost per collection, revenue shares, service fees, styling, etc.

Historically, licensing has been a major factor in the democratization of luxury fashion. Many luxury brands have embraced collaborations, a type of licensing, using limited run drops designed to create demand around the brands participating. Licensing is often the strategic path that luxury brands take to go from just being a product brand to a lifestyle brand. Co-branding with films, music, or celebrities, or in this case, gaming companies, helps brands stay relevant and connected to consumers - across physical, digital, and metaverse worlds.

Partnership Considerations

Tech: Wide-scale adoption partially hinges on embedding application utility into digital products so they can work across gaming platforms and virtual worlds. To develop a greater understanding of new platforms, traditional fashion brands will likely need to embrace open source collaboration.
One-off campaigns vs recurring revenue streams: Most brand marketers are still trying to figure out how to fund metaverse investments. Spend is being allocated from different budgets such as theatrical interactive gaming or licensing.
Legal: Potential conflicts with copyrights, licensing, franchise agreements, trademarks, etc.

Appendix

Select AR + Digital Fashion Companies

RFTKT Studios became popular in the NFT space after sneaker collaboration with FEWOCiOUS generated $3M. RTFKT launched and became profitable in 2020. The sneakers sold more than 600 times, and buyers could also get the physical shoes. For 2021, revenue will exceed $4.5M, compared to $600K for FY 2020.
- In May 2021, RFTKT raised $8M in funding from A16, C Ventures, Galaxy Digital, Shrug Capital, +more. RTFKT is planning to expand the use case for NFTs by building out a companion app for virtual try-ons and content creation, along with other projects for its users to connect further with their purchases. It also plans to launch a fund for creators in the future.
- RFTKT’s long-term goal is to create a platform to bring on new creatives, allow them to freely monetize their ideas, and embrace what’s possible with the use of NFTs. In the future, RFTKT sees NFTs as keys or passports into experiences, games, or virtual events. *acquired by Nike in Dec 2021
DressX is a digital-only fashion startup building an NFT marketplace. “The world’s largest platform for digital-only fashion”, with more than 100 partner designers and thousands of digital items available for purchase on its website. The process is currently manual, however, the company has experienced significant traction working with the Fabricant and other leading digital fashion labels. Raised $2M seed from Artemis, Alpha Edison, Signal Peak +more in June 2021.
- On its mobile app, users can pay a monthly subscription fee to access certain garments as AR filters. These are similar to premium Snap filters for couture fashion, where content creators can film YouTube videos or IG Stories while wearing virtual outfits. The company lists clothes and accessories from over 100 3D and traditional fashion designers. Between 12% to 30% of each sale goes back to the designer, excluding items designed in-house.
CLO-Z is the real-time virtual try-on technology for clothes. The tech helps brands reduce apparel returns and increase sales conversion. CLO-Z technology precisely tracks the entire human body in 3D in real-time. It's compatible with Web (mobile/desktop), iOS, and Android and can be integrated into any app. Partnered with 3D production studio Virtual Rags.

Select Digital Fashion and Luxury Partnerships

Fortnite | The in-game culture in Fortnite is an asset for Epic Games. Fortnite has made $1B in two years of selling “skins” for players to dress up their characters. A typical skin costs between $2 and $20. The skins are purely aesthetic and do not impact the player’s abilities, underscoring the demand for virtual self-expression.
- Epic generates revenue through IP collaborations with brands. Its NFL collaboration sold 3.3 million NFL-branded skins in two months, generating an estimated $50M from a single set of skins (1,500 V-bucks; ~$15 each).
Roblox | The company is proactively pitching marketers and focusing on new partnerships as large advertisers are vying to reach Roblox’s historically young demographic. With its 40M+ users, Roblox has partnered with Nike, Disney, Warner Bros., and Gucci. Roblox advises many of its new advertising partners to offer virtual fashion and branded merchandise on the platform’s marketplace to promote brands and designers, test new ideas, and launch entire collections. They encourage brands to think beyond recreating a digital version of their physical merchandise, such as experimenting with bespoke items created specifically for the metaverse.
- The “Gucci Garden Experience” offered a series of themed rooms users could walk around in as mannequin-like avatars, interacting with various items and trying on digital clothing and accessories available for purchase. Most of the items on offer were collectibles priced from 120 to max 900 Robux (~$1:100 Robux). A digital iteration of Gucci’s Dionysus Bag with Bee sold for an original price of 475 Robux (~$6). After the sale, scalpers flipped the virtual product for $4,115 or 350,000 Robux (physical bag retails for $3,400).
Genies | Genies created a new 3D Avatar SDK which allows partners to create a branded avatar experience and online marketplace in-app. Gucci, GIPHY, P&G (Cheetos), NBA, New Balance, and celebrities Justin Bieber, J Balvin, Shawn Mendes, Cardi B, and DJ Khaled have all used Genies in their marketing strategies.
- Selling digital goods within their own apps gives brands like Gucci a new revenue line. Revenue from any goods sold through Genies’ SDK is split between the parties. If a celebrity is involved, the revenue split goes three-ways: Platform, Genies, Celebrity (SDK setup costs + revenue split weights NA).
- Avatar and digital goods integration also allow brands to gain insight into how users interact with their avatars and which digital goods they gravitate towards. Genies’ SDK has a CMS revealing “aspirational data,” given that users often create avatars based on an aspirational version of who they want to be. An SDK partner or brand can then create features or test different methods of content delivery, based on the aspirational content they’re accruing.
- Genies closed a $65 million Series B in May 2021 (Bond, NEA, Breyer, Tull, NetEase, Dapper Labs, and Coinbase). With this round, Genies plans to expand its digital goods and NFT marketplace on Dapper Labs’ Flow blockchain, allowing customers to purchase, sell and exchange digital wearables.
Snapchat | Snap is introducing AR try-on experiences with fashion partners, bringing users and businesses together through the Snapchat camera. These tools aim to capitalize on existing user behaviors of trying on and sharing various lenses. The company’s goal is for brands and consumers to think of Snap as a virtual permanent storefront.
- Farfetch provides an immersive shopping experience using 3D Body Mesh and voice-enabled controls. Farfetch was eager to test something that gives consumers the ability to try on products and makes the digital shopping experience feel more physical. Snap plays a key role in their marketing channel mix; with a personal feel driven by shared content between friends, and a focus on direct messaging rather than public sharing.
- Prada is tapping into new gesture recognition capabilities that let shoppers signal to the camera when they want to try on another item. People can set down their phone, step away, and see how various Prada purses would look on them by using a “swiping” hand gesture to change the colors.
- Piaget is leveraging AR to allow consumers to try on bracelets and watches, building on Snap’s existing tools that detect the face for makeup and eyewear try-on and feet for sneaker try-on.
- Poshmark uses “Snapchat Minis,” (akin to WeChat mini programs), to host its daily shopping events directly within Snapchat.
DressX Partnerships | Farfetch is the digital wholesale partner of DressX while Crypto.com is focused on the NFT shop of DressX. The DressX marketplace partners with Crypto.com to ensure seamless transactions for purchasing and trading digitally wearable clothing. DressX is also launching a new pre-order platform with Farfetch, digitizing a total of 40 items, half menswear, half womenswear (incl. Dolce & Gabbana, Off-White, Balenciaga, Palm Angels, Nanushka, and KHAITE).
Louis Vuitton NFT Game | The game acts as a way for LV to tap into its younger audience, inviting them into the LV universe and creating an opportunity for the brand to introduce itself to new customers. It creates a challenge that everyone can be a part of without having to purchase anything. Players can customize characters with different Louis Vuitton monogram prints and colorways, and learn about LV's history throughout by collecting postcards and other memorabilia. While it’s not the same thing as participating in metaverse — it shows how serious brands are about building immersive, online-only experiences.
Bitmoji x Off-White | Off-White teamed with Snap to enable users to dress Bitmojis in 12 virtual looks within lenses, chat, the Snap Map, games, and Bitmoji Stories. The brand’s goal is for the digital generation to feel represented as their true self in every platform they use to communicate. The collection is also available for retail.
Wanna | Partnerships with Gucci, Adidas, Snap, Reebok, GOAT, Puma, Farfetch, La Moda. Gucci was the first luxury house to release its own digital sneaker with Wanna. Last year, Gucci worked with Wanna to deliver AR try-ons for the Gucci Sneaker Garage. The brand predicts that in 5-10 years, a large portion of fashion brands’ revenue will come from digital products. They are using digital fashion as a way to supersede product photos, and create more engaging experiences, closer to offline shopping.
Zepeto x Ralph Lauren | plans to launch a 50-piece digital clothing collection available to purchase in the social networking app. The company has pursued a number of virtual projects in the last year in a bid to tap a younger generation of consumers. RL also worked with Snap to create a collection of Bitmoji avatar outfits and AR experiences and was the exclusive outfitter of G2 Esports in 2021.
Dapper / Brud (Lil Miquela) | Virtual characters and their metaverse-specific lore are becoming more common as tech and AI intersect with personality-driven industries. Lil Miquela has worked with brands like Prada, Dior, and Calvin Klein.
Twitch x Burberry | Amazon’s Twitch has 140M unique monthly users who watched almost 2.2B hours of content in April alone. In the fall of 2020, Burberry became the first fashion brand to livestream the debut of its latest collection on Twitch, attracting an audience of 40,000+ viewers. This signals Amazon’s ambition to be the primary retail presence in the metaverse.
IMVU | A community of users powers IMVU's P2P economy by designing and selling virtual fashion designs and destinations. IMVU is offering select digital fashions as wearable NFTs on OpenSea. Digital wearable NFTs are the second entry into the blockchain space by IMVU's parent, Together Labs, issuer of VCOIN, the first transferable digital currency designed for the metaverse. IMVU is changing the narrative on the functionality of digital items, merging the exclusivity of high fashion in the physical world and the limitless creativity of the metaverse.
Neuno | Sydney-based Neuno is currently working with five luxury fashion houses on launching NFTs - Unlike current NFT marketplaces, where anybody can upload and sell an NFT, Neuno only works directly with brands. This ensures a premium user experience, reassuring buyers about authenticity. They are working with a social media platform that specializes in filters and one of Asia’s biggest games so users can both post photos of themselves ‘wearing’ the dress and can dress their in-game avatar. Customers will be able to buy NFTs with their credit cards, reducing the friction of transacting in cryptocurrency.
The Fabricant | Amsterdam-based digital fashion house. Designs 3-D virtual clothing to be worn by avatars online - they have partnered with Off White, Atari, Buffalo, Rag & Bone and more, in addition to releasing their own original designs. The Fabricant works with DressX for its marketplace and digital wallets act as a vehicle for users to transfer designs and digital goods.
Aura | Aura Blockchain Consortium is the latest fashion-blockchain entity to come into play, joining other networks like Arianee (Ba&sh, Audemars Piguet and Vacheron Constanti), and VeChain (Givenchy and H&M). Aura is open to any luxury brand (who pay licensing fees and a fixed fee per product) providing the ability to track and trace any product with a unique digital identity based on a NFT, with all brands collectively contributing to the blockchain governance and strategy. This rare collaboration among luxury players highlights blockchain as an increasing focus for luxury amid consumer expectations for transparency and the pandemic’s pivot to digital-only products.