This article first appeared in The state of fashion: technologyan in-depth report co-published by BoF and McKinsey & Company.
The pioneers of the metaverse have shown that it is interesting for fashion brands to invest in virtual worlds. Certainly, a fully formed metaverse – comprising an interconnected virtual ecosystem that overlaps or provides an alternative to physical reality – is not yet possible given technological constraints. But brands’ experiences with metaverse principles, such as virtual fashion, extended reality, games, and non-fungible tokens (NFTs), demonstrate the impact that virtual activities can have as marketing tools and community building for fashion. Global spending on virtual assets reached around $110 billion in 2021 and is expected to grow at roughly the same rate as the gaming market to reach around $135 billion or more by 2024.
The next frontier for big brands will be to translate unproven technologies into sustainable revenue streams, effectively separating hype from reality. Over the next two to five years, fashion brands focused on metaverse innovation and marketing could generate more than 5% of their revenue by investing in virtual businesses today.
Beyond a five-year horizon, some optimistic observers expect massive adoption of virtual worlds by consumers, creating the biggest opportunity for the fashion industry since e-commerce. The bears predict that the hype around the metaverse will fade as technologies fail to meet expectations or users prove reluctant to use virtual spaces as widely as some business plans envision.
While it’s uncertain whether significant numbers of consumers will develop full-fledged virtual lives and spend most of their time in the metaverse, significant revenue opportunities for fashion brands will emerge.
The pace of adoption will be dictated by advances in technology, interoperability between virtual environments, and social acceptance. Tech players as well as start-ups and fashion brands need to develop technologies that help transform today’s unrefined virtual experiences into mature, immersive realities. Massive consumer adoption could be a significant barrier – 78% of people who have ever ventured into virtual worlds say they lack physical interaction while doing so.
As a result, many players will likely hang back to see evidence of commercialized use cases and tangible ROI before investing. For others looking to seize the trading opportunity, the greatest short-term earning potential lies in virtual assets that can be traded, transferred, or used for payment. We identify two clear use cases for virtual assets that have long-term potential:
AR mode and virtual skins
In virtual spaces and on social media platforms, the appetite for creating and adapting online identities is high: approximately 70% of US consumers from Gen Z to Gen X rate their digital identity as “ somewhat important” or “very important”. A similar appetite for virtual goods can be found in China, where 70% of luxury consumers have purchased or will consider purchasing virtual goods.
Some companies are using augmented reality (AR) to let users edit photos and videos, and creating digital skins to change the look of a user’s avatar. For example, digital fashion startup DressX, which sells virtual clothing that can be added to a photo and posted on social media, has partnered with brands such as H&M to launch digital collections. Meanwhile, users of online gaming platforms such as Roblox regularly update their avatars with new skins, even daily in some cases. The potential revenue generation from gaming outfits and accessories can be significant. Gucci sold a virtual version of its Dionysus bag for the equivalent of $6 on Roblox, which then led to auctions of over $4,000 per bag when resold on the second-hand market.
The multi-billion dollar gaming market will continue to provide opportunities for fashion – the gaming skin market could reach $70 billion by 2024, up from $40 billion in 2020. Brands will need to look to established gaming and platform partners to find breakthroughs.
Over the next two to five years, fashion brands focused on metaverse innovation and marketing could generate more than 5% of their revenue by investing in virtual businesses today.
Yet, as with any emerging technology, there are risks. On the one hand, brands – especially luxury ones – need to be aware of the sale of “cheap” digital items that could weaken the exclusivity of their brand image. AR technology is in a relatively early stage of development, where glitchy or unwieldy apps can harm the user experience.
Additionally, if brands choose to partner with virtual platforms, gaming or otherwise, the high profile opportunity may be dampened by high participation rates, which could be as high as 50%. commission on revenue.
NFTs as digital twins and loyalty tokens
Much of the frenzy over blockchain-based NFTs has centered on digital art collectibles, which are in some cases bought and traded for outrageous sums, grabbing headlines as some observers scratch their heads. The compound annual growth rate of the NFT market value skyrocketed 750% between 2018 and 2021, from $41 million to $24.9 billion.
But NFT’s rapid sales growth rate is already beginning to moderate. Indeed, the daily trading volume on the NFT OpenSea market fell by 80% between February and March 2022. NFT skeptics suggest that this could indicate the bursting of a bubble in an unsustainable market with a limited number of active customers and rampant hoaxes and scams.
However, even if the hype dies down, use cases will emerge that address industry pain points and consumer desires with apps that support community building, traceability, and authenticity. products.
The long-term business opportunity for fashion brands to engage with NFTs will likely serve more pragmatic purposes by using NFTs as “loyalty tokens.” Gucci, Adidas, and The Hundreds, among others, have used NFTs to provide benefits such as early access to new NFT drops and physical products, essentially serving as a membership program. In a sense, these NFTs are digital collectibles, since users cannot yet wear them in virtual worlds, although they can use them for social media profiles. Brands are starting to add more “utility” to collectible NFTs, which could make buying one more attractive to consumers and translate into a long-term opportunity for brands.
We see the most compelling use case for NFTs as digital twins that house information about the history, authenticity, and ownership of a physical or digital product, which is especially beneficial for the luxury segment. in its fight against counterfeiting. The twins allow products to be associated with a theoretically tamper-proof registration and unlock the ability for brands to collect royalties on resale. A host of start-ups and industry initiatives such as Aura Blockchain Consortium, Lablaco, and Arianee aim to commoditize blockchain-based digital twins. Lablaco is working to link its digital IDs to virtual versions of clothing, so customers can participate in augmented reality experiences such as try-ons.
Partner, Build, Acquire
While a few disruptors, such as digital fashion marketplaces, will only focus on virtual goods, most innovative and tech-savvy brands will capitalize on the opportunity to diversify revenue streams and target Gen-Z consumers and Millennials. Players who wish to experiment in the metaverse but do not have the required internal capabilities can:
- Partner with gaming or tech companies, like Gucci has done in its partnership with Zepeto, a social networking and avatar simulation app, to produce paid digital skins, or like Burberry has done when it teamed up with Tencent to launch a limited-edition scarf. with Chinese virtual influencer Ayayi.
- Build their own capabilities by recruiting talent with technology-related skills as well as a deep understanding of the metaverse and its communities, as Balenciaga does by creating a “metaverse business unit” dedicated to metaverse marketing and commerce.
- Make acquisitions, like Nike’s deal to buy virtual fashion studio RTFKT in 2021.
As in the early days of e-commerce, some metaverse related ventures may fail or require rapid iteration. However, fashion is well positioned to capitalize on engagement with virtual worlds and the metaverse, due to its connection to self-expression, status and creativity. Leaders should consider metaverse strategies based on their company’s digital ambitions and customer targets.