Digital Fashion Failures

In 2021’s blockchain bull run, financial services (incl. banking, fintech) and gaming were amongst the top industries that were impacted by an influx of both venture capital and corporate interest. While a smaller recipient of venture capital funding, the digital fashion space also saw a notable surge in interest ($102m in 2021) from street and luxury fashion brands alike.

However, the anticipated impact of blockchain technology on the digital fashion space has been limited despite the increasing shift of time spent in online spaces. In 2021, the digital fashion market was only generating $120m in total revenue. Morgan Stanley analysts projected that this might grow to $50b by 2023 despite the sub-sector’s negligible revenue impact for top brands. To put this in perspective, this lofty projection of $50b would have been ~25-30% of the entire gaming market in 2023 (Gaming Industry Report - Q4 2023).

In our view, the digital fashion industry will not achieve meaningful revenue impact any time soon.

As digital identity and expression remain pivotal in the evolving virtual social landscape, the future impact of in-real-life (IRL) brands online may be limited (<$3b by 2030) unless fashion and clothing brands adapt.

Recap: 2021-2023

Vogue dubbed 2022 “A Year of Fashion NFTs”; the industry had a 30.5% growth rate from 2021.

Top brands made $270m from late 2021 to early 2023 from primary and secondary sales of NFTs. While active partnerships and NFT campaigns have continued to roll out, consumer interest has all but fallen off a cliff (Vogue). Metaverse Fashion Week, the prime digital fashion event hosted by a digital-incumbent, Decentraland, could not garner even the Decentraland’s community’s buy-in, and the proposal for an event in 2024 was rejected (Decentraland).

Fast forward to today: there were little to no mentions of web3 and the metaverse at New York Fashion Week in February 2024. This trend correction is eerily similar to the shift in sentiment (or lack thereof) at gaming conferences in 2023.

Why Has Digital Fashion Stalled?

While these NFTs could have served as a “jump start” for the growth of the digital fashion industry, these campaign-driven projects have failed for the following reasons:

1. Overleveraging of exclusivity: Similar to NFTs in the gaming space, the initial interest in these collections was driven by artificial scarcity. These projects have primarily revolved around luxury products and used “hype”-driven marketing in order to boost primary sales and an initial burst of secondary sales. This lever is unsustainable - there is little to no evidence across gaming and digital fashion that exclusivity alone drives recurring interest in and usage of these digital products.
   • While more accessible brands like Nike and Adidas have also released their fair share of these collections, this primary and secondary sales pattern is similar to that seen when each releases a sneaker collaboration.
2. Lack of community contribution due to exclusivity: Exclusivity limits the base of potential community contributors. The translation of exclusivity to the digital world only matters if people care, and the past 3 years have shown that people do not care in the long term if there is no associated utility. While blockchain games have been hamstrung by a lack of player liquidity, big brands such as Nike and Adidas have the privilege of an existing customer base; these brands should be able to pull in interested customers at scale (yet they have not been able to).
3. There is little upside to digital enablement alone: Consumers learned quickly that there is no value to exclusivity for exclusivity's sake. While this might change in the long run (no time soon), these digital products essentially operate as club membership cards without any true benefits today (and consumers clearly see right through that).
4. Lack of focus or misalignment with what is important to digital incumbents: One of the primary drivers of the anticipated growth of the digital fashion industry was the dramatic shift of Gen Z and Gen Alpha into interactive virtual spaces (games and similar digital experiences). However, too many of these marketing plays do not matter to gamers and are transparent cash grabs. Oftentimes, people hired into “Head of Metaverse” roles did not come from games (nor did they play them). A better way to describe these current strategists are digital natives that come from fashion; there is a fundamental lack of understanding of what gamers actually want and will pay for.

How to Move Forward

The digital fashion industry is showing some early signs that there is potential for it to break out of the hamster wheel it has been stuck in since 2022. Early adopters Gucci, Dior, and Louis Vuitton made quiet changes to their approach to digital fashion during their fashion weeks in Milan, London, and Paris; they cut out the blockchain and crypto-focused terminology while still taking advantage of the technological benefits.

Last June, Dior re-introduced the concept of hardware-enabled sneakers (first done by Nike in 2018) with a blockchain twist through the B33 sneaker. While Dior touted that the shoes contained an encrypted digital key that allows the owner to access a “personal, secure platform offering dedicated services”, to translate, this just meant that the shoe contained an NFC chip that gave the owner access to a blockchain-secure way to verify authenticity.

More importantly, to highlight, no part of this technology (NFC chips, blockchain) has really changed in the last decade. NFC chips were invented in the 1980s and the proliferation of this technology has progressed to the point where you can buy them on Amazon. What has changed, however, is how the technology is used and marketed by brands.

There are three things that we think should be taken into consideration by brands as they iterate on the next phase of digital fashion.

1. Less runway, more every day: There needs to be a significant shift to move away from flashy, “one-off” luxury items into experiential products. Technology is a tool that should be used to achieve a goal (e.g., increase LTVs by increasing customer engagement with the brand between purchases to the likelihood of repurchasing); it cannot be used as a tip-of-the-spear to sustainably appeal to consumers. For example, the most practical tool to date has been blockchain as an authentication tool. Combined with NFC chips, fitness trackers, and other smart devices, tech-enabled fashion has so much potential to grow in spaces across fandom/loyalty and games.
2. Refocus on high-growth audiences: To date, the priority of a majority of digital fashion products has been to cater to the digitally savvy cohort of existing luxury customers or fashion-forward blockchain natives. This needs to change - in order to grow this market, there needs to be an introduction of labels and experiences that are relevant to younger audiences.
3. Partner with gaming: The ability to showcase and use digital fashion within games and digital spaces provides the utility required to make exclusivity mean something. Brands should more aggressively partner with gaming companies, distribution platforms, or gaming-incumbent creators to ensure their digital fashion products (blockchain-based or not) matters to gamers.

Takeaway: While digital fashion rode the wave of blockchain interest in 2021 and 2022, it is clearly in decline and lacks consumer and investor interest today. In order to become relevant and achieve any meaningful stake in the digital consumer space, the average consumer needs to experience true daily utility (vs high net worth digital collectibles). The industry cannot continue down the NFT collection-driven path; the already small base of customers will continue to dwindle due to the lack of value, community buy-in, and relevance.

However, there is hope for digital fashion. If the industry can shed the hype-chasing collectible wave that got it here, and instead expand into experiential enablement by embracing real (daily/weekly) utility and focus on the demographics relevant to digital-enabled products. We believe that the hope for digital fashion lies in its inevitable partnership with the video gaming industry. If that happens, we can envision a viable (and lucrative) path forward for the digital fashion industry. Until then, it will remain irrelevant.