$140,000 Cryptokitties: What The Unlikely Lovechild Of Cabbage Patch Kids and Bitcoin Can Teach Us About Advertising

Retail hysteria.

There is really no other way to describe it.

Although there has been a “must-have” toy every holiday season, the ravenous, rioting mobs of parents that appeared in October 1983 (and didn’t let up until after Christmas) were unlike anything American toy retailers had ever seen.

See, 1983 this was the season of the Cabbage Patch Kid. And if you weren’t around for it, that season was completely and absolutely nuts. Why the frenzy? One simple reason:

Scarcity.

Coleco had devised a manufacturing process to bring to dolls what digital media has been promising for a decade: personalization at scale. Through different combinations of gender, hair color, hair length, eye color, skin tone and clothing, each Cabbage Patch Kid looked fairly unique, and with each doll sporting its own birth certificate and adoption papers, truly no two dolls were the same.

Combined with clever marketing and an intentionally limited supply, Coleco had created true scarcity – a frenzied demand for its products that most manufacturers only dream of.

Scarcity exists when the demand for something outweighs the supply (one of the most useful concepts I learned in Econ 101). In terms of retail, three things happen when this occurs:

1) some people who would have bought something at a normal price through normal channels have to go without;

2) some people will go to much greater lengths and spend more time to acquire something than they normally would have; and

3) some people will pay more than the normal price of something because they value it more than the retail price.

And this happens all of the time in our world. If you don’t believe me, when was the last time you heard someone say, “Hey! We just walked up to the box office and got 4 Hamilton tickets for Friday night at face value!”

That sentence doesn’t exist in our society.  And that’s scarcity at work.

Why is this relevant? Because scarcity is one of the keys to the success of the advertising industry, particularly in television. The reason the network upfronts have been so successful for so long (and somehow still survive) is based on the idea that there are a finite number of advertising slots across a handful of networks in primetime. Since primetime is when a plurality of US households have the TV on, many advertisers are still convinced that these pods are the best chance to get your video message in front of the largest number of your potential customers. Limited inventory + lots of advertisers = premium priced ad slots.

But then came digital.

In the early days of digital advertising, there were three homepages that were able to command a significant premium (MSN, Yahoo! and AOL) because they were the only ones who could deliver 100MM+ views in a single day, which could justify their cost premium. Combined with a few other strong (e.g. ESPN) and specialty (kbb.com) brands, they had successfully brought the concept of scarcity to the digital world.

Unfortunately, it was not to last.

As the internet grew, a combination of: 1) the exponential explosion in the number of websites; 2) cookie technology that allowed advertisers to track their audience across all sites; and 3) the adoption of a purchasing model based on a set number of impressions (CPM) rather than a period of time – created a very different reality for advertisers.

Oversupply.

There was a glut of inventory – the opposite of scarcity (and a publisher’s nightmare). So websites started selling their remnant inventory – first to ad networks and then on open exchanges – with the hopes of filling at least some of those empty 728×90 boxes sitting on their websites.

But the damage was done – almost no one was viewing digital advertising space as scarce.

Today, digital scarcity is a hot topic again – but in a slightly altered flavor.  And this time it comes from a completely different source – Bitcoin. Or more specifically, the blockchain architecture underneath it that supports digital files that cannot be copied.

Let’s look at this newest version of digital scarcity for a minute. Just like analog scarcity, it is only achieved if demand outweighs supply. In the case of Bitcoin, the original architect Satoshi Nakamoto designed scarcity into the system by:

1) limiting the number of Bitcoins in circulation forever at 21 million; and

2) making it impossible to make copies of Bitcoins (they could be divided endlessly, but not replicated like other digital files).

And although this stability proved to be a strong trait of the currency, it still took a bit to catch on. Bitcoins held no real value when you couldn’t do anything with them (which is why 10,000 Bitcoins could only by 2 large pizzas in 2010). But as Bitcoin became a more established currency, the coins became scarcer – and their explosive growth in value was largely made possible by the stability of a capped number of coins that couldn’t be replicated, copied or counterfeited.

And that’s where it gets interesting. It is this new digital scarcity – which relies on the inability to create duplicates of digital files – which has drawn attention from a number of different industries. Up until this point, musicians and film studios, for example, were subject to people making unlimited, flawless copies of their IP with no way of tracking or receiving compensation for it. And it’s hard to create scarcity for something if the supply is essentially unlimited.

But now, if you are a Hollywood studio, theoretically every copy of a particular movie file could be managed and tracked utilizing a blockchain platform. Only those people with an exact digital key would be able to stream their unique copy of the film, and technically, if there were a finite number of copies of the film, the price could go up with the volume of viewing across the network.

Now, I’ve read this idea a few times in various articles, and as both a musician and a lover of movies, I think the idea of paying a little more for each stream of a song or viewing of a film because my neighbor just consumed it first is completely bananas. If I’m 30 minutes late to buy my son the new Twenty One Pilots song and it now costs $364.85 to stream it, forget the track: I’m spending the money on his piano lessons, because clearly music has become an incredibly lucrative field. Nonetheless, the concept of a digital version of something that is unique, can be fully tracked (and theoretically can fluctuate in price) is quite intriguing.

In fact, what if you could create something digitally that had the scarcity of a holiday toy and the ability to change price according to demand? What would Cabbage Patch Kids look like on a blockchain?

Ladies and Gentlemen, I give you CryptoKitties.

Launched in late 2017, CryptoKitties is a “game” based on the Ethereum platform where you can buy a unique digital cat (using not Bitcoin but Ether, the second most popular cryptocurrency) with specific attributes and characteristics. And CryptoKitties actually take Cabbage Patch to the next level, as you can breed your unique cats to make more unique cats, and on and on for generations. Some cats have more desirable attributes, so they are relatively more expensive. And unique. And scarce.

How fun! How cute! Right? That’s what I thought, too, until I learned that one of these little digital felines sold for $140,000 in May. It’s hard to call CryptoKitties a “game” with a straight face when one of these unique little meowing digital files commands a price that could have bought a BMW I8 Supercar … or a 3 Bedroom Townhouse on the shore of Lake Superior for that matter.

Clearly, people value things differently.

And understanding that concept is the key to taking advantage of scarcity.

I’m sure CryptoKitties, like every collectable before it, will have their Day of Reckoning – particularly because, unlike Beanie Babies or 1964-1/2 Ford Mustangs, as a completely digital play, Cryptokitties only exist in someone’s digital wallet. This makes it difficult to display in a collector’s case in the living room, or drive it down to the malt shop, or however else people show off the fact that they possess something scarce.

But scarcity, digital or analogue, is very much a part of our market economy and something businesses should shoot for – regardless of the industry.

So a few takeaways:

  • A well-executed and coordinated marketing strategy and distribution plan can create demand that outweighs supply: scarcity
  • Customers value things differently, and whether it’s a kid’s doll, a digital ad on cnn.com or a 30-second spot on Empire, there are business strategies that can take advantage of scarcity to maximize profits
  • If you do not figure out a pricing strategy to take advantage of scarcity, other arbitrage players will capture these profits instead (eBay and Ticketmaster for example)
  • There will always be a few extreme customers paying outrageous amounts for something – and the rest of us will continue to shake our heads as it happens
  • Digital advertising could benefit from an industry-wide relaunch with clear value propositions that can create scarcity and demand premiums
  • We may soon be entering a world where unlimited, high-quality digital copies of IP are very hard to come by, which is great for IP owners as long as the pricing model doesn’t go haywire. But at least we’ll all know the true market value of our favorite songs

I knew that economics degree would come in handy someday.

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