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Digital luxury: A conversation with Karinna Nobbs – part two


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GAM Investments’ Swetha Ramachandran recently interviewed Karinna Nobbs – a digital visionary and academic specialising in the rapidly evolving fashion space. Karinna recently co-founded The Dematerialised - an experiential marketspace for digital fashion including a white label operating system for the creation and trading of non-fungible tokens (NFTs). In the second and final part of their conversation, Swetha and Karinna discuss how traditional brands view digital fashion, current barriers to entry as well as the influence of gaming culture and blockchain initiatives.

21 July 2021

To read part one of the discussion click here.

Power to the people – or the brand?

Swetha: Counterintuitively, it seems that younger consumers care much more about brands. They are willing to be quite loyal if they perceive brands to be authentic. Is that why the larger luxury houses are nervous to enter the digital fashion space? Or do they think this is a passing fad?

Karinna: There are a few factors. One is the question of what is driving the activation. Is it a brand-building exercise or are they a type of brand that needs to demonstrate instant return on investment or instant sales from digital fashion? I would argue that a lot of the activations do have a direct return on investment. But there are not a lot of examples of this. RTFKT sold USD 3.1 million worth of digital sneakers in seven minutes and the company’s phone was off the hook from brands just because they saw proof of a revenue stream. Much also depends on the culture of the band and whether it is public or private. Another reason is control. Not long-ago, brands were asking: “Should we have a social media account? Should we even sell online?” Brands have had to factor in these challenges because, with certain elements of digitalisation, access is democratised. If done poorly, it can devalue the brand. The third reason is around the quality of technology. Badly deployed activations turn consumers off the brand straight away. At the same time, we do not want brands to be put off from experimenting so it is a tough balance to strike.

Swetha: Traditional luxury DNA is so rooted in that sense of history that the start-up mantra feels alien to them. What did you think about the announcement of the Aura blockchain initiative by LVMH, Prada and Cartier, given how rare these collaborations tend to be?

Karinna: Whenever the industry has brought people together from a sustainability perspective, there is a sort of cross-contamination, but in a positive way. I believe it is what we need because, at a certain point, there is a lack of knowledge in order to make the decisions about whether or not they should do an activation. I have heard so many stories of when an agency is pitching to a senior board member to sign off on a digital-related project, where first they may say no and then they will pitch it to their children and come back convinced about the project. And that is what changes it, not a spreadsheet or a diagram or a statistic.

Swetha: Do you think that we are at a point right now where everyone gets super excited, and then it dies down – which is when the real work happens?

Karinna: We have a few different things coming together here, including the digitalisation of fashion or digital fashion, NFTs and the emerging metaverses. Those by themselves are interesting phenomena in their own right, but it is when you put them together that they have the highest degree of long-term impact.

Swetha: The overlay to that is the trust economy that is enabled by blockchain, that allows resale, which is increasingly becoming bigger, both digitally and for physical fashion.

Karinna: And a higher degree of choice. If we see the growing creator economy where consumers are the creators and each one of us is a publisher and a photographer, it is not going to be long before each of us could be fashion designers should we desire it.

Swetha: And where does this not work? I recently read about virtual wine NFTs, something you can never actually taste in real life but are selling well.

Karinna: With an NFT, you get something of value, and it is portable. Where NFTs do not work is when they are a gimmick and not thought through. It does not work if it cannot answer the question: “What value does that NFT holds for the asset effectively that it is attached to?”

Swetha: I think that is the sticking point in a lot of people's minds that I have personally had to overcome - just because something is not physical does not mean it is not real. It is not materialised, but it can be real and dematerialised.

Karinna: Exactly. During the competitive analysis that I do for The Dematerialised, I try out all the other digital fashion companies. I pick the garment I want, I send them an image of me – they then send an image of me and the garment. I have started to get excited when I pose for the photograph in the first instance, and then the anticipation of wondering what I will look like in the digital asset. For me, it brings a new friction layer in a positive way around curiosity and relationship building that brands can get into.

“Just because something is not physical does not mean it is not real.” Karinna Nobbs.

Swetha: There is emerging criticism over the environmental footprint of crypto. Do you think the sustainability angle will improve over time for digital assets that are on the blockchain?

Karinna: If your brand is one where the core value is lowering impact there are a number of blockchains that you can that you could create an NFT with that have low to negative impact. Also, the migration of more chains from proof of work to proof of stake where you are immediately changing the impact by between 95-99% is a fantastic innovation for digital fashion. There is sometimes a demonisation of digital, where because it easier to measure in digital that you can be more critical of it, whereas actually, it is very much this kind of like iceberg notion that we see in physical fashion. For me, sustainability will become a non-issue because the technology is already solving it as we speak.

Swetha: It seems like the barriers to entry are lower for digital fashion than for physical fashion, because the need to build out stores does not really exist. The dematerialised nature of the product being produced also lends itself quite easily to new creators getting a shot that they would not otherwise. But that said, what about the barriers to scale in the digital world?

Karinna: It is easier in one instance because once you have made the garment once, you could sell it a million or a billion times should you decide to do it so you have no logistics, etc. From that notion, it is very scalable, but the scalability is obviously linked to the adoption or purchase of that piece in the first instance, as well as usability. One of the issues is that within digital fashion, there is not a universal file type if you like. Just as we had mp3s with music - we do not have that in digital fashion yet already, which is an issue. For instance, if you bought NFT from me, you could not take it into Fortnite because Fortnite is a walled garden. So that interoperability is an obstacle to scalability at this precise moment.

Swetha: Could a brand like Louis Vuitton potentially leverage that to infiltrate these various walled gardens?

Karinna: Potentially – but the thing to note is that each of the different whether it is Fortnite or League of Legends or Call of Duty or Roblox has a different aesthetic and their own separate ecosystem. If we think about operating systems such as Windows versus ios – it has taken a long time for us to have compatibility. There are no committees that have come together from across sectors to say: “Can we somewhere along the line create a universal file type for these types of assets?” This would definitely make life easier. For example, within digital fashion, a lot of the garments are typically made on Clo3d or Marvelous Designer software platforms, but these are designed for creating digital items that you then go on to make physically – the two programmes were not designed for fashion that would get rigged on a digital avatar. There is a technological spaghetti junction in the space that drives some developers off the wall because nothing is compatible with anything else.

“Even on a philosophical level, NFTs fundamentally challenge what you think of as ownership.” Karinna Nobbs

Gaming is the new rock and roll

Swetha: Is gaming culture really taking over fashion? Or is there an element of exaggeration in that increasingly repeated view? Are the implications more wide-reaching than playing a game? The notion that everything is becoming gamified is spreading fast, look at Peloton and fitness for example.

Karinna. I do see that games and the metaverses are the next big wave of culture. Education itself is becoming gamified. It has been said that gaming is the new rock and roll and we can now see that. Even in our professional lives, if we look at the uptake of web-based virtual reality, we can see large scale corporates moving to incorporate virtual reality in their remote meetings.

Swetha: Do you think the recent shakeout in crypto overall has made digital fashion designers nervous? To what extent does a brand’s inability to disaggregate crypto from digital fashion hold them back from making inroads into this space?

Karinna: I do not think designers are nervous. A lot of people have been doing this long enough to know that crypto by its very nature is about peaks and troughs. The Dematerialised as a marketplace is cushioned from that somewhat. It does feature in discussions with brands who are still grappling with the implications of a crypto crash, which then affects adoption. Even on a philosophical level, NFTs fundamentally challenge what you think of as ownership. That is a challenge for brands - especially if you are a head of merchandising, or head of buying at a traditional heritage brand. Some brands do not want to be on certain marketplaces. I suppose it is similar to when brands first took out injunctions against eBay to say eBay could not resell their products. We are seeing similar kinds of cases of that within digital fashion.

Swetha: Would one way to resolve this be for brands themselves to maybe set up their own marketplace?

Karinna: Yes, that would make sense; then they would be able to begin building trust themselves. And although the whole purpose of this is decentralisation, at least that they have a level of autonomy over that process.

Jumping first

Swetha: Who do you think would be could be the first luxury brand to create a proper NFT that would be well received?

Karinna: My dream brand would be like someone like Alexander McQueen or a couture brand like Iris Van Herpen. Anything couture related would be a turning point for consumers. The point I make when I pitch to brands is that they have a lifetime revenue stream from their archives sitting there, waiting to be developed in a healthy, traceable way using NFTs, where the brand controls the provenance. It is a no brainer, but I guess I am biased! It just takes one to launch one and there is going to be a domino effect, definitely.

Swetha: You had commented that RTFKT selling USD 3.1 million worth of shoes in seven minutes was a turning point, after which they were getting calls from everyone. But those calls have still not actually translated into action. So, what do you think needs to happen for brands to actually get serious?

Karinna: For the luxury sector, things tend to have a three- to six-month timeline because of their risk aversion and decision-making processes. I am finding it easier to speak to key people within key brands at all levels. And they are all very open. But nobody wants to go first.

Swetha: Yes, someone has to jump first. If you had a forecast for what this industry could be five years from now, what would it be? What is the blue-sky scenario?

Karinna: My prediction is that within five years that at least 10% of our wardrobe will be digital.

Swetha: What could get in the way of that happening?

Karinna: At the moment, unless you are a gamer, there is a lack of places where digital fashion can be worn And, on top of this, some of the user journeys to get in and out of the different blockchain metaverses are not straightforward. In my view, the barriers are definitely around being all dressed up and having nowhere to go – digitally. There is an irony there. There is also the ongoing backlash with the environmental impact of crypto. We need to have clear research studies that show a full lifecycle analysis of digital, not just the production processes. And then we need similarly, a solid understanding by different brands and stakeholders. It is clear there are lots of different options besides an Ethereum proof-of-work chain. If you do want to get into this space that you do not have to damage the environment while you are doing it. A digital-only Met Ball could be a way for people to feel like they can go somewhere wearing their digital dress!

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.

Swetha Ramachandran

Investment Manager

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