Why Socios, and football fan tokens as we know them, are probably doomed

With Manchester City's Socios Fan Token made a significant leap after the club being crowned Premier League champions, before falling shortly after, and a fantastic article by Joey D'Urso for The Athletic at the end of April, Kai McKechnie Head of Marketing at Premier Sports Network highlights how Socios and its club partners are profiting at the expense of fans.

After the crypto bloodbath of the past few weeks, there has been a lot of ‘what doesn’t kill us’ talk. In football, Socios remains the dominant player. It has 50+ tokens, 100+ clubs and has seen off competitors in the form of iQoniQ and Sportemongo.

So, while not everyone will make it, the assumption is that they will. It may seem like painful times, but as a silver lining it will be exciting to see a transition from the hype economy to the tech and services merit economy for a while, once the chaos is over.

Even aside from Socios’ whole business being tied to spectators’ sentiments about wildly volatile assets like Bitcoin, I think there are some reasons to question the company’s fundamental reliability.

Even before the crash, the value of Chiliz, Socios’ crypto, and most FAB (Fast Access Blockchain) tokens have been on the slide. For example, Manchester City’s tokens were nearly reaching £28 in August and went below £4 this week, more than 86 per cent down from its all-time high. This is a huge problem. If the tokens and crypto market is on a continuous decline, this makes it much less interesting to the traders who piled into it last year. Without an upward trending price, future token sales get harder to hype.

And with prices low, clubs in the programme can’t feed more tokens onto the market, which is where the real profit is. From a traders’ perspective, Socios has gone cold. For clubs, it looks like a one season wonder. And fans are becoming ever more aware of its drawbacks, especially after the Advertising Standards Authority (ASA) ruled the tokens were being misleadingly marketed.

Socios have tried to respond with various marketing initiatives. They signed Del Piero and Messi as brand ambassadors, the latter for a reported fee of US$20 million. Socios have also begun going TV commercials. In the US, they have embarked on signing dozens of teams in the major and minor leagues. However, the US teams are sponsorships - Socios don’t yet service those markets. And their marketing isn’t moving the needle.

You can read Joseph D’Urso’s report for The Athletic which reveals that Socios fan token holders spend an average of £150, with many fans/ investors seemingly based in Turkey as the Lira collapse has meant people turning to crypto to stay afloat.

Manchester City made £20m from Socios last year?

In the last six months, I heard from a number of people in the media and across the football industry that whenever clubs are considering crypto, they mention the same exciting fact: that City made in the region of £20 million from their Socios deal last year. I wondered, is that possible? If so, how? And could they hope to make a similar amount this year?

Do not get confused between the differences between crypto, fan tokens, NFT projects etc. So I have put together an extensive glossary to guide you through ‘blockchain lingo’ on order to navigate the developing frontier of Web3.

Obviously, City aren’t going to disclose how much they got, but let’s look at the hypothetically.

Firstly, an overview of the deal structure. When clubs join Socios’ programme, they get a signing bonus, rumoured to be a six or even seven figure fee for Premier League clubs. On top of that, the clubs get 50 per cent of the income from the ‘First Token Offering’ (FTO).

For City’s FTO, the club sold two million tokens' between March 2021 and May 2021 at £2 each, raising £4 million - of which City received £2 million. (This is a slight simplification as City were part of a pledging scheme, where fans could pre-buy some months before the club signed, but it doesn’t really impact City’s take on the token sale).

The problem with the first token sales is that the price is capped, limiting the income. If we suggest that City got a £5 million signing on bonus, that still leaves them £13 million short of the rumoured £20 million.

How would a hypothetical club raise the rest of the £13 million?

Here’s an idea: While the first token sales have a capped price, once the token prices float, those £2 tokens can appreciate very substantially. FTO sales tend to represent only 5 - 10 per cent of most Socios clubs’ total tokens. So, when do the 90 per cent, plus, other fan tokens get released?

From what I can tell, it’s when Socios wants. Their Terms and Conditions don’t seem to commit the company to disclose a schedule for release and, in practice, I can’t find an example of them trailing additional token sales for a club. This is not to allege any criminal or underhand behaviour by Socios or their club partners.

What seems to happen is that Socios feed additional tokens on the market, bringing the clubs 50 per cent of whatever the current market price is.

Hypothetically, not in City’s case, if the size and timing of token releases were decided in consultation with clubs, might that create the potential for clubs to steer this additional income into specific financial years?

In that instance, the calculated timing of additional token releases could be very profitable. Shortly after the tokens became tradable in Mach 2021, they skyrocketed to over £20, before dropping to between £5 and £10 - still a decent profit if you bought at the FTO price. But then prices began to climb again, hitting nearly £28 at the end of August.

And imagine, then, hypothetically, that Socios released 700,000+ new tokens on to the market, and you managed to get an average of £20 per token, that would give clubs £7 million on £14 million in sales. £15 per token would give the club £5.25 million on £10.5 million in sales.

Looking at this, then, by timing additional token sales and slipping them onto the market at a peak, you could start to make in-roads into that rumoured £20 million revenue as a club. Probably not the full £20 million, so maybe there is some rounding up for marketing purposes.

Problem is, of course, if you increase the token supply by 50 per cent (from 2 million to 3 million) at a time when crypto is on the way down, you risk crashing the price.

And that’s what happened. City tokens cratered, during which time the club released essentially no new tokens, before a price increase to its all-time high in August. So to answer the question, it is clear to see how, with a big signing on bonus, a successful FTO and a second token release at the peak, a club might be able to earn in the region of £10 million with Socios in a year. Though, I am still sceptical about the figure of £20 million and how that could possibly be repeated.

Would Socios agree a significant annual fee for clubs? Maybe. But the majority of the income is going to have to come from token sales. And if you find an extra one million tokens crashes the price, when will the remaining 17 million tokens be saleable at anything like a good price?

In theory, if City were to get 100 per cent, minus commission, on all non-launch token sales - where the remaining 18 million belong to City - then that essentially doubles their income on the August token dump and makes the £20 million figure possible.

Collectively, all this raises the problem that Socios likes to use the language of share trading when selling tokens but doesn’t provide basic information necessary to all people to buy tokens on an informed basis.

For example, in the app, Socios displays the total number of Arsenal tokens as 40 million, but that is not how many tokens are available to buy and sell. According to rocketfan.com the current circulating supply of Arsenal tokens is little over 10 per cent of the supply at 4.6 million. So, when considering the value of a purchase, you need to be aware that it could, or will be diluted nearly ten-fold.

When, you ask? We don’t know, because as mentioned Socios aren’t committed to a specific schedule. Given the history of release speed for most clubs standing between 10 to 20 per cent in the first 12 months, most clubs will be unlikely to have released all their tokens by the time their three-year contract with Socios expires.

Presumably, they will then re-sign and continue to release tokens over the course of the extension. But with no commitment to release an agreed schedule, allowing Socios or the clubs to choose when to sell tokens positions the clubs not as endorsers of the scheme, but as whales competing to get the best price at the expense of their fans because, in effect, the club stands as the largest token holders at any point.

By simple supply and demand, Socios and your club - who are recommending this scheme to you - could crash the value of your holding to maximise their own value from the scheme.

In my opinion, the correct way to do this would be to remove the power of releasing tokens from Socios and the club and auto-release an identical number of tokens each month over an announced period. If they were to do this, it would bring transparency to the scheme, creating informed customers and removing the ability of clubs to participate in the market. I wonder why they haven’t?

Look at it this way, there is a reason that the majority of football clubs delisted from the Stock Exchange. They found it extremely difficult to perform well in financial markets. In this financial market of fan tokens, they have complete control.

If City, or any club for that matter, really has made a mint from Socios fan tokens, I suspect it may have been through dumping tokens on fans and that, given the slow down, was a one season wonder.

Being this in mind, couple with Liverpool’s limp NFT sales (lets not get into that catastrophe), those working in the finance, commercial or marketing departments of a sports organisations should be very cautious of assuming crypto products will bring substantial, reoccurring income in the medium term or that fans will continue to engage just because of the brand. In fact, I believe more fans will likely turn against clubs for embarking on such short-term projects at the expense of supporters, especially with already rising ticket prices and club merchandise, not to mention the current global economic downturn.

Deception

Socios has spent years lying to customers by saying that its tokens “never expire” and I want to go into more detail just how the company and its club partners misled - and continue to mislead - buyers. In the long run, this will prove to be catastrophic for the opportunities that Web3 presents to the sports industry.

Socios predominantly market their tokens through partnerships with clubs and national associations. But what happens when the contracts do eventually come to an end? Will you still be able to vote? Will Socios still be able to use the club’s branding? What will happen to the token’s value?

For a long time Socio's’ marketing material has been perfectly clear: “they NEVER expire.”

If you looked at the website, you’d see that “fan tokens are for life,” “fan tokens are forever,” and are “yours to keep forever.”

In the “What are fan tokens?” FAQ description they “are digital assets that never expire.” The message was continually shot-gunned home: “fan tokens never expire,” and “are yours to keep forever”.

Meanwhile, if you visited the AC Milan club-specific launch page on the Socios site or the other partner pages, you’d read that, you guessed it, the messaging is consistent… “fan tokens never expire.”

So, it couldn’t be clear, could it. The marketing is reminiscent of that used by the Dogs Trust. The claim and variations of it were all over their site and marketing. No one could be in any doubt, fan tokens aren’t just for Christmas. You buy one, it’s yours forever. You can buy with confidence.

Well, guess what? That’s right, it was BS, because at the same time they marketed the tokens this ways, Socios' Terms and Conditions told a very different story. “7.8.9 The fan token may lose its voting rights… and may lose value upon the expiration of the partner’s agreement.”

And how about 7.8.4 “The holder of a fan token may continue to participate in the relevant Partner’s Polls for as long as… the Partner remains part of the Socios platform.”

“No guarantee is given regarding… the existence of the secondary market for said tokens.”

Socios’ markets: “It never expires.”

Socios’ lawyers: It expires if the club gets rid of us or don’t renew us. You won’t be able to vote. Your token may become worthless. And no one will buy it.

Now, I don’t know what you would call this - deception? Lying? Marketing? But, to me, it looks very much like while Socios were loudly claiming one thing, its Terms and Conditions were quietly whispering the truth, which was very different. But how many people actually read that?

Socios’ lawyers knew the tokens weren’t forever, but did Socios customers? I struggle to understand how anyone not profiting from saying they were “forever” could believe that the marketing and legal statements were compatible.

When questioned, Socios responded that: “Fan tokens don’t expire - whatever happens, the fan who has purchased them will continue to own those collectibles.”

In much the same way that, if a software error bricked your iPhone, you’d still have an iPhone, but it is rendered useless.

I’m not a lawyer, but I wondered about the wisdom of pivoting to saying, in effect, that the product you have always said isn’t an investment (they insist it is a “utility token”) isn’t a con because, once the utility vanishes, it becomes a collectible investment.

And, of course, if they really believed they hadn’t been misleading people, how come once they were challenged on this, they went on a clean-up job? If they believed it - that it wasn’t misleading - how come they’ve since charged the FAQs?

And how comes on the homepage, fan tokens are now “yours to keep” but no longer “yours to keep forever".”

But, like a clean-up crew who let a witness escape, they forgot the US version of the site which retains the “forever” text.

And have a look at 2.2 in the new Terms and Conditions which came into effect at the beginning of April. That’s right, while Socios continue to claim in the marketing that the tokens “never expire” they now admit plainly (by legal standard) that they do.

Those tokens you bought? You now understand the deal with your clubs “will eventually expire or be terminated.” Again, for those clubs who have partnered with Socios, you really haven’t looked into the best interest of your fans.

This isn’t an isolated piece of dubious marketing. In 2021, Socios falsely claimed to Sifted that they “have never and would never encourage token trading.” They also repeated a modified version of this claim to The Athletic a fortnight ago. It’s just not true.

The problem with Socios then: even if they don’t oppose to crypto or fan tokens or selling influence over clubs or exposing fans to a risky trading game, this is still a business that, it seems to me, routinely engages in deceptive and misleading marketing of their product.



Conclusion

The moment a club ends its contract, the tokens become worthless, and if that happened with a big club, it would be curtains for the business.

As I understand it, Socios sign standard three-year contracts with clubs. Some teams are or will soon be entering the last year. One of these is Juventus. Imagine what would happen if they declined to continue with Socios?

So come time for renewal, they and every other marquee club will have Socios over a barrel. Socios could end up paying ever larger sums to keep clubs in a programme that has not run out of steam and will soon have to face the flaw at the heart of its business: its business model is conning fans into joining a trading game by monetising fan engagement. But this is not true fan engagement, this is a short-term money grab.

Traders are quickly losing interest and fans can see that the risk to reward calculation doesn’t make sense just to vote on which player’s washbag you want to see inside of.

If there was ever a use of this tech, it would be as a rewards tool not a profit centre - a way to connect, engage and reward fans globally, not a way to scalp them.

But that is just not how Socios is built. It has promised partners a massive stream of cash, fan control and appreciating investment that is doesn’t deliver.

So what reason is there to believe it can continue to grow and succeed? In my opinion, absence some huge production development, we will see the end of Socios in European football sooner rather than later. And good riddance.

Things don’t look too bright for Socios. So far this calendar year, the platform hasn’t made any big club signings or launched any huge FTOs, with the Crystal Palace token launch in February earning the club in the region of just £64,000, having sold just 32.1 per cent.

Additionally, from late last year, Chiliz (the Socios crypto) is down at about half its peak. The signing of Messi as brand ambassador caused a brief spike, which returned below what it had been before he signed within a week.

Socios, in my opinion, does not live up to the standards that fans have a right to expect and that clubs should be demanding of a commercial partner, in order to provide real value for their fans.

If there is a genuine use to fan tokens, it’s only then, when Socios have left the stage, that we will see it.

Unfortunately, it is these quick money grabs from commercial partners and our clubs that are going to ruin genuine opportunities in transition as fans will - and are already doing so - losing trust due to the lack of transparency.

In addition to Socios, there are too many people who have become so called ‘experts’ in this space because they have watched a few videos on YouTube. They simply want your cash in their pocket, and then they will disappear in 12 months’ time leaving your head in the sand.

There are very few people who have the knowledge and capabilities to deliver a long-term and fruitful strategy. The real experts are the ones posting on LinkedIn, but working quietly behind the scenes. They know that there is still lots of learn despite operating in Web3 for more than a decade.

If you work at a professional club, league or governing body, do you own research. Speak to people. Spend the next six to twelve months educating yourself - reading, attending networking events and connecting with others in the industry. Don’t be a sheep and follow the big clubs, just because they are doing it. This is not a phase; this is the future of sport and every other industry for that matter.