He Marketed Beanie Babies. He Doesn’t Get NFTs.

Two Q&As about asset bubbles, NFTs, and Phil Mickelson’s crypto brain

Before we begin, I want to be very clear that this newsletter is decidedly low stakes. This post and these interviews were all conducted before the events of last week and that’s why I held this newsletter for a few days. Like everyone, I’ve been watching the news from Ukraine with a feeling of powerless outrage. Geopolitics is largely outside my professional wheelhouse and I figured the best thing to do in times like this is to step aside and not attempt to compete for attention with those bringing vital news and analysis from the region. I’ve been trying to read and understand more about the conflict and its long history, too. When things are intense, sometimes widening the aperture helps ease a bit of the anxiety for me. At the bare minimum, it is better than tweeting.

Today’s subscriber-only post is not about the news of the day, but maybe it is a welcome diversion. It features two short Q&As I did that are sort-of-but-not-really about NFTs. They’re more about hype and the way that it makes human beings do strange things. I am, of course, talking about the late-’90s Beanie Babies craze and golfer Phil Mickelson’s NFT-adjacent viral comments about the PGA Tour and his subsequent career meltdown. Rather than explain, I’ll just jump right in.

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In January, this tweet kept popping up on my timeline:

This was a real thing in the late 1990s. People were dead serious about this! Beanie baby value would only ever go up! pic.twitter.com/vrSHiLeCjx

— Alan Cole (@AlanMCole) January 17, 2022

It was obviously meant as a comment on the current hype around NFTs, as seen through the history of other wildly popular collectibles. NFT–Beanie Babies comparisons are legion these days, with evangelists arguing that NFTs are not another asset bubble despite looking quite a bit like previous asset bubbles. I had a nice little chuckle at this one and then, as I perused the quote retweets, found this interesting comment from Gabriel Dorosz:

I worked on early versions of the Ty website back in the 90s. It was weird for a number of reasons, not least bc we had to keep the new Beanie Baby releases locked in tbe company safe after unknown co-workers repeatedly stole them. Early ebay took off in large part for BB resale. https://t.co/O0trHsrBXp

— Gabriel Dorosz (@gabedorosz) January 17, 2022

Whether there was anything to glean about NFTs and asset bubbles or not, I was curious to get a sense of what it was like helping build the Beanie Babies website during the peak of the Beanie boom. So I called Gabriel—who now works as an advertising strategist for The New York Times—to hear more.

Charlie Warzel: How’d you end up at Ty and in Beanie Baby land during boom times?

Gabriel Dorosz: My first job out of college was at a company called Purple Monkey Studios, based outside of Chicago. They were one of several early-stage “interactive” companies. This was still during the early days of the commercial web, when everything was wonkier and harder to do and you called in experts for any kind of interactive website or digital design. In 1997 or 1998, we took on Ty, the parent company of Beanie Babies, as a client.

Warzel: So, like, at the peak of the Beanie Baby boom?

Dorosz: My memory is hazy here, so I actually called up some former colleagues to check. What we remember is that what had started to happen was this emerging secondary market for Beanie Babies was forming on eBay. Prior to the Beanie Baby craze, you’d really only heard about eBay as people quietly bid on random ephemera, like a Karate Kid lunch box or something. But Beanie Babies had set eBay on fire and was one of the first items to change the understanding of eBay as a secondary marketplace for goods and services. Ty Warner [the Beanie Babies creator and sole shareholder of Ty, the company] himself had realized, if he could carve out a piece of that market, there was money to be had—since it was happening without him.

Warzel: So you guys were basically supposed to try to build a platform that would help them get a cut of the resale of Beanie Babies?

Dorosz: I think what we—really, what they—ended up doing was creating their own online community and engaging all the super-collectors in a Ty-owned online space. I remember there was a whole wave before social networks of brands building their own communities. And companies like ours built them for you. Like Bally Total Fitness had this online portal and pre–social network called MyBallyTotalFitness. It was kind of like an intranet but the idea, at least with Ty, was to own as much of the commerce of that secondary market [as possible].

Warzel: So what was it like working with them as their product was, rather weirdly, at the center of American culture?

Dorosz: We all remember the founder showing up to our offices in a huge bulletproof limo. He was an interesting character, for sure. I think he’s having some serious tax issues now, from what I’ve seen. [In 2014, Warner was sentenced to probation and given a $53 million fine for tax evasion.] I remember going to their office in Oak Brook, Illinois, and meeting with the creative director, who we later found out was his younger sister. The Ty website and the company’s identity was very sparkly and rainbowy and My Little Pony–ish. They were very strict about us working in that aesthetic.

The thing I remember most was that the company would give us the new Beanie releases a few weeks ahead of time—a physical box of new Beanie Babies. Our job was to take nice photos of them and put them on the website with the store release dates.

[Forced scarcity was one of the reasons Beanie Babies were so popular. According to reports, individual stores were limited to 36 toys in each new style. Then the styles were promptly retired.]

We were working in a small office of only 10 or 15 people, but still, some of the Beanie Babies started disappearing from our boxes. It got to the point where we had to lock them in the company safe. Eventually, we found the stolen Beanie Babies from our office on eBay. That was mind-blowing to me at the time—that people would risk their job to steal new Beanie Babies. It was also an indication of, Wow, this is a runaway phenomenon.

Warzel: That is wild. Do you think that the people making Beanie Babies were surprised by their popularity?

Dorosz: I think everyone, including the Ty people, were surprised at the level of passion that organically grew around these things. Even now, it’s difficult to understand. Like, look at those things! Why did it happen that way? If you go back and look at their story, the time from their first prototype to their massive sales is pretty short. From the very beginning, they tapped into something. And the energy around—and the desire and the passion for—the product was really rare.

Warzel: Do you think that Beanie Babies really changed the direction of eBay?

Dorosz: In my memory it did. I was a person who was young and worked on the internet. And I remember that I thought of eBay as almost like a thrift store. A gamified thrift store. But watching people steal Beanie Babies and sell them there—in that moment it was clear that eBay was a full-on marketplace. People could make a lot of money there—not just as a hobbyist selling collectibles. You could, in theory, build a business reselling things on eBay.

Warzel: I’m curious, having spent time in the eye of an asset-bubble storm and having worked your whole career in advertising, are there lessons you’ve taken from this Beanie Babies experiment?

Dorosz: Personally, I think it’s good to be skeptical, and also realize you’re not always going to relate to the energy that people bring to a new phenomenon. I’ve spent a bulk of my career in what you’d call the bleeding edge of new technologies. It’s been my job to understand them and to communicate them to people. When you age, you begin to naturally question your ability to understand new technologies and experiences. They’re often designed for younger people, but also you lose a bit of that connection to popular culture. For me, NFTs are one of the things where I just struggle to understand the popularity. The Beanie Babies comparison for me made things click. Because it feels similarly irrational. That doesn’t mean it’s not a real market and not something that loads of people aren’t deeply involved in. It just means that, to me and many others, [we] don’t really see the appeal and question the hype.

Warzel: Is that a weird place for you to be in? Like, I covered the ad industry back in the days where Web2 evangelism was everywhere and there were so many “big new things.”

Dorosz: That’s definitely an element of the version of advertising that I grew up in and progressed through. In the early days, it was Adobe Flash. In 2009, I was doing a lot of the brands need to be on Facebook thing. It was billed as the next evolution of the micro-site. You have VR/AR, which has been the hot thing for, like, five different cycles. There was a craze of getting branded shows on Netflix. Or the food-truck activation event with branded photo booths that people were pitching. The metaverse and NFTs seem to be very popular now as a conversation topic. Some of that is driven by the industry that wants to sell crypto and NFTs. But there’s also a cottage industry of innovation agencies that want to sell brands on activating these technologies, simply because that’s where the money is.

Warzel: Not really a question, but I just let out a long sigh.

Dorosz: It’s an industry of people evangelizing newness. The brands are always in a situation where they don’t want to be left behind. When there’s a big cultural change or an innovation occurs, on the brand side they must feel like they have to engage with it to some degree. What is this? What is the value to our business? It’s always difficult to see the future, of course. Some brands will experiment—like you would with anything—on a trial basis to see if it makes sense. But there’s a whole cottage industry of people who exist to say, “If you don’t do this, you’ll surely fall behind.” And sometimes that’s true. Things that seem obvious in retrospect, like social media, were fought tooth and nail by some execs. Sometimes you have a zeitgeist change and sometimes it’s a flash in the pan. I remember with Second Life there was a similar level of energy invested in that—not incomparable to the metaverse stuff we see now—but it mostly faded out fairly quickly.

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I can’t prove it, but I have a hunch that most Galaxy Brain readers aren’t golf fans. Still, you may have seen last week’s news about Phil Mickelson, one of the sport’s biggest earners and most popular personalities. Mickelson went viral last week when he admitted to a reporter that he was willing to overlook the Saudi Arabian government’s human-rights violations and become deeply involved with a Saudi-financed golf league. Here is just a snippet of his batshit comments to journalist Alan Shipnuck:

We know they killed [Washington Post reporter and U.S. resident Jamal] Khashoggi and have a horrible record on human rights. They execute people over there for being gay. Knowing all of this, why would I even consider it? Because this is a once-in-a-lifetime opportunity to reshape how the PGA Tour operates.

Normally, I wouldn’t bring golf drama into this newsletter … but one of the things the golfer wants to “reshape” is, uh, the ability to make money off of NFTs? From the interview:

A bigger deal is that the players don’t own the highlights of their own shots. Each of these moments potentially could be turned into an NFT and sold to fans or collectors … The Tour is sitting on multiple billions of dollars worth of NFTs … They are sitting on hundreds of millions of dollars worth of digital content we could be using for our social media feeds. The players need to own all of that.

I’m a casual golf fan, but I am not knowledgeable enough to say whether or not one of golf’s most famous names almost tried to tank the league that made him hundreds of millions of dollars in order to get in on the ground floor of a crypto play. So I reached out to D. J. Piehowski, who is part of No Laying Up, the popular golf podcast and company. Piehowski and his colleagues have been picking apart the intricacies of the Saudi-golf-league story for months. If you want to go more in-depth on this topic, go listen to this No Laying Up podcast. Or read on for D.J.’s take on the crypto subplot.

Charlie Warzel: One reason the Phil Mickelson saga is breaking my brain is that it seems to have a substantial crypto subplot. Among his many gripes, Phil is apparently furious that the PGA Tour doesn’t allow players to license their own media, and is looking at the NBA’s Top Shots NFT marketplace as an example of the money that’s being left on the table.

At the risk of being completely reductive, did CryptoBrain cause Phil Mickelson to get in bed with the Saudi government’s sports-washing golf league? Like, did one of golf’s biggest and most beloved names almost try to sabotage one of the sport’s governing bodies because people have been whispering in his ears about selling JPEGs on the blockchain?

D. J. Piehowski: Phil’s recent comments definitely seem to be at least a little bit crypto-fueled. He has complained at length about the PGA Tour not allowing players to retain their own media rights, and he told journalist Alan Shipnuck in his now-famous November rant about why he was contemplating joining the Saudi league that “the Tour is sitting on multiple billions of dollars worth of NFTs.”

However, I think it’s important to remember that this current batch of conversations around breakaway leagues has been going on with the top contemporary players in the game as far back as 2014, and you have to think Phil has been in these conversations for as long as they’ve been happening. The core “problem” being explored in these concepts is the fact that the superstars in the world of golf are underpaid (stay with me, because they are kind of correct). At the very least, the on-course earnings of the top golfers on the PGA Tour are extremely disproportionate to the amount of value and interest they bring to the tour.

In golf, unlike most other professional sports, there are no contracts or salaries; players simply go to tournaments, compete for the prize pool, and add it up at the end of the season. In theory, this is obviously an extremely “fair” way to distribute money—players eat what they kill, and at the end of the season, the best players are typically at the top of the money list. But for a player like Rory McIlroy or Jordan Spieth (or Phil), there is no adjustment or bonus for being one of the very few players that actually sell tickets and bring the eyeballs that drive the tour’s massive TV deal. Last season, for instance, Bryson DeChambeau—one of the most talked-about golfers on the planet—won a major on the way to earning $7.4 million on the golf course, while Corey Conners—a very talented yet relatively anonymous player—made $4 million without even winning a tournament. With the way superstar contracts have trended in other sports, it’s understandable where these players are coming from.

Because the tour is a member-run organization (it’s complicated, but the players “run” the tour, instead of team owners like you see in other sports) and because it’s responsible for treating Nos. 1 through 200 on the money list as equally as possible, it can’t just hand out cash indiscriminately to the players that it feels “deserve” it. This is where the breakaway leagues come in. They promise to trim the fat—fielding 48 players every week instead of 156—as well as offer bigger purses and guaranteed money. DeChambeau, for instance, appeared to be faced with the option to either work hard and hope to make his $7 million in another career season ... or he could take a guaranteed paycheck north of $135 million from the reported Saudi league.

The reason I lay all this out is to reiterate that this is not a new issue on tour, so it’s unlikely that Phil heard about NFTs and ran to the Saudi government to try to create leverage with the PGA Tour so he could sell them. The more likely scenario is that Phil has spent decades trying to change the tour toward his vision of what it should be, and the structure necessary for the tour to exist has prevented many of those things from happening. And if he’s trying to get his fellow players on board with a new tour, he’s likely grasping at whatever talking points he can get his hands on to poison the well on the PGA Tour. The NFT discussion just seems to be his latest grievance in a much larger problem.

Warzel: You and your No Laying Up colleagues have parsed the ins and outs of this at length on your podcast, and one of the things you’ve come back to again is that Mickelson is pulling lots of big numbers out of thin air. He said recently that “the Tour is sitting on multiple billions of dollars worth of NFTs,” which sounds … inflated? And even if he’s right (from a 10- or 20-year perspective), the kind of deal that other leagues (like the NBA) have only kicks a small percentage of the transaction fees (5 percent, I believe) back to be split evenly among every player in the league. I’m doing some back-of-the-envelope math, and since its inception, $600 million of NBA NFTs have been sold. If you take 5 percent of that and then divide it over about 450 players, you have roughly $66,666 per player. That sounds like … not a lot of money to want to mutiny over if you’re a professional athlete!

I guess what I’m asking is (lol): Is he making these numbers up? Do you think Mickelson has any idea how Top Shots work? Or how NFTs/Web3 projects work?

Piehowski: The thing you grasp about Mickelson from reading his quotes and listening to him is that he’s both incredibly smart and incredibly ... creative ... with some of the crusades on which he embarks. For instance, last year when he said that the PGA Tour only pays out 26 percent of its revenue to players, I have no doubt there’s an earnest way that he got to that number in his head. And if he sat you down and explained it to you, it would probably sound like it made perfect sense. But in reality, no one at the PGA Tour can understand his math, since the actual number is roughly 55 percent.

The NFT talk feels very similar. He clearly pulled those numbers from somewhere, but I certainly can’t explain the thinking that went into them. Maybe quoting the tour’s digital assets at $20 billion (!!!!) was an off-the-cuff misspeak, but it seems like you would need about a dozen more Tiger Woodses to get to that number.

Warzel: There’s a part of this controversy that is relevant to the way that the hyper-financialization of the internet and the Web3 stuff is coming for almost every industry. While Mickelson might be grossly exaggerating the dollars at stake here, it does seem like most sports are going to have a reckoning over player media rights in an extremely online era. Do you think this is a legit gripe for players to have—especially for golf, which is (to the point of it becoming a cliché) trying to expand its reach and grow?

Piehowski: There are certainly much smarter people than me that can venture a guess on the Web3 side of things, but on a practical level, it is going to be interesting to watch how the tour evolves the digital side of these rights while maintaining the bread and butter of its business—TV-rights fees. For all its differences, the one thing golf does have in common with other sports is the need to bundle players’ collective media rights and sell them to TV networks for exorbitant amounts of money (the new PGA Tour TV contract is reportedly around $300 million more per year than its old deal). While that is already funding massive purse increases on tour, it also has restricted players from doing almost anything media-wise outside of PGA Tour competition.

This was another one of Phil’s grievances: Each time he did The Match series—the exhibitions with Tiger Woods, Peyton Manning, Tom Brady, and others—the events were forced to pay seven-figure releases to the PGA Tour in order to use their members on TV. Phil would argue that the players are independent contractors and should be able to do what they please outside of PGA Tour events, but my guess is the tour would argue the last few weeks are pretty good proof of exactly why those guidelines exist. No one is forcing any independent contractor to be a PGA Tour member, but in order to take advantage of all the things the tour offers outside of tournament purses (playoff bonuses, lucrative pension programs, etc.), it makes sense that the tour needs to have measures in place to protect its rights holders and itself from other leagues poaching its players.

It seems like there are commonsense things the tour can continue to embrace in order to #GrowTheGame and continue to appease players—it makes highlights available for players to share on their social channels and seems to embrace things like Bryson’s YouTube channel. The tour has begun to set up an NFT marketplace similar to what you described above, but I can certainly count on one hand the amount of people I’ve heard discussing it. Take that for what it’s worth, I suppose.