Pudgy Penguins’ approach may be the answer to fixing NFTs’ revenue problems

Pudgy Penguins was once solely known for its 8,888 NFT collection. But ever since 24-year-old Luca Netz bought the project for $2.5 million and took over as CEO in April 2022, it has evolved into an “IP and brand development company.” For the organization, that has meant a growing universe of digital properties and even a jaunt into the physical realm.

Pudgy Penguins’ digital collectibles have generated over $400 million in transaction volume since they were released. That early success in the NFT market has now been parlayed into the creation of an open-world, digital player experience called Pudgy World, which integrates blockchain technology from Ethereum and zkSync Era, as well as an entire toy line, Pudgy Toys.

Earlier this week, Pudgy Toys became available in over 2,000 Walmart stores across the U.S., opening the door to growth avenues outside the blockchain. The company is also launching its toys in Smyths, one of the biggest toy store chains in the United Kingdom, in a bid to augment its toy sales from Five Below, Amazon, Hot Topic and other retailers.

The toy-focused expansion is Netz’s bet that NFTs should have a broader presence, one that’s not limited to the digital world. The effort ultimately stems from solving a couple problems that the industry is facing, he says. “If you’ve seen what has taken NFT projects to zero, [it] has been this Achilles Heel of wanting to drive revenue and having no other [option] than to make more NFTs, which [comes at] the expense of the greater community and project,” he explains.

Classic supply-and-demand dynamics are at play here. Akin to a company issuing more shares, minting more NFTs of a particular set can cause the individual value of those assets to fall. Simply creating more NFTs doesn’t necessarily mean that demand will rise commensurately for the entire set. Sometimes dilution is just dilution.

Selling software makes for a profitable business model because it’s cheap to distribute, which yields high margins. NFT mints have similar economics. Selling toys and other physical goods, on the other hand, requires a different economic model. Netz compared the company’s profits on its Walmart toy push to what people once made from minting, or creating, new NFT collections: “What it does is it covers my burn. It gives me a model that if I continue to scale, I can grow and forecast and project.”

Pudgy Penguins expects toy sales of about $10 million between May and the end of the year, Netz said on TechCrunch’s Chain Reaction podcast recently. After accounting for gross margins, partnerships and licensing fees, the company will make about $1.5 million to $2 million on that total, he added.

For a small company, that’s real profit that can be reinvested into the business.

While Netz doesn’t expect the toys to bring in hundreds of millions of dollars in the next few years, he does see it as a forecastable, projectable revenue stream — something that’s not common in the NFT world.

The million-dollar question he’s trying to answer with this project is: How do you take this cute little character and put it into the hearts and minds of millions of people? But that in turn gives rise to a billion-dollar question: How do you then take the folks who bought a cute toy and turn them into digital consumers of the Pudgy Penguin brand, and perhaps even active users on the blockchain?

He thinks the answer starts with creating awareness: “Something that’s simple and [seemingly] menial as a toy line can actually create the roadmap and the growth pattern that ultimately leads these types of products to success.”

“Digital collectibles are still taboo; they’re still intimidating,” he adds. So, Pudgy Penguins wants to bridge the gap and get people familiar with the brand without making it only accessible to web3-native people or requiring users to understand the blockchain technology. This is something that we’ve seen web3 gaming developers do to reach mainstream audiences as well.

“We asked ourselves: We’re bringing web3 IP to the real world, but how do we actually bring the technology in a form where you can just reach out to a shelf and grab it?” Netz asked.

The answer came in the form of a “birth certificate” (a QR code) that accompanies every Pudgy Penguin toy that people can scan and redeem on the Pudgy World. Creative and efficient, we’d say.

TechCrunch’s take

Several TechCrunch staffers recently dove into the Penguinverse by buying a plush toy (no corporate funds were used in this very serious research project), joining Pudgy World, and trying out its games and its “lobby” — a proto-social space that feels like a cross of vanilla World of Warcraft, a blank slate, Webkinz and Club Penguin.

You can clearly see the work underway to build a digital ecosystem that is predicated around an IP pillar. This is a tried-and-true strategy. Angry Birds managed to transcend from a mobile game to around a half-billion dollars’ worth of box office receipts, for example. Harry Potter went the opposite direction, moving from the written world to film to assorted merchandise, and recently, a smash-hit video game.

The world-building at Pudgy is still nascent, so we only see one major sticking point with this juncture: By moving into other markets crowded with large, prominent brands, the Pudgy team is not only working on its web3 chops and cred, but also on the hearts and minds of regular folks far outside its home ground. Harry Potter and Angry Birds, for example, were far more popular and had much stronger brands when they jumped formats. Now we get to see the Pudgy team try to do it earlier, and from a very different starting point.

Netz also shared that the target demographic is 18- to 26-year-olds, which we think could be a difficult age group to reach, even if that’s the original NFT collector demographic (we’d be happy to have the company prove us wrong, mind). Pudgy Penguins and its online world seems more appealing to younger groups, comparable to Webkinz or Club Penguin, and given how cute the penguins are, kids would like this a lot.

And, younger groups may be more open to adopting this technology with open arms. Whether that’s because they don’t care or because they find it cool, younger people are often more open to technological changes and advances than older generations.

That said, penguins are adorable, and who didn’t gain some weight during COVID?

This story was inspired by an episode of TechCrunch’s podcast Chain Reaction. Subscribe to Chain Reaction on Apple Podcasts, Spotify or your favorite pod platform to hear more stories and tips from the entrepreneurs building today’s most innovative companies.

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