Franchising in the Metaverse

Last year, we published an article setting out our top tips for brands looking to explore the brave new world of non-fungible tokens. The article focused on the minting of NFTs which are key to unlocking many parts of the metaverse, but there are many other concepts to consider when looking at opportunities for consumer-facing brands in the metaverse.

Firstly, brands will need to get to grips with the concept of the metaverse to understand the opportunities it offers. At its simplest, the metaverse is a digital ecosystem which allows users to interact with others in a 3D virtual environment. Unlike the current iteration of the internet, the metaverse gives an opportunity to deliver products and services virtually in exchange for alternative currency, such as NFTs or cryptocurrency. Secondly, brands will need to consider carefully how this new channel intersects with their existing franchise models.

1. What are the opportunities? 

In 2022, boutique fitness brand TRIB3, announced its partnership with OliveX, a fitness metaverse company, whereby the partnership will offer TRIB3 classes and workouts in its virtual gym and allow users to enter into virtual challenges. TRIB3 operates a franchise model in the UK, Spain and Finland, but its move into the virtual world allows for far greater expansion through the ability to directly engage with greater numbers of consumers across the globe. A move that continues a trend that really started during the Covid-19 pandemic, as fitness brands had to move online to stay engaged with customers.

Some fashion retail brands have developed software in the metaverse which allows consumers to try on clothes and accessories remotely to improve the customer experience. We have also seen food and beverage brands make plans to offer consumers the choice to purchase the products in the virtual world, which would then be delivered in the real world. For example, McDonald's filed a patent in the U.S. in 2022 to cover the provision of new metaverse services of "operating a virtual restaurant featuring home delivery".

Additionally, certain brands have created NFTs featuring their branded products and are interacting with customers by allowing them to obtain reward points as they trade the NFTs, which can be redeemed for in-store experiences. The likes of Fortnite have hosted in-game concerts with A-List acts and this environment provides opportunities for brands to promote and sell their products and services, as they might at a real world concert.

In a franchising context, brands will need to consider carefully how their franchisees can participate in these types of activities. In the food and beverage example, a franchisee store close to the customer could fulfil the order which was taken in the metaverse, but this raises a number of questions:

• Which entity will make the sale to the virtual customer?
• Who controls the brand experience and pursues opportunities in the metaverse?
• If it’s the franchisor, do they dictate the sales price and take receipt of payment? In which case this type of sale is different from a "typical" in-store sale in most franchise networks. If the franchisor is controlling the brand experience, are franchisees contributing to the R&D and ongoing costs?
• How does a franchisor decide which franchisee gets to fulfil the order, in densely populated areas with multiple franchised sites and no contractual exclusivity?
• Does this type of activity fall within existing marketing budgets?

In addition to different product offerings, the metaverse offers further opportunity for collaboration and information sharing between franchisors and franchisees. Training sessions may be delivered online, which could be particularly useful for international networks and help eliminate support costs. Franchisors may also use the metaverse to deliver networking events for its franchisees or to entice others to join the network by hosting virtual conferences.

Lastly, the metaverse allows for even more advertising space. Where franchisors have traditionally charged an advertising levy, the brands may wish to specify what proportions of the fee will be spent on physical advertising as opposed to within the metaverse. This is particularly the case where franchisors want to keep control of advertising for consistency across the network, and some franchisees will want to know that brands are forward thinking to opportunities in the future before signing up to the network.

The opportunities in the metaverse are unlimited, but brands will need to act fast and with a creative mind if they want to be considered a front runner.

2. How will the franchisors protect their brand?

We have already seen a wealth of franchised brands make applications to register trade marks for the brands in the digital space specification. In 2022, McDonald's registered 10 trade marks for virtual goods and we have seen many brands follow suit. What is clear is that the race to register trade marks for virtual goods and services is happening quickly. It is true that in many jurisdictions, there is a race to be the first registrant of the rights to gain the protection from a registered trade mark. For those networks with larger operator franchisees or master franchisees, franchisors will want to ensure that they register the trade mark and not the franchisee – any attempt by a franchisee to acquire registered rights in the brand should be quickly shut down (and should be prohibited under a franchise agreement). Forward thinking franchisors may therefore wish to make applications to register trade marks for virtual goods and services in the key markets it operates or wishes to operate in the medium to long term.

It is also important for franchisors to understand how intellectual property rights are owned in the metaverse in order to monitor its brand portfolio. For example, transfer of the underlying property rights in an NFT are not transferred upon purchase of the NFT and will remain with the original rights holder – see more in our article here.

Whilst it is not yet clear whether policy makers and regulators will introduce new or updated legislation to deal with infringement cases in the metaverse, brands should ensure that they place themselves in a position so that they can monitor for infringing material. A franchisor should encourage compliance across the network and reap the benefits of having many pairs of eyes in franchisees who can report any third party infringement in the metaverse to the brand owner. 

3. How will the metaverse interact with the real world for franchise networks?

A well-functioning franchise network will see a franchisor continuously seeking to update and improve the system as new opportunities arise, working in consultation with franchisees. Whilst an operating manual provides an easy route for documenting operational updates, there is a blurred line between when an update actually requires a variation of the franchise agreement, and franchisors should use this as an opportunity to consider the interplay between the operating manual and the franchise agreement, and how changes can be made to both with minimal disruption in this rapidly changing digital environment.

We may see a distinction between franchisees operating in the real world and separate franchisees operating in the metaverse (but with due regard to competition/antitrust laws, which are generally opposed to barriers between markets, virtual or real), or franchisees being granted the rights to operate in both under one agreement. In either option, the grant of rights should be clearly defined under the franchise agreement to avoid inadvertently granting or excluding rights where it is not the intention. The traditional franchise model is likely to evolve further, with franchisees also performing the role of a service provider or agent in certain sales contexts.

Franchisors will also need to consider how it receives the royalty under the franchise agreement. For networks operating in the metaverse, careful consideration must be made in drafting how the royalty will be calculated, particularly where franchisees will receive revenue for the business in different currencies including digital currencies such as cryptocurrency.

It remains yet to be seen how franchising will intertwine with the metaverse. However, one thing which is certain is that brands who are aware of the risks and have strategies in place will put themselves in the best position to expand their network both effectively and sustainably.

If you require any further information in relation to this area, please do not hesitate to contact Gordon Drakes or Kate Williams.