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Profit versus Prophet


I seem to have an uncanny knack for accidentally predicting wrong things. As in, I make whimsical forecasts, and they turn true in problematic ways. For example, last month I wrote about a hypothetical "Diceless SciFi Miniatures set" being a bone of contention. At the time, I thought that was a fairly safe, untapped niche. Turns out that the nice folks from Tyrant Games have been producing "Wehrmacht", a (you guessed it) diceless miniatures game. They wrote me to ask if I really knew of anyone competing in their niche.

Oops. Peeking at "Wehrmacht", I was impressed. Perhaps I'd even read about it somewhere and it had stuck in the back of my head as a cool thing, so I used it as an example without thinking. But that's the sort of backwards prophecy I'm talking of-- writing one thing which later turns out to mean something else.

Case in point, in last week's RPGnet front page update, I wrote a teasing phrase about how this week, the world ends. Well, this week, West End Games announced it was firing all its employees and filing for bankrupcy.

Ironically, we have a batch of reviews of West End games products that just came in this week-- many of them quite glowing. But that's not enough to pay the bills.

Now, this prophecy ability is totally useless, since it only reveals itself in retrospect. But it does raise an interesting point, on whether there is anything one can predict in this industry.

I mean, one of the top 5 companies folds with little warning? Back at the GAMA Trade Show, Scott Palter was quite happy with WEG's progress and we'd talked about some advertising things. A few weeks later, he told me to check back later because things were in flux. Then, this news (broke by Pyramid, in its new online guise... you remember Pyramid, the cool magazine that switched from paper to electronic because this industry is so troublesome?) appeared and laid that issue to rest.

The industry is in general reeling. Distributors are not paying their bills, companies are folding, conventions are sources of controversy. Lousy business practices and short-term panic handling rein, and anyone with talent ends up moving out of the industry into computers or writing genre fiction for a heck of a lot more money than is paid here. All this leads people to one of two fundamental realizations:

  1. The industry is in a downturn and only the largest will survive.
  2. The industry is in a downturn and only small publishers will survive.

Yes, they're mutually exclusive. But people do seem to be bopping into one or the other camps. This is where being able to predict the future would be very, very handy. If you're a retailer or distributor, which way should you go? Focus on the 'big guns' to ride things out? Or cover the niche markets better to survive and profit? It's a million-dollar question (well, for most companies, perhaps a hundred-thousand-dollar question).

Many people have commented that the small publishers are the ones to bank on, simply because they can ride out down times. Most small publishing outfits are second jobs, so zero sales simply means hibernating until things turn up. There's little overhead, no real salaries to worry about, and (usually) no investors or stock holders pressing you for higher profits.

The downside is, though, that making no money in a business-hobby is just downright depressing. It's difficult enough running your own business and producing creator-owned works. When such items sit in your basement instead of reaching readers, it's heartbreaking. All the more so when you get good reviews, you get emails and letters asking for copies, and you get rave response at Conventions. The market is there, but reaching it is where the entire industry breaks down.

Distributors are reluctant to carry, well, anything. They have to put their money out up front, then hope they can move it. Retailers might order only 1 or 2 at a time, so distributors keep their orders small to minimize their own risks. After costs and overhead, most distributors are only making 1-3% on a book. So each copy of your $20 book they move only nets them forty cents. If they order a whopping 50 copies (a fairly typical small press order, these days), they've made a whole $20 off you. Hoo ha.

Now, yes, if they do this for 50 different small publishers, they've just barely started to make real money: $1000 each round of orders. From that, though, they have to pay for the time it took to place the order, bill things, etc. Most distributors don't bother with 'small fry', because they see only short-term profits. They miss the two important ways to make money: finding hits, and service.

Finding that "hit" game is a useful way to get good cash flow. It's obvious to most people that not ordering small press is a foolish, short-sighted decision. One success (Vampire: The Masquerade, say, or Magic: The Gathering) quickly brings great profit-- and if you don't play the market, you can't hit upon those success. And truth is, a good order system doesn't incur much trouble.

The other route is service-- retailers go with distributors who can get them what their customers want. Breaking even on a small press product is worth it if it means you're the "one stop shop" for a given retailer-- they'll order their hundreds of M:TG and TSR products from you also. If you can't get the special orders for Metagame or Fuzzy Heroes or whatever, though, they'll switch distributors-- not just for the small stuff, but for everything. So by failing to provide a variety to the retailers, distributors are not providing good service, and lose clients.

There are some who would say being conservative, sticking with the top five (or top ten, or whatever) companies is a better path to take. To which, of course, the answer is "West End". A top five company, and folded. If you're a distributor, how are you going to make up the revenue from selling Star Wars books? If you only carried the top ten, you don't have a history of providing different products to your retailers, so they're likely already getting other stuff elsewhere. You've closed off your market with them.

Worse, with the web and direct sales, a saavy retailer who only wants products from the top five companies can try to get them direct. The retailer gets an extra percent off the sale, the publisher gets a lot more from the sale, and the distributor is left out of the loop. And five companies is easy for a retailer to deal with-- you hardly need a distributor for that. You only need a distributor when you want many products in small quantities, not when you need a handful of items in large numbers.

Going direct is indeed the big fear of distributors. But if they fail to provide service (to their retailers and to their publishers), it's a natural course of events. In some ways, though, it's still a lose-lose experience. The publisher has to handle more of the workload. The distributor is cut out of the loop. And the retailer has to track more orders.

A well-functioning distribution system can drive the industry and keep profits flowing through all three tiers. A poor distribution system can throttle companies, alienate retailers, and result in lost sales all around. Now, there are no givens in this. Publishers take a chance when they pay the printer for a given run. Distributors take a smaller chance when they pay 40% for a book they think they can move. Retailers take a small chance when they try to provide varied stock for their customers to select from.

Good business is risk management. Right now, the industry is driven not by risk but by crisis-- by panic and reaction. Retailers, afraid of something akin to the CCG card glut of yesteryear, order only their proven top sellers, and don't draw in new customers. Distributors cut the lines they carry to focus just on their most profitable ones, not realizing they're reducing the overall market growth. And publishers cut back on their marketing because they can't move enough product to pay for it, so the word about new products doesn't get out.

I can't predict which companies will succeed and which won't, or whether a given product will go gold. But there are some things that don't require second sight. In the RPG industry, there's a glaring disfunction between the different tiers. It's short-sightedness. And it, more than any single product or company, is what is causing the RPG market slump. It's all our own fault, and we need to wake up.


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