RSDancey on the Web
I’ve zoomed in from cosmic strings, to natural disasters, to the presidential election in the US in 2008, to something wholly trivial, and yet, for me, of continuing, consuming interest:  The Hobby Gaming Industry.
If you’re not interested in dice, miniatures, slaying dragons, exploring strange new worlds, or the companies who make the tools to do those things, check back in tomorrow when I’m gonna review my new phone (especially in light of Apple’s announcement today).
For those of you who are still with me, here we go......over the cliff!
First, I'll define "a hobby game" as "a game where you spend substantial
time preparing to play the game and a significant portion of the value
proposition of the game comes from the out-of-game experience."
Second, I'll define "a hobby game store" as a store that generates at least
a third of its gross revenue from the sale of hobby game products or
products designed to support hobby games.
I entered the hobby gaming market as a 6th grader at Westhill Elementary in Bothell.  I found an article in Dynamite magazine that had a picture of a map set up with miniature figures and about a half page description of people playing Dungeons & Dragons.  Without rules, a firm understanding of how you made a “game” out of that stuff, or much else to go on, something deep in my soul connected with the idea of a roleplaying game, and I was hooked.
Fast forward to October 1998.  Peter Adkison tapped me to take over as the business manager for roleplaying games at Wizards of the Coast, primarily responsible for fixing Dungeons & Dragons and releasing 3rd Edition.  In the intervening years, I was fortunate enough to co-create Legend of the Five Rings, and Five Rings Publishing Group, and while at Wizards of the Coast I worked on a dozen trading card games and a half dozen roleplaying games.
I mention all this by way of defining my bona fides for the following commentary.
When we created L5R in 1995, the conventional wisdom in the gaming industry was that there were 5,000 hobby gaming stores in the North American market.  That conventional wisdom was wrong, but we didn’t really figure that out until sometime in 2000.  In fact, there were between 2,000 and 3,000 hobby gaming stores in the late 1990s.
In 2000, Pokémon swept the hobby gaming market, and there was a short-lived increase in stores as people rushed to cash in on the Pokémon phenomenon.  From 2001 to the present, there has been a steady decline in the number of retailers.  Today, the best estimate that Luke & I can arrive at is that there are between 1,000 and 1,500 hobby game stores left.
Those stores can be roughly divided into 3 categories:  “A” stores, which are the best of the best, “B” stores which are average stores, and “C” stores, which are either failing or will fail within one year.  Depending on the year, and the business cycle, the ratios of those stores range from 20:60:20 to 30:40:30, and all points in between.
In 1992, the hobby gaming market was primarily a business of book publishing.  The market was driven by roleplaying games, and novels based on roleplaying games, and printed materials that supported roleplaying games.  About two-thirds of the revenue in the market came from these roleplaying and roleplaying related products.  The total size of that market was approximately $100 million at retail.  80% of that revenue was generated through hobby game stores.
In 2007, the market consists of three major categories, in order of volume & revenue: trading card games, miniatures games, and roleplaying games.  In addition, the market now also has smaller, but still significant categories like “hobby” board & card games.    The total size of the market is approximately $1 billion at retail.  30% of that revenue is generated through hobby game stores.  That translates to a 300% increase in revenue in just over 15 years.  At the same time, the number of stores has declined by about half.  So the average retail store is now generating 600% more revenue in 2007 than it was in 1992.
And yet.... the retail tier is facing extinction.  Their overhead costs have increased faster than their gross margins in absolute terms.  Their inventory costs have skyrocketed.    They face competition from e-commerce retailers who undercut their pricing power and erode their margins.  The products have become vastly more complex, and the burden for product support has fallen on their shoulders, with impacts on staff costs, rent, merchandising, and the scarcest resource of all:  time.
As a result, more stores continue to fail, further reducing the footprint of support available to the publishers.  The largest publishers have escape routes into the mass market, into the book trade, into Europe, and elsewhere.  The mid-tier publishers however have few options, and are being crippled by this slow dieoff.  Small, niche publishers, who rely on catching lightning in a bottle to have a chance of success, are even worse off.
And, preamble complete, we come to Gaming Industry Predictions.
1)  In the land of the blind, the one-eye’d man is king.  There are 6 one-eye’d men in gaming:  Wizards of the Coast, Upper Deck, Games Workshop, Privateer Press, WizKids, and White Wolf.  These six companies have the ability to move the market through innovation.  All six are actively exploring all their retailing options.  All six have the cashflow to invest in effective research & development, and are seeking products that can explosively grow the market.  All six are one-eye’d because they suffer from tragic flaws which limit their prospects for success.
A)  By the end of 2007, Wizards of the Coast will have reduced its game output to Dungeons & Dragons and a handful of other RPG products of little consequence, Magic: The Gathering, and the Star Wars Starship Battles game.  All other games will either already be terminated, or the final releases in their lines will be in production or on sale.  There will be nothing in the hopper either.  WotC will be preparing to attempt to ride a small number of horses extra hard to meet the demands of corporate parent Hasbro for the next few years.
B)  Upper Deck will make a move into roleplaying games in 2007, but will be crippled in that attempt by the lack of a viable platform for the game, in both terms of a license, or an internally developed property.    By mid-year, the World of Warcraft collectible card game will have become the top driver of revenue and profits at the company, but by the end of the year, its success will have faded rapidly because its appeal to game players will never match the volume of sales to players of the on-line game seeking special items -- which will be increasingly available in other venues besides booster packs of the card game leading to a rapid collapse in its sales.  By the 4th quarter, Upper Deck will be in the midst of a massive layoff as they shed talent hired in the previous 18 months.  Vs. System, the residual Yu-Gi-Oh! business, and the other anime themed games Upper Deck is or will produce will not generate nearly enough profit to sustain its gaming cost structure, and its executive management will cut deeply, and extensively.  Most of those who lose their jobs will leave the hobby gaming industry, never to return.
C)  Before the end of 2007, Games Workshop will announce it is either being bought, is going private, or is merging with some other entertainment venture to form a new entity.  On November 27th, Games Workshop was notified that Fidelity International had liquidated its position in Games Workshop’s stock, selling approximately 2.4 million shares, or 7.83% of the company.  On or about that date, 6 million shares, or more than a third of the company, changed hands.  As of yet, we are unclear who bought and sold those equities, but we believe that the action, which has no similarity to any recent move in Games Workshop’s stock, heralds a major change at the company.  On January 5th, Games Workshop made a profit warning announcement, indicating that sales in the run up to Christmas had not met expectations, and that the company was revising its earnings estimates downward.   Managements failures to address their sliding business model, and increasing pressure from large investors will force major changes at GW by year’s end.
D)   Privateer Press is about to experience the agony & the ecstasy of the hockey stick curve.  They are the only one-eye’d man in hobby gaming that is going to generate sales growth from the acquisition of new players who will be buying and using their products as intended: as gaming components.  Replicating the growth seen by TSR and WotC will be hard, but possible.  Privateer is eating into Games Workshop’s US sales, and its deals in Europe are providing real competition on the Continent as well.  They are delivering a compelling alternative to GW’s aging and internally compromised brands to a customer base that feels abused and neglected.  By the end of the year, Privateer Press’ successes will make it a likely takeover target, as Matt Wilson and his team try to navigate the incredibly challenging shift from startup to successful sustained growth company while remaining independent.
E)  WizKids will make a graceful, if forced, departure from the hobby gaming market, seeking to mainstream their offerings, and migrate the bulk of their sales into the mass market channel.  They will fight the good fight for most of 2007, but by GenCon Indy they’ll have had an internal change of heart regarding their current strong focus on the hobby channel, and will be re-aligning themselves as a primarily mass-driven producer which will be reflected in their actions in the 4th quarter.  Signs of this shift will be the cancellation of most of WizKid’s lines that can’t earn sales at mass, like Horror Clix, and the cancellation of retailer support programs.  They’ll still have core market sales, but those sales will be incidental to their revised plans, not central to them.
F)  White Wolf was once the shining hope of the industry.  When they released Vampire: The Masquerade in 1991, they did the impossible:  They got a whole new group of people to enter the roleplaying hobby en masse without cannibalizing any pre-existing business, and that group included a roughly equal number of men and women -- addressing in one swoop a critical failure of all previous entrants in the category.  The 2000s have not been kind of White Wolf, as it has delivered a revision to its core games that was not well received, and it has not been able to recapture its glory days as a leading RPG publisher.  Late in 2006, they merged with (read: were acquired by) the makers of EVE OnLine, a space-opera MMORPG.  As a result of this change, look for White Wolf to become ultimately focused on its MMORPG offering, and by the end of 2007, to have reduced its paper-based publishing business to a shell entity, providing reprints of its games to a dwindling number of buyers.  White Wolf has a chance to migrate their whole business into the electronic realm, and Mike Tinney and his team are smart enough to seize that opportunity wholeheartedly.
2)  2007 will be the year that the mass market titans, Mattel and Hasbro, come into direct competition in the hobby gaming space, but the conflicts will be light skirmishes not major battles.  Powerful forces in both companies are at work which will lead to a clash as Hasbro’s Boys Toys group under COO Brian Goldner tries to take and hold a strategic position in the market, while Mattel’s game group fires shell after shell at the market in the hope that one will strike gold.  It is very possible that Hasbro or Mattel will buy a hobby gaming company, likely a trading card game publisher, before the end of 2007 as a foot soldier in that war.  Neither company will be successful in their real goal;  to replicate the Pokemon/Yu-Gi-Oh! phenomenon in 2007.
3)  One of the top 5 distributors will go bankrupt by the end of 2007.  That failure will have a trickle-down effect, taking a mid-tier publisher or two with it, and seriously damaging several more.  Unlike previous years, the survivors will not attempt to buy it for its mailing list, or its inventory assets.  In the resulting liquidation, a massive wave of recent products will be remaindered via eBay, suppressing used game sales nationally for at least six months afterward.  I predict the collapse will occur between ORIGINS and GenCon.
4)  My Spider-Sense is tingling, and has been since late in 2006.  By GenCon SoCal the industry will be dealing with a rampant sense of doom, fed by the continuing erosion of retailers, the bad news from Upper Deck, and widespread late (or non) payment of freelance designers and artists caused by a cashflow crisis throughout the mid-tier of publishers.  For industry insiders, this will be a period similar to that of 1996.  The tumult, chaos and confusion will obscure the emergence of a new game platform, probably created by a new company from outside the industry, and possibly sold through a retail channel that only partially overlaps with the hobby gaming industry, which will create a whole new ecosystem in the hobby gaming space.  For those paying very careful attention, year’s end will present a ray of hope in an otherwise disastrous time - creating a way out of the trap of the collapsing retailer tier.
"The opening up of new markets and the organizational development ... illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one ... [The process] must be seen in its role in the perennial gale of creative destruction..."
Quote from "The Process of Creative Destruction" by Joseph A. Schumpeter, 1942
Tuesday, January 9, 2007
Predictions: 2007:  The Game Industry