Observations about changes in game distribution (and publishing)

At GenCon I attended several seminars about game publishing and game distribution.  I’m not intending to self publish games, though I will self-publish some books, but I am interested in distribution in connection with selecting a publisher for the new edition of Britannia.  A designer negotiating contracts needs to know how games are sold.  So I’m not an expert about this compared with an experienced publisher.  But I think I can tell you enough to make this interesting.  I knew most of this before I went to GenCon but still we can call it “what I learned about game distribution and publishing at GenCon”.

Typical distribution.  Tabletop hobby games are sold in three fundamentally different ways.  One is sales directly by the publisher to customers, either at conventions or online.  The second is online sales by retailers.  The third is sales in “brick-and-mortar” retail game stores where people walk in and buy games. 

Another but much less common method is sales through non-specialty retailers such as Barnes & Noble and Target.  Mass-market games such as Monopoly are sold through Toys “R” Us, Walmart, and other big retailers.  Hobby game publishers always want to “get in on the action” of mass-market distribution, and that’s why sales in Barnes & Noble and Target are exciting for those publishers.

I’ve listed the three major methods in reverse order of sales volume.  Most hobby games are still sold through game shops, or shops that list games is one of their major segments along with comics and other popular culture.

Only the first method, direct sales by the publisher, enables the publisher to receive 100% of the “manufacturer’s suggested retail price”, MSRP.  Sales to distributors are typically at 40% of MSRP, though some of the bigger manufacturers evidently get a little more.  The distributor then adds 10% of MSRP to the cost when they sell to the retailer.  So the retailer is typically getting a game at 50% of the MSRP and they have to decide how close to the MSRP they will sell it for.  The brick-and-mortar shops generally go to the full MSRP while the online retailers take a smaller percentage and hope to succeed through volume and through much lower fixed costs, because they’re not supporting a storefront.

The by-far largest hobby games distributor in the United States is Alliance.  A distributor in similar position in Britain is SDVM.   Why there is one distributor that’s the “800 pound gorilla” in these two countries I do not know.

The percentage of MSRP received by the publisher from sales through game shops and online retailers may be the same, about 40%.  The problem is that online retailers rely on volume and low fixed costs because they don’t have a shop to maintain.  As a result they can undersell the brick-and-mortar retailers.  This can drive the brick-and-mortar game shops out of the equation.  In the 21st century it’s very common for people to go into a shop, learn all they can about an item, and then go home and buy it online for (say)
five dollars less.  In the age of smart phones it’s not exceptional to see someone point a smart phone at a barcode and look at the online price right on the spot.  Though I rarely visit a game shop, I’ve seen this happen at Origins.

Cheap Internet sales tend to crowd out sales direct from the publisher.  In general, the publisher itself must charge MSRP online so that it won’t be seen as underselling retail shops.  Usually the publisher can give a discount at a convention - which doesn’t mean it will - because that’s expected, and the volume is low enough that it doesn’t bother the brick-and-mortar people. 

If the online sellers charge much less than MSRP, the publisher itself isn’t likely to sell much online.  That’s a big hit, because they get 40% (roughly) from the online seller’s sale, compared to 100% of their own online sale.

Price setting.  Some publishers, consequently, are trying to find ways to keep online retailers out of the equation so that the actual price to consumers is closer to the MSRP.  That helps brick-and-mortar retailers immensely, and the idea is that more games will be sold if the game is available in brick-and-mortar retailers.  I don’t know if anyone has any data about this, but clearly some percentage of games is purchased on impulse, someone sees it in a store and decides to buy it.  This is helped in hobby game stores by various demos and events that may go on to bring attention to certain games.  Your average game player is not someone who reads BoardgameGeek frequently, and the same may be true about the average game buyer.

One way to keep the price near MSRP is a fairly new law that allows manufacturers to require sellers to maintain at least (IIRC) 80% of MSRP price on items.  A few manufacturers, such as Mayfair, take advantage of this but one can wonder how well it can be enforced.

Another method is to keep the games out of the hands of the online retailers.  But if you work through normal distributors the distributors happily sell to the online retailers who may give them much bigger orders than a typical brick-and-mortar shop.  GameSalute (see below) has an option for small publishers to sell only through GameSalute’s online store and through brick-and-mortar stores in order to keep the actual price of the game close to the MSRP.  Also, if a manufacturer negotiates exclusive distribution with a distributor, as Mayfair and FFG have recently, then perhaps part of the deal is agreement that the distributor will not sell to online retailers.  I don’t know, but I cannot figure out why else a big company would negotiate an exclusive distribution deal (well, other than getting better than 40% of the MSRP. But then would the distributor do it?).

While many hobby game buyers accustomed to online purchases may feel that buying a game for 30% off the MSRP is their god-given right, it doesn’t necessarily make sense for publishers.  And it’s the publishers who are risking their money.

Aggregation and fulfillment.  If you’re a small publisher you may not be able to get the attention of a big distributor like Alliance or SDVM.  If they don’t expect your game to sell a lot then they may not bother to bring it to the attention of their customers, the retail shops.  And if you’re a small publisher, the distributor may simply assume your game isn’t going to sell much, if they bother to think about it at all amongst the hundreds of games published each year.  In that case you may go to an aggregator.  The aggregator puts together packages from many small publishers to sell to distributors.  In order to make a profit the aggregator pays the publisher just 33% of the MSRP.

There are publishers who try to act as their own distributors, selling directly to retailers, but this is time-consuming and requires some knowledge and data about retailers.  In this category we also have GameSalute.  This is a relatively new company that offers fulfillment to small publishers.  Fulfillment means that GameSalute takes care of all the details of sales for the publisher, taking a cut of the revenue.  GameSalute has gone to this in a big way and has a large stable of games, sometimes with exclusive distribution.  I think that in effect they have become a distributor for the small publishers because they try to sell directly to shops rather than to Alliance or other distributors.  (Another fulfillment company I’ve heard of but know nothing about: Impressions.)

The difference between aggregation and fulfillment is that the latter may warehouse the inventory of small publishers games and take care of all the details of selling while the aggregator is more strictly a middleman between small publishers and distributors.  I’m sure there are shades in between, each company may offer somewhat different services


These percentages are very important to publishers of course, but are also very important to game designers because royalties are usually based on the revenue of the publisher, not on the MSRP.  Frequently in the revenue calculations some shipping is subtracted as well - the publisher usually pays to ship product to distributors - so it’s difficult to calculate anything exactly.

The mass-market.  Mass-market games are often purchased around Christmas time as gifts.  One of the things that sets mass-market games apart from hobby games is that people who are not game players recognize the titles of mass-market games like Monopoly and Sorry and Battleship.  They’re more likely to buy a game as a gift if they recognize the name.  Another aspect of mass-market games is that many people think they already know how to play the game that they’re purchasing as a gift – even though in practice most people don’t even play Monopoly correctly.  Mass-market titles become brands so strong that we see big movies being produced “based on” mass-market game titles like this past summer’s Battleship movie.

Just as important, when people buy tabletop games as gifts they typically don’t want to pay $50 or $60, so it’s another characteristic of mass-market games that they tend to be down in the $25-35 range.

Settlers of Catan, while it is a little too complicated to be a mass-market game, is nonetheless approaching the brand recognition status of some of the mass-market games.  There is actually a simpler version of Settlers of Catan aimed at the mass market, unfortunately called Catan: Junior.

Kickstarter
The most popular seminar subject at GenCon was Kickstarter, because Kickstarter.com is a source of funding for many creative projects including games.  At present it is available only in the US, and I know of one foreign company that incorporated in the US specifically so that they could use Kickstarter.

Kickstarter is part of crowd funding, raising funds to produce something from a lot of people rather than from individual investors or venture capitalists.  As far as I know the original crowd funding was called the “ransom method.”  A writer offered to write a short story and distribute it for free to everyone if enough people offered contributions to meet his stated goal.  He used this method several times and may still be doing it.

Kickstarter was founded on a patron model.  The contributors were supposed to offer funding for worthwhile projects as patrons rather than as customers who were receiving something specific in return.  But for games at least it has become the equivalent of a pre-order system, not so different in effect from the P 500 system used by GMT and other wargame publishers.  In a pre-order system you get enough orders for whatever you’re going to produce that you know you have enough money to afford to produce it.  GMT originally called it P 500 because they wanted 500 pre-orders, although nowadays 750 would be desirable.

Kickstarter includes lots of perks other than the actual game to help people feel like they’re part of the process, to “see how the sausage is made” as one GenCon panelist put it, but there are potential tax differences between a patron model and a pre-order model important enough that the Kickstarter people insist that they’re running a patron model even as game companies use it for pre-orders.

A survey of people involved with supporting video games on Kickstarter shows that most of them feel it’s very important that they get a downloadable or even physical copy of the game they’re supporting:
http://www.gamasutra.com/view/feature/176839/gamasutras_kickstarter_survey_.php
(Anyone interested in using Kickstarter for funding should read the survey results.)

Pre-orders are very important to small and even medium-sized companies.  GMT deviated from their model once with a game that they were sure was excellent.  They printed a larger-than-usual run.  When that game sold poorly they nearly went out of business.  When a Kickstarter campaign achieves 10 times as much funding as desired – this is not unheard of for games – that makes a publisher’s job that much easier.


Publishing
Let me interject a few comments here about publishing.  One factor dominates publishing costs: the number of copies of a game that are printed.  Much of the costs of printing are fixed costs, the same lump sum no matter how many are printed.  As a result the price per unit goes down rapidly as a number printed goes up.  For example I saw the difference between the price for 1,500 and 2,000 copies of a boardgame through Ludofact in Germany not long ago and it was “awesome”.  Yet the major problem with printing more copies is that if you don’t sell them you’re going to lose money.  And the almost-as-important problem is, if you print more games where are you going to store them?  The third problem is if you print more games you need to have more money up front.  Since the economic downturn, printers are much less likely to print without money in hand.

Many years ago the conventional wisdom was that your MSRP for a game would have to be six times the manufacturing costs.  Lately I’ve heard 5 to 1, 4 to 1 (which must really be pushing it), even 8 to 1 for a company that’s known for selling fairly expensive games.  If you think about it, if you’re selling most games through distributor at 40% of MSRP and your printing costs are half that (20%) then you have a ratio of 5 to 1.  But that means that the other 20% of the MSRP has to pay for all your other expenses including shipping, and provide your profit.  If you go to 6 to 1 then your printing costs are about 16% and you have 24% for other expenses.  That assumes you’re going through a normal distributor; if you’re a small publisher and you have to go through an aggregator then you’re really getting squeezed even at 6 to 1.

Publishing on demand (POD) avoids the up front/fixed costs of conventional printing and avoids the inventory costs because a game is only printed when someone buys it.  But the quality of POD board and card games is not quite as good as the quality of typical game printing, and there is less flexibility in components.  If you’re only printing books, as in RPG books, print quality is no longer a problem.  The print quality of RPG Now and associated companies (who I’m told use Lightning Source, the biggest POD printer in the country) is just as good as the printing of many conventional book publishers.  There are a few publishers who have their own printing equipment – more or less POD equipment – to take yet another middleman out of the equation.

I was going to talk about considerations for game designers to negotiate a contract in light of the numbers above but this is already quite long so I’ll leave that for another day.