Thursday, July 05, 2007

Economics, Technology, Philosophy, and Law

There's an old joke that goes like this:

"I'm running a store, but I lose money on every product I sell!!"
"So how do you stay in business?"

This article is about gaming and all those things that appear in the header--economics, technology, philosophy, and law. It's more about the roleplaying industry, which is having a tough time in the modern market, but a lot of the discussion could apply to Eurogaming as well--particulaly the niche sort of Eurogaming that we're more likely to enjoy that's less family-oriented, more strategic, and thus less likely to appeal to the mass market.

So accept my caveat that they may not apply 100% to the normal topics of this column, but nonetheless I think it's related.

Economics: The Deep Discounters Appear

In the mid-1990s the Internet was opened up for commercial use. This ultimately created many new industries,from MMORPGs to downloadable movies, but it also created a largely unique business model that hadn't existed before: the deep discounter.

Before that if you wanted to sell things you usually had to open up a brick & mortar storefront. This required lots of costs, like rent, local taxes, and additional staff. But, it also offered unique advantages like visibility, human beings to talk to, and the ability to physically inspect products you were interested in buying.

After the commercialization of the Internet you could now open up a virtual storefront. You no longer needed a physical building in the town square; instead you could get by with an online website. A web of interconnectivity ensured that even with minimal advertising, you could get the word out. And in return you shed all of those extra costs. A deep discounter could now "flip" products, buying them from a distributor, then selling them for just a few percent more.

On the downside, he lost all those cool advantages too, and perhaps that would be OK if they weren't the exact sort of advantages that keep bring people into niche gaming industries.

Technology: It Changes Everything

This is ultimately a story about technology, and how it changes everything.

For years gaming companies--and this is why these topics are definitely more about the roleplaying industry than the Eurogame industry, because it's even less approachable--had depended on a specific economic model for success. In this model they could expect to pay a certain amount for marketing and expect to get a certain amount of free marketing from game stores and through those bring in enough new customers to offset the constant (and expected) outflow of old customers.

Deep discounters changed that model because they didn't bring in new customers in the same way. This essentially broke the old economics of game publishing, and it got worse over the years as online discounters increasingly proliferated and drove brick and mortar stores out of business. In a generally tough time this additional loss of replacement customers hurt the most niche companies the most, but I'd bet by 2007 everyone has seen some result of this, whether it be contraction or just reduced growth.

However you can't really blame the deep discounters. Some of them are fools who literally are losing money on every sale they make and are dragged hobbyist industries down with them in their ignorance. Others, however, are doubtless eking out a living, living a small-scale version of the capitalist dream.

Instead you need to blame technology, and this isn't the only time that technology has screwed up an economic model. Here it's a bit harder to see the cause and effect, but I'd instead point you to a model where what's going on is much more clear: television.

Several years ago the Tivo came out. It allowed you to watch television without watching commercials. The problem: most television is dependent upon commercials for its income. Just as with the advent of deep discounters an improvement in technology broke an old economic model creating a new reality that is totally unsustainable in the long-term, no matter how much consumers might enjoy the short-term benefit.

Philosophy: Dead White Men Predicted It
Though our generation has seen more technological innovation than the rest of history, nonetheless dead white men predicted a lot of these problems that technology is causing.

"The Tragedy of the Commons" derives from an 1833 parable by William Forster Lloyd, though it was actually popularized in the 1960s by Garrett Hardin. It suggests that unrestricted access to a finite resource generally destroys the resource. For example if you have a field where many shepherds graze their flocks, each shepherd gets a notable gain when he adds a single sheep, while any cost in damage to the field is divided among all the shepherds. Thus, no one individual is encouraged to reduce their usage of the resource.

A closely related issue that's even more relevant to the topic at hand is the "Free Rider Problem". This states that when something has a cost, but provides a common good, then some people will enjoy the good without having paid the cost, but that when too many people do so, then the common good won't appear in the first place. This problem is most frequently used in discussions of labor unions, but it equally applies to any social benefit, and is the reason that countries' tax systems aren't voluntary.

So take this back to the world of gaming: those game stores are providing the common good. They're improving the hobby's visibility and bringing new players in. Everyone receives the benefits whether they shop at a brick & mortar store or not. Their favorite manufacturers are able to stay in business, and thus they keep manufacturing new games which everyone can purchase. However some people "free ride" by purchasing instead at deep discounters, and thus don't contribute to the growth of their hobby--or even to its continued existence at a very fundamental level.

Thus: set economic models + new technologies (as understood by old philosophies) = doom + gloom.

Law: A New Option
The big problem here was that manufacturers couldn't do anything about this. They could know that deep discounters were devaluing their product and decreasing their opportunities for replacement customers, but if they tried to cut deep discounters out they could be charged with price fixing.

Some took the route of refusing sales to stores without a storefront, which solved part of the problem, but not for stores which also ran deep discount operations.

Last week the Supreme Court changed this with a 5-4 decision which will probably allow game companies to set minimum prices for their products, saying, for example, that stores couldn't sell their products for less than 80% of MSRP for 90 days after receiving it.

I'm pretty sure the roleplaying industry is going to take advantage of this. I don't know about board game manufacturers. They've had a rosier last several years, but from what I've seen no hobbyist gaming boom ever lasts. It's going to be a big deal in any case. It's also going to cause considerable upset among consumers who could see their spending power go down by 15% or 25% (if they previously bought at deep discounters).

Personally, I went over to buying from brick & mortar-only a few years ago, but I'll be honest: it wasn't because I was making a philosophical statement. I just wanted to support a top-notch local store. If it weren't for them, I'd still be a free rider, destroying the commons.

For whichever hobbyist industries are affected, it'll be a hard time for customers, but it'll also be an entirely required economic change. The old model was broken. It's been broken for at least ten years. A new one had to be created. We benefited from unfairly low prices for ten years, and now it's going to seem unfair when prices return to their normal levels.

But that's change, and in our world of technology, there's always a whole lot of it.

You can read more about the decision, and a lot of comments on it, some very erudite, some totally uninformed at Ryan Dancey's blog.


Chris Farrell said...

I think you're looking at this whole internet thing and seeing only the problems. How many gamers got into eurogames by reading Mike Siggins' commentary on Ken Tidwell's The Game Cabinet on the internet? How many gamers have been brought in by BoardGameGeek? How many local game groups have been created by seeking others out on the internet? How many local game groups are kept alive by internet communications? These are tremendous forces for the expansion of the hobby that were unavailable in the past.

The tragedy of the commons is not really an appropriate analogy for the local game store. The tragedy of the commons would be if a local community had a free meeting room that anyone could use at no cost, and as a result was rendered unusable because because nobody took care of it and gamers were denied a place to meet.

The local game store is a money-making enterprise that isn't using any sort of public good. The game companies are selling product, and if they can't work to support the game stores to publicize their games, it's their marketers and their economic model which is at fault, not the internet. There are no public goods involved here. It's just that in the past (perhaps) publishers could get a free ride in terms of publicity from game stores who found it advantageous in terms of getting customers into the store by having gaming space. Now retailers are getting squeezed (although with shipping being what it is these days, they're not as squeezed on price as it might first appear), and they have to either provide better service, become more cost-competitive, or go to the game companies and say, "hey, we provide a valuable service, you should be chipping in". It's not a question of abusing a common good; there is no common good (in the sense of over-fished public oceans) involved here. It's a question of economics and competitiveness. In my opinion, if local stores are being hit, it's because of convenience, not price (although good prices don't hurt). People find getting stuff delivered to their door convenient instead of having to drive 20 miles to a game shop with surly staff. If publishers are allowed to fix prices, than many game stores will get a free ride in being freed to charge high prices without worrying about having to compete on service, and I'll have to drive a lot more, which I don't like to do.

CCG companies have understood this and sponsor tournaments in local venues. Games Workshop gets this and makes it hard to get discounts online so that people will go to their hobby centers, which tend to have great gaming spaces and really encourage people to actually play. It is entirely possible that for lower-cost, smaller-market boardgames, this sort of exposure isn't as valuable as it sounds.

If you ask me, the RPG space is more complex. I gripe about substandard product in the board game arena, but as a sometimes-RPGer I think the RPG market suffers from a glut of over-complicated, inadequately-playtested, low-quality, hugely time-intensive product to a far greater degree than boardgames. What the RPG space needs is not so much a better business model (although a better business model would help) as better, more broadly-accessible product.

Anyway, if the retailers get shut out because they can't provide competitive service, it's not just because the internet can allow companies to make money by discounting games, it's also because the internet is a huge force in both disseminating information about games and getting like-minded gamers together, and the need for a game store to provide such a service has been significantly reduced.

Shannon Appelcline said...

I view the Internet as a powerful force for aiding EXISTING gamers.

I believe it's a very bad force for finding NEW gamers.

And, this isn't just a story about competition. A core problem is the advantages that local game stores offer often can not be billed for. You can't bill someone for helpful staff or the ability to pick up a product and handle it. You can't bill them for demos, and it's even pretty hard to bill for a gaming space.

As a result many people go to their local store, take all of its advantages, then go buy their product online. They thus get the best of both worlds ... until the local store goes out of business.

It's short-sighted and moral free; this ruling is just going to put the decision into the hands of someone more long-sighted: the publishers.

If anything a price floor could improve competitiveness. Right now it's just about impossible to compete with a deep discounter. With a price floor an online store and a b&m store are offering the exact same goods and so the ONLY place they can compete is via other services.

Can your local store often enough services to offset the ease of use of an online store?

I also can't imagine why this would result in you driving more. You'll be just as able to purchase online in the future as you will now, prices might just be a bit higher.

dan daly said...

Shannon, I think there's a fundamental flaw with your argument. Brick and mortor stores don't bring people into hobby's- at least not most people (in my humble experience). People get into gaming because their friend has a cool board game they play with them, or their older brother hands down their rpg collection, etc. People join because someone else they know is already in the hobby. It doesn't matter where the first person got the game- at a brick store, online, at a yard sale, whatever.

Any lack of market growth (a new generation of gamers) is primarily due to competition from computer and console video games in my opinion- not from online boardgame/rpg stores.

dan daly said...

I just read this in your follow up comment Shannon:

"If anything a price floor could improve competitiveness."

I believe that goes against every economic principle in the capitalism book. Higher prices are good for the consumer and the hobby? That doesn't make much sense. How about:

Lower prices=more games sold to more customers=growth of the hobby.

dan daly said...

Just wanted to follow up- after reading more on the Supreme Court ruling, I agree with it's legal reasoning. A company should be able to make any deal it wants with a buyer as long as the details are all there up front and everyone agrees to them. That being said, I disagree with the premise that setting price floors would be a boon to the gaming industry and the premise that online discounters are responsible for eroding the base of gaming.

David Lund said...

Shannon, I always enjoy reading your articles, and this one was certainly no exception. Your analysis is very thought provoking.

I have to join the chorus, though, in saying that I think you've got it wrong. I have no doubt that the emergence of deep discounters has had a negative impact on the bricks and mortar retailers, but I don't agree that it follows that the discounters or the internet in general are therefore bad for the hobby or for publishers. I think Chris and Dan are right that people come into the hobby through their friends, not, at least in general, through stumbling across a FLGS. And while a good local store might help support a game community, Chris rightly points out that the internet offers its own ways of fostering niche communities.

I would amplify their points by saying that for at least some of us, the internet and the discounters are the reason we have grown in the hobby. I offer my own experience as an example. I live in a fairly rural area. The nearest city with more than 100,000 people is just over 150 miles away. There are a handful of stores in my local area that sell comics, minis, and CCGs, but none that have more than a small number of boardgames, usually gathering dust on a shelf in the back.

When I met my wife 5 years ago, her family was hooked on Catan. I was fascinated, so I did some digging on the web and stumbled across BoardGameGeek. That led to discovering the enormous range of board games that were available. I was able to start buying and playing those games only because I could buy them online. I have tracked down a couple FLGS in the nearest city, but I can only really justify the 300+ mile round trip when I am heading there for business or some other purpose. Truthfully, I prefer to buy online because with a few clicks of a mouse I can get a whole range of opinions and information about most games. I can see photos of most of the components. Often I can even read session reports. Even when I can make the trip to the nearest FLGS, they can't offer me that level of information.

I realize it is risky to generalize from anecdotal evidence. But I think my experience does reflect the reality that many people do not have a premier FLGS within a reasonable distance. For us, the internet offers access to games, a supportive community, and, frequently, the ability to seek out others in our areas who have similar interests. Getting that support online rather than at a B&M doesn't diminish the support. Indeed, all of the unbillable advantages that you ascribe to the B&M stores have a pretty clear online analog: I can certainly get helpful information and recommendations online. Session reports can serve in lieu of demos, and many games have online versions or game play videos available to further meet that need. Game space may not have an equivalent apart from online implementations, but the truth is that there are a large number of people who don't live near a B&M that offers a game space in any event. And, as at least my experience indicates, the internet certainly can be a good tool for bringing people into the hobby or supporting them in their exploration of it. Had I been limited to the B&M stores in my area, I would still be playing Catan with my brother-in-law every few months. I wouldn't be playing the games I play now.

As to the economics of contracts that prohibit deep discounting online, I don't see how they benefit the industry. Assuming that publishers or distributers are charging discounters and B&M stores the same price per unit, there is no particular advantage to them in selling to or through one sort of retailer or the other. Discounters will always have the economic advantages of having less overhead; so forcing them to charge higher prices will only result in increasing their margin per unit (which benefits no one but the former discounter), possibly at the cost of reduced volume. I think it is wrong to assume, however, that reducing the volume of a discounter would automatically translate to increased volume for a B&M. My discretionary income is essentially fixed. If the price of games goes up, the result is not that I will buy the same number of games somewhere else but that I will buy fewer games overall. That means less profitability for the publishers, which can't be good for the hobby. Reducing the total volume of games sold to existing gamers by handicapping one means of distribution to favor another on the speculation that the physical store will be better at recruiting new people into the hobby doesn't seem far sighted to me; it seems like a risky gamble.