Gaming industry economics, essay discussion, HELP!

[Longtooth Studios]

In my pursuit of a BA in graphic design, I am naturally taking a class in economics. Since I plan on continuing my involvement in the gaming industry and plying my trade here, I thought it fitting to get the opinions of the gaming comunity. Hopefully some of the market leaders will throw in on the discussion.

By the time this starts pulling in some discussion, my assignment will have been turned in for the following question, but a better understanding of the market will help me at the end of the course to write my final.

I also plan on posting further topics in this same thread so if you are knowledgeable in the gaming industry economics, now is your chance to shine!

1. [FONT=&quot]What market structure best characterizes your chosen industry? (Provide details regarding general number of sellers/buyers, product differentiation, barriers to entry, availability of information, and advertising.
   [/FONT]

My thoughts are...

The Tabletop Role Playing Game industry displays a few key tendencies that mark it as a Differentiated oligopoly.
It is dominated by a handful of sellers offering substitutable goods.
Industry leaders compete with existing rivals and try to block new entry by offering a variety of products.
There is some product differentiation, but overall each is offering a very similar experience.
While gamers who want to get their feet wet in e-publishing content may do so with few barriers, the cost to really compete against the industry leaders remains pretty high.


The Open Gaming License created an environment that is similar to a Monopolistic Competition such as many competing sellers with few differences in the product. The cost to compete in the printed market is still high and the market leaders get the lion’s share of the power to set their prices.

 

[OnyxPharaoh]

Finance in the gaming industry

I feel your pain.

I have been an avid gamer for many decades now and the dream of running my own game publishing company has been a motivator for some time. However, one thing I have noticed after decades of gaming is that publishing is a very difficult business to break into. The costs associated with the print and distribution are phenomal. Sadly, the games that had the most promise were also the most underfunded. The capital simply went dry before the games could really take off.

I think the sad truth is that the best games had excellent designers behind them but noone who knew how to properly run a business and turn a sustainable profit. I have to assume that the reason some companies fail and others succeed is because of the entreprenurial geniuses working behind the scenes.

As a major in Finance one thing I know for certain is that with the rare exception, all roleplaying game manufacturers are closely held private companies. While this is good from a creative standpoint it leaves financial information on the health of these firms in the dark. Major publicly held corporations have to provide quarterly and annual statements to the SEC providing relevant business data for the period in which they are reporting. This provides an excellent opportunity to examine what a company is or isn't doing to be successful.

With the exception of Hasbro I have been hard pressed to find any game producer that has released any sort of economic data. And even in the case of Hasbro there is no way to separate the WOTC division's earnings from that of the rest of the company. So even in this best of cases, we are still in the dark.

I am however confident that a profitable role playing game company with the right mix of creativity and financial engineering could be exceptionally successful. In truth, the only thing protecting the market share of the industry leaders is brand recognition and global distribution. With modern technology there are ways to overcome both of these advantages. The trick is to keep your firm profitable enough to survive those growing years with proper diversification and a good debt/equity mix.

 

[Nagol]

I'd suggest it's closer to a Contestable Market.

New players jump in and established players fall out regularly.

There is almost no barrier to entry and what there was is falling dramatically due to digital publishing and online sales.

Additionally, many competitors are happy to give away their product for free or lower than the cost of production because it is a hobby and they want to share.

 

[Nagol]

<snip>

I am however confident that a profitable role playing game company with the right mix of creativity and financial engineering could be exceptionally successful. In truth, the only thing protecting the market share of the industry leaders is brand recognition and global distribution. With modern technology there are ways to overcome both of these advantages. The trick is to keep your firm profitable enough to survive those growing years with proper diversification and a good debt/equity mix.

You know the secret to making a small fortune with a RPG company? Start with a large fortune and publish. It'll be a small fortune soon enough.

There's a reason no one has a publically held RPG company -- they can't build up to that capitalisation level.

 

[Umbran]

I am however confident that a profitable role playing game company with the right mix of creativity and financial engineering could be exceptionally successful.

Well, I think that will depend upon what you call "exceptionally successful"

In truth, the only thing protecting the market share of the industry leaders is brand recognition and global distribution.

You say that as if these were small things.

With modern technology there are ways to overcome both of these advantages.

You can, in theory, overcome one of these things - the distribution issue. Brand recognition is not nearly so easy to establish.

In all this discussion, there's been little mention of a major point that is apt to be a limiting factor in the financial picture of any RPG company - the market is apparently *small*, and that will limit the potential of anyone trying to enter it.

 

[TerraDave]

Hmm...focusing on TTRPGs (which is quite different from say the thriving hobby board game industry, for example)

Market structure: one big company and big brand, a tier of medium players, and then several small niche producers. Monopolistic competition might be the simplest model--price markups combined with low overall margins and many differentiated products--but with very different scales to the various "monopolies". Such that at its core, the industry looks more like a monopoly in durable goods.

The OGL and PDF publishing have lowered the barriers to entry at the edge of the market, but this mostly affects the edge and maybe some of the midtier players (I will get into a key exception or two below...). At this end of the market, there are many many products, and a fair amount of entry and exit, both by start ups and by established game makers that cycle in and out of RPGs.

The core of the market is D&D, which has had a dominate position for the entire history of the hobby. A handfull of companies and games have come close, but never for as long.

Barriers to entry and economies of scale rest on a few things:

-Intellectual property: Copyright may not be what it used to be, but still counts for something.

-Product differentiation: This follows from the first, and that for a game to get any where, it needs to be seen as offering something at least slightly different.

-Marketing: Not that easy to get a large number of players to try your game.

-Support: The model that emerged years ago for TTRPGs is that it is not just a game, but a line of products. Doing this whole line is a barrier.

-Durable products: You compete with pretty much everything ever released, from that point of view, the market is quite crowded...you need to show some kind of "innovation". Fortunatly, the complexity of RPGs has left space for that over the years.

-Network externalities: (the big one I have held back). People play D&D because they play D&D. The combination of strong underlying consumer preference (people like fantasy RPGs) and this does help it dominate. To break out, you need to build a new network, probably by finding a major nich, filling it, and then holding on.

Lets take some examples from this last point:

Mutants and Masterminds: real rival, champions. Champions has long had its detractors, but its only real competition was Marvel Super Heroes back in the old days, which combined biggest RPG maker (TSR) with huge brand with simple mechanics that where really far from Champions. That license was lost, champions (inspite of all kinds of issues) hung on. Then comes OGL and D20 license. You know have a new network to latch onto with your supers game. As time has passed and that network has solidified, M&M has evolved into its own game.

Paizo: How did pathfinder do so well? First, it did face two big problems, the durable goods problem (tons of 3E stuff) and direct competition from WotC. Solution: network. The 3E network, and there own built with the mags and then adventure paths. They knew they couldn't (and didn't want to) beat 3E, so they came up with a strategy to be innovative enough and leverage those networks.

In general I think they key to understanding the market is the interplay of durability and network externalities, that certain niches are bigger then others and probably have established companies in them, and that the complexity of the product that allows for some continued innovation and differentiation.

 

[Croesus]

There is some product differentiation, but overall each is offering a very similar experience.

I am however confident that a profitable role playing game company with the right mix of creativity and financial engineering could be exceptionally successful.

These two comments reminded me of the following posts (When was the last time you bought a tie? and Why I don't sell Kimchi):

Seth's Blog

Consider, prior to TSR and D&D, there was no TTRPG market. TSR in effect created a new market by providing something consumers didn't even know they wanted. In doing so, they created what we today refer to as the RPG industry. All competition within the industry seems to be simply more of the same - no one is attempting to recreate the TSR experience of creating a totally new market.

There are opportunities to do so. Anyone remember "How to Host a Murder"? I played several of the games, mostly with people who wouldn't be caught dead playing D&D. Yet I also saw more real roleplaying in those sessions than I see in the average TTRPG game. The rules are simpler, the scenes more structured, the gameplay much more laid back, and most of all, prep time is minimal. And for a time, they were very successful. Yet no one considers them to be part of the RPG "industry".

Just my two cents', but I think the only way we'll have an "exceptionally successful" RPG company is if they create something new, rather than simply regurgitating the same old stuff to the same old tired market.

 

[Umbran]

Consider, prior to TSR and D&D, there was no TTRPG market. TSR in effect created a new market by providing something consumers didn't even know they wanted. In doing so, they created what we today refer to as the RPG industry. All competition within the industry seems to be simply more of the same - no one is attempting to recreate the TSR experience of creating a totally new market.

Well, you say in doing this, TSR created a new market. Anyone trying to duplicate that effect would, then, be creating a *new* market, not something in the current industry.

However, I think there have been attempts to grow the market into new areas - say, computer games, Neverwinter Nights, for example.

 

[Croesus]

However, I think there have been attempts to grow the market into new areas - say, computer games, Neverwinter Nights, for example.

Agreed. And while standard computer RPG's tend to have limited sales compared to more mainstream products, some games, such as World of Warcraft and Diablo, have done very well, apparently generating profits in excess of the entire TTRPG industry. And while these games keep most of the standard TTRPG tropes, they remove many barriers to play, such as massive rule books, hours of GM prep, getting a group together at a particular time and place, and so on. This suggests that one of the primary limitations on the growth of the TTRPG industry is the commitment required from players and GM's. And raises the question of why the industry has failed to find a solution that both works and has been successful (in terms of sales).

Well, you say in doing this, TSR created a new market. Anyone trying to duplicate that effect would, then, be creating a *new* market, not something in the current industry.

Just as D&D was built on something that already existed (miniatures gaming), there's no reason that the "something new" can't grow from current TTRPG's or CRPG's, other than inertia and the sometimes passionate resistance to anything new in the industry.

Personally, I expect it will instead come from something completely different - perhaps social media or phone apps.

 

[Longtooth Studios]

From the perspective of a graphic designer who desires to work in the gaming industry, I think that my odds of making a living doing what I love is probably better than a games designer trying to market the next great TTRPG.

I have a great product, and it has afforded me the opportunity to play around in the gaming industry, but I don't know if it will ever be the "Big Thing" I had dreams it would be when I first started at this.

It has been a great opportunity to be creative, show my ability to be innovative and has given me some exposure to the industry. I would like it to be more than a good mark on my resume, but in the end as I move into my profession, that is all it may ever be.

Then again, it is possible that some change in the industry fans the flames of my inventions and they take off, and soon every gamer has a set in front of them at their tables.

This is the same scenario that many people trying to break into this industry face.

You either make a living by working for the leading firms, or you make a living providing a service to those trying to become an industry leader. That is to say that the source of revenue is either coming from the larger companies with whom the consumers are spending their money, or you try and help the ones who are pouring their own resources into trying to reach critical mass. This is one possibility that the OGL has afforded many of us.


Another thing I would like to know from those who have made gaming their livelihood working for the industry leaders.
Do they still enjoy playing?
Are there weekly games at which all the great minds in gaming sit around the table and experience the ultimate gaming experience?
If not then I guess I will find myself a career doing page layout for porn and try to cultivate my ultimate gaming experience at my FLGS.