Gaming industry economics, essay discussion, HELP!

[Longtooth Studios]

One thing that struck me as I have been doing my economic research is that the OGL created an environment simular to a Monopolistic Competition. Acording to that model, the long run profitability eventually turns to 0 as the new entries into the market attempt to supplant the leaders. (its not an ideal Mono. Comp. but it has aspects of it.)
This is something that can be seen in the fact that Pathfinder has become such a major force in the industry and may very well shoulder older leaders from their place of control.

Does this theory have any substance or am I stumbling over the model?

 

[Umbran]

This suggests that one of the primary limitations on the growth of the TTRPG industry is the commitment required from players and GM's.

I think few would argue against that. It is one of the limitations. I suspect others are stronger, but it is certainly one.

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, that seems fairly simple to me - those things that limit the growth also increase the depth and flexibility of the experience.

This is true of most human endeavor, though - the most rich experiences come from things you have to commit to, things you actually put effort into. This isn't a problem to be solved, so much as a fact of human existence.

 

[ggroy]

One thing that struck me as I have been doing my economic research is that the OGL created an environment simular to a Monopolistic Competition. Acording to that model, the long run profitability eventually turns to 0 as the new entries into the market attempt to supplant the leaders. (its not an ideal Mono. Comp. but it has aspects of it.)
This is something that can be seen in the fact that Pathfinder has become such a major force in the industry and may very well shoulder older leaders from their place of control.

Does this theory have any substance or am I stumbling over the model?

This sounds more like the Cournot or Stackelberg models of competition, when the number of firms becomes "large"

Cournot competition - Wikipedia, the free encyclopedia
Stackelberg competition - Wikipedia, the free encyclopedia

 

[OnyxPharaoh]

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

I'm not entirely sure what you mean by this.

Size doesn't factor in to whether or not a company is privately or publicly held. The reason RPG companies favor private ownership or LLC status is because it gives them greater control over their intellectual property.

The drawback to not being publicly traded is that it creates difficulty in raising new capital. Without easy access to additional capital to fund new projects the company is forced to plow back it's net income severly limiting its growth potential.

I don't think the flaw is with the industry, but instead with the business models commonly employed by these entrepreneurs. A narrow focus coupled with limited knowledge on how to properly diversify their assets forces many companies into a short growth spurt followed by a rapid death.

 

[OnyxPharaoh]

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.

Brand recognition is far easier to obtain now with mass communication and internet technology. Brand loyalty is created simply through the creation of a superior product and maintaining a strong relationship with your consumers.

This should be easier in the RPG industry than in others because we are talking about, as you said, a small market. Being a niche market with educated consumers makes reaching your customers easier. People have self inflicted restrictions on where they obtain their gaming products making placement even easier.

But you are right, it is a small market, and that is another flaw of models employed by most roleplaying game companies. Everyone is concerned about making games for current gamers, few are going out of their way to make "new" gamers. They aren't reaching out and attracting those who have never played but would likely enjoy these games.

I'm sure any of us who have been gamig for any length of time have introduced new players to roleplaying. We either started a group or brought in people who had never played before. In many cases, we selected those people because we thought it would appeal to them and often it does, creating new die hard gamers in the process.

But these companies need to step up and stop relying on gamers to breed their own population. They should investigate ways that they can expand the industry beyond the simple word of mouth that is often the catalyst for new consumers to enter the market.

 

[Croesus]

Size doesn't factor in to whether or not a company is privately or publicly held.

Perhaps not, but it sure as anything makes a difference in whether investors are willing to sink in their capital. Let's put it this way - if you have the opportunity to sink a few million dollars into a large market or a small one, which would you choose? The only reason to go into a small market is if you can dominate it, but Hasbro/WOTC is already there.

And private companies generally only go public for two reasons: 1) to monetize their intellectual property (generally by technology companies), and 2) to raise capital for significant expansion. But so long as the TTRPG industry is so small, and not growing dynamically, what company is in such a position, or likely to be in the forseeable future?

 

[Croesus]

One thing that struck me as I have been doing my economic research is that the OGL created an environment simular to a Monopolistic Competition. Acording to that model, the long run profitability eventually turns to 0 as the new entries into the market attempt to supplant the leaders. (its not an ideal Mono. Comp. but it has aspects of it.)
This is something that can be seen in the fact that Pathfinder has become such a major force in the industry and may very well shoulder older leaders from their place of control.

Does this theory have any substance or am I stumbling over the model?

I can't speak knowledgeably to the specific terms you're using, as I haven't formally studied Economics. However, simply as a thought-experiment, assume that WOTC stops publishing D&D products. It doesn't matter what the reason, just assume they stop, but they also do not sell the IP. How would you describe the TTRPG industry then?

Then ask, can the OGL ever lead to such a situation? I think not - the OGL can certainly change things around the edges, but so long as all the smaller companies continue to try to beat D&D on its own terms, I'm not sure how they supplant WOTC, or even erode its revenues sufficiently to reduce profitability to zero. Just my two cents', but I think WOTC would have to mess up in some spectacular fashion to lose its dominance, and with it, their profits. (Much like TSR did for a time) If that ever happens, I don't see the OGL as the cause, but their own mistakes.

 

[OnyxPharaoh]

Perhaps not, but it sure as anything makes a difference in whether investors are willing to sink in their capital. Let's put it this way - if you have the opportunity to sink a few million dollars into a large market or a small one, which would you choose? The only reason to go into a small market is if you can dominate it, but Hasbro/WOTC is already there.

And private companies generally only go public for two reasons: 1) to monetize their intellectual property (generally by technology companies), and 2) to raise capital for significant expansion. But so long as the TTRPG industry is so small, and not growing dynamically, what company is in such a position, or likely to be in the forseeable future?

I am really not trying to be an arrogant dick when I say this, but this entire statement is wrong from top to bottom.

Investors aren't concerned with the size of the market or the ability to dominate it. Investors are concerned with a reasonable rate of return. Reasonable in this case being a percentage return equal to the risk free rate plus a premium for additional risk.

For example: Let's say I have a consumer market that consists of only ten people. If my company can provide a return on the invetment that is acceptable to the investors, let's say it's something outrageous like 25% on every dollar invested, then people will be lining up at the door to invest in my company.

The return I am able to provide can be influenced by market size for sure. But it can more easily be influenced by my capital management, debt/equity mix, plowback ratios, methods of depreciation and amortization, accounting methods, EBIT management and a large number of other factors. In fact, by controlling the other variables I can effectively minimize the effect that a small market has on my overall return.

Additionally, companies go public for one reason and one reason alone, ease of raising capital. Monetizing your intellectual property can occur with our without public equity. That's a management decision, not a financing one.

WOTC/Hasbro may certainly be a market leader, but their ability to dominate it, is only reliant upon Hasbro's willingness to keep pumping capital into the division. Let's not forget, TSR sold out to WOTC because the company was failing financially. They could have had a lock on the market but their inability to manage their finances crippled them forcing the sale. Next we have WOTC selling out to Hasbro because Hasbro was looking to capitalize on the CCG market. D&D was a byproduct of that acquisition that apparently realized a good enough return to keep it around.

But Hasbro did not hesitate to divest those operations they felt weren't producing a good enough return. Gencon and Origins were both sold as well as their entire chain of retail stores.

Bringing me back around to my original point. WOTC/Hasbro now dominates the market for no other reason than sound financial planning and marketing success. This is not something unique that they are doing. It is just something that good manufacturers do to stay in business.

Again, I apologize if am coming off as a know it all dick. It's not my intention. As a financial analyst it is my job to review this sort of data and incorporate it into reports for investors. Hasbro being the only RPG company that is publicly traded has forced me to concentrate my industry examinations on this one firm......a fact I actually find rather depressing.

 

[Nagol]

I'm not entirely sure what you mean by this.

Size doesn't factor in to whether or not a company is privately or publicly held. The reason RPG companies favor private ownership or LLC status is because it gives them greater control over their intellectual property.

The drawback to not being publicly traded is that it creates difficulty in raising new capital. Without easy access to additional capital to fund new projects the company is forced to plow back it's net income severly limiting its growth potential.

I don't think the flaw is with the industry, but instead with the business models commonly employed by these entrepreneurs. A narrow focus coupled with limited knowledge on how to properly diversify their assets forces many companies into a short growth spurt followed by a rapid death.

I agree high capitalisation does not equal publicly traded. It often happens that highly capitalised high-return/high cash flow companies stay private to maximise investor control and privacy.

Although it is possible to have a low-capitaliation company go public, it is hard in practice to do so. For a small company, going public offers two major advantages from the perspective of the owners:

1. It offers the original investors access to the equity generated in the company via a (large) capital buy-in from new investors.
2. It provides the company with access to capital flows and increases the methods available to the company to raise further capital as needed.

Consider the number of companies that have existed in the RPG space. All have begun as small start up companies. None have ever gone public and rewarded the original investors. A few (very few) have been purchased by public companies typically for properties other than the RPG section of the company. Such purchase completely surrenders IP control in a way a public offering does not.

The evidence is there that RPG companies occupy a poorly-funded niche in the entertainment industry with an effective cap on maximal size below the requirements for exchange-traded public incorporation.

 

[Croesus]

I am really not trying to be an arrogant dick when I say this, but this entire statement is wrong from top to bottom.

No worries - you're attacking my position, not me, so it's all good.

My contention is that the TTRPG market is so small that there is only room for one market leader. All the others simply don't make enough money to make it worthwhile. And even the market leader apparently isn't making enough actual dollars to be considered an important part of Hasbro's business.

Let me put it this way - every company can only focus on so many priorities. Start too many projects and initiatives and bad things begin to happen. If I'm running a firm that can invest in TTRPG's, why would I do so unless I not only get a good rate of return, but sufficient actual dollars to make it worth my attention? The opportunity costs have to be taken into account. Add in the boom/bust cycle TTRPG's have experienced in the past, and I can certainly understand why there aren't potential investors lined up around the block to throw money at the industry.

Investors aren't concerned with the size of the market or the ability to dominate it. Investors are concerned with a reasonable rate of return. Reasonable in this case being a percentage return equal to the risk free rate plus a premium for additional risk.

Let's assume your statement is 100% accurate. Then the only conclusion I can make is that the industry does not provide sufficent rate of return to justify potential investment. Is that your contention? Or, approaching it from the other side, are there such significant benefits in staying private that no company other than WOTC has stopped being a private entity?