Hi guys,
There are always different perspectives, especially in an industry as diverse and imaginative as ours. The only people who can truly say whether the d20 market as a whole is slumping are the distributors - Those-On-High-Who-Oversee-All. However, from conversations we have had any shrinkage in the d20 market as a whole has been minor. What we are beginning to see is a whittling away of companies who, for a variety of reasons, are seeing their own sales slump - and this is where we have seen the loudest noises about as shrinking market come from. The days of any new company hitting the market and automatically selling 2k, 3k, 4k or more are gone. Companies are tending to regard first month sales of 1,500 copies as not just acceptable, but good, and if a book sells anything more than double figures beyond the 2-3 month mark then it is surely something a bit special. However, even the 'larger' and more established companies in the d20 market are finding this difficult and first and only month sales of 7-800 are not becoming unusual. Once you get down to these numbers a company will find itself in the position of having to a) greatly reduce costs (and many companies, we know, are burning money like it is going out of fashion) and b) getting the bosses to quit the company full-time and get day jobs if, indeed, they did not have them already. This is, of course, a downward spiral as attention is no longer concentrated 100% on the company's activities but it would be rare for a company to completely disappear - at this level, a company can be sustained on earnings from day jobs and is released from the burden of salaries. Basically, it can become a credit card company. That said, it is still possible to hit, say, the 5k mark on first month sales and continue with a sizeable percentage of that every month for two years or more - that is not the sign of a shrinking market.
In effect, what is happening is that many companies (and, again, I am talking about the larger guys here) are finding their position in the market slipping and their sales evaporating. There are excpetions - Privateer, for example, are coming on in leaps and bounds. Keep an eye on those guys. Others are finding their d20 market disappearing and are being propped up by other markets they are established in, such as card and board games.
As to Joe's orginial question, it does not matter whether there is a slump or not in the market - any company should be constantly striving to push itself forward. As the saying goes, a business either moves forwards or backwards, it never stays still. To this end, companies should;
1. Diversify - those more established companies I mentioned earlier surviving on their board and card games are a perfect example. Without the other strongs to their bows they would be laying off staff left, right and centre, and potentially leaving the market altogether. Diversification is good. And you may just find there is something more profitable than RPGs out there (surely not!).
2. Expand their markets - so very, very few RPG companies are getting into mainstream book stores in any meaningful way (that is, not a few hundred copies of a few books getting into the chain but thousands). Now, the entry barrier into the mainstream market is staggering and exceedingly difficult to overcome. Add to that the whole problem with returns and not actually selling the books you though you have, and many companies seem to not even try. The mainstream market is a very different animal than the hobby market but companies continually address the latter. Those with their heads screwed on right are a) actively producing books _for_ the mainstream market and b) making sure they avoid the returns problem.
3. Professionalism - this is a bit of a harsh term and is not quite what I mean. It also covers a multitude of sins. However, many publishers are still making the most elementary mistakes on their front covers, many give no thought to marketing and many just seem to talk to no one else in the business. There are some very simple steps that can be taken to improve relations with customers, retailers and distributors that are just being ignored. It is not rocket science and goes a long way to helping sustain sales.
4. Efficiency - many companies are shedding money when they simply have no need (and I am not talking about trimming down the odd cent per word for freelancers). I would advise anyone to take a good, long hard look at their costs and see where savings can be made - even if it means, ultimately, more work. We know what some companies are paying for various services and we are not surprised some of them are having trouble. Harsh, but true.
As to Joe's point about 3.5 causing a backlog of older books, in our experience this has just not been the case - however, many companies following the 3 month sales cycle will not notice the difference and may be tempted to blame flat back catalogue sales on this. Be careful who you listen to here.
To your final point, Joe, I would not worry. There will always be a place for good talent in the d20 market - I cannot imagine Mr Mearls will ever have a problem finding paying work and if he does, he should talk to me

As another example, we are currently in negotitations with a couple of writers that consistently get good praise for their d20 work, with a view to bringing them on as full-time staff members. So, not only will they have a constant venue for their work, they will be able to support themselves and their families with it too. Best of both worlds.
Napftor: You make an interesting point about publishers needing to dig deeper into their own niches. However, I am not certain that it is correct

There are many angles to this, such as a company turning away from diversification in order to concentrate on what it knows and whether players really want full-spanning gaming worlds or prefer to create their own. We have a few products coming out soon that have been designed specifically to test this hypothesis, so I will let you know!
Finally, I have never bought into the idea (and this is mentioned again and again on the vaunted 'industry' forums) that the lesser companies - those start ups, perhaps, who are putting out their first book on their credit cards - are dragging down the entire industry, forcing good products off the shelves.
Poppycock. Utter poppycock. If you are producing a book that you believe is first class but it is not getting the sales you expected (and this includes healthy back catalogue sales beyond the three month mark) then you are doing something wrong. It is that simple. I do not believe for _one_ minute that the gaming public, our paying cutsomers, are stupid. I do not believe they throw their money around with no regard to what they are buying. They really are buying the books they want and are doing so month after month. If you are a company that is experiencing dwindling sales, don't blame other companies - it is something you are doing that is wrong, be it in production, quality, design, marketing, strategy or whatever. But don't blame the little guy (if you are having trouble matching his sales, you are in serious trouble anyway) and don't blame the larger guys who are doing 80% of things right. No one runs their business but you - and the customers we sell to know exactly what they want and how they want it (it is not as if getting feedback was ever a problem in this industry!).
So, if you are worried about your favourite hobby going down the plug hole, don't be. d20 has still got plenty of room to expand, grow and develop. Niches will be filled and new ones developed, even as the game system is taken into areas no one has yet found.
The future is bright. The future is d20.