When Random House Sued TSR For $9.5M

Benjamin Riggs is continuing to talk about his research into the history of TSR. He recounts here a tale of TSR's accounting practices which contributed to their eventual demise.

Dungeons-and-Dragons-Basic-Set.jpg
Check out Ben's Plot Points podcast

In April of 1996, Random House sued TSR for lack of payment on an $9.5 million loan.

You may ask yourself how TSR came to owe its distributor such a large sum of money. The answer lies in the 1979 distribution agreement between Random House and TSR, in which Random House became TSR's exclusive avenue into the book trade. In that agreement, signed by Gygax himself, Random House agreed to advance TSR 27.3% of the retail value of their product upon receipt. Random House could also return the product to TSR for a refund. All this meant that TSR could produce cash by shipping to Random House instead of waiting for actual customers to purchase their products.

The arrangement seems bizarre, but Jim Fallone, a TSR alum familiar with the agreement, said there may be an excellent reason for it. TSR's books were beautiful, and therefore expensive. Also, TSR had a back catalog that sold well. Sometimes, TSR faced a choice between printing new material, and reprinting old material that sold well, but might take time to make a return on printing costs. The Random House agreement was a way around this problem. TSR could print and ship new copies of the Player's Handbook knowing that they would get paid for it soon, and then also afford to print new material.

According to Fallone, the math on all this works out fine, so long as no more than 20% of TSR's products are returned. But in the 90's, TSR's many forays into creating new game worlds increased their levels of returns to more like 30%. At the same time, TSR began overprinting products. DragonStrike, for example, was a hit game that was driven into the red by overprinting. The game sold 100,000 copies, and had reorders for 50,000 more. Management, however, decided to print 150,000 copies of the game, which never sold.

Also, TSR began to use Random House to generate ready cash. Fallone said that TSR began to “abuse the loan aspect of the contract by shipping product to Random House that there is no actual sales demand for just to generate the advance payment in order to cover printing debts then you pour gasoline on the fire."
These practices helped cause TSR's near bankruptcy in 1997.

Thanks to historian Michael Calleia for providing me with a copy of the 1996 lawsuit and 1979 contract.

If you're interested, I talk to TSR alums Jim Lowder and John Rateliff here about the contract. "A 1979 contract between Random House and TSR would take 18 years to kill the company that started the role-playing game hobby. Thanks to historian Micheal Calleia, Ben has a copy of that very contract, and discusses how it led TSR to near bankruptcy in 1997 with TSR alums James Lowder, Chaosium’s executive editor, and John Rateliff, an internationally renowned Tolkien scholar."
 
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Russ Morrissey

Comments

Beleriphon

Totally Awesome Pirate Brain
In retrospect it reminds me of Coca-Cola releasing New Coke in 1985, where its often been speculated that they did it on purpose knowing itd fail just to make tons more money a few months later with Coke Classic. Again I could be wrong.
To quote the Coca-Cola Company President and COO, Donald Keough at that time, "We're not that dumb, and we're not that smart."

Actually market share and sale showed that New Coke sold as well, if not better, than the original formula. The problem was less about sales and more about marketing. If the formula had been slowly changed to the new one without changing packaging or even telling consumers most people would never have noticed.
 

billd91

Hobbit on Quest
Hasbro has had a light touch on WotC management (don't hurt the goose that lays the golden cards!),
I'm not so sure of that considering it's likely Hasbro's core branding issues are part of what set 4e on a course to failure. Moreover, they're the ones who installed Greg Leeds as CEO of Wizards from within Hasbro. My thoughts on that was it was intended to transmit Hasbro corporate culture into Wizards of the Coast.
 

Parmandur

Legend
I'm not so sure of that considering it's likely Hasbro's core branding issues are part of what set 4e on a course to failure. Moreover, they're the ones who installed Greg Leeds as CEO of Wizards from within Hasbro. My thoughts on that was it was intended to transmit Hasbro corporate culture into Wizards of the Coast.
Some have speculated about the "core brand" initiative causing issues, but honestly things were more complicated than that, and most of 4E's problems were unrelated in my experience.

Leeds ended up doing a pretty good job: his leadership allowed WotC the space to do a two year suspension of material and playtest. That's amazing, when you think about it.
 

Hussar

Legend
I'm not sure I agree @Parmandur - you can trace a lot of 4e's design decisions directly back to the notion of "core brand".

For example, why design 4e around the idea of powers with very concrete, discrete effects? Well, it allows for every table to have roughly similar experiences because it somewhat writes off the effect of the individual DM. Which is important if you're going to have this massive influx of new gamers who are in need of that guidance.

I'm not saying that's a correct idea. 5e kinda shows that maybe it wasn't such a great idea really. :D But, the logic is pretty easy to follow. If we're going to have two or three times as many gamers as we have now, and those other 50-66% of gamers have little to no gaming experience, we want them to be able to play with as few hiccups as possible. It's applying the Magic the Gathering (or MMO's if you like) logic to D&D.

So on and so forth. 4e arguably takes so much of the workload off of the DM with the idea that the DM, while the greatest asset to the game, is often also its greatest hinderance. :D
 

Parmandur

Legend
I'm not sure I agree @Parmandur - you can trace a lot of 4e's design decisions directly back to the notion of "core brand".

For example, why design 4e around the idea of powers with very concrete, discrete effects? Well, it allows for every table to have roughly similar experiences because it somewhat writes off the effect of the individual DM. Which is important if you're going to have this massive influx of new gamers who are in need of that guidance.

I'm not saying that's a correct idea. 5e kinda shows that maybe it wasn't such a great idea really. :D But, the logic is pretty easy to follow. If we're going to have two or three times as many gamers as we have now, and those other 50-66% of gamers have little to no gaming experience, we want them to be able to play with as few hiccups as possible. It's applying the Magic the Gathering (or MMO's if you like) logic to D&D.

So on and so forth. 4e arguably takes so much of the workload off of the DM with the idea that the DM, while the greatest asset to the game, is often also its greatest hinderance. :D
Sure, they made decisions that they judged would be friendly to onramping people into the game: but I think the designers believed they were good decisions that flowed logically from the evolution of 3.5, not something imposed from higher than Rob Heinsoo.
 

Zardnaar

Hero
I am not thinking of 3.5.
Wires crossed, 4E phb says it's D&D for the next decade, Mearls said he considered 5E 2010, design started 2011.

I remember late 2011 a ost claimed on the WotC site they had started work on 5E, claimed to be from the Seattle area.

The got poo pooed and then they announced the playtest not long after.
 

Zardnaar

Hero
Sure, they made decisions that they judged would be friendly to onramping people into the game: but I think the designers believed they were good decisions that flowed logically from the evolution of 3.5, not something imposed from higher than Rob Heinsoo.
Always came across as top down designers doing whatever they wanted.

Doesn't take a genius to realize that blowing up the realms and D&D at the same time might not be the best idea.

Bubble design maybe. The correctly identified the problems 3.5 had but came up with the wrong solutions. For example big 6 magic items, side effect of allowing PCs to buy magic items and escalating numbers.
 

LordEntrails

Adventurer
Taking the emotive "paying them for the privilege" language out of it, I'd be curious to find out how much money they make comparitively from DMs Guild (while being adventures and supplements, not novels). I know that the OBS rep at UKGE last year told me that many DMsG publishers were selling more than major publishers on DTRPG.
Several of the larger names have posted their revenue from the Guild on the Facebook group. Don't quote me numbers, but I'm pretty sure that several were well over $50k (profit, after art costs and revenue sharing etc).

but a murder suicide nixed that plan
Huh? Care to link or share? First time I've heard this.
 

gyor

Adventurer
Benjamin Riggs is continuing to talk about his research into the history of TSR. He recounts here a tale of TSR's accounting practices which contributed to their eventual demise.

View attachment 114453
Check out Ben's Plot Points podcast

In April of 1996, Random House sued TSR for lack of payment on an $9.5 million loan.

You may ask yourself how TSR came to owe its distributor such a large sum of money. The answer lies in the 1979 distribution agreement between Random House and TSR, in which Random House became TSR's exclusive avenue into the book trade. In that agreement, signed by Gygax himself, Random House agreed to advance TSR 27.3% of the retail value of their product upon receipt. Random House could also return the product to TSR for a refund. All this meant that TSR could produce cash by shipping to Random House instead of waiting for actual customers to purchase their products.

The arrangement seems bizarre, but Jim Fallone, a TSR alum familiar with the agreement, said there may be an excellent reason for it. TSR's books were beautiful, and therefore expensive. Also, TSR had a back catalog that sold well. Sometimes, TSR faced a choice between printing new material, and reprinting old material that sold well, but might take time to make a return on printing costs. The Random House agreement was a way around this problem. TSR could print and ship new copies of the Player's Handbook knowing that they would get paid for it soon, and then also afford to print new material.

According to Fallone, the math on all this works out fine, so long as no more than 20% of TSR's products are returned. But in the 90's, TSR's many forays into creating new game worlds increased their levels of returns to more like 30%. At the same time, TSR began overprinting products. DragonStrike, for example, was a hit game that was driven into the red by overprinting. The game sold 100,000 copies, and had reorders for 50,000 more. Management, however, decided to print 150,000 copies of the game, which never sold.

Also, TSR began to use Random House to generate ready cash. Fallone said that TSR began to “abuse the loan aspect of the contract by shipping product to Random House that there is no actual sales demand for just to generate the advance payment in order to cover printing debts then you pour gasoline on the fire."
These practices helped cause TSR's near bankruptcy in 1997.

Thanks to historian Michael Calleia for providing me with a copy of the 1996 lawsuit and 1979 contract.

If you're interested, I talk to TSR alums Jim Lowder and John Rateliff here about the contract. "A 1979 contract between Random House and TSR would take 18 years to kill the company that started the role-playing game hobby. Thanks to historian Micheal Calleia, Ben has a copy of that very contract, and discusses how it led TSR to near bankruptcy in 1997 with TSR alums James Lowder, Chaosium’s executive editor, and John Rateliff, an internationally renowned Tolkien scholar."
This is clearly what killed TSR, or part of it, not Setting bloat.

I mean look at all the Settings for 5e, including 3rd party settings and you see that they are hurting 5e at all.

Thule, Scarred Lands, Midguard, Eberron, Forgotten Realms, Ravnica, Aquilae, Western Realm Gazetteer, Iskløft, Esper Genesis, Legendary Planet, Talislanta: The Savage Land, Arcanis, Primeval Thule, Numenera, Stargate, World of Farland, Pathfinder: Kingmaker, part of Ravenloft and Greyhawk, and more, ect...

If you count Planeshift articles you can add Zendikar, Dominaria, Innistrad, Amonket, Kaladesh, Ixalan.

With more coming.

This has not caused a split base or D&D to crash. You can have lots of settings if you are smart about it and make sure you don't over print.
 
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jedijon

Explorer
If ya’ll could find some way to get together around a gaming table and record/film it, I’d watch—amazed.
 

MGibster

Adventurer
Honestly I couldnt even begin to remember where I read this or who said it so its possible Im misquoting or misremebering. But I remember thinking at the time I read it that it was a pretty dirty move as they planned on eventually releasing 5E before they even released 4E. 5E wasnt designed before 4E but 4E was always meant to have a finite product life cycle, IIRC, 5 years. Struck me as odd when I read it. In retrospect it reminds me of Coca-Cola releasing New Coke in 1985, where its often been speculated that they did it on purpose knowing itd fail just to make tons more money a few months later with Coke Classic. Again I could be wrong.
It's very easy to fall into the trap of thinking a large company is infallible but they make mistakes. New Coke was a serious miscalculation on the part of Coca-Cola but switching to a new formula made sense from a business standpoint. Their were losing ground to to Pepsi, especially among younger soda drinkers, they're bottlers had a serious problem with the price of syrup, and they actually considered just having a new flavor of Coke but many in the company complained that they'd just cannibalize their own market as they did with Diet Coke and Cherry Coke. But Coca-Cola could not have predicted the overwhelming backlash against New Coke. But for a blunder it was a pretty successful one.

Likewise 4E was designed in response to lost market share. In 2000 who would have predicted another company like Paizo would come along and out D&D the new edition of D&D? 4E was an attempt to take the lead again and it failed spectacularly. I don't believe WOTC released a product they expected to fail so quickly.
 

Alzrius

The EN World kitten
Likewise 4E was designed in response to lost market share. In 2000 who would have predicted another company like Paizo would come along and out D&D the new edition of D&D? 4E was an attempt to take the lead again and it failed spectacularly. I don't believe WOTC released a product they expected to fail so quickly.
I don't know if D&D was losing its market share when 4E came out, but this sounds like you're saying that 4E was released as a reaction to Paizo. That wasn't the case; Paizo only went their own way and became a competitor to WotC when WotC cancelled Paizo's license to print Dragon and Dungeon magazines in anticipation of 4E while simultaneously not having finalized their (WotC's) plans for how much the new system would be accessible to third-parties.

Now, WotC gave Paizo some advance notice that their license to print the magazines was going to expire, but with no firm plans as to whether or not they'd be able to make 4E-compatible materials, Paizo was left in a slow-motion lurch. Printing requires months of advance notice, so Paizo had to make a decision and fast. With no clear signals coming out of WotC, Paizo eventually decided to go their own way, and so they created Pathfinder...which for its first two years was entirely 3.5 compatible, only becoming its own RPG in August of 2009, over a year after 4E had been released (though they'd announced that it would be its own RPG as early as March of 2008, when they began their open playtest).
 

billd91

Hobbit on Quest
This is clearly what killed TSR, or part of it, not Setting bloat.

I mean look at all the Settings for 5e, including 3rd party settings and you see that they are hurting 5e at all.

Thule, Scarred Lands, Midguard, Eberron, Forgotten Realms, Ravnica, Aquilae, Western Realm Gazetteer, Iskløft, Esper Genesis, Legendary Planet, Talislanta: The Savage Land, Arcanis, Primeval Thule, Numenera, Stargate, World of Farland, Pathfinder: Kingmaker, part of Ravenloft and Greyhawk, and more, ect...

If you count Planeshift articles you can add Zendikar, Dominaria, Innistrad, Amonket, Kaladesh, Ixalan.

With more coming.

This has not caused a split base or D&D to crash. You can have lots of settings if you are smart about it and make sure you don't over print.
But how many of those settings are getting a lot of WotC investment? Most aren’t even theirs. By comparison, TSR was producing materials for multiple settings, dividing their own market, and often setting price points based on what they thought people would pay, not how much they cost to produce. That helped hollow the company out so the cash flow crisis and Random House cracked them like a piñata.
 

lowkey13

I'm sorry, Dave. I'm afraid I can't do that.
It's very easy to fall into the trap of thinking a large company is infallible but they make mistakes. New Coke was a serious miscalculation on the part of Coca-Cola but switching to a new formula made sense from a business standpoint. Their were losing ground to to Pepsi, especially among younger soda drinkers, they're bottlers had a serious problem with the price of syrup, and they actually considered just having a new flavor of Coke but many in the company complained that they'd just cannibalize their own market as they did with Diet Coke and Cherry Coke. But Coca-Cola could not have predicted the overwhelming backlash against New Coke. But for a blunder it was a pretty successful one.
The New Coke blunder is incredibly instructive for a lot of reasons, and while you summarize it pretty accurately, I think that some of the salient points remain instructive for people who either weren't around or didn't fully understand all the points.

1. Coke had always been the 500lb gorilla in the soda industry. But what people often forget is that Pepsi ("The Choice of a New Generation") was destroying Coke in the early 80s- it was hip, it had the celebrity power, and so on.

2. Coke did everything right in terms of testing and rolling it out. Really. Internally, they designed a product that people preferred to both Coke AND Pepsi. And the pulled out all stops in advertising it- this was the new, awesome coke! You're going to love it!

3. Except people didn't. See, there's a lot of ways to look at it, but the thing is ... you're just selling sugar water. In a certain way, whether it's Coke, or Pepsi, or RC, or OK (heh), or McStore GenericFace, it's flavored sugar water. Consumers aren't purchasing based on blind taste tests- they are purchasing based on brand identification, loyalty, nostalgia, and habit.

This terrible unforced error had two amazing properties- it rekindled the public's desire to have the "real Coke," and it refocused the Coca Cola company on, well, not worrying so much about the taste, but hitting hard on brand loyalty and nostalgia.


What this means in other areas is an exercise that I will leave up to others. ;)
 

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