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.

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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

MGibster

Adventurer
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
You’re absolutely correct. I got my order of events wrong. I don’t believe 5e would have come as quickly as it did if Paizo hadn’t had so luck success with Pathfinder. WotC was losing market share to Pathfinder.
 

gyor

Hero
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.
But that is my point if you do it right, you don't divide your market at all. Having a lot of setting does not require a lot of investments.

One key is to keep the official settings connected and useful for poaching for home brew settings. Another thing is to not be afraid to use EBooks for expanding settings. EBooks Beyond their core Setting book/s, this cuts expenses, and risk. Look at DMGUILD, while not official they are functional published by Wizards in a sense and there is now way more content being publish in 5e for D&D settings like FR then in 2e and it will only grow. Heck thanks to DMGUILD they are still selling the old 2e books as EBooks.
 

Parmandur

Legend
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. ;)
My personal hypothesis is that a large part of the backlash was cocktail related.

Who's ever heard of a Rum and Pepsi?
 

Parmandur

Legend
But that is my point if you do it right, you don't divide your market at all. Having a lot of setting does not require a lot of investments.

One key is to keep the official settings connected and useful for poaching for home brew settings. Another thing is to not be afraid to use EBooks for expanding settings. EBooks Beyond their core Setting book/s, this cuts expenses, and risk. Look at DMGUILD, while not official they are functional published by Wizards in a sense and there is now way more content being publish in 5e for D&D settings like FR then in 2e and it will only grow. Heck thanks to DMGUILD they are still selling the old 2e books as EBooks.
WotC really seems to have hit on something with their "genre booster" approach, too. Maybe you aren't running a game in Eberron, but maybe the adventure material for a Newspaper group patron will help a Forgotten Realms game, and monsters always help.
 

lowkey13

I'm sorry, Dave. I'm afraid I can't do that.
My personal hypothesis is that a large part of the backlash was cocktail related.

Who's ever heard of a Rum and Pepsi?
OH OH OH! My favorite fun fact!

We get the word cocktail from an ye olden time practice of taking a piece of ginger and shoving it up a horse’s posterior to make it cock its tail up, and seem younger and friskier!

I don't know that you can do that with either Coke, or Pepsi.
 

Parmandur

Legend
OH OH OH! My favorite fun fact!

We get the word cocktail from an ye olden time practice of taking a piece of ginger and shoving it up a horse’s posterior to make it cock its tail up, and seem younger and friskier!

I don't know that you can do that with either Coke, or Pepsi.
Only one way to find out.
 

Staffan

Adventurer
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.
This is, I think, why Pathfinder 2 is being so successful while at the same time getting some accusations of being 4e-like. They identified the same problems with 3e/PF, but came up with better solutions.

This is clearly what killed TSR, or part of it, not Setting bloat.
Think of it this way. You have 100 hit points. A dragon breathes on you which deals 85 points of damage to you. Then one of the dragon's ogre flunkies runs up to you and crits you for an additional 17.

Which of these two KOed you? In the direct sense, the ogre. He's the one who brought you to 0. But if the dragon hadn't breathed on you first, the ogre's crit would have been a nuisance - sure, it hurts, but you can deal with it. The bulk of the damage, that dropped you to the point where a lucky crit from an ogre could KO you, was dealt by the dragon.

Similarly, TSR was hurting from a long series of poor business decisions. Multiple settings was one. Poor cost control was another (publishing books that cost more to make than TSR could sell them for). Overprinting Dragon Dice was a third. And I'm sure Ms. Williams funneling some money to herself via the Buck Rogers license didn't help. So, in 1996, TSR was in bad shape, and Random House got sick of being treated as their ATM and demanded their money back instead of unsellable crap novels, which was the killing blow.
 

JLowder

Explorer
Looking into Lowder, he doesn't seem to have been directly involved with D&D for ~25 years, and was never a WotC employee. Not a current insider.

Mearls spoke on the topic on some point, feel free to listen to the Happy Fun Hour archives.
WotC continues to keep my books in print in various formats, I worked with both WotC and Hasbro on the Worlds of D&D comics for Devil's Due a few years back, I was a consultant on Tomb of Annihilation, and I have talked with folks over at WotC about fiction as part of the D&D IP as recently as a few months ago. RPG-related fiction is a specialty for me.

When venture an opinion about WotC's fiction program, I make it clear it is my opinion. I also don't cast myself as an insider. But, yeah, I actually do still have connections to the program and the company.

Cheers,
James Lowder
 

Parmandur

Legend
WotC continues to keep my books in print in various formats, I worked with both WotC and Hasbro on the Worlds of D&D comics for Devil's Due a few years back, I was a consultant on Tomb of Annihilation, and I have talked with folks over at WotC about fiction as part of the D&D IP as recently as a few months ago. RPG-related fiction is a specialty for me.

When venture an opinion about WotC's fiction program, I make it clear it is my opinion. I also don't cast myself as an insider. But, yeah, I actually do still have connections to the program and the company.

Cheers,
James Lowder
Alright, duly noted.
 

JLowder

Explorer
He went more into detail about it elsewhere, but Google Fu hasn't turned that up. The gist was, WotC didn't see a point to continuing to invest in producing the novels internally. Believe it or not, no big Hasbro boogieman killed the novel division, that was all WotC.
It's not either/or here. Hasbro has never been all that thrilled about the fiction program. This goes back to when they bought WotC and did not even realize that the company published fiction. (I was told a Hasbro VP noted in an early meeting something along the lines of "We do fiction?" when told about the latest Salvatore bestseller.) Fiction publishing and distribution is not the same as game publishing and distribution, and Hasbro knows they are not experts there. They normally license that out, just as they license out comics and other stuff that is not part of their main business.

So long as WotC's fiction program was making sufficient money, Hasbro was willing to let it go on, but they were not throwing more money at it to grow that part of the operation. There were talks shortly after the WotC purchase to make the WotC fiction department a more robust operation within Hasbro, where WotC Fiction would publish material tied to other Hasbro IP or projects. There were even some books commissioned and written, which will likely never see the light of day because Hasbro decided it did not want to go in that direction before any were published.

Since that happened, the book department at WotC has steadily shrunk and was eventually subsumed by games. (D&D-related fiction had been a separate department since around 1990, back at TSR.) Fiction got fewer and fewer resources, and was cast more and more as support product to games. They lost many of the fiction experts in house. WotC came to run the fiction in ways that made it less attractive to fiction authors. Sales overall continued to diminish, as might be expected. The exception here was Bob Salvatore's Drizzt material, but WotC had figured out some time ago that they should leave Bob alone to write what he wanted and, basically, build his own teams to get his books done.

Barring some major change of direction, it was inevitable after Hasbro decided not to make WotC Fiction a bigger part of the Hasbro operation that the fiction lines would eventually be closed and the fiction licensed out. Because that's the standard Hasbro approach to fiction--which eventually became the standard WotC approach. When Mike M. and other WotC folks talk about the company not being fiction experts or not having the resources, I would venture a guess that we are all in agreement on the problems and the history of how the fiction program got to the point where it made limited sense to continue.

By the by, fiction had never been a strong aspect of WotC's identity, either. They had tried to do Magic fiction in house, but ended up burning the program to the ground once or twice even before the TSR purchase. They went the licensing route at one point with Magic fiction, too, so it was not a big jump for them to start thinking like Hasbro on this. (Side note: I was offered the job of heading up a new Magic fiction line at WotC after the TSR buyout, but turned them down because I did not see a really clear, longterm commitment to fiction within the company. It was the right move; the line I was going to head up was killed a couple months later, along with a planned Magic RPG that was going to created in tandem. Though I admit the overall fiction program hung on a lot longer than I had expected.)

The interesting thing now, of course, is that both WotC and Hasbro are realizing that their best chances of branching out into other media rests with narrative content, such as fiction. You don't make miniatures or Netflix series out of the Encumbrance Rules, but WotC got a lot of subsidiary use and related products out of my novel The Ring of Winter (Artus Cimber, Ras Nsi, etc, etc, in RPGs, minis, board games, card games, computer games...). So it is possible they (Hasbro + WotC) end up bringing fiction back in some form. That now fits in with the larger vision for D&D's value as an IP, and vertical content creation and delivery are back in fashion (eg WotC buying a computer game company), so fiction could get better resources and more support this time. What happens with the latest planned D&D movie will impact the fate of fiction at the company quite a bit, so we shall see how that plays out.

Cheers,
Jim Lowder
 
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Parmandur

Legend
It's not either/or here. Hasbro has never been all that thrilled about the fiction program. This goes back to when they bought WotC and did not even realize that the company published fiction. (I was told a Hasbro VP noted in an early meeting something along the lines of "We do fiction?" when told about the latest Salvatore bestseller.) Fiction publishing and distribution is not the same as game publishing and distribution, and Hasbro knows they are not experts there. They normally license that out, just as they license out comics and other stuff that is not part of their main business.

So long as WotC's fiction program was making sufficient money, Hasbro was willing to let it go on, but they were not throwing more money at it to grow that part of the operation. There were talks shortly after the WotC purchase to make the WotC fiction department a more robust operation within Hasbro, where WotC Fiction would publish material tied to other Hasbro IP or projects. There were even some books commissioned and written, which will likely never see the light of day because Hasbro decided it did not want to go in that direction before any were published.

Since that happened, the book department at WotC has steadily shrunk and was eventually subsumed by games. (D&D-related fiction had been a separate department since around 1990, back at TSR.) Fiction got fewer and fewer resources, and was cast more and more as support product to games. They lost many of the fiction experts in house. WotC came to run the fiction in ways that made it less attractive to fiction authors. Sales overall continued to diminish, as might be expected. The exception here was Bob Salvatore's Drizzt material, but WotC had figured out some time ago that they should leave Bob alone to write what he wanted and, basically, build his own teams to get his books done.

Barring some major change of direction, it was inevitable after Hasbro decided not to make WotC Fiction a bigger part of the Hasbro operation that the fiction lines would eventually be closed and the fiction licensed out. Because that's the standard Hasbro approach to fiction--which eventually became the standard WotC approach. When Mike M. and other WotC folks talk about the company not being fiction experts or not having the resources, I would venture a guess that we are all in agreement on the problems and the history of how the fiction program got to the point where it made limited sense to continue.

By the by, fiction had never been a strong aspect of WotC's identity, either. They had tried to do Magic fiction in house, but ended up burning the program to the ground once or twice even before the TSR purchase. They went the licensing route at one point with Magic fiction, too, so it was not a big jump for them to start thinking like Hasbro on this. (Side note: I was offered the job of heading up a new Magic fiction line at WotC after the TSR buyout, but turned them down because I did not see a really clear, longterm commitment to fiction within the company. It was the right move; the line I was going to head up was killed a couple months later, along with a planned Magic RPG that was going to created in tandem. Though I admit the overall fiction program hung on a lot longer than I had expected.)

The interesting thing now, of course, is that both WotC and Hasbro are realizing that their best chances of branching out into other media rests with narrative content, such as fiction. You don't make miniatures or Netflix series out of the Encumbrance Rules, but WotC got a lot of subsidiary use and related products out of my novel The Ring of Winter (Artus Cimber, Ras Nsi, etc, etc, in RPGs, minis, board games, card games, computer games...). So it is possible they (Hasbro + WotC) end up bringing fiction back in some form. That now fits in with the larger vision for D&D's value as an IP, and vertical content creation and delivery are back in fashion (eg WotC buying a computer game company), so fiction could get better resources and more support this time. What happens with the latest planned D&D movie will impact the fate of fiction at the company quite a bit, so we shall see how that plays out.

Cheers,
Jim Lowder
So far, it appears the strategy is to license it out to traditional publishers.
 

JLowder

Explorer
So far, it appears the strategy is to license it out to traditional publishers.
Yes. Go with operations who know the market and plan to make all your money through licensing fees. The fiction market right now is a disaster. (I am dealing with distribution headaches as part of my work with Chaosium.) There are a lot of good reasons to be cautious about publishing fiction right now.

Licensing does leave the content a little less in your direct control, though, and adds a long time to the development process. Doing fiction in house means you can get a book out within a year if you spot a trend. It's harder to do that with licensed books, because the review and approval process can add months to the schedule.

It's also harder to coordinate content between things being published in house and things that are licensed, though Google Docs, Skype, Slack, and a lot of other tools make that much easier than it was even a few years ago.

The financial question becomes: Can you make enough money through licensing fees that it's worth the company's time to employ staff to do approvals? And there's also the creative/IP control question, though: Would you be better off making the narrative IP development part of your main business?

Cheers,
Jim Lowder
 

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