Welcome back. In our last post we covered the basics landscape of the three-tier system of retail distribution. This time, we’ll turn our attention to some of the early disruptions to this system.
Online Game Stores (OLGS)
In the early 2000s, brick-and-mortar (B&M) board game retailers everywhere started facing increasing competition from online stores. Various retailers started selling online. Some were large warehouse-style retail stores like CoolStuffInc (CSI) that began offering online ordering as a more convenient alternative to phone-order sales. Boardgame buying clubs emerged too – loose groups of customers who banded together to order games from distributors at a discount. Others market entrants were purely online sellers, with a different business model than retail stores: narrow profit margins and high volumes.
Most friendly local game stores (FLGS) buy games at 50% of the MSRP, and sell at MSRP, for a margin of 50% of MSRP. That margin has to pay for all their salaries and fixed cost. Some stock won’t sell at full price, and needs to be discounted, and eventually cleared out at cost or liquidated below cost. Retailers tend to cut prices reluctantly, since the cost of holding stock is relatively low (or is perceived as being low) at most stores. By holding the line on prices, retailers maintain the value of the games they sell, and teach customers that if they want the game, they have to pay the MSRP, because there is no inevitable major price reduction coming.
OLGS, on the other hand, don’t have a physical storefront. They have to maintain a website, but that’s relatively inexpensive, and they save substantially on labor, land, and building costs, since they can build their warehouses in cheap industrial zones rather than pricey, well-trafficked commercial districts. Instead of selling at MSRP, OLGS sell games at as much as 30-35% off of MSRP (e.g. a $50 MSRP game will sell at roughly $35 or less). With free shipping at $100 or $150 per order, OLGS incentivize gamers to buy larger individual orders, which likely leads to more games being bought overall too. Even though the profits for each sale are far smaller, the high volume makes up the difference.
Who’s Afraid of the OLGS?
OLGS are typically beloved by gamers, and despised by FLGS, for obvious reasons. But publishers have an ambivalent relationship with them. On the one hand, OLGS drive a lot of volume, and offer service to gamers who don’t live near an FLGS. On the other hand, by pricing games so low, they devalue them in the eyes of customers. If the publisher says a game is $50, but you can buy it for $35 online, isn’t the game worth $35?
Publishers sell to distribution, so they get paid the same amount whether those distributors sell on to an OLGS or an FLGS. But FLGS began to ask why they should buy that $50 game for $25 when they had much less chance to sell it for $50? Some of the sales they used to be able to count on migrated online, where people bought the game for $35. Understandably, customers were not willing to pay such a large premium to buy at their FLGS, and FLGS began to avoid stocking games there were heavily discounted online.
This has led to charges, by FLGS and some publishers, that OLGS are a parasitic business model. The argument is that OLGS alone couldn’t sustain the needs of the game industry. Unlike FLGS, the OLGS don’t have play-spaces, active communities, and organized events that help to grow the industry and attract and retain new customers. Instead, OLGS simply pick off a segment of customers from the FLGS after the FLGS as done the hard work of converting the customers.
This argument has some merit, but it also fundamentally misunderstands the unbundling of services that the internet enabled. FLGS provide a few services to gamers, including play space, community, information about games, and, naturally, the games themselves. However, FLGS generally charged mostly for the games themselves, and those revenues subsidized the rest of the business.
Thanks to the internet, though, gamers could learn about games and experience a virtual game community on BoardGameGeek, Facebook, Twitter, and Reddit. They could connect with other gamers in real life through Meetup. They could even try games before they bought them using software emulators like Vassal or by playing at Board Game Arena and other sites. The could then buy games, at a discount, from an OLGS.
This happy arrangement was especially appealing to the very large group of people who don’t live in driving distance of a good FLGS. And FLGS on the whole had a negative reputation for being inhospitable, unprofessional, and generally seedy places of business. While there are many quality FLGS, for people without access to one, the OLGS and the rest of the online gaming ecosystem was incredibly attractive, and is perhaps internally sustainable.
Imports and Exclusives
The US boardgame revolution is usually traced back to 1996, when Settlers of Catan arrived from Germany, and alongside Magic: The Gathering, laid the foundations of the modern US gaming industry. Germany’s larger and more established gaming industry continued to churn out hits and must-have titles that the US market was now primed and excited for.
One way those games found their way into the market was through online game stores. Brick-and-mortar retailers couldn’t justify flying out to Essen, Germany for the annual Spiel, the largest boardgaming convention in the world. They couldn’t sell enough copies of new games in their store to justify making the trip.
But OLGS, with their national reach, higher volume, and more hobby-focused audiences, could serve as a conduit for importing games from Europe. In some cases, OLGS were able to secure exclusive rights to distribute and sell a game in the US. These exclusives were important to driving new customers to create accounts and buy for the first time from an online store. One example of this was FRED (Funagain Retail Exclusive Distribution), which has experimented with various models for exclusives, including signing exclusive distribution deals for specific games with publishers, and signing retail-exclusive deals where certain games would only be available from their retail partner, Funagain. The relationships between FRED, Funagain and Eagle-Gryphon Games are themselves a fantastic tutorial on the changes rippling through the industry.
Exclusives, by the way, were nothing new. Distributors were fundamentally offering a commodity service to retailers. They all sold the exact same games at roughly the same prices. Distributors generally gave better terms to stores that ordered from them in larger quantities, which encouraged stores to concentrate their with one main distributor to maximize their discount.
In order to compete with one another and try and break into relationships between distributors and stores, competing distributors sought to sign publishers to exclusive distribution relationships. In an exclusive distribution relationship, only one distributor carries the games of a particular publisher. Fantasy Flight Games and Alliance distribution had one of the most consequential exclusive relationships. Today, Alliance remains the exclusive distributor for FFG’s parent company, Asmodee, who control properties like Catan, Ticket to Ride, and games set in popular universes like Star Wars, Game of Thrones, and Lord of the Rings. As a result, nearly every game store needs an account with Alliance. It remains an open question in the industry whether the other four big distributors will be able to continue to profitably distribute board games without Asmodee products in their catalogs.
Throughout this period, the distinctions between retailer, distributor, and publisher all continued to blur. Some distributors were also operating OLGS; some FLGS were also operating OLGS and importing games from abroad like a distributor. Publishers were also getting in on the import game, with Rio Grande Games leading the way. Rio added value to imported games by creating editions intended for the US market, and then used their distribution agreements to push those games out into stores. New publishers like Z-Man Games followed suit, making localization and import their main business model.
MAPP Agreements
OLGS and their low prices weren’t only a problem for FLGS. The entire 3-tier system was threatened. Retailers, and increasingly, distributors, looked to publishers to address the issue. Publishers began to feel the pain as retailers shifted their buying habits to punish publishers that participated in the devaluation of their own games.
One way that publishers sought to defend the value of their products and ensure that retailers would continue to choose their games over the ever-increasing flood of alternatives was through MAPP agreements (Minimum Advertised Price Policy). In the US, the First Sale Doctrine says that once you sell a copyrighted product, like a board game, you, as the rights-holder, can’t continue to dictate to the buyer how they have to treat the product or how they can sell it. In effect, this limits the tools that publishers have to set prices in distribution or retail. Publishers can declare an MSRP, but nobody has to listen. In fact, if publishers and distributors colluded to fix game prices, that would likely be illegal.
Instead, what many publisher did was create agreements with distributors and retailers in which retailers agreed that to have an account with the distributor that gave them access to the publisher’s catalog of games, they would abide by a restriction to not advertise games below a certain price, typically 20% off of MSRP. While retailers could charge whatever they want, they couldn’t advertise low prices in stores, catalogs, ads, or even websites. In essence, this meant that OLGS would have to hike their prices back up to a level that made FLGS somewhat more competitive.
The problem with a MAPP agreement lies in enforcement. There are many retailers, both online and B&M, and monitoring infractions required cooperation and coordination with distribution. An FLGS could order from the distributor and abide by the MAPP in-store, but also operate an OLGS where the bulk of the games were actually sold, but not in compliance with the MAPP. It was very hard for publishers to police this behavior, and very easy for retailers to get around the system.
Amazon sellers were particularly hard to stop, since Amazon’s own compliance team wasn’t responsive. Scofflaw sellers who were caught could simply make new accounts, creating a whack-a-mole problem. Stonemaier Games founder Jamey Stegmaier detailed his company’s failed experiment with a MAPP back in 2018. In essence, without compliance from Amazon on price-setting it was impossible for Stonemaier Games to successfully control prices though its MAPP.
While other companies do have MAPPs, Asmodee’s is probably most notorious. A short time after Asmodee announced that it would restrict distribution to only the Big-5 distributors, they also declared that only approved retailers could sell their products online, and that online sellers would get different terms (read: higher prices and less time to pay) than B&M sellers. Asmodee would manage its relationships with Amazon, Target, Walmart and Barnes & Noble directly, under a different set of terms.
Asmodee’s new policies set off major disagreements across all tiers. On the one hand, all publishers liked the idea of protecting game values. Asmodee’s MAPP would help make all MAPPS standard and well-enforced. FLGS welcomed that too… but FLGS absolutely hated the restrictions on online sales. For most FLGS, online had become an important sales channel. Having to choose between online sales and Asmodee products put them between a rock and a hard place. At the very least, online sales were a way of turning slow-moving games into cash that could be invested in games that sold faster. OLGS were also unhappy, as they would be cut out completely. And everyone wondered what the impacts of Asmodee’s relationships with big-box seller and Amazon would be.
Ultimately, Asmodee pivoted from this heavy-handed and legally fraught approach. They signed an exclusive distribution agreement with Alliance and hand-in-hand with that agreement, Asmodee rolled out a MAPP that restricted advertised prices to 20% off. Rather than controlling customer prices by controlling the prices distributors could sell at, Asmodee moved to controlling the prices retailers could buy at. However, OLGS and sellers who more generally made more money from online sales than B&M sales are not eligible for a MAPP agreement with Asmodee, and as a result, they can’t order products from Alliance. Underpinning Asmodee’s ability to enforce this MAPP was its close, nearly-a-partnership relationship with its exclusive distributor, Alliance. And as a result, Asmodee has a much greater level of control over how its products sell and are priced online.
Consolidators
While Amazon and OLGS were growing into volume retailers, the publishing side of the industry was fragmenting enormously. Many publishers sought to enter the US market, but they needed help. In addition to designing, printing, and marketing games, publishers also need to handle warehousing, logistics, and selling games to stores and distributors. Foreign publishers and new publishers often sought to outsource those needs to one of two companies in the hobby market: Publisher Services, Inc. (PSI) and Impressions Game Distribution Services. These companies are called Consolidators or Sales Agents, and they take on aspects of both publishers and distributors. Typically, consolidators were helpful not only in managing logistics, but in helping companies sell into distribution.
Breaking into distribution was a major goal of new publishers, because distribution is a large sales channel that is otherwise difficult to sell into. But distributors are skeptical of new companies, especially those with only one or a couple of products. Each new publisher is a new account that needs servicing, a new set of shipments, new inventory, etc. With more and more publishers entering the market, distributors couldn’t keep pace.
Consolidators were part of the answer. Consolidators took all of their clients’ products and made a single, consolidated catalog. Distributors could purchase from that catalog, and the consolidator would ship the entire order as one. In essence, from a distributor’s perspective, a consolidator was like one big publisher.
Consolidators could also operate as mini-distributors or their own. While traditional retailers preferred to buy from their existing distributors, other retailers, including online game stores and big-box retailers, were open to buying direct from the consolidators. PSI, in particular, leveraged a relationship with Barnes & Noble into a sales pitch for itself. Publishers knew that PSI would pitch Barnes & Noble with the best games out of PSI’s stable, and many signed up with PSI hoping to access that channel.
OLGS Consolidation and What’s Next
Ultimately, the mushrooming OLGS phenomenon was only a transitional phase, as other parties started taking notice of the industry. Many of the original OLGS, like Funagain and Thought Hammer are either out of business or no longer operating as OLGS. The business has consolidated, with a handful of large companies continuing to operate the same basic model of selling at high volume and low margin. OLGS, like distributors, also handle CCGs, miniatures, and other categories. Some OLGS have gotten into the fulfillment business as well, helping publishers manage Kickstarter campaigns and other direct sales.
Overall, OLGS represent an important chapter in the story of the growth of board game retail online. However, like in other sectors, Amazon and big-box retailers are claiming more and more of OLGS business. The overall pie is growing, but the balance of power does appear to be shifting, inexorably, towards the big retailers. Next time, we’ll take a look at mass-market big-box stores took note of the board game sector, and started moving in. See you then!
