Drowning in Gold: The Kickstarter Menace

Welcome back! We’re going to cover the impacts of Kickstarter on the 3-tier system in this post. You can go back and read about the 3-tier system, and the impacts of online game stores and mass-market stores on the industry in our previous posts.

Scaling Up

When Kickstarter launched in 2009 nobody realized how much of a force it would become in the boardgame industry. Boardgame projects started appearing on the platform in 2010, with Alien Frontiers and Eminent Domain, which raised nearly $15,000, and nearly $50,000, respectively. By the end of 2011, nearly $2 million had been raised on Kickstarter. This trend accelerated dramatically, jumping to over $15 million the following year, and eventually reaching $176 million by 2019, a growth of almost 90x over 9 years. Nearly $800 million have been raised for tabletop games on Kickstarter in that period.

For a sense of scale, in 2018, hobby games did about $870 million in sales in North America (including board, card and dice games, RPGs, and miniatures games like Warhammer, but excluding CCGs). Though the details are murky, it seems reasonable to conclude that KS represents at least 15% of the North American boardgame market. And while the rate of growth has slowed somewhat, every day, on average, 7 new games are funded on KS.

Kicking Down Barriers to Entry

In every industry there is competition not only among the existing players, but among outsiders who hope to break in. Some industries are very hard to break into. If you want to start a new airplane manufacturer, for example, you need an enormous list of skills and assets, including money, smart people, influence among regulatory bodies, access to raw materials, and more. All of these represent barrier to newcomers who wish to enter the market.

The hobby boardgame industry was never an especially high-barrier market to begin with. Games are not very hard to manufacture, there are no secret patents and processes involved, and the raw materials are common and easy to source. Games are also not very expensive to design, at least insofar as designers work on a royalty basis, meaning that publishers don’t need a lot of cash up-front to secure rights to a game. There are real costs in illustration, graphic design, shipping, and marketing, but on the whole, it takes a lot more start-up capital to open a retail game store than it takes to publish a game. Yet, for many publishers who started up in the 80s and 90s their only option was to mortgage their homes and take loans from friends and family.

Normally, when a business wants to raise money, it can either take on debt, or sell equity in return for investment. From the perspective of an investor, lending money is less risk, and has lower potential returns. Lenders charge higher interest rates on riskier projects, and will often ask for loans to be secured by an asset, or to be personally guaranteed by someone with assets. This way, if the business goes south, the lender can collect on those assets and at least limit their exposure to loss.

By law, in a bankruptcy, creditors get paid out before equity-holders which is why investing in a company by purchasing equity is risky. The entire investment can be lost if the business goes belly-up. In general, in small industries with relatively low margins, it’s hard to find a pool of investors. Why buy a slice of a boardgame company instead of, say, a video game company? Or a tech startup in a larger industry with greater potential for profit? Entrepreneurs in the boardgame space simply didn’t have access to capital markets to solicit investments outside of friends and family.

Aside from money, another substantial barrier to entry was access to the customer. Most games were sold through retail, and a new publisher needed to get picked up by a distributor or consolidator in order to sell at volume. Publishers who can count on sufficient volume can order larger print runs, driving down the cost of each unit and improving their profit margins. Without distribution, publishers simply didn’t’ have a way to shift enough units to make money.

Kickstarter to the Rescue

Kickstarter was the answer to both of these barriers. On the money side, Kickstarter enabled creators to raise cash in order to fund production and shipping. On the sales side, Kickstarter offered a combination of a direct sales channel and an effective viral marketing platform.

Kickstarter shifts a lot of risk from publishers to consumers. Normally, a company has to design, produce, ship and market a product before making any sales. Pre-orders from distribution in the months leading up to the “street date” (the day a product is officially for-sale in stores) represent the first taste of revenue for the publisher, after two years or more of spending. If the game goes poorly, all the money sunk into production now becomes dead inventory that is hard to sell and expensive to store.

However, the more important cost, the biggest loss, is the opportunity cost. Every publisher has a limited amount of capital to invest in making games. Each game is a shot at turning the initial investment into more money, and every miss is a lost opportunity to have made a different game, a more successful game, a game that would generate profits for years.

Advantages of Kickstarter

Kickstarter offered publishers an unbeatable package. Publishers could test demand for a product and pre-sell thousands of copies prior to actually committing to production. They could then take that money and use it to print the game. Publishers got money up front, and then delivered product as long as two years after receiving payment – a complete reversal of the normal approach of spending a lot of their own money two years in advance to make games, and hoping to collect money from customers at the end. In addition, KS offered opportunities for engaging customers over the course of the campaign, increasing virality of projects, and assessing demand from overseas.

KS sales were low-risk, yet also very profitable! In the KS direct-to-consumer model, publishers didn’t have to share revenue with distributors and retailers. Remember that publishers were used to getting 35-40% of MSRP per unit. Even after offering a rich discount to KS backers of as much as 25%, publishers were taking home 75% of MSRP per unit on these sales.

While KS was initially a channel for amateur publishers and enthusiastic hobbyists it very quickly transformed from a way to get a dream project produced and into a full-fledged business model for a new class of publishers. Kickstarter worked exceptionally well for a few different types of campaigns. In particular, campaigns for miniatures-based games were enormously popular and successful. Without Kickstarter, the relatively high startup costs of sculpting and mold-making made these projects very risky, but with Kickstarter they were a license to print a money. This concept bled over into high-quality and high-production boardgames more generally, which also succeeded well on the platform.

Another successful approach to KS was to monetize an existing fan base. Exploding Kittens raised over $8 million from fans of the internet comic The Oatmeal. Reprints or reboots of classic out-of-print games like Fireball Island did well, and even major missteps like the campaigns for Up Front and Glory to Rome failed to derail KS.

There’s much and more to say about how Kickstarter evolved, and the various business models that leverage it in one way or another. For our purposes we’ll focus on what KS is like today, in 2020. Publishers of all kinds use KS, from amateurs raising a few thousand dollars in modest campaigns to fund passion projects, to publishers who use KS as part of a near-exclusive direct-to-consumer business model, to traditional publishers who increasingly use Kickstarter for its marketing and cash-flow advantages. Some publishers grew up on KS, and then grew out of it. Others swore off KS at first but are now embracing it. And despite the fact that customers take on much more risk when backing a KS than buying a game, the number of backers continues to grow.

Kickstarter Finances

We’ve talked briefly about the advantages of Kickstarter, but this is a good chance to recap.

Traditionally, a publisher sells to a distributor for 36-40% of MSRP. The distributor sells for about 50% of MSRP, and the retailer sells for 100% of MSRP. Remember, the way a publisher sets MSRP is by calculating the per-unit landed cost of the game. That means how much it costs to print a game and ship it to the company’s warehouse, on a per-unit basis. They then multiply that cost by at least 5x, and for more mature companies by 6x-8x or even 10x. In other words, a game that costs $5 to print and ship might get an MSRP of $30 (assuming a 6x multiple). The publisher will sell the game to a distributor at no more than 40% of that $30, or $12. The $7 per-unit margin has to pay for all the other costs the publisher has, including marketing for the game itself, as well as any salaries and ongoing operational expenses.

On Kickstarter, the publisher collects all the revenue for the units they sell on KS. Looking at our example above, we might assume that the publisher would sell the game for $30, and keep it all. But that’s not actually what happens. First, there are a few costs that apply in KS that don’t apply in traditional retail. KS takes a 5% right off the top. There’s also a bite on the credit card processing of about 3%. In distribution, many invoices are paid by check, rather than credit card, so this is an additional costs. And finally, there’s last-mile shipping. KS publishers must deliver to the home of each customer, rather than to the warehouses of 1-3 distributors. Those shipping costs are a substantial additive cost.

Between the engagement needs of the KS campaign and the customer service needs of fulfillment, there are substantial operational demands that KS publishers must meet. Solutions like pledge managers help, but at a cost of a few points off the campaign. And staffing costs are generally higher for KS publishers, either directly, or through an outsourced fulfillment partner, to meet the need.

These additional costs are real, but they certainly are far less than 60% of MSRP though. Publishers are coming out far ahead relative to selling into distribution for 36-40% of MSRP. And since they’re still coming out so far ahead, publishers have room to charge customers less, while still delivering more. A game that costs $5 to produce might sell on KS for $25, or even $20, instead of $30. Backers are incentivized to back on KS through some combination of a discount off of the retail MSRP and some exclusive or additional game content. For the publisher, selling at $20 on KS still results in far more profit than selling to a distributor at $12 — so long as they don’t underestimate their shipping costs!

Kickstarter to Distribution

For a publishers using Kickstarter, those sales are only the first part of the overall revenue they hope their games will earn. The KS campaign’s first goal is to raise enough money to make a large print run possible. After KS fulfillment is done, the remaining copies still need to be sold, and ideally, the game does well enough to justify another print run. For many publishers that means selling the game into trade (ie distribution).

For distributors, KS games are a dilemma. Publishers have already fulfilled some of the demand for the game through the KS campaign. Moreover, the retail version of the game is typically lesser in content and/or quality, and also at a higher MSRP relative to what KS backers paid. That makes retailers less enthusiastic about carrying the title, unless there’s very strong demand. Retailers don’t want to order too many units from publishers, because they don’t know how much demand still remains for the game – it’s usually been a year or more since the KS campaign itself, and publishers don’t promote the retail release of a KS game nearly as heavily as the campaign itself. The distributor doesn’t want to over-order and then get suck with dead inventory.

As a result, distributors will generally shy away from ordering KS games, or will only order a small quantity, or will order only based on retailer pre-orders. If a KS campaign was especially large, that might be a factor, but if the publisher took late pledges, that will factor in the other direction.

Distribution Gets Flooded

Distributors, like everyone else, only have so much working capital, so they can’t buy everything. In the past, when there were fewer products, distributors could buy a larger quantity of inventory from publishers. This generally makes sense: large shipments do benefit from some economies of scale, and having inventory on hand meant never losing a sale. With fewer titles in general, games had a longer period of peak sales, and a long tail of consistent low-volume sales.

As publishers started publishing more titles, distributors tried to keep up. Publishers and distributors are partners, and publishers expected that distributors would carry their whole line, including the bestsellers and the back catalog. However, with more games entering the market, something had to give. Distributors either had to cut SKUs from their catalogs to make room for the new ones, or they had to buy fewer copies of games and stock a broad, shallow catalog. Mostly, they opted for the latter.

The challenge with stocking a broad catalog is scalability. BoardGameGeek lists over 600 titles and expansions that were published in 1999, and over 2500 that were published in 2019. With that kind of growth, distributors can’t possibly keep up. Every new title represents a conversation with a publisher, a sell sheet or a page in a catalog, a shelf in a warehouse, orders in and orders out, and another item that needs monitoring and reordering when stock runs out. And since distributors carry fewer of each title, reordering has to happen more often. Every system for keeping track of stock and orders is strained. Personnel have a harder time remembering what’s coming, reorders are harder to assemble and execute. And it’s not just SKUs, it’s also more publishers. That means more relationships, more orders to put in, more shipments, each with fewer items in ever-more categories. Once upon a time, distributors could help sell a product to retailers. These days, they barely know what’s moving on and off their shelves.

In the midst of this crush of volume comes the reality that profitability isn’t necessarily accompanying the volume. The shortened sales cycle and tiny tails of many games have left distributors holding more dead stock than ever before. Narrow margins have narrowed further due to the higher transaction costs of stocking broad but shallow. Asmodee’s exclusive arrangement with Alliance put the other four major distributors in a bind by taking away tent-pole deep-stock products. Retailers buying in ones and twos and ordering frequent restocks cut into the margin some more. In essence, distributors were working harder and harder for smaller margins. At the same time, they were serving both publishers and retailers less and less well.

Other Tiers Respond

Publishers depend on distributors to reach customers at scale. But suddenly, some publishers were using Kickstarter, Amazon and the like, and racking up high-margin direct sales to fatten their bottom line. At the same time, sales into distribution were declining. Publishers saw it as distributors taking on less risk and failing to partner and push winning products. That characterization is not entirely fair though – it was the publishers who were publishing more and more titles and fragmenting the market.

Another important contributing factor is the ongoing absence of centralized data or shared data standards and communication. Often, a retailer will order a restock from a distributor, only to be told that the product is out of stock. However, the publisher will have plenty of stock available. Unfortunately, though, the data systems in use today do not provide visibility throughout the supply chain. Retailers may not know the product is available from the publisher. Distributors may not know either. Publishers don’t know whether distributors are coding a product as out-of-print or simply out-of-stock. This is an enormous point of friction that further favors direct sales, shorter supply chains, and greater visibility into those supply chains.

No matter who was to blame, publishers looked at the bottom line and saw rising numbers in direct channels, and declining numbers in trade. And they didn’t need traditional distributors to access some promising high-volume channels like Amazon and Target.

Retailers found themselves in a less satisfactory position. Distributors were less and less helpful in helping them identify great new hits, even as they were also becoming less reliable as a source of product. Even when the product was in stock, it was often more expensive than customers had grown to expect, thanks to KS and OLGS. Exclusive KS content, botched product launches and allocated print runs left retailers struggling to serve their customers. Even regular, loyal customers began to wonder why their game store was no a reliable source for the games they were most excited about.

Retailers responded in a variety of ways, and quite a few have closed over the years, unable to compete simple as a shopping outlet for games. As profit margins continue to shrink at retail, many stores are pivoting to other revenue-generating products and services, including stocking accessories, apparel, and sometimes even furniture instead of games themselves. Many of these products don’t come through traditional distribution either.

What Does the Future Hold?

How will all these strands come together? Will distributors rebound? Will online retail eat B&M whole? For those and other predictions, you’ll have to wait for the exciting conclusion to Drowning in Gold! See you back soon!