Tuesday, August 18, 2015

DSG Vintage Arcade Post-Mortem (For Now)

This is a somewhat sad article for me to write, but I know it's for the greater future.  Unfortunately, the DSG Vintage Arcade is, for now, effectively gone.  Reduced to a single classic vertical multi Ms. Pac-Man upright, a vestigial icon of what used to be, and which will remain in operation for as long as we're in business.  The greater dream of incorporating a genuine vintage arcade in the DSG business structure has, unfortunately, been relegated to the woodshed.  Space constraints are merciless, and the raw math has every square foot competing with every other as DSG continues to develop at a blistering pace.

In today's article, I'm going to recount how we got to this point, including showing some photos, and then we'll take a look forward to what the future holds for this business segment.

As some of you may know, I am an arcade video game and pinball enthusiast.  I use the word "enthusiast" in understatement here; one might as well call ordained priests "Jesus enthusiasts."  I love arcade games.  I utterly love them.  Ever since my first game of Pac-Man at the ripe old age of six years, in 1980, at the 7-11 store on Baseline and Price in Tempe, Arizona, I have been completely in the tank for arcade games.  Their combination of instant approachability and a challenging but rewarding learning curve had me hooked from the start.  And they rewarded literally: the better you became, the longer you could play on a single quarter.

Even when the Great Video Game Crash of 1983 hit, I was undeterred.  I gobbled up consoles and cartridges from the bargain bins and obliterated them in relentless play.  I took my allowance to the local pizza joint every chance I got and dumped those tokens into Gauntlet, 720 Degrees, Black Tiger, VS Super Mario Bros, Xybots, S.T.U.N. Runner, Mercs, and Cyberball, the internecine generation of arcade games between the golden age and the Fighter Era.

Oh, the Fighter Era.  That was when arcade games became a permanent thing in my life's journey.  Just as progressive metal music had started to eclipse video games atop my priorities list during my high school years at Brophy, during the tail end of my junior year, Street Fighter II: The World Warrior arrived at Golfland and seemingly everywhere else, and I couldn't get enough quarters to feed it.  I practiced the Shoryuken over and over, ad infinitum.  Champion Edition followed and I was there.  Mortal Kombat was so huge it even made governments take notice.  And all the while, the 16-bit and 32-bit console generations were delivering superb experiences to players at home.

Around the Street Fighter Alpha era, hardcore fighting fans started to build "Superguns," or adapters allowing them to plug JAMMA (Japanese standard architecture) arcade motherboards into television outputs and handheld controllers, and it became possible for us to play the real arcade fighters at home.  I bought a cheap and dirty imported Supergun, and I needed more.  In spring 1999, when I was partnered with Arizona Gamer, I bought a full upright Street Fighter II on eBay.  That launched me into a five-year binge of collecting, fixing, and operating arcade games.  Around 2003-2004 I sold off what I had at the time to avoid having to keep moving it from one rental dwelling to the next.

Here were two of my early units, a Vampire Savior 2 cabinet running SF2 Champion Edition (the VS2 board must have been in my Supergun at the time) and an X-Men vs Street Fighter in a converted Pit Fighter cabinet.  These are shown in spring 2000 in the back room at Gamers Cardz in north Phoenix.


That XvSF later got sold to a friend of mine, who then sold it back to me when I opened DSG.  I upgraded it to a Marvel vs Capcom 2, and then moved the MvC2 motherboard into a better cabinet.  That unit is now in my den at home.  Fifteen years of lineage continuity; not bad.  Lineage is a big deal with arcade game collecting, especially with so many converted in the field.  A perfect restoration would have units reverted to their original game as manufactured, and for "kit" games meant as conversions only, installations in reproduction cabinets.

Here were three units that were mine at the time (the candy cabinets) and one that was not (the Gauntlet), shown in summer 2000 at Gamer's Edge in Chandler.


The one and only Ray Powers bought them from me, took them home, had them in his kids' playroom for a decade, then sold them back to me when I opened DSG.  One of the candy twins had failed on him and been replaced with a 3Koam Z-Back cabinet, which I brought to DSG in the form of a Street Fighter II: Champion Edition machine, and then later Street Fighter Alpha 2.  Here it is in the foreground with DSG's opening-day arcade line-up!


Yes, that's a Star Wars, Ray's Gauntlet, a TRON, that same XvSF, and more.  Our initial vintage arcade line-up was pretty good if I do say so myself.  I was completely thrilled in early 2012 to be able to rebuild the arcade dream and make it an authentic value-add and an aspect of DSG that would set us apart from the competition.  And for a while, it did that.

After opening day I completed repairs on the Neo Geo candy cab that Ray sold me, and then added a Mortal Kombat II and 4 to the line-up.  A series of other games cycled in and out at a rapid pace.  Donkey Kong Jr and Mario Bros, SNK vs Capcom, a Nintendo Red Tent, Zaxxon, Black Tiger, and Rampage World Tour, among others.


DSG even had an exclusive!  Thanks to some archaeology by one of the business partners, we got hold of one of the only Ms. Pac Plus motherboards in existence.  We had a marquee custom printed for it and used a restored Ms. Pac cabinet as the shell.  Check it out, the only working copy of this game ever operated in public:


We still have the innards and marquee from the Ms. Pac Plus, but refitted that cabinet to a multi-Pac and sold it to a customer.

Late in the summer of 2013, we hit a jackpot of sorts.  A non-working Dance Dance Revolution SuperNOVA became available locally for far less than market value.  That same business partner and I knew we could fix the problems the owner described, so we picked it up.  It turned out to be an original first-run dedicated (not converted) unit, one of about 250 ever built by exclusive distributor Betson Vending using internals supplied by Sony and Konami.  The core system was a heavily modified Japanese Playstation 2.  The VGA monitor was dead and we replaced it, and voila:


Unfortunately, he and I were the only ones happy about it.  The other business partners hated it and its earnings after the honeymoon period weren't enough to defend the space it took up.  I really wish we had been able to store this thing for the future.  I grudgingly went along with the narrow majority preference to liquidate it instead.  A few eBay buyers bit and then flaked out; running out of time to decapitalize the item for tax purposes, we donated it to the Boys and Girls Club down the road.  Considering they got it from us for nothing, maybe they'll let us buy it back for a nominal fee at some point, if it's still intact.  It's absolutely gorgeous gear, it worked bang-perfect, and as an arcade game manufactured in 2006 (practically yesterday where this industry is concerned), it had an operational life expectancy as long as you like.

Over the course of early 2014, the arcade wasn't popular around DSG.  I wasn't working there full time and our then-manager didn't like it.  It still earned money, especially when we brought in a restored High Speed for DSG's first pinball machine.  As long as cash came in, the business prerogative kept at least some of the arcade on location.  However, space constraints had already effectively killed it; we just didn't realize it yet.

See, during the window of time when the DSG Vintage Arcade had around a dozen units operating, it was a draw all by itself.  People came just to see that, and we had a chance to get them interested in our other offerings.  Yes, it also earned money from existing customers, players waiting between tournament rounds or what have you.  But it also gave mainstream visitors a touchstone, a comfort point.  Something they understood and recognized.  Increasingly throughout 2014, comics took over the latter role, and as the arcade dwindled, it became an afterthought.  If you're not running at critical mass, it's just not an attraction.  The Pinball Hall of Fame in Las Vegas takes in over a million dollars in quarters annually using a line-up of restoration gear a lot like ours.  We'd be happy with a fragment of that, but we need to provide enough of a draw to move the needle in a market where "barcades" and weekend spots like Mesa's awesome Starfighters Arcade are the emerging factors.

The business partners and I understood the arcade could not succeed for as long as DSG's other business was physically crowding it out.  The economic benefit of a rack of retail against an arcade cabinet in that same square footage was no longer a question: Retail wins.  We were already starting to constrain organized play space, giving a haircut to the top end of our capacity that we never used and reducing our effective seating from 146 players to 108 -- and really only 72 when not running three games per table.  Around this time we began our long planning process toward our next location.  And it was agreed, the arcade would migrate to the homes of the equipment owners until such time as it could come back to life as an attraction on its own again.  We had to focus on making every square foot count, on monetizing our space as efficiently as possible.

I traded the red Z-Back to my business partner for a Tempest, which had been a longtime grail for me ever since it appeared in the Rush "Subdivisions" music video.  With my Donkey Kong vertical multi, the initial Bahrcade took shape in my living room:


Meanwhile, my business partner made a large buy of pinball gear from a container shipment and has spent the entire year 2015 so far gradually restoring the machines, week by week, piece by piece.  We have some amazing titles in store, both comic-relevant (Teenage Mutant Ninja Turtles), sci-fi relevant (Star Wars), rarities within the pinball world (Whodunit and No Good Gofers), and all-time greats (We're going to keep these a surprise for now).  We are bursting at the seams with excitement that we will eventually be able to bring all these and more to our customer public.

The final DSG Vintage Arcade line-up before it was reduced to the single Ms. Pac-Man included three other units: Street Fighter Alpha 2, High Speed pinball, and Star Wars Episode I pinball.  Episode I was one of two tables built on the Pinball 2000 architecture and is a genuine pleasure to play, an unexpectedly good game considering the poor quality of the movie license it wears.  Alpha 2 is in my home, while the two pins went back to the other guy's place for now.  The front corner where the arcade lived out its final days is being converted this week to retail rack and fixture.

At home, now located in my den, the Bahrcade today features a nostalgia row of hardware from DSG's now bygone era and a couple of pieces that are my own.  Clockwise from the east: Asteroids Deluxe, Tempest, Donkey Kong multi vertical, Radikal Bikers, Nintendo Playchoice with multi-NES Everdrive cartridge, Street Fighter II: Champion Edition pinball, Vectrex multicart, and not shown but added to the den since this photo was taken, my fighter cabinet with SF Alpha 2 and MvC2 motherboards in it.  I sold the TRON to a collector who made me a cash offer I couldn't refuse.



It will be at least the summer of 2016 before DSG is able to open a new location, and there will be overlap while the existing store still operates during its remaining lease.  The new location is being scouted and will be selected knowing that we intend to bring back all the glory of our vintage arcade many times over and we will need room to facilitate that.  I know I am setting a high expectation, but I also know how much amazing gear we have squirreled away right now, so I am confident of our ability to deliver on that promise.

If you're on the Video Arcade Preservation Society's KLOV (Killer List of Video Games) message board, you can find me there from time to time under the moniker Mike Valmike.  (My pseudonym is a Les Miserables reference.)  You can find the above-referenced DSG partner there as well under the handle MJMMX.  For privacy he prefers not to publish his real name online.  The Arizona collecting community on the KLOV board is really quite friendly, sociable, and helpful, and we are always happy to welcome another collector to the fold.  I guess you might say we're all... enthusiasts.

Monday, August 10, 2015

Three Years Down, One Very Big Year Ahead

Though we had been conducting online operations for some months before that day, on Friday, August 10, 2012, Desert Sky Games (not yet "and Comics") opened its doors to the public at 2531 South Gilbert Road, Suites 106 and 107, in the Town of Gilbert, Arizona.



As you've seen in this blog, I have been in the hobby game trade since 1998 in various roles, but I had been on an extended hiatus since finishing law school in 2006 and focusing on my work with the Arizona Department of Health Services and on my developing family.  Planning for DSG started in August 2011 when the venerable Atomic Comics chain abruptly closed all four of its Valley locations without warning.  Upon learning that their closure was not sales-related, and seeing that Magic: the Gathering and board games were on an absolute tear nationwide, some friends and I decided it was time for us to re-enter the trade.  The entirety of the fraternal-twin suburbs Chandler and Gilbert, with a combined population well over 500,000 people, had zero game stores within their mutual bounds.  The coast would never be clearer.

The original plan was to open a high-end board game and MTG lounge where people would play in a premium environment.  It was what we in the development group personally preferred, and seeing places like Cafe Mox, Enchanted Grounds, and Black Diamond Games told us that it was probably viable.  In retrospect, this was a mistake; though many players say they will pay for a premium experience, few actually do.  That's okay.  We had to adapt and we did.  We have since moved to the hybrid model including comics, and continued building out support of the full spectrum of games.  A significant part of our success today comes from players of games other than Magic who know we will run organized play for their game using the official sanctioned materials.  Many stores don't or won't.  If it isn't Magic, many stores don't want to spend any time on it.  So, rather than focusing exclusively on high spenders, we focus on the welcoming aspect, on making the store approachable and comfortable without having people feel like they're in an expensive restaurant.  We don't want to be a gamer pit either, but rather a mid-range "Mario" of tabletop entertainment.

So, throughout late 2011, while players cracked Innistrad booster packs, we scoped out all manner of suite frontage around town, including Atomic Comics's old suite at the Chandler Fashion Center mall.  Unfortunately, landlord Macerich Westcor had higher ambitions in terms of the revenue from that space, and it was breakpoint rent to boot, so we let that opportunity pass.  In retrospect, although I don't know how we'd have survived from then to now in that space, I would utterly love to have it today.

Ultimately what appeared to be the best combination of factors came to us from De Rito Partners and the location we're in today.  There were plenty of mistakes in that process but mostly we came out of it solid.  We have 2400 square feet, and it was a vast expanse in 2012 but is far too small now.  The lease ramps, but averages ~$11/sf for the length of it.  Of course this means we paid no rent for the first six months and we're at ~$17 plus triple-net now, a total near ~$25/sf.  Yee-owch.  But it got us into a building where we have fantastic street presence, good neighbors (even the massage joint), excellent geographic coordinates, and an area demographic that's still so good it seems like the numbers have to be fudged.  Nope, they're real.



It was the building we needed in order to make DSG a reality and make it fly.  Now, as we enter the stretch run of 2015, we have the luxury of deciding on a new long-term landing destination.  This autumn, while we engage in what promises to be our best holiday season ever, we'll also be setting up our next lease.  Due to permit hell and buildout time-frames and the like, this process will take us at least through our fourth anniversary or thereabouts, so about a year.  We will then be in the final year of our current lease, and we can open up the new location and overlap for a while before winding up business at our current digs.

We've actually been working on moving for a while now.  We had a few-strings-attached lease opt-out clause that matured in March and we could have left right then and had it work.  There was an unused Blockbuster Video building a mile away that had come out of receivership.  It was 5000 square feet for about the same rent we're paying now.  A deal among deals.  We contacted them to offer tenancy but Verizon beat us to the punch with their LOI.  (Though they still have not opened.)  Because the space was so ideal -- it was even built out just the way we would have wanted it -- we had all our eggs in that one basket and did not look elsewhere.  This is also partly unavoidable.  If you're looking for commercial property, they expect you to be able to commit if they meet the terms you solicit.  If you flake out on them, they won't take your calls the next time you want to make a move, and you'd better believe these landlords tend to own multiple plazas.  Tire-kickers are not welcome in the world of commercial real estate, which is why often you work with a broker.

It was disappointing to miss out on the Blockbuster Video location, but the prospects and opportunities abound and are almost too many to keep up with, despite our very narrow set of need criteria.  We've looked at 4,000-square-foot mall space; we've looked at 8,000-square-foot rehab retail plaza frontage, and we've even looked at a staggering 25,000-square-foot mixed-use warehouse in a nearby industrial park.  The rent on that behemoth is actually only about double what we pay now, which if it weren't for the high buildout cost, would make "going huge" the obvious winning play.  But each of the spaces we've prospected is promising in its own specific way.  And depending which way we go, the next evolution of DSG will be partly adapted to that usage.

It's too soon for me to say what the outcome will be, but when it does happen, I can't wait to share it.  The bottom-line goal is to make Desert Sky Games and Comics the best store it can be for those of you who call it your tabletop game or comic collecting home-away-from-home.  The non-negotiables that the new space absolutely needs to have are a much greater space for gameplay, and a location that's not far from where we are today and remains within easy reach of the freeway.  Beyond that, all options are on the table.

All options, as long as they involve the store being bigger.

In the meantime, thank you all in advance for your continuing patience with our use of the constrained current space we have.  I promise to do everything in my power to fill it to the rim with the Brim of awesome games and comics and fun organized play.

You have given us three awesome years.  I can't wait to see how great the fourth is going to be!

Tuesday, August 4, 2015

What Is My Store Really Worth?

The most rudimentary research will reveal that the valuation of businesses is an inexact thing.  With such a wide variation in methodology, of course, comes the problem that any result you reach is probably complete bollocks.  I’m sure I'll make no friends among MBA enrollment counselors with that statement.

Since nobody can agree on how to value a business, we’re left to reduce our analysis to the fundamental elements: A good or service in the capitalistic sense is worth only what a buyer with money in hand is willing to pay for it.  Of course, you can find an even wider spread of value that way — virtually any amount is potentially “in play” and you never know what maniac buyer might vastly overpay or what distressed seller might accept a pittance — but at least those values are by definition accurate.  If someone paid $N for a business, for at least one crystalline moment in time, damned if that business was not “worth” precisely $N.

In practice, one can iterate from there.  Upon repeated sales, most necessarily comparison sales due to the unlikelihood that one business would change hands repeatedly over a short duration, we can discard the outlying highball and lowball transactions, and a more realistic spread emerges for each business similarly situated to the type and scale under analysis.  Sandwich shops are worth $84k or so, brew pubs $500k, international airlines $24 billion.  There's some variance, of course, but you get the idea.

The value shown there doesn’t derive directly from the balance sheet of the business, of course.  In the hideously unlikely case that, say, the Los Angeles Lakers were mired in debt, they would still be worth multiple billions of dollars.  This starts with comps, since Steve Ballmer paid two billion for the lesser Clippers only a year ago this month.  But beyond that, the capability of any NBA or NFL team (or whatever sport you like) for generating cash flow, their branding and IP, their "team history" as an exploitable, all add up to a profit potential that is going to be well in excess of the assets on the positive side of their ledger even if the team is swimming in liquidity.  

How is the business worth more than it's, well, worth?  Some amount of that is back-of-the-napkin math that I've heard referred to as “soft value” — goodwill, customer footfall, brand awareness, and like such.  While soft value is absolutely a real thing even though it’s intangible, “hard value” is a much safer basis for valuation for the simple reason that, aside from virtual elements such as IP, it’s all “actual stuff.”  You have it.  You could put it in your truck and haul it off, were you so inclined.  Or, to be more blunt, put “goodwill” in one hand and defecate in the other, and see which hand fills up first.  In business, you don't have what you can't count.  I guess that makes brand awareness somewhat better than outright "goodwill," since metrics actually exist to measure its reach.

In one of the Facebook closed groups for game and comic store owners, there was a discussion that looked at valuation of businesses in our industry from a new angle.  It is a real eye-opener, and absolutely made me take a step back and look at my operation in a critical fashion.  The discussion question was: 

“If someone wanted to clone your store right across the street from you, how much would it cost them to do that?”

The first blush at this question goes to the aforementioned balance sheet.  What would a new buildout cost, then inventory on the shelves, staff labor during all that, administration, legal, permit hell, time elapsed, and so forth.  You can come up with a number.  

The point of the question, of course, wasn't to get us to do math.  It was supposed to turn our focus to the nature of our soft value, and how well developed it really is.  (Again, soft value is absolutely real.)  The question prompted us to contemplate whether we brought something to the business that can’t be duplicated by sheer brute force of money, by a newcomer arriving with a gigantic open wallet.

But I liked the question much more as a cold, cutthroat intellectual and economic exercise, because I prefer not to rely on soft value.  To be certain: I’m prouder than I can express with how amazing my store’s community is.  And I do try to improve DSG's soft value every day.  I just don’t think it’s fair to my customers to hang such an anchor around their necks.  It seems like a very short pathway from there to a state of mind where I would start believing that the community “owes me” a living.  The community does not, of course.  I have to find new ways every day to make my customers happy, to improve the value proposition DSG offers, however minuscule the increment.  If I do well, customers voluntarily engage in business with me, to mutual benefit, without having some nebulous altruistic “duty" imposed upon them.  At the end of the day, as I've said before, I have to pay that landlord in dollars of money, not "brand awareness."

So, I looked instead at the question as a function of the degree to which brute force, i.e. capital to burn, could overwhelm all the soft value and bring a newcomer store, a clone of mine across the street or even right next door, up to parity with me.

DSG’s buildout was $60k at first and another ~$40k over time.  So there’s a starting base of $100k.  Right at this moment, my inventory stands at about $160k in bottom-dollar, scrounge-it-up, max-discount-tier replacement cost.  There would be about $40k in labor and materials costs to assemble, deploy, and organize, including administrative, legal, compliance, and so on.  So, the low end of what gets the newcomer to where I am is only $300k, which seems like a lot (and reflects awesome growth) but isn’t that much for an industrial conqueror determined to have its way.  In “real business” money, $300k is a lark.

So if someone came to my plaza with that $300k in hand and had perhaps another $50k to burn on operational expenses and to fund their mistake lessons as they got their sea legs, they could clone me and then catch up to me. They could do it with impressive speed.

Once the newcomer achieved that, it would be war.  

A knock-down drag-out fight between equals would ensue.  The attrition would be catastrophic.  Both stores would spend six figures to the left of the decimal over the course of years chipping away at one another and fighting over a customer base that would quickly weary of the rivalry and bleed out of the hobby or migrate to other stores around town.  It would be a brutal, excruciating, expensive fight.

And that fight would never happen.

Why?

While I'd put my ownership group's ingenuity and my staff's congeniality up against anyone, any military leader will tell you, you don't enter a fight with an equal force. You enter a fight with an overwhelming force. You bring a focused hammer, designed to crush your enemy with as low cost to your own assets as possible. When you play Axis & Allies, a key learning moment is realizing you don't want your opponent's best units to get to take a second shot in a combat phase. You bring as much redundant firepower into the fight as necessary to ensure that it's a one-round blowout, attacking or defending, no matter how many infantry you have to proliferate to ensure that your key territories threaten single-round resolution to any comers. 

So it is with brute force.  The smart arrival would not bring $350k, intending to clone me up and operate at parity and compete.

The smart arrival, the business intending to crush me and take over, would bring $700k.

And they'd obliterate me.

They’d build a store at the next level of magnitude and outclass me from the moment they first opened the doors.  It would not be a fight, but an execution.

But… and you knew there would be a “but,” didn’t you?  The miracle of understanding strategy, both on my part and theirs, assures that they will never bring $700k and obliterate me.  That outcome, like the $350k fight, also would never happen.

“But Bahr,” you might ask, “You just explained why that strategy would work.  Why wouldn’t they do it?”

Because it’s not cost-effective.  It’s a strategy that would crush me, but it’s not the best option.  The winning strategy gets me to hand over the keys for $400k and walk away without a fight.  They get the same result, the same outcome, and it costs them three hundred thousand dollars less.  They’d save almost half of the budget it would have cost them to pry me out of the picture by force.

That $400k figure is not imaginary.  It is at least as real as those valuation numbers back at the top of the article.  It’s the most recent number my business partners and I agreed would be enough to get us to snap sell.  I’d have to confer with them again to ratify any offer, but with reasonable confidence I think we’d accept.  I can’t say that number would necessarily be the same in six months or a year, especially if DSG keeps growing, but that’s what it is today.  A new arrival with $400k cash money in hand and a serious intention to enter my market from an ironclad, established position would find himself or herself able to do precisely that.

And that is why warring entities parley.

In answer to the discussion question, my understanding of the foregoing is part of the unique value I bring to the business.  I bring a realistic and unflinching acceptance of the most exacting competitive arithmetic the business could conceivably face.  And in the face of that analysis, I conclude that my business, at least right now and today, is worth at least $400,000.  There we go.

In answer to the follow-up question, what would I do after cashing that big check and winding up the books?  I would first take my family on vacation.  Next, I would write the story of DSG until the point at which it no longer included me.  After that, many options on the table.  Probably some combination of opening a vintage arcade, perhaps even as a non-profit like the Pinball Hall of Fame, and writing prolifically.  I would explore my options for returning to the regular daily use of my law degree in some manner.  And for as long as DSG prospered under its new ownership, I would not return to the hobby trade, at least not in the retailer role, and at least not in my immediate area.  After all, unlike the savvy entrepreneurs opening Magic: the Gathering clubhouses every other mile, I try to avoid diving headfirst into a market that is already well-served to the point of saturation.