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Thursday, February 23, 2017

Forty Predictions for Magic in 2017

EDIT #2: Throughout the spoiler season for Modern Masters 2017, I will indicate where card reprints have confirmed or refuted my predictions.

EDIT: Within an hour of this article appearing, I was asked rather pointedly where I had gotten my information.  Take that for what you will.  I do not have any inside information.  As I explained in the article, I spent years as a professional analyst.  I observe, I assess, and I draw inferences.  Every prediction in this article is a combination of what I've seen parties such as Wizards of the Coast actually do publicly, what they say publicly (especially Mark Rosewater's blog, which telegraphs a lot), and how the market and its inhabitants have behaved in reaction to various events.

Why should you ever believe anything I write?  How can you tell whether I know what I'm talking about?  I see people all over the greater comic and hobby game trade generally making all kinds of predictions, and rarely are they held to account.  It's even worse when those predictions are made in a self-serving interest toward the commentator's own investments.  There is a fundamental ethical breach there.

This comes up, of course, because of the MTG Finance (tm) community relentlessly dumping on Modern Masters 2017 in a misleading effort to be able to buy in as low as possible, and retailers dumping on it in an effort to get ahead of the preorder cycle after the underperformance of Aether Revolt.  I am going to run contrary to the prevailing winds and state that I think Modern Masters 2017 will be a hit.  But how can that be expressed in a way that is objective and not subjective?


I have been reading a lot of liberal psychologist Scott Alexander's Slate Star Codex blog lately.  Mr. Alexander's stock in trade is that he strives to be excruciatingly honest about his own beliefs, thoughts, motivations, possible biases, logical fallacies he might be committing, and so on.  He has written that unless the examination is enough to make you uncomfortable, you haven't truly reflected and you aren't truly challenging your own preconceptions.  Then, through that lens, Alexander examines the social and political news of the hour.

Alexander's political and legal analyses are extremely insightful.  When I say this, I remind you that I literally made a living as a political and legal analyst from 2007 to 2014, so I hope my praise of his acumen carries some weight.  He has earned the ire of readers of both major political parties, and rightfully so, as he has made them uncomfortable by pointing his incendiary flashlight at their respective parties' hypocrisies, hypocrisy being one of the core dishonesties he seeks to stamp out.

One of the best things Alexander does is putting his analyses to the test by recording his forecasts with a confidence level, and scoring them afterward.  Thus, we may judge for ourselves whether he is a credible pundit, and it is no longer a subjective question.  It is proven.

As Alexander writes, "There's a failure mode where pundits make lots of predictions, get proven wrong again and again, but keep their editorial columns and TV shows and reputations.  If you're wrong often enough, at some point people should stop treating you as a sage and start looking for wisdom somewhere else.  There's an opposite failure mode where somebody is wrong once about some freak event and their opponents demand that they never express an opinion again.  The solution is to predict probabilistically and keep track of the results."

That's the honest, credible, objective approach.  And I am up to the challenge.  If I can post good scores year in and year out on this sort of thing, you will know that I am credible and my analyses can be trusted.  Moreover, if my scores vary widely by topic, you will know when you can put more confidence in my assessment.  Once I get the mechanics down pat, maybe I will even take bets like Scott Alexander does.  The use of confidence levels allows him (and now me) to stretch out a little and make some more meaningful predictions, and to nest predictions inside one another.  I think this is going to be great fun to watch unfold.

The scoring is purely mathematical, so subjectivity shouldn't be a factor.  Out of every ten 60% predictions I make, I should be right about six times, and there's about one step of margin of error.  If I'm right four or fewer times, looks like I'm not as knowledgeable on that topic as I thought.  If I'm right eight or more times, I am probably hedging too much and underestimating the accuracy of my guesses.  Which is fine, it just means I should be making more ambitious predictions and cashing in on them in advance.  Over time I should trend toward even.  I should only be wrong once in ten tries at 90%.  I can be wrong half the time at 50%.

The steps I will use are 50%, 60%, 70%, 80%, 90%, and 95%.  If you are at least two steps away from me on your prediction, we have a challenge.  (If you think my 60% prediction should be 55%, for example, we don't really have a substantial disagreement.)

The timing of this article is deliberate: the Modern Masters 2017 spoiler week is about to begin, and I wanted to include some predictions for that.  For the purpose of limiting scope and keeping this simple, this first Fearless Predictions article will focus solely on Magic: the Gathering.  In particular, I am going to dump a bucket of cold water on some of the more pessimistic predictions I have heard circulating as of late.

Key:
Confidence level of prediction: Prediction, as specifically as I can articulate.

95%: There will be more WPN retail stores in the Phoenix metropolitan area on December 31st than there were on January 1st.
95%: Hasbro will report greater sales of Magic: the Gathering in 2017 than in 2016.
80%: Wizards of the Coast will not enact a comprehensive brand reinforcement scheme, like those of Asmodee, Mayfair, WizKids, or Games Workshop, in 2017.

90%: Modern Masters 2017 will be effectively sold out from distribution by June 30th. YES
50%: Booster boxes of Modern Masters 2017 will sell for at least $300 by December 31st.
60%: ...for at least $280.
70%: ...for at least $260.
90%: ...for at least MSRP. YES

80%: The five "Zendikar Fetchlands" will be reprinted in Modern Masters 2017. YES x 5
90%: ...or in Amonkhet block. YES x 5
95%: ...or otherwise in 2017. YES x 5

95%: Snapcaster Mage will be reprinted in Modern Masters 2017. YES
95%: ...or in Amonkhet block. YES
95%: ...or otherwise in 2017. YES

70%: Liliana of the Veil will be reprinted in Modern Masters 2017. YES
80%: ...or in Amonkhet block. YES
90%: ...or otherwise in 2017. YES

60%: Cavern of Souls will be reprinted in Modern Masters 2017. YES
90%: ...or in Amonkhet block. YES
95%: ...or otherwise in 2017. YES

50%: For each of Blood Moon YES, Chalice of the Void NO, Mox Opal NO, and Tarmogoyf YES being reprinted in Modern Masters 2017.
60%: ...or otherwise in 2017. YES N/A N/A YES [I am throwing out the two artifacts because I realized them being printed in Aether Revolt as Inventions means I was already correct and simply had not noticed it.  So I'll take no credit for that.]

[100%: Griselbrand will be reprinted in Modern Masters 2017.  This was just spoiled so I don't get to use it, but I would have predicted 70% or so, which is a bit too cautious.  It is banned in Commander and thus highly appropriate to land in a Masters series set.]

70%: Damnation will not be reprinted in 2017 (aside from the judge foil still being distributed). NO

60%: Craterhoof Behemoth will not be reprinted in Modern Masters 2017. NO

95%: Nicol Bolas will have a planeswalker card in Hour of Devastation. YES

90%: There will be a Masterpiece Series card at a TCGPlayer Market price under $15 for at least seven straight days by December 31st. YES - Black Vise
80%: ...under $10. YES - Black Vise, Austere Command, Aggravated Assault

60%: There will be a casual-friendly product later in 2017 that will feature reprints from the Portal trilogy, Starter, and/or other ancillary products from long ago.

70%: The block after Amonkhet will be called Atlazan, like on the leaked booster wrapper samples. NO, Ixalan
70%: Atlazan block (or whatever it will be called) will contain Modern-playable dual lands.

90%: Wizards will announce the spring 2018 Masters series set by December 31st. YES, Iconic Masters
50%: ...which will be a sequel to Eternal Masters. Pending Spoiler

80%: Crystal Commerce will not have another widespread outage lasting longer than 24 hours in 2017.  To qualify as a widespread outage there must be worse than 50/50 POS functionality and TCGPlayer must Deactive all sync accounts on its own initiative.

80%: Frontier will become an official format by December 31st.
90%: ...and will not be included in the Pro Tour Qualifier sequence.

95%: The Reserved List will remain in effect by December 31st.

95%: I will still be in business on December 31st.

There you have it, folks.  Think you can do any better?  Great!  Publish it and we can compare after the fact and find out.  Especially if you are a popular video or article pundit.  Rudy, Saffron Olive, I'm talking to you guys.  Go on record and let's see if your doom and gloom predictions really do come true, or if you are just clickbait.

60%: Saffron Olive will do it. NO
50%: Rudy from Alpha Investments will do it. NO

Let's see, then.

Monday, February 20, 2017

Adding Value vs Speculating on Consumables

I have a special guest once again for today's installment at The Backstage Pass!  Mike Kistler is one of the owners of Epic Loot Games & Comics, with locations in Centerville and Springfield, Ohio.  Kistler is also a member of the GAMA Retail Division Board.
Today we're going to get into a bit of a business philosophy discussion.  Mike and I have had some discussions about when our industry is adding value and when a reseller is just a speculator, and what difference it makes.  Those chats led into something a little more robust, and we wanted to bring it to you here.

BAHR: Let's get right into it.  We are both capitalists by trade.  I know your perspective on this stuff is a little different than mine.  Can you give us an introduction to your outlook on this?

KISTLER: Sure.  The thesis is something like "there are more productive goals to capitalism than a business looking at only income minus expenses."  The topic of Amazon reselling and taking advantage of scarcity as an opportunity to make a margin play, has been on my mind lately.  But it is at the core of a lot of things we resell.  People are content to profit in this industry essentially by being a nearly end consumer of rare things, rather putting capital to work in a way that benefits multiple stakeholders.

BAHR: For clarity, you're mainly looking at secondary market items here.  Collectible trading cards, comic books, video games.

KISTLER: Right.  But also anything that "gets hot" and becomes scarce, which you will see in the board game category too, or even pop culture collectibles.

BAHR: The NES Classic Mini last December.

KISTLER: Absolutely that.

BAHR: So a store will buy these things, giving a ratio off market value, this is fundamental economics for us, we've looked at it here in my pawnshop article.  Or if it's new, the store buys it in distribution and marks it up to whatever.  And in either case that markup is the central earnings mechanism for us.  Isn't it fair for the seller to profit from his or her selection and curation of goods?

KISTLER: The thing is, selection and curation are different from speculation.

BAHR: Explain.

KISTLER: Transactions are what fuel the net sum growth of capitalism.  Making money doesn't create production or value or purpose.  Transactions require money to change hands.  Hoarding items to make 10% on a simple flip margin doesn't add anything.  It neuters the macroeconomic benefit.  You have a full-service business that runs a 50% margin, but maybe only makes 5% profit because the value add costs and is built in to the equation.

BAHR: It seems like there is probably some foundation baked into that.

KISTLER: Okay.  Let's assume everyone involved in the trade is a capitalist and believes that Adam Smith got it right, for the most part at least.  Gun Land and Butter Nation trade because both sides feel like they are gaining something.  (In our trade, I think we'd call it Wood for Sheep.)  Transactions generate wealth.  All the parties involved agree to the transaction because they feel like it's a good value for themselves, that they're richer afterward, at least on a utilitarian level.  If net wealth was lost, the need fulfilled or enjoyment gained from the transaction was worth whatever was given up.

BAHR: Value for value.

KISTLER: And while transactions always involve individuals, those individuals can associate for complicated or longer lasting or more nebulous transactions that can benefit each, but are not as simple as wood-for-sheep.

BAHR: Voluntary cooperation is at the root of business, but you posit something further.  Can you expand on that?

KISTLER: Any group is still made up of individuals.  The straightforward example is capitalists pooling resources to form e.g. a corporation.  This creates opportunities beyond their individual reach.

BAHR: Absolutely.  For something concrete that isn't maybe just another business, you would point to what?

KISTLER: I would argue that a good example of a group of individuals working together in a way that generates a more beneficial sum of wealth is a library.  Not every individual in a community would buy a copy of every book, but could very much benefit from borrowing books temporarily from one another.  A book isn't very perishable, but it is inefficient to own as an individual, generally.  It gets shelved and is used little after that.

BAHR: Yes.  Extremely infrequent utility.  It's how the Toolbank charity framework evolved.  A great many books are read zero times or once.

KISTLER: It's also cost prohibitive for individuals to purchase a book at equilibrium price who are further down the demand curve, even if they aren't extremely far down.  And it's expensive for a publisher to service all those individuals around that equilibrium point of the demand curve.  On the other hand, a buyer at a library and a seller for a publisher can agree on a more expensively licensed version of the book that can be sold at less than the integral of the demand curve it serves, but stretch further down it, capturing an overall larger sum of revenue at a lower cost than would be achieved selling only to the individuals.

BAHR: We are disregarding instances where an individual would keep a book libraried for the purpose of ongoing reference, right?

KISTLER: Yes, owning a book and leaving it on your shelf may be a solid choice for some people.  Depending on how much they enjoy the aesthetics of the book or the convenience of having it always on hand, as a consumer of the book, that may be a wise purchase to make.  There is some more Economics 101 baked into that, but you get the idea.

BAHR: You raised some questions in our discussion before about the underlying stakeholder-business relationship, and this seems like as good a time as any to delve into that.

KISTLER: In our hobby retail world there are only a few main categories of stakeholders.  The obvious is store owners.   Other important ones are customers, suppliers, and employees.  There are also landlords, various services providers, governments and other communities we rely on and support.  So, a question would be, who are hobby stores in business for?

BAHR: At heart, the owner(s).  Others will benefit but those who risked money did so on an expectation of return.

KISTLER: Indeed, the common answer is the owners/investors.  Somewhere around here is where the meat and potatoes of the discussion happens.  Follow the money and ask yourself again who the store exists for.  Investors put in capital.  Let's say year one they invest $100k to get everything started.  A year later the new store has done $200k in sales.  Using the flow of cash as a metric, as a group who has had a larger impact on how and why the store operates, investors or consumers?

BAHR: Given this is a first-year store that is going to promise the moon to customers and have to walk most of that back, I'm going to say consumers, since the operating investors are going to be learning their chops and gaining their sea legs and will be overeager to please and will not fully understand which requests are feasible and which are not.  Or what even makes sense for the business.  Our industry is so scattershot compared to something like running a cafe, where the objective is so much cleaner: Serve delicious food and drinks in a welcoming atmosphere.  But I'm not sure that's the context you meant.

KISTLER: Not exactly, but assuming keystone margins, how relevant of a stakeholder are the suppliers of goods, compared to investors?

BAHR: A good or bad distributor can make or break a new store.  They definitely matter.

KISTLER: Absolutely, choosing distributors and manufacturers who are good partners to support definitely matters.  So there's another premise, I guess.  I just implied a handwave argument that the cash flow of transactions is the blood of a capitalistic venture, and the parties involved are the vital organs.  The flow of cash is a transaction, guns and butter, building our collective wealth, evident because in every instance, all parties involved must perceive an increase in value to agree to complete the transaction.

BAHR: The perpetual question in commerce.  How do you deliver value all the way up the chain.  Intermediation adds cost but doesn't usually change the product (but would surely change a service, which is why services are so elastic at the point of delivery).  If there isn't a value gain perception every step of the way, the product stops moving forward and money stops flowing the other way.

KISTLER: Pretty soon you can see where this trail leads.  A couple years later, the store does $500k in sales, revenue from customer spending.  The store spends $250k with suppliers for the merchandise.  They spent $125k for rent, utlities, repairs, marketing, and other service providers.  About $100k goes to employee payroll.  After that $25k is return to investors.  The investors own the business, but how much control and power do they really have, and how much must they be mindful of other stakeholders like customers, suppliers, service providers, and employees?

BAHR: If you're asking me whether the other stakeholders are important, I would say yes.  The investors still have a lot of control, evidenced by how many stores fail for each one that remains open and profitable, while they interact with a vast pool of consumers and largely a similar pool of suppliers and landlords and so on.  But even as I say I think the investors have the most control, I would say the consumers are the most important stakeholders.  They literally decide the final outcome.  Setting aside atypical stores that have side income from publishing, accessory printing, Patreon for their social media work, or what have you, every single dollar of revenue at most stores (mine included) comes from a sale to a consumer.  I cannot pay the overhead, cannot pay my people, cannot pay myself or the ownership group any money whatsoever that did not arrive by means of exchanging merchandise for a consumer's money.  So ultimately, in some way, I need to furnish that consumer with something he or she wants more than the green spending rectangles being offered in exchange.

KISTLER: Which ties in exactly to our original point about whether we are adding value, or are just speculating on consumables.

BAHR: What difference do you believe it makes?

KISTLER: I said before that hoarding items to make 10% on a flip doesn't create value and is bad.  By bad I am saying it is not very capitalistic.  It's OK for consumers.  Necessary sometimes.

BAHR: For example, when the economy takes a sharp turn, everyone's ornaments or entertainment playthings are the first things to get dropped/sold or not collected anymore.

KISTLER: Goods consumed end the capital chain.  On the consumer end of the transaction, that value is accrued indefinitely.  "Hoarded" maybe, but rightfully theirs to keep.  Once we eat the food we bought, we stayed alive, bought that time and some pleasure, used up those resources pretty quickly, and cannot put them back to use.  That value has left a remnant in a pretty much unusable state, from a purely capitalistic point of view.  Ideally the money we traded for that food will continue to pump through the veins of capitalism, but by wanting to stay alive in that instance we created demand for a perishable one-time-use resource, and this ended a capital progression.

BAHR: Makes sense.

KISTLER: Whereas speculating and hoarding is like this but the store is being more of a consumer than a capitalist.  Look, anyone can get joy out of owning something collectible.  If someone does it for reasons like that, it's fine.  It's like buying a piece of art that hangs on the wall until the owner tires of it or is bored seeing it and it loses value for them, or it outlives them and the estate sale rolls around.  But they're a consumer, and don't need to be bothered convincing themselves that they're an investor, a driving component of the machine of capitalism.

BAHR: Everybody's a dealer these days.

KISTLER: Right, and it's all arbitrage at the household level.  Not arbitrage in the sense of, I find a direct conveyance of two overlapping value sets.  But in the sense of, I'm not creating anything other than availability of a transaction for a consumable and then just squatting on it, hoarding it if you will, until that executes.

BAHR: Right.  Craigslist.  Amazon Seller Central.  eBay.  Garage sales have been around since the postwar suburban boom, but not like today.  They were rummages then.  Now it's a hunting ground to see who has undervalued a flippable item by ten percent after shipping and PayPal fees.

KISTLER: If they find joy in that as a hobby, or are doing that well enough to provide a service to stores or collectors, sure, that's OK with me.  If they want to speculate on something as a capitalist, in a capitalistic manner, it should be something that operates, not something that sits on a shelf and they hope maybe they can just sell right back someday.  If they buy stock, put capital into a business, that creates value rather than locking wealth in a closet.

BAHR: I know a lot of people who would consider locking the collectible away a preservative move. But I suspect the primary motivation is pecuniary.  They aren't just brave stewards of historical artifacts.  They intend that this SuperDude Returns #1 Variant is going to be sought by collectors and will ultimately flip for $400 rather than the $100 they spent on it.  Otherwise they wouldn't waste their time with it, they would just read the base cover edition.  So is this being a bad capitalist?

KISTLER: I suggest that it does.  Recall the other stakeholders involved.  In the years our imaginary company grew to $500k in sales, suppose it retained earnings until there was $250k of inventory and capital expenditures on the books.  In theory those investors could liquidate for that $250k.  But they're currently getting $25k of that $500k after COGS and expenses to reinvest or pocket.  Essentially they're getting a 10% ROI.

BAHR: Unless they need the money back, tough to argue they should shut off the music.  They let the wager ride.

KISTLER: And to do that they want to try diversifying.  But maybe staying with something familiar. They plan to speculate on collectibles they sell in their store.  They see an opportunity where they could spend their $25k product selling for $50k today, but they project they could sell it for $60k in a year.  That's in line with their current ROI, they're familiar with the product and comfortable with their projection so don't fuss about risk, everything seems great.  Why not be in both retail and speculating?

BAHR: We're assuming this is turn-rate neutral somehow, otherwise, as I like to remark, "I ain't running a museum here."

KISTLER: Putting something on a shelf means you set it and forget it.  Keeps expenses down.  Great, right?  Except it doesn't lower fixed expenses.  It needs to pay its fair share of those too.  OK, so assuming $50k of fixed expenses -- rent, utilities, whatever else.  This investment needs to pay its tenth of that.  Its eleventh of that, if you think of us as technically now a $275k venture with this new investment.  Maybe instead we're pretty sure the $50k MSRP product will actually fetch $65k in a year.  Now is speculating a good idea?  From the perspective of just the investors, at a decent increase in price, yeah, it looks like a good idea.  But it looks good to the investors because during that year that capital doesn't create a lot of expenses.  From the "income minus expenses" point of view, it's a fine decision.

BAHR: I talk about this a lot as the "labor load" of a product or category.

KISTLER: But from a stakeholder point of view, capital is no longer flowing through other stakeholders.  Low expenses means there's no employable work generated.  Capital isn't being spent to improve the store or promote the joy of gaming to potential customers who yet realize how hollow and meaningless their lives are without the fun we provide.  It sounds counter-intuitive to embrace expenses, but I say learn to love that labor load.  (Within reason, of course.)

BAHR: We may disagree in part here as I don't fundamentally condemn buy-it-and-stow-it as such.  One of many business models in our trade, different from the "boutique" and the "bowling alley," is one I call the "shoebox," a typically small deployment that runs on pure efficiency and is only concerned with gaining value on every transaction, and is content to sit on merch indefinitely until it gets its price.  It's tough to succeed as a shoebox because you're literally vulnerable to every disruption in a retail sense.  Everyone else's value-add scores against you; everyone else's sale price that beats yours is dispositive; everyone else's more convenient location serves to position them in front of you.  If anyone can get the item in another way, they are maximally incentivized to do so, aside from some very tangential benefits of being able to examine the merch in person, knowing the store owner can be trusted to authenticate it, not having to wait for or risk damage in shipping.  But for an owner who wants to keep that labor load minimal and likely keep occupancy costs down as well, the shoebox model can work.

KISTLER: Well, there's another option for investing, and this reaches to what you asked me about how capital can be used to benefit multiple stakeholders.  How it can be capital at work, capital that is fueling some sort of wealth increase within a time period.  The time part is obviously important because everything should be viewed as something like an annual ROI.  The stakeholders part is also important because how the capital is used for a group can create options that can be more beneficial for the sum of the group than only considering options from the point of view of one individual and the individuals they directly trade with.

BAHR: By which you mean an investment other than in products intended to appreciate in value?

KISTLER: Right, like diversifying working inventory to increase sales.  If the investors are familiar with products related to their store, picking exciting new things to increase the books from $250k to $275k will ideally increase by a turn rate resembling the current one.  If all goes well, next year there are $550k in sales on $275k book value.  Even if variable costs increase, such as more staff hours in register coverage, more advertising and marketing for new product and events, and so on, fixed costs shouldn't move much.  At certain thresholds, yes, fixed costs stairstep up with growth.  But in general, pure product throughput doesn't change a lease or debt service.  In the end, the investor hopefully now has 5% of the new larger sales to pocket or reinvest.

BAHR: We're in the boutique model here, product is expected to turn, to come in and then be gone.  In most of retail, inventory "rots on the shelves."  In our trade, not always.

KISTLER: You could do it either way, and from the vantage point of the investors, the two options are a wash.  But from the point of view of the other stakeholders there is a tremendous difference.  Rather than tying up $25k in capital, the investment in diversifying working inventory generates $25k increased revenue for suppliers, $50k of increased sales to a broader base of customers, and $22k-ish worth of money going to employee payroll, advertising, and so on, and investors still get their 10% compounded ROI.

BAHR: Safe to say you favor this configuration, then.

KISTLER: Yes, because it's more efficient as a mechanism for wealth generation.  Instead of focusing solely on themselves, if the investors are willing to incur expenses that generate returns through the layers of other stakeholders, and increase the economic activity in aggregate through such circulation, it creates more of a rising tide.  There are long-term benefits to this.  Some intangible, some perfectly tangible in terms of what you can build and how much of it.  And you're not depending on some niche market to continue holding onto an artificial value signature that may be predicated heavily on hearsay and hype.

BAHR: You don't need the Beanie Babies fad to persist.

KISTLER: You only need engagement in the overall product or service type you offer.  That's it.  Publishers are able to be publishers and their great content is your great content.  Also, distributors are able to curate and deploy, and their storefront is your storefront.  Rather than the way it is today with some of them backdooring product to liquidation channels, your bigger-picture decisions make you their valuable business partner whom they should also in turn want to serve with mutually-beneficial bigger-picture decisions.  Thirdly, consumers are able to partake of the entertainment without being concerned that they're missing out on a stock market move.

BAHR: You already know I favor that.  The corner bowling alley doesn't have to be worried about whether the five-pin appeared in more pro tour decklists this year.  They just have to provide a clean, welcoming, fun place to bowl.  So, in the wider view for the business, when your takeaway from an investment is the same whether it's win-lose or win-win, it is compelling to argue that you should work toward the mutual win.  I'll give you the last word.

KISTLER: It shouldn't be too far of a jump to say at this point that, all else seeming to be equal from the individual's point of view, a collection of stakeholders who are trading more often should be generating more opportunities for each other and have a higher potential to increase their total combined wealth.  I think it's the better way to go.  I think it's better capitalism and better business, and you are setting up relationships and connections that will reward you later.

Well, that's all the time we have for today here on The Backstage Pass.  Thank you so much, Mike Kistler from Epic Loot and the GRD, for giving so generously of your time and perspective for this article!  For my readers, wherever you invest, now you have something to think about, whether it makes more sense to blackhole product on an expectation of appreciation, or whether the aggregate benefit of throughput activity presents a more compelling option.  What do you think?  Leave a comment on our web zone and I'll send pizza rolls.



      Friday, February 17, 2017

      No Place Like Hub

      This week's article, a rather substantial one, ran late and I finally decided to bump it forward into a future week and instead post next week's article early.  Apologies for any inconvenience.

      We're approaching March, which means a week in Las Vegas for the GAMA Trade Show and the arrival of a huge Magic release, Modern Masters 2017.  What that also means for me is that it's time to get back to scouting new locations for our hub store, on the assumption that the Gilbert location will have to move this fall when its lease ends.
      It's amazing just how thin the pickings are.  For as poor as the commercial leasing market is supposed to be right now in this era of political and economic turmoil, most worthy rents appear rented and not changing any time soon.  In fact, one of my nearby competitors is moving at the end of March and I have found his landing spot within 80% confidence, not by means of my own intellectual prowess, but simply because I knew his search zone and there were only a few candidate locations that made any amount of sense for him that were actually available for lease.

      So yeah, the cupboard is quite bare, both overall and given our usage needs specifics.  And I don't want to get locked into a bad lease because it was all that was available.

      The photo above is a site I scouted last week that has a lot going for it: size, upscale plaza, decent physical condition, and nearly move-in ready.  But wait, no dice: There's a GameStop in the plaza, so we're likely to be locked out by a usage exclusive.  It also faces west, a point against, and the rent rate is a touch on the expensive side, which would be fine if things went well, and would be death if we stumbled out of the gate.  Even so, I will do my diligence before eliminating it.

      The default assumption is that the new location will be the hub.  I am fully willing to make DSG Tempe the hub, but I don't think the landlord is going to let us.  There is not very much parking at that plaza and we are starting to strangle out the co-tenant restaurants on busy event days.  It's good that the Tempe store is right on the light rail line, and it's good that it's a walk-up for a fairly huge amount of population in the high-density housing nearby and at ASU's main campus, but at the end of the day it's simply not going to be our Madness Games or Sentry Box.  Which is too bad because the cost to operate that store is extremely favorable.

      So if Tempe cannot be an event hub, it could still be a shipping hub.  The way Magic: the Gathering has swooned in recent months, I almost wonder how necessary a large event center really is anymore.  But then Tempe will go and have almost 100 players for Friday Night Magic, as it just did, and I am reminded that yeah, capacity is probably a good idea.  Gilbert did not have as many last week but it was still a crowded house.  I really don't like the idea of telling people not to come to my stores and play games, when I spend so much marketing money and effort telling people to come to my stores and play games.

      Let's suppose the business model didn't favor large event hosting for whatever combination of reasons.  Tempe has the physical space and the central location to be the nexus for administration of a network of branch stores as originally imagined in the mergesplosion of last December.  We're already laying the early groundwork for Superstition Springs, despite being informed that no fewer than three other stores are moving to that area or opening there.  We believe our plan for that location will be unaffected by their proximity.  We also should have a safe and clear means to deploy at least 50 seats of capacity, safely getting us Advanced Plus status with Wizards of the Coast, however much that counts when you've got three or more stores in a chain and can get product easily anyway.  There is no urgency for us to work on our Payson location because my access to commercial space there is not time-limited; I am at liberty to develop that when the scheduling suits us.  What happens if I make a daring move farther south in Gilbert (or neighboring Chandler) into the wealthy neighborhoods between the San Tan 202 freeway and the Hunt Highway?  The store would not need to be large, and it would not need to host the main singles inventory.  Square foot for square foot, such a store would be expensive to lease and operate.  But does that matter if we are getting prime demographic customer arrivals?  We would have to build it really beautifully and feature the cream of the crop of product lines, but I think it could be done.

      Of course, a lot can change between now and the summer, when we realistically have to go ahead and make our move in order to clear permits on time.  Perhaps we will return from GAMA and find that the local commercial leasing market has opened up a ton of options for us.  Perhaps Tempe, Gilbert, and whatever other location will each become a hub: Tempe as a comics hub, Gilbert as a shipping hub, and Superstition Springs for events, if we're able to get a ton of cheap floor there.

      Mostly I am excited because I know the components of the business that are already working and will properly scale.  Being able to "load-balance" two stores of inventory has been a revelation.  Our procurement has never been this efficient, and we still haven't even locked down all our handling processes yet!  Load-balancing for three or more stores is just going to be frosting on the cake: I can order aggressively on items I know should gain traction, and I can go broad but thin on things that are there so we can be the place that has them, but for which a single store would have been taking a greater gamble by stocking.  I can even carry things that achieve market coverage merely by being in stock at the hub, and no branches.  We're already seeing some of that scale payoff with Tempe hosting the comics back-issue library and Gilbert hosting the deep miniatures stock.

      Wherever we go, the underlying goal is to create a fun place for people to shop and play, that is close enough to where they live and/or work that they are sufficiently able to visit that location in the first place.  Some centralization has to happen, but a lot of the mechanics of this can be transparent to the end user.  The comic collector who only wants new content will have his or her pull box hosted at any location he or she chooses.  The latest Magic and Pokemon packs will appear at every DSG.  The website will serve the entire chain.  But nothing I do is going to eliminate the need for the store to be reachable by the audience.  There has to be a "there" there.  That is what I need to build, and the future shape and form of "there" will be in my mind's eye while I scout for our new home.

      Tuesday, February 7, 2017

      Increment By Increment

      Sunday night, we saw the greatest comeback in football history.  No team had ever overcome a 25-point deficit to win a Super Bowl, but the New England Patriots did just that in their overtime win over the Atlanta Falcons.  The remarkable thing is how the Patriots achieved that comeback.  Trailing 28-3 early in the second half, many teams would be heaving desperation shots, low-percentage plays that stood little chance of helping reestablish control of the game.  The Patriots instead methodically and painstakingly marched one drive after another, putting up a touchdown to close within 28-9, a field goal to make it 28-12, then after a huge turnover, a touchdown and conversion to make it 28-20, and then again to tie the game.  In overtime, Tom Brady dismantled the weary Falcons' defense and James White punched in his third touchdown to seal the deal.

      image credit (C)2017 Akron Beacon-Journal

      What does this have to do with the comic and hobby game business?  Everything.  Methodical, gradual, incremental gain over excruciatingly long periods of time are the way of the world in a trade where there simply isn't enough money in play to brute-force a programming upheaval or a facility renovation or a massive product line deployment overnight.  Apple does their big store upgrades during dark hours and slow seasons to the delight of fans, but it's a staggering outlay of resources and coordination to achieve that so quickly and seamlessly.

      The most important time when incremental, patient persistence counts is when the clock is ticking.  Rent is coming due.  Maybe big terms payments are coming due.  Most often, one or more of these things overlap with payroll or sales tax.  Even a great sales day isn't going to cover that bill in one shot, and if you are like me and still get the heebie-jeebies from seeing invoices for enough money to buy a new car with options, it can be demoralizing and overwhelming to realize you have to come up with that in how many days?  Wait, did you say days?!?

      The only way to build to it is to string together solid days of business.  That may mean hustling for sales, which I found myself doing quite a bit during the winter market malaise we've been in since around October, not counting those great two weeks or so at the end of December when everything looked easy again.  Rent and payroll come together next week as well as terms?  Let's say I'm on the hook for $18k, to use an outdated example.  Whatever our running bankroll is, since we keep money around all the time for buys, we need $18k more by the middle of the following week to hit all the bills.  Eighteen thousand dollars!  In nine days!

      But wait, that's only $2000 per day.  We have averaged more than that for a while now.  Cooler heads prevail; this is achievable.  Some of our daily yield is store credit redeemed rather than moneydollars received, and while Friday and Saturday totals tend to be well in excess of that average, sometimes those gains are partly offset by a $1200 Tuesday.  So what do we do to make sure we get ahead of that two-pound-a-day pace?  I push a few items to eBay a little more aggressively than I otherwise might.  I check the Crystal Commerce channel sync to make sure everything that's being shared is showing in stock, by means of spot-checking a random few of the thousands of items listed.  I might go ahead and run a 90-day sales report on a product line and see if there's anything to discontinue; a clearance sale with even a deep discount of 50% or more can quickly raise several thousand dollars if I'm sitting on a lot of product, and since that product won't be replaced, the entire yield can be allocated directly to the upcoming expenses.  Whatever I want to push, I make sure to boost a Facebook photo of it, targeted at the audience demographics I hope will give a damn.

      In essence, I buckle down and make incremental gains.  A little bit today, a little tomorrow, setting up to buff the upcoming weekend just a little bit more.  Before you know it we've not only raised the eighteen large, but we've kept buying cards and video games all the while, replenishing our resource base for the next time we have to build extra bankroll on short notice.

      Most importantly, I don't make desperation heaves into triple coverage.  I don't put Underground Seas on eBay at 80% of TCG Market.  I don't sell booster boxes at cost just to "get out from under them."  That stuff has value!  Not only am I cheating myself out of value if I set that stuff on fire, to use insider lingo, but I'm also training the public to wait until I'm desperate and scoop up merchandise at a fraction of the price.  Nobody would pay $2k for a tricked-out iMac if they knew it would be in the Fry's Electronics Tuesday circular for 38% off sticker every month or two.  There is certainly room to use pricing as a tool to turn some quick sales, but it needs to be done deliberately and with laser focus.  Pick specific things you want liquidated, make sure they are good candidates for liquidation, and then strike fast strike hard no mercy sir.  Get that stuff turned into cash Now.  And don't dither for a moment.

      Incremental gains work in other regards as well.  The gargantuan addition of millions of Magic cards to our Crystal Commerce inventory continues apace, with a full-time dedicated staff member working on that primarily, everyone else on staff contributing during periods of slow customer arrivals, and management and myself coordinating, taking our turns at entry, and even taking our turns at card sorting.  Sorting cards is the great equalizer at DSG: Everyone does it at least some of the time, from the owners on down to the newest hire.  (Owners don't do it that often; we're not here to play this game on beginner mode.)  Importantly, this massive project includes keeping up with the ingestion, intake, administration, reconciliation, retrieval, packaging, shipping, and verification of existing stock as cards are bought and sold to pay our bills every day.  To date we've still only inventoried cards printed from roughly 2011 forward.  Some of Modern and virtually all of Legacy and Vintage remain in processing, except what has been reprinted in Masters and Command Zone sets and whatever we've purchased from the public on actual buy tickets in the point-of-sale.  The sales snowballed quickly once we got a very modest amount of cards entered.  A positive problem to have.

      One of my longest-term projects, one that has been taking so long I think it's going to outlive the facility it was started for, is to configure the Gilbert store's fixturization so that everything is completely off the floor and we can use floor-cleaning appliances like motorized mops and waxers.  You can't do that if you have merchandise on the floor (heresy!) or close enough that splash damage is a thing (blasphemy!) or you're using light-duty fixtures that aren't rugged enough to withstand commercial-grade janitorial labor (abomination!).  The next building I set up is going to be ready for this right from the start, if I have my druthers, or as soon as possible after that.  We're not at scale to have concrete and metal everywhere like a Sam's Costco, but part of why boutiques get so dirty and granular is that their physical plant sorely lacks durability.  DSG needs to do better.  And that has meant a meticulous and systematic replacement of fixtures and floor usage with the deployment you see now, which has only a few trouble spots remaining and most of those backstage.

      There are other projects I only get to revisit every once in a great while.  Our graphic and logo assets still need to be redone. Our arcade restorations are ongoing.  Product lines I'm working on adding.  Repairs on consoles that came in and were bought non-working.  Taxes, for that matter.  There's always something, many things.

      I can't do it all in one day or even one week.  But we do need to get it done.  Inexorably, one bite at a time every chance we get, we gain ground on the longer-term objectives, until one day I wake up and suddenly it's finished.   And that's when we start enjoying the payoff.