Tuesday, August 28, 2018

Smith: Discounting As a Game Retail Strategy

I'm taking a quick break from The Backstage Pass to wrap up some overdue projects and prepare the business for its first full, unimpeded holiday season at the new massive Chandler location.

Fortunately, my readers, you'll not lack for excellent guidance this week!  I have a guest article to present to you from my friend Stephen Smith, who along with his wife Tracey Smith owns and operates Big Easy Comics, a magnificent store down in the bayou of Covington, Louisiana, located a quick dash north on the Lake Pontchartrain Causeway from N'Awlins herself.  With a massive facility and devoted player base, Big Easy is the nexus of tabletop in the SoLa region.  The store even prepares hot pizza on site for players, along with a growing menu of other lunch, dinner, and snack options.   Big Easy is a substantial enough player on the comic side of the biz that Stephen was asked to deliver the 2018 Hybrid Theory GAMA Trade Show seminar on comics in Reno, as I mentioned back in March.
Anyway, I've already learned a great deal from Stephen both in person and online, and I'm delighted to bring his observations to you here on The Backstage Pass.  Without further ado, I yield the floor.

DISCOUNTING AS A GAME RETAIL STRATEGY
by Stephen Smith
Originally posted January 23, 2017 to the Big Easy Comics Blog

I started writing this as a post for a Facebook group full of great retailers I’ve become acquainted with over the past few months and realized I had so much to say that I should blog about it instead. It was brought on by some reactions to some comments I made about running events at a loss and some general comments I (and others) made about discounting being a poor business strategy. It snowballed into a few deep discounters stating that retailers selling boxes of Magic Cards for more than they do are wrong to do so. They said some other things about buying business, incentivizing customers with discounts, and that “some profit is better than none” while simultaneously not understanding that gross profit doesn’t actually mean that you made any money.

In beginning to write the post I found myself stating unilaterally that undercutting your competition doesn’t work in the game trade. Of course that’s a bit presumptuous so I’ve decided to discuss the experience Tracey and I have had the past 6+ years. That said, it’s not going to work pretty much ever. If it works for you, you’re the exception and you may have still done irreparable damage to your business. If you’re reading this and saying “but all my online sales!”, you're a retailer that has a B&M because you can’t get the access to product you need otherwise and would make more net profit if you could dump your retail location and switch to selling exclusively online. Or maybe you just love it. Because let’s face it, you’re not getting rich owning a comic or game store and filling TCGPlayer orders in a warehouse is a whole lot less effort than hand selling.

I’m getting to a point, I promise.  In 2017, game retailers generally agree that most markets are saturated with game (CCG) stores. Opening up a new store in one of these markets and dropping your prices to undercut all the existing businesses doesn’t work. Your competitors have customers and you don’t. They’ve built communities and you haven’t. In building communities they’ve cultivated meaningful relationships that you don’t have. If you’re the one doing the undercutting, your best case scenario is it causes a price war and starves all the businesses of cash until someone closes. This opens space in the market to pick up those existing, most likely disgruntled, customers. For your sake, hopefully they don’t blame you (they probably will).  Unfortunately, in this best case, the newer store without the established base is the one that closes most often. Savvy competitors will essentially ignore you and let you starve yourself out. They also know that once you start to fail you’ll do any number of financially irresponsible or ethically questionable things in an effort to right your ship. You’re not operating in a vacuum, your competitors will react to the things you do. You’re probably not smarter than the last guy and they can probably tell you what you’re going to do next before you do it.

We deal with on average 1 new store per year opening up in our market. They always go with beating our prices as their primary strategy. I don’t know why this is the tactic that everyone thinks is best, but it’s what they all do. They don’t do enough investigation about their competition and why they’re successful, they just look at the prices and say, “I can beat that!”

There have been clubhouses, chains, and well funded start-ups and they’ve all gone belly up. The first time it happened to us we weren’t sure what to do about it. We’d been in business less than a year and were genuinely afraid. This store opened up half a mile down the street and most of our customers had to drive past it to get to us. We ended up doing 2 things after gaining as much information we could about our soon to be competitor; one was a great idea and the other was terrible. First, we worked really hard to make our store better by expanding and adding additional dedicated play space. We weren’t certain we could afford it yet but we felt we had to accelerate our plans and add it a year before we originally intended to. Second, we matched their $2.99 price on Magic boosters. Adding the space was a huge success, price matching probably cost us $10,000 in gross profit. What of this new competitor? No one played there. No one cared about it. Half or more of our players didn’t know it existed. The ones that did disliked the manager and the less than ethical way he ran the store. To our surprise, we’d successfully built a loyal following because of how we ran our business and treated our customers. They didn’t care what we charged for a pack of cards. We gradually increased our price back to $3.99 and we haven’t looked back. I will caveat that by saying that we do offer special pricing by the box or by the case, not crazy lowest common denominator pricing, but fair pricing that allows us to continue supporting our community and stay healthy as a business.

There have been several others to open since our first experience. All of them nice people following their dream of owning a game store. The common thread between them seems to have been a lack of understanding of the market they entered. It’s a well served market and there’s not a lot of room. There are stores 30 minutes to the east, west, and south and sparse population to the north. The best option (and still not great) to open a store in the area is to find an under-served area of Greater New Orleans. What those might be I’m not sure. Logistically it would be a nightmare for us to open on the South Shore so I’ve never looked into it (plus we’ve made some great friends with stores of their own). I highly recommend not marrying yourself to a particular geography. If you want to own a game or comic store then find an under-served market and open there or buy a store that’s already open. You’ll be much happier with the path of least resistance. You might also find that long time retailers you considered making your competition can become your biggest cheerleaders.  We all want a strong healthy game trade after all.

If you do plan to open in a place with competition then you’d better be able to identify an opening in your market or understand from day one that it’s going to be you or them and plan accordingly (shitty, I know). Then you win by operating ethically and being a better store that adds more value to the customer experience (deeper pockets don’t hurt either). Customers aren’t stupid. They’ve seen it all before. Most stores don’t make it 2 years and they know it. They’re not going to make an investment in a new one just because you can save them a couple bucks.

Winning on price does not create customers that will be loyal to you. It drives consumers that are loyal to price to you. If your competitor is doing it right then you’re not going to pry very many customers away from them with a low price strategy. As always – thanks for reading! -Steve

Stephen Smith co-owns Big Easy Comics in Covington, LA with his wife Tracey. A retailer for the past 8 years, he also has a BS in Computer Science and an MBA. While not working on his comic & game store he works as an Enterprise Cloud Architect for a large IT firm.

Monday, August 13, 2018

Time Enough at Last

In a Facebook group the other day, there was a discussion about how ROM piracy enforcement is starting to get harsher and harsher, ranging from outright litigation from publishers to prosecution by authorities to getting cut off by local ISPs for excessive downloading.  There are ways around a lot of this, of course.  You can Tor Browser your way into a limited range of anonymity.  The various repositories migrate and re-open, fueled by malware dollars and porn banner ads.  If you're bound and determined to acquire content without paying for it, it can still be done, for a while longer at least.

It struck me as I read through the discussion that I no longer bother pirating... well, anything really, but in particular, I no longer bother pirating ROMs, and I really had to think about it to realize when that transition occurred and what prompted the decision.  And this is saying something, because let me tell you, I basically spent decades pirating everything.  I was the very definition of a digital hoarder.  BBSing on the HST in the '90s, Napster and Limewire and Morpheus at the turn, Bittorrent thereafter, and no CTO box ever seemed to have storage options enough.

Thinking back, it was easy to remember when I stopped pirating other things.  Law school in 2004 was the end of computer software piracy for me.  My entire future depended on me being able to use tools like Microsoft Office with no compromises and no excuses.  I was still a PC fellow at the time so there were only a handful of apps I needed, but they were expensive and crucial.  I made a decision that I had enjoyed my fun as a computer hobbyist, downloading "LeEt WaReZ" when there was nothing at stake, but my professional career demanded legitimacy, and if I was going to make a living using these tools, I owed their creators, fair and square.

Music and movies lasted slightly longer.  Bottom line, I wanted to listen to all the music a few times, and I only wanted to pay for "keepers" among my favorite bands or movies, in the form of my CD and DVD collection.  This is a quibble.  It wasn't right.  In 2008, when Alexandra was born, I decided I wanted to be setting the right example for the kids.  By this time I was also a student of Objectivism and I believe in the value of compensating people for the enjoyment they provide me.  It didn't hurt that technology was offering a hassle-free content library that worked seamlessly across an ecosystem; 2007 had marked my migration from Windows to OS X, and I celebrated by spending absurd amounts in iTunes.  I own proper copies of most of what I consume, I subscribe to services that provide the rest, and if you see a song in my library that I haven't bought one way or the other, odds are it's simply not available at any price, and I stand willing to purchase it if that should change.

My console ROM collecting went on somewhat longer.  There haven't been above-board options for most such consumption, as a lot of it is rare or in some cases fully unobtainable legitimately.  But ultimately, I turned away from that as well, around the beginning of this decade, and now I remember how that went down.

Essentially, it became pointless to pirate ROMs when the ultimate payoff, entertainment through gameplay, became more readily attainable legitimately than illicitly.

ROM piracy wasn't always emulation, of course.  Back in the 1990s, when the Super Nintendo reigned supreme, those who knew where to ask were able to get devices called console copiers.  The Super Wild Card and Super UFO were the most popular models at the time.  They sat in the cartridge port of a SNES and allowed games to be played from ROM images saved to 1.44MB floppy disks.  If you borrowed or rented a game, you could copy the ROM from the cartridge to disk right there on the spot.  The largest carts back then took up two or three disks.  Later versions had ZIP disk support and ultimately just USB connections so you could leave everything on your PC's hard drive.  Years later it got even easier: flash memory cards were big enough to hold everything, and the console copier was superseded by the "flash cart," playing ROMs on the original hardware via a passthrough cartridge as though the original media was being used.

If the above sounds suspiciously like the emulation you already know about, that's not an accident.  Emulation grew out of what had begun as simple storage spoofing.  Computers at the time couldn't effectively emulate consoles, because you needed a computer of far greater power to run a virtual machine as a subprocess and produce a decent result.  But by the end of the decade, reasonably functional software like NESticle and SNES9x and MAME existed that allowed the games to be run on a computer directly.  Typically you'd be stuck using keyboard controls or the subpar PC joysticks of the time, but the bottom line was that you could play games without paying for them.  Lots of games.

Like typical ROM collectors, at one point I had enough video games stored and ready for play via emulation that I could spend multiple lifetimes doing it and still not reach the end.  It was an orgy of plenty that could scarcely have been approximated in human history.  The internet is endless content, of course, but this was endless gated content, endless admission to an endless festival.  It was easy to see why so many people, including me, found software piracy so appealing.  And within a few years, computers could emulate much newer systems with ease.

So I basically had free entertainment forever.

And then, somehow, just like I do with all kinds of things, I let it turn into work.

I don't mean DSG; the store has nothing to do with emulation and won't even carry products that are tailored toward it.  I mean that in order to maintain these vast, always-ready catalogs of video games for every system and every variant and every piece of hardware on which they might run, and dodging The Man the entire time doing it, I was using up inordinate amounts of time and attention collecting new release ROM dumps, installing new versions of emulator executables, testing and making sure things still worked, updating and testing firewall software, torrent software, Tor, and everything else, and on and on.

So before long, I realized I was spending more time and effort preparing to play video games for all eternity than I would actually spend just paying for games I wanted to play, and then playing them.  Then, later, I could pay for the next game I wanted to play, and so on, lather rinse repeat.  And by doing this I could let it be the publisher's problem about making it work properly on my hardware or it needed a new patch or whatever.  And that I could do this for the rest of my natural life here on this earth and still not come close to running out of ready and available content.  They'll keep making more.  And I could do it in the light of day without having to hide behind a grip of IP proxies before navigating over to The Pirate Bay.

And what's more, used retro video games are amazingly affordable.  I can pick up systems from the 32-bit era and play some of the best titles around for a pittance.  It's such a friendly consumer landscape that I literally make part of my living providing it.  I bought a used PS2 just so I could revisit titles like Vandal Hearts and Gran Turismo 4 and Katamari Damashii.  I finally had a Sega Master System come in and I'm going to re-enable the hidden FM sound channel and fire up some Phantasy Star for old time's sake.  I'm going to savor it.

So at the core of my realization was that: beyond being morally right, consuming video games via legitimate means instead of through ROM piracy was actually the superior experience.  So much so that I quickly found my cache of available legitimate content outpacing my ability to consume it, which had been the original attraction of ROMs and emulation.

The above theory is proving out: Right this moment I have more things sitting on my Xbox Live account that I have not played, or haven't touched for more than a few starting levels, than I have games I've played exhaustively, by a ratio of many times over.  My Gamerscore has a pile of points from the likes of the Rock Band series and Ori and the Blind Forest, and then a whole bunch of 50/1400 and 0/750 scores from the scads of games I swore I'd get back to when I got around to it.  This includes a bunch of retro games that I bought for the convenience of having them on my X-Bone (or the Xbox 360 before it) despite being perfectly capable of playing them in an emulator for the past ten to fifteen years or longer.  Same with the Nintendo Virtual Console.  I think I've actually purchased Super Metroid and Super Mario 64 at least a dozen times across different media and systems, including Japanese originals, preferred for speed running.  We own around 50 physical games at any one time across the Wii, Wii U, and 3DS in disc or card form, and I barely play a fraction of them.  (The kids do somewhat better.)

The irony has to be making Nintendo and Microsoft smile.  Before, I played games without paying for them.  Now I pay for games and I barely (or never) end up playing them.

Oh, and I can't really speed run anymore.  In the classic Twilight Zone episode referenced by the article title, Henry Bemis has a post-apocalypse library all to himself, but breaks his glasses and can no longer read.  Much the same way, I now have legit access to all the games I care to play, but I am getting older and my nerves are shot.  I can't perform the cleanest and most precise moves necessary.  I know what to do and when to do it, I can master the run routing, but my hands refuse to obey my brain's commands in real time, so getting onto today's leaderboards is an unrealistic expectation.  I enjoy watching the speed runs now, enjoying the achievements of those who are pushing the envelope and playing mistake-free football and entertaining me while they do it.  YouTube is changing passive viewing entertainment and this is just one minuscule facet of it.

I still have some flash carts that get used to test hardware more than anything else.  My kids mostly want to play Minecraft and that's cloudware like everything else on the leading edge.  Ah, the kids.  That's the other piece of this equation.  My family.  My wife who I never have enough free time to spend with, and my kids who I never have the energy to keep up with.

I think about all the time I spent making sure I had the latest bullsh*t JRPG ROMs translation-patched, which I'll grant was back when I was a single idler, and I resent that I don't have that time back now to spend sitting on a tropical beach with Stephanie, listening to the surf and drinking sweet beverages and enjoying the bliss.  I think about all the money I spent on adapters and drives and storage and specs and so on to keep this digital library that nobody cared whether I was keeping, and I resent that I don't have that time now to spend hiking through beautiful mountain wilderness with Greg, Evey, and Allie.  And it's not just the notion of vast, exotic vacations, either.  I'd be delighted just to be able to spend the time teaching my kids to play musical instruments, or watching mystery shows with Steph, or taking the entire crew for a great dinner out, or what have you.  It's not too late, but so much time has already elapsed.

And now as my collection of purchased iTunes Media has grown truly massive and the XBL and VC purchased game collections are sufficient to meet the greater share of the our family consumption, let alone the physical media we still own, I find myself in this gradual toboggan ride down where I get onto my computer, poke through the old directories, find a bunch of MKV files of movies I just don't care if I ever find time to watch, and I delete them unseen.  Or a bunch of downloaded ISOs for one system or another that I'm just never going to bother trying to burn and modchip and screw with, so let's get those gigabytes back.  Or I'll raid the bookshelf for games with a layer of dust on them and just trade them in to the store for resale.  I'll probably upset a lot of people from my old #ytsejam days by admitting that I deleted most of the bootleg concert recordings I had collected.  I just don't listen to them, and I got tired of curating the library around them.  I'm still holding onto my collection of rare music videos and concert videos, since even with the reality of modern YouTube, a lot of it is still not circulating publicly, and if I tried to upload it to YouTube it would get me shut down on copyright strikes.  I'll surely find some way to bequeath and offload it all to "the world" eventually and then I can watch on demand the same as everyone else.  And sure enough, the amount of time I spend having anything to do with emulation is now essentially zero.

I will never stop loving video games, of course.  Unlike tabletop, which I take no joy in right now because of burnout from work, I still find myself able to steal a spare hour and savor Ori or Street Fighter or Metroid or Castlevania.  But mostly?  I find that there aren't enough hours in the day, or days in the week, or years left in my life, to endlessly tinker with the mechanisms of hoarding illicit content, never mind its appeal to the autism endorphins.  Life is just so much better than that.  I can have all the fun for a fraction of the effort if I'm willing to fork over some dollars of money to parties that, bottom line, are entitled to that compensation in the first place.  It makes piracy as such seem even pettier in hindsight, a pursuit undertaken by the oblivious and entitled gamer/viewer/listener.  The Spanish Proverb proves true again: "Take what you want, and pay for it."

I wish I had achieved that epiphany back when I had the time, youth, and health to spare.

Tuesday, August 7, 2018

Six Years of Survival

By a quirk of the calendar and there being only one leap day since we opened, our 6th anniversary week matches exactly our original opening week in August 2012!

While we had online operations underway already and had a soft opening on Thursday the 9th, Desert Sky Games in Gilbert opened for the first time publicly on Friday, August 10th!  That first "Magic on a Friday Night" (since we were awaiting our Wizards Play Network approval) drew 30-ish players and it seemed like we had all the space in the world at our original 2,400-square-foot suite at 2531 South Gilbert Road.
This blog does plenty of reminiscing and of comparing past performance to current trends, so I won't dig too deeply into those particulars.  But right now my overall impression as I look back at the company's history so far is one of survival.  This is perhaps colored by the past twelve months being the most challenging since we opened, and in fact the most challenging career year in my adult life up to this point.

Now that the move is pretty much in our rear-view mirror, looking back on how badly it went has been a somber experience.  We went into the move flush with money from a moving sale and we had arrangements in place for an inexpensive buildout.  Even with a projected sales drop due to the move, we were on track to return to normal growth trajectory within a few months, ostensibly assured by holiday sales.  In practice, we had months of delay, had to have a bunch of work re-done to meet code, and thanks to all the downtime and our initial ability to use only a third of the new space, we saw sluggish sales throughout late 2017 and well into 2018, including a moribund holiday season where it seemed like nobody shopped local until it became too late to buy from Prime.  We had to borrow, and that meant servicing debt, and that meant money flushed down the rat hole.  It sucked.

The good news is that we had substantial inventory and asset reserves, and we were able to lean on that throughout the months after the move.  Between cashing chunks of that out and utilizing financing as cash-flow reinforcement, we were back to mostly normal operation by late spring.  Most of the moving debts are paid off and none of them are coming back.  The store's economic machine is running hot now, and we're starting to really taste that size advantage.

And that size advantage has been at the center of all this.  During this entire ordeal, the key asset, the reason we moved where we did in the first place, was in our hands and locked down.  We had the space and we had the location and we had it on a favorable lease.  We have DSG Chandler, the biggest game store in Arizona, by a nose over Prescott's Game On and Glendale's Imperial Outpost, both excellent businesses.  We have access to the freeway less than a mile east and additional freeway access to our south and west, and we're in the heart of Chandler's professional tech corridor, an outstanding place to do business.  We have acres of parking and great food options nearby.  We face north so the afternoon sun no longer scorches the storefront.  And we have by far the most organized play capacity in the East Valley, coming at a time when other area stores were opening larger storefronts and starting to get a little braggy and belligerent against the compact-but-high-volume business engine I had in place at DSG Gilbert.  Now we have over 6,000 square feet, elbow drop.  We know how to leverage that asset into monetizable activities.  And best of all, we're paying the right price for it.

Physical facilities are the most difficult part of a retail business to change.  Leases typically lock the business in for three to five years or more.  Internal changes are expensive and external changes are oftentimes not possible at all.  I spent over four years at Gilbert literally climbing the walls extracting every last square inch of value I could out of that facility, and it was maxed out.  I wasn't going to be able to take the business any further until I reset the baseline.  DSG Chandler was the result of that.  We went big rather than going home.  Going home would have been easier, but then we wouldn't have the vast untapped potential of our physical plant today.

The ownership group is finally exactly where it needs to be.  We had some great contributory investors early on in 2012 who sold their equity during the first year or so of business.  We then had two difficult separations from partners who went on to open competing stores, one of which had a decent two-year run and closed in late 2016, and the other of which opened in 2017 and has not been consequential.  The ownership group now includes one of the best and most respected judges in the southwest, an electrical engineer who works miracles for us behind the scenes, some guy who writes blogs, and my wonderful wife who serves as our final sanity filter when we're about to embark on some risky plan.

They say hard times make strong people, and if that's the case, then sun's out and guns out as far as we're concerned.  I don't think DSG Chandler is performing anywhere near its ceiling yet, and we are only beginning to scratch the surface of what our new hub facility can do.  We are painstakingly gardening up a business culture where our employees know we have their back and trust them to use integrity and good judgment, and their performance reflects that trust and confidence.  We are carefully cultivating a player community through the fearless expulsion of toxic individuals, despite our foreknowledge that those we ban will repay us with a social media smearing, which indeed several have done.  It is worth it because the player base that remains is Good People Whom Others Like To Interact With.  We're in the business of selling fun.  It is essential that every part of this mechanism be oriented toward that.

DSG Chandler won't always be the biggest dog in the yard.  Capitalism ensues as usual, and someone else will expand and be the new square footage leader, or someone else will show up and open huge right from the grip.  They will benefit from that the way we're benefiting from it now.  In the meanwhile we will have had that much more additional time to iterate, improve, develop, diversify, deepen, and reinforce.  We'll probably have satellite locations again before much longer.  That was something we figured would be in place by now back when I posted our move announcement for our 5th anniversary.  Then the store move ran late, and ran expensive, and so on, and I figured the prudent thing to do was to shelve expansion plans and just make sure we got the core back to 100%.  We did, and we want to spend the rest of 2018 laying in reserves, and then our eyes will be on the horizon again for branching out.  Meanwhile, at our hub, by the time the DSG Chandler lease ends in September 2022, I hope against hope that it's just like DSG Gilbert was in 2017, where we burgeon at the boundaries and cannot possibly squeeze anything else in.

And if the trade winds shift and blow cold, we'll pivot and do something different.  Despite all of the foregoing and how much pride I have in our people and this thing we've built, I am eminently willing to go "microstore" and pick up my stethoscope and hang out a shingle and do things that way.  It wouldn't be my first choice, not after putting a year of blood and treasure into building a megastore, but I will do what I must to ensure the best long-term outcome.  Volition supersedes all other prerogatives.

Here's hoping for good tidings when the end of Year Seven comes around the bend!