Sorry about the six-month break, there. I was kind of preoccupied with a wedding. But yeah in addition to that, business at DSG and in the greater hobby game industry overall has commanded my firsthand attention, and now that we're on the other side of a holiday shopping season that behaved almost exactly to forecasts, it's time to look back at 2022 and recognize how absolutely absurd this past year in the biz actually was.
The Pokemon TCG had nowhere to go but down, regressing to the mean but still well above the doldrums of 2017-2018. The Pokemon experience of late 2020 and early 2021 was like a force of nature. We literally got to the point briefly in December 2020 where we had no booster boxes on the shelf. And it wasn't for lack of ordering enough, or for underpricing! Demand and sales volume were simply that high. Anything we could get was snapped right up. Our biggest Pokemon days have been the releases of Battle Styles and Evolving Skies, both of which happened in 2021, but we had great revenue on the likes of Brilliant Stars, Astral Radiance, Lost Origin, and Silver Tempest in 2022. Looking forward, we see Pokemon as a mainstay of our business in a way that it never was pre-pandemic, but because of that extreme volatility, we don't ever want to have to pay the bills with nothing but the 'Mons. Our chips will never QUITE be all-in on the table with Pokemon the way we did for Double Masters 2022 or for products like Time Spiral Remastered before that. Of course, I say that with two behemoth releases inbound in the next three months alone: Crown Zenith and the Scarlet & Violet Base Set. Bring it on, Nintendo.
Video games had an interesting descent to normalcy after stores like mine all got cleaned out during the pandemic. We're still not readily able to stock Playstation 5 or Xbox Series X systems on demand, which is just as well given that new systems are breathtakingly margin-free and exist primarily to drive trade-in volume. Nonetheless, we sold a lot of Nintendo Switches, including the new OLED versions, and at no point in 2022 were we out of stock entirely on them, to my recollection.
Previous generations of systems slowly returned to stock, at levels I'm not completely happy with, but which are adequate. We stopped taking in most optical disc systems since the drives are starting to hit very high failure rates, much the same as automotive CD stereos from the 2000s are all breaking down now. I'll be intrigued if future years pose a big challenge for nostalgic Xbox 360 or Wii players hoping to enjoy license-locked and de-listed titles marooned on those platforms and unavailable via more current means. Meanwhile, on any given day, we can typically fill a nostalgic millennial's order for a Nintendo 64 or Game Boy Advance with some carts and controllers/accessories, and those are great tickets so we're always going to bend over backward to make that visitor happy.
The operative progression in 2022 in the video game category was toward subscriptions and away from everything else, which has implications for brick-and-mortar retail as you might suppose. The most successful subscription service is Xbox Game Pass, and verily, Xbox One/Series physical disc media is among the lowest-selling software in the store, ranking below even old Sega stuff. Our sweet-spot software inventory across Nintendo systems, older Playstation, and the vintage platforms, grew steadily all year, which might be a function of good buying volume on our part or might be a function of demand plummeting... and is probably some amount of both.
I have stated before that the video game category would sunset some day and the business would change. It's not that we wouldn't be able to sell any video games, but that the focus would shift from players to collectors. Bread-and-butter gamers who seek bargain value at stores like mine and then trade games back in when they finish them will find their needs served by Game Pass and the other subscription services -- and as of November 2022, a staggering thirty million gamers are doing exactly that. In the course of the Microsoft-Activision-Sony hearings, we learned that over 28 million subscribers are on Game Pass, with another 1.5 million apiece on Playstation Plus and Nintendo Switch Online. I think players will still be with us for a while yet, because so many thousands of absolutely awesome titles are still, to date, marooned on older systems and media. However, if there is a profit to be had, those titles will find their way to present-day markets, which we have seen broadly on platforms like the Vita and the Wii U, where virtually every consequential game has arrived on Switch or is eventually expected to. Thus, in the future beyond when players need local independent video game stores, only collectors will be seeking our channel, and that is the absolute worst audience to serve. There are some angels amongst the collector public, but the vast majority of that audience in the video game hobby are extremely anti-store in general, have already acquired all the common titles they want, and will seek only the rarest fringe of inventory, and whine like a mule about price while knowing full well it is fair market value; they just hope the store is stupid or desperate. Yeah, I'm not looking forward to dealing with that.
Oh, lest I forget. The Magic: the Gathering singles market collapsed. Or, more accurately, it is still collapsing. Around three months ago we started to see discussions on the MTG finance social media groups and subreddit that indicated that this collapse was finally being noticed by others. Griffin and I noticed it late last year and acted accordingly, and our reward was a six-figure cash payoff, literally. The canary in the coal mine for us was not the pace of reprints in products such as Modern Horizons 2 or the Secret Lairs, though neither of those helped. Rather, it was seeing literally hundreds of Commander reprints every six weeks as new Standard and Commander Legends sets included multiple Commander decks and a refreshed List to top it off. With Arena killing paper Standard and Commander predominating in the meatspace game world, that reprint cadence produced a glut of singles in needlessly duplicative catalogue nomenclature. (Weirdly, the List was the more sustainable part of this, as a card that repeats exactly on the List is identical to its previous Mystery/List printing and does not create a new duplicate SKU.) TLDR version: Singles became virtually impossible for players OR STORES to keep up with. The bough broke.
Using tools such as the TCGplayer inventory reporting, CSV exports, Massprice, and Griffin's coding acumen, we observed that there was a vast "middle" of cards that was crumbling into dust. I only wish we had noticed this a year sooner still. Singles like Vendilion Clique and Containment Priest are great examples of once $20-$40 all-stars that are now literal bulk dollar rares. DSG's inventory of over a million cards was seeing an internal erosion that was frightening in its magnitude and threatened to undermine the asset component we had spent years building. We utilized our software tools to carefully adjust tranches of cards to an amount near Direct Low, typically above Market, and well below our typical pricing near Listed Median. (This was after segregating our $100+ Reserved List stock.) Then, we began a gradual process of ratcheting down the price one percent at a time every few days. This resulted in a grinding effect where we basically sold enormous amounts of cards, at quite literally the highest price we could get at the threshold of immediacy, given no announcement, no fanfare, no outward sign that we were doing anything.
Over the course of months, the money rolled in and the cards rolled out. And a corollary effect occurred: Our labor cost to manage singles, previously masked by the ordinary course of fulfilling Reimbursement Invoices, became clearer on the ledger. We were able to see the tremendous waste caused by time sunk pulling Pauper Commander lists. We were able to count just how worthless it was to open singles at set release with the glut of reprints forcing values down. It went further than that, but you get the picture. Waste in the form of inventory decay, waste in the form of inefficient labor loads in the task processes, waste in the form of accounting for it all. A fortune passing us by and right down the drain, previously offset at scale by the main singles revenue level, but no longer sustainable with card values collapsing.
Once we figured we'd sold down enough, leaving 10% for the next guy as we were taught to do, we sold off the rest of our sub-$100 cards to other vendors. Don't cry for them; they got a smashing deal for an enormous hoard of cards, even at the New Reality value levels those cards had fallen to by that point in time. With our new-found labor savings, we were able to reduce again the price of sealed Magic product to levels that others in town really can't keep pace with, without resorting to subscription gimmicks and the like. With our space freed up, we have yet even more future projects incubating. I look forward to, eventually, discussing them. We still deal with high-end singles and that has been awesome, with the exception that we're upside-down on some of our best-condition dual lands because of how competitively we've been buying on them. We don't mind waiting for the market cycle to rebound, as it typically does in late spring as tax refunds propagate.
The singles sell-down contributed to our cash position that let us barge in heavy on Double Masters 2022 as we had planned. That set is indicative of the overall trend for Magic in 2022. It was great out of the gate; so great, in fact, that I literally bought a sports car with the profit distribution from the release cycle. But it slowed down and now I have probably a three-year supply remaining, including cases upon cases of both draft and collector boxes. The market price of the boxes has dipped back toward pre-order levels, and I don't feel like selling them that low, so as with our cleaner duals and RL staples, we're just going to sit on them until the sun comes back out.
The big benefit of the MTG singles collapse is that it will eventually bottom out. Some of my peers say they think it has already happened. From my analyst perspective, I haven't seen enough longitudinal data to say whether they are correct or not, but I would like them to be. Throughout the trough cycle, buying opportunities will abound for any store in a strong cash position, and right now, that's us. We know there's at least some amount of haves-and-have-nots in the scene, with one day earlier this month bringing us news of FOUR game store closures, two of them local. (I know I haven't worked on the game store closure list lately. I'm kind of hoping GAMA will take it over.) With singles values in the dumpster, buying great collections for a song should be possible, even at competitive levels versus the marketplace. I think values will behave a little differently in the recovery now that people know the pace of card prints and reprints will continue to accelerate, but that players will still want to play. I have a notion of what the cold equations will look like in that market. But for now, we're all just engaging in educated guesswork. I expect to be in the Magic: the Gathering business for as long as DSG exists, so it's a puzzle I had better be solving as we go.
TCG Accessories were dumb in 2022. We made money on them well enough, but it seems like every accessory brand went ultra-wide and it became kind of pointless to attempt comprehensive coverage. The best practice in this industry is to be an arms dealer and play no favorites, offering any accessory a card player might want, and accepting that the vagaries of shipping out of China would cause periodic outages and blurps in selection from the customer end. I decided to take a different approach that might end up being wrong, but it's an approach that satisfies my autistic brain: coverage of a narrower range of brands, basically just Dragon Shield and Ultra Pro, but trying to keep every color sleeve in stock as close to 100% of the time as possible. I have been carrying Ultimate Guard also but I'm contemplating dropping them. Players still like Boulders and Sidewinders, kind of, and used to love the Arkhive series of cases since Boulders and Sidewinders are designed to fit inside them in a modular way. But now there are umpteen different kinds of Hives... Arkhives, Minihives, Superhives, Treasurehives, Omnihives, and on and on. And that has diluted demand to where most of the Hives move too slowly. I have racks upon racks full of them. Meanwhile popular colors of Dragon Shield can sell a master case worth in a week or two. I'd rather devote limited shelf and storage space to deeper stock of those.
Meanwhile of course inflation has socked us all in the junk like a load of bricks. And if you're going to argue that inflation isn't real or that Putin is to blame, get outta here with that nonsense. A staggering 80% of all dollars in existence were printed in 2020 and 2021. That is a sure-fire recipe for an inflationary bloom. Collectibles that experienced an easy-money spike in 2021 at the front of that cycle fell back to earth in 2022, but costs of living didn't. Interesting how that works. Thus and so, players saw their discretionary money reduced, and they cut back spending accordingly this year. DSG survived well enough thanks to hedges upon hunkers upon consolidants; one might accurately say that the focus of my personal Year 2022 was to reinforce the value of the business's asset base in its various liquid and illiquid components, much of which work was not public-facing, and a little bit of which I discussed above. This was a terrible plan if we thought the year would boom, and a perfect plan if we thought the economy would suffer a heroin hangover from 2021's inflationary high. And, well, we were right again. Damn it feels good to be an analyst. (link absolutely NSFW)
"Why is DSG not a WPN Premium Store Yet?" is a question one might reasonably ask, and the reality is that I might abandon trying for lack of time to allocate to what has proven a very subjective and indefinite process. DSG's main store isn't quite set the way I want it yet, but even just short of the goal line, it is already one of, if not THE, most beautiful game stores in the entire southwest. I have some finishing touches in the works and in progress that should hammer that reality home pretty solidly. In fact, just in the course of iterating toward our configuration prerogatives in the wake of the unexpected fire and store move from 2021, the store turned into the cozy ultraboutique that Wizards usually prefers for Premium. The store really should just be made Premium as it stands. It's there. However, our original WPN representative kept finding additional things for us to do, and then he left the company and our new rep hasn't worked with us yet (and we haven't had time to work with him anyway). Ultimately, this entire situation might just be a casualty of priority. While I'd appreciate having the credential and getting the associated perquisites, DSG's Premium application taskwork simply hasn't risen into the top ten on my ongoing List Of Things That Are The Best Thing I Can Do Next since at least late 2019. And as Canadian retailer Ted Yee correctly observes, the only thing about a store that really needs to be premium in the end is that store's bank account balance.
Anyway, I hope you emerged from the riptide of 2022 healthy and intact, and I wish you all the best of health and prosperity in 2023 and onward! We have a lot on our agenda and as per usual, we're going to do it without explaining ourselves, perplexing the haters and intriguing our competitors, and ultimately (if we succeed) achieving advantageous position in the market.
Today's blog article theme song, "World Coming Down" by Type O Negative, pertains to the foregoing only in the grammatically literal sense of its title. The actual song is a masterpiece of gothic metal introspection on the nature of masculine vulnerability and brutally honest self-reflection. It might be the best thing Peter Steele ever wrote, and the world remains emptier for his unfortunate absence these past dozen years.
