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Seriously, what is up with that? I guess the bear could protect them.
Anyways, what do Diablo III, Kickstarter, and finance logistics – a term I invented; hooray for making things up – have in common? I will tell you, and it will be a way to show the importance of finance logistics in game publishing, but I am confident it will apply to other areas of business that we as gamers are not as interested in.
So it is time to pull back the curtain and reveal the great Oz himself!
"Finance" pertains to money, but more specifically to how money will be utilized to accomplish certain goals. Money creates more time (labor) and more stuff (materials); it is critical for any business (even a game publisher) to be successful.
"Logistics" pertains to how things are moved, transported, timed, routed, produced, and so forth. To be good at logistics means that you will be able to get the most cost-effective and time-effective delivery. Getting this right can lead to lower costs, better products, and market dominance – so it's very important.
So my newly invented term pertains to the methods, timing, and application of money to a specific goal. Sure, at some level, this is part of finance in and of itself – time-value of money anybody? – but I want to concentrate on the relative value of different kinds of revenues based on their profit margins, required capital outlay, and speed with which they come in.
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I loved Diablo and Diablo II, and now I now Diablo III. It is not just the style of the game, but the execution and storytelling that drags me in. I know because games that mimic Diablo's game play do not have the same effect on me.
At this point, I have played about 27 hours as a wizard and I just finished act 3 on Nightmare difficulty and I am level 49 (out of 60). To put this in perspective, some hardcore gamer friends of mine have put in over 35 hours and are at lower levels.
This is a result of applying the lessons from Finance Logistics to playing Diablo III.
The core mechanism of Diablo III is killing monsters in order to level up, which opens up improved spells/abilities/gear. There are lots of monsters; it's typical to be attacked by 20+ monsters at a time in small sections of one dungeon. Maybe it is the epic scale that I like...
Anyways, the faster you progress compared to where you are in the game, the easier things become – so I identified one magical property as the most important to have on gear early in your leveling up, namely +exp per kill.
So I bought gear with this and quickly stacked up over +100 exp per kill, which means that killing one hundred guys is about 10% of the exp needed to level up. (At the lower levels you need around 20-30.)
This speed of progression is what allowed me to get so awesome in Diablo III so quickly.
Kickstarter – Here it is again...
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Kickstarter allows games (good or bad) to be produced outside of the old-school gatekeeper system, as long as they get the support needed. The key here for the publisher is that money can be invested in the product which is necessary for the Kickstarter project, but not into the more expensive physical creation of the product. The standard for Kickstarter now requires artwork, and the pre-project costs can easily approach $5,000.
But that is an insignificant investment compared to the $25,000-50,000 cost to properly release a small number (2,000-ish copies) of a quality Eurogame.
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Or on the simple end, "when the money comes in" as I like to say. I will compare two different methods of publishing a hypothetical game similar in scale and components to Belfort, one method using Kickstarter and one not using it. Note that this is a simplified and idealized timeline.
The costs used are estimates based on my experience dealing with around a dozen schedules like this. It is also simplified and idealized. The accounting will be a cumulative NET cash flow representation.
First, the old school, non-Kickstarter method of selling games only to distributors, who then sell to retailers, who then sell to customers. We do a little better than the model below thanks to people who buy directly from Tasty Minstrel Games on our launches. We get about a 30-40% boost in revenue for those sales, which is super-helpful while still offering great deals to consumers.
Month 0: Commission artwork, paying 33% up front. Cumulative NET cash flow = (-$1,650) of total artwork costs.
Month 1: Artwork continues.
Month 2: Artwork continues.
Month 3: Artwork finishes, start the pre-press process, pay 50% up front of manufacturing costs on a 2,000 copy test run. Cumulative NET cash flow = (-$13,350)
Month 4: Finish pre-press.
Month 5: Await finishing of manufacturing.
Month 6: Manufacturing finishes, pay remaining 50% of manufacturing costs. Pay for ocean freight up front; pay for safety testing. Cumulative NET cash flow = (-$31,500)
Month 7: Games arrive, sell games, pay shipping costs, pay various custom fees. Cash outlay this month depends on the size and nature of the shipments.
Months 8-9: Receive payment for games already sold, pay for more shipping, pay for royalties. At sellout, adjusted revenue (-shipping and -royalties) for 2,000 copies sold at $60 retail will be $36,000. Cumulative NET cash flow = $4,500 with a commercially "successful game" – but now you have a popular game WITHOUT any inventory!
Month 10: Reprint! 3,000 copies now, reinvesting the revenues. Pay 50% up front. Cumulative NET cash flow = (-$9,100)
Month 11: Game finishes production (shorter print time now), pay remaining 50% of manufacturing and pay ocean freight. Cumulative NET cash flow = (-$27,200)
Month 12: Games arrive, and selling begins again.
Months 13-14: Collect adjusted revenues from the sell out $54,000. Congratulations, Cumulative NET cash flow = 26,800 is now positive with the capability to reprint out of the previous cash flow! But you have no inventory again...
Month 15: Reprint! 3,000 copies again to keep your investment capital for other games or to return it to your pocket. Pay 50% of the manufacturing costs. Cumulative NET cash flow = $13,200
Month 16: Game finishes production (shorter print time now), pay 50% of manufacturing and ocean freight. Cumulative NET cash flow = (-$4,900)
Month 17: Games arrive, and selling begins again.
Months 18-19: Collect adjusted revenues from the sell out $54,000. Congratulations – cumulative NET cash flow = 49,100 and is now positive with the capability of reprinting out of the previous cash flow! But you have no inventory again – and this time you really should print more than 3,000 copies.
You get the idea I think...
Now for the new method through the use of Kickstarter
Month 0: Commission Artwork. Pay 33% up front. Cumulative NET cash flow = (-$1,650) of total artwork costs
Month 1: Artwork continues.
Month 2: Artwork continues. Start Kickstarter campaign utilizing the artwork which is finished.
Month 3: Kickstarter finishes. Pre-sell 1,000 copies for an average of $45 per copy, receive 90% of Kickstarter pledge value. Artwork finishes, start the pre-press process, pay 50% up front of manufacturing costs on a 3,000 copy test run (boosted thanks to Kickstarter response). Cumulative NET cash flow = $22,000
Month 4: Finish pre-press.
Month 5: Await finishing of manufacturing.
Month 6: Manufacturing finishes, pay remaining 50% of manufacturing costs. Pay for ocean freight upfront; pay for safety testing. Cumulative NET cash flow = $2,000
Month 7: Games arrive, sell games, pay shipping costs, pay various custom fees. Cash outlay this month assumes an average handling and delivery cost of an average $15 per copy. Cumulative NET cash flow = (-$13,000) – but there are 2,000 copies left in the warehouse!
Months 8-9: Receive payment for games already sold, pay for more shipping, pay for royalties. At sellout, adjusted revenue (-shipping and -royalties), for 2,000 copies sold at $60 retail will be $36,000. Cumulative NET cash flow = $23,000 with a commercially "successful game" – but now you have a popular game WITHOUT an inventory!
Month 10: Reprint! 3,000 copies, reinvesting the revenues. Pay 50% up front. Cumulative NET cash flow = $8,500
Month 11: Game finishes production (shorter print time now), pay 50% of manufacturing and ocean freight. Cumulative NET cash flow = (-$10,000)
Month 12: Games arrive, and selling begins again.
Months 13-14: Collect adjusted revenues from the sell out: $54,000. Congratulations – cumulative NET cash flow = 44,000 and is now positive with the capability to reprint out of the previous cash flow! But you have no inventory again...
After month 14, you're almost up to the net cash flow of the 19 months prior. With this new Kickstarter method, in month 15, you could print 5,000 copies, get back into a slightly negative cash flow (maybe even zero). With a sellout by month 19, this new method would be sitting at $90,000 of positive cash flow – or enough to continue printing and be able to utilize those profits elsewhere.
Pros and Cons of the Old School vs. Kickstarter
Pros for the Old School method:
-----• People cannot complain about you using Kickstarter.
-----• Some retailers don't want to buy something that has preorders placed via Kickstarter.
Pros for Kickstarter:
-----• Smaller capital investment required per game, $5,000 artwork commitment (or so).
-----• Sooner self-sustaining game nature, month 14 (or possibly earlier) instead of month 19.
-----• Larger print runs reduce marginal production costs.
-----• Test the market to make sure people will buy a game you are releasing, before committing $25,000-$50,000.
-----• Allows the release of more quality games than without Kickstarter.
-----• Allows a platform to reward loyal fans.
-----• Provides exposure in advance of the release that would otherwise not be there.
-----• Provides fans a method to really support a company that they want to support, even if they pay for the game well in advance of delivery.
Prototype version of Ground Floor
Finance Logistics takes into account the speed, direction, and allocation of investment/production capital to bring about the most beneficial results. Kickstarter is simply good finance logistics. An initial outlay of $5,000 for artwork is much more cost effective than $25,000-$50,000 for everything.
There might be times when there isn't enough money to do anything but the artwork, unlike with Eminent Domain, where we couldn't even afford the artwork at the time. And there might be times when utilizing Kickstarter frees up money to do other things like importing Village or starting iOS production of games.
This is why Ground Floor is on Kickstarter right now; it just makes good Finance Logistics. This is why a tiny company like TMG – with two part-time workers being paid and three part-time workers not being paid – will be using Kickstarter for the foreseeable future. Until two months ago, TMG had only two part-time non-paid workers.
A dollar pledged on Kickstarter is more valuable than $1 of revenue later because it is faster. Faster progression here makes everything later even easier, as in Diablo III. That is why it makes sense to offer good deals on Kickstarter and bonuses. That is why you as the publisher need to take care of the supporters; it just can't be done at cost. Or can it? Maybe we will push the envelope and test that, too?
Michael Mindes
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