This is a second article on the economics of game publishing, following up on The Economics of Gaming: Manufacturing two weeks ago. The previous article talked about the high investments required when you’re printing your game and why that can lead to accidental scarcity of a game — against the wishes of any publisher.
If I were to offer three big picture insights related to manufacturing, expanding on what I wrote in the previous article, they’d be these:
- Board game publication is not a hugely lucrative business (unless you’re Hasbro, or maybe Asmodee).
- Board game publication has very low margins, which means that a little financial mistake can set you back a lot.
- When a publisher charges a price for a game, that’s usually because it’s the price they have to charge in order to afford publication.
So keep those truths in mind as we dig further into the economics of game manufacture by discussing another topic that’s been in the news lately: tariffs.
The Economics of Tariffs
The first fact of the matter is this: Donald Trump has announced tariffs of 25% on many Chinese imports, including toys and games. Mind you, no one is sure when they’re going into effect. June 1 was the official date, but that recently was delayed until June 15 (as long as the goods left China before May 10). Meanwhile, the rumor mill is claiming that a deal may be near — or alternatively that even more Chinese goods will be taxed soon.
The other fact of the matter is this: most hobby board games are published in China, as are some card games and some roleplaying games, and they’re included among those toys and games that are scheduled to be taxed at a higher rate starting in June.
Here’s what that means: most board games (and perhaps card games and roleplaying games) are likely to see a 25% price increase in the near future.
These are all pretty simple economic facts, so it’s been pretty surprising to see arguments against them. I think those are arguments are one part wishful thinking, because we don’t want to see our hobby get a lot more expensive, and one part political loyalty, because Trump voters don’t want to believe that their candidate is doing something that might be costly to them personally. But neither wishes nor loyalty are going to hold these new taxes back.
Economics are inevitable.
But China Pays the Tariff, Right?
Not in the least. Unfortunately, Trump has confused matters by saying that the tariff is “paid for mostly by China, by the way, not by us.” That’s 100% a lie. It’s not how tariffs work in any economic system. Instead, a product’s importer pays a tariff to the customs service when the taxed goods are brought into the country. In other words, the game publisher is going to be paying the tax when he brings his shipment of printed games onto American soil. That money then goes into the United State’s governmental coffers. (As it happens, 115% of those monies collected are then being paid out to farmers harmed by China’s retaliatory tariffs, but that’s a whole different story.)
Afterward, the game publisher is obviously going to pass that tax on to the consumer, because the retail price of product is ultimately a reflection of the costs that went into producing the product.
Won’t We See Smaller Increases?
Wishful thinkers realize that the tariff is actually being charged on the manufacturing cost of the goods, not the retail price, and think they’ll get to see smaller increase. In other words, for a totally hypothetical game called Pinionlength, which has a manufacturing cost of $11 a unit, the 25% tariff will add $2.75 to the manufacturing cost of the game, bringing it up to $13.75. So, the wishful thinker believes that they’ll similarly see an increase of $2.75, bringing the $55 retail price up to $57.75, not the 25% retail increase that’s being predicted (which will bring the retail price of the game from $55 to $68.75 — or more likely: $70).
Consumers seeing this dramatically smaller price increase is not just unlikely, but impossible. That’s because there’s a whole retail chain that runs from the manufacturer to the consumer, and each link in that chain needs to increase the price to meet their own costs.
A general rule of thumb for manufacturing is that a publisher has to multiply his manufacturing cost (not including production costs, such as author, designer, and artist fees) by five to get the final retail price, in order to support the whole retail chain. This is because the manufacturer sells to a distributor at a 60% discount. The distributor then sells to the retailer at a variable discount based on volume, running from 40% to 50%; Alliance Game Distributors, for example, starts new retailers at an average of 47% discount.
To put it another way, Rockmaker Games pays $11 to print a copy of Pinionlength and sells it to Alliance Games for $22 who then sells it to high-volume retailer for $27.50, who then sells it to customer for $55. Rockmaker and the retailer each double their immediate outlay of capital, which they mostly use to pay for their other costs (for Rockmaker that includes design royalties, art costs, brokerage fees, staff salaries, and warehouse fees; for the retailer that includes retail rent, staff salaries, utility bills, credit card fees, and fraud and loss costs; and for both parties that includes the risks of unsold goods).
These incremental price increases pretty much require Donald Trump’s new game tax to be multiplied across the entire chain as well, but here’s some more specific numbers to really show why:
What if the Publisher Eats the Whole Cost?
Rockmaker eating the cost means that they’re now paying $13.75 for each copy of Pinionlength, but they’re still selling it for $22. Where they used to earn $11 profit per copy, they now only earn $8.25. Over a print run of 10,000 copies, they gross $82,500 instead of $110,000. Meanwhile, their other costs have not changed. The designer is still earning his percentage of revenues, the artist still needs to be paid, and all the regular costs of a publishing house continue. Rockmaker could easily be losing money on the game at this point.
(I don’t think anyone is suggesting that Rockmaker just ignore the costs of the new tariffs, and it’s pretty obvious why not.)
What if the Publisher only Increases by the Minimum Required to Maintain Profits?
This seems to be the actual argument from the folks who think that we’ll see a lesser increase at the retail register. Their theory is that Rockmaker only needs to increase their sales price by the $2.75 they’re paying. But, this doesn’t actually work with the economics of selling a product through a retail chain. It suggests that the cost of tariffs somehow are different from all the other manufacturing costs, and they’re not: they’re just another cost in making a product.
But here’s how the numbers would work out if a publisher did this:
Rockmaker pays an extra $2.75 for each copy of Pinionlength, so to maintain their $11 profit, they increase their price to distributors from $22 to $24.75. Since this price is a 60% discount, that means the new retail price has to be $61.87 — which means that the consumer is only seeing half of that 25% tariff increase. Great, right?
Here’s why those numbers don’t actually work:
The manufacturer who previously put out $110,000 for Pinionlength is now paying $137,500. Yes, 25% more (excluding shipping). And, as you might recall from the last article, publishing is all about cash flow. So, the publisher is actually tying up an extra $27,500 for six months at a time, without seeing any more return. That might mean he doesn’t have money to pay for salary, rent, or electricity, because the extra money isn’t growing through investment in good games, like it should. But it definitely means that the publisher has less money to invest in additional print runs. To be precise: he now has to skip every fifth print or reprint, because the money is tied up. So if he used to publish five games a year, he now only can publish four. That means there’s less chance that the truly great games get to market (especially the niche great games). Meanwhile, the publisher’s money supplies are continuing to spiral downwards because now he didn’t make money on that missing print or reprint either — even though his staff, warehouse and rent costs are staying the same. It’s not quite as overt as losing money because of not increasing prices at all, but it’s still a very definite loss.
What if the Publisher Shares Out the Cost?
Which leads us to this. The publisher is putting in 25% more capital on each printing, so he increases his cost to the distributor by 25% to maintain his profits (and thus his ability to pay bills). He’s now earning as much money as he did before on his investments, and he can keep paying his ongoing costs, but sadly, that 25% increase now goes down the entire retail chain, because it’s all based on percentages. So, yes, our retail game prices see that full 25% increase.
Mind you, the entire retail chain is now worse off than it was before:
The manufacturer is still publishing only four games out of five, because he had to pay extra money to the government (or, if you prefer, because he’s now paying extra money to farmers for the privilege of printing games in China). There’s still less chance of that really great game being published. Finally, every game represents a bigger risk, because there’s more money involved. Eventually, some businesses will go out of business due to those larger risks.
Distributors and retailers can similarly buy fewer games and have bigger risks. And last, we consumers buy fewer games too — or we eat out less, buy fewer treats for our cats, and don’t send our kids to college. Everyone pays. Except the two governments involved aren’t paying anything: they’re just weighing the damage to their economies against the concessions demanded by the other party.
With all of this said, we actually may not see the full price increases immediately, at the retail counters. Oh, word is that some manufacturers are already increasing their prices to distributors, but others may be afraid that a 25% increase may stretch the elasticity of game purchases beyond what they can bear. So, I wouldn’t be surprised if we see some manufacturers hold the increases to the 10% or 15% that represents them just passing along the straight dollar increase, rather than the percentage. There’s been some research that this is pretty standard for tariff increases. However, that smaller increase may not actually be possible in a sector with such tight margins, and the publishers certainly won’t be able to hold lower prices for long. Still, we might see the full 25% price increase appear in steps in games over the next year.
Of course the converse possibility is that Trump’s new taxes end in December 2019 or mid 2020 or January 2021, but then manufacturers decide to maintain their higher prices, since inflation would eventually cause them to rise anyway. And so we’re left with permanently higher game costs as our reminder of Trump’s trade war with China.
But Isn’t China Production Low-Quality Anyway?
Some peoples’ response to Trump’s tariff has been that’s it’s no great loss, because those Chinese books just fall apart and the games … I don’t know … are made of lead or something?
No, they’re not. It’s been a more than decade since this has been the case.
I do definitely remember having lunch with the publisher of a notable, then up-and-coming board game company in the mid ’00s, and he described to me how they were getting great printing quotes from China, but at the cost of them having to regularly send one of their staff out to check quality. And, I do remember opening up some of the first Chinese gaming products around the same time. Many had a funny smell; all of them had weird linen textures; and there was a particularly memorable game that had a sticky card finish. But that was almost 15 years ago, and the world has moved on. There was an interim period when you had to hire local agents to monitor the manufacturing for you, but now you can pretty much order from China, and if you like the quality of the samples, you can trust that the game will come out that same quality — and that’s some of the best quality in the world.
Any complaints about “slave labor” also tend to be false for the printers being used by game publishers. Yes, China has dramatically lower costs of living, and thus wages look a lot smaller, and obviously there are union-created work protections that we enjoy in the US that are totally absent from China, like 40-hour workweeks and holidays and sick leave. But fundamentally, gaming publishers are requiring living wages and decent working conditions from their Chinese printers.
The old prejudices are exactly that, and not representative of modern Chinese manufacturing, particularly not for those printers used by our industry.
Why Not Print in the United States?
Tariffs tend to have two purposes. First, they can be used as an economic lever, to try and damage the economy of a country who is doing something that you don’t like. Second, they can be used as a core element of trade protectionism, to grow specific industries within a country by making it more expensive to manufacture those products outside of the country. According to Trump’s claims, he’s doing the first thing: engaging in trade wars to damage other countries and draw concessions. With Mexico, that was about making them turn back immigrants who were seeking asylum in the United States after passing through Mexico from South or Central America. With China, it appears to be about getting them to crack down on rampant intellectual property violations.
And it’s good that Trump (mostly) isn’t engaging in protectionism, because it wouldn’t work, at least not for board game manufacture.
That’s in large part because the United States has gutted its manufacturing infrastructure over the last few generations, turning our country into a service economy. If Trump were trying to drive manufacturing back into the United States, it wouldn’t work, because the manufacturing capacity isn’t here, and what’s here isn’t always up to the standards of modern manufacturing.
Take books: black and white books are often still printed in the United States, but for color books, the odds are increasingly large that they’re printed in Canada or China. Take cards: the United States has a strong card printer in Cartamundi, and they have some competition, but the bottom line is there’s not a lot of choice.
And then we come to board games. Here, there’s such a wide difference in manufacturing costs that it’d take a tariff three or four times as big as the Trump Tax to move publishers to the United States.
Two Monkey Studios did some comparison shopping a few years ago, and they laid out the problems with producing board games in the United states.
First, US printers were often demanding runs of 10,000 units. That’s doable for a large company if they have faith in a game, but totally cuts out production by anyone smaller or for any smaller products.
Second, Two Monkey found that manufacturing prices in the United States were approximately double the quotes from China. And shockingly, there wasn’t a dramatic change in shipping: moving things around on trucks in the United States ran about half the price of shipping all the way across the Pacific. So, consider Pinionlength, which was printed for $110,000 in China with $20,000 in shipping costs. With 25% tariffs it’s now $137,500 + $20,000 shipping = $157,500 total. Meanwhile, US quotes might result in $220,000 printing costs but only $10,000 in shipping, for a total of $230,000. And that’s what the tariffs aren’t going to move printing back to the US (even if there was the manufacturing capacity and comparable quality).
In any case, many publishers don’t have any interest in printing in the United States, because the board game sector has a very strong international presence. It’s hard to find apples-to-apples comparisons of hobbyist board games sold in Europe and the United States, but it seems likely that the minority of hobby board games are sold in the US. One article, on Catan, notes that it sold 400,000 copies in its first year, well before it was translated into English, but only achieved 400,000 copies yearly in the US over a decade later, in 2007. So, if games aren’t selling primarily into the US, then obviously publishers have no reason to pay higher costs to print there, because they can avoid the tariffs by selling most of their international goods outside of the US. Which is pretty much how international trade works.
(There also doesn’t really seem to be the capacity elsewhere. India was looking like an up-and-coming option for manufacture, but the last I checked they were still mostly focused on cards, not board games.)
So, yes, those tariffs are likely to increase the price of US board games, and yes you as a consumer are likely to see the whole 25% increase, in a few years time if not immediately. No, this isn’t likely to drive printing back to the US, because the manufacturing capacity just isn’t there. No, Chinese printing isn’t low-quality, and yes, the printers used by game manufacturers are likely to have minimum standards for their labor. So, there wouldn’t be a silver lining even if the tariffs were to reach the 75% or 100% level that would be required to get board game publishing out of China.
You can certainly argue whether the tariffs could possibly achieve their stated goal of halting China’s massive IP violations. That’s a valid opinion to have, though my reading on trade wars has suggested that they tend to be more destructive than constructive, which also seems to be the widely accepted economist opinion in the 21st century.
But the coming price increases: those are facts, not opinions, as are the increased risks for publishers, the pending decreases in games published, and the real possibility that a favorite game publisher might go out of business.
Game designers and manufacturers are scared, not because of politics, but because they know the grave economic dangers that these tariffs pose for our industry:
Goodenough, Amy C. May 2019. “The US-China trade war, the cost of paper, and the economics behind roleplaying games”. d100 News. https://d100news.com/2019/05/23/the-us-china-trade-war-the-cost-of-paper-and-roleplaying-games/.
Hall, Charlie. May 2019. “Trump’s trade war with China is causing major concerns in the tabletop game industry”. Polygon. https://www.polygon.com/2019/5/17/18628486/trump-trade-tariff-china-tabletop-games-rpgs-cards-dice.
Selinker, Mike. June 2019. “Trump’s tariffs could ruin the American board game industry”. Polygon. https://www.polygon.com/2019/6/5/18652411/trump-china-tariff-board-games.
The original article can be found on the great Mechanics & Meeples