Wednesday, December 06, 2006

[IPR] Disintermediation

I've been interviewed several times recently, and people often ask about the business model of IPR. I thought I'd post a little primer about some of the nitty-gritty of publishing and selling games, and where IPR fits in that picture.

So, to understand what IPR does, you need to understand the concept of disintermediation. To anyone who read business literature during the dot-com boom, the term disintermediation will be familiar. To everybody else, it's a long word for a pretty simple concept: cutting out the middle-man.

Any business that creates items it wants to sell has a problem: how do you get these things you make out to the people who want to buy them. Traditionally, it's been pretty hard to hook these two groups of people together. That's why stores exist. They gather up a lot of different items people want to buy, and customers come to the store to get all the supplies at one place. This is pretty simple. It does get complicated upstream, though. Stores often have the same problem their customers do: how do I find all the different people who have things I might like to sell?

This is where distributors come in. Distributors search out products and present stores with a big list. These are products they have researched, often purchased, and then sell on to the retail store.

You see this pattern in all sorts of industries, and you find it in the role-playing game industry as well. In the RPG industry, this is called the "three-tier system." Tier 1: the game manufacturer. Tier 2: the distributor. Tier 3: the retail store. The thing is, for small publishers like Galileo Games, the three-tier system had actually become a four-tier system. Distributors were not interested in researching, pursuing, or purchasing from very small publishers who may or may not be in business in six months (an understandable, if problematic, attitude). So, they were relying on fulfillment businesses, like Key20 or Impressions, to find and consolidate lots of small publishers together and then the distributors would order lots of titles together. These fulfillment businesses are like distributors to the distributors.

I'm sure you can see the problem that is starting to appear here. First off, retailers need a significant discount in order to keep going. They have a lot of overhead costs: rent, utilities, staff. They need to make a certain percentage, usually 40-50%, off each product to stay in business. Distributors need to make some money, too, or they couldn't warehouse and ship the books, maintain the staff to find and order the products, etc. They want another 10-20% of cover price. Then you add in the fulfillment house, taking 15-20% of what's left, and there is a pretty small piece of the pie left for the creator.

When the dot-com bubble was in full swing, there were loads of books and articles about how the internet would change this sort of arrangement. The word for this was disintermediation. The internet would facilitate buyers and sellers meeting directly, and cutting out all the levels of middlemen that had grown up in just about every industry imaginable.

This definitely happened, and you can see the results in a variety of places. The ones I think demonstrate this best are places like Lulu or OneBookShelf (formerly RPGNow and DriveThruRPG). These are places where creators post their work, and customers come directly to shop. Of course, the sites themselves act as middlemen, but at least one layer, and usually more, has been removed from the transaction.

However, there is another problem that occurs on these sites. Anyone who wants can post a product, and many do. There is soon a vast slush pile that potential customers have to shift through, and the value of the store owner becomes evident. IPR deals with this by screening all products that go up, thus insuring a level of quality. This quality may be idiosyncratic, because I am the one who does all the screening, leading to a collection of books that reflect my own tastes, but it is better than no screening at all.

I'm sure I'll have more thoughts and comments on this subject in the future, but I wanted to post this since I've explained it (in considerably fewer words) several times in the recent past, thanks to various interviews about IPR.

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At 11:03 AM, Blogger Guy said...

Honestly, did you ever have to reject some books for reasons of quality?

If so, how many?

At 1:05 PM, Blogger Brennan Taylor said...

Yes, but it's been a handful, no more than six titles. Take into account the fact that I actually went out and recruited about a third of the publishers on the site, and then you can see I had more influence on the games there than it may seem.

At 3:02 PM, Anonymous Mike Holmes said...

Well, and what's more, simply by having a screening process, you eliminate anyone who doesn't think that their product is good enough. This producer self-selection cuts out a lot of people who would post their games to a site if it were just "we sell everything."

Mike Holmes

At 2:44 AM, Blogger Guy said...

I'm not sure Mike. I don't think these people get to the point where they have a published game.

At 9:52 AM, Blogger Brennan Taylor said...

I think you might be surprised, Guy.


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