Hardly a day has gone by in the past several weeks that I don’t get a call (or text, or email) from someone in the game industry asking how Catalyst Game Labs plans to deal with the ongoing tariff situation. Several publishing companies have already published articles on how tariffs will affect their businesses and the overall hobby game trade, but I’ve kept rather silent except to suggest privately that we Don’t Panic. (Hitchhiker’s Guide for the win!)
I’m not an economist. I don’t have a business degree. What I have is over thirty years of small business experience, including (currently) a very successful games publishing company and a chain of toy & game retail stores. I understand overseas and domestic manufacturing, cash flow, and profit margins. I’ve personally coordinated millions of dollars’ worth of international shipping. I am a specialist in intellectual property licensing. And I’ve built a dozen retail stores from the ground,up.
So, yes, my knowledge of tariffs and my opinion on their effect in the industry should be considered, at the least, “professional.”
Still, I had hoped to ride out this bumpy stretch of ground and just get back to work. But as this off-road adventure drags on and misinformation continues to be shared on the topic, and as Catalyst Game Labs will soon be making its own defensive moves, I now feel obligated to publish my own thoughts on these capricious and unsustainable taxes.
RECENT EVENTS
Already I suspect some readers are sharpening their knives. A few are already searching for a Comments section to dog me for the use of “politically divisive”terminology.
capricious: given to sudden and unaccountable changes of mood or behavior; impulsive; unpredictable.
If anyone believes the past weeks of escalating tariffs—followed by implementation delays, followed by exemptions for some industries, and then a threat of higher tariffs—was balanced, reasonable, or predictable…seriously, stop reading now. I’m not being political (not yet) and I don’t much care about the politics. I care about the business. I care about the games.
Or it may have been my use of the word “taxes.” Of all the misinformed and/or obtuse reactions I’ve read on social media, my absolute favorites are that tariffs are a penalty on (insert country here, likely “China”), or, even better, a tax on (insert country here, again, likely “China”).
These blanket tariffs are a tax, for certain. Anyone who wants to argue otherwise should go Google“tariffs” before continuing(1). However, they are not a tax on other countries. They are a tax on American businesses importing products from outside the US. Tariffs are meant to modify behavior, but not of the target country. Not directly. Tariffs may be used to protect domestic product by adjusting—in effect, legally manipulating—market prices. They may also be used as negative reinforcement against targeted industries in an attempt to(hopefully) force companies to bring their business back to domestic shores (which may, following the dominoes, affect a target country). And when used as part of a clear economic plan, over years,they can be an effective economic tool.
Unfortunately, at the moment, they are not being used in such a manner. They are being wielded as a blunt instrument of state policy, and are, in effect, punishing successful American businesses manufacturing products other Americans want to buy at reasonable prices, all for the political gain of our president who has publicly (and proudly) admitted to his own past efforts in avoiding taxes(2).
There. That was me being a little bit political. Now we can move on to the actual effect of tariffs on business in general and the games industry in specific.
COSTS VERSUS MARKET PRICE
Most game companies work as publishers, not as manufacturers. Meaning we develop a game or game-adjacent product, go to a manufacturing company (printer,bindery, plastic injection factory) to produce it, then get our New Product delivered to a warehouse where we sell it (wholesale) to retailers or (at a discount) to a distributor who then sells to retailers.
(Wow! That is incredibly simplified.I could write for hours unpacking all that. But let’s roll with what we have.)(3)
If New Product costs $5 to manufacture (our Costs of Goods Sold, or COGS), the next decision we have to make is to set a retail price (Manufacturer Suggested Retail Price, or MSRP). Some publishers use a “5x” strategy, meaning they set New Product’s retail price at $25. These companies usually sell a good portion of their product direct to consumers, the gamers, maybe through an online store, maybe through a crowdfunding platform. What they are probably not doing (or not doing well) is putting their product into retail stores or into distribution(4).
More likely, the games publisher is using an 8x strategy. (Or 7x, or 10x. Pick your multiplier and do your own math; I’m using 8x for the purposes of this demonstration.) With an 8x multiplier, the publisher sets New Product’s MSRP at $40.
At this time, I’m going to leave aside details surrounding shipping and other potential expenses. Some publishers base MSRP on “landed costs” or “cost to warehouse”and some absorb shipping expenses (et al) as basic costs of doing business. In the end, it doesn’t matter where you absorb that expense, so long as you account for it.
So: $40. Which means the publisher will sell New Product to retail stores for around $20 (a 50%discount, also known as “keystone”), or to a distribution company for $16 (a 60% discount) such that the distributor can sell to retail at around 50%. These discounts are pretty much baked into our retail system. Some companies get around them for a time. These are usually the same companies which end up in trouble the minute something changes without warning (again, see “capricious”).
Catalyst Game Labs earns most of its income through distribution, so I will focus on the “Discounted Price.”
The Discounted Price earns the publisher a basic revenue (per unit sold) of $16. Minus the $5 COGS leaves a net revenue of $11. This net revenue has to cover development (design, writing, art, layout, etc), payroll, leases,insurance, royalties, and probably a lot of Red Bull. If the company is well run, those costs are somewhere in the $7 range, leaving a profit margin of about $4.
Now multiply these numbers by print runs of 2,000-8,000 copies, and 2-10 New Products per year.You now know what most game publishers know.
There. All caught up.
TARIFFS
“Why does the publisher have to raise prices?”
“What does it matter? China pays for the tariff.”
“Just make the game here in the States!”
Did anyone notice what I didn’t say in the last section? I never said a thing about the product being made in the States or in (insert country…okay, from now on,I’m using China).
That’s because it doesn’t matter. COGS is COGS.
Until New Product is in your warehouse, you have nothing to sell and no way to recoup anything you’ve spent along the way. Manufacturing may be (much) cheaper overseas, but shipping containers from China is incredibly more expensive than shipping them across the States. Sometimes it’s a choice. More often it’s mandated by the market.
COGS is COGS.
And because this is true, every dollar spent on cost of goods will (almost always) result in that same 8x multiplier. Yes, I’m oversimplifying, but not by much.Because here is another truth:
China is NOT paying the tariffs(5).
I don’t know how much clearer I can say that. And yet—I expect someone will argue this exact point;I’ve seen it declared too many times on other websites. Apply ten seconds of reason here: If the US could force China or Chinese manufacturing to pay these tariffs (it can’t) Chinese manufacturing would simply raise its cost on the American publisher, forcing it back on us. Capitalism at work.
Why is this important? (Okay, now I’m going to talk about shipping costs. Indulge me.)
In 2020, Covid drove the cost of international shipping way up. “All in” including port fees and final truck delivery to the warehouse, containers went from just under $5000 to well over $30,000 by some reports. I paid around$28,000 (each) for my most expensive containers. Assume this container holds around 5,000 copies of New Game. (In theory it can hold up to 6,500 of a basic $40 game, but rather than Min/Maxing I’m using an average print run.) So, assuming my $5 COGS once contained about 80 cents in shipping costs… my new “landed cost”is closer to $9.80. [$5 COGS - $.80 + ($28,000/5,000)]
My COGS just went up $4.80.
Please refer back to the previous section, where my likely profit margin was $4.
I am now losing $.80 per game sold.Assuming I sell every one of them, it will cost me $4,800 to bring happiness and joy to 6,000 lucky gaming groups.
As it turns out, I was very fortunate. I built Catalyst Game Labs to withstand such a (temporary)crisis. I didn’t have to take out a loan, or ask my crowdfunding backers to pay more for the rewards they were already due. I didn’t even raise prices, not right away. I honored my prices for several months even though I was taking losses on some of my newest (and bestselling) product. I had enough existing inventory to balance out the shortfall. Not all companies had that luxury.
Still, no business can afford to take losses forever. So, eventually, I did raise prices, but in a measured and fair reaction to the market as it slowly returned to a“new normal.” I believe Catalyst bought a lot of goodwill in that period, delivering product despite the losses at a time when we all needed a little extra fun in our lives. It wasn’t easy, but our sales in subsequent years tells me that our fans appreciated it.
Reasonable? Responsible? I like to think so. Hopefully you agree. But that was five years ago and part of a global pandemic. It really wasn’t much of a cost, either,compared to the sacrifice of others. So why am I talking about Covid?
(Some of you are way ahead of me,I’m sure.)
Here’s why:
The recent tariffs have raised cost of goods for all products manufactured in China. First 10%, then almost immediately 20%. Then 54%. Then I believe it was at 104% for like a day before jumping to 145% which is where tariffs are as I write this article (but with threats of over 200% already in the media). I had seven containers of product on the ocean when the first tariffs hit, and was given about five weeks “grace” to get my product through customs.
Ever try to hurry a freighter?
By the time my containers made port and got through Customs I was taxed $240,000 for games I had been working to produce for the past year, a good measure of which were already sold.
Remember that $5 COGS from the previous section? Now it’s $6 for no other reason than the Earth kept spinning and time had passed. That lost dollar, times tens of thousands of units, represented a new license we could no longer afford to pursue; a new game design we couldn’t afford to purchase.Research. Raises against inflation. Jobs.
Now tariffs are at 145%. I have friends in the industry who are in the same place I was back in March. New Product on the ocean. When they arrive, there is no asking for a do over. No waiting for the tariffs to return to something sane. They will be taxed. Immediately. And that hypothetical New Product? Landed cost just rocketed to $12.25.[$5+($5*145%)]
COGS just went up $7.25.
Please refer back to the previous section, where the likely profit margin was $4.
Please refer back to the top of this article, where I called these taxes “unsustainable.”
Do you see why?
DOMESTIC PRODUCTION
“If the tariffs are causing the price to raise by $15, then just use that $15 to print the product domestically. Problem solved!”
I found this comment on the forums of a popular gaming news site, discussing an excellent article in which a veteran publisher explained how tariffs raise COGS which raises MSRP. The entire process, including the math, was laid out amazingly well. The critique basically ignored the entire article,berating the publisher with a condescending attitude; like the publisher was a kid running a lemonade stand and in need of serious adult supervision.
Let’s unpack this advice.
Assumption: America already has the production facilities we need to manufacture new board games.
We don’t.
I follow worldwide and domestic manufacturing technology, especially with regards to quality and costs. At this time, books and cards can be printed at “reasonable”comparisons to overseas manufacturing. And there is a reason why“reasonable” must be in quotations. It’s a multi-level balancing act. How many copies are you printing? Color or black-and-white? What’s going on with the price of paper (some card stock needs to be imported and so are subject to tariffs)? Do you want special effects faux-leather covers, or foiling. What kind of packaging do you require?
Some of the effects which allow publishers to differentiate their products (and gamers enjoy) are not all available in the States at costs that make sense. Even a most basic product, like a black-and-white soft-cover book (which Catalyst often produces in the US), is still more expensive—even with international shipping considered—than our overseas options. Added to that, most of the printers we know are already booked out at least six months in advance and cannot guarantee our schedule.Catalyst would have to produce far fewer books.
As for those boxed games weighing down our closet shelves…what might be argued as the backbone of the gaming industry…once you start looking at chipboard, plastic components, wooden meeples, special-cut borders, vacuum-formed trays;it gets so expensive so fast it’s just as crippling as the tariffs.
Could this force someone to invest strongly in the manufacturing necessary to create everything we want here in the States? Maybe. Although it’s likely that person would need millions of dollars, years of preparation (by which time the tariffs may be rescinded and the entire project a waste of time and resources) and they would likely have to import all the big machines from outside the country anyway (hello tariffs!).
Final answer: If gamers are fine with their RPG books and card games all having simplified production quality and with greater delays than current releases,these items may be possible but would still involve a price hike.
Assumption: Somehow, we can take the MSRP increase due to tariffs and use that to produce New Product here in the States without further affecting our MSRP.
Let’s revisit the Costs Versus Market Price section, above. In fact, I’m going to ignore (fora moment) the most recent tariff hikes that took us all the way to145%.
Why? Because 54% tariffs are hard enough to deal with. A publishing company must raise MSRP by 17% in order to maintain its Net Income while decreasing its overall Profit Margin. Yes, that’s how the math works. Here are the results for you to check me:
COGS Development Discount MSRP NET Margin
$5.00 $7.00 $16.00 $40.00 $4 10%
$7.70(+54%) $7.00 $18.72 $46.80 (+17%) $4.02 8.6%
Extrapolating from the commenter’s advice, all we need to do is find a manufacturer in the States who can make New Product for the $6.80 difference in MSRP. Assume everything else is consistent (quality, scheduling, etc.); it won’t be, but for the sake of argument. COGS is now $11.80. Plus $7 general development costs, brings the break-even cost of New Product to $18.80. Even at the new MSRP, the $18.72 Discounted Price means the publisher is still losing $.08 per game.
And that’s our previous best-case.Because the tariffs are now 145%!
Okay: To hold the value on $12.25 in COGS [$5 + ($5*145%)] means an increase in MSRP to (just over) $58.That gives us $18 to work with. I’m willing to bet I can find an American manufacturer able to make what used to be a $40 game for an adjusted COGS of $23. Plus $7 upfront development costs brings the break-even to $30. And the Discounted Price of a $58 game is…$23.20.Hmm. However, if I sold everything straight to retail stores for $25…
I think I’d rather run a lemonade stand.
By the way, this is looking at a publisher with a healthy 8x multiplier. Go back and do the math for a5x multiplier trying to stay in distribution or retail stores, and it gets ugly very, very quickly. Company-ending ugly.
Assumption: Game publishers are stupid. Or greedy.
If that’s how you want to think about game publishers, or businesses in general, very little I say is going to change your mind. But imagine filling out your tax return this last month, and instead of the tax return payment you were expecting the government mails you back a new Form 1040 with an executive order explaining, “No matter your job, work history,or previous tax bracket, everyone must pay 145% of their Net Income.Except for Apple. And maybe automobile manufacturers.”
And when you point out how impractical (and unfair) that is, they argue, “You obviously don’t see the big picture.”
My point? This is our job. We enjoy what we do, but we also take it seriously. If we could make our product here in the States, for a reasonable price, we would. If China would agree to pay our tariffs, we’d let them. And if our prices go up, it’s almost always in reaction to outside forces.
NEXT STEPS
Game publishers are raising prices.They have no choice. Likely, it won’t be enough. Not against 154%taxes.
Veteran publishers will eat as much of the extra cost as they can to protect their position in the market. Some have already announced they are planning to let New Product sit at the manufacture in China, because COGS is COGS and the math don’t work. Catalyst will bring in just enough product to protect our position in the market while raising prices as little as possible. If that means selling some of our newest product at a loss, that is what we will do.
Meanwhile, mid-tier publishers, many of them with far less room to maneuver, will be hurt the worst. Some will fail and leave the market. (This is also already happening, but I’ll let those companies identify themselves where and when appropriate.) How many great New Product games will be abandoned at Customs because publishers can’t afford this tax?
And new publishers will be backing away as fast as they can, if they can, waiting for the market to improve. This is the bigger tragedy. I’ve always believed that new publishers are the best innovators in the gaming industry. Less innovation means less excitement. Not what I hope for in an industry based around entertainment(6).
Fortunately, it’s not all doom and gloom and it is certainly not the end of our industry. There is also opportunity here. This crisis will allow us to reevaluate ourselves and our business models. To adjust product lines. To engage with our customers, and let them know we will still be here for them.And, for the publishers who have built themselves around long-term growth, there is definitely an opening to attract an even better market position.
That is what I’ve been telling my industry friends when they call.
As for the gaming customer, I understand you may feel a desire to lash out as your favorite form of entertainment comes under attack. Please, don’t. It doesn’t solve anything.
Give us time.
Gamers are very smart people. We’ve spent our lives learning rules and then bending the hell out of them.We’ve given our Game Masters migraines. We’ve gleefully written our favorite publishers to point out math errors in their rules. And then we bought the next game to do it all over again.
We, the publishers, also love games. And other gamers. Otherwise, why would we do this? Very few of us grew up planning to become game publishers, but along the way we found a calling (and, yes, for the lucky ones, a way to make a living). Tabletop publishing may be a billions-dollar industry(7),but most of us are getting by in million-dollar-companies with personal take-home pay somewhere between your local pizza-delivery driver and a high school teacher. And while I can’t speak for all of us, I bet I can speak for many:
We aren’t going anywhere.
Tariffs are just the latest rules revision, dropped on us without any play testing or consideration of balance or fair play. We are all working hard to figure out how to deal with the reality in front of us and bring our customers the next great game we have to offer.
We will need to make some hard business decisions, even if tariffs come back down to something reasonable and sustainable. At the moment, I know many companies are looking at loans, layoffs, salary reductions and shutdowns. These are the realities of running a business and, yeah, it may feel overwhelming. So I’ll return to my first piece of advice:
Don’t Panic.
Do what you need to do to survive this round.
Tomorrow is a new game.
NOTES:
