Paizo Publishing’s 10th Anniversary Retrospective—Year 2 (2004)

The Worst of Times

Thursday, April 26th, 2012

This blog entry is the third in a series of blogs commemorating Paizo's 10th anniversary.
Click here to read the first installment.

As 2004 opened, there was a cloud hanging over Paizo. The reality that Star Wars Insider and the Star Wars Fan Club were going away in a few short months really hit home. Star Wars accounted for more than half of Paizo's revenue, and supporting the company purely on income from Dragon and Dungeon wasn't going to work. I personally had two options. The easiest would be to shut down the company. As I mentioned in my first anniversary blog, it takes a long time to get paid for magazine sales, and while that makes starting up a magazine very difficult, it also means that if you stop publishing, money keeps coming in for almost a year. It would have taken a while, but eventually, we'd have been able to recoup most of the money that Vic and I had invested in Paizo.

The other, much more daunting option was to try to replace that lost revenue. Subscription and advertising revenue would dry up immediately, of course, and that would hurt a lot, but we would still be receiving big Star Wars Insider newsstand checks for almost a year after our final issue went out in April. That gave us some time to ramp up new business to replace the lost income. We had already launched Undefeated in 2003, and were hopeful that it would start to pick up some of the slack. The other arrow in our quiver was the venerable Amazing Stories magazine, which had been included in the license along with Dragon and Dungeon when we took over Wizards of the Coast's magazine business. Amazing Stories launched in 1926 as the world's first magazine dedicated to science fiction. TSR had acquired it in 1982 and published it for 13 years, putting it on hiatus just a couple of years before Wizards acquired TSR. Wizards almost immediately brought Amazing back, publishing it for about 3 years before resting it themselves in 2000. We decided to try to make it work yet again, with the staff from Star Wars Insider mostly moving directly to Amazing and Dave Gross becoming the magazine's 16th Editor-in-Chief.

This time, we had a slightly different plan. Amazing Stories had always focused almost entirely on prose fiction, with short stories making up the bulk of each issue. We wanted to continue running great original fiction, but we also wanted to cover the rest of sci-fi/fantasy genre: movies, TV shows, comics, video games, etc. We were hoping that we could make a magazine that appealed to fans of science fiction and fantasy, and that the expanded media coverage would make the magazine appealing to a larger advertising base.

Michonne Bourriague and Amy Allen pose with members of the 501st Legion at the Star Wars Fan Club Dinner With the Stars.

But before we relaunched Amazing, we needed to finish up our run on Star Wars Insider and the Official Star Wars Fan Club, and we didn't take that job any less seriously while our time was running out. In February, we held the first and only Fan Club Dinner with the Stars here in Seattle to coincide with Emerald City Comicon. Our guests were Michonne Bourriague (Aurra Sing in The Phantom Menace), and Amy Allen (Aayla Secura in Attack of the Clones and Revenge of the Sith, which hadn't yet been released). In addition to dinner with the guests, attendees received a stash of Star Wars merchandise supplied by Paizo and Lucasfilm, and a special autographed souvenir photo ticket created just for the event (we still have a few of those for sale here on paizo.com).

Paizo's final issue of Star Wars Insider in April revealed Episode III villain General Grievous, who had previously only been seen in animated form. And as my reign as President of the Official Star Wars Fan Club concluded, I got a chance to go down to San Francisco and dig around in the Star Wars product archives, which was a real thrill for Vic and me as collectors.

With the loss of Star Wars, Dragon became king at Paizo, boasting both the largest number of subscribers as well as the best newsstand sales. Dragon #315 was the first issue ever published which had support for every D&D campaign setting—19 of them—from Forgotten Realms and Greyhawk to Red Steel and Hollow World. Dragon #319, coupled with its sister publication Dungeon #110, gave 3.5 DMs everything they might need to set a campaign in the world of Dark Sun. Dragon #320 celebrated the 30th anniversary of D&D with one of my favorite pieces of cover artwork ever!

Lisa Stevens at the Paizo booth sporting the Warduke T-shirt made for theDungeon relaunch and Erik Mona showing off the T-shirt designed for the relaunch of Dragon.

The biggest news for Dragon that year came at Gen Con, in the form of a relaunch that began with Dragon #323. We had heard from our readers that our issues were often too hit-or-miss for them—with narrow themes such as Dark Sun or ninjas, there was always some portion of the audience that wouldn't find it useful. And if a large enough group skipped a particular issue, we'd lose money on it. So our new goal was to provide something for everyone with every issue. Since many of Dragon's readers were players, we started the Class Acts section, which would include a short article for each of the core classes. We also put more consideration into balancing the types of articles that made up each issue to ensure that we didn't leave anyone out. For the most part, this seemed to really work, and Dragon's sales started to improve.

With the continuation of the Adventure Path concept we'd launched the previous year, things were also looking up for Dungeon. 2004 ended up being one of the most important years for the magazine, and its success eventually heralded Erik Mona's rise from Editor-in-Chief to Publisher and James Jacobs' rise from Associate Editor to Creative Director.

Dungeon #111 introduced the first-ever adventure for Eberron, and the following month saw Dungeon's most ambitious issue ever: Erik and James worked with Gary Gygax and Robert J. Kuntz to revise and expand Kuntz's famous Maure Castle superdungeon. This issue also marked the first and only time that Dungeon had just one massive adventure packed between the covers.

The Undefeated cheerleaders and the temporary tattoos from Gen Con 2004.

At Gen Con, Dungeon also had a relaunch with issue #114, with even bigger changes than we'd made in Dragon. First off, Polyhedron went away as the companion offering to each Dungeon issue. This was significant to Erik especially, as he had come up through the ranks as Polyhedron's Editor-in-Chief, and the magazine held an important place in his heart. But readers were making it clear to us that Polyhedron was a very divisive feature, and if we wanted to give Dungeon a chance to catch up to its more successful brother, Polyhedron had to go.

We also moved Dungeon to a format that featured one low-level, one mid-level, and one high-level adventure in each issue. This gave DMs a treasure trove of adventure content that ensured there was something that could fit their campaigns no matter what levels they were currently playing. In addition to the three adventures, Dungeon would now feature new campaign content in each issue. Dungeon #114 revisited the Isle of Dread and saw the start of Monte Cook's "Dungeoncraft" and Wil Wheaton's "Wil Save" columns. It also featured the very popular "Mad God's Key," the first published work by Jason Bulmahn. The end of 2004 saw the final adventure in the Shackled City Adventure Path and the start of the well-received three-part Greyhawk Istvin series.

Undefeated magazine grew a little bit, finding new subscribers and appearing in a few more mass-market outlets. However, we were still having trouble getting the traction that we really needed in our key market: hobby game stores. At Gen Con, we had Paizo's most controversial promotion ever: the Undefeated cheerleaders, who applied Undefeated temporary tattoos to con-goers arms. It definitely helped drive traffic to the Paizo booth, even if not everyone was happy about us having "booth babes."

Spider-Man adorns the first Paizo issue of Amazing Stories.

Amazing Stories launched in September, though we offered a sneak peek at Gen Con in August. The first issue showed off Amazing's new look with a Spider-Man movie cover. It also had my favorite thing we published in Amazing Stories: Dave Gross had devised a column called "1,000 Words," where we would provide a writer with a picture, and they would write a story using—you guessed it—1,000 words. Harlan Ellison—er, sorry... "Harlan Ellison®"—was pegged to write the first installment, but due to a miscommunication, he wrote only 100 words. When we pointed out the problem, Harlan befuddled us again by turning in... another 100 words. Desperately, we reached out to Neil Gaiman, who saved the day by writing a hilarious 800-word introduction to Harlan's 200-word story. I couldn't stop laughing!

At the end of August, Paizo moved into new offices on Richards Road in Bellevue. Located just a few blocks away from our first office space, it finally gave us room to give everybody a desk—and most importantly, we actually had warehouse space, and no longer had to stack back issues in the hallways (something that had caused many frowns from the fire inspector).

The biggest change we made at Paizo, though, was largely hidden behind the scenes until late in the year. Webmaster Rob Head added programmer Gary Teter to our web team, and the two of them spent months building an infrastructure that would completely transform paizo.com. Our original website had really been little more than a portal to sign up for magazine subscriptions and a place to post news releases. In August, we rolled out a new paizo.com complete with messageboards, which quickly become home to an incredible community. And in November, we launched our e-commerce store selling not just Paizo's own products, but for the first time offering thousands of gaming items from hundreds of gaming companies. Our first day's sales, on November 24, 2004, weren't earth shattering—in fact, we only did $1,124.56 in total sales the first week! (Trivia: the first non-Paizo product sold through the site was White Wolf's World of Darkness: Antagonists hardcover.) Though it started slow, eventually the paizo.com community and our web store would become two of the most important things that keep Paizo running.

The Paizo office on Richards Road and a peek through the front door, where David Neri answers calls at the new office. To the right, Prepress Manager Kelly O'Brien shows off our high-end Creo Veris machine, used to create color proofs for each page of our magazines.

We'd also had a few big staffing changes at Paizo. After Mary Franklin left the company to join Lucasfilm—where she still is today—Jeff Alvarez, who had started only the previous year as a Customer Service Representative, was made Director of Operations. Keith Strohm was promoted to Chief Operating Officer in August, and in October, Erik Mona was promoted to Editor-in-Chief of both Dragon and Dungeon, a well-deserved change of title for all of his hard work on Dungeon and Polyhedron that year.

The entire Paizo staff had worked their butts off in 2004, but at the end of the year, I was faced with a very tough choice. Even with the launch of Amazing Stories and the growth of Dragon, Dungeon, and Undefeated, Paizo wasn't even coming close to making up the lost revenue from Star Wars Insider. We had finally located the flaws in Johnny Wilson's "Three-Legged Stool" model of the magazine business (detailed in the "Debunking the Three-Legged Stool" section below). Our cash reserves were depleted, and I had actually started to put some of my retirement money into the company to make ends meet—something I had promised myself that I would never do. The stress on me personally was the highest that I have ever borne in my 25 years in the industry. I now knew what they meant when they said that Conan ruled over Hyboria with a heavy brow. There was one particular moment that will forever be etched into my brain: It was a Friday in early December, and Vic and I were driving home from the office late in the evening. It had been a particularly hard day, with money being tight and a bunch of bills going unpaid. I had been agonizing over spreadsheets with sobering names like 2005Hardline.xls, 2005BudgetcutUndft.xls, 2005NoAmazing.xls, 2005BudgetSmallSalaries.xls, 2005Budgetcutpeople.xls, and 2005Armeggedon.xls.

You have to understand, the people at Paizo are my friends. And with just a few keystrokes on a spreadsheet, I was potentially destroying lives, or at least changing their trajectories forever. The stress took over while driving home and I had to pull over to the side of the road and started bawling. I knew in my heart that I needed to make some drastic changes to give the company a chance to survive. I needed to cut Amazing Stories and Undefeated and all of their staffs to give Paizo a chance. But at that moment, sitting on the side of the road, I just wanted all of it to end. I turned to Vic and said, "I am done. I can't do this anymore. Let's just close it all down. I don't care about the money anymore. I just don't want to feel like this each day. I am not strong enough to carry this burden." If I had been alone, I might just have ended Paizo on that day; I was that low. But Vic picked me up, got me talking about the good things we had at Paizo. Got me thinking about how this wasn't the end, just a very large bump in the road.

But it still was a very hard time for me. The first thing I did was lay myself off. There was no way that I was going to draw a paycheck if I had to lay off a bunch of my colleagues. I would work for free and not get paid again until Paizo was on better footing. Then, on December 16, I had to do something that I promised myself I would never do: I had to lay off a bunch of people. All told, six people lost their jobs that day.

At the end of the day, Paizo was a lot leaner and focused. For now, we were the Dragon and Dungeon magazine company. But laying off six people wasn't magically going to put us on the path to prosperity. There was a LOT of hard work to be done in 2005. We needed to start building the foundations of an entirely new company.

Employees who started in 2004 (in order of hiring date):
Jenny Bendel, Director of Marketing
Gary Teter, Software Developer
Ole Sorensen, Graphic Designer
Sarah Robinson, Graphic Designer
Mike Schley, Graphic Designer
Jeff Berkwits, Editor-in-Chief, Amazing Stories
Jason Bulmahn, Associate Editor

Employees who left in 2004 (in order of their end date):
Mary Franklin
Patrick Velotta
Lisa Chido
Wade McNutt
Matthew Beals
Matt Sernett
Dave Gross
Jenny Bendel
Theresa Cummins*
Kyle Hunter*
Michael Mikaelian*
Jenny Scott*
Ole Sorensen*
Jeff Berkwits*

*laid off as part of the cancellation of Amazing Stories and Undefeated

Debunking the Three-Legged Stool

In our first anniversary blog, we mentioned Johnny's Wilson's "three-legged stool" model for magazine publishing, which dictates that successful magazines need to garner revenue from three streams: newsstand sales, subscriptions, and advertising.

Unfortunately, 2004 was the year that we discovered the major flaw in Johnny's model.

We knew that Undefeated was never going to attract a ton of subscribers; instead, we hoped to make most of our money on that title by selling to the hobby gaming market which—unlike sales to newsstands—couldn't be returned and was generally finalized within 90 days. We planned to bolster that solid, predictable income with advertising revenue from game publishers.

Amazing Stories took the opposite tack. We didn't expect much at all in the way of hobby sales, but we hoped to maintain a decent newsstand presence, and, over time, build a small-but-loyal subscriber base like we enjoyed with Dragon and Dungeon. We hoped to attract advertising from book and comic publishers and TV and movie producers.

Best of all, we had a shortcut that would give Amazing an immediate newsstand presence. Newsstands effectively have standing monthly orders for magazines. They may adjust that order from month to month, but once they start buying from you, they generally keep buying from you. The surprising part is that these standing orders aren't done by magazine title, but by something called a bipad. Once you have a bipad, you can actually replace one magazine with another, and the standing order will essentially transfer to the new title. And our distributor told us that we'd be able to use the Star Wars Insider bipad to launch Amazing Stories, so we wouldn't have to spend time and money to convince newsstands to pick up the new magazine—it would be automatic.

In our last blog, we explained that it took over a year to get final newsstand sales figures for a particular issue, so it wasn't until early 2004 that we had full data on even our first few all-Paizo issues of Dragon, Dungeon, and Star Wars Insider. Accountant Dave Erickson and I spent a couple of months poring through that data, and we finally emerged with a spreadsheet that let us predict sales data for recent issues with a fairly high degree of accuracy. Which meant the real analysis could begin.

By the end of 2004, we finally had enough data to prove that magazines don't actually make money from newsstand sales. It turns out that almost all of the costs associated with newsstand distribution increase in direct proportion to the number of copies you distribute; there are almost no economies of scale to be had. Therefore, increasing the number of copies you distribute doesn't increase your margin at all. The only way to increase the potential profit on newsstand sales is to increase the magazine's sell-through—that's the percentage of magazines that you've actually sold to customers once all the returns have been finalized. But it turns out it's virtually impossible to improve sell-through in any long-term way.

Unlike hobby stores, newsstands get to return any magazines they don't sell. This means that there's no risk associated with them ordering too many copies. In fact, retailers deliberately order more than they expect to sell, for a couple of good reasons. The most obvious is that they can't sell magazines they don't have, so ordering more than they think they'll need ensures that they'll have copies to sell in case sales are better than expected. Less obvious is the fact that it's easy for customers to overlook a small stack of magazines on the stand. On a shelf with dozens of different titles, a single copy of a particular magazine can literally get lost in the crowd; it's harder to overlook a stack of four or five copies. So retailers don't just want an extra copy or two on hand‚ they want an extra stack or two. So, no matter how many copies you sell in a month, retailers will order more the next month, assuring that if your sales continue to be strong, your sell-through percentage will stay pretty much the same. And if the next issue proves to be less successful, then they'll just return more copies, decreasing your sell-through, and the fees associated with the extra printing and the extra returns will likely wipe out any extra revenue you may have earned from the previous issue doing so well.

What is good sell-through, anyway? Anything above 30% was considered pretty good in the industry. Our best-ever issues were in the neighborhood of 40%. That means that 60% of the issues we printed were destroyed unsold. A bad issue would have sell-through in the 10% range. So not only were we sometimes paying to print almost nine times as many copies as we actually sold, but we were also paying to have all those copies trucked around the country, put out on newsstands, removed from newsstands a month later, and then destroyed. Along with, of course, a fee to the distributor for tracking all of that activity for us.

At this point, you may be wondering how all of those other magazines on the newsstand survive if none of them make any money. The answer is that those magazines make their money almost solely from advertising. (Open up a popular newsstand magazine and look at the masthead—that's magazine lingo for the credits page—and you'll usually find that the advertising sales staff vastly outnumbers the editorial staff.) These magazines are willing to lose piles of money on newsstand distribution in order to get people to buy them. The reason is that the more readers they have—whether profitable or not—the more they can charge advertisers to reach those readers. (This also explains why they often have low, low cover prices that don't even cover the cost of printing, or subscription rates that don't even cover the cost of postage, much less printing and editorial costs.)

But specialty magazines like Dragon and Dungeon can't bring in the same kinds of ads that those magazines can. They're not going to pull high-revenue ads for cars, cigarettes, or designer watches. At best, we might get ads for video games or high-profile fantasy novels‚ and those only because of Dragon and Dungeon's strong position in those markets, the result of decades of history. Amazing Stories and Undefeated didn't have that going for them.

Generating ad revenue is a difficult business. Advertisers want to know that the money they're spending on advertising results in increased sales. But it's usually very hard for advertisers to determine whether their ads are bringing them customers. From the publisher's side, we could provide estimates of the number of people that were potentially reading the ad, and we could talk about the prestige of being in the magazine. We could even tell them how some distributors would only carry RPG products that were being advertised in Dragon. But we couldn't tell them how much of a return they'd get on their investment. And as the internet became a more viable—and more measurable—means of spreading the word and selling products, magazine ad sales became harder and harder to do.

Worse still, even when we did manage decent ad sales, actually getting paid was a difficult prospect. Leaf through a bunch of old Dragon magazines, and you'll find loads of ads from game publishers and game stores that aren't in business anymore. In many cases, those folks were already in trouble when their ads were in print, and paying us was among the least of their worries. Now, look at some of those full-page ads from big companies... would it surprise you to learn that many of them didn't bother paying us either? The only recourse we had to keep people paying was that we wouldn't run more of their ads until their accounts were paid up—but if companies decided they didn't really need to advertise with us, we were just out of luck. Eventually, we required advertisers to secure ad placements with credit cards, and that helped eliminate most of the deadbeats—but it also reduced the number of people willing to place ads with us. Couple that with the start of a recession, where advertising is among the first things to drop from a company's budget, and you have a very difficult business indeed.

Now recall that our intent for Amazing Stories was to make its money on the newsstand and from advertising, and that we had the benefit of the Star Wars Insider bipad to launch Amazing. Well, shortly before launch, we learned that we had been misinformed about the bipad. We'd have been able to use the bipad if Insider had ceased publication, but because it was simply going to another publisher, the bipad had to go with it. That left us needing to spend months upon months and thousands upon thousands of dollars to build up an unprofitable newsstand presence from scratch, just so we could get circulation numbers high enough to begin the daunting task of trying to attract advertisers that might want to pay us. We hadn't yet realized it, but before our first issue even hit the stands, the world's oldest sci-fi magazine's days were once again numbered.

So what about Undefeated, with its non-returnable hobby sales revenue? We mentioned last month that if we could just get every game store in the country to buy two copies, we'd be set. (And frankly, we probably could have gotten by with just one copy per store.) But what we hadn't considered was the low value proposition for hobby distributors. Hobby distributors make a percentage of the retail price of everything they sell to their retailers. They have a limited amount of time each month in direct contact with each retailer, though, and if they have the choice between spending five minutes trying to get them to buy an $80 trading card game display box or trying to get them to buy an $8 magazine, well, the game makes them 10 times the money. After 10 issues, we realized that we weren't going to get around that fact, and coupled with the lack of ad revenue, we had to pull the plug on Undefeated.

Working with creative people in a high-stress environment such as magazine publishing can lead to crazy and fun times. In 2004, a meme started with photos of employees slapping Advertising Director Rob Stewart. Of course, it was all choreographed. As time went on, the phony slaps became more and more animated. Here are a number of pictures of folks doing "The Slap" on Rob.
From Left to Right: Amanda Titus, David Neri, Erik Mona, Keith Strohm, Sarah Robinson, and Sean Glenn.

Lisa Stevens
CEO

The Bulmahn Cometh

2004 was a crazy year for me. I was working for an architectural firm in Milwaukee while moonlighting with the RPGA as one of the Living Greyhawk campaign directors. My duties included writing, editing, and approving adventures, so I decided to try to get published in Dungeon, sending them an adventure that was tied into Living Greyhawk. Erik and James liked the idea and published "Mad God's Key" in Dungeon #114.

I had always wanted to work in the game industry, and with a publishing credit under my belt and a few years’ experience working with Wizards, I decided to shoot for the moon and applied for a job in Wizards of the Coast's R&D department. I was incredibly surprised when I made it all the way to the end of the process, and in July, Wizards flew me out to Seattle for a face-to-face interview. I knew the job at Wizards was a long shot, so it came as no real surprise when they eventually offered the job to someone else.

But while I was in town for the Wizards interview, I also paid a visit to Paizo, where Erik hastily put me to work combing through the slush pile. As it turns out, while Wizards was interviewing me, they were also interviewing Dragon editor Matt Sernett for a different position, and when they hired Matt a few months later, that left Paizo with a job opening. Erik dropped me an email to let me know that Paizo was hiring, and just two weeks later, after a few quick calls and an interview, I was driving out to Seattle. My first day of work was October 11.

The whole time was rather surreal. I was incredibly excited to be working on Dragon, a magazine I had been reading since I was a kid, but I didn't know much about how magazines were put together. It was a steep learning curve, but I had plenty of time in my life for work. I was living in a tiny place with rented furniture until my belongings back in Milwaukee could be packed up and shipped out to join me. I didn't know anyone other than my coworkers, so I didn't have too many distractions. That said, I nearly quit and drove back to Milwaukee just a few weeks later.

Everything had seemed to be going fine. I was finally getting a handle on how the job worked when Erik came back into the editorial pit and closed the door—and nobody ever closed that door. He explained to everyone that Paizo was laying off a number of employees and putting Undefeated and Amazing Stories on permanent hiatus. I was shocked. I was worried that I had joined a company that was in danger, and I'd left behind a good stable job to do it. Later that afternoon, I pulled Erik aside and asked him if I should plan to move back to Milwaukee. After all, my old lease wasn't even up, and I was pretty sure I could get my old job back. He reassured me that Dragon and Dungeon were doing great and that I had nothing to worry about, but it took me a few more weeks to come to believe that. Looking back, sticking with Paizo was the best decision I've ever made.

Jason Bulmahn
Lead Designer