Report to the Stakeholders for 2004

by Steve Jackson

Steve Jackson Games Incorporated has a single stockholder . . . me. But we have a great many STAKEholders — that is, people who have a stake in the success of the business. These include our employees, our distributors, the retailers who carry our line, and, of course, the people who PLAY our games! Less obvious stakeholders, but very real, are the creative talents who produce our games, the printers who create the finished product, and the convention organizers who depend on us for game programming, prizes, and so on.

We try to stay in good communication with all our stakeholders. The main avenues of communication are our website, the catalogs and other marketing material that we distribute, and the quarterly letter that goes to the 100+ people and companies to whom we pay royalties. But last year, as an experiment, I wrote a report not unlike the "report to the stockholders" that you would expect from a public company. It was a useful exercise for me, and I got a surprising amount of favorable feedback from all levels of the hobby. So let's do it again. Note that, unlike the typical "report to the stockholders," this report does not strictly start and finish with the calendar year 2004. There have been significant developments since December 31, and I'll discuss them.

Overview

We are, as I assume the reader knows, a publisher of games. In a big change from last year, not all these games are physical products. A number of them are digital downloads . . . PDFs and a few other types of file sold through our e23 site. We still have no videogames for sale, but we are close to launching a public alpha-test for an online game, UltraCorps. We also publish two online magazines: Pyramid and the Journal of the Traveller's Aid Society.

We have been in business since 1980, so this year will see our 25th birthday. We employ, at the moment, 28 full-time staff, plus a number of part-time personnel and contractors.

Our 2004 gross was approximately $2.8 million, up about 4% from last year. Our 2004 financials are not yet complete. We may show either a small profit or a small loss for the year; due to our upcoming move (see below), we expect to write off some inventory rather than moving it, but we don't know how much yet. Our cash flow has been positive and our overall fiscal health is improved over last year.

Our most important products, as last year, are the GURPS roleplaying books, with more than 100 items in print, and the Munchkin card game. With its sequels and supplements, Munchkin accounted for nearly 40% of our sales in 2004.

Significant Changes in 2004

At the end of 2003, we moved our warehouse operation . . . storage, assembly, and shipping . . . to Las Vegas. We had high hopes for this move, but it was unsuccessful, putting too much burden on our Controller. So we gave up on the Vegas warehousing. As of February 1, 2005, our main inventory, and all our distributor shipping, is being handled (very well!) by PSI out of their Georgia warehouse.

However, the assembly side of the Las Vegas operation went much better, and we did find a good assembly supervisor, so assembly operations have stayed in Las Vegas, and we are discussing offering assembly services to other companies.

In 2003, we quit casting our own miniatures. We have now contracted with Gray Cat Castings (operated by Richard Kerr, who was formerly our chief sculptor) to keep the Ogre figures, and some others, available through Warehouse 23.

The High Points

2004 brought us some big wins.

Sales

This was our biggest sales year in a decade . . . bigger than any year ever, except when we shipped INWO during the collectible card game craze. Why? Munchkin keeps getting bigger, and the GURPS Fourth Edition launch helped . . . but it's also very important that we have good relationships and communications with our distributors, and that we floor with the biggest ones, making sure that our whole line remains available all the time. Our Director of Sales, Ross Jepson, deserves great credit for making this all work.

e23

We had hoped that e23, our digital-product division, would launch in the second quarter of 2004. It is to laugh . . . or, perhaps, to cry. It didn't happen in 2004 at all. But after a number of delays and false starts, the digital doors opened in mid-January of 2005.

So far, we are pleased. Gamer reactions have been good and sales are encouraging. As of this writing, we have around 250 files on sale; some are original content, some are the creations of third-party publishers, and a few are electronic reprints of out-of-print SJ Games books. Our goal is to offer 1,000 files for download by the end of 2005. This may be ambitious, since it works out to an average of about 18 a week . . . we'll see how it goes.

One thing you will not see in e23 is PDF versions of our new GURPS books. We know that some publishers are issuing their new books simultaneously in hardcopy and PDF. We are concerned about the effect this will have on the retailers, and unless something happens to remove that concern, our hardback books won't be available in PDF. Support products, of the sort that aren't normally economical for retailers to carry at all, will appear in PDF and not hardcopy.

The Forums

The modern successor to online "newgroups" and "bulletin boards" is the public forum, where any Internet user can post comments and read the comments of others. We already had newsgroups associated with Pyramid Magazine, but in 2004, we launched a set of universally accessible forums on a variety of games-related subjects (plus the obligatory "off topic" discussion area). We're very pleased with those. We have approximately 2,500 registered users, and at any given time there are almost as many visitors online as there are registered users. It's another way to get customer feedback, and that's always good.

GURPS Fourth Edition

A great deal of our effort in 2002 and 2003 went into preparation of the new edition of GURPS, our flagship roleplaying system. In early 2004, at the GAMA Trade Show, we made the public announcement, and at GenCon 2004, we launched the two volumes of the new Basic Set. The new edition is reorganized, streamlined, and divided into two hardback volumes to make it easier to use. This is still GURPS, but it's a better GURPS.

The response was wonderful. We were very pleased with the way the new books came out, and (far more important) the fans were happy and let us know . . . and both reviews and sales have been excellent. Our celebrations were marred by a binding problem with many copies from the first printing; more on this below.

Since then, we have continued to release supplements, though at a slower rate than originally planned; more on this below.

We are awfully pleased with the way these books came out. The interior art is excellent, and the covers look beautiful. The fan reaction to the covers we showed at GTS 2004 was very critical, and we held a competition and invited the critics to submit their own cover designs. Several of the entries were better than our original concept, and we ended up by picking a design submitted by Victor R. Fernandes of Brazil and using it not only for the Basic Set books, but throughout the line. Thank you again, Victor!

UltraCorps

Several years ago, I had the opportunity to play UltraCorps, a very fine online game. It is a browser-based, turn-based game of galactic conquest. This isn't a busy niche in online games; in fact, as far as I know, there is nothing like it out there!

UltraCorps had been offered (in 1998) on the Microsoft Zone, but had been dropped because it was not popular enough. I thought the game would appeal to the kind of people who like SJ Games products . . . and, of course, our overhead is lower than Microsoft's. We bought UltraCorps from its developer. I feel that though its technology is old, its concepts are sound . . . and its appeal is timeless. We are in the process of redeveloping it, with input from some of the old faithful players, and insuring compatibility with today's browsers. We'll soon do at least one large-scale public test. We plan to have the game fully updated and tested before the end of the year, and offer subscriptions.

This is a win in two ways. Not only do we hope to turn a profit, but we will learn a great deal about online games by rehabilitating it!

Digital Games

A 2004 goal was to release at least one digital game by the end of the year. We didn't make it. But there was progress. We've hired Chris Maka, formerly of NCsoft, as our Executive Producer. He worked on the hit City of Heroes, as well as the forthcoming Guild Wars and Tabula Rasa.

We're working on a number of projects now . . . some in-house, some with individual programmers, some with development houses. Most of these are relatively small-scale "learner" projects that will let us get our feet wet. We are actively seeking partners among the major console and PC publishers, as well as among "wireless" (e.g., phone) game publishers. The first priority is to implement some of the existing products in our catalog, but I'm excited about the chance to do new designs for the digital media.

Our existing fans should note, though, that we intend the computer game division to stand on its own. It won't take over our existing staff . . . the tabletop GURPS books and Munchkin games will keep coming.

Warehouse 23

Our online store continues to grow and improve; it surpassed its 2004 sales goal by nearly 10%. Since the last report, we have become the exclusive online retailer for Grey Ghost Press and the CaBil, and for two more highly popular webcomics: Schlock Mercenary and Queen of Wands. We maintained existing relationships with John Kovalic's Dork Storm Press, and with the game companies we had been serving, including Atlas Games. Our customer service continues to be a point of personal pride for me.

Ehhhhh . . .

In some places we gained in one way and lost in another, or just held steady.

Staff

This was not our best year for staff. It's important to retain experienced people, and since my last report we have suffered significant losses.

In 2004, our very talented Managing Editor, Andrew Hackard, left for opportunities outside the industry (though he is still working with us, and in fact is editing GURPS Powers right now). We also lost several experienced writers and editors to burnout, personal issues, and other factors. People like this aren't replaced with a classified ad; 2005 will have to be a rebuilding year for the creative department. This is hitting hardest in our GURPS schedule. We had intended to release one large hardbound supplement every month. We now see that we'll be doing well to ship half that many; quality has gone up, but releases have slowed.

Warehouse 23 has a new manager. Over the last few years, Michelle Barrett built our old Direct Mail department into an efficient and profitable online store. Late last year she warned us that she'd be leaving to go back to school. This could have been a disaster, but Michelle gave us plenty of notice, left a well-trained assistant to promote into her position, and (like Andrew) remains a friend and interested in freelance work. We expect W23 to roll on with little or no problem.

The bright spot is that we have filled both the key positions that were open at the end of 2003. Paul Chapman, who has experience in a variety of positions at SJ Games, is now our Marketing Director. And, as discussed above, Chris Maka is our new Executive Producer. Another important addition is Jerry Vinyard, who brought many years of banking experience when he joined us as Assistant Controller.

Failures

And there were places where we clearly slipped backward.

Business Organization

Our business organization slid badly backward and hasn't completely recovered. The loss of Andrew Hackard left a creative-management gap which, as of this writing, we are still working around as we look for the right replacement. The problems with the Las Vegas operation distracted our Controller significantly, enough so that financial statements were seriously behind and the third-quarter royalty check run was a month late . . . the money was there and the records were good, but the only people who could deal with it were putting out fires elsewhere. As of this writing, though, Jerry Vinyard is providing the much-needed help to allow the business office to catch up.

We do have written goals for the year 2005, as we did for 2004. They are not as well-defined as I would like, or as ambitious (read on for why) . . . but they're there.

Once again, I did not manage to replace myself as SJ Games' chief executive. I didn't even make a big effort in 2004, nor will I do so in 2005 . . . there are computer deals to make and office issues to solve. Not that management isn't interesting, and sometimes actually fun, but one day I'll be able to concentrate on what I do best: making up games.

GURPS Online

Very late in the year, regretfully, we mutually announced the termination of the GURPS Online project with Worlds Apart Productions. We still believe that this type of project could have potential, but we do not have any current plans for an online GURPS game.

Characters Book Binding

Not long after we shipped the Fourth Edition GURPS Basic Set, we began getting reports that the Characters book was losing pages. Indeed, it turned out that the binding was defective on many copies. The reprint has a heavily sewn binding, as will future GURPS hardbacks; it's an added expense, but it's good insurance even for thinner books. We sent a replacement copy to everyone who needed one. The hassle and expense were considerable, but we appreciate the supportive comments from those fans who understood that we don't do this kind of thing on purpose . . .

State of the Industry

The "hobby" or "adventure" game industry (not to be confused with the mass-market game industry epitomized by Monopoly, or the "gaming" industry that runs casinos) saw a rather flat year in 2004. No big publishers or distributors closed their doors, but a number of small ones did. Card games remained popular, roleplaying continued to suffer from a glut of amateur and semiprofessional d20 releases, and European (and European-styled) board games continued to make inroads.

Collectible card games continued to be big business, but the center of the CCG industry moved farther from adventure gaming and closer to anime and media fan-service. Licensing has replaced play value as the first consideration for the average CCG publisher, and the market is encouraging this trend.

The hobby didn't see any true breakout hits, but WizKids' Pirates of the Spanish Main married a popular theme with a new style of game component and earned a lot of sales. We have continued to work with various partners to accomplish shared goals. Significant additions in 2004 include:

• PSI, who is now acting as our fulfillment agent;
• more distributors with whom we have flooring contracts, thus making it easier for retailers to get our products;
• several overseas publishers who are now creating translations of Munchkin releases on a regular basis, and a few who are translating GURPS Fourth Edition;
• Adventure Retail, which represents us at Origins, GenCon, and other major conventions;
• and the publishers who are distributing digital product through e23.

We still believe this sort of cooperation is our future.

Looking Forward

Our announcements at the GAMA Trade Show in March will not be as dramatic as in 2004, when we made our "GURPS Fourth Edition" splash. Still, we think the retailers will be pleased, and we expect them to enjoy the special items we'll be giving away.

We anticipate our 2005 revenues to be about the same as 2004's, but their source will be different. Munchkin sales just keep increasing. However, the need for a "building year" in the creative departments will mean there will be fewer GURPS books, and fewer brand-new board and card games, than we might otherwise produce. We expect the big changes for the year to come in the digital domain, as e23 and UltraCorps grow and as other projects step into the spotlight.

The Move

The last piece of news: We are preparing to leave the office where we've been for most of our 25 years. The property is under contract for sale. The closing date might be as early as April, or months later; once it closes, we have about five months to get moved. We have no way of knowing what the schedule is until we're told.

Where will we go? We don't know yet. We've done a lot of preliminary searching, but until we have a moving date, we can't expect a landlord to hold space for us. Right now, there are suitable sites within hiking distance of the old office, so we may not go far.

But this is one reason that this has to be a "building" year: we need a new building! We're excited about having more and better space; the IT staff, for instance, has completely outgrown its area in the old offices. In the long run, the move will be a very good thing; in the short term, it'll be a distraction. Interesting, and sometimes even fun, but still a distraction. We'll deal with it.

Thanks for your support. We'll see where the year takes us.

– Steve Jackson

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