A little bit more economics
Three-tier distribution creates three distinct markets in action: the profitability relative to effort/cost for the retailer (signficantly, taxes and rent), the profitability relative to effort/cost for the distributor, and the profitability relative to effort/cost for the publisher (significantly, printing). The first and the third have literally no contact with one another, and traditionally, distributors will not inform publishers about which stores are ordering how many copies. (Interestingly, the publisher sets the MSRP, which superficially appears to be a link/unifier among the tiers, but remember - that price means literally nothing in the U.S.; the retailer can sell it for whatever he wants.)
The assumption, or myth as I think of it, is that all the tiers are minor modifications of a fundamental market process occurring between publishers and end-use customers. According to the assumption, consumer demand drives store orders, and store orders drive distributors' demand from the publishers. I do not think that any of this is, or has been true for role-playing games.
The reason why not lies in several factors. One of them is each submarket in the tiers system acts as a filter for the diversity available for the next step. However, that filter's "holes" do not operate in any way that is relevant to, say, a customer's needs or interests in the games. That is, what makes a game a successful venture-capital investment for a distributor is not what makes it a successful purchase for a customer. Another factor is the difference between long-term, repeat sales strategy vs. short-term, immediate-debt driven sales strategy. The latter has typically prevailed in hobby game retail.
Therefore, the distributor has no interest in whether the consumer actually buys or doesn't buy a given game in the stores. Repeat sales are of no interest - it's all one to the distributor, because he has a warehouse of more recent orders. What works for him are (a) orders for big-ticket, high-MSRP items, and (b) orders for the next installment of a given sequence of publications.
Here's another wrinkle: the game retailer has no window into the availability of games - what they are, how good they might be - except through the distributor's catalogue. He is, effectively, a captive market: he needs games to sell, and the ones he must buy are the ones that the distributor has to give. The distributor will even tell him which ones are Hot Hot Hot, which is to say, the ones the distributor would be most happy to unload. The retailer is basically the distributor's bitch.
This problem is compounded when one considers the time-unit of decision-making on a retailer's part. It's short: somewhere around six weeks, varying slightly. It's barely adequate for comics; it is 100% inadequate for assessing how well a given role-playing product actually does what it purports to do, per play-group and per customer. Therefore product performance (whether the game is any damn good) plays no role at all in the retailer's decisions about what to order. The retailer paid no attention, whatsoever, to how a customer liked a given game or how much fun it was to play. What matters is the unsold stock - all of it, raw debt, his latest deep-order - sitting on his shelf, and which one this gamer is likely to buy today.
So, effectively, the retailer is screwed from the get-go. He's a debt-bunny, frantically representing the distributor's interests, believing deeply in the existence of the New Hot Thing, and seeking to blame customers and publishers when things don't go well, as they typically do not. I'll have to hold off from discussing (i) desperation measures like deep-ordering based on the ceaseless cauldron of "industry" rumors, (ii) unbelievably poor tracking of actual sales in the stores in both short and long term, (iii) the role of light-fingered fanboy staff in the stockrooms of both distributors and retail stores, and more.
To shift to the other end of the chain, the publisher now confronts this set of doors or hoops even to have his game appear in stores at all. None of the priorities of those "doors" has anything to do with a customer actually playing, liking, and promoting the game itself, among the gaming community. The publisher must accepted, or "picked up" as they say, by a distributor, or his games are just a bunch of paper in a basement. In just a few years following the mid-1980s, publishers either realized they needed to conform to the distributor's economic needs (including the features of dominating retailers) or vanish. Whether this was a deliberate decision or based on imitation of what they saw apparently working, is not important. The realization is apparent in the physical nature of the games. Staple-bound booklets, ziplock bags, and boxes became replaced by perfect-bound paperbacks in the form most gamers now know well, with the AD&D hardbacks essentially setting the standard as the "real men" version of RPG format. SJG, The Chaosium, Hero Games, and Iron Crown Enterprises all illustrate the transition during the late 1980s.
Effectively, a strange kind of supply-side economics came into action. Not the classical form, but a stepwise form operating in both directions from the center. A publisher's success relied solely upon his ability to convinced distributors to carry his books, and therefore, upon his ability to pump out new, periodical product. A new publisher in the 1990s encountered advice cobbled together out of survival tactics, all based on pleasing distributors, but none of which were working anyway. In the stores, customers could only buy what they saw, and they could be easily fooled into thinking a company is "successful" because its books are all over the shelves. They could easily be trained by a retailer to accept him as the voice of the hobby, informing them about what is good and what is popular, not knowing that he was desperate to recoup whatever funds he'd sunk into ordering whatever Hot Item he was effectively told to order.
More history
By the middle 1980s, a certain power/status structure had appeared among the companies, with AD&D (mistakenly) perceived as a mainstream class of its own, with wargaming companies like Iron Crown and Avalon Hill perceived as the hobby-specific power-hitters (when Hero Games was bought by Iron Crown and when RuneQuest was bought by Avalon Hill, these events were perceived as "success! success at last!"), and with SJG as the innovative, edgy move-us-forward company. Looking back, I think that by around 1986, most RPG publishers had bought their own marketing hype: that role-playing was the Big New Hobby Sweeping the Nation! Hitting it big, or getting into some kind of venue that was supposed to accomplish that, was the brass ring. D&D had "done it!" with Waldenbooks, short-lived as that was; everyone else was still in hobby-land, but if you could get picked up by a real (i.e. wargaming) company, then you'd "done it!" in that more limited way. None of these perceptions were to last past 1990, but they were the cultural foundation for the transition at that time, and that's where the hobby's "old dons" come from.
Given the change in the economic framework and the couple of years it took to sink in, a new context was created in which these older companies were ill-prepared. That context (the three-tier system) is the environment in which our current crop of self-described mainstream publishers came into existence. It informed their values regarding procedural game design and physical game presentation. The leading publishers that I described before - the ones that survived and adjusted the first few years of distributor-driven shifts - all hit the skids by the early 1990s, in various ways, some surviving and some not. Discussion of the very few mavericks (BTRC, Phage Press, a couple others) will have to wait. Discussion of the new companies that arose, including Wizards of the Coast, and these companies unquestioned belief that FASA offered the core model of success, will also have to wait. The fascinating story of R. Talsorian should be reviewed in full.
Other thing that have to wait include (i) the supplement treadmill tactic, which killed many companies and nigh-killed many others; (ii) the scorched-earth tactic, which saved a few companies but also destroyed what shreds remained of any functional hobby based on store culture, and (iii) the few retailers which managed to change their habits and values entirely, and who, not surprisingly, are the most successful stores today.
The content, or actual in-play procedures, of RPGs - what we call "game design" - also tracks nicely to the economic history and the context for publication, up until the advent of "post my game on the internet" as a common and mutually supportive practice. The late 1970s and early 1980s were a time of proliferation of techniques, diversity of goals, and expansion of scope and topic. From then until the early 1990s, several game lines settled into three distinct foundations of design: the AD&D approach, the GURPS/Hero approach, and the BRP approach. Just about all role-playing games built afterwards represent modifications of one of these chassis, and sometimes a little mix-and-matching among them. By the early 1990s, certain syncretic combinations were established, primarily using Cyberpunk, late-stage Champions, and Shadowrun as templates: this is where the so-called Storyteller system comes from. These combinations were now, for all intents and purposes, "role-playing" - a feeble, mismatched, and limited bag of techniques, especially compared to the spunky renaissance 15 years previously. Look over the 1990s game titles, especially those which were released as Hot New Things with promised lines of supplements stretching into eternity.
It's testament to gamer culture's wonderful imagination and drive that a certain spark of novel design did continue to show up here and there in the early 1990s. I can talk more about what that was and why it often failed during 1992-1996. I can also talk about why and how LARPing seemed like an obvious alternative, and why Magic boomed the way it did.
Oh, there is so much more to discuss, which I have to hold off from. The history of GAMA, the Trade Show (not the same things! did you know that?), and Origins; the debates and role of returnability up the chain; the hidden use of outside funds to start up companies and to keep them "alive," and more. I haven't even mentioned the economics of various forms of D&D, which left so many publishers' bodies floating in its wake while being perceived as the flagship of the hobby. My core point, in any of those discussions to come, is to identify the distributor-driven three-tier system, and its features I described earlier, as the unspoken, perceived-as-natural environment in which all these events went through their contortions.
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