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The Bungie Soapbox is an excuse for us to write at length about things that interest us. Every month we'll have a new essay from a Bungie person on some facet of the gaming industry.

This month's rant supplied by Alexander Seropian, our Fearless Leader.

Coming out of the booth on... Distribution Myths and Lies

by

Alexander Seropian

When I started Bungie, all I wanted to do was write a computer game and sell it. Like the way I sold popsicles during the summer when I was in fifth grade, or my chemistry notes in college. My naive vision had an elegant simplicity, a kind of commercial innocence.

It wasn't long before that innocence was betrayed by the long list of vendors, distributors, retailers, and mail order companies who were more than eager to reach their hand into my pie. Now, don't get me wrong. We couldn't have made it to where we are, or get to where we are going without these channel partners, but there's a lot that goes on behind the shelves that consumers don't always know about.

Bungie sells to different kinds of customers. We sell direct to the end user, we sell to mail order companies (from which consumers buy), and we sell to large distributors (that in turn re-sell to stores, from which consumers buy). While selling directly to the end user is a simple process, retail distribution gets a little complicated.

Channel 1: End User Sales (easy)

A) Bungie places ad B) Customer sees ad and buys product C) Bungie ships product to customer.

Step A can be a magazine ad, direct mailing, newsletter, web site, demo, etc...

Channel 2: Mail Order (less easy)

A) Bungie submits product to mail order company for evaluation. If approved, Bungie doesn't ever have to do this again. This didn't happen until we released Pathways for most of the mail order companies.

B) Bungie Buys an ad. Yep that's right, Bungie doesn't just sell to the mail order companies. The mail order companies have sales people, whose job it is to sell ads to Bungie (they get commissions too).

The tricky part here is that Bungie must buy the ad two to three months before the ad comes out, i.e. a December catalog is booked in October. So planning for new products can be hard, and mail order companies, by law, are required to estimate shipping dates, which is why they are frequently saying "two weeks" even when Bungie is saying "we don't know".

C) Mail order company sends Bungie an order for product. Note: This absolutely doesn't happen until Step B is done.

D) Customer sees ad and buys product from Mail Order Company.

E) If Mail order company bought too much, then they send the product back. That's right, NOBODY ACTUALLY BUYS PRODUCT FROM BUNGIE. It's all consignment. If they don't sell it, it comes back to Bungie. Remember this lesson, it repeats itself later.

Special Notes: With entertainment software, a mail order company derives most of its profit from the advertising sales, not the product sales. A full page ad in one of the big Mac catalogs cost about $25,000.00 (times 150 pages is 3.75 Mil... per month!). On a given month we may pay $9,000 for an ad. For the mail order company to make more than that ad price they would have to sell over 1200 units of product that month, which only really happens around Christmas. Consider Microwarehouse, a publicly traded company, which does around $750 million a year. They produce 4 catalogs with a total of over 600 ad pages a month. This generates a mammoth $180 million per year. The remaining revenue ($570 million) generated by product sales, yields only a 20% margin. That makes the ending score $180 million for ad sales, $114 million for product sales. Remember this lesson, it repeats itself later.

Channel 3: Retail Distribution (hard)

A) Bungie submits product to distributor for evaluation. Distributor says, "Bungie who?"

B) Bungie spends years and lots of money, trying to make a name for itself, so Bungie can go back to distributor with an established customer base.

C) Repeat steps A and B as long as is necessary.

D) Distributor offers Bungie a contract with the following options: - Bungie guarantees that distributor is getting a better price than anyone in the world. - Bungie agrees to take back any product distributor is unable to sell (remember the consignment lesson). - Bungie agrees to give distributor anywhere from 3-6% of sales as a marketing fee. Note that distributors typically mark up software by 1-3%, remember the marketing profits outweight product profit lesson? - Bungie agrees to spend at least $10,000 on product launch marketing with distributor. Again, remember the marketing profit lesson. - Bungie agrees to pay shipping to the distributor. - Distributor agrees to pay Bungie 30 - 90 days after delivery of product. Note: this is the biggest joke here. THEY NEVER PAY, until they need more product.

E) Bungie tries to negotiate, but ends up getting the shaft like the rest of the software developers and bends over for the contract.

F) Distributor says, "OK, to get you into Retail Store X, you'll have to spend $5,000 on their in-store catalog" or even better "You'll have to pay $25,000 on their end-cap". That's right kids (this is an important lesson) every time you walk into a store and see 100 copies of "Mutant Death Machine" stacked on the end of the aisle, it isn't because the store thinks it's great. It's because the publisher paid big bucks to get it there. And the store gets to keep those big bucks as profit.

G) Now we sell some product to the distributor.

H) Now we realize to compete with all the other software that the distributor sells, we have to bribe the sales people. It's called a SPIFF. That's when Bungie says, "OK, I'll give you a dollar for every unit you sell to a store". Or we have to tell the distributor that we'll give them a rebate of 5% if they sell a certain amount.

I) OK, here's the best part: DISTRIBUTOR GOES OUT OF BUSINESS owing Bungie a ton of money.

Now, this whole rant may sound like a bunch of whining from a company that's made plenty of moolah selling a great game, and it is whining. But, wouldn't it be nice, if selling software were like selling popsicles on a hot summer day?

---------------------------------------------------------------------------- Alexander is CEO & Founder of Bungie Software and is constantly evolving his job role by hiring talented people to work with. Eventually there'll be enough smart people around that he'll be able to sit on his butt all day and do nothing.

You can reach Alexander at theman@bungie.com. You can look at previous Soapbox articles if you missed 'em the first time around.

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Last Updated August 30, 1996. Webmaster@bungie.com