Podcast: Jesús Rodriguez

I spoke with ⁠Jesús Rodriguez⁠, author of the ⁠Dungeon Investing⁠ substack, where he writes about the business of miniatures, video games, tabletop games, comics and RPGs. We discussed Games Workshop, owner, designer and manufacturer of the Warhammer and Warhammer 40K worlds of miniatures. Jesús walked me through the company's rise-fall-and-rebirth to explain how its history shaped its culture. We then explored the trade-offs inherent in GW's hype-driven business model; the operational complexity and diseconomies of scale this creates; management's slow embrace of IP content; and the company's potential for growth.

If you'd like to read more of Jesús' work, I highly recommend starting here:

⁠Analysis of Games Workshop⁠ (2017)

⁠Games Workshop: A look into the future⁠ (2023)

The following transcript has been lightly edited with ChatGPT:

My name is Graham Rhodes, and I'm delighted to welcome Jesús Rodriguez today, author of the Dungeons Investing Substack, where he discusses gaming and entertainment companies worldwide. Welcome, Jesús.

Thank you, I'm happy to be here.

Today, Jesús and I are going to have a discussion about Games Workshop, the London-listed company. I think Jesus has been one of the most prolific authors about the business. He's written some really interesting things, not just about Games Workshop, but also about the wider animation and content industry. So, we're really lucky to have him. But before we get into the discussion, I just have to give a reminder that we're not making any investment recommendations today. So, please don't take this as financial advice. Is that right?

Absolutely right.

Perfect. Let's kick off. Why don't you tell us a bit about yourself?

Actually, I work in a very unrelated field. I work in software engineering and I started investing back in 2016 when I began saving a bit of money in my second year. I fell into this sort of by accident. I asked my father what to do with my money, and he told me to check out a guy who ran an investment fund in Spain. Actually, he was not running it at the time due to a non-compete clause. I'm talking about Parames, who was one of the pioneers of value investing in Spain. He was promoting his new fund at the time and had published a book to try to promote it. I read that and the impression I got was, "Man, this is so easy. Why should I pay someone to do it for me?" And obviously, now I know I was a bit wrong, but that was the first impression I got. I started trying and I was very lucky in the first couple of investments because I was wrong, but I still made money. I was lucky enough to get the timing more or less right. And, when you have some success in something, you get hooked on it. So, almost immediately, I started publishing what I was doing on a blog in Spanish where I wrote about Games Workshop, among other things. Yeah, that's how I got into the investment community, so to speak.

That's where I came across you. I found your old blog post about Games Workshop and the three-part series you wrote around 2017 explaining what had changed within the company. We'll get to that in a second. But the question I have for you is: you're not a professional investor. This isn't your day job. Why do you write?

One thing you hear a lot about in investing is the loneliness of it, so to speak, the need to be a contrarian, the need to be a very independent thinker, and so on. Honestly, I think it's a story we like to tell ourselves because it definitely doesn't work for me. The reason I write is to meet other investors and to be able to talk with them. I've found that discussing my ideas and hearing other investors' ideas helps me a lot. And it's also fun. So, that's why I write — to meet other people in the space.

One of the things that I like most about Dungeon Investing, the Substack, is the way you look at the entertainment and content industry globally. You're not siloing into any one genre or geography. And I think that's really cool. You're one of the few people who sees it globally. So, I have to ask: are you a gamer? Is that how you connected all these dots?

Yes, although less than I would like to, obviously now. But, to be honest, it has its limits. I am both an avid reader, and I was more of an avid consumer of anime and manga, and also a player of tabletop RPGs and the like.

And is that how you came across Games Workshop? Was it through your own hobby?

Yes. I played through my whole high school era and partly through college as well. I used to play both fantasy and 40K. That's why I'm so happy they got Bretonnia out in the Old World because that was my faction. It was without an army book for 10 years. But yeah, I played a lot, and honestly, I was always more of a lore person than a miniature painting person, so to speak. But yeah, I really liked it.

When I wanted to talk to you about Games Workshop, you said the best way to frame it is to talk first about geek culture. So why don't you tell us a bit about geek culture and what it is, and why does it matter for Games Workshop?

I think it's important because Games Workshop is not the only company benefiting from this. We have seen Bandai Namco, we have seen Sony, we have seen a lot of these kinds of companies that capitalize on what in the nineties or even in the early 2000s were marginalized interests, so to speak. We see it with Marvel as well, but that's the obvious one, right? They capitalize on interests that were apparently not so widespread, but now they seem to have a lot of success.

And really, what I think has happened here is that a lot of people actually were into many of these things, but they were not out in the open about it. First of all, obviously, all these people now have money, which is serious. They are in prime consumption age, so to speak, which has its own risks as well. But also, they realize that their hobbies were far more common than they seemed because they were not as open as they are now. And I think that propels it to other levels.

That's the source of identity for many people. Many people identify around sports teams or around their jobs or around their family, but for many people, these kinds of hobbies are a big part of their identity alongside these other things, or even more than that. So for me, that's why it's important because we are not talking about hobbies where you spend a bit of time. We're talking about hobbies that you use to define yourself, and you do spend money on that. It's not something that is a very tiny necessity for you. It's something that you put at the front of your desires. Yeah, that's why I think it's really important to keep into consideration which things are part of it and which things are not really hobbie but enter that very selective club, so to speak.

Right, where it becomes part of your identity. And I guess, like, your social milieu or your social status as well.

I don't think that is going away because you have, so first of all, I don't think it's a surprise to anybody to see that across almost all the world, fertility rates are down a lot. Not everyone cares less about it, and they care more about their individual interests. Not saying that's good or bad or whatever, it's just what's happening. So things that define yourself individually take more importance in terms of expenditure.

The other revolutionary change is the internet because all of a sudden it becomes really easy to find other people who share a niche interest. And actually, even like 1 percent out of 7 billion people is a lot of people, right?

Yes, no, I think that's maybe I didn't express it correctly, but that's what I meant by having things more out in the open and more visible. So yeah, it absolutely benefits.

And then, with YouTube and Instagram, you have the rise of influencers who make a business out of promoting this and showcasing the lifestyle and the identity.

That's absolutely true. But in Games Workshop's case, it's very interesting because most of the influencer community is actually critical and negative towards Games Workshop. They always have been. My impression is that they actually serve a tiny slice of the fan base. Maybe we can talk about it later.

I've yet to meet a single fan who's happy. There's always something more that GW could be doing. But anyway, that's a good place to ask you: what is Games Workshop and what does it do before we get ahead of ourselves?

Basically, Games Workshop is a miniature company. They invented a whole lore of stories around it to sell those miniatures. Or that's what it was in the beginning, at least. We are talking about the 80s. Basically, they started out as a re-exporter of Dungeons and Dragons stuff. Then they expanded into other games and eventually made their own range of miniatures and their own war game. Actually, it was very successful in the UK, and I think part of the reason was that it was very punk, really at the beginning. Now it has changed a lot. So, it was very referential, but also in a very irreverent way. Think about, for example, in fantasy, you have the Skaven, right? And it's only giant rats. And the weapons are, among other things, giant hamster wheels. It's seriously like everything in that that comes from that time is very strange and very over the top.

It's like J. R. Tolkien if J. R. Tolkien took magic mushrooms, right?

Yes, which I suspect was the case actually. But no, the thing is, it aligned very well with the zeitgeist of the time in the UK. And it expanded fairly well. Then they went through a process of professionalization and eventually in the early nineties, I think it was '91, but I don't remember off the top of my head right now, they went through a management buyout process. Where Tom Kirby came to own a big chunk of the company and also be the CEO of it. He started a very profitable process of internationalization. That was something that you see really the best description you can find of it is reading things about franchise expansion in "One Up on Wall Street," in the Peter Lynch book. It's exactly the same, it's land and expand. Yeah, it's basically just looking for more geographic places where they don't have a presence established with a store. The store serves as both a selling place and as marketing, and little by little they want to expand the hobby both in the islands and outside of it.

That lasted until the late '90s, early 2000s, which is when all along this, the punk spirit of Games Workshop was a bit tempered down and made to appeal to a more general public, which also slowly benefited them. I do miss the old stuff at times, but this one appears a lot more and it was made a bit less tongue in cheek and a bit more serious in terms of the fluff and so on. The big change was in the early 2000s with the Lord of the Rings license, really. That's when Games Workshop grew a lot in a couple of years because they got the license from New Line to produce the official licensed minis for the films. I think it never outsold Warhammer 40k, but it definitely outsold Fantasy fairly quickly, especially in the US and the UK. They invested a lot in expanding the stores, production capacity, warehousing, and all that.

After the three films were released, one year later, sales plummeted, which is supposed to be expected, right? The thing is, as we all know, operating leverage cuts both ways. That left Games Workshop with a bit of a problem. Actually, I think they even had losses one year, which you'd say that's not so bad, right? But with a company with an asset base as flimsy as Games Workshop and with all the retail stores depending on them and so on, that was actually tough. Keep in mind that we are talking about a product that has around high 60s to low 70 percent gross margin. So for that kind of business to enter into a loss period, something is going really wrong. Actually, they had to go into essentially a cost control mode for a while, and they actually made some very interesting changes in the business in terms of efficiency.

Let's put some dates around us. Tom Kirby leads the management buyout in 1991. He inherits this business, which has created a fantasy world and a sci-fi world as a means of selling pewter miniatures at a very high margin. He expands it internationally in the nineties.

Yeah, Lord of the Rings, early two thousands. And they have this hip product, but it's very faddish, and the fad fades very quickly.

When you start talking about cost cutting, that's around like 2010. Am I right?

I think it starts in 2007, 2008, something like that. I don't have the exact year off the top of my head, but yeah, that's the period.

They do cost cutting very strongly for a couple of years. Basically, they completely changed their retail model. So it was smaller stores with a smaller range to carry also less inventory, and to be able to manage the stores with only one person. That changed a lot the fixed cost of the retail area. They also optimized a lot in terms of manufacturing and in terms of the costs they had at the central stage. They also narrowed down the range, but not in terms of miniatures, really. But for example, almost all translations were removed; the translated range was almost obliterated, which yes, cuts down on sales a bit, but they decided that the weight and cost was far more important at that stage.

And to be fair, they managed to stabilize the company.

That also came with other stuff, and I don't think it's directly related to the cost cutting because this is something Games Workshop also did in the early 2000s before the cost cutting, which was a lot of hostility towards fans. A lot of hostility in the sense that, for example, I remember that you had to be careful with what you shared in message boards because you could lead to the message boards being taken down. Yeah, careful. Okay, you can describe the rules of it, but you cannot post a page or things like that. Don't get me wrong. There were instances where things were taken down completely. Not many, but enough to create a sense of hostility towards the community as a whole. Yeah. And also in the spirit of cost control and margin expansion, they also expanded prices a lot without actually doing much in terms of quality and so on.

Actually, this was also the time when this actually was a bit later, but it was also the time when they introduced a new line of miniatures. They went into plastic in the late nineties. And for the most part, they actually did a good job of it. But there was a period after, I think it was after the cost-cutting period, when they introduced something they called fine cast, and that didn't go down very well because the quality was not very good. And it was also at the time, and we are talking now for chronological reference about the period between 2007 and 2015-16. Okay.

That's the period where we see that the company is stable in terms of it's not going to die, it's profitable and so on, but we see a lot of stagnation. There is no growth. There is a lot of hostility towards fans. There are good margins, but they come out of expanding price and so on, not of getting new customers. So the situation, my impression is that in that situation, the company was milking what they had, but also slowly dying.

So what changed?

What changed was, first, Kirby left the company finally.

This is the CEO who led the management buyout in the early nineties.

Yes. He retained the stake for a few years, longer after that. I think he finally sold out in 2019 or 2018. I don't recall, but when Kirby left, that had a lot of effects. Basically, what changed the most was the policy towards the client base. And first, they changed completely the approach in terms of no more takedowns of content, no more things like that. Although there have been instances a bit later. And also, they started putting a bit more gear into having a discounted range for inventory that does not move much. Honestly, those are really tiny things. In the sense that, okay, so you launch Warhammer community, you start organizing tournaments again, and you stop trying to take down things in fan sites. And that's basically it initially.

Then there have been more things. They have been working also with many people and influencers. I don't know if I would call them influencers. Basically, you have fan networks in every place. For example, in Spain, I think the most well-known ones are "Lamont de Oros," which is a podcast about it. Basically, they used to only work with people in the UK, maybe in the US, but they have been expanding that.

They have also been expanding the Warhammer Alliance program. But I think the main improvement they have had after that, because okay, so I think those early changes were very important to get the goodwill of the fans back and to get some people back in the hobby. And after that, they started improving on the launch cycle, on the quality of the miniatures. And that was possible because they had massively expanded the size of the studio in the 2015, 2014, 2016 era. Okay. They, I think it was still a small studio, but it grew like I have the numbers right here and basically in the talent development, the staff grew by more than 50 percent between 2015 and 2017, and it was already growing before. So that allowed them to have a faster release cycle. And keep in mind that those are relatively small costs. I think it's 3-4 percent of the design itself, of the total costs of Games Workshop now. I could check it, but it might be 5, but it's not bigger than that. So allowing them to do that and to increase the sales through that is much more valuable than the cost it has.

And then, we have other things, for example, all the specialist games, like Necromunda and so on, all the Kill Team stuff, which I think you are a player, no? But basically, they were trying to have Warhammer, both 40K and The Old Fantasy, were very long games. We're talking about three hours at a minimum. And, with both the box sets with Warhammer Quest and also games like Kill Team or Warhammer Underworlds, they actually tried to shorten it and to have skirmish games, really. And I think they have been pretty successful in getting some people back into a hobby that really don't have time for the long version of it.

Yeah, basically, first they got the goodwill of the fans back, then they worked on expanding and on selling more.

There's a subtle point that you make that I'd love to explore, which is there was a change in philosophy between making miniatures and making games. Again, I think what you're trying to say is that when you focus on making games, you keep these communities, these worlds, quite energetic and vibrant, and you give players a reason to be excited. Do you want to just elaborate on that a bit? Cause I think it's quite important.

Actually, yes. And I think this is a big change from the Kirby era as well. And actually it's reflected in the annual reports, even annual reports, sorry. When you read Kirby's annual reports, they are always prefaced by saying that what they make are miniatures and miniatures for hobbyists, that there is no reference to play at all, like whatsoever. And now they are talking about games, really, and about communities and so on. They are not talking about someone painting in their basement. Basically, the whole approach about what their famous base was changed completely. They started focusing both on the and again, as I was saying, they started organizing tournaments again because until the cost-cutting era, they had been organizing tournaments or supporting local organizers across the world, really. And then they mostly stopped doing it. And that was a huge hit for the fanbase, really.

Look, if you know the Warhammer competitive scene, these are the players that spend more money, really. Yeah, because they are trying to follow the meta constantly. And basically they were cutting them off. It was a very weird approach. They decided to focus on the core competencies during the cost-cutting era. And I think they chose wrong.

But in the after that period, they really focused on making games again. And to be fair, there were also a couple of IP deals that helped a lot. And I'm talking about the Vermintide and the Warhammer Total War deals. And I think those were signed before Kirby left, given the timing of the releases. Although that was never publicly clarified to my knowledge, but they were signed before that, I think, and the impact they had on the approach that Games Workshop takes to IP, it was, I think, massive. But maybe we can talk about that more in detail later because I don't think they had a lot of impact in cross-selling, really.

There was one final, let's say, alienation point in which was the... okay. As you mentioned before, they have a game for fantasy and a science fiction universe, right? And they killed the fantasy one. That was in, I think, 2014, something like that. Don't get me wrong, they didn't just suddenly kill it. They were starving people of content for a long while. There were a couple of years before that where the releases were really not common at all. And then they did all the End Times event and they released Age of Sigmar. Don't get me wrong, I think Age of Sigmar is a fine choice as a game, and it is selling really right now. But as you can understand, many fans were annoyed that Games Workshop just decided to discontinue the game they were playing at.

As you described earlier, if you're building your identity around something like that, you would be pretty upset. But I think it's important.

We're going to talk about I guess some of the discussions or like the debates around the company today, but I think it's really important to put those debates into context because you have to really understand. The history of the company and what it's been through in order to have a good reference for today. Because so many of the people who are leading the company today went through their formative years during that period, and I think they've learned a lot of lessons from that, including possibly like some conservatism, but we'll get back to that in a second.

So I think, one way we could just wrap that up is if you could give us a quick summary, like, where do you see the company today? We've talked about where it's come from the changes it's undergone, but where's GW and where's the hobby today?

First of all, I think Warhammer has, well, Games Workshop has the strongest community at any point in their history. It's both much more widespread and much more communicated than at any other point. I see numbers of tournaments going up. I see a lot of content online, not directly produced by Games Workshop, although they control the conversation pretty well. I think on that regard, Games Workshop is fine. I also see a company that seems to, in the last couple of years, I don't know if they have a very clear direction because it seems at times that they don't know if they want to be fully released power or they are doing more box sets or what are they doing exactly. But they are still selling well, their core range and expanding the community part and overall, I think that the hobby is in a very good state because of all the... a small additions on the small games that we were talking about before, but yeah, I don't know if I think the expansion of it is slightly more uncertain.

That's a good lead-off then into talking about the present and the future. What do you mean when you say that the expansion is uncertain?

It doesn't seem clear to me that they know the way they want to go. My impression is that they are trying to be more release-oriented. And this is what we see, for example, with the biweekly pre-orders and all the... it seems like their machine is oriented towards, "Okay, every two weeks we release something. And that is what we want to sell. The core range is a bit secondary." That's my impression of late, at least, that they are moving more into a release-based cycle.

Do you know the company Supreme?

Yes.

So I sometimes feel like Games Workshop's model is a little bit like Supreme's in the sense that they generate a lot of hype for drops and the whole machine is geared around generating that hype and selling a short range, limited edition product which by definition is scarce and unavailable for most people. Is that what you mean by a release-oriented business?

Exactly. Yeah, it's exactly what I meant. The thing is, I honestly don't think their sales are completely geared towards that, but I think a bigger and bigger chunk of it. It's geared towards it. But at the same time, they keep adding things to what they consider their core catalog, right? It's not like everything they release has a limited shelf life. So that complexifies a lot. The management of their inventory, their production, everything, because those are things that they commit to having in stock.

And I think this is the truly unique feature of Games Workshop because the way they monetize their intellectual property is through the sale of physical miniatures. So it's not Netflix, where you can add a subscriber at virtually zero marginal cost or where you can have one more person playing Fortnite at virtually zero marginal cost. As you just mentioned like the complexity, as you add more games and more players and broaden the range and have a release cycle with a very rapid cadence, like the complexity just gets kind of exponential, doesn't it?

If they were purely doing a release-based thing with a relatively narrow core range, it wouldn't necessarily be a problem. The thing is that it doesn't seem clear what they want to do as a company, and they are doing both very rapid releases and some of them are of limited production, but also many of those releases are just incorporated into the core range and the core range expands.

Why don't you define first what you mean by core range? Just so we're all on the same page.

So what I mean by the core range is things that are going to be available out of the first production run because they usually tell you if it's something that is going to be limited or that it's something that is going to have several runs if it turns out...

A core range might be like the basic army books that you need to get started playing the game.

Yeah, although the books, for example, it's something they contract out so that's less of a concern but for example, I don't know, a core Tactical squad of Marines, right box. That's part of the core range, but only a tiny part of it. So the thing is, basically when you have an ever-expanding core range, you have a bit of a problem in terms of SKUs, in terms of managing the production brands for it. And I think that's what... why we are seeing the margins drop a bit. And also not the only reason there is also other things that we will talk about later in terms of design, in terms of logistical challenges they have had, but I definitely think that's 1 of the reasons why it's difficult to see the old margins that we were just to see.

It's like diseconomies of scale as the company gets bigger, it becomes more complex, which becomes more expensive to service and operate.

Don't get me wrong. I still think that they are at a level where actually expanding the sales makes sense. If you look at the returns on capital and the margins they have. Yes. It complexifies the company. It drops the margin a bit, but it is within an acceptable range. I don't think they are. If you look at their margins historically they reached a maximum in I think 2019. 2020 when the previous Warhammer 40K edition release. Indomitus, I think. And yeah, they reached their top in margin there, but that was not sustainable margins. Okay. They were at the limit of what they could do. Right now, my impression is that we are seeing both that they have a lot more slack in the organization, which actually is as it should be, because at the time it was running like crazy. And also that. These effects of the range have augmented the dropping margin, so to speak, but we can go into more details later. If you think that's interesting.

Help me understand, like one of the recurring complaints you see people making is that they can't buy what they want to buy. So whether that's the core range. As you just said if you want to start a space Marines army, you need to have some intercessors or something. Or these limited edition drops. Why is that? Is it because Games Workshop can't manufacture enough? Like it doesn't have capacity because they recently said, actually they do have enough capacity or is this like just the way the business is designed to be?

You have to differentiate the complaints that you were getting in 21 and the complaints you're getting now. Okay. Because in 2020, 21 actually 2019 as well, there was a true limitation of manufacturing capacity. They just couldn't stock enough. They were just unable to do it, but they increased the capacity of the manufacturing capacity a lot since then. My estimations, it's not like ever they ever talk clearly about this, honestly, but my estimation is that they have more than double from what I see in the addition to fix assets and so on.

But the thing is right now, when you see those complaints, it's mostly about limited editions. Or about the releases running out of a stock, but that the stock is going to be replenished later. Okay, so they are going to be able to buy it in some months time. How long is those months? Maybe it's 6 and maybe by then you have no interest anymore. Which is a bit dangerous. I think they have been a bit too conservative in estimating the size of the stock for many releases. I think the Old World was an example for a recent one, but there have been more Legiones Imperialis. There have been I mean if you go a bit farther back, you have Cursed City, the initial release of it. It's, there have been several and actually no this. The last pre-order set that they had, which has I don't remember, but it, was it a Deathwing box, something like that? Yeah. Yes. They, it also ran out of stock fairly quickly.

So I think they have been very conservative. I think they are a bit scared of having, so in not last year, but in 20, the 2022 financial year. Okay. For our listeners games, workshop ends, their financial year in May. Which is a bit strange, so when we are talking about 2022, we refer to 20 21, 20 22, really. But in, in that year they had a lot of, a lot of inventory depreciation because they couldn't sell what they had produced now, my impression is that, and maybe it's wrong, but my impression is that was very related to the ability to get the inventory to the right places more than. lack of demand of inventory. Yeah. And I think to try to avoid this, they have been very conservative. And now that the logistical constraints are not as tight, or at least that's my impression, they should be, they start to be able to sell more, but I don't know if they have. Keep in mind that the releases have like a six month lack period preparation period. Yeah. So I don't know how, when they will be able to fully adapt to that.

I get the idea of limited editions being something that you buy almost impulsively because, if you don't buy it now, you won't get to buy it again later. That makes sense. As I said, it's what Supreme does very successfully, not to mention many other luxury brands. But the core range, like it's weird when stuff like that goes out of stock because that makes it hard for people to play. It makes it hard to get into the hobby. And I wonder we talked about the difficult years. Is this a hangover of that where they are just afraid of getting too big, too quickly or carrying too much of the wrong kind of inventory. And so have a bias towards being conservative with their forecasts.

It's possible, but I'm not sure about that. Games Workshop has always been a relatively conservatively run company. They always have kept and they keep cash reserve to not have to depend on any bank loans and everything. Actually, they, I think they took a loan back in 2007, I think, but I think that's about it. And yes, they have been always very conservative. That's not necessarily a result of the troubles the early 2000s, but it's in their DNA and honestly, I think that's okay for the most part, but I think what they are looking more at is capital efficiency. Yeah. And I think, I honestly think that with the return on capital they have, they shouldn't like, I would love to see them invest more.

Yeah. And maybe invest more in inventory, just like holding stock to be ready to sell it to channel partners or players when they need it.

That one is a trickier proposition, because actually they have been increasing the amount of stock that they carry. I don't have the numbers right in front of me, but if you compare to 2018 or something like that, they actually have increased a lot in proportion to the sales the days of the stock that they have increased. So I think to a point they have been doing it. What I don't think they are being, they haven't prepared to do is to risk. A bit of overproduction because even in 2022, when they have these problems, I don't think they were demand problems. I think they were logistical problems. So I think they should risk it because releases are running out in 15 minutes. I think there is a lot more demand than they are covering. And I think it sounds to try to get a lot of capital efficiency out of the company in the wrong places.

You've mentioned twice the difficulty of getting the right product to the right people at the right place at the right time. Why don't we talk a little bit about the channel strategies? So GW has three channels, right? They have their own online, they have their own retail, and then they have third party Trade channels. If you were starting from a blank piece of paper, do you think you would design it that way?

Oh, boy, that is a good one. And I don't think so. I think the retail part is something. It's actually difficult because the retail part is mostly marketing really. Yeah, nowadays, because what the retail part does is they organize activities, they have playing tables and so on. They help introduce new people into the hobby kits and so on. It's actually difficult to get rid of them. But the thing is, there are local stores that do that as well. So maybe it would be easier to support those better. I don't know. It's an effective system, really. But it's it got there by accident because the initial strategy was not for the stores to actually be the expansion point, but nowadays they are mostly marketing gimmicks. They still make money, but much, much less than the other two channels. What I wouldn't do is focus on direct sell online mostly.

Oh, that's controversial. So you wouldn't support more direct online sales.

Maybe a bit more, but no, I wouldn't like them to shift the channel completely. Because I think the physical side of it is really important to keep the number of people interested in the hobby estate. So I think it would be falling into the same mistakes that Kirby did back in the day, which is focusing on increasing margins now, rather than keeping the community around the games in a healthy state.

So they could increase their gross margin by selling more direct. But actually what you're saying is that's an investment into customer acquisition, customer retention, and all of these things. Got it. Yeah. I think I agree with you there. Actually, I think I agree with you there, but wouldn't it be easier to forecast if you move to a pre-sales model where people, I don't know, put down a deposit, then you'd know exactly how much to produce and how much to sell.

Yes. But if you do it at the expense of increasing churn, is it worth it? Mostly because, and this is something we still have to talk about, the IP. But I think for Games Workshop, it should be far more important right now to keep both the hobby about around miniatures alive and the presence of the IP alive, rather than squeezing the last drops of margin out of the miniatures business.

Yeah, I think you're right, actually. And we touched on margins a little bit here, but I think in some ways we're a little bit wrong to anchor on 2021 because that first year of COVID was so extraordinary.

To be fair, Games Workshop was one of the very few companies that renounced most of those subsidies almost immediately. So the effect of that is relatively subdued. Yeah. But basically, they were running the operation ragged. It was 24/7 shifts. It was insane. They didn't have the capacity to run that operation, really. It was something didn't fall apart.

Okay. That, that's a fair point too. But I think your wider point is these people are stewards here of, uh, the brand, the culture, the community, and they're thinking longer term than just, how can I increase my operating margin by 5 percentage points next year?

That's my impression. And that's what I hope it's true. But because I think it's the correct choice, actually. And I think it also aligns with what they have been doing with the community. But that's my impression. Obviously, I don't have any direct contact with them.

Yeah, that's also something they're quite famous for. That's a good place to ask about something that you raised when we were talking before, which is release fatigue. So one of Kevin Rountree's, mantras, for the company is more Warhammer more often. But maybe there's. Too much Warhammer too often. Do you want to talk a little bit about release fatigue?

I think those are a bit two different concepts. At least the way I understand them. I think there is the risk of release fatigue, of course. I think they are releasing a lot for AOS and for 40K. And I can't keep up with the releases and I am only just checking on them. I'm not even trying to buy. So for someone that is actively in the hobby, it must be exhausting. So yes, I think that's a risk and I don't think like maybe they can keep running it at this pace, but I don't think it can increase the pace for each of the games. That's why I think the old world can be a bit of an outlet for that, to enable them to increase the frequency of releases overall without adding to the fatigue, because square base is a different public, really. Just to clarify for our listeners the old world and the fantasy game is run as regiments and all that. And the other is more of individual models. It's not exactly like that, but just to, it's basically different sets of players. They have overlap, but not as much as AOS and 40K or, you know, uh, 40K with Horus Heresy and so on. But yeah, I think that's the release fatigue is a real risk, but the more Warhammer, more often part, I think is best framed less in terms of frequency of release and more in terms of the support to the tournament community and so on. I think my impression is that's what they mean, that it's more engagement at the, on a day-to-day basis. But I might be wrong. Yeah. That's how I always understood the more Warhammer more often.

I see. Okay. And another thing that's been difficult for the company is its IT system. You mentioned you're in software development. Obviously, you have no special insights into Games Workshop, but tell us why has Kevin Roundtree been writing about upgrading the enterprise resource planning system every year since he became CEO? And I think 2016.

We're talking about eight years and running. It's incredible. Honestly, I don't know what happened there. It's certainly not the norm. Look, these migrations are always complex. It's normal to be talking about two or three years. Eight. I don't think I've ever seen anything like this. They have had time to change systems where they want to migrate to. If they started the immigration in 2016, the new system is already old. One thing I suspect might be a factor is that Games Workshop is famously cheap, you know, its core roles. Okay. It's the same with the studio roles and so on. And with the studio roles, it doesn't matter as much because they don't have much competition, but in the IT market in the last few years. Okay. Look getting a well-paying role was fairly easy and Games Workshop was, for example, I checked on those jobs because I'm in the sector, obviously, and they were below the pay range I could get in Spain. No forget about the UK. They rely on their capacity to recruit because it's a hobby for many people and maybe in some areas they shouldn't as much. But yeah, honestly, that's the only thing I have in my mind into why it has taken so much. I'm sure there were many problems and many systems to integrate, but eight years is insane.

Can you, like, I don't know, in one or two sentences, explain to us why ERP is so critical and how that could help with the challenge of getting the right products to the right place at the right time?

Basically, it's the system where you control all your needs. Or I'm not in the ERP side of things, mostly, so I'm not an expert on the systems, but it's where you record and store all the data, all the trends that you have on terms of resources that you're going to need on each place. If you don't have that in place, it's very difficult to manage a release cycle like this.

All right, we're gonna switch gears and talk about the IP for a second because until now we've been talking about the primary monetization method, which is through the sale of plastic miniatures. But Games Workshop has also done a number of licensing deals throughout its history. It's also not done a number of licensing deals throughout its history like I think you told me there was a rumor that Actually, the game Warcraft was supposed to be based on the old world lore, right? But it never happened. Why don't you tell us a little bit about Games Workshop and its IP and its efforts at licensing?

So first of all, it's not a rumor. It was confirmed by people at Blizzard. There were licensing talks about it. The thing is, Games Workshop was not very flexible apparently. And to be honest, I think that it not happening was lucky for everyone involved. And I know that might be a bit controversial, but if you look at the games where Games Workshop was involved at the time, they weren't particularly successful. And I think part of it was because of the creative control they sought to exercise at every turn. For example, if you look at Shadow of the Horned Rat, which released almost at the same time as Warcraft, and it's also a strategy game, but it didn't do particularly well. I think actually that Warcraft's popularity helped Warhammer a bit, even if there are a few things that are a straight-out copy, which they are. I think it actually helped to popularize Warhammer, especially in English-speaking countries because of the aesthetics of the orcs, for example. So I think it was positive for everyone involved really.

But going into what Games Workshop does nowadays with royalties and income and license income. So right now they are earning between 25 and 30 million pounds depending on the year, which is a fair bit of money, taking into account it goes almost straight to the profit line. But they don't have a lot of expenses on it. I think they spend a couple million a year on the licensing area. So we are talking about 20 something million of pre-tax profits right out of it. And it mostly comes from video games nowadays, really. There are other deals. You have the deal with JoyToy on action figures and the deal with McFarlane more recently, you have the deal with Wizards of the Coast for the magic set, but mostly it comes from video games and mostly from the Warhammer Total War series. And then you have Dark Tide, Rogue Trader, Inquisitor.

There are a bunch of them, but one thing I've seen of late is that they don't tie the creators that much as they used to. They seem to be giving them a bit more leeway and that has been very successful. If you look at the last few years, you would have expected IP to grow in importance between Games Workshop and they haven't. My impression is that it is a matter of lead times that they have signed relatively important deals of late. But in the same way that the deals with Sega for Warhammer Total War, and I don't remember the other studio, Fatshark, was it? For Vermintide? They were signed before Kirby left, and they actually gave more of the return going into 2020. I think we won't see the results of the current licensing strategy until starting in the coming years, and honestly, I think right now we are seeing part of it because we are seeing.

Okay, so if you think about the video games that have been released, other than Vermintide and Total War, the lineup until this year has been fairly weak. There was the Inquisitor Martyr game, which did okay. There was the Battlefield Gothic game, which did okay-ish, but mostly they were not good things. And now you're seeing Darktide, you're seeing the Rogue Trader RPG. And we are still missing the Nexon releases and some other stuff. I think we are starting to see the deals that were signed a few years ago when the 40K IP in particular, but also fantasy, started to gain more mainstream popularity thanks to the previous cycle of games. I think that's why we haven't seen it rise in importance, but I don't know, I might be wrong.

Okay. It works with a lag. And I guess that's especially true for the biggest deal, which is the Amazon one currently under negotiation, I believe but which could still take another three or four years to actually get into production.

I hope it gets into production before. But in, in release, I think it's going to be very hard to see results before at least a couple or three years. These things really take a massive amount of time. And Games Workshop is famously zealous anyway about it.

I mentioned at the beginning that one of the reasons I most like to read your sub-stack, Dungeon Investing, is because of how you reference IP gaming content companies from around the world. So I'd just like to ask, how does Games Workshop compare to Toei Animation, which is probably the marquee IP company in Japan? You see a One Piece live-action film on Netflix or Slam Dunk came out in cinemas last year as well. So it just feels like they're getting their IP into more places and they have bigger budgets behind production and exploitation of that IP. So what is there that we can learn from them and how have they been able to take something as niche as One Piece and successfully take that worldwide? What could GW learn from them?

Actually, I don't think GW should learn from Toei. I think GW should learn from Shueisha. And what I mean by that is they should partner with companies like Toei. Because you can't, like Toei Animation has been doing this and occupying the same place in the IP exploitation chain since, what was it, the forties, fifties. You cannot replicate that expertise in short order, but what you can do is partner with them. And honestly, I find it puzzling that we don't have any animation other than what we see in Warhammer Plus, which honestly is very clunky and they seem to be using it to learn a bit, but other than that, we haven't had anything. I think the reason for it is that Games Workshop is very reticent to put money into audiovisual content directly and the way animation studies usually work is that you partner with them and you put up part of the money. That has been very successful for many companies.

The reason I think Games Workshop is a bit reluctant to do that is that the success for the companies that do it has usually come from cross-selling. For example, Saint Seiya or Digimon and so on are successful for Bandai because they can sell other stuff linked to it, not because of the royalties of the IP. And Games Workshop knows, because of the Lord of the Rings deal, that if cross-selling works at all, it's faddish. So I think that's why they are a bit reluctant, but at the same time, I think we have seen a shift in the IP value chain where animation or the story as such is more and more what has value rather than the adjacent stuff to it, because you can sell video games based on it. Basically. And also streaming has grown a lot in the last few years, which translates into, okay, so paid content is more and more of a thing. And that means that IP is more and more valuable. And I don't think Games Workshop has come on board that.

Can you elaborate a bit like what would be a sign that they're coming on board or what haven't they done that you think?

No, I think they are slowly coming to it. And I think the Amazon deal is a sign of it. And also the tests on Warhammer Plus are a sign of it, but they have been slow in coming to it because they have always thought, my impression, they have always thought of content as a way of selling miniatures rather than as a good into itself. And with the result of the previous video game cycle, they are seeing more and more that there is real potential there. And that's what they are trying now but I think that's why we haven't seen the IP income ramp up yet because like they didn't believe in it until relatively recently.

If they think that IP is a way to sell miniatures, why is Warhammer Plus closed? How come that isn't like open to everybody and pumped out on YouTube for billions of people to watch?

Oh God, I love that you asked me this question. First of all, I think that content should be more open. I think they are right now seeing it as a way to experiment in the space without spending money. And personally, I think that they are doing it in the wrong way because Warhammer Plus is never going to be an engine for making money for the company. Like they might break even on it, like they are doing a bit, and they might make a bit of money out of it. But look, you're never going to make millions of people pay for that subscription service. No, they just don't have the ability to produce enough content. And also, it's around one single IP. And that's always going to be. So my impression is that, okay, it's cool that you want to keep it for yourself, but at least release the old stuff into the wild, what you released a couple of years ago in the paid service. I hope that they eventually do it because they did a very risky move in my view, which was removing all the fan animations from YouTube.

And the quality of the animations was. Yeah. Some of them were so good, right?

Yeah, we all have seen Astartes. But the thing is, they made a very risky move there. Basically, you are removing free content from the wild, and you are not replacing it with anything. So I think that's a bit of a risky move and I hope they correct course because I don't think they should be trying to keep Warhammer animations as exclusive content. They should try to make money out of it indirectly, and they are never going to have a big enough fan base to do it on their own.

Why are they making their own animations as opposed to licensing the IP to someone who can dedicate expertise and resources to it? Okay. Nintendo didn't produce their own film, right? They went to, not Pixar, the other one.

I don't know. I honestly, my impression is that they are using Warhammer Plus to learn about the space because otherwise, I cannot make sense of it really because as a marketing ploy, it makes no sense. And as an exploiting IP ploy, also, it doesn't make sense because you are never going to have a big enough fan base that is willing to pay only for that. It has two potential uses that are really the same, which are an introduction to the space because you can use those animations as a proof of concept to bring on board other studios and so on, or you can use it to understand how the production system works and so on and try to go at it solo, which I hope they don't do. Because again, they don't have the expertise, but yeah. So in summary, I think it should be open. At least the things that have been released a while ago.

You wrote in one of your pieces that Games Workshop is its own TAM, its own total addressable market. Can you just help us understand what you mean by that?

Yeah, sure. So basically, the hobby market, it's like Games Workshop's fraction of it. It's so big. And by the hobby market, I mean, the market of specialized board games, miniatures, and so on. Games Workshop's fraction of it is so big that basically the market grows or shrinks according to how Games Workshop. If they are able to expand their presence, that is what grows the total addressable market. It's not that they can take a share of anyone else. That's why I think it's so important what they are doing with the Warhammer Alliance system internationally, which is the program to bring schools into have actions in schools and so on, which until very recently, it was restricted to the UK. And then they added the U.S. and now it's almost everywhere. But as of last year or two years ago, nothing, which is also, by the way, these are the things I meant when I talk about investing through the profit and loss account. Is that they are growing the share they dedicate to Warhammer Alliance. They are increasing the size of the studio and that has been visible, especially this last half and the production side as well.

It sounds like what you're saying as well is there's no reason why they cannot keep growing the market given all the levers that they have to pull and the number of people they can draw into the hobby who aren't here yet.

Yes, when you compare the penetration of the hobby in the UK with other countries, no country is even at 20 percent of what the UK is.

Do you mean like on a per capita basis or how are you measuring that?

Basically, measuring sales per inhabitant. I think I have a few more details on it in the post on Dungeon Investing, but basically in the UK, they sell as much as in all continental Europe and half of what they sell in the US. Don't get me wrong, the UK economy is big, but not that big. Honestly, I don't think other countries will reach the level it is at in the UK. First of all, and don't get me wrong, I'm correcting those numbers to account for the share of retail. Because for listeners, Games Workshop also has a lot more retail in the UK than anywhere else. And that means both in retail and in online direct sales, they book the revenue at the price to the customer. But in trade sales, they book the revenue without the margin the retailer gets, which is significant. I think it can be up to 30 percent or something like that, given the discounts at times.

That effect is relevant, but even if you correct for that, the penetration in the UK is massive compared to anywhere else. If they get to that level in the US and in continental Europe, not to speak about Asia, it could still more than quadruple its revenues easily. Now, I don't think that will happen overnight, but I think they are taking the correct steps to do it with increasing the translated range, the Warhammer Alliance program, and so on. And I think that's what they are focusing on right now. I think they have been somewhat successful because if you check growth, obviously, by the way, something that has surprised me a bit is that UK growth seems to keep pace with continental Europe and so on. It's a... I don't know when they can stop expanding in the UK. Which surprises me as much as you.

Yeah, it does. But on the other hand, the UK has a very active gaming community and the hobby has deep roots there. So why shouldn't it keep growing?

Because again, they sell 97 million pounds in this year, which is almost... the UK has 60 million inhabitants right now. Something like that.

Something like that.

Yeah, it's a lot.

It's sometimes easy to lose sight of what they're doing as shareholders because we always want them to be doing more and better, but actually, I think the current management, they've gotten more right than they've gotten wrong, certainly. And the things they've gotten right, they've gotten very right.

And also, not only that, but the things that they have gotten right in my impression, many of them won't bear fruit for a while. Because all the Warhammer Alliance expansion, which honestly, I think plays a big part in why the UK has so many people into Warhammer. All that has a cost and goes through the PNL, but we won't see results for four or five years. And that's all right. At least for me. But it's a cost, and you see it. You see the dropping margins, that they are spending more in core costs. For example, this half, the core cost increased like 30 percent. It was most of the problems with margin that we were seeing.

Shocking to me that Leviathan was a massive launch. It did, I forget, like 30, 40 percent better than Indomitus, but with a decrease in operating margins from 45 to 30, they actually didn't make any more money. Like the operating profit was flat.

Yes, but with Indomitus, they were over-earning, we know that. They were over-earning. It's to their credit that they were able to run the production lines efficiently enough to get that out of the gates with what they had at the time. I think they were using close to 100 percent of the manufacturing capacity all the time, which is not sustainable at all. You have breakdowns, you have maintenance, they were not doing almost any of that. So yeah, that Indomitus, we are never going to see those margins, I think. Maybe after IP in a while, but those margins were insanely high. And I think, I honestly think that we are going to see some operating leverage from here because they have increased core costs a lot, but I think that is the top of the range we can see.

Do you think GW could ever become a majority IP company?

Yes, I honestly think so. Like it has a very rich universe and it's a matter of starting to get it out there, and I think it's wide enough that it can cover a lot of different interests. The thing is, again, they have seen the IP as a marketing gimmick for a long time and it takes a lot of time to shift those gears. I think they have started. I think what we are seeing with the Amazon deal and with the more leeway for the video game publishers points in that direction. But I don't know. It will take time.

Do you think the culture of GW is too insular?

Yes, the short answer is yes, but it's how they hire, so all their top management comes from the inside from being many years at the company. And then middle management also comes from inside. And then the people they hire in the lower ranks are usually people who already love the product because otherwise, they wouldn't be working for the company since they are paid really badly. Check the average salaries for people in the design studio.

Oh, I heard um, there was one influencer, a guy called Juan Hidalgo, who does painting. And he interviewed for a job at GW and he got an offer. And I think he said the starting salary was about GBP 32,000.

And for that, you have to be one of the main miniature painters in the world.

This guy has a hundred thousand plus followers on YouTube. He probably makes more in a month.

That's what they offer. And look, in software engineering, it follows the same pattern in all their jobs, it follows the same pattern. So look, they are very cost-conscious, so to speak, maybe too much in some areas. And that has some drawbacks like, for example, the insularity, because no one would work there that wouldn't already be part of the culture.

We talked about them being like stewards of the IP and the lore. And I think everything's a trade-off. There's never a right answer and a wrong answer. It's all about trade-offs. So they've obviously skewed towards hiring for culture, hiring for fit, as opposed to hiring for expertise. And maybe this is just the result of that. If you read interviews with some of the guys who've been there for 30 years, the arc of their career is never linear, or it's never devoted to just one thing. They tend to move around quite a lot within the company, actually. Probably that has pros and cons. Like maybe the pro is that it helps to disseminate the culture, but maybe the con is you don't have one guy who's like the best IP negotiator in Britain, kind of thing, or the best person at implementing ERP systems.

Now, look, fully agree. And honestly, if that's been the trade-off, I'm on board with it. Yeah. But you have to be aware that the trade-off is there. They are never going to be like... I prefer this company to a very aggressive on IP US company that is... no, I would prefer that by far. I think it's always going to give us more sustainable results, even if they are less optimal at times. But yeah, you have to be aware that this is a trade-off.

And the direct sales is a sticking point, yes.

Now, on that part, I think they are absolutely right. I wouldn't like them to expand on retail and more than necessary and no physical presence for me is a big no. Because the trade partners they essentially work like Games Workshop stores, but they don't have to spend that much on it.

The spending comes through the lower margin. So you could have a 90 percent gross margin if you sold everything direct, but then your operating costs would probably be higher because you'd have to run these big stores to build.

Exactly. So all in all, I think they are better off running it with trade partners. That's my impression. And the only alternative to have better margins and no trade partners would be to increase direct selling online, and that, in the long run, I think, would be detrimental. But that's my impression.

I think you get commoditized quite quickly. Because actually, like, all the stuff is the moat, right?

I think the community aspect of it is also a big reason why things like 3D printing have not taken off that much because technically it's possible, no matter how much they say, "Oh, it's better. The ones that we do are much better," and so on. It's true, but not that much.

All right. Jesús, you've been so generous with your time. I think we will wrap up there. If people want to find out more about what you've been writing and your thoughts, they can go to the Dungeon Investing substack. But otherwise, what is the best way for people to get in touch with you if they want to learn more or to contact you?

So they can find me on what used to be called Twitter, with my old handle, Trampas Al Poker. And yeah, those are the two inlets for anything that you want to send my way.

Okay. Thank you again for your time. It's been such a pleasure. Appreciate it.

Thank you. Graham, it's been a pleasure too.