Article Submitted By: Eric Portney
Have you ever had that moment of inspiration – that Eureka! moment while you’re taking a shower where you have a crazy idea, and you wonder “Why hasn’t anyone ever thought of this before?” Sanity soon kicks in, and you dismiss the concept as junk, and try to forget about it. But over time, the idea just won’t die.
I had such an idea recently. And while I’m not at all convinced of it’s viability as a business model, I thought it would be interesting to present it to the Quiet Speculation community, to attempt to crowdsource the concept, consider its possible merits, or to pick it apart and expose its flaws. As I have no means to actually START a business like I am about to propose, this is purely an exercise for you, the reader, to weigh in on what I think would be an interesting Magic business model.
Well Eric, get on with it then. What’s this crazy idea?
Ok, ok, it’s coming! But before I lay the idea out though, consider this. Is it better to own a home or rent one? Common sense says own. But is that really true? An editorial in Wired Magazine this month argues the contrary (http://www.wired.com/magazine/2010/11/st_essay_ownership). What about other goods? Do I need to own a car when I can rent one from ZipCar? How about a lawnmower, if I only use it twice a year (ok, I *should* use a lawnmower on my lawn more often than that, but this is reality here), if I can rent one from my neighbor through http://snapgoods.com/. Why would I pay $80 for the complete Buffy the Vampire Slayer series on DVD, a show I’d probably only watch all the way through once, if I can stream it via Netflix in its entirety to my XBOX 360 or Wii for $9 a month?
Interesting questions, but how do they relate to Magic: the Gathering and Finance? It’s quite simple, really. In short, I propose the creation the Netflix of Magic cards, where customers can rent full decks or deck components for a fraction of the cost necessary to own them outright. Crazy! I know! But perhaps it’s not as far fetched as it sounds at first, and I will outline below some of the details I’ve surmised that would be necessary to establish such a business.
However, I’ll need your help. I am not a successful entrepreneur. I have never been to a local SBA meeting, never registered for a business license, and never gone through any of the trials and tribulations of running my own business before, and have no leg of authority upon which to stand. All I have is an idea – and I ask you all to participate with me by reviewing my proposed business model, and comment on what works, what’s junk, and what needs fleshed out in more detail.
Right, let’s get down to it then!
The Business Concept
The idea is to create a company, let’s call it Tier-1 Rentals, whose purpose is to provide a web site where tournament magic players could acquire the cards, or even whole decks, that they need for an upcoming event. The target audience of this is not the LSVs, Zvis or Floreses of the world, but rather the wannabe tournament player looking to emulate the successes of last week’s Pro Tour at their next Friday Night Magic, Grand Prix or other local event, but they have neither the time nor the money to afford the full cost of a high caliber deck (with a high-caliber price tag).
Tier-1 Rentals would allow players to select from a menu of recent winning Magic Tier-1 or Tier-2 decks, customize them as desired, or build a deck from scratch. Pre-defined decks, sideboards, or combo packages can be pre-configured for quick selection. Decks would arrive, pre-sleeved, along with a postage-paid return mailing envelope.
To determine the price to charge per rental, we would assess the low price value of the deck or desired cards based off of a site like magic.tcgplayer.com, www.magiccards.info and/or www.magictraders.com eBay data scrapes, calculate a 20% value price for rental, and then tack on a per deck or per set number of cards shipping/handling fee.
Rental fees would be valid for a 1 week period, and would be mailed out on Tuesdays via 2-3 day priority USPS mail, and include a pre-addressed priority envelope pouch for returns. Returns not postmarked by the following Wednesday would be assessed an additional week rental fee.
All rentals would require a credit card, and the signing of a waiver that cards would be returned in the same condition, or they would be assessed a replacement fee equal to the “High” value, plus a replacement processing fee. This replacement value would be presented to the customer upon checkout.
If the renter wished to purchase the cards, they could do so for 120% of the initially quoted per-card replacement value, with credit applied at a rate of 20% of value per week already rented. In other words, if after 2 weeks they wished to keep the cards, they could pay 80% of the value. If they rented them for 6 weeks, they could keep them for free at that point.
To help promote the business, custom sleeves with licensed or new artwork/designs could be created, with the www.tier1rentals.com address or logo imprinted across the bottom of each sleeve.
The Startup Costs
The initial investment would involve acquiring multiple sets of key cards used in the top tier decks. We would target possessing in inventory sufficient cards to be able to build 5 to 8 of each Tier-1 deck, with two backup playsets of each “fringe” card. This may mean the acquisition of 8x each Standard set, with additional playsets of particular cards in high demand.
Looking at the current eBay sales of complete, non-foil Standard sets, we get the following numbers (rounded to within $5 for simplicity):
- SOM – $150 (8x = $1200)
- M11 – $100 (8x = $800)
- ROE – $100 (8x = $800)
- WWK – $125 (8x = $1000)
- ZEN – $90 (8x = $720)
So, 8x all of the current Standard sets comes in at $4520.
Now, lets consider the cost of two supplemental 4x playsets of the Top 10 most in-demand, and expensive, cards in Standard. By acquiring these singles, we would be able to create at least four of nearly any competitive deck renters may require.
- Jace the Mind Sculptor – $70.00 (8x = $560.00)
- Koth of the Hammer – $30.00 (8x = $240.00)
- Vengevine – $32 (8x = $256.00)
- Primeval Titan – $33 (8x = $264.00)
- Venser the Sojourner – $17.00 (8x = $136.00)
- Elspeth Tirel – $17.00 (8x = $136.00)
- Mox Opal- $18.00 (8x = $144.00)
- Molten-Tail Masticore – $12.00 (8x = $96.00)
- Gideon Jura – $20.50 (8x = $164.00)
- Baneslayer Angel $15.50 (8x = $124.00)
The cards identified in this Top 10 list were derived from Chris McNutt’s QS Master Sheet 2 BLS (http://www.quietspeculation.com/2010/10/the-nutt-draw-buy-lists/), however, the price per card was acquired from the Nov. 2, 2010 average monthly eBay prices indicated on www.magictraders.com, or, for Scars card, my own sleuthing on Completed eBay sales. I rounded to the closest $0.50, for simplicity.
With this information, 8x of each high-priced, high demand single totals $1984.00. Let’s round that to an even $2,000, for use in our estimations.
In addition, custom deck sleeves and sleeve artwork would need to be commissioned, and enough sleeves would need to be ordered to accommodate 20 simultaneous deck rentals, and extras for replacement of damaged/lost sleeves (approximately 2400 sleeves would be required initially). Quick price checks on bulk sleeves put this at around $140.
Adding it all up, the estimated price for these startup costs is $6520 for cards, $140 for sleeves, $1000 for marketing (ballpark guess), $1500 for web site/shopping cart creation (another ballpark guess, although using pre-existing free CMS solutions like Drupal, and free shopping cart add-ins like Zen Cart, this may end up being cheaper, especially if we do the labor ourselves), $1,000 for legal fees/business setup fees and registration (another ballpark figure). Total initial startup estimate – just over $12,000.
Risks and Risk Mitigation
Identified risk scenarios
Item loss/degradation – How would we deal with damaged cards, lost/stolen individual cards, cards replaced with different versions, entire deck theft?
Card value fluctuations – Through the cyclic nature of Magic, cards rise and fall in value as cards are initially released, hyped, and validated through use in tournaments. During these swing periods, there may been the need to invest in additional singles for specific deck creation.
Liquidity to acquire new product – How do we ensure that we have sufficient cash available to acquire new sets as they are released, usually in recurring three month intervals?
Inventory availability – If a deck is rented, sent out on a Tuesday, used by the renter, and then returned postmarked by the following Wednesday, then that deck would be unrentable for a week-long span. For cards that have a short useful life span, only being used every other week cuts into the potential monetization of any given card.
Item loss and degradation would be mitigated through the necessity for the renter to provide a credit card to secure the rental, as well as the signing of a consent form that they understand that they will be charged the full replacement value of any lost/damaged cards. The total value of the rental would be identified for the renter at the time of check-out. However, would-be thieves can work around this, providing a credit card with just enough money to pass a balance check, or the credit card itself could be stolen.
To manage this, we could require the renter to provide their DCI number, and the DCI member name must match the name on the securing credit card, and their listed DCI member town must match the town of their credit card’s billing address. Furthermore, we could limit new customer rentals to those who have at least five DCI sanctioned events associated with their number. This would put up an additional hurdle for those who think they could rent a $300 deck for $60 and just disappear. Requiring five sanctioned events may restrict the pool of customers eligible to use our service; however, given fears over theft, it may be justified to employ this method to help ensure that the renter is legitimate. Besides, how many new, non-sanctioned players would even consider using this service? Those players are not our target clients.
Honestly, this issue is by far the largest risk, and I am keen to hear suggestions from the QS readers regarding it. Are the precautions outlined above sufficient? If not, what would you suggest to solve it? Or is this a showstopper that invalidates the entire business model. Make a note of your thoughts, and consider adding to the conversation in the Comments below.
As for card value fluctuations – this risk would be mitigated through the expected heavy rental rotation of whatever are the highest-valued cards at the present time. Higher value cards will be the most-rented cards, as we are offering a service to allow people to use these cards for a fraction of their actual value, and as such we expect these cards to reach Break Even Point quickly, and provide a strong Return on Investment over the life of the Standard tournament season.
Regardless of why cards need to be replaced (need to increase supply, replace damaged or stolen cards), we would also need to establish a quantity of cash to use for reinvestment into new products. For example, when a hard-to-acquire Legacy staple is reprinted (e.g. Chain Lightning), we would need to be able to predict whether or not this would lead to an increase in demand for Legacy decks, and be able to identify other Legacy cards to acquire that would go into these decks.
As sets rotate, perhaps 2-3 months before the normal October rotation, high value cards from the soon-to-be Extended sets can be sold off via eBay, via direct sales to store buylists, or used as trade material for current Standard high value cards.
As far as lost revenue due to inventory availability – this is tricky, and I don’t know the best answer. It’s easy to say that if a deck or a synergistic set of cards is out of stock, demand is high enough that we’re likely to rent them again as soon as they are available. But it may become necessary to change the returned postmarked dates to earlier in the week (Mondays?) and/or mail out rentals on Wednesdays or Thursdays. That way, cards can be used week after week – but processing becomes not only labor intensive, but time sensitive, as renters would likely need to have the deck in-hand by Fridays for immediate use.
Return On Investment (ROI)
To figure out our ROI, we’ll start conservatively, and assume 4 concurrent complete Tier-1 deck rentals each week.
For ease of comparison, let’s take the low Deck Price of recent high-placing decks at the Star City Games 2010 5K Standard Open in Nashville, representative of the caliber of decks we would offer:
Elf-vine: $286.06 http://magic.tcgplayer.com/db/deck.asp?deck_id=703962
Rug Ramp: $551.85 http://magic.tcgplayer.com/db/deck.asp?deck_id=703963
Eldrazi Ramp $281.99 http://magic.tcgplayer.com/db/deck.asp?deck_id=703975
Koth Red $408.06 http://magic.tcgplayer.com/db/deck.asp?deck_id=703979
Together, these decks have a low value of $1,527.96. If we rented these decks at 20%, that would be $305.60.
This would generate approximately $4,000 in revenue over a 13-week quarter (or close to $16,000 in a year). Given the estimated $12,000 to acquire sufficient cards, supplies, marketing and business setup costs, as well as an additional $800 to $1,200 every three months when a new set is released, the Break-Even Point would be about one year. After this point, surplus over revenue would be realized at a rate of around $3000 per quarter.
Of course, renters could consistently check out Pyromancer Ascension decks (Low value $72.19 – http://magic.tcgplayer.com/db/deck.asp?deck_id=703992), and tie up key cards like Scalding Tarns from use in more lucrative rentals like Ramp decks. But I’m working these numbers with the assumption that we are providing a service that grants access to more expensive decks at a discounted price, so the typical client wouldn’t be interested in decks they could otherwise purchase outright.
Hopefully though, as the business grows, we’d be able to sustain renting out more than just four decks at a time and the delta between cost and surplus over revenue will increase favorably.
Here’s an area where I need to ask the community for help. What recurring expenses am I not considering? How much needs to be set aside for taxes. How much are LLCs taxed, versus estimated taxes I would have to withhold were I simply filing as self-employed via a 1099 Form. How much would insurance cost? As the business grows, if I hired part-time or full-time help, what would be my obligations for benefits? Is this business model defined as a service or a product, and would I need to collect sales tax?
In short, what are the gotchas I am ignoring, and how would they impact the bottom line?
Projected Growth Areas
While initially only offering decks built using current Standard sets, we would increase our deck creation abilities to offer older formats, or casual formats.
Tournament support – The goal would be to be able to provide cards for any tournament sanctioned by Wizards of the Coast, or tournaments offered by Star City Games, TCGPlayer, or any other high-profile tournament (e.g. the Vintage championship annually held at GenCon).
Casual formats – Popular EDH cards can be offered, or even whole EDH decks based on a particular General. Planechase, Archenemy or Vanguard cards could be rented as well, or specialized deck sets could be created for Faction, Two-Headed Giant, Emperor, Chaos Magic games, Shards, Tribal decks, etc. Pre-constructed decks for the above formats (without the ability to customize) could also be sold directly.
Draft packs – create 24 randomized packs from any Magic base set or expansion, allowing renters to recreate block drafts from the past, or create cross-block drafting sets. The contents of the draft would be cataloged, but the cards wouldn’t be individually assessed for value, rather, a flat draft pack fee would be charged. No chase rares with a value beyond that of the rental fee would be included in the draft set. The renter would be provided with a postage-paid flat rate box to return the draft set. Draft set Rentals could have a longer time period if cards used in it are not in high-demand or part of the current Standard sets. Standard cards would only be incorporated should sufficient quantities of complete sets be available to create both draft sets and sustain the normal deck rental system simultaneously.
On-site Deck Rental – We could prepare Tier-1 decks for quick rental on-site at large tournaments. Pro players may decide to call an audible, and switch decks at the last moment. But if they do, they might not have all of the cards necessary to build the deck on-hand. Unlike dealers charging full price on the cards, renting a deck may be ideal for Pro tour players, as they may only ever want to use the cards for that tournament, and would end up selling the cards back to the vendors at the end of the event. That is a lot of hassle that could simply vanish through on-site rentals.
Now Here’s Where You Come In
Remember, the purpose of writing this article was to put forth a purely academic business model – I have no intention of creating Tier-1 Rentals or any similar company. Rather, I merely thought it was a concept worth exploring, and one which many of you may have ideas on how to improve. I would love to hear everyone else’s thoughts and opinions on this business model. Are all of the risks identified and acknowledged? What other areas of growth are there? Is this concept so much of a hassle, with too long of a break-even point before realizing any return to be worth exploring?
Please add your thoughts to the Comments below, and thanks for reading!
Eric Portney is just a humble Magic player – one with no financial expertise, business expertise, Pro Tour experience, and a substandard 1569 DCI rating after 15 years of enjoying the game. Suffice to say, he is not an expert, and humbled to present this idea to the Quiet Speculation community for open discussion. He can be reached at email@example.com, or @Lackey via Twitter.