Cause of Dungeon and Dragon Cancellations

One of the "core" assumptions of this post (profitability of the magazines) has been refuted by someone who would know.
I'm still a bit of a doubting Thomas regarding the degree of profitabilty. But I'll look at that some other time (maybe). The core piece of information is that the decision was apparently unilateral.
I'll leave the rest of the original post up (below) in the spirit of preservation.

Cause of Dungeon and Dragon Cancellations
Subtitle: Wizards was probably as surprised as everyone else.
The question, for me at least, is what caused the sudden cancellation of Dragon and Dungeon? The outcome seems disadvantageous to one decision maker (Paizo) and neutral-to-mildly-bad to another (Wizards). When two actors get together to make a decision that seems sub-optimal for both of them it’s basically time to deploy (a simple version of) game theory.
I think it’s relatively easy to demonstrate that the cancellation of Dungeon and Dragon was the only possible outcome given the payoffs for Paizo and Wizards. I think it’s also fairly apparent that Wizards wasn’t the main driver of this truck.

Background
It’s the end of the golden age (as I’ve called it in the past) for DnD. Dungeon, which had been a resource non-parallel for DMs for the past 5+ years is a solid magazine with a small but loyal readership.Dragon, however has (probably) been performing poorly. I’ll talk a little bit about the causes of dragon’s weak sales but the signs are all there. I stopped reading it regularly a long time ago, but still evaluate it most months and from both the aggressive “promoing” (free sorc on black dragon) and tie-in’s with both Dungeon’s Adventure Path and the “we guarantee Eberron and FR content in every issue” stuff recently I think wasn’t the only one. Likewise the proliferation of regular advertorials for gaming product suggests a “revenue squeeze”.

The coming battle for the only remaining market: Adventures
I think the crux of the issue was that the quality of Dungeon had been so high, and the price so reasonable that it’s basically completely starved the adventure market. When Wizards was into producing non-adventures this was good for them. But the oversupply of crunch has harmed their ability to sell books by adding a couple of extra feats (I also see this as the root of the problems with Dragon). So they shifted to adventures… Paizo’s success with the compilation of their first adventure project suggested that the sector had legs and the area was free of serious competition due to the dungeon effect.

Once they got in (probably after some market research) and started going with their Expedition to… series wizard’s realized they did have a competitor they needed to worry about. Paizo itself. Paizo's adventure path's when collected, were a serious threat... already paid for they could be priced reasonably cheaply and tie up a whole gaming group for a year.
So Wizards blocks them from releasing a second Adventure Path.


The Negotiations
WotC and Paizo get together and negotiate (prompted by the upcoming expiration of their contract). They're in very different postions.

Wizard’s Ace(s)
The key thing to understand is that Wizards’ holds all the cards and this is why they lose. The rules of the game mean that they have to play their cards to their maximum strength, and Paizo knows it. So Paizo picks from the best of a bad lot and go with an option that Wizards probably didn't anticipate.
Wizards' already have a contract that allows them to control Paizo’s publishing schedule (see: preventing them from releasing an Age of Worms collected hardcover, etc.), control the future publishing of anything that's already appeared in Dungeon or Dragon (see: no new releases of any Dungeon related material after the Paizo license expires), 100% control of all the IP (Greyhawk, FR, etc) and so forth.
Dragon and Dungeon continue to be barely profit making (or possibly unprofitable in Dragon’s case) but they aren’t on wizards balance sheet so that’s not an issue from wizard's standpoint; they may be making marketing payouts for specific features and providing free articles by staff or freelancers but those are one time marketing expenses (and small ones). Wizards’ products get fawned over in advertorials in Dragon, support materials for that appease various segments of their fan base are produced at minimal cost.
They’d like things to continue on ‘as-is’.

Paizo’s Position
Obliviously Paizo’s in an awkward spot; they aren't consistently profitable.
Dragon isn’t doing well. Dungeon is, but it’s only targeted at DMs (a much smaller base). They’ve been working on diversifying but, outside of Dungeon and Dragon they’re just another OGL publisher/online vendor. The Adventure Paths hardbacks are their ticket to “real” publisher status (and since they’re already paid for with a built in audience, very attractive on a risk basis).

The love their roll as “gatekeeper” to DnD; they have an excellent position with greater access to the casual DnD player than anybody (and I mean anybody, they probably have 10 times more exposure than Green Ronin or Necromancer). But they’re constrained by agreements with Wizards, almost certainly extremely restrictive ones. And they’re trapped on a very rapidly moving hamster wheel: they need people to buy their mags, every month.

The more IP they produce for wizards the worse their position gets. If they were still an internal unit and a cool adventure they produced using Aboleth glyphs drove up sales of the (excellent) Lords of Madness book they could fight for revenue…. Not an option as a 3rd party publisher. They’re fulfilling the core function of the mags in the DnD brand (drive sales, keep excitement up) but they don’t see the profit. Heck, they may be paying wizards for the privilege.

And that guy who spends 30+ dollars on the Lords of Madness may pass on the next issue of Dragon. And the hamster wheel is spinning faster and faster but each day they get a little bit less cheese.(Do hampster’s each cheese? I dunno. It’s a metaphor…)

The Meeting
So Paizo comes in, Wizards says “let’s keep this going as is” (maybe they bring up an internet component maybe they don’t) and Paizo says “No.”
Wizards: You’re nothing really without us, you’re only what you are because we make you official and let you play in our sandbox
Paizo: We need more freedom, we need to produce more supplements
Wizards: No can do, it messes up the schedule having too many “official” adventures out. Stick to the mags
Paizo: It’s not enough, revenue is too choppy, we’re trying to branch out; we need more freedom to build on what we've got
Wizards: Dragon and Dungeon are too important to our brand to let you have that sort of freedom; let’s talk again once you’ve helped us launch this internet thing next year. For now, stick to the mags and whatever OGL stuff you’ve got going on the side.

And Paizo jumps.

Wizards is shocked.
Paizo was supposed to be a magazine publisher… Why won’t they stick to publishing magazines?
They love Dragon/Dungeon. How could they do something that would destroy Dragon/Dungeon?
Eric Mona loves Greyhawk…. He’d never accept the loss of the ability to do Greyhawk stuff…

For Wizards it’s probably a bit like watching your friend blow of his own leg with a shotgun and then insist he’s going to “walk home by himself”.

Fallout

Wizard's Delimma
Internally nobody’s really happy with things, but nobody’s in a position to get a buy in from Hasbro to re-negotiate with Paizo in a more fluid fashion. What would they do anyway? Bring Paizo back in from the cold? That would wreck budgets and introduce massive personnel issues. They’d probably have to promise to kill Dragon and/or Dungeon to get it approved anyway.

Wizards doesn’t have a decent press response because they don’t have decent market response. [I give them points for not trying to come up with anything either. Product talks and hype walks. Controling the hype here was the best option.]

How bad does Paizo's position look?
Horrible.

• They’re producing roughly the same number of pages per month (mags are about half ads and they dropped one mag and all the adds) [this is good.]
• They have basic infrastructure for distribution [also good.]
• They have no official content
• They don’t even have their own OGL content.
• They’re at a bizarre price point. 20 bucks is about the price that people stop impulse buying and begin to start counting pages (“I’ll buy that next month, if nothing better comes out” or “for 5 or 10 bucks I could have a hardback WotC adventure” ).
• They have no branding (Pathfinder? ugh terrible movie), and no IP.

Who’re you going to convert?

• People who bought Dungeon and Dragon every month. It’s theoretically the same cost for these people, and the same number of pages... but those people were probably “variety people”, who liked lots of different things, or completeists (possibly the dreaded “official content only” completists). Having one book about giants-in-cold-mountains isn’t going to appeal.
• Adventure Path followers are, of course, your best buddies. But 240 bucks a year is, well, it’s a grotesque price to pay. If you’re counting by “campaign” it’s still more than triple the going rate.
• Nobody else (?)

How Bad is Paizo's position really?

Sometimes you have to think backwards to get where you need to be… so think about it like this. What series of supplements

• Comes out monthly?
• Is based in a single campaign setting?
• Has a theme for each monthly product?
  

Yeah, that's right. Paizo is gunning for Eberron.

If you’ve been coughing out 35 bucks a month for some hacked together retread with a few extra dollops of cream by Keith Baker or some other talented freelancer (and you’re getting a bit sick of it) Paizo’s in a position to offer you a better deal.

A new campaign setting, produced by seasoned pros, with first rate Wayne Reynolds artwork, delivered right to your door, slavishly tended by a company that is swearing to do nothing but carefully nurture the IP you’re investing emotionally in, and… it’ll be ~30% cheaper to boot.

That rushing sound you hear is Eric Mona turning every single browie-point he’s ever received for “keeping the Greyhawk flame alive”.

You’re probably saying “Varisia”? I can’t even pronounce it… to which I say…

“I couldn’t even pronounce Eberron when it started…”