VALUE: After Hours (S07 E43): Inside the Warhammer Flywheel: Why Games Workshop Has a Real Moat

During their recent episode, Taylor, Carlisle, and Todd Wenning discussed Inside the Warhammer Flywheel: Why Games Workshop Has a Real Moat. Here’s an excerpt from the episode:

Todd: Sure. So, one of the companies that we have in the KNA Capital portfolio is a UK company called Games Workshop. If you’re a hobbyist, if you’ve ever followed Games Workshop, you know the Warhammer 40,000 brand. And so, they make tabletop caricature games that are pretty intense.

It’s the most similar comparison is Dungeons & Dragons. I know I might get fried by the passionate Warhammer Group for saying that there’s like Dungeons & Dragons. But it’s a similar concept, and it’s an opportunity to create these deep narratives. Games Workshop, they have a publishing arm, so they create all these stories and they release new editions and new characters. They have new scoring systems. It just keeps it really fresh and interesting.

And so, they are growing very nicely. In fact, they have an upcoming series on Amazon that’s going to be coming out about– That’s led by Henry Cavill, the actor. He’s apparently a huge Warhammer fan. So, they’re going to be creating–

Jake: Superman plays Warhammer, huh?

Todd: Exactly. Exactly. He’s a big hobbyist and big Warhammer fan. So, they’re creating all this IP around its movies. That’s really taking it, I think, to another level, which is why it’s currently in the portfolio. But it’s such a niche business, and that’s their focus. If you read the annual letters, which are great. I highly recommend reading their annual letters, you’d think with all this IP and this fantasy world, that they’d have these glossy annual reports with all these crazy characters. But it’s just–

Jake: And then, yield English.

Todd: Exactly. Exactly.

Jake: [laughs]

Todd: But it’s just like a word document. It’s great. It reminds me a lot of Berkshire in that way. The CEO Kevin Rountree just speaks very plainly, talks about what their focus is, and their goal is to create the best games possible, best characters possible and that’s it. That’s their focus. They want to continue doing that forever. His phrase is, “We’re going to keep doing this forever.”

And so, when I hear that phrase, that gets me interested. It’s like, this is something that I’m thinking about long-term beyond my tenure that tends to be sign of a good steward of capital.

Tobias: So, what is the business they own the Warhammer brand? It’s not a retail location selling games. It’s a–

Jake: Well, there are stores. I’ve seen them.

Todd: Yes. Yes. So, they do have stores around the world. There’s one in Cincinnati here where I live. There’re most major cities. Most of them are run by a hobbyist. So, they’re single person stores, and they’re open from 12:00 to 08:00, six days a week. You can–

Jake: [chuckles] It’s like Comic Book man from The Simpsons?

Todd: Very similar. I remember my daughter and my son and I walked into one and everyone’s turned and looked at us like, “Who’s coming?” [laughs]

Tobias: New blood.

Jake: You don’t belong here.

Todd: New blood.

Tobias: Strangers.

Todd: Yeah. I’m not one of you guys yet. It’s a very addictive habit. I’ve told people that I bought my first set of Warhammer characters– It’s really cool, because there are these little plastic figures that you can snip out and then you take the time to paint them. And so, there’s an IKEA effect where you’re building and creating these characters, making them come alive and they’re yours, and then you can take them and play them against your friends and you can have these really ornate landscapes where the games are happening. A friend said, “You’re crazy for starting this because it’s a really expensive habit.”

Jake: Yeah.

Todd: I think the starter kit was about $65 for just the first set of aliens and humans to fight each other. So, it’s an interesting business model. They have retail shops, and they have the business through third parties. So, if you’ve just a general hobbyist gaming store, they may have the Warhammer games there as well.

Jake: Any sense of like, what’s the annual spend on the power user?

Todd: Yeah, there’s definitely a power law in effect here. There’s the super players where the top 10% spend. It would not surprise me if it’s well into the five figures per year in terms of what the top decile of spenders do play on. There’s been a risk of 3D printing for a long time. This idea that, “Hey, we can just replicate these characters using 3D printers,” that happens a little bit around the periphery. Maybe there’s a really expensive character that someone just really wants to play with.

But generally speaking, the hobbyists, I think, understand that if they don’t give money to Games Workshop, what that’s going to do is the whole world just slowly fades. Because Games Workshop also is engaged with the publishing. They create the narratives in the world. So, if you take them away, what are you really left with? And so, there’s this really good, strong, virtuous flywheel I think that happens. That phrase gets thrown around a lot.

But when people enjoy their games, they want to play with other people, it creates community, in-person community, which is increasingly rare today. And so, I think generally speaking, people are seeking community, real physical community and this is one way to do it. Anything that can do that today and be very profitable at it, that’s a good place to be, I think.

Jake: Have they done any video games?

Todd: They do. They do license video games. So, if you have a switch, you can buy Warhammer games on there as well.

Tobias: There is a big Warhammer franchise, where the Space Marines– Is that associated with it?

Todd: Yeah, those are like the “human characters.”

Tobias: So, that is part of that universe.

Todd: Right.

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