Plugging the Corporate Leak

This is not a strategy article. This is an article in economics. Specifically, this is an article about Wizards’ recent change in the price of set redemption from $5 to $25. In my opinion, this is the most significant change Wizards has made to the MODO economy in at least 5 years.

For those of you not familiar with set redemption, it is a policy of Wizards that, if you complete a virtual set of cards (e.g. Gatecrash, or Innistrad), you can exchange that virtual set for a physical set. Availability of these sets is specified by Wizards and published in a table:

As you can see, redemption guarantee and cutoff dates are batched by year, defined by core set release. Scars Block and M12 are available through 11/04/2013.

Innistrad Block and M13 are available through 11/03/2014. Return to Ravnica Block (and M14, presumably) are available through 11/02/2015. In my opinion, these are reasonable time frames. This is long enough for sets to cycle out of Standard, which is a natural line to draw. Wizards originally included this feature to boost confidence in early MODO. With pack prices the same online and in real life, players needed reassurance that they were not simply throwing away money on worthless virtual product. This was a legitimate concern of players and an effective solution by Wizards. The idea was that connecting the virtual and physical markets would prevent virtual card prices from being too low to motivate online activity. If a physical set is worth $150, and a virtual set is only worth $50, then people will buy virtual sets, redeem them, and sell them as physical sets. This causes the price of virtual sets (and individual virtual cards) to rise, in part because redemption causes virtual cards to disappear from the system, thus decreasing the virtual supply. Ideally, this causes the markets to equalize in price, although they will remain separated by the value of the effort it takes to redeem and sell sets.

This feature was originally free in the US, except for a $3-per-shipment fee. At some point in the mid 2000s, however, Wizards introduced a $5-per-set redemption fee. This caused a stir because it seemed to go against Wizards’ guarantee to uphold the value of virtual sets. A $5 fee cut directly into profits from redeeming and selling sets, thereby separating the virtual and physical prices. Imagine, for example, that set redemption cost $500. No one would redeem sets because that costs more than a physical set on the secondary market. $5 is not the same as $500, but it had an impact, if only on players’ perceptions of being treated fairly by Wizards.

Being an avid MODO limited player, I often found myself with many sets. In particular, this was fueled by my love of sealed. Until recently, the best-value MODO events were the Sealed swiss queues that occur during the two-week release period after a new set has become available online. These 4-round, 6-pack, 16-player queues cost 24 tix and pay out 13 packs for 4-0, 8 packs for 3-1, and 3 packs for 2-2. In addition, you get to open 6 packs:

The reason these queues were so profitable is that you could redeem sets. I regularly grinded these events at a rate of 8-10 queues per day, with an average return rate of around 6.5 packs per event. Assuming pack prices of 3 tix, it cost 24 – 6.5 X 3 = 4.5 tix to open 6 packs, or $27 per box. Assuming 8 queues per day, for 12 days, gives 96 queues, or 16 virtual boxes.

It is easy to see how this can turn into profit through redemption. Grinding this many queues provides as many commons and uncommons as you could ever want. Moreover, it provides a large number of rares and mythics, and often enough foils that it is fairly easy to finish a foil set. Until Wizards increased the price of set redemption from $5 to $25, this was the most effective way to pull winnings out of the system. This method turned tix into cash at a rate of about $1.15 per ticket. The alternative is to sell tix for money on paypal, which gets around $.95 per ticket.

Wizards, however, noticed the leak and decided to plug it. Their first attempt was several years ago, when they revised the structure of their Sealed swiss queues. These queues used to be even more profitable, when you could use 6 packs and 4 tix to enter the release Sealed swiss events, which at that time paid out 15 packs for 4-0, 10 packs for 3-1, and 3 packs for 2-2.

We can calculate the difference in expected value between the current and former prize structures fairly easily. Assuming all 16 players in a Sealed swiss queue play all 4 rounds, the queue will end in the following pattern: 1 4-0, 4 3-1, 6 2-2, 4 1-3, and 1 0-4. Under the old system, players paid a combined total of 16 X 6 = 96 packs (worth 288 tix) and 16 X 4 = 64 tix, or 352 tix in value. The total prize payout for the event was 15 + 4 X 10 + 6 X 3 = 73 packs, or 219 tix in value. This means players were paying, collectively, 133 tix to open 2.67 virtual boxes, which comes out to about 50 tix per box, or 1.4 tix per pack.
Under the new system, players pay 16 X 24 tix, or 384 tix. Players win a total of 13 + 4 X 8 + 6 X 3 = 63 packs, worth about 189 tix. Thus, players now pay 195 tix to open 2.67 virtual boxes, which comes out to about 73 tix per box, or 2 tix per pack. Thus, the restructuring of release Sealed swiss queues increased the cost of playing those queues by about 46%, on average.

More recently, Wizards recently eliminated the 4-pack, 3-round, 8-man Sealed swiss queues, which were widely recognized as a high-value event. These queues cost only 4 packs to enter. They paid out 5 packs for 3-0, 3 packs for 2-1, and 1 pack for 1-2. With 1 3-0, 3 2-1, 3 1-2, and 1 0-3, this meant players were paying 8 X 4 = 32 packs to win 5 + 3 X 3 + 3 X 1 = 17 packs. This means that players were paying 32 – 17 = 15 packs, or approximately 45 tix, to open 32 packs, which comes out to about 1.4 tix per pack:

They replaced these events with a 6-pack, 3-round, 8-man Sealed swiss queue that costs 6 packs and 2 tix to enter, and pays out 6 packs for 3-0, 4 packs for 2-1, and 2 packs for 1-2. Players collectively pay 160 tix to enter these events, and win 6 + 3 X 4 + 3 X 2 = 24 packs, worth about 72 tix. Thus, players pay 88 tix to open 48 packs, which comes out to about 1.8 tix per pack. This represents a 29% increase in the cost of non-release Sealed swiss queues:

These changes were damaging to MODO profitability, and made limited play less attractive, but were not nearly as damaging as the recent change in set redemption cost. By increasing the cost of set redemption from $5 to $25 per set, Wizards effectively prohibited commercial set redemption. This change applies to Gatecrash and all future sets. If you want to redeem 10 sets of Return to Ravnica, for example, you only have to pay $53 (10 sets X $5/set + $3 per shipment). If you want to redeem 10 sets of Gatecrash, however, you have to pay $253 (10 sets X $25/set + $3 per shipment). And, of course, you still have to collect the virtual sets.

It may still make sense to redeem a foil set from time to time, or perhaps to redeem a set or even a playset for personal use, but the business of set redemption as a way to pull winnings out of MODO is over. If redeeming sets added about 20% in value, and sets typically sell for $100-150, then an additional $20 fee per set means that it is no longer worth the effort to redeem sets to sell. You are better off selling tix via Paypal for $.95.

This has several consequences for MODO. With commercial redemption off the table, more cards stay in the system. This increases the supply of virtual cards, which should decrease the price of those cards. This means that all limited play is devalued. Now, the best thing to do with extra rares is sell them as quickly as possible. Moreover, this should also cause the price of packs to decrease because the price of singles plays a large role in pack prices. And when pack prices fall, constructed profitability also falls.

The effect of this change was so drastic that I lost motivation to play the release Sealed swiss queues. I used to play up to 120 per release, but for Gatecrash, it felt as though I was not profiting by playing, or was perhaps even losing money, so I stopped playing those events entirely. Card prices quickly crashed and pack prices were low. In fact, I have barely played limited since this change. Last season I was not qualified for the MOCS, and I will most likely also not be qualified this season.

It is difficult to gauge the full scope of this change’s effects. It may be that the price of tix falls as people who used to sell sets instead begin selling tix. It may be that the price of physical sets rise due to decreased supply. It may be that card prices fall so low that it again makes sense to redeem, even with the $25 fee. It is hard to predict these things without company-level data about the size of set redemptions relative to the total market. Parity between the virtual and physical markets has certainly been damaged, although the extent of that damage is unclear. The one benefit of this change is that, when card prices fall, constructed Magic becomes more accessible because decks are cheaper to build.

One effect I am sure of is that I am no longer a limited MODO grinder. Much as Wizards’ recent changes to the pro club have made it difficult to stay on the Pro Tour, their addition of the numeral 2 in their redemption fee has made profiting from limited grinding nigh impossible. Drafts are still fun from time to time, as are weekend Sealed premiers, but the drop in expected value has considerably reduced my online activity. Whichever consultant came up with the idea of plugging this leak in MODO certainly earned his or her fee.

Currently, it is difficult to profit from MODO. You essentially have to do well grinding constructed Dailies or weekend premiers, or win a big event such as a release championship, PTQ or MOCS. Alternatively, you can own a bot or speculate on card prices. Little by little, Wizards has been finding ways of making MODO more profitable for them, and they just took a large step toward that goal. I fully expect that they will enact other ways to “optimize” their system. Unfortunately, this comes at the expense of players’ profitability and satisfaction.

 
  1. This tax is stupid because the resulting deadweight loss will decrease the quantity demanded.

    It will probably increase WotC’s profit in the short run, but a decrease in quantity demanded in the short run will translate to people abandoning the game in the long run, which is very bad for Wizards.

    Increasing your profit per sale at the cost of decreasing total sales seems generally like a long-term mistake if you are making a game, because the popularity of a game snowballs — the more people play the game, the more popular it will become in the future, because it gets exposure and legitimacy. This is a move in the opposite direction.

  2. Yeah, it’s recent. The online release began on Feb. 11th. It usually takes about a month for sets to become redeemable, so this change didn’t take effect until early March. That means it has been in place for about a month, which is just enough time to see some early effects of the policy.

  3. Hope more people do exactly what you do. Play events a lot less. If people just crumble and keep playing and paying wizards will see no reason to change things back. I recently heard they are going to try to do some sort of a digital tie in with paper magic, hopefully it is decent. Their monopoly is just so frustrating to deal with sometimes.

  4. I loved this article, and would definately appreciate you writing about more finance articles in MODO/MTGO.

    I really think Wizards should’ve waited a little bit to get to the $25 mark, like next set being 10 and the set after 15, but this change was so drastic that you can see results even a month after, when most consequences are seen 3 months after at the earliest.

    I completely agree with Random Scrub, there will be more profit for Wizards, but many players will stop playing and the bad advertising from those same players is going to prevent new players from getting into MTGO.

  5. This was the last straw for me. The thing for me has always been that once you factor in employee salary and overhead, everything else for Wizards is pure profit. MTGO cards and packs are digital objects. They aren’t printing anything, there’s no shipping involved, the money has always flowed towards Washington.

    I’m a small time grinder because employment has been scarce these past few years. I also prefer the draft experience, which is a shot in the wallet. I had just discovered the joys of four pack sealed (The games were dull and bomb dependent, but at least the EV was okay) when they shut that down. I was considering redeeming my first set when they implemented the change your article refers to. Between the recent changes and the new client, I am ready to say goodbye to my online collection forever without regrets.

    Well, a few regrets. When I first tried MTGO, I was dumbfounded at how low the quality of their software was. I was stunned that people couldn’t draft casually, for free. I was disgusted by the vile personalities I encountered in Limited and the obnoxiously poor quality of the marketplace. Yet my love of the game itself sucked me in, caused me to spend hundreds if not thousands on fake cards.

    Magic the Gathering Online is a gambling site that charges its users for their decks. It is gambling for children, pariahs and fans of fantasy. Magic the Gathering Online has not enriched my life, it has worsened my gambling problem. The fact that it is a collectible card game with dragons and wizards makes it hard for us to admit we have a problem and seek help. Today I am uninstalling the software and never looking back. Farewell, sweet mythics.

  6. It is refreshing to see an article in this vein where the author has a grasp of economics and ev calculations, so keep up the good work. That having been said, two issues:

    “I regularly grinded these events at a rate of 8-10 queues per day, with an average return rate of around 6.5 packs per event.” I believe this claim entails an average match win % of about 77.5, which is a tough pill to swallow.

    “Whichever consultant came up with the idea of plugging this leak in MODO certainly earned his or her fee.” I think this is misleading. It is not as if +ev modo players are like winning black jack players and wizards is the house. Wizards must pay some theoretically fixed rate to maintain Magic Online. Printing digital objects to pay out tournament winners costs them essentially nothing.* Winning modo players are supported by money other modo players put into the system. Of course, increasing the cost of redemption will make them more money as long as the move doesn’t backfire and reduce sales, but there was never a “leak”.

    *The precise cost of printing a digital card IF it is redeemable is (odds card is redeemed) * ((cost to print/ship)-(fees)). This is a very small number, if it is even positive.

  7. Sounds like good news for people like me who don’t want spend a few hundred tix on a set to play standard. Maybe now the card prices will come down enough that this massive barrier to entry will stop punishing poor people who want to play Magic.

    Silver lining and all that…

  8. @Mathisje: it could definitely be considered a leak to let players go infinite too easily. You are forgetting the “cost” of players stopping buying packs. Imagine the sealed queues paid out a hundred packs. That would cost Wizards more in lost sales than in card redemptions.

  9. I too have played a lot less. Booster pack values have fallen a lot and I just don’t have the will to spend much time playing any more.
    I think that what someone at wizards may have failed to recognize is that the vast majority of players don’t actually spend $800 on their $800 deck. Everyone who has a budget learns after a year or two playing magic that if they want to keep up with the hobby, they need to learn to make smart trades and a lot of competitive players learn to pool and borrow cards.
    Grinding high value queues and events is the MODO and redeeming and selling sets is an extension of this wisdom most players gain.
    If there isn’t a way to make my tickets work a little harder, I am just not going to play.

  10. @mathisje

    Having an average return rate of 6.5 packs doesn’t require a win rate of 77.5 Imagine that you 4-0 and then 0-4. You have played 2 events and won 13 packs. Thus you have averaged 6.5 packs with a win rate of only 50%, which is the average win rate for players overall.

    More likely, however, is that a good player will 3-1 or 2-2 most of the time and will sometimes 4-0. Suppose you play 4 events and finish 3-1, 3-1, 3-1, and 2-2. That is an average of 6.75 packs won per event, and even that is only a 68.75% win rate. During some releases I averaged over 7 packs per event.

    As to your other comments, creating virtual cards does cost wizards something. They have to get the artwork in the system and make sure the cards are all programmed correctly, which includes working out bugs. But even if we assume that costs them nothing, it does cost them to print and ship physical sets. That was wizards’ original excuse for adding a $5 per set fee.

  11. @Fishy

    You bring up a good point, but increasing the EV from the player’s perspective won’t necessarily lower sales. IMHO wizards would be better off embracing winners and using them as a carrot to drive up sales.

    @dustini

    Yeah, I goofed on the math. FWIW, to average 6.5 packs would require about 66% while averaging 7 packs would require 69%. Your examples don’t account for probability distributions, so I’m not sure how useful they are…

    “Creating virtual cards does cost wizards something. They have to get the artwork in the system and make sure the cards are all programmed correctly, which includes working out bugs.”

    Sure, but this is a fixed cost, it is not calculated for each digital object.

  12. You guys do understand that wizards objective is to make a fun game that provides a good experience for the player right?

    This is not poker, EV is not something they should consider. How many times do you consider the EV of playing some random game in your Xbox?

    Back when I played magic was simply a game, nowadays everyone seems to think that Magic is this gold mine where everyone is entitled to make money out of it. This is a hobby, treat it as it.

  13. EV is what we expect to gain or lose from an activity. It can be positive or negative and applies to all manner of activities. So, for example, if Wizards creates an event which costs 10 tix and pays out 2 packs to everyone, the EV is 2 packs – 10 tix + the value of fun. If packs are 3 each, that means the EV is -4 tix + the value of fun.

  14. @OldSchoolMagic It’s true that for the vast majority of players, Magic is a -EV game, and you’re kidding yourself if you’re playing it for a profit. (And even if you have figured out how to turn it for a profit, the profit is likely to be so miniscule that if you really cared about making money you’d do something else.) However, EV is important to consider because for anyone with any kind of applicable budget, your EV dictates how many games of Magic you’ll be able to play per dollar spent. (E.g. If I draft and use my packs won to do more drafts, then the more prize packs I win, the less I’ll have to pay per draft, even though I’m probably losing money in any case.) XBox games are typically different because it’s a fixed cost to buy the game, after which no further transactions occur.

  15. As someone who just recently re-joined MTGO (I had left 5 years ago – or so) I actually found that I could afford to get back into the game at a much cheaper level than previously.

    The fact that the Gatecrash cards are cheaper is a positive for all the constructed players, as well as the casual players who dont play in tournaments, and just push $ into the system, such as myself. – I play the pre-release queues, and then pick up the cards I want to play with from the secondary market. Thus generating a large amount of $ for wizards, without looking to get any “expected value” except for the enjoyment of playing the game.

    There are lots of players like myself, who play and pay $ for the enjoyment of the game, and not as a means to earn money – If this change is affecting the markets as you suggest, then it is actually in favor of players who are looking to play the game itself, and not earn a living off playing a card game.

    (P.S. we are also the type of players who love to play the “cube draft”, and enjoy it)

  16. The real issue here is monetary growth (tickets flooding the system) and card base growth. Right now, limited queues produce more cards and sap tickets out of the system via the 2 ticket fee.

    This creates significant downward pressure on card prices, since fewer tickets are chasing after more cards. This is especially true in the short run, in the standard singles market.

    A more complex model would also take into account “obsolescence;” namely, cards that rotate out of standard and aren’t not used in other formats. These cards essentially leave the card base but the tickets used to buy them remain in the system. In theory, without a way to allow tickets to safely flow out of the system, prices for standard cards would move up and up as the tickets from the last cycle stick around to bid up prices.

    Since it would be insanity for Wizards to limit the number of tickets players can buy, its main instrument of monetary policy are the prices it charges to play in limited queues, constructed queues, and set redemptions. These help set the “siphoning rate” of tickets out the system. If these fees did not exist, card prices would skyrocket for all formats as the system was flooded with tickets. The value of the ticket itself would eventually collapse as well as frustrated players left MODO and dumped their tickets on ebay.

    Cube draft is also an excellent way for wizards to siphon off tickets to keep the singles market from overheating. It charges a fee in tickets which shrinks the monetary base and creates no new cards. If cube were always available however, the permanent siphon might cause card prices to move down.

    Check out my blog for economic news and analysis.

    fx-fusion.blogsopt.com

  17. I just abandoned magic online due to this increase, I can no longer play the game in order to redeem sets with this increase. It’s cheaper to order cards from suppliers.

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