What I Learned Watching My Own Business Being Disrupted

Video Arcade
By Sklathill on Flickr https://flic.kr/p/5krqKs

Amazon is reportedly coming to Australia. Local retailers must be sweating bullets at this stage. A good number of them are at serious risk of disappearing after Amazon shows up. I've been buying from Amazon for nearly ten years. Mostly books and DVDs, with a few other items here and there. Mostly it was due to convenience, but lately it has become a matter of speed and reliability.

Recently I bought some cables from Amazon after a local seller did nothing with the order for 6 days. Amazon had the same cables with a seller who shipped to Australia, and guaranteed delivery by Thursday with expedited shipping, and were cheaper! A friendly UPS driver handed it to me on the Friday morning. Being used to international timezones I didn't think anything of the Thursday vs Friday bit, until Amazon emailed me to let me know they are refunding the entire shipping cost because they missed their delivery estimate (the first time it has ever happened to me in 10 years).

With service like that, Amazon is going to crush retailers like the local supplier I tried to order the same cables from. They're simply going to take their customers away from them. And I feel a little bit sorry for them, because a similar thing happened to me 20 years ago. And it taught me quite a few things.

In my late teens I went into business with a family friend. The friend was the majority owner. My parents invested in the business to help me get started, with the intention that I would gradually buy out their share as I saved money and the business grew. It should have been the start of my life as a successful business owner, but we didn't count on the entire industry collapsing just a few years later.

We were in the business of coin-operated amusement machines. Basically we ran a bunch of pinball machines, driving games, shooting games, and had them out on sites such as airport lounges, video rental stores, and pool halls. This was during the peak years of NBA Jam, Mortal Kombat, and the original Daytona and Sega Rally driving games. Coming out of high school and a brief stint at university it was like a dream come true. I loved to play video games, and quickly learned how to fix the machines when they broke.

Video Arcade
Arcade Infinity, by Sklathill on Flickr

The money was good, and the machines paid for themselves fairly quickly. To put that in context, a standard video cabinet running a game like NBA Jam would cost a few thousand dollars, and earn that back within a few months. Most games were profitable over a year or two, and when new games came out you could often leverage your investment in cabinets by replacing the PCB that contained the game itself, and then changing the signs on the cabinet and the button layout if necessary, and presto you've got a brand new game for your customers with minimal outlay. Seeing school kids crowding around a Mortal Kombat 3 cabinet in a video store, pumping in $1 coins over and over again, the business seemed like an absolute winner.

There were two ways to grow an amusement machine business. You either kept finding new sites to place machines, which was a sales job that my business partner was pretty good at, but which left us spread thinner and thinner with maintenance and collection runs. Or, you open a video arcade with a few dozen machines in a single shop. We decided to keep two of the best sites running, and then invest in more games (a mix of brand new and second hand machines) to open our own arcade in a local shopping mall. It was the same mall that dozens of school kids would pour into after school to play a single Mortal Kombat or NBA Jam machine. Obviously a shop full of games would draw a similar crowd, not to mention the weekend shoppers as well.

So we opened the video arcade, and things almost immediately went badly for us.

For the couple of years before I joined the business I worked in retail. I was in the department that sold TVs, VCRs, music, and video games. During that time the original Sony Playstation arrived on the scene. It was an expensive gaming machine, and the games themselves weren't amazing once you spent more than a few minutes playing them. But Sony persisted, and the Playstation got cheaper, and more games came out. The Christmas before I quit that retail job we had a huge demand for Playstation consoles and games. They were selling out as fast as we could get stock in. This was mainly due to two factors – the price of the console had dropped to around $300, and a bunch of great games were re-released as platinum titles for around $50.

Heck it was such a great deal I even bought one myself. In hindsight, I should have seen what was about to happen, but I wasn't paying attention.

Suddenly a Playstation and a few games was an appealing option for parents to buy for their kids. Yes, it wasn't cheap, but let's put that into context. The video games in our arcade were $1-$2 per game. Some of the games were quite short too, if you weren't very good at them. It took patience to stretch your few dollars out over a half hour or more. A child could walk in with $10 and spend it in less than 10 minutes. And that was with our games tuned to be easier and more forgiving, because we were trying to attract more repeat customers. But for a parent who wants their kid to be entertained for half an hour or more while they do some shopping, seeing that kid come back empty handed 10 minutes later starts to make a Playstation and a few $50 games look a lot more appealing. One Playstation game has tens of hours of entertainment value.

Our customer traffic started going down, and so did our revenue.

Unlike other businesses, we didn't sell anything over the counter. All we did was give change. So our cash register always had the same amount of money in it. All the revenue was locked up inside the machines, and we couldn't afford the sophisticated gear to track the takings in real time. Each week we would go from machine to machine and empty the coin bin into a bag. The bags were tipped into a coin counting machine, and all the coins were bagged up in plastic bags of specific amounts. We'd count the bags, work out the total, and then walk the cash around the corner to the bank to deposit it.

Each week the takings were lower than the week before, barring a few exceptional weekends where we had a spike in customers. Ironically one of our busiest Saturdays came the day after we were robbed. I guess word got around and all the kids wanted to take a stickybeak at the place, even though there was nothing to see. I didn't mind the attention as long as they dropped a few coins in our machines while they were there.

With revenue shrinking we tried everything we could think of to stay alive. We changed the floor layout, ran letterbox drops (home internet access was still rare back then), set up a “retro corner” with cheap classic games, and brought in brand new games that we could barely afford to buy. We had some success with a setup of two gaming PCs for customers to go head to head on games like Quake, but we couldn't work out how to scale that (PCs weren't our area of expertise, and LAN gaming hadn't taken off yet). We cut our trading hours, and eventually we cut all our staff who were down to minimal hours anyway.

And one day I sat in front of my spreadsheet and looked at the latest week's revenue, looked at the bank balance, looked at the bills, and I knew it was over. I showed my business partner and said the words…

“We've run out of money. We're done.”

It was, quite frankly, depressing to watch as our video game business got killed off. It completely sucked. How did it all go so wrong? For many of the same reasons that kill businesses today.

  • We didn't look at emerging threats. I bought one of the damn things myself, but at that age wasn't savvy enough to see the risk to my own business, let alone the entire industry.
  • We assumed our revenue would just scale by the number of machines we could run. If 12 kids crammed into a little corner of a video rental store after school to play our Mortal Kombat machine, surely 120 kids would come into our store to play our 20-30 machines. Nope.
  • We didn't start small. I guess we assumed that running a few machines out at different sites was the “small” stage of the business, and we were ready to go large. Completely wrong, because we were trying a new model for us, not a scaling up of a proven model. We took the biggest space available and tried to fill it, but that left us with an “empty” feeling during the quiet times (see empty restaurant syndrome). It also exposed us to way more risk because of the investment required to fill the space with machines.
  • We hired too many staff too early. We could have survived with just the business owners and maybe one weekend casual to help on Saturdays. For months we paid staff to keep the place open when no customers were even showing up at those times. It took a year to cut the staff to the right level, but by then it was too late.
  • Our tracking data, which was limited, wasn't used to inform our decisions. I think we did track individual machine takings, but never used it to adjust floor placements. We had no visibility of our best days of the week or times of day were, other than to go by our own perception of busyness. You can't improve what you aren't measuring!
  • Our location sucked. We thought we had a great spot, out front of the shopping mall with lots of outdoor space. As it turned out, we were in a weird little black hole between the main entrances and got very little foot traffic. And all it took was a few teenagers with skateboards hanging around the outdoor area to scare off parents.
  • We didn't experiment or try to pivot. At all. The two games PCs were our only real experiment in a new line of business, and when they showed promise we just ignored them. Online gaming was about to take off, and not long after that PC LAN gaming cafes were quite popular, but they've been disrupted by cheap home broadband as well.

We should have seen it coming, but we didn't. We were so wrapped up in our business idea that we ran full speed into the collapse of the industry. Everything we tried was aimed at propping up our old way of doing things, instead of adapting to new threats by changing how we did things. It was a solid learning experience, but a painful one. I've taken those lessons into every business venture since then, not all of them successful, but none of them as significant a failure as that first business turned out to be.

I think more than a few businesses here in Australia are going to feel the same pain when Amazon arrives on our shores, especially the one that can't ship a few cables between two cities quickly. If you're reading this I hope you're not one of them.

By Paul Cunningham

Paul is a writer and entrepreneur living in Brisbane, Australia. He enjoys spending time with his family and running in the mountains. Paul was the founder of Practical 365, a former Microsoft MVP, and Pluralsight trainer. Paul is also on Twitter and Instagram.

4 comments

  1. Great read Paul!

    I do also think there is a big threat with business that are going well. i.e. Been built up to a certain level where they are humming along and the owner can step away to some degree. Those businesses, more than any, are at the biggest risk of disruption because the owner has lost the feel for ‘living on the edge’ and always needing to be one step ahead of the game. It’s something I’m super-aware of currently with both our businesses!

    1. I’ve also seen that a lot at the individual level in the IT industry. People have a tendency to cling to the comfort of what they know and ignore emerging technology. One day they find themselves years behind the industry in terms of skills and that’s not a good place to be in.

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