World Class Villains

If you want to sink US$100m into this venture, the state of Rhode Island would really like to talk to you.

38 Studios

• Game That Destroyed Them: Project Copernicus
• Studio Launch Date:  8 September 2006 (as Green Monster Games)
• Studio Closure Date: 8 June 2012 (when bankruptcy was formally announced)
• Invested In By: Founder Curt Schilling, publishing deal with EA, other investors, the selling of various things to keep cash on hand
• Estimated Money Blown: Curt Schilling invested US$50m of his own money, Rhode Island backed a US$75m loan of which US$50m was used, EA paid US$35m upfront to publish 38 Studios’ single player Kingdoms of Amalur: Reckoning title, so we’re at US$135m and that’s before the smaller investors are counted
• Cause of Death: Paying top dollar for top talent, paying top dollar for too many people to meet contractual requirements, appearance of limited cost control, management not conveying 38 Studios’ financial position to their employees, desperately hopping from one pile of cash to another while burning through it

The fall of 38 Studios is fairly fresh, so I’m sure more will come out about who knew what and when. It’s also political, given that Rhode Island is now on the hook to pay back a large loan with nothing to show for it. Then there’s also the aspect of a celebrity gamer trying to make “his” game and turn his dream into a financial reality, only to fall far, far short.

Baseball player Curt Schilling made gaming headlines when he announced the formation of Green Monster Games in 2006 – not only was he, a long-term gamer, behind the studio, but so were comics icon Todd McFarlane and fantasy author RA Salvatore. The studio, initially thought to be named after a left-field wall at Fenway Park (but Schilling (posting name: Ngruk) claimed differently), was going to be creating “industry changing games” and it soon became known that it was working on a MMO.

“Feed me, Seymour! Feed me!” – Munch, the Green Monster Games logo / mascot

Green Monster Games set up in Maynard, Massachusetts, renting 30k sq feet of office space. In 2007, Green Monster Games changed its name to 38 Studios, with “38” being Schilling’s number and the reason for the change being that somehow being named “38 Studios” tied in better to company plans to “[blur] over into various other media, like video on demand, like the online presence, like Todd [McFarlane]’s figurines, like graphical novels, and Bob [RA Salvatore]’s vignettes, and various writing releases that we can do, as well as full blown novels”.

This was going to be a ‘new’ kind of video gaming company. Brett Close, then CEO and President of 38 Studios (he resigned in late 2009) described the studios’ aim to create high quality products while also maintaining employee work-life balance:

“We’re privately funded. We’re in a spectacular position, this combination of being able to have the freedom to create the intellectual property, and choose how we want to present it. We’re not be driven by a publisher that’s breathing down your neck, and can be very careful about – back to your point – how you do this right, how to avoid crunch.”

To be honest though, it seemed to be mostly talk. Other than Schilling posting things on message boards (here as gehrig38), the search for investors and the announcement of lots of experienced MMO developer / tech sector hires, 38 Studios was relatively quiet in game terms until 2009 when they announced the purchase of Big Huge Games and the single player RPG it had been working on to release. Although work on the MMO (codenamed Project Copernicus) continued behind the scenes, 38 Studios now had Kingdoms of Amalur: Reckoning (codenamed Project Mercury for a time) to talk about. This was the first step in the “broad media” platform the company was aiming for.

In 2010, it was announced that EA would be publishing  KoA:R, a deal worth $US35m to 38 Studios. Another key event happened that year – Curt Schilling went to a fundraiser where he met Donald Carcieri, then-governor of Rhode Island. You can see a timeline here, but the end result was that the Rhode Island Economic Development Corporation (RIEDC) voted to back a US$75m loan in exchange for 38 Studios moving to Rhode Island, creating 450 local jobs (base salary $67 500 or more plus benefits to count) and paying back the loan. 38 Studios moved into a 10k sq foot office in Rhode Island around April 2011.

For 38 Studios’ first title, KoA:R sold pretty well and reviews were broadly positive. I’ve seen some articles compare its sales to Skyrim and say it underperformed, but that’s an unfair comparison.

38 Studios didn’t get all the money upfront – it was spread over time based on meeting employee targets and other milestones – but by March 2012 it had received US$50m and its studio size had grown from 94 in October 2010 to around 300 in May 2012 (excluding the 91 employees of Big Huge Games). They launched Kingdoms of Amalur: Reckoning in February 2012 to fair reviews and over 1m sales globally, but it appears this wasn’t enough to see any extra revenue returned to the studio under the publishing agreement with EA.

The first public sign of trouble emerged when 38 Studios was unable to make a US$1.125m Annual Guarantee payment in May, then descended into farce as 38 Studios tried to make payment on a later date with a cheque that bounced at first. By the end of the month the studio was closed, with everyone laid off.

Within Rhode Island, there was political fallout and those who were associated with backing the loan agreement with 38 Studios resigning from their positions. Current Rhode Island Governor Lincoln Chafee has been a public face in commenting on 38 Studios’ problems and Rhode Island’s involvement, with the result being that Schilling has repeatedly commented to the media and on Facebook that it was Chafee’s comments that drove investors away and stopped payment of tax credits that would have kept the company afloat.

There are at least three facts that point to a problem in Schilling’s perception here:

• It took less than 30 days for the company to collapse once it missed its Annual Guarantee payment, indicating the company was already on a knife-edge financially;
• That 38 Studios had already twice before come close to being unable to make its payroll, only to find last minute investors; and
• Internally the studio didn’t think Project Copernicus would be ready to ship until June 2013, so it would have required a lot more capital (especially at a cash burn rate of US$4m a month) to launch. Any investors looking at those financials would have blanched.

If you are constantly looking for investors to fund you so that you have money to pay back your other investors, you’re building something with about as much structural integrity as this. Better hope the wind never blows.

38 Studios already looked like a risky venture to many, which is why it hadn’t been able to secure a major investor / publisher to support development of Project Copernicus and why Rhode Island’s deal was so attractive to them. When a studio that has just shipped a title with solid sales can’t make a scheduled payment, it doesn’t require a Governor’s comments to raise concerns about that company’s financial state.

Internally 38 Studios appears to have been a great place to work, eliciting a lot of loyalty from its employees. Initially 38 Studios employees appear to have been told that news of their financial issues was just a media beat-up; things looked a lot less rosy when the company shut down, medical insurance abruptly ran out and some employees found they could be on the hook for second mortgages on houses they thought that 38 Studios had sold for them as part of relocation packages. Schilling later admitted to blindsiding his employees by keeping the studio’s true financial situation from them.

Things are yet to shake out for the players of 38 Studios. Subpoenas have gone out as various authorities sift through the wreckage to try to find out what happened.  Curt Schilling states he’s invested the majority of his fortune into the failed company; his once possible political career is highly unlikely to start given his proclamations on limited government while accepting taxpayer-backed financing that went bad. Former 38 Studios CEO Jen MacLean backed away from the collapse, indicating she was on maternity leave at the time.

In the end, 38 Studios collapsed with over US$150m in liabilities, mostly to Rhode Island. Rhode Island taxpayers could be on the hook for US$112 in total loan and interest payments.

RA Salvatore apparently hasn’t earned any money from his involvement with 38 Studios, with his payment deal being on the back-end of the projects; Todd McFarlane hasn’t commented on the situation. Both appear to be less the key founders of 38 Studios as initially depicted and more as on-call consultants.

The only organisation to have some silver lining is Big Huge Games, with the majority of these employees picked up by Epic Games to become (informally at least) Epic Baltimore.

So, what’s the take-out here? Obviously the market conditions that 38 Studios launched with in 2006 were very different to those it expired under in 2012, with investors no longer interested in pouring tens of millions of dollars into MMO development. But it’s not like 38 Studios should have been strapped for cash – as identified, they had at least US$135m put into the studio. Yes, they got a single player title out, but it fell a long way short of the initial “broad media” dreams, or even releasing the promised MMO, while burning a lot of cash.

Project Copernicus was meant to be the jewel in the crown of 38 Studios, and its developers loved talking about it, but after six years of development all the gaming public really saw was an unpopulated environment trailer and some concept art hurriedly released in what seemed to be an attempt to ensure the artists could put something into their portfolios for their next job.

It appears that 38 Studios spent up fairly substantially, burning cash as it went with not enough regard for how much they’d need to release and sustain the title. I’ve pointed out that agreeing to employ 450 people in Rhode Island was a massively expensive venture, so it looks like either 38 Studios failed to forward plan or did their planning on a false set of assumptions. Schilling attracts a lot of attention as the face of the company, but all of the 38 Studios management team have questions to answer about where the money went.

38 Studios: from venture to vultures in 6 years.

Some people have blamed Rhode Island for getting involved at all and I have to agree that in hindsight it is very easy to question their due diligence process. Would a successful 38 Studios started a Rhode Island video gaming industry? It’s doubtful, given the high risk of the industry and cost of establishing a studio, unless Rhode Island was going to offer those kind of ‘protected’ loans to a number of different entities.

(I don’t agree that government has no role in fostering the development of local industry – it does. But this was a case of putting all your eggs in one basket and with a much steeper downside for the people of Rhode Island than for 38 Studios even if Project Copernicus had been a smashing success.)

I can’t see that many organisations stepping up to re-start and launch Project Copernicus. Its development team is scattered, the value of the IP questionable and it is uncertain how much development time it really needs to be launch ready. There may be a few organisations interested in seeing how much they can vulture up on the cheap, but they’d be looking more at tool sets and art assets than trying to launch a MMO that doesn’t even officially have a name announced.

UPDATE 25 July 2012: Here’s a great post-mortem interview piece on 38 Studios that indicates Schilling’s force of personality and lack of understanding around business operation possibly didn’t help the studio work effectively and even assisted its downfall.