5/18/12

38 Studios Sinkerball

Like the weather, the top news events change rapidly here in Rhode Island. Our events weather picture has been relentlessly stormy of late, unfortunately, with our state being pummeled by a succession of unfolding crises: municipal financial meltdowns, the Institute for International Sport scandal, and now 38 Studios. The hits just keep coming.

As this column goes to press the situation at 38 Studios in Providence, which employs about 200 bright young video game wizards, is in financial trouble, having missed its first payback payment to the state a week of so ago. Keith Stokes, the head of the RI Economic Development Corporation, is out of a job and the EDC, Governor Chafee’s office, and the General Assembly are wrestling with a very tough question: assist 38 Studios financially (and perhaps “throw good money after bad,” as the Governor has said) or cast it adrift to sink or swim on its own. What makes the situation especially dicey is that should 38 Studios go under, all of us will be on the hook for slightly over $100 million.

The sweetheart deal with 38 Studios, pushed through by the Carcieri Administration and the EDC during the Governor’s last year in office, was fully reported back then, as was the high stakes, hit or miss nature of the recreational video game industry. Essentially, RI backed 38 Studios as a venture capital company might, offering $75 million in upfront, start-up money, secured through EDC issued bonds, that had the state’s taxpayers liable should the company fail. As is front and center in everyone’s awareness now, should 38 Studios fail the state will have a $102 million dollar “moral obligation” to pay the loan back.

We also learned at the time that bigger, more established video gaming companies have come and gone, with millions of invested dollars lost in the gamble. New games have to be instant and enduring winners; fickle, never satisfied gamers (mostly male teens) quickly turn away from games that don’t hold their interest. Questions were also raised about the business acumen and experience of Curt Schilling, a future Hall of Fame pitcher who ended his career with the Red Sox in glorious fashion with a World Series ring. Despite his on-field heroics and even his many opinions on baseball matters, as voiced on sports radio (even while he was supposedly running 38 Studios), what did he know, anyway, about the video game business or starting a company from scratch?

Schilling lured state officials, starting with Governor Don Carcieri and Stokes, with the prospect of bringing jobs in a brand new industry here to RI. His own celebrity status in Red Sox Nation didn’t hurt either. Of course, state economic development officials are always attempting to bring new companies to the Ocean State, but they have a mixed history of success in doing so, after throwing tax breaks and other perks to them to get them to commit. In Schilling’s case, the risks were outsized yet the deal sailed through anyway. Don Carcieri used to work for Cookson America, a British company that bought and then sometimes sold companies around the world that didn’t prove profitable or fit into the Cookson manufacturing mix. With 38 Studios, it now can be said, the Governor got caught in the headlights. A year and half after the deal went through, 38 Studios produced its first fantasy game, and despite some initial success and positive chatter in the industry, it sales have disappointed.

Carcieri’s successor, Lincoln Chafee, inherits another bad situation but is blessed with being on the opposing side of the 38 Studios deal right from the start. Chafee, in running for Governor, questioned the deal and the role of the EDC board. He wasn’t long in office before he shuffled the board, removing those board members who lined up with Governor Carcieri in making it happen.

By the time you read this, the state may have forgiven the $1.1 million first payment that 38 Studios couldn’t make and plans may be in the works to infuse 38 Studios with more funding to see them through this rough patch. The state may not have much of a choice but to do so (after all, who really thinks the revenue surplus will be used to pay down the structural deficit the state faces year after year?). But then again, this being stormy Rhode Island, there could be a lot more to the 38 Studios story, which could morph into a series of scandalous revelations. Stay tuned.

Hey, it’s just our money, and somebody or something is always abusing it at our expense.