Earlier this week, we reported on some serious financial issues going on over at Curt Schilling’s 38 Studios. As more information becomes available, though, one thing is becoming clear. There is something we’re not being told.
38 Studios has defaulted on the a $1.125 million loan guarantee payment that was due on May 1 to the State of Rhode Island. Joystiq has reported on the terms of the deal, which put a $75 million loan guarantee in Schilling’s hands in exchange for moving the studio to Rhode Island, creating 450 jobs and collateral in the form of the studio’s existing and in-production intellectual properties. You read that correctly. If 38 Studios doesn’t clear up this little missed payment matter, Kingdoms of Amalur: Reckoning, the studio’s in-progress Amalur MMO and anything else belongs to the state.
While a sell-off of these properties would recuperate some of the $50 million already paid to the studio, it’s unlikely that they will net that much. The state will likely move for expediency, taking a lower than market value payment to close the matter quickly. Regardless, it’s a black eye for the industry.
Reports indicate that only 288 of the 450 promised jobs have been created in Providence, though under the terms of the agreement, if all else was moving smoothly, this wouldn’t necessarily be a matter for concern. The terms indicate that the 450 goal must be met within three years, and IBM was hired as an independent party to monitor progress. The acquisition of Big Huge Games by 38 Studios has been dragged into this because 91 employees are still located in Baltimore.
The big question that lingers is, “what happened to the money?”
Breaking the numbers down, the studio not only blew through the almost $50 million it’s drawn down from the loan to date, but also any revenues from the sales of Kingdoms of Amalur: Reckoning. As a rough calculation, we know that, according to March NPDs, the game had sold 410,000 units in the US alone. Since NPD doesn’t track digital sales, this is an extremely conservative estimate. At a rough calculation, this is a gross amount of $24,600,000. We don’t know how much that translates to, though, because there was another party involved in bringing the game to market.
Kingdoms of Amalur: Reckoning was published through the EA Partners program. This is, essentially, a suite of services offered to third-party, independent developers in need of expertise in marketing and distribution. It’s unclear what he terms of that arrangement were, but it means that a cut of the game’s sales (whether a flat rate or a percentage) go to EA and never make it all the way to Providence. We’ve reached out to EA for more information on the arrangement with 38 Studios, but they declined to disclose details. They did let us know that each partnership is tailored to the needs of the developer.
Additionally, as we know from our conversation with Danny Bilson of THQ, the MMO landscape is becoming perilous. 38 always envisioned Amalur as an MMO setting and was reportedly still at work making that happen. However, the startup costs, not to mention the ongoing maintenance, server needs and marketing to make an MMO happen require up-front purchases of core game content along with the subscription model. As we’ve seen, pay-to-play MMOs are becoming a rare breed, with free-to-play becoming the prevailing theme. The transition from subscription to free is also a more frequent occurrence, with Lord of the Rings Online, Champions Online and DC Universe Online just a few that have survived and flourished after the switch.
The Rhode Island Economic Development Corporation held an emergency meeting yesterday to determine the fate of 38 Studios. At Schilling’s request, the meeting was held in private, which should infuriate the taxpayers in the state. The loan to the studio was a matter of heated debate, with bondholders and residents on the hook should the developer go belly up. These people have a right to know what is going on, and the media outside the closed-door gathering wasn’t terribly kind about telling the former pitcher just that. No decision was made at the meeting and no comment has been issued by 38 Studios. We’ve reached out to them directly, but at the time of publishing have not received a reply.
Frankly, Rhode Island made a poor, politically motivated decision that evidences a naiveté about the video game industry for all the EDC’s purported research. The loan deal seems to have been more about the crowing of elected officials than safeguarding taxpayers. 38 Studios had never released a game prior to Kingdoms of Amalur: Reckoning, and with no track record of success, “risky” doesn’t even begin to cover the situation. Worse, with a planned follow up slated to take on World of Warcraft, Star Wars: The Old Republic and TERA, success beyond the first game was anything but certain. Unfortunately, it looks like the residents of Rhode Island will be the ones to suffer.
As some measure of satisfaction, cries for the ouster of Rhode Island EDC chief Keith Stokes have been heard. Stokes, who lead the charge for the 38 Studios loan, will be replaced. That doesn’t fix the situation, which is likely to get worse when 38 Studios receives its nearly $400,000 tax bill from the City of Providence this summer, but it might hold back the (legitimately) angry mobs for a short time while officials figure out how to dig themselves out of the money pit.
We’re watching this story closely and will report back as more details emerge.
Update (May 17, 2012 @ 4:13 PDT) – It seems that 38 Studios had to ask for a check in the amount of the outstanding $1.125 million back from the Rhode Island Economic Development Corporation. According to WPRI and other Rhode Island news outlets, the Governor’s office disclosed the situation to the public. Additionally, a spokeswomen from the Economic Development Corporation disclosed that the 38 Studios is unable to make its payroll, which was due for disbursement today.