38 Studios Is Dead; Fallout Over Company Implosion Takes On Life Of Its Own

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News Posted: Sun, May 27 2012 7:02 PM
Last week, Curt Shilling's 38 Studios fired all of its employees and closed down. The casualties included everyone at Big Huge Games, the developer responsible for Kingdoms of Amalur: Reckoning. Schilling brought his company to Rhode Island in 2010, after the state pledged a total of $75M in loan money to entice him to do so. Reports indicate that 38 Studios borrowed roughly $50M of the $75M it was allotted before failing to make a scheduled payment, failing to make payroll, and shutting down.

Absent any other factors, it'd be a sad story of how good game developers can be hammered by tough conditions. The "other factors," in this case, are considerable. For starters, there's the fact that Kingdoms of Amalur, while not a blockbuster, has sold between 1.1 and 1.2 million copies to date. According to Rhode Island governor Lincoln Chafee, Kingdoms of Amalur "failed," and sold less than half of what it needed to in order to reach the break-even point.

That fact, if true, speaks to serious problems within the company. Selling 3 million copies would've made Reckoning one of the top games of 2012, particularly for an RPG. Fallout 3 sold less than three million copies; Fallout: New Vegas hit around that mark; Oblivion sold 3.75M. Three million sales as a break-even point is terrible. It suggests that 38 Studios cost structure was absolutely hemorrhaging money, and implies there was no way the company could've possibly hoped to sustain continuing operations until its next game, Project Copernicus, would've shipped in 2013.



Now, there's evidence of even shadier behavior. When Schilling relocated his company to Rhode Island, he bought out the homes of at least some employees and moved them down to RI along with the rest of the company. The homes may not have been resold, and at some point, 38 Studios stopped paying the mortgages. At least one employee has now been contacted by the bank, asking what happened to the mortgage payments. The employee in question was told the home had been sold, and is now potentially on the hook for the unpaid mortgage. Depending on where the funds came from, 38 Studios actions may also have violated its loan agreement with Rhode Island.

Heads have already rolled on the Rhode Island side of the equation, but Schilling isn't talking to reporters and Chafee, who opposed the original loan and wasn't governor when it was signed, is still in damage control mode.

The emerging portrait of Schilling is anything but flattering. Reports regarding his actions immediately prior to the shutdown vary; Schilling has claimed to have invested over $30M into 38 Studios, while other statements indicate he yanked out $4M of his own funding that could've met payroll and sustained the company another few weeks. He ended up dealing with Rhode Island in the first place because venture capital firms were unwilling to fund such a risky venture without substantially more control than Schilling was willing to share. Asked just how much money Schilling had sunk into the venture, Chafee responded with: “what we hear is different than what we can document right now.”

38 Studios is a cautionary tale of what happens when a gaming fanatic with a giant ego and no experience in the industry decides he can do it better than anyone else and convinces someone with more money and less sense of the same thing. Schilling's tactic of recruiting big names like RA Salvatore and a well-regarded design studio (Big Huge Games) resulted in what is, by all accounts, a thoroughly decent game. Somewhere along the way, the "Throw money at it" approach went off the rails and resulted in ballooning costs that destroyed the company. All of this should've been clear to Schilling by early March, given Amalur's sales and Project Copernicus' launch date. Regardless, after years of aggressively self-promoting and trash talking about both sports and gaming, Schilling has gone silent, refusing to comment on the situation.

It'll take months for investigators to disentangle the ruins of this mess, but in the meantime, the tax payers of Rhode Island are out as much as $112 million, the 308 former employees of 38 Studios are jobless, and Curt Schilling has guaranteed himself a place in the history books -- as an object example of how not to run a company or go into business.
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Reduce the price of the game and remove the draconian DRM scheme and maybe just maybe they would sell a few million more copies.

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sackyhack replied on Mon, May 28 2012 10:09 AM

What's worse is Curt went on several campaign trails for politicians, including George Bush in 2004 and McCain in 2008 and preached about small government and how terrible government funded insurance is. But he was perfectly willing to suck up and waste taxpayer money when it helped HIM out. It's not just and "object example of how not to run a company", but it's also a textbook definition of hypocrite.

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Joel H replied on Mon, May 28 2012 11:25 AM

I've been over to one of the Amalur fansites, and it's really sad. They're hammering the governor of RI as a crook without paying attention to what was obviously an impossible cost structure.

People seem to be confusing the quality of the game or of the team with the ability of the company to continue as a going concern. BHG was, by all accounts, a good game studio. Amalur was a solid game. Copernicus had some exciting stuff. But none of that matters if you can't pay the bills.

I think I know where the 3 million figure came from, after a bit of consideration. Studio 38 had something like 330 employees. If we assume the average salary was $40K, that's over $1.2M a month just for payroll, before any of the other overhead was tacked on. 3 million copies at $15 profit per copy (that figure assumes a 50/50 split between Studio 38 and EA), is $45 million. $45 million / 18 months until Copernicus launched (from KoA's January release date) would be about $2.5M per month.

Once you factor in the cost of power, utilities, and rent, plus the loan payments and interest Studio 38 would've needed to make to RI, the three million figure doesn't seem so far off. Alternately, it's possible that Chafee was talkign about other unknown debts. Regardless, it shows the tremendous cost of trying to break into video games the professional way. Schilling's $114M earnings were chump change when measured against the cost of product development.

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rapid1 replied on Mon, May 28 2012 7:02 PM

Lol sackyhack that's par for the course now really is it not. I mean really the Republican party in general is almost a joke. Wait until the election Obama just by default probably has 25-30% of the dedicated vote right now because he supported in statement gay marriage. That means every single person of that persuasion as well as anyone who supports your right to lead your life as you see fit not as lead it how the government say's you should will vote for him for that reason alone. Then of course the Republican candidate in waiting is a member of a religion that is taught about as a cult in regards to any theological theory. So I am supposed to give the controls of the most powerful military on the planet to a deacon at a cult church, REALLY!

Either way on this one sounds like Mr. Shilling will be the next Barry Bonds/Roger Clemons for the media to focus on for the next five years after New York and then the Federal and New York State Govercrap sues him blind for a decade or so. Either way this also sounds like a very large amount of shady dealings in general.

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invasion replied on Tue, May 29 2012 4:12 AM

If you would have done a little bit of research before writing this article, you would have learned that Kingdoms of Amalur was developed with EA publisher money. Not a dime of Rhode Island tax payer's money. In fact, 38 studios never saw any of that 75 Million dollar loan that was supposed to be given to them. There is so much more to this story that is yet to be uncovered, and it is very amateurish of you to come to jump to conclusions without knowing the whole story.

I tried writing all that without calling you a *** moron, but oh well.

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@Joel H: Just FYI, I think that average salary figure is skewed way low; we're talking about super in-demand, talented engineers, artists, designers, etc. Their payroll costs were most likely much higher.

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Kingdom is not developed with EA publisher money. EA is just a publisher. They did not have any money invested in the game. 38 Studio so far already have about 50 millions of the 75 millions in pocket. You really have to do your own research before posting nonsense.

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digitaldd replied on Tue, May 29 2012 10:01 AM

Relocation expenses for 300+ employees, plus the services of R.A. Salvatore and Todd McFarlane sure cost a pretty penny. Sorry to see this turn into such a big clusterf***.

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Joel H replied on Tue, May 29 2012 10:08 AM

Invasion, RedSox:

Right. So the $50 million went where?

38 Studios "Never saw" the money? They fulfilled the loan requirements and were handed checks for just shy of $49M. If 38 Studios never saw the cash, you're implying massive fraud on the part of company executives -- fraud Schilling certainly would've been a party to. Certainly *I* make no such claims.

Let's revisit what I actually state, rather than what you've knee-jerk responded to. My criticisms are leveled at 38 Studios cost structure. Those criticisms are going to hold true regardless of whether or not it was EA's money, Rhode Island's money, or Curt Schilling's personal funds.

All of the evidence currently available points to too much cash going out, not enough coming in. Kingdoms of Amalur may not have torn the sales charts to pieces, but 1.2 million copies is thoroughly respectable. I have purposefully shied away from leveling any accusation of wrongdoing at BHG or claiming that the quality of either KoA or Copernicus was subpar.

The facts are thus:

1) Schilling was never able to attract VCs or private investors, despite heavy lobbying.

2) KoA sold reasonably well.

3) Despite money from EA, funds from Schilling (according to him) and $49M from RI, 38 Studios folded.

That money *went* somewhere. It was spent. No one is claiming otherwise.

The cost structure of the company was very clearly *wrong.* The simplest explanation is that Schilling assembled a group of talented people without having the funds to pay for development through to the end.

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RTietjens replied on Tue, May 29 2012 5:45 PM

No matter what the details are, this is a sad loss to the gaming community.

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Joel,

Getting your information from Fires of Heaven forums and calling it factual is your first mistake, They are honest about how they feel but that ends there, they would rather flame each other and continue personal wars with each other than actually research facts and admit the truth when they are wrong.

The facts

1) Schilling was able to attract VCs and private investors but backed out because of government attachment and the marketing scheme to keep quiet for so long.

2) KOA sold better than EA expected but it still wasn't enough to cover the 50m advance for the BHG division in Maryland. In no way was this earmarked for the MMO funds.

3) 150m was invested total, 50m went to BHG purchase and KOA development. 52 mil of the 75 mil for meeting labor requirements the other 23mil when into a hold or escrow type account as a back up to make loan payments.

4) the 1.15m missed payment was an EDC Fee, there is another one due next year. These Fees are separate from the loan.

5) and most important the loan was a "Moral Obligation Bond" any reporter or reporter wanna-be that's worth their salt will research this close, especially that it involves a vote to be paid back, not paying it back will result in RI credit rating to drop.

6) 38watch is one of the more informed fan-sites that is one of the better informed and professionally conducted fan-site. We have been following 38 studios since near its beginning. We have no reason whatsoever to Lie, Stretch, or Sugarcoat the truth nor are we paid to print and spew the gibberish that most news agencies have.

So Joel if you want a better more accurate source to spin your half a story BS, come visit and READ the forums, I know exactly where your information came from and trust me, its not even close to 100% accurate. You have egg on your face.

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Joel H replied on Sun, Jun 3 2012 2:09 PM

DTGat,

I really hate to burst your bubble on this one, since you wrote an informative post, but I've never even heard of the Fires of Heaven forums, or visited them. I assume you mean this guild website?

http://www.fohguild.org/index.php

I sourced this story from articles at Kotaku, the Boston Globe, a Providence, RI paper, and several other stories. Nothing I read discussed FOH or anything published there. I have kept an eye on 38Watch to gauge the reactions of the user community, but found it mostly full of people claiming that Chafee was a crook / had done something illegal, and that "When the real facts come out, ZOMG!" In other words, it's full of people who believe this is personal.

I'm working on a follow-up story based on the information we've learned in the past week. One of the things that stands out is that Schilling was widely liked and seen as being one of the good guys by his own 'teammates.' That counts for something on a personal level, but doesn't say much about the business situation.

What *I* take away from the situation at this point is that you don't have to be a bad person to be a bad businessman; you don't have to be corrupt to have a poor business structure.

If you have sources you think paint a better picture of the situation, I'll be happy to read them. In the meantime, I'd respectfully suggest you check with an author before claiming he sourced an article from a location that isn't mentioned.

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There was some insider information that he did, for no valid reason (the EDC fee fiasco was the result and used as an excuse after the fact) renege on the deal for the tax credits, and later that was confirmed by Curt from his outburst. It is obvious Chafee is clueless and is counting to heavily on his "experts" that may have fed him mis-information intentionally. This is evident by his mixed messages in his press releases, clearly this is a case of backstabbing politics. I think he is crooked, he intentionally mis-represented the RI taxpayers and continues to Lie to them.

On a side note, IMHO Kotaku is junk and that guy is another bandwagon jumping idiot. WPRI is has no integrity and its headlines are for sale to the highest bidder and prolly has the most mis-information spewed to date. The Projo as one dev called it, has tried hard to get both sides of the story. The Boston Globe, no idea - yet.

Obviously, you didnt read forums deep enough, thats fine, Ill take a few points off your credibility for being judgemental of us :D. The facts about Chafee actions are obvious, its much too late to claim that he didnt do a ton of damage to 38S's reputation prior to the layoffs. While its true we dont know if he has personal vendetta or its totally clueless and is being someone else's lackey in this. The one thing is true, he is an effin idiot. I think the layoffs were a result of 38S either giving up or in retaliation to something Chaf and RI did or didnt do, and the added fact that 2 investors backed out directly because of Chafee's public comments.

all our sources are linked in the forum threads, there are several different threads with sources.

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Joel H replied on Mon, Jun 4 2012 12:08 PM

I think most of what's come out of 38Watch (by which I mean individual poster comments) is unadulterated fanboyism. I am still watching the situation to see what develops. Chafee isn't a crook -- he's a politician who viewed a $75M loan guarantee to a single company with a single game as a stupendously bad investment.

There's no evidence to suggest he was wrong. On the contrary, everything I've seen thus far suggests that Schilling was desperately stumping for investors due to a lack of money to pay for continuing operations. Chafee can fairly claim to have acted in the long-term interests of Rhode Island and to have refused to throw good money after bad.

The one inarguable point coming out of this is that 38 Studios had a non-sustainable cost structure. Maybe Chafee hurt the company's last-ditch attempts to secure investment. Maybe not. Either way, it's a categorically different scenario than the battles between, say, Activision and Infinity Ward.

Edit: I realized this last point was unclear. In the Activision/Infinity Ward struggle, there was clearly double-dealing and bad faith on both sides, with candid emails exchanged between executives regarding how to limit payments to IW executives and cut costs. In the RI/38 Studios situation, there's less evidence of bad faith, and more of an object example of why video game development is a bad bet for any sort of economic revival.

Video game development is intrinsically risky, prone to delays, and extremely expensive. Schilling may have been dedicated, forthright, and up front on all counts, but betting big money on a video game company with no proven history was a bad business decision. I think it's entirely possible that Chafee may have chosen to make a bad situation untenable, but he didn't *create* the bad situation to begin with.

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