Few stories can better illustrate the problems with the tech sector, the entertainment industry and ???crony capitalism??? than the sad saga of 38 Studios, the video game company founded by baseball legend Curt Schilling.
In a nutshell, Schilling wanted a piece of the computer game industry, which has evolved to resemble Hollywood in many ways. Quite a few big games have skated far past the point where Hollywood would regard them as a top-shelf blockbuster, in both audience and revenues. And no movie has ever raked in as much money at the box office as the highest grossing video game of all: the online game called World of Warcraft, which has pulled in over $10 billion dollars and sold 10 million copies since its 2004 release, in part because its players pay a monthly fee, according to the gaming website Digital Battle.
That???s a deep pool of cash, and it???s no surprise Schilling wanted to swim in it. The problem is that A-list video game development has huge startup costs. The product must be designed, written, and tested. Music and art must be incorporated.
A large fortune
Schilling, who helped lead the Philadelphia Phillies to the 1993 World Series and won three World Series Championships in 2001 (Arizona Diamondbacks), 2004 and 2007 (Boston Red Sox), pumped his large personal fortune into the endeavor. ???I put everything in my name into this company,??? the right-handed pitcher has said. ???I believed in what we built. I never took a penny in salary. I never took a penny for anything.???
But even more funding was needed, to the tune of $100 million. (38 Studios wanted to create an online fantasy game to compete with the World of Warcraft juggernaut.) Schilling couldn???t get enough private investors on board. Despite his personal popularity, he didn???t have a business model that inspired confidence, or the computer-industry experience necessary to sell it.
So he turned to the government for help, specifically the government of Massachusetts, where he is fondly remembered from his Boston Red Sox days. Things didn???t work out, in part because Schilling was aiming so high. He promised to create a lot of jobs with his company, but he needed a huge loan guarantee to do it. Massachusetts Gov. Deval Patrick said no, and was criticized in some quarters for letting 38 Studios slip away.
Undaunted, Schilling moved along to Rhode Island, where he made a pitch to then-Gov. Donald Carcieri and the state???s Economic Development Corporation. The deal he worked out has now become the subject of lawsuits, because 38 Studios secured $75 million in loans from the state, but proceeded to go belly-up without ever finishing its big game project. Three hundred Rhode Island residents suddenly found themselves out of work when the company shut down. The subsequent governor, Lincoln Chafee, described the deal with 38 Studios as ???a grave injustice put upon the people of Rhode Island??? and a ???squandering??? of tax dollars.
The lawsuits essentially allege that Schilling and Carcieri, who also served as chair of the Economic Development Corporation, lied to its board of directors about the prospects for 38 Studios. Evidently no one involved in the decision knew anything about the video game industry.
38 Studios was dangerously under-capitalized???the suit by Rhode Island alleges that management never really had a solid plan for surviving beyond the end of 2012. The deal was rushed through quickly, leading one EDC analyst to complain, ???I have more information on the typical $10,000 micro-loan than I have on a $75 million request.???
The only legislator to vote against the loan to 38 Studios, Rep. Bob Watson, called it ???too fast, too loose, and frankly a scandal waiting to happen.??? Other legislators later said they didn???t realize the entire $75 million loan was going to one company.
Rhode Island was in bad shape economically, leading to criticism that the EDC was too eager to win over a big, flashy software company, in the manner of a desperate gambler betting everything on one last throw of the dice. They crapped out, and are now reportedly on the hook for over $100 million in total losses. Curt Schilling was also driven bankrupt personally by the failure of his start-up.
Motivated by politics
When 38 Studios began falling apart, after just a year in Rhode Island, Schilling went to the new governor for help, but Chafee said he didn???t want to throw good money after bad. Schilling thinks the decision was motivated by politics???he and former governor Carcieri are Republicans, while Chafee left the Republican Party to become an Independent.
But the whole affair was soaked in the same flavor of political influence that polluted debacles like failed solar panel maker Solyndra; changing the letter after the names of the players doesn???t change the game. Neither does changing the subject from dubious green energy technology to dubious video game technology, both funded by politicians who didn???t understand them.
In both cases, it???s too bad more attention wasn???t paid to the private investors who passed on the deal. The situation also resembles the way Hollywood studios are able to steamroll star-struck legislatures and win special concessions for movie projects, which don???t deliver the kind of jobs and economic stimulus that were promised.
Actually, it might be unfair to compare ???green energy??? to what 38 Studios was actually working on, beneath the layers of political maneuvering and lawsuits.
They were never able to finish the big online project, but they did release a stand-alone single-player computer game based on its art design and technology, called ???Kingdoms of Amalur: The Reckoning.??? It got rather good reviews in the trade magazines. But the company that produced it, after securing $75 million in loans from the taxpayers of Rhode Island, was forced to sell off its assets in November 2012 for just $830,000.