May 14, 2012

Questions About 38 Studios' Solvency?

Monique Chartier

John Depetro alluded to it earlier today. But it looks like WJAR/NBC10/Turn to 10's Bill Rappleye got what can only be viewed as a confirming quote from Governor Chafee.

State officials have been meeting with the video game company owned by former Boston Red Sox pitcher Curt Schilling, Gov. Lincoln Chafee told NBC 10 on Monday.

"We're always working to keep Rhode Island companies solvent, and that's what we're doing with 38 Studios," Chafee said.

Potentially at stake, of course, is $75 million tax dollars, as WPRI's Ted Nesi and Steve Nielsen point out.

The R.I. Economic Development Corporation gave 38 Studios a $75 million taxpayer-backed loan in 2010 with the strong backing of EDC Executive Director Keith Stokes and then-Governor Carcieri.

Let the record show that Governor Chafee was strongly opposed to this arrangement from the beginning.

It is to be hoped that these reports are overblown and 38 Studios will successfully navigate some purported rough seas. Nevertheless, it is hard not to hear and read these reports and come to one inexorable conclusion: however small these loan guarantees are compared to the total of economic activity in the state, this is not a realistic approach to economic development. Taxpayer capital cannot begin to substitute for a good (or even just neutral!) business climate. This, in turn, can only be created at the General Assembly by legislators who are willing, in the words of small business owner Roland Benjamin, to

look at the small business community as a growth engine in the economy, not a tax revenue source

I would only quibble by omitting the adjective "small". Big and small; we need them all.

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I can only double down on my prediction from 6 months ago that 38 Studios will in all likelihood go bankrupt within the next 5-10 years, if it even survives that long. This was a case of a little knowledge in the gaming industry being a very dangerous thing for the hubristic central planners pushing the deal through. It looks good on paper - a self-proclaimed gamer celebrity wants to move his company to a troubled state to build his video game empire in a quickly growing field. He shows off some fantasy concept art - analogizes to a couple of successful IPs like God of War and World of Warcraft, and claims to be able to replicate their success. The "experts" are convinced and pat themselves on the back for finding such a promising start-up.

What actually happened is a case study in the folly of central planning. The company secured a sweetheart deal of $75 million in public funds and went on a massive hiring spree, paying outrageous salaries to grow as quickly as possible. It cranked out a boring, generic fantasy game that got mediocre reviews but racked up a huge number of preorders and impulse buys from the hype of it all - none of which has anything to do with quality or feedback. The IP is now completely worthless and the company has nothing promising in the pipeline to justify its existence except an all-or-nothing bet on an MMORPG based on the same dull IP that nobody in the gaming community cares about. The game will have absolutely no chance of competing with World of Warcraft and Bioware's $200-300 million Star Wars MMORPG, both of which have dedicated fanbases, huge market shares, come from respected companies, and command beloved and long-established IPs.

It's just the same old story with government picking winners and losers in the economy - the company goes through a massive expansionary period until they blow through all the public funds and then go bust under the weight of their own incompetence and bad incentives. They take big, all-or-nothing bets on the public dime because they are incentivized to do so. Solyndra, Evergreen, 38 Studios - always the same result. But the central planners keep picking "winners" because to admit they can't would be to admit that their clairvoyance powers were a crock in the first place.

Posted by: Dan at May 15, 2012 8:03 AM

Well said, Dan. Perhaps they could milk the stata a bit longer if they team with URI and advertise international games that promote world peace....

Posted by: Mike678 at May 15, 2012 8:11 AM
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