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Damaging public comments caused 38 Studios downfall, says Schilling
Damaging public comments caused 38 Studios downfall, says Schilling
May 29, 2012 | By Mike Rose

May 29, 2012 | By Mike Rose
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    39 comments
More: Console/PC, Business/Marketing



38 Studios founder Curt Schilling has broken his silence over the financial troubles of his Rhode Island-based company, stating that the desperate situation is, in part, due to broken promises from the state, and damaging comments from Governor Lincoln Chafee.

The studio's ongoing financial struggles came to a head last week, when 38 Studios and its subsidiary Big Huge Games were forced to lay off their entire staff.

In an interview with the Providence Journal, Schilling has now said that Rhode Island state officials reneged on a deal that would have allowed 38 Studios to claim film tax credits.

He also said that the state went back on a deal by which the studio was to defer the $1.125 million payment that was due on May 1, so that it could meet its May 15 payroll.

Elsewhere, Schilling said that Governor Chafee's public remarks about the studio's issues were "devastating," and he claims that a publisher pulled out of a $35 million deal to finance a sequel to Kingdoms of Amalur: Reckoning as a result of the comments.

Schilling says that he is set to lose more than $50 million of his own personal savings as part of the failure of the venture.


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Comments


Kelly Kleider
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What would be refreshing is for the person at the helm to take responsibility for his poor governance. The upheaval of so many lives should come at some personal cost to Schilling.

Roger Klado
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-"The upheaval of so many lives should come at some personal cost to Schilling."-

I imagine the 50 million he put up that is as good as money burned...
is probably a horrific cost considering he is over the hill now.

Out of every one hit hard I would certainly put him on a bullet to the mouth suicide watch myself.

Michael Hahn
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I just think its sad event all around. Whether its politics or something else to blame. I hope we all learn something from this. Curt followed his dream and whether right or wrong, people lost their jobs at the end of the day. I am sure more will come out from more sides before this is finally put to rest.

I hope everyone who lost their jobs finds new work soon.

Maria Jayne
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People on the inside pointing fingers outward, people on the outside pointing fingers inward. Nothing new really.

Also, that $35million deal for KoA 2, is he suggesting money given to make a sequel would actually have been used to pay all the people working on the mmo rather than you know...making the sequel? Because 38 AND Big Huge got laid off. As far as I'm aware, only Big Huge made the former KoA. So that doesn't excuse why 38 studio devs were not being paid.

Michael Rooney
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Why would using profits from one division to subsidize losses/RnD in another be taboo? It happens in every industry.

Tom Baird
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I don't think any publisher would agree to finance a game, if they knew their financing was going to another product.

A Publisher puts money in with the expectation of getting a return on that amount, if the developer uses that money for a different game, they are effectively hiding the return from the publisher but still taking their money.

This also means that KoA2 won't have 35 million from the publisher used on it, meaning a smaller scope than the publisher would have expected, which also damages any return they would have expected.

In short, it almost certainly would go against the publisher's contract, and is heavily screwing over your investors, which is why it is taboo. This is only the case with invested money, and it's not taboo if it is your own accrued profits.

Michael Rooney
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@Tom: If independent studios worked that way a lot of them would never get to develop any of their own IP. They sign contracts (hopefully) with the expectation that the contracts will be profitable so they can reinvest the profits into other development.

If what you say were a breach of contract anytime you came in under budget you could be sued, which would be idiotic.

Stephen Horn
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@Michael: I'm totally naive to the whole business end of the industry, but wouldn't such contracts usually come as two parts, one to fund the game, the other to share the game's profits?

There's no ethical dilemma in using the profits for R&D, of course, but is it really standard practice for studios to take the first part of publisher funding and develop two games at the same time with it? One for the publisher and the other funded by the publisher's money but hidden from them? That seems unethical.

Tom Baird
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@Micheal
There is a huge difference between investment in an in-development game, and profits from the sales of a completed game. It's sensible, and a given, to invest the after launch profits from the game into a new IP. This is where an initially contract startup can start to develop it's own IP. It's destructive to the publisher negotiation to do it to the investment money before the game is completed. Otherwise, when you run out of money, or come up with a product that isn't worth the amount the publisher invested into it, you are looking at a lot of trouble, because you spent their investment on somebody else's product.

I can't say what is or isn't a breach of contract, as it depends on the contract, but it is definitely destructive to any publisher relation, and is openly shortchanging your investors out of their investments, since they don't get a % return or distribution agreement on your other products. If you came in under-budget you could give the remainder back. That's not possible if you spent it on someone else's game.

Edit: I should note, I'm also not much of a business person, but to me it doesn't make any sense that a publisher would allow you to screw them over so blatantly for the reasons I'm listing.

Michael Rooney
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The point I am making is that publishers don't pay you to spend their money. They pay you for deliverables. If you're meeting your deadlines and shipping the game they paid for it shouldn't matter to them whether you are paying one developer to do it and burning the rest of the money or you're paying 10,000 developers $2 weekly.

It's obviously more complicated because the contracts aren't as trivial as the above, but that's the general idea.

Because of the nature of separate contract negotiations it's possible to be put in a situation where you couldn't meet reasonable demands of spending all the money you are given (without just wasting it) or to not spend some additional money out of your own pocket (usually filled with money from other contracts).

I'll give a better example. You have 50 software engineers who each have $50k salaries. You get 2 contracts. In one you are being paid $2 million with a promise of X deliverables and a promise that you will dedicate 15 developers to the project. You get a second contract that pays you $1 million requires Y deliverables and needs 35 dedicated developers. Do you miss your payroll because you don't want to use the first contract to pay your second set of developers? Do you fire 10 developers and not take the second contract? Do you just give 15 arbitrary developers a raise and 35 a pay cut?

No, you take them both and give everybody a bonus for $10,000 as long as you meet all the deliverables.

Tom Baird
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In that example, you make sure your contracts arn't bad(the amount the spend should match what you deliver). Your example is charging Publisher 1 for the deliverables being sent to Publisher 2. Using publisher names so it's easier to read, I can bet EA would be pissed if one of their developers was taking their money and spending it on a game for THQ. If you don't need all of EA's money, you give it back, you don't go and invest it into competitors. If THQ doesn't give you enough money to meet their demands you let them know, and sort it out with them. But spending EA's money on THQs work going to make for a very angry publisher.

Think of a publisher as contracting the development of a game, so he pays X amount, and in the end owns 1 final product. He's not paying for you to be successful, he's paying you to create a specific product, and he expects his money to go to his product. He doesn't want you asking for extra money for him, because one of his competitors is being stingy, and he doesn't want you taking his money, that was acquired under the expectation that that was what it cost to create what he wanted, and then spending it elsewhere, and giving him a cheaper product as a result.

And it does matter to them if you made their 35 million dollar game on a shoestring budget, because they just paid 35 million for the thing. If it only cost 10 000 and you charged 35 million and hid the rest in other game contracts, you just scammed them for over 34 million dollars, by telling them something costs magnitudes more than it did, and not returning the excess. No matter who you are, you care when someone you pay is 'burning your money', because it means your money is being burned. Publishers arn't charities.

Just imagine you contracted a carpenter to build a shed, and he charged you $100 000, telling you that's how much it costs to make the shed you want (his fees included). He then makes a $10 000 shed and uses the rest to make his own, much nicer shed for $90 000. What he advertised, and what he delivered doesn't match, and you've been scammed. This is the same idea if you were a publisher contracting a developer for a game.

I understand what you are saying, but they don't just choose 35 million out of a hat, they choose it because they want 35 million worth of deliverables. They are requesting contract work to be done, and expect you to charge what it costs to make, and don't expect to be paying you for work given to competitors.

John Ingato
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@Michael Rooney So if am given 10 mil to create a game it's ok if I only spend 2 mil developing it? You do realize that the more money that get's put into it the better the product it is going to be. Don't you think they are going to be expecting a 10 mil quality project?

Sherman Luong
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feels like your reasonings (both) are based on that you are working for the publisher as a salaried employee.You are not. The studio has its own cost. The money the publisher is giving you is what you are charging for creation of the game. Whether you use 10 devs or 50. It is the cost of the service you are providing.

Its not like you are going to be mad if you just gave burger king $1 buck for its burger and you find out that $1buck was used to make your next customers burger.Your game studio is a service provider.

You charge your cost and the money is there to spend as the company sees fit to ensure its survival.Making milestone is part of making sure your customers are happy.

Rob Wright
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So....EA didn't have the rights or even an option deal for a Reckoning sequel? This seems strange. I thought it was pretty standard in the industry that a publishing deal usually includes the rights or first dibs on any sequels or expansions. Makes me wondered even more about thedeal 38 Studios struck with EA, and I continue to get the feeling that it was extremely unfavorable to the developers.

Also strange -- why DID this news initially become public? Why did the state make an announcement about 38 Studios dire financial condition? It certainly seems odd that the state would want the bad news to go public if 38 Studios was looking for extra funding, additional investors, publishing deals, etc. After all, it's in the best interests of RI to keep the company afloat. So was this news leaked ahead of the state meetings? Or did the state just decided to make the economic council meetings public, despite the potential consequences? Anyone know what the exact timeline of events was?

Dave Smith
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EA wasnt interested i think

Matthew Mouras
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I don't think it's that odd given the climate. It could have been a calculated decision - get the bad news out front, or be labeled as trying to hide the fact that there were serious issues with the loan of public money? It's documented that there were journalists looking into developments at 38 Studios. Maybe the state just wanted to be as transparent as possible in order to avoid a worse situation.

Jorge Gonzalez Sanchez
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The top brass love tossing the hot potato around when shit hits the fan. Regardless of industry or epoch.

But their problems don't go a lot beyond reputation getting a bit tarnished.

On the other hand, the employees who worked for years on the game and got fired for doing a great job, and the gamers who liked it and will never get a sequel (at least from the same team) get truly shat on. I know it's only reasonable since without the suits none of this would have been even possible, but it still sucks.

Jonathan Murphy
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Schilling's blamed everyone but himself. Who did the closed door meeting to push this through? He did. Who approved the contracts so employees got stuck with a second mortgage? He did. I read somewhere that they needed to keep hiring people and spending or they would lose the money. Who in the hell thought that was a good idea? Oh right. He did. This wasn't a dream, this was a scheme. Anyone who knows basic math knew this didn't add up.

james sadler
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So he's gonna lose $50M of his own savings? Why didn't he throw that in there to keep the studio going to begin with if it was his dream to run a studio? I have even less respect for this guy now. Sure their publishing deal fell through and the state were being butt heads, but that doesn't mean its time to shut down. That means its time to break into your own reserve accounts and fight back.

Glenn McMath
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I might be wrong, but I think the implication is that he's already spent $50 million of his own savings on the game/studio. If that's the case though, something seriously messed up must have been going on with the development of that game, because that would put the spent budget to date up around $90 Million with not much to show for it as far as I can see...

Micah Wright
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There's a concept we use a lot in Hollywood: Gap Financing. It's when you run out of money halfway through making your movie and have to run out and quickly secure some more. You show the financiers what you have, explain your path to completion, and then take it on the chin with lousy loan terms in order to get the money to finish what you started. I just can't believe that the equivalent doesn't exist in the games industry, which says to me that everyone looked at the cash-flow out versus the completion factor of the game and that's when the smart money decided to bail. NOT when some governor of some rinky-dink state makes mean comments about you in the media.

Oh, and for a right-wing "Free Market" Ayn Randian Tea Partier to be whining that the Government (which he's supposed to hate) reneged on the back-room deal (which he's supposed to hate) to repay the taxpayer-funded loans (which he's supposed to hate) to his corporation is laughable in the extreme. Just once I'd love to see one of these guys who bitches and moans about Government meddling in the Free Market actually practice what he preaches.

Just another Corporate Welfare Queen with his hand in the taxpayers' pockets. I'm sure that NONE of that money went into his pockets, just like no taxpayer money went into Mitt Romney's either... oh, what, Bain Capital received over $250 million in taxpayer monies by stiffing taxpayers with unfunded pensions, and dumping taxpayer loans exactly like this one? Well, I think I just found Mitt Romney's new Vice Presidential running mate!

Kevin Reilly
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It is more likely that any private money kicking the tires at 38 walked out the door when it was revealed that their stake would be subordinated to the rights that RI debt holders in 38's assets (ie Game IP). Why buy 38 Studios shares from Schilling at inflated valuation when you can buy their debt from RI for pennies on the dollar?

Dave Smith
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right Micah, being a hypocrite sucks, taxpayer funded welfare sucks, and being an actual free market supporter is awesome!

Keith Thomson
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There's this idea out there about the intellectual purity of things and how it's somehow desirable... when what it really does is put you at a massive disadvantage compared to the rest of the world with nothing to show for it but your moral high ground.

With government subsidies, and term limits alike, it's better to play within the current system while trying to change it, rather than adhering to your ideal system when everyone else is taking advantage of them, and getting a massive advantage against you and ensuring that your ideas will never reach fruition. Maybe it takes a few large scale failures/abuses to make the politicians realize how stupid their ideas truly are?

Nooh Ha
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"There's a concept we use a lot in Hollywood: Gap Financing... I just can't believe that the equivalent doesn't exist in the games industry"

Debt financing of games production (e.g. completion bonding) has been around at least since the 90s and has been used by most of the big publishers at some point in their past. It has never really taken off because of the much higher risk of substantial product slippage and complete product delivery failure combined with the much higher resulting finance costs. Gap financing of in-production but troubled titles would simply amplify this risk and cost. Also all these debt deals usually require a guaranteed repayment on completion and thus require the involvement of a publisher, something 38 Studios quite obviously could not provide.

Michael Rooney
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Does anybody know what's going to happen with the KOA IP? Who owns it now, and what are they going to do with it? It would be a huge shame for RI to own it with no plans to do anything with it. If they owned it and put it up for auction or something I'd be happier, but it's still a waste of a potentially great IP with a pretty solid first title.

Joe Wreschnig
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@Nunya,

"What's more, if they don't make money on it, and lose something like 30-40 mil on it, they're going to have their asses handed to them by the voters."

The politicians that brokered the deal have already all been voted out or resigned. If Chafee gets voted out for this in favor of a mainstream (or worse) Republican it will be yet another page in this travesty of both statesmanship and business.

Keith Thomson
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I don't think it was RI's loan to defer payments on, they were just guaranteeing the loan. Of course, there was that 25 million that they held back that could have been used instead.

Ron Dippold
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I'm still going with 'Bad business plan.'

Joe Wreschnig
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Did the "damaging public comments" fuck up the mortgage and health care payments (issues that must be at least a couple months old) also?

Sherman Luong
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I do blame RI.

Yes it was a bad investment to start with for taxpayers. But it did nothing to make it so that they can recoup that lost revenue back!

Publicly denouncing the situation does not help R.I. or 38 Studios but creates a lost for everyone.

Martin Sabom
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So all the crying about people losing their jobs..WTH they never should have had them in the first place IMO. I mean really almost 400 peeps. Doing what? Schilling is a tool when it comes to business clearly but no matter how I try to cipher the math $90 million is a huge chunk of change to burn up in such a short time. If RI forced a certain number of jobs as a condition to receive the $$ then they are as much to blame as Shilling is really and should have their head examined.

David Pierre
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I honestly don't get what you're trying to say. The artists and other people who were working on the game shouldn't have taken jobs in the field that they are qualified in and are generally hard to grab? They are at fault because they wanted work and didn't worry about the overhead which isn't even in their hands to manage?

Shea Rutsatz
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Im with David. The employees who lost their jobs are not at fault at all. I had a hell of a time finding work, and I'm sure I would have jumped on board as well.

Jonathan Murphy
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I actually know someone who went to work for 38 studios. He didn't know what was going on, and yes he needed the work. What am I supposed to do if I apply anywhere? Judge whether the company will belly up in a year? Get real I'll take what I can get. That's the game industry.

Anonymous Designer
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epic fail

Thomas Nocera
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Out of adversity comes opportunity. The blame game needs to be called off, and a reliever for Curt Shilling needs to be pitching for solutions that preserve jobs and RI's fragile economy.

Mark Morrison
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This whole deal is really sad and doesn't bode well for the game space IMO. We have begun to see emails coming into Unity Technologies from ex-staff for access to dev. tools and support. I am happy to say that we can provide support for new start up teams to make good out of bad here. Find me on LinkedIn or the other various channels, and I will help support any ex-38ers interested in Unity. Good luck to all affected and best of luck!

James Cooley
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They borrowed money they couldn't pay back and seemed to want to suck up more while bleeding cash. This wasn't a simple cash-flow problem like me being broke until payday; this was the Titanic taking on water. It was Ion Storm repeating itself, only with a guy who didn't have the track record with games development of a John Romero. Sorry, but if your business is so shaky that can't pay the staff unless you stiff your creditors, then you are pretty much doomed to go under. I mean, they wrote a hot check to the State of Rhode Island! Curt Schilling seems to not have learned anything from this.


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