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Reason On How and Why 38 Studios Went Bust 227

Posted by timothy
from the other-people's-money dept.
cathyreisenwitz writes "The 2012 bankruptcy of Rhode Island-based video-game developer 38 Studios isn't just a sad tale of a start-up tech company falling victim to the vagaries of a rough economy. It is a completely predictable story of crony capitalism, featuring star-struck legislators and the hubris of a larger-than-life athlete completely unprepared to compete in business." Reason makes no bones about its view of this kind of public-private "partnership."
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Reason On How and Why 38 Studios Went Bust

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  • Just curious.

    I see the Gov't Making another stupid decision and legislators not reading something they passed (Some didn't realize that the package was ONLY for 38 studios). Happens all the time.

    But Crony Capitalism? Don't see it.

    • Here's how... (Score:5, Insightful)

      by MikeRT (947531) on Thursday January 03, 2013 @01:31PM (#42464801) Homepage

      Crony Capitalism is when you use the state to get unfair private advantage. It's not like a builder who gets the state to "smooth things out" when building something for public purposes (ex. police station, highway, etc.). There are times when the government needs to help facilitate the work of private parties. This was not one of them. It was the government doing something with a marginal public purpose (the nebulous "it'll create more jobs" excuse).

      Put another way, this is precisely the same sort of crap we saw Bush and Obama do with the banking sector (using public funds to secure private losses that were not incurred due to a public purpose). In either case, the government stepped in to do what the market should have done in an otherwise private transaction with minimal to no public purpose.

      • Re:Here's how... (Score:4, Insightful)

        by Caffinated (38013) on Thursday January 03, 2013 @02:11PM (#42465317) Homepage

        Put another way, this is precisely the same sort of crap we saw Bush and Obama do with the banking sector (using public funds to secure private losses that were not incurred due to a public purpose). In either case, the government stepped in to do what the market should have done in an otherwise private transaction with minimal to no public purpose.

        To be fair, there's a strong public interest in the banking sector not melting down, so while we might have wanted to go about it differently, ultimately the public was going to have to stabilize the banking system and that was going to take money. The cronyism in the bailout was that we didn't then make the "guilty" parties pay for their damage or significantly fix the system.

        The loan guarantees for 38 studios were just worse than usual example of local/state business "incentives" which are unfortunately quite common. They're not cronyism exactly since businesses can (and do) compete without these sorts of things, but they're typically needless giveaways of taxpayer money regardless. That being said, there are certainly areas where government investment makes sense, but this isn't one of those cases

        • by stenvar (2789879)

          To be fair, there's a strong public interest in the banking sector not melting down

          There is. But many of the institutions that were bailed out were simply investment houses, not banks, that could have gone under without causing a lot of problems. In addition, the US government didn't have to make the rescue a big tax payer gift; they could have rescued these companies but demanded steep compensation down the road for it.

          And the conditions under which the banking sector got into this state were also created

        • by bigpat (158134)

          To be fair, there's a strong public interest in the banking sector not melting down, so while we might have wanted to go about it differently, ultimately the public was going to have to stabilize the banking system and that was going to take money. The cronyism in the bailout was that we didn't then make the "guilty" parties pay for their damage or significantly fix the system.

          Problem is that the banking system actually did melt down and all that public money went towards propping up rich people with a lot of assets invested in these banks which otherwise would have failed. Loans were not getting made for a period of time which is basically the definition of a banking system collapse. So, what system was saved? What happened now is that a new system was created that doesn't work by any rules

      • by geekoid (135745)

        "Bush and Obama do with the banking sector"
        sigh, No. THAT was do to lack of regulations and then needing to save the economy.

        • Re: (Score:3, Insightful)

          by Q-Hack! (37846) *

          "Bush and Obama do with the banking sector"
          sigh, No. THAT was do to lack of regulations and then needing to save the economy.

          Sadly, this tends to be the on going idea popular with the mainstream media. It is, however, incorrect. It was the regulations of the banking sector that caused the banks to look for new ways to make money. ie. sub prime loans. Had the government not regulated banks they would have used the standard model of intrest rates and fees to make money. Instead, the government decided that part of the population that is high risk, needed to be given loans to purchase a home. It was the action of forcing banks

          • by anagama (611277)

            That the banks were forced to lend to low income people and that caused the problem is more of a tale than anything else. Certainly it wasn't helpful, but it was at worst a tiny percentage of the problem.

            Nobody was twisting Countrywide's arm from making loans and crappy CDOs (*), but the real problem was Credit Default Swaps on the CDOs. These are a type of insurance a lender can take out on a loan (didn't even have to be a loan the lender made) wherin the insurance company would pay the loan off if the c

          • by willy_me (212994)

            It was the regulations of the banking sector that caused the banks to look for new ways to make money.

            So, had their been no regulations then the banks would simply overlook this new way to make money? What you're suggesting is insane. The banks will always try to make more money and will do everything they legally (and sometimes illegally) can to maximize their profits.

            Regulations don't exist to screw over the banks, they exist to prevent the banks from screwing us over. Getting rid of regulations only makes it easier for the banks to do just that. I'm not saying that all regulations are good as some

    • by Anonymous Coward on Thursday January 03, 2013 @01:39PM (#42464889)

      Insofar as the governor making the call was a (R), and the ceo of the company involved was a notable (R) campaigner (and there was serious talk of him running as (R) for senate a few years back, for the seat Scott Brown won)... it did indeed smell of "politically motivated favor to a friend of the political party" at the time.

      At a minimum, Curt probably had a leg up over other CEOs in getting in to see the governor and talk about his great company, even if the decision itself wasn't biased -- even those who are trying hard not to bias decisions directly have a hard time not having a serious bias in that they talk to their political allies a lot more than their political foes.

      The article doesn't go very deep into that aspect of it though.

      (disclaimer: I worked at 38, and I disagree with some aspects of the article; in particular, it fails to mention that the new (D) governor of RI jerked the company around by cancelling payments to the company which _caused_ the sudden cash crunch that pushed it off the cliff, as revenge for the above... What the crony giveth, the anti-crony taketh away. But the original deal did smell funny, and management was surely also at fault for dancing so close to the edge of a financial cliff that one failed payment from the state could push them over, so the article isn't too far off the mark.)

  • This article only discusses some of the investment money and where it came from. Nothing about technical or software issues, or anything about what the company was actually doing or what went wrong. That would have been the only part of interest to me. Also don't bother going to the second page of the story to read one final sentence. I swear that's done on purpose for more ad exposure or more page hits.

    On a side note, entering HTML tags with the stock iPad keyboard is a major pain.

    • by Joehonkie (665142)
      The things that went wrong weren't on the technical or software side, so there's nothing to discuss there. They made 1 complete and functional game and were working on an MMO. The money and management ARE the "what went wrong."
    • by Anonymous Coward on Thursday January 03, 2013 @02:16PM (#42465385)

      What we made:

      1) A console game -- Kingdoms of Amalur: Reckoning. Published by EA, you should still be able to buy it even with 38 gone (and it's been a year, it is probably discounted at this point; available for xbox360, ps3, pc, though if you play on a pc you should go buy an xbox controller because the keyboard/mouse control isn't that great). Got mostly good reviews, sold pretty well. It's an action-heavy-RPG, think the combat of God of War with a crunchy MMO inspired "gather piles of loot, explore a big world, do quests for lots and lots of people..." backing.

      2) The Big Project the company was working on was an MMO, just titled Kingdoms of Amalur, set in the same world long afterward; you could think of Reckoning as a kind of teaser to get people excited about the world and story to lead them into the MMO. Think WoW, but with a very different art style (I can't really describe it in text, you can search for the screenshots if you care), and lots and lots of refinements. It was approximately a year from release when the company went foomp.

      3) Assorted tie-ins. Yeah, just like you can get the WoW novels and comic books and action figures, there were plans for that stuff too. Obviously, those things don't get launched til after the MMO does, so they were in early-planning stage.

      Technical and software issues: MMO software is big, and we were chasing a moving target. With an MMO... it's not hard to write an MMO that's better than what WoW was at launch, lots of people have done that. But to make any headway at all in the market, you've got to make something that's better than WoW is Right Now, because to attract a gamer of an inherently social game, you have to pull them not just away from the gameplay of their current game, you have to also lure them away from the circle of friends in their current game. You don't yet have a raiding guild in our game, so our gameplay/art/story/etc has to be enough better than WoW (or LotRO, or DDO or FFXIV or EVE, or whatever you are currently playing that we're trying to convince you to turn off long enough to try our game), that we can convince you to try us for long enough to get a guild going and establish those friendships in our game. That's a high bar, and in a multi-year development cycle, you have to go back several times, look at the new games and expansion packs coming out, and say "hey, WoW just came out with kung-fu panda expansion... is there anything in there that is really compelling? Is there some new piece of gameplay or UI that is good enough that we ought to match it, or is something that we can see how to do better?" If you compare the WoW UI of today to the UI of three or five years ago, there is a world of difference in usability. You don't notice it at the time, since it's growing in bits and pieces, but if you've played an MMO of today, you'd never go back to one of three years ago. Which means... Those design docs from when 38 studios first formed had to go through a lot of revision. Systems written early, we'd go back and say "oops, this needs to be seriously expanded, otherwise we'll look bad by comparison".

      The last week, for example, as we watched the financial axe fall, we were running our one functional raid between sessions of watching the idiot governor holding press conferences about us. And then we'd post-mortem the run, say what was fun, with a lot of comparisons to other MMOs -- "here's why X was more or less fun than it would have been in game Y". That generated a lot of new feature/bug requests; it's often hard to tell what is going to be fun until you actually are running around in the world flinging fireballs... which is great, and very "agile", but unfortunately wrecks havoc with scheduling. In hindsight... Build in more slack in the budget/schedule to pay for revision passes, because with a game (or with art in general I guess), you're likely to do something, look at it, and see a way to improve it. Unless your goal really is to pu

  • This magazine (Reason) is clearly against public-private partnerships, if anything seeing them as even worse than regular purely-government projects, due to the increased potential for this kind of cronyist corruption (but still inferior, in their view, to purely private-sector endeavors). A lot of free-market conservatives see them as an improvement on purely-government projects, though: public-private partnerships are often promoted as a way to bring efficiencies of the private sector into infrastructure and development (e.g. a pubic-private partnership to build a toll road), rather than having the "big government" do it all.

    Are those two different camps of the economic right? Perhaps "libertarians" versus "pro-business conservatives" or something along those lines?

    • by Quila (201335)

      The problem with public-private partnerships is the high likelihood that politics will be used to make business decisions. That will probably not produce very good results. It also opens up a huge channel for corruption, with businesses paying off politicians to send taxpayer money their way.

      Even when you build a framework for these partnerships and attempt to instill checks and balances into it, it can go wrong with political pressure. Look at Solyndra. It was done through a system that had the beancounter

    • Are those two different camps of the economic right? Perhaps "libertarians" versus "pro-business conservatives" or something along those lines?

      Most modern democracies have a fairly standard set of parties (roughly from left to right): communists, social democrats, "classical" liberals, Christian democrats, and nationalists. In the US, Democrats comprise the left end of the spectrum, Republicans the right end of the spectrum, and classical liberals sit uncomfortably in the middle without their own party. Exc

  • A constitutional amendment (state and federal as appropriate depending on where the scandal occurs) allowing Qui Tam lawsuits against elected officials whose allocations a reasonable person would say are for private benefit. Let the legislators and governor be personally liable for these costs and suddenly you'll see the entire body militantly opposed to bailouts, "investments," etc.

    Heck, it already has precedent in a way at the federal level. If a member of the civil service knowingly tasks a contractor to

  • Mr. Bloody Sock was a fantastic athlete but a complete meathead. Anyone who invests in any pro athlete's business plan has a financial death wish. You can count the number of really successful jocks-turned CEOs on a digit-challenged hand. (I'm not counting those who get rich off permanent endorsement deals)

  • Summary (Score:5, Informative)

    by phantomfive (622387) on Thursday January 03, 2013 @01:58PM (#42465147) Journal
    Looks like baseball player Kurt Schilling (who apparently was very good at baseball) decided to start a video game studio, who knows why.

    He tried to raise $50million from private investors, but they didn't think he could make money.
    He went to the governor to get some money, but the governor didn't think he could make money.
    A new, naive governor was elected in Rhode Island, and desperate to improve the economy of the state, he approved some $75million in loan guarantees.

    They hired some people, built the game Kingdoms of Amular: Reckoning [wikipedia.org], and did a surprising number of things right considering a baseball player was the founder.

    It turns out that in making a modern game, one of the hardest things is getting good developers in the right places, and the game turned out to be buggy. Very buggy. And they didn't have a good level designer, so the levels were kind of boring. These things combined to sink the game.

    So, the company failed. And taxpayers now have to pay back the loans.
    • by Holi (250190)

      A new, naive governor was elected in Rhode Island?

      Not so new as he was about to leave office due to term limits.

      • Oh, you're right, I misread this collection of compound sentences from the article:

        Donald Carcieri (R-R.I.), term-limited and searching for a legacy after presiding over one of the worst state economies in the U.S., featuring long spells of double-digit employment and frequent last-place finishes in rankings of business friendliness. In a classic spasm of "do something, anything" government desperation, Carcieri made it his mission to lure 38 Studios from its headquarters in Maynard, Massachusetts to Rhode Island.

    • Re:Summary (Score:4, Insightful)

      by VortexCortex (1117377) <VortexCortex@Nos ... t-retrograde.com> on Thursday January 03, 2013 @02:34PM (#42465587)

      TL;DR: Big shot "idea man" makes the most common rookie mistake by trying to make some huge MMO as his first project. These always fail, no big surprise.

      They should have made some smaller less financially risky games first to get some experience, but since he already had money he was able to make it further than most 1st time game devs with stars in their eyes do. You wouldn't believe how common it is to see this same "idea-man" BS anywhere newbie game devs gather: "Guys, I have this amazing idea for my 1st game, it's going to be a MMORPG that blah blah blah" The most common response is: "Can you make a match 3 game yet? Block dropping game? How about a Chase-Maze game? A pixelated platformer? If not, do those first. Put the huge game on the back burner kid until you know how much work that's going to be."

      What's ridiculous is that EVERYONE in the game industry but newbs knows that doing something as big as a MMO or Tactical FPS as your first project is folly. Seems to me the Rhode Island investors didn't ask ANYONE with experience in games if they thought it was a good idea to invest. That's the point about "Crony-ism" I'd be driving home. Protip: Don't fund a Kickstarter made by folks with no prototype to show -- a working demo if it's their 1st game; Famous folks are a different story, but only if they got famous doing the kinds of things they want you to fund.

      • by Rogerborg (306625)

        Urgh, we had that thread over and over again on the Irrlicht 3D engine forums, with Sparks McGee types rocking up clutching their Great Plan for writing The Ultimate MMO. All they needed were some devs to do the easy bit, writing the code and stuff.

        Granted, better games wouldn't get made without people trying the impossible, but extraordinary claims require extraordinary proof. Until you've got a playable alpha, you've got nothing. You can't play an idea.

    • Or even more summarized:
      Inexperienced guy founds studio.
      studio makes a game that was not very good (and required an annoying origin account).
      studio goes bankrupt, and nothing of value was lost.

      • studio goes bankrupt, and nothing of value was lost.

        Unless you're a citizen of Rhode Island, then you lost a lot of money when your state officials decided they could do venture capital.

    • Re:Summary (Score:4, Informative)

      by Anonymous Coward on Thursday January 03, 2013 @03:39PM (#42466431)

      (Rhode Islander here with some context)

      Schilling was not only very good at baseball, but was a legend in New England for helping win a World Series for the Red Sox while pitching with an ankle that was hours from surgery replacing a snapped tendon with one from a cadaver, which wasn't healed, and bleeding profusely throughout the game. This put him in a pantheon usually reserved for mythological creatures in the minds of people in the region (who were Red Sox fans, at least). I assure you, this isn't an exaggeration.

      The general consensus in RI is that Carcieri (who had come into office on the platform of being a business man and knew how to fix the state, and in his first term ran a "Big Audit" to find waste in govt which is what earned him a second term) and other RI politicians were enamored with Schilling and his World Series championship rings, seeing him as a winner they could invest in. No one in RI govt had any clue about the video game industry, and RI's tech history was nary more than a couple college research shops and branches and subdivisions of companies located elsewhere. No one in government there could understand what they we're approving.

      The new governor, Lincoln Chaffee, sought out video game industry insiders for advice when 38 Studios was melting down, unlike anyone else before him, and quickly came to realize that this ship was sunk, and not worth putting money into. Chaffee was critical from the start (not because it was video games, but because of the loan going to one place), and has come out of this looking prophetic, and will certainly win re-election in 2014.

      Its not a surprise that this didn't work to anyone who did a little homework, but it was sad to see it all go down as it did. The truly sad part is that RI is becoming an anti-tech state as a result, and is going to end up scaring away more business and people as a result. It's a worst case scenario.

    • Looks like baseball player Kurt Schilling (who apparently was very good at baseball) decided to start a video game studio, who knows why.

      Actually the "why" is known. Hubris. Schilling has an ego the size of Texas. Think Rush Limbaugh who happens to pitch major league baseball and you've got an idea. Schilling was very good at his sport and is on the bubble for the Hall of Fame, meaning you can make a case both for and against him going into the Hall. But you have to be really good to even be on the bubble.

      Schilling's arrogance made him a great pitcher but in real life he sees everything in black and white. There are no gray areas

  • Just hire some nerds to clickety clackety on keyboards and voila--you've got your 5 star video game.

    This is way everybody does it and does it so well.
  • DRM. I don't buy games with any DRM, period. Yeah, yeah, Steam is the "cool" and "acceptable" DRM - Well, no thanks. I nipped off and bought The Witcher II instead.

  • And one of the proposals for projects for 2013 was a video game/console. I mentioned that the half dozen of us there could probably have down with 38 Studios couldn't and it wouldn't have cost the state taxpayers $125 Million.
  • Capitalism is easy. You don't even have to make a product to get rich.

    Lets face it, a large number of start-ups offer a good idea and nothing more. The owners get millions from capital investors to simply "try" and develop an idea. When that idea fails they shrug their shoulders and blame everyone else. Then they ensure their "parachute" fund of a few million is secured nicely in some offshore bank account and move to Belize and retire, maybe even kill a few neighbors or something.

    Hey, Shawn Fanning got

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