38 Studios: Curt Schilling's Crony Capitalism Debacle

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.

Former Boston Red Sox pitcher Curt Schilling, an iconic figure in New England after anchoring a historic playoff comeback which ended a legendary 86-year title drought, founded 38 Studios near the end of his baseball career in the hopes of becoming a big shot in the intensely competitive multi-player gaming world. 

Since 2006, Schilling invested millions of his own fortune into 38 Studios, and with the self-assured bravado he exhibited as a major league baseball player, set out to find investors to infuse his company with the roughly $50 million needed to complete 38 Studios' first game. Although Schilling is the kind of local legend who could get a meeting with every venture capitalist in New England, Massachussets VCs passed on 38 Studios. WPRI-TV's Ted Nesi reported that one such potential investor said "it would have taken a lot of babysitting to do a deal with Schilling because he was inexperienced and the management was inexperienced."

Finding no success raising financing in the private sector, Schilling turned to Gov. Deval Patrick (D-Mass.), but the Patrick administration declined to get involved when "they couldn't make the numbers work for us."

Enter Gov. 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 unemployment 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. 

Using his bully pulpit as both governor and chairman of the Rhode Island Economic Devlopment Corporation (RIEDC), a quasi-public agency whose mission is to promote business in the state, Carcieri pushed hard for 38 Studios to receive a $75 million taxpayer-guaranteed loan.

Each loan guarantee must be approved by the Rhode Island legislature, and when the votes were cast in 2010, only one lawmaker voted against it. Rep. Bob Watson (R-Greenwich) noted "a lot of red flags" in a "very risky" deal that was "too fast, too loose, and frankly, a scandal waiting to happen." Watson added "more often than not, politicians are very poor when it comes to making business decisions." 

Watson is clearly on to something, at least in the Ocean State. Some legislators later admitted that they did not realize that the loan guarantee meant to stimulate Rhode Island business, was in fact, only going to stimulate one business, 38 Studios.

In 2011, 38 Studios moved from Massachusetts. After little more than a year in Rhode Island, with monthly expenses approaching $5 million and their big game release more than a year away, 38 Studios began to unravel with stunning swiftness. In May 2012, 38 Studios defaulted on a $1.1 million loan payment to the RIEDC, then tried to deliver a bad check. Unable to meet payroll, the company laid off its employees in a mass email, with one employee learning of his new unemployment only after his pregnant wife was told at a doctor's visit that their health insurance had been terminated.

Schilling has been an outspoken "small government Republican" activist, who campaigned with President George W. Bush in 2004, but with his business in dire straits, he once again turned to the state for a bailout.

Unfortunately for him, Donald Carcieri had been succeeded as governor by Lincoln Chaffee, a Republican-turned- Independent and vocal opponent of the 38 Studios loan from its inception. Gov. Chafee sharply declined to to use any more taxpayer dollars on the foundering company, which Schilling described as a politically motivated "$100 million I-told-you-so."

After the company filed for bankruptcy, Gov. Chafee appointed the non-partisan Rhode Island Public Expenditure Council (RIPEC) to produce a study that included an analysis of the collapse of 38 Studios and why the state's development agency, completely failed to monitor the taxpayer's investment. RIPEC's Executive Director John Simmons told Reason TV that the RIEDC lacked any meaningful "guidelines and principles" to effectively monitor the progress of the loan and report to the governor and the RIEDC's board.

Schilling, who claims to have invested $50 million of his own fortune in the company, now says that he is broke, and may have to sell some of the prized memorabelia from his baseball career, including the famed "bloody sock" from the 2004 American League Championship Series. 38 Studios' assests are being liquidated and the already economically depressed state of Rhode Island, thanks to the interest on the 38 Studios loan, is now on the hook for more than $100 million.

In November 2012, Rhode Island filed suit against Schilling and several former EDC board members alleging fraud, racketeering, and conspiracy. The lawsuit claims that Schilling and former EDC Executive Chairman Keith Stokes (who now works for the legislative lobbyist firm The Mayforth Group) knew the company would run out of money by 2012, but concealed that from the EDC before the loan guarantee was finalized.

Former Gov. Carcieri hoped 38 Studios would be the cornerstone of a new video game tech hub in Rhode Island. Instead, the fallout from the collapse and squandered taxpayer dollars will make the state unlikely to cut any more of what WPRI's Ted Nesi describes as "special, one-off deals with individual companies...picked by a certain group of people in state government."

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  • Mint Berry Crunch||

    I played the demo for KoA: Reckoning. It was kind of fun, but quite glitchy. Like, even more rough around the edges than you'd expect a demo to be.

    I was probably aware it was "that Curt Schilling game" at the time, but hadn't heard about all the government loan shenanigans.

  • Jordan||

    I played the demo too, but thought it was terribly boring.

  • Red Rocks Rockin||

    I rented the full game when it came out and enjoyed it, but Schilling was out of his mind if he thought that was going to be the breakout title to put his company on a solvent path.

    There wasn't anything ground-breaking about the game's setting or characters(just your typical mage/rogue/warrior options and Tolkein-esque archetypes), nor the actual gameplay. Multiplayer games are a dime a dozen, and if you want to be successful, you need to offer something revolutionary to compete with the big boys.

    You look at a series like God of War, which WAS revolutionary in its gameplay and storyline aspects (to the point that games like Dante's Inferno blatantly ripped it off), and the established fan bases of WoW and Call of Duty that 38 Studios was trying to poach, and KoA never was going to measure up.

    Just great stupidity by Schilling and the Rhode Island legislature to sink as much money as they did into it. They probably could have started small by developing a few fun, addictive apps, and used that revenue to invest in the creation of a strong single-player franchise that was unique in the gaming world. Instead, the company copycatted and ended up imploding.

  • tparsons47||

    38 Studios didn't really develop that game - they bought Big Huge Games, who developed it. The actually game 38 Studios was working on was never finished or released.

  • RightNut||

    Big Huge Games was pretty much defunct without Brian Reynolds(he went to zygna) anyway.

  • rhofulster||

    Well, one more thing to throw in FIL's face when he claims that Rs aren't as magical thinking (economically) as Ds.

  • Sevo||

    "Enter Gov. 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..."

    And just dying to make it worse; some legacy.

  • Paul.||

    The thing that bugs me about some of the public officials' comments about this situation is that 38Studios wasn't watched closely enough, there wasn't enough oversight etc. B frickin' S. The loan never should have been given. The agency designated to dole out public dollars to private companies should have never existed.

  • MoreFreedom||

    Right on Paul. Yours is the first comment that gets at the real problem here: government picking winners and losers - in this case RI taxpayers are the losers while 38 studios' employees were the winners. Also, I expect that several RI politicians got some campaign cash from Shilling and other 38 studios execs.

    The more power government has to pick winners and losers, the more power the rich will have relative to the rest of us, and that rich will include the politicians as well (as they get in on deals where they hand out our money).

    The obvious solution, is to separate government and commerce. Let the free market regulate producers, it does a better job.

  • Restoras||

    The only lesson I'm getting from this article is that a celebrity businessman conned $$$ out of RI when it couldn't be had from MA...making RI dumber than MA. Astounding.

  • MoreFreedom||

    Maybe, maybe not. Schilling might be the dunce he claims to be and may have lost his wealth. But it depends on how the company was setup and financed. If it's a corporation, then generally stock is issued to the founders putting in the cash, but their liability is typically limited to their investment.

    The way most crony crapitalists operate, is they use as little of their own money as possible to get the company going. Then they get government guaranteed loans and then start paying themselves outrageous compensation until the company is bankrupt. Some of the founders may have done this.

    But we don't know as I've not seen their corporate and accounting records or seen any analysis of them.

    If I was a crony crapitalist, knew Schilling and he offered to let me in, I could see his celebrity helping to get a government guaranteed loan.

    It's bad for our prosperity when economic decisions are made by politicians, rather than by people working with their own money.

  • RightNut||

    Applied for a few jobs their about 6 months before they went belly-up. At the time I was bummed I didn't get the job, kinda glad now.

  • Red Rocks Rockin||

    Five years ago, I left a Tier 1 job at a company about nine months before they declared bankruptcy. I had only been there about five months, but I saw they were heading for a breakdown about two months into it, because the customer service was horrible.

    Coming from the Air Force, where people started jumping on your ass if a circuit wasn't back up in less than 10 minutes, to that company was an eye-opening experience, to say the least. I'm still amazed that I voluntarily left instead of being released, because our NOC was losing more experienced bodies left and right.

  • CZmacure||

    "featuring long spells of double-digit employment" You mean "double-digit unemployment" right? Because I don't think any state could achieve 100% employment.

  • Rothbeard||

    How many digits in 100?

  • ||

    ...the RIEDC lacked any meaningful "guidelines and principles" to effectively monitor the progress of the loan and report to the governor and the RIEDC's board.We don't even know how to monitor loans.


    FIFY.

  • Danno||

    Check out the building scandal in Wisconsin regarding WEDC http://watchdog.org/64902/wi-e.....n-problem/ and more to be lost by a airplane company that first fleeced Maine then jumped to Wisconsin to fleece those taxpayers: http://www.kestrel.aero/index.php/the-kestrel The plane has been in perpetual design and testing. When are people going to learn the government picking companies only leads to cronyism and failure much more than the private market. Did these EDC departments even have a Credit Manager that did AR trending and used credit agencies like Experian?

  • Sevo||

    From the Wisconsin link:
    "Just because we’re not going to collect, is this a bad loan that Commerce did?” Thieding asked, underscoring the philosophical debate of government playing banker with taxpayer deposits."

    Hey, it's only taxpayer money! Who cares if we get it back?
    Some "debate". Use your own money, asshole.

  • commenter8||

    How To Cut Spending: End Corporate Welfare!!!

    As Rex Nutting of Marketwatch noted in his 12/18/2012 article “Why isn’t Obama demanding corporate welfare cuts?”, “$2.6 trillion could be saved [...] It’s possible to achieve all the budget savings we need for the next 10 years simply by cutting the fat out of discretionary spending programs and tax expenditures [removing all of the corporate welfare] without raising tax rates on the wealthy or cutting the safety net at all.”

    Oil and gas companies, which are raking in record profits, certainly don’t need $4 billion a year in subsidies, and even the oil company CEOs admit they don’t need it!

    Why are cuts to Social Security and Medicare even being discussed while literally billions in corporate welfare are constantly spilling out of the Treasury?

    White House petition to End Corporate Welfare:http://wh.gov/Qa6f

  • Sevo||

    commenter8| 1.4.13 @ 8:14PM |#
    "Why are cuts to Social Security and Medicare even being discussed while literally billions in corporate welfare are constantly spilling out of the Treasury?"

    Because a 100% end to corporate welfare doesn't likely amount to a rounding error in S/S and the various medical scheme budgets.
    Yes, it should be ended. But it's only a start and the others are going to get the axe.

  • BMFPitt||

    Why are cuts to Social Security and Medicare even being discussed while literally billions in corporate welfare are constantly spilling out of the Treasury?

    Because you could cut the entire rest of the federal government besides interest on the debt and we'd still barely be in the black.

  • Virginian||

    You're asking the guy who bailed out GM to end corporate welfare?

    It took eight tries, but with commenter8 science has succesfully created the dumbest fucking human being in the world.

    It never fails to amaze me how progressives can watch their heroes do something bad and wrong and wicked and nonprogressive, then argue ferociously that not only did their heroes not do the bad wicked thing, but that secretly they want to do the good righteous thing but can't because of obstructionist Republicans/the 1%/other assorted enemies of progress.

    Obama loves corporate welfare. Solyandra is corporate welfare. Bailing out GM is corporate welfare. Every single company that got money under the "stimulus" package is a recipient of corporate welfare.

  • uythsb||

    Happy New Year,NBA ,NFL 2013

  • BMFPitt||

    Instead, the fallout from the collapse and squandered taxpayer dollars will make the state unlikely to cut any more of what WPRI's Ted Nesi describes as "special, one-off deals with individual companies...picked by a certain group of people in state government."

    Highly doubtful.

  • دردشة العراق||

    thank you

  • Sean Heningham||

    Their inevitable bankruptcy was a bummer considering Kingdoms of Amalur was my favorite game of the year. An impressive first big release for Big Huge Games.

  • Soxfan17881||

    The bloody sock from the 2004 ALCS is gone...he threw it away. The one he has to sell is from the World Series.

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