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Schilling move fires debate over incentives

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By Hiawatha Bray
Globe Staff / July 28, 2010

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Who lost Curt Schilling? As the former Red Sox pitcher prepares to move his video game company to Rhode Island, politicians and video game industry executives are debating whether more could — and should — have been done to keep the company in Massachusetts.

On Monday, the Rhode Island Economic Development Corp. approved $75 million in loan guarantees to Schilling’s 38 Studios LLC, and Schilling said he’d move the game company from Maynard to a still-undetermined site in the Ocean State. In return, Schilling promised that 38 Studios would bring 450 new jobs to Rhode Island over the next three years.

The deal has reignited debate over the wisdom of economic incentives like the loans, guarantees, and tax breaks that state and local governments give to companies that promise to create or retain jobs. Because Schilling’s four-year-old company has no revenues and has not yet released its first product, critics said, Rhode Island is gambling on the success of an untried company when its failure could leave taxpayers on the hook for millions of dollars.

Greg Bialecki, Massachusetts secretary of housing and economic development, said Schilling apparently hoped his discussions with Rhode Island officials would goad Massachusetts into making him a better offer. Although Bialecki said he had discussed possible tax breaks with Schilling earlier this year, in the end Massachusetts was unwilling to offer such a big incentive package to one company.

“We were prepared to offer incentives,’’ he said. “We were not prepared to participate in the bidding when it got as high as it did.’’

Massachusetts should have made a better offer, said Michael J. Cavaretta, a lawyer at Morse, Barnes-Brown & Pendleton in Boston who works with local game companies. Cavaretta said that with government assistance, Greater Boston could someday rival San Francisco, Los Angeles, or Seattle as a center for video game design. “To get to that level, [offering] some incentives would certainly help,’’ he said.

On Monday, Schilling said that he stopped talking to other states four months ago, and started dealing exclusively with Rhode Island. “It’s paid off in spades,’’ he said.

Thanks to Rhode Island, Schilling said, 38 Studios will have enough funding to go beyond merely producing games, and into the more profitable business of publishing them. In April, Schilling said that he had invested $30 million of his own money in the company, meaning the Rhode Island deal will bring the total investment in 38 Studios to more than $100 million before it makes its first sale.

Schilling was not available for comment yesterday.

Rhode Island will not provide the money directly from taxpayer funds. Instead, the state’s economic development corporation will issue $75 million in bonds that will be sold by a bank, which in turn will lend the money to the company in stages, as it meets a series of milestones.

For example, 38 Studios will get the first $20 million when the loan agreement is reached, probably by Aug. 31. When the company discloses a date for its relocation to Rhode Island, it will receive $10 million more, and it will get another $20 million when it creates its first 80 full-time jobs in that state.

In addition, 38 Studios must pay $8 million in annual fees to the economic development agency over the 10-year life of the loan. The company must create 450 new jobs in stages over three years, and pay a penalty of $7,500 per year for each job it fails to create on schedule.

Rhode Island taxpayers would be stuck with the unpaid balance of the loan only if 38 Studios fails. The state gets first rights to all of the company’s collateral, including intellectual property rights to any 38 Studios games, and can use that to recover money if the company can’t repay the loans.

“I would love to see a program like this in Massachusetts,’’ said Jeffrey Anderson, chief executive of rival sports game company Quick Hit Inc. in Foxborough. Anderson said he’s generally opposed to government aid to businesses, but the video game industry is different because it attracts high-paying jobs that can give a big boost to a state’s economy.

Anderson said that for a good offer, he might follow Schilling across the state line. “Is it something we’d consider, given the right opportunities?’’ said Anderson. “Of course.’’

But Bill Reed, the chief executive of Demiurge Studios Inc., a game development company in Cambridge, thinks Rhode Island went too far. Reed is sorry to see 38 Studios go; he published an open letter to Schilling on the Demiurge blog, urging the former ballplayer to reconsider, and offering jobs to 38 Studios employees who choose to stay in Massachusetts.

It makes no sense to provide such a large loan guarantee to a start-up that has yet to bring a product to market, according to Reed. “It’s hard for me to make sense out of doing it,’’ he said. “I wouldn’t want to see my state doing that.’’

Gubernatorial candidates in both Rhode Island and Massachusetts attacked the loan guarantee.

Timothy P. Cahill, a former Democrat now running as an independent in Massachusetts, criticized the officials who made the deal with Schilling. “I think I would not have done what Rhode Island did,’’ Cahill said. “I don’t think as a matter of policy it’s a good idea to give tax credits to individual companies, betting on their success.’’

Lincoln Chaffee, an independent candidate in Rhode Island and a former Republican US senator, also criticized his state for taking a potentially expensive gamble. Schilling’s company is in a risky business and has no track record, he said.

Meanwhile, Rick Gorka, a spokesman for the campaign of Massachusetts Republican Charles D. Baker, said Schilling’s departure was an example of a “toxic business climate’’ created by Democratic incumbent Governor Deval Patrick.

Schilling’s search for government incentives was first reported in March. At the time, Schilling, who holds conservative political views, wrote on his company’s blog that “38 Studios is not looking for ‘handouts’ or ‘tax breaks’. Any responsible entrepreneur exhausts every avenue of potential funding when running a start-up company; we’re no different.’’ Schilling said he had a responsibility to his 180 employees to explore every option to make 38 Studios a success.

“We were founded here, in Massachusetts, and it’s where we would love to stay, and grow,’’ Schilling wrote. “But (and there’s always a but) our first responsibility and priority will always be the long-term health of the company. . . . To not explore and pursue these conversations with other cities would be the height of negligence on our part, and that’s just not going to happen.’’

Hiawatha Bray can be reached at bray@globe.com.