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Scenarios for 38 Studios going forward

Posted by Scott Kirsner  May 23, 2012 01:29 PM

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I've been talking to people this morning about the most likely scenarios for 38 Studios, the Providence-based game development shop that seems to be running out of money after receiving a $75 million loan guarantee from Rhode Island. As of today, the company's CEO and senior VP of product development have updated their LinkedIn profiles to indicate they're no longer with the company.

I spoke with game industry executives and venture capitalists who've invested in other developers of massively-multiplayer games. Not everyone wanted to talk on the record, but here are some of the scenarios they sketched out for what happens next at 38. (I left a message today for 38 Studios seeking comment, but haven't heard back.)

Scenario #1. A bigger game studio or media company comes in and offers to take the 38 Studios assets for nothing. They keep developing 38's forthcoming game "Project Copernicus." One game industry insider said the idea would be, "We'll take it for zero, make payroll, and probably cut the team down radically from its current size." But Dan Scherlis, a former executive at Turbine, a developer of massively-multiplayer games that was bought by Warner Brothers in a somewhat distressed state, pointed out that "Project Copernicus" looked pretty far from completion in the trailer that 38 hastily released last week. "There were no characters animated in the trailer, and that was very disturbing to me. There seemed to be a huge effort toward art and asset development, and not enough focus on the gameplay."

It's unlikely that a private investor would come in and want to keep funding 38 to develop "Copernicus," said Jeffrey Anderson, an executive at Majesco Entertainment and former CEO of Turbine. "That would be the best scenario, to find someone to keep funding it," but spending an additional $50 million or $60 million to try and produce a big hit might not appeal to many investors, he said. The company has said its target date for finishing "Copernicus" is June 2013. "If it was two or three months away [from completion], most everyone would [invest] to be able to turn the card over and see what's there," he said.

It's possible in this scenario that Rhode Island or founder Curt Schilling would hold onto a small equity stake, but it likely wouldn't be much. The main goal would be keeping some number of people employed in Providence, and getting the "Copernicus" game across the finish line after years of development. I couldn't get anyone to suggest who might be a likely acquirer here, though Anderson said that it could be "an Asian partner looking to pick up a team and talent in the U.S."

Scenario #2. Someone acquires 38 for their division in Maryland, formerly known as Big Huge Games, as well as the game that group launched earlier this year, "Kingdoms of Amalur: Reckoning." That team, says Anderson, unlike the larger group of 38 Studios employees in Providence, "has a history of delivering projects, meeting budgets, and hitting timelines." An acquirer in this scenario would probably get the assets related to "Copernicus," but may or may not decide to invest in finishing that game. Game giant EA, which released "Kingdoms of Amalur," would be one candidate in this scenario.

Scenario #3. Rival game companies like Turbine are already cherry-picking talent from 38, and headhunters have been calling employees for several weeks now. That could make the company less appealing to anyone looking to acquire a game development team in Rhode Island or Maryland. And both places, observes a VC who has invested in game startups before, "are way off the beaten track as far as location. You want a team that's in a center of excellence that you can build around. Providence is a great place, but it's just not there as far as game development."

In this scenario, 38 eventually shuts down and files for bankruptcy, and sells its revenue-generating product, "Kingdoms of Amalur," to another game company. Office furniture and computers get sold cheap, and it's likely that "Copernicus" never sees the light of day.

In summing things up, Beach Cooler Games CEO Hank Howie told me that unfortunately, massively-multiplayer online games are "kind of yesterday. What's hot now are mobile, social, and games that are free to play." Howie added that when a company says they're a year away from finishing a game, "that means they don't know."

"I think it's hard to bring this company in for a landing even a rough landing."

(Incidentally, no one with whom I spoke today discussed a scenario where a "white knight" would come in, continue to finance the company in its current state and size in exchange for some chunk of equity, and get "Copernicus" into the market.)

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About Scott Kirsner

Scott Kirsner was part of the team that launched Boston.com in 1995, and has been writing a column for the Globe since 2000. His work has also appeared in Wired, Fast Company, The New York Times, BusinessWeek, Newsweek, and Variety. Scott is also the author of the books "Fans, Friends & Followers" and "Inventing the Movies," was the editor of "The Convergence Guide: Life Sciences in New England," and was a contributor to "The Good City: Writers Explore 21st Century Boston." Scott also helps organize several local events on entrepreneurship, including the Nantucket Conference and Future Forward. Here's some background on how Scott decides what to cover, and how to pitch him a story idea.

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