38 Studios' spending topped $133M, documents reveal

PROVIDENCE, R.I. (WPRI) - Curt Schilling's video game company 38 Studios blew through more than $133 million before it collapsed into bankruptcy last month, according to documents newly obtained by WPRI.com.

38 Studios' operating expenses totaled $118 million between its founding in August 2006 and the end of 2011, the documents show. The company earned no revenue during that period; the bills were paid out of Schilling's personal fortune and, starting in November 2010, proceeds from a $75 million taxpayer-backed loan awarded by the R.I. Economic Development Corporation.

During the first three months of this year the company spent another $15.4 million, including $5.4 million in March alone, but also booked its first $27.7 million in revenue, the documents show. Bankruptcy records show a 38 Studios subsidiary received a $28.7 million advance from Electronic Arts in January after it finished its first game, "Kingdoms of Amalur: Reckoning," which EA published in February.

The nearly 1,100 pages of memos, emails and financial statements provided by the EDC under a public records request shed new light on how in less than two years 38 Studios went from a high-profile company championed by former Gov. Don Carcieri and House Speaker Gordon Fox to a bankrupt enterprise that defaulted on its obligations and laid off roughly 400 workers.

"This was just not a startup atmosphere in the company, where you really hunker down and have macaroni and cheese - that's what most companies do," Gov. Lincoln Chafee told WPRI.com on Tuesday. "This was very, very different. [It] might not have been caviar, but they were living high on the taxpayer's dollars."

"38 Studios was hemorrhaging cash - our cash," Saul Kaplan, who was executive director of the R.I. Economic Development Corporation until 2008, told WPRI.com. "The thing that is most amazing to me is their burn rate was about $5 million a month all through 2011, heading into 2012, and it didn't slow down even when they knew they were running out of cash."

Schilling: 'Invulnerability' at firm

A Harvard study found 38 Studios spent $705,000 on "travel and entertainment" in a two-year period, and employees didn't contribute to their health insurance. "We never had that sense of urgency or panic," Schilling told Boston magazine in an interview published this week. "I think there was a sense of invulnerability - I don't want to say invulnerability, but I think we were comfortable."

The documents obtained by WPRI.com also raise new questions about whether 38 Studios executives were overoptimistic about the company's prospects. Their business plan projected the company would take in $109 million in revenue over the course of this year, including $6.5 million a month from April to June; $476,333 a month from July to September; and $19.9 million a month from October on.

The documents don't offer a rationale for those numbers, but 38 Studios executives told a bankruptcy trustee they'd projected "Reckoning" would sell more than the 2 million copies necessary for them to break even on the EA advance and begin earning royalties. Actual sales totaled around 1.3 million copies.

"I don't think 2 million was an unreasonable estimate - I thought it would do 2 million to 3 million," Michael Pachter, a game-industry analyst at Wedbush Securities, told WPRI.com. "They may have been counting on an extra $30 million to $40 million of revenue from the game."

"I think probably went they started working on the game that was probably a realistic assumption for them, but with the way the [game] market's deteriorated that's probably a best case, not a bad-case scenario," said Mike Hickey, an industry analyst with National Alliance Capital Markets.

Expensive game drove costs

Pachter and Hickey both said they weren't surprised that 38 Studios spent more than $133 million, considering Schilling's main project was "Project Copernicus," a massively multiplayer online game along the lines of "World of Warcraft." The company reported that it spent $104.5 million on research and development through March.

"That's reasonable," Pachter said. "The cost is all people. The cost of the technology is tiny."

"That's a monster number, obviously," Hickey said. "But six years of development - most of that's headcount. ... It doesn't surprise me over six years they spent that much money." 38 Studios' loan deal with the EDC also required the firm to keep staffing levels high.

The analysts said 38 Studios' bigger problem was its failure to attract investors other than Schilling himself and the state of Rhode Island, which together kicked in an estimated $100 million over the years.

"If you want to make a high-end MMO you're probably looking at north of $100 million," Hickey said. He added: "To do it independently, without a track record of success, is basically unheard of. [Schilling] obviously acquired a strong team of industry professionals that he thought could come up with something that worked. Clearly it didn't."

Tom Zaccagnino, the lead director on 38 Studios' board, did not respond to messages. Schilling has declined repeated requests for an interview. Carcieri has not spoken publicly since 38 Studios' began to unravel.

'Star Wars' damaged MMO hopes

Pachter said 38 Studios' efforts to attract additional financing were likely hurt by the disappointing performance of "Star Wars: The Old Republic," a new MMO backed by EA that was released in December. "Star Wars" cost an estimated $200 million to develop but hasn't been as big a hit with subscribers as expected.

"I honestly think if 38 Studios had moved to get financing months earlier they would have been fine," Pachter said. "Had they been out in the market in December I think they would have been fine, and I think they probably believed they were fine." He also suggested Rhode Island "should have thrown good money after bad" and kept the company afloat for another month while searching for a buyer.

Chafee said he wasn't convinced it was worth it. "I just didn't see any evidence that another penny, another million, another $10 million, could get them to firm financial footing," he said. "I never had that confidence and I was always reluctant to get in any deeper."

Kaplan, author of "The Business Model Innovation Factory," said the newly released documents suggest 38 Studios needed another $60 million or more to finish "Copernicus" and it's unclear whether that much money could have been found. "I can't imagine a scenario where anyone was going to put that capital in," he said.

"That's the chief financial officer's job - to make sure they don't run out of cash," Pachter said. "They should have had enough cash on hand to finish the game a year ago just to be safe. You don't want to keep going back and back and back to raise capital."

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi's Notes blog. Follow him on Twitter: @tednesi

Tim White ( twhite@wpri.com ) is the Target 12 investigative reporter for WPRI 12 and Fox Providence. Follow him on Twitter: @white_tim