Long odds for RI-backed Schilling game

PROVIDENCE, R.I. (WPRI) - Curt Schilling faces daunting challenges – but not insurmountable ones – in turning his company's flagship video game into a hit and making good on his promises to Rhode Island.

The retired Red Sox ace's 38 Studios is aiming to crack the toughest section of the gaming market with its Copernicus project, a so-called massive multiplayer online game, or MMO.

The $75 million loan guaranteed by Rhode Island taxpayers that the company is getting will fund the MMO's development and allow 38 Studios to eventually publish its own titles, according to Schilling, who has estimated his personal investment in the company at more than $5 million.

• Related: How the Schilling loan will work (WPRI Blog)

Creating an MMO "is a big gamble, and it's very unlikely he'll be successful" with Copernicus, Mike Hickey, an analyst at Janco Partners in Colorado, told Eyewitness News. Schilling "must be a great marketer, because it's a pretty difficult market to raise capital in," he said.

Salvatore, 'Spider-Man'

Schilling, who pitched his last Sox game during the 2007 World Series, has said he first became a gamer when he started playing the "Wizardry" games on his Apple II in the 1980s.

Copernicus has been in development since mid-2006, when Schilling founded 38 Studios, then known as Green Monster Games. Originally called Project Mercury and slated for release late this year, it has been delayed.

Schilling, who is 38 Studios' chairman, has recruited top talent for the Copernicus project, notably R. A. Salvatore, a fantasy writer whose books have sold more than 15 million copies in the U.S., and Todd McFarlane, the graphic artist known for creating the comic book "Spawn" and contributing to "The Amazing Spider-Man." In May 2009, 38 Studios bought Big Huge Games, a Baltimore-based game studio.

"38 Studios is doing everything right to minimize the risk of failure," Michael Pachter, an analyst at Wedbush Securities in Los Angeles, said in an e-mail. "The key to a successful MMO is a great story, compelling art, and a well-crafted game.

"Much like the movie industry, investment in quality personnel doesn't always pay off, but it considerably improves the prospects for success," Pachter added.

38 Studios 'will succeed'

The most successful MMO is Activision Blizzard Inc.'s "World of Warcraft." Its roughly 11.5 million subscribers spend up to $14.95 a month to pay the game. Other titles have struggled to gain an audience, and now face new competition from "Farmville" and other social games played on sites like Facebook.

About two-thirds of all MMOs have lost money, according to Pachter, and Copernicus will have to compete with other upcoming releases, including one based on the "Star Wars" films, as well as "World of Warcraft."

"My guess is that [38 Studios] will succeed, but it's really hard to forecast without seeing the game," Pachter said.

The business model for MMOs is also changing, with companies allowing users to play the game for free and then trying to make money by selling them digital goods, such as virtual weapons, inside the game.

That model, which is already common in Asia, is now catching on in the U.S. and Europe. Last year, a lack of subscribers led Warner Bros. to drop its $15 monthly charge for "Dungeons & Dragons Online" and make it free.

Copernicus "will likely have to adopt that model," Hickey said. "The time-based subscription model is really hard to put on the market, I think."

'Magical world' Amalur

That may be why 38 Studios is hedging its bets. In March, the company announced its first release would not be the long-gestating Copernicus but rather "Kingdoms of Amalur: Reckoning," a single-player role-playing game, or RPG, for Xbox 360, PlayStation 3 and PCs developed by the Big Huge Games team in Maryland.

The video game "sets players on a heroic journey to unlock the mysteries of Amalur," which is "a magical world, filled with strange landscapes, exotic cities, colorful characters and terrifying creatures," according to a press release.

"Reckoning" is scheduled to be released in September 2011 and will be published by Electronic Arts (EA), one of the nation's largest video game publishers. Backers of 38 Studios pointed to EA's support as an indication of the company's potential. (A spokesman for EA declined to comment.)

EA and 38 Studios will need to sell 1.75 million copies of "Reckoning" to break even on it, but they are likely to sell only 1 million, according to estimates by Janco Partners. "It's tough because it's a new IP" – intellectual property – "and the market is ... really buying franchises," Hickey said. "It's hard to establish something new."

EA's investment 'enormous'

The recession has hurt the video game industry. Sales of games for consoles like PlayStation 3 and Xbox 360 fell 9.8 percent last year, according to NPD Group. Electronic Arts has reduced the number of new games it releases annually from more than 50 to around 35, Hickey said.

Sales of console games are unlikely to rebound significantly until new machines are released, which will not happen before 2012 at the earliest, said Evan Wilson, an analyst at Pacific Crest Securities in Portland, Oregon. Online games continue to grow more popular, he said.

Schilling has estimated EA's investment in "Reckoning" will total as much as $50 million. If that figure is accurate, it would be "an enormous number" and suggest that EA is also supporting 38 Studios' development costs in addition to marketing and other expenses directly related to "Reckoning," Hickey said.

The size of EA's investment may also limit 38 Studios' ability to make itself money from "Reckoning" because of the return the larger company will require first, Wilson said.

Having deep-pocketed backers like Electronic Arts and Rhode Island is not a guarantee of success, he added. "The most important thing for [38 Studios] is to make it a great game," he said.

Large payroll promised

Under the terms of 38 Studios' deal with the state, the company is supposed to have 450 full-time employees working in Providence by August 2013. If 38 Studios fails to meet annual employment milestones, the company will pay the state $7,500 per year for each missing job.

The company currently employs about 200 workers who make an average of $75,200 a year, Schilling said during a July 28 interview on WEEI. They are split between its Maynard, Mass., headquarters and the Baltimore base of Big Huge Games. A spokeswoman declined to comment on whether the workers in Maryland will relocate here.

Employing 450 people would make 38 Studios "an enormous company" within the video game industry, and the figure suggests the company plans to develop a number of titles simultaneously, Hickey said. A typical game needs a staff of 80 to 100 workers, while an MMO like Copernicus could need up to 200, he said.

A total headcount of 450 is "a reasonable number" if Copernicus is successful, because an MMO requires a sizable staff to handle customer service and to play and monitor the game, according to Wilson.

"The MMO business is a great one if you can attract a large number of gamers, but it's also difficult because you have to attract a larger number of users, and the chicken versus the egg scenario is a tough one to really figure out," Wilson said.

On WEEI, Schilling predicted 38 Studios will be "a multibillion-dollar company" someday.

Carcieri's new industry

Officials in Rhode Island have emphasized their expectation that the $75 million guarantee to lure 38 Studios will be the catalyst for the growth of a gaming industry cluster in Rhode Island. It "has the potential to spark the expansion of a new industry in our state," Gov. Donald Carcieri said in a statement last week.

Rhode Island is already home to the Rhode Island School of Design and the New England Institute of Technology, both of which teach aspiring game developers, and the Treanor Brothers Animation studio, as well as a growing number of technology and digital media companies.

The 38 Studios guarantee is similar to investments made in the 1990s by Gov. Bruce Sundlun's administration which paved the way for the modernization of T.F. Green Airport and the constriction of Providence Place mall, Keith Stokes, executive director of the R.I. Economic Development Corporation, whose board agreed to the $75 million loan guarantee, told Eyewitness News last week.

"It's a risk, but I think as you look at the share of the consumer wallet, video games are still gaining," Wilson said. "As a state, if you want to start attracting more talent either in tech, media or entertainment, then video games I think is a good place to do that."