ReadWriteWeb DeathWatch: 38 Studios

On its own, “Game Developer Fails to Wow, Folds” is hardly newsworthy. But add lies, possible criminal behavior and a $100 million bill to taxpayers, and you have a DeathWatch Candidate. Throw a controversial baseball icon into the mix, and you have a winner! 38 Studios collapsed under the weight of its own ego, and the shockwave took down hundreds of people along with it.

The Basics

In 2006, former Red Sox pitcher Curt Schilling launched Green Monster Games (renamed 38 Studios after his jersey number a year later). In 2009, the company acquired Rise of Nations developer Big Huge Games. Schilling, a vocal opponent of big government, then relocated to Rhode Island after negotiating $75 million of state-backed loans - claiming the company could create an estimated 450 jobs. 38 Studios found creative ways to spend that money, attracting top-tier talent, including Spawn creator Todd McFarlane and author R. A. Salvatore.

But in six years, 38 Studios released only one game, this February’s “Kingdoms of Amalur: Reckoning.” Reviews were mixed but generally positive, and the game found decent commercial success.

The studio’s crowning achievement was to be Copernicus, a much-hyped Massively Multiplayer Online game (MMO) that, judging by the official fly-through video below, should have been at least visually stunning.

 The Problem

Last month, 38 Studios ran out of money. It missed payroll, canceled employee health insurance, bounced a check to the state of Rhode Island and ultimately closed up shop, firing more than 400 employees in multiple locations.

Then things got ugly. According to a letter published by gaming site Gamasutra, Schilling had been missing health insurance payments for several months, knew the end was coming and failed to give his employees any warning. He even kept job postings on the site, as well as a blurb about the company’s “commitment to quality of life” for its workers. The Gamasutra letter and dozens of similar stories paint a picture of Schilling as a sleaze and a liar. At worst, he might be a criminal.

That would be par for the course for Rhode Island, which Newsweek once claimed to have “the most corruption per capita.” Schilling was reportedly cozy with the state’s then-governor, after meeting at a Republican fundraiser. According to a Boston Globe article, Keith Stokes (the Economic Development Corp.’s Executive Director at the time) used his influence to stop a budget amendment that would have capped loan guarantees like the one given to 38 Studios at $10 million, just before the company’s controversial loan went through.

Two years later, the cash-strapped state is on the hook for more than $100 million of principal and interest, and Stokes has resigned. The State Police, Attorney General’s office, FBI and U.S. Attorney’s office have launched a joint criminal investigation looking into, among other things, potential misuse of funds.

On June 16, Schilling fired back, accusing the state’s EDC of bailing on $8.7 million of tax credits that were due to the studio. On Friday morning, Schilling told a Boston radio station that the lack of those credits cost 38 Studios a $15 million third-party investment that would have saved the company. Schilling blamed Rhode Island Gov. Lincoln Chafee for many of the company’s problems. “I think he had an agenda and executed it,” Schilling said on air.

The wheels haven’t stopped turning. Michael Corso, a broker who helped negotiate an $8.5 million loan for the studio based on expected tax credits, is associated with a movie shooting in Rhode Island that just received $625,000 in new tax credits.

The Player

Curt Schilling has never shied away from the spotlight, even when it got a little awkward (like the time he talked trash about World of Warcraft after being comped a pass to its creator’s conference). Schilling is an exciting presence, but by most accounts, he’s a lousy leader. While his star power helped attract investors, one product every six years won’t pay the bills.

Even if none of the mud sticks, Schilling’s inability to perform basic arithmetic will write him into the history books as one of the tech and gaming industry’s most inept leaders. As CNN’s Dan Primack wrote, Schilling, 400 employees, and Rhode Island taxpayers had to learn the hard way that venture capital is best left to those who know how to make money.

But Schilling still doesn’t seem to understand his own role. In the radio interview, Schilling acknowledged some responsibility for the situation, yet claimed “the amount of hatred [he was receiving] is surprising, given that I’ve never hit my wife, I’ve never driven drunk, I’ve never taken drugs, I’ve never done steroids, I’ve never done the things that a lot of people have done.”

The only fan Curt Schilling has left might be Roger Clemens, who is no longer the most reviled former Red Sox pitcher in New England. He may have used steroids and played for the Yankees, but Clemens was acquitted of the criminal charges he faced.

The Prognosis

Studio 38 is dead, and Schilling claims to have lost $50 million of his own money in the process. But the true victims in this saga are the hard-working employees who bought into the dream, lost tens of thousands of dollars of income and benefits, and created a beautiful piece of work that may never make it to market. In response, the gaming world has reached out to the former employees: Epic Games announced plans to hire 100 of them.

Can This Company Be Saved?

There’s no hope for the company, or for Schilling’s business reputation, but Copernicus may yet ship. Rhode Island is examining its options and will be courting buyers. Anyone interested in the intellectual property would need the resources to maintain and expand the game over time, limiting the list of suitors and reducing the expected price.

The DeathWatch So Far

ReadWriteWeb’s DeathWatch series highlights businesses and technologies facing potentially life-threatening challenges. Each week we examine a vulnerable company, check for a pulse and look at its chances for recovery.

Research In Motion: No change in status.

HP: No change in status.

Nokia: No change in status.