State must learn from 38 Studios’ fall

“It looks like the EDC got it right this time.” More

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PBN Editorial

State must learn from 38 Studios’ fall

Posted 5/28/12

“It looks like the EDC got it right this time.”

– PBN Editorial, Aug. 2, 2010

There is little question that the R.I. Economic Development Corporation did not get “it” right when it set the terms of its deal with Curt Schilling’s video game company, 38 Studios LLC, amid reports of mass layoffs at the firm.

Yes, the EDC worked hard on the agreement, creating a fee and penalty schedule that gave the state a nice return on its investment. But there are questions about how the EDC monitored the progress of this investment that must be answered before we can learn what to avoid with other deals going forward.

And using 20/20 hindsight as we stare at a roughly $110 million interest and principal liability, it should have been clear from the beginning the deal was not worth the gamble.

First, developing a massive-multiplayer online game is more akin to making a blockbuster Hollywood movie than it is a project for a typical tech startup. High upfront costs can lead to a big payoff, but with no guarantee for success.

Secondly, it is clear now that 38 Studios did a deal with Rhode Island because it was the only investor that did not demand an equity stake in the company. But equity, and ownership dilution, is the right call, since it puts no pressure on the company’s cash flow.

Gov. Lincoln D. Chafee reports that Mr. Schilling remains resistant to accepting diluting investments.

With no hope of securing any more loans, the only way out as a going concern for Mr. Schilling and 38 Studios is to accept a diluting equity investment. Under no circumstances should the state send any more to the company if that does not happen.

And if Mr. Schilling is not willing to take on just such an investment, it is time for the state to call the loans and liquidate the company. It’s really that simple. •

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