The Struggles of 38 Studios

The state of Rhode Island is working hard, very hard, to make sure that Curt Schilling’s 38 Studios remains a going concern. It appears the state is on the hook for $50 million+ if 38 Studios defaults on its loan that is backstopped by a state guarantee.

And let me be clear — no one wants the company to fail. Back when the deal initially went down, I said that Curt Schilling has every right to find the most lucrative deal for his company but that the state of Rhode Island was making a mistake. What the state did was make a big, concentrated, multi-layered bet.

Big — $75 million big. Concentrated — $75 million of a $125 million initiative in a single company. Multi-layered — the return on investment rests on the assumptions that 38 Studios has picked the right content, put it through the right distribution channel, and picked the right revenue model. Oh, and you’ve got to spend most of your money upfront to develop the content and build the distribution platform before any customers show up.

Now, I know nothing about online gaming. Maybe Schilling’s onto something; maybe he isn’t. Do you think the folks working for the state of Rhode Island knew what they were getting into? An investment in a company like 38 Studios should be the domain of industry experts (risking private capital) or private investor with a high tolerance for risk and an interest in the field (like Schilling) — not government bureaucrats using public funds.

And as an aside, nice work by Greg Bialecki and the rest of the Massachusetts economic development team in not responding to RI’s offer with one of their own.

I sincerely hope 38 Studios makes it. But the ongoing inability of the public sector to make investment decisions in volatile, complex markets should encourage us to get it out of the business of picking winners and losers.

Crossposted at Pioneer Institute’s blog.