Monday, May 28, 2012

Despite AS220 success, not all rosy in Providence

Posted By on Mon, May 28, 2012 at 11:05 AM

38 Studios

When we wrote about the revival of downtown Providence, R.I. — a feat helped largely by arts organization AS220 — one of the successes we documented was the establishment of video game company 38 Studios.

38 Studios, founded by former Boston Red Sox pitcher Curt Schilling, had set up shop right across the street from one of AS220's three buildings and symbolized Providence's success in attracting multimillion-dollar businesses to its formerly troubled downtown. The state had offered the company a $75 million loan guarantee to move there in 2010, which "officials said would bring jobs and tax revenue," the New York Times reported last week.

The reason why it's in the news now? 38 Studios was late on last month's payment of $1.1 million to the state economic development agency. Worse, it's laid off its entire 400-person staff.

Perhaps worse still is that the state of Rhode Island is now responsible for part of 38's debt, according to an article posted today by CNNMoney. The cash-strapped state now owes $112 million in loan principal, interest and fees, and taxpayers have little chance of making up even a quarter of their potential losses.

The article points to evidence that the entire enterprise was flawed from the beginning. Despite good intentions of attracting jobs and setting up a skilled technology business with the hopes of attracting others, 38 struggled both internally and externally. Those outside the company feel the state didn't do its due diligence in the deal, either. The article says that nearly all the members of board of directors for the Rhode Island Economic Development Corporation have resigned or asked to not be reinstated when their terms end.

"I think Rhode Island was star-struck by Curt Schilling," says Alexander Sliwinski, news editor for the video game site Joystiq. "You didn't see Rhode Island give Harmonix, Irrational, Turbine — all companies with established track records — $75 million to move."

Though analysts estimate 38 Studios is worth about $20 million, its staff (cut with no pay) is where the value of the company lies, intellectual property and half-finished products aside. It's expected that the state will sell all the assets to Electronic Arts.

Forbes, however, sees a silver lining in the fallout. Per an article published Saturday, often the death of a large video game company can prove to be fertile ground for other smaller companies to grow.

The message for state governments looking to boost their economies is to make themselves attractive as a place for games companies to set up. The trick is to achieve a critical mass of developers under your roof, so even if games companies go under, new ones will arise and take root in your soil.

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