The Fall of Amalur
38 Studios. For the past two weeks, this story has practically overshadowed every other story in the game industry. Even in the mad dash of news released in the weeks prior to E3, which any other year would be all the news in this business, the demise of 38 Studios looms over everything. And it seems to me that over the last couple of weeks everyone has put their own $0.02 in. Most of it from the perspective of passersby staring at the spectacle of a horrific traffic accident on the side of the freeway. But maybe it’s because everyone is in shock (unless you are in New England, then you are outraged – New Englanders love to be outraged by anything people in high places fuck up at; just ask Drew Bledsoe). But everyone else seems to be transfixed, which is probably why some of the most obvious stuff that should be what is being said about this situation, is not.
I’ve been reading everywhere like a madman, and the most obvious things, the stuff that in this particular incident are likely to be reserved for hindsight, no one is saying. And worse still, none of the talking heads in the game business are even speculating on solutions to fix this mess at all. This despite the fact that if 38 Studios goes under, it is going to have a negative impact on every game publisher and developer in North America and the EU. Half of every politician for the next decade will use 38 Studios as the poster child for not handing out tax breaks, and tax credits to game studios under their aegis. For the end gaming consumer, this means that the price of games are about to go up again over the next few years. When you consider that in many places, game companies receive between 30% to 50% of their development costs returned to them via nontaxable revenue earned under tax credit programs, you begin to realize very quickly why the retail price for games is headed upward should 38 Studios tank. And what is most sad, is that 38 Studios can be saved; should be saved even. I’ve already listed several good reasons why, and there are even more.
Not saving the studio, means that there are absolutely no winners in this situation . . . well there will be one winner, but it won’t be anyone currently associated with this situation. More on that later. Were it not for the game of politics being in the way, and the fact that it is an election year, I am surprised that the state of RI simply did not double down on their investment in 38 Studios to help them get the game done and out the door. After all, everyone has to know by now, that unless this game is completed to spec, there is no chance of any winners coming out of this situation. Everyone does know that, right? Right?
I mean, it’s an MMO, which means if it is successful (say even 1 million users), it’s going to pull down $120 million per year, for every year it is a viable property, with the potential of a $120 million, to $150 million payday in the first year alone. That’s more than enough money to pay off all the debts on 38 Studios. And if they pay the loans off early, they only pay the principal on the loans, leaving everything beyond that as actual profit. The standalone Amalur game (the one without the subscription) sold more copies than that in 90 days, which is a pretty good barometer that the Amalur MMO could hit the numbers it needs to put the entire company in the black, right out of the gate. And that does not include the merchandising surrounding the game. Don’t forget that Todd McFarlane is part owner, and he knows merchandising better than damned near anyone on the planet. And there is still the matter of the standalone Amalur series coming out of Big Huge Games. The current game has only sold 1.2 million units (a lot more than that when you include digital sales figures). That is a great start for a new RPG series. With the right cultivation, you can easily turn that into 3 to 4 million units for the sequel, and as much as 6 to 7 million units for the third game in the series, and amortize the loses incurred from the first game, across the trilogy as operational loses.
I know that it is not the business of the state of RI to be in the games business, but you have to figure that almost anything is better than shafting the state to the tune of $120 million. And what could be better than turning Amalur into a multibillion dollar IP? Yeah it’s risky, but then so is everything in life. No one ever won by giving up in the last mile. And with a year left to release this game, make no mistake about it, they are most certainly in the last mile. But’s let’s keep this so-called risk into perspective. The only reason 38 Studios is defaulting on their loan payments, is because they ran out of operating capital. MMOs are not only expensive to make, but are the most expensive type of video game to create. The $75 million that was loaned to the company may seem like a lot compared to most video games; and it is. The average video game today costs between $20 to $35 million to produce. But $75 million is a drop in the bucket for an MMO. Most MMORPGs cost well over the $100 million mark to produce, some even soaring into the $120 to $150 million range. And if there were any mistake 38 Studios made, was attempting to make a MMO with too little money. It’s not mismanaged money, or misplaced money, or embezzled money, or even commingled money. It’s not having enough money in the first place that is sinking this ship. So the risk of completing this game and getting it to market, are no different than the risks of completing any MMO. And with only a year left to completing the game, all of the risks now lie in not completing the game at all.
What most likely is about to happen is, 38 Studios is going to default on the loan, the company and all it’s assets are going to revert to ownership by the state of RI anyway, who then is going to auction off the assets of the entire company. And while true the Amalur IP is currently worth $20 million, anyone familiar with realty, and bankruptcy are already very familiar with the fact that the very nature of firesale auctions, is going to result in a sale of the property for far less than it’s marked value – it’s why you can buy millions of $300,000 foreclosed homes for as little as $50,000 these days.
RI will be lucky to get even $10 million for the sale of 38 Studio’s assets. Still leaving the state on the hook for the other $110 million. Meanwhile, some other company like Turbine, SOE, Blizzard, or Webzen (all private game publishers who could bail 38 Studios out, save the jobs of everyone who got laid off, get the game finished to it’s original vision, and turn it into a major IP) are just sitting around right now waiting for the state auction of 38 Studios, so they can pick up what is potentially a billion dollar IP, and an almost completely finished MMORPG, literally for pennies on the dollar.
And the state of RI? The moment someone like Blizzard buys this company for pennies, and turn Amalur into one of it’s cash cows, are going to be kicking themselves for not making the state double down on their investment, and stick it out through the rough patch. They are still going to be over $110 million in debt (complete with higher taxes to pay off that debt), the year somene like Webzen profits their first $120 million off the IP. But none of that profit will go to pay off RI’s debt . . . not a single penny of it. The citizens of RI think they are pissed now. Wait until some company like SOE comes along and turns $150 million in profit off the Amalur IP, while the people of RI are still paying off $120 million in loans, and nary a penny of that profit goes to the state, or towards paying of that colossal debt. They don’t know pissed yet, but they may find out first hand in a couple of years.