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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.


2 responses

  1. I’m not sure where you got your information about how successful MMOs are. At one point it was easy for a title to launch and attract 1m+ players, but that’s followed by dramatic drops in player subscriber numbers (e.g. AoC, WAR, even SWOR). An active 1m player base (with sub fees) is very big in Western markets.

    Next, revenue isn’t profit. Any amount earned by a MMO studio then has to be allocated to ongoing costs / expenses, so that if you’ve got 400 people employed (as 38 Studios had planned to) you’re probably paying out US$4m a month in rent and wages, plus other costs. Looking around at some quarterly earnings statements Paragon Studios (City of Heroes / Villains) only gets about US$2.5m a month (so US$10m a year) and Funcom (AoC, TSW) was somethng similar if I’m remembering correctly.

    Yes, a successful MMO is a profit machine, but a middling / unsuccessful one is a death spiral. 38 Studios appears to have been sourcing cash from every investor they could to keep the doors open, and while MMOs are expensive to make 38 Studios were still a year away from launch but had spent all their cash. They weren’t keeping a lid on their costs. Trion Worlds managed to do it for RIFT with US$50m; 38 Studios spent that to get to this particular crisis.

    For RI to double down, access another US$50m+ just to get the game out the door with a company that has been running low on cash for months already would have been a terrible deal.

    Blizzard Activision won’t be buying Amalur, nor will SOE. The game is too far from done and the dev team apparently spread to the four winds. When the 38 Studio fire sale starts, a number of parties will go through and look to see what can be bought and used profitably – perhaps the toolsets, maybe the engine – but I can’t see anyone trying to buy the whole project to re-start it as originally intended.

    June 19, 2012 at 10:50 pm

  2. First of all, I’m no dummy (not that you insinuated that I was one, but I need to clear the air on that fact up front). I run a business of my own, and I understand full well that revenue =/= profit. I also understand full well the costs associated with running a business, and that successful MMOs often cost tens of millions of $$$$ every year to run. None of that is lost on me. But the fact still remains in the case of 38 Studios, that you cannot possibly expect to ever recoup any of the money loaned to the company, if they do not get actual product into the hands of consumers. The only thing RI can ever expect to recoup from this deal, is whatever they auction the company off for. Last check the company was valued around $20 million just prior to the meltdown. But whether you sell the whole entity, or whether you sell it piecemeal, there is no way RI is ever going to regain anything other than a fraction of the value of the company; much less what they already invested into themselves. With a product that has been in development as long as their game has been, yeah you can cut your loses and run, and there are those who will call that the fiscal responsible thing to do. But with a year left before release, seeing it through to the end, while risky, is the only option that could have possibly yielded a full return on investment. As it stands, currently there are zero winners in this fiasco. By giving the actual product a chance to recoup loses, then you give all the losers a chance of at least breaking even – and maybe if you are lucky, really truly lucky, everyone becoming winners in the long run. And let’s face facts, the final year of an MMO development is about balancing, bug hunting, and tweaking anyway. Meaning the game is pretty much already complete, or so close to complete that it may as well be complete for all points and purposes.

    And no RI did not themselves have to double down on the studio. But at the very least, Rhode Island governor Lincoln Chafee could have honored his word that he would actively work to secure private investment in 38 Studios to insure the game was completed, thus giving RI taxpayers a real chance of getting all of their money back. But no sooner had the words come out of his mouth, than his action backpedaled on that promise. But it’s an election year, so I guess backpedaling on promises is par for anything that comes out of any politician’s mouth. Chafee gets to give the state of RI a big, “I told you so,” and ride that “I told you so,” all the way to a re-election vote. It’s win-win for him, but for the rest of the state, and for all the employees at 38 Studios, there is nothing but losers all around. Also with doubling down (or helping them get private investors), there are all manner of conditions and stipulations the state could place on the deal to further the cause of the taxpayer of RI – mind you, most of those stipulations should have been a part of the original deal in the first place. The fact they cut 38 Studios a deal, and did not at the very least require them to move their incorporation status to RI so they could collect taxes from any revenue generated by the company, just speaks of the level of incompetence at work at the top of the State. Of course being from Mass, none of this gross incompetence of the RI government surprises me one iota. We’re always afraid that somehow RI’s incompetence is going to drag all of New England down a hole, like Greece is currently doing for the EU.

    And no, there is zero guarantee the game ever would have been a success if released – risk is a part of business that can only be mitigated, not negated. But then it also could have been an overwhelming success. What Chafee really needed if he was ever serious about helping RI, was a task force made up of game industry insiders and experts, from both publishing, and developing, to come in and actually look at the progress of the game and determine whether it stood any chances for success – he can demand that of 38 Studios, because as an investor in the company, it is the State’s money at risk, and there are laws that govern the power that investors have over companies. But he did not do any of that. He did not do his due diligence. He had one presentation from Schilling (a person we know has not been 100% above board about the fiscal situation of 38 Studios), and based his entire course of action on that alone. And then had the nerve to comment (alluding to Schilling and crew), that some people don’t know anything about running a business.

    And as for whether an unreleased MMO can be turned into a success story . . . well for that, I will point you over to the case of APB. Not unlike Amalur, APB was a very ambitious MMO conceived and developed by Grand Theft Auto creator, David Jones, and his studio, the now defunct Realtime Worlds. APB was released in July of 2010, and for all points and purposes, unfinished, and very quickly bombed. A little over two months after the game started, it ended, and Realtime Worlds went belly up with their game. Two months to the day after that, GamersFirst swooped up the entire property literally for pennies on the dollar at $2.3 million (£1.5 million, according to reports on the deal). GamersFirst went on to staff up a new team to take over the game, centered around cherry-picked former employees of the defunct Realtime Worlds studio, including studio head and the game’s visionary, David Jones, himself. They proceeded to balance the game, fix most every issue from the original release, convert the MMO over to a F2P MMO, and then in May of 2011 the game relaunched in open beta as APB: Reloaded. And unlike it’s predecessor, APB: Reloaded has been an unmitigated success. In the year since it’s relaunch, APB: Reloaded has managed to gain over 3 million active users, and sits as Steam’s second most successful micro-transaction game. And just looking at pure revenue numbers, taking into account that probably only 25% of the Reloaded’s +3 million players actually spend money on it, if the money those 25% spend every month winds up averaging out to ~ $5 per overall active players, then annually, you are still looking at a huge chunk of change coming in revenue – before you start subtracting for operating expenses. All of this,s from a game that was one of the industry’s biggest, and most public failures.

    GamersFirst seems to be making it their core business of rehabilitating failed MMOs with real potential, into F2P MMO success stories. If they can routinely pull that off with abject failures in the market, imagine what can be done with a game that never had a chance to fail in the first place? And you can bet that every time GamersFirst turns another failure into a success story, that other MMO publishers are looking on, and learning with the intent of eventually replicating that business model for themselves.

    My ultimate point is, and there is multiple established precedence to adequately argue that point, a game like the Amalur MMO that has not had an opportunity to leave a bad taste in the mouth of any gamer, if it is even halfway well made to begin with, with as much free publicity as the game has garnered, has “rehabilitation” hit written all over it. Somebody in the MMO business is very likely to buy the entire IP outright, likely for pennies on the dollar, and very likely before it even gets to the auction block. And everything that happens to it after that, is gravy. It could have been the State of Rhode Island’s gravy had their governor actually given a damn about anything other than himself (or maybe he’s just got bad advisers like everyone else in Rhode Island politics). Like I said, at the very least he could have honored his promise to help the company secure private funding in exchange for certain terms and conditions. He did not even bother to do that; he just sat around pretending his hands were tied, all the while publicly bad mouthing 38 Studios’ potential, in an effort to distance himself politically from the company – not foster investor relations to save the company. Which in my book, makes him even more incompetent than the idiots that inked the deal with 38 Studios in the first place.

    June 22, 2012 at 6:15 pm

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