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38 Studios misses payroll, struggles to pay off state debt
38 Studios misses payroll, struggles to pay off state debt
May 17, 2012 | By Tom Curtis

May 17, 2012 | By Tom Curtis
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    54 comments
More: Console/PC, Business/Marketing



The grim news surrounding Kingdoms of Amalur developer 38 Studios continues to mount, as new reports indicate that the Rhode Island-based company was unable to pay its employees this week.

Over the past several days, the studio has been in talks with Rhode Island officials to discuss its serious financial woes, and today a spokesperson for the Rhode Island Economic Development Corporation confirmed that 38 Studios has missed its most recent payroll, reports local news group WPRI.

The publication reports that 38 Studios employed 379 full-time employees as of March 15, with some 288 employees located within Rhode Island state.

Meanwhile, Rhode Island Governor Lincoln Chafee said that 38 Studios is in the process of fulfilling the overdue $1.125 million loan payment it missed earlier this month.

This news comes just a day after 38 Studios head Curt Schilling met with state officials asking for more funding for the company. Thus far, the state has not taken any action, though another meeting has been scheduled for Monday.

In the midst of this turmoil, the EDC's executive director, Keith Stokes has stepped down from his position altogether. Stokes played a major role in providing 38 Studios with state funding, and helped coordinate the $75 million state loan the company received in 2010.

Schilling publicly acknowledged his company's troubles on Thursday night, promising "We will find a way, and the strength, to endure" on his personal Facebook page.

All of this financial trouble came to light just a few months after the company launched its first title, the Big Huge Games-developed Kingdoms of Amalur: Reckoning, which sold roughly 330,000 copies in the U.S. during its first week of sale. If it can secure additional funding, 38 Studios also plans to release its upcoming MMO, dubbed Copernicus.

If the company does close, WPRI reports that Rhode Island taxpayers will have to make up for the failed loan by paying roughly $112.6 million (including interest) through 2020, and Joystiq says the studio's IP rights will go to the state.

[Update: It seems that 38 Studios has not yet paid the state after all, as WPRI updated its story to note that the company's chief financial officer, Rick Wester, contacted the EDC this afternoon to inform the state that 38 Studios had insufficient funds to cover the $1.125 million payment. The EDC has since returned the studio's check.

Governor Chafee added that the EDC would still accept an overdue payment if 38 Studios can somehow come up with the funding.]


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Comments


Joe Wreschnig
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The title of this post is "38 Studios pays Rhode Island state" but where does it say they paid the state? In the article you linked, I see:

"38 Studios misses payroll, can't pay RI"
"38 Studios failed to pay its employees Thursday, then stiffed the state as well."
"Rick Wester, its chief financial officer, called the agency and said there were insufficient funds to cover the check, so the [state] returned it."

Frank Cifaldi
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Joe, those updates were made to the source article after ours went live. When we wrote this story, the check had NOT been returned yet, it was still believed that RI was paid. We're updating our story to reflect this right now.

Joe Wreschnig
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Haha, oh wow. I interpreted the WPRI article to mean they sent a check on-time but with insufficient funds and that's what the talks were about. But if they sent the check after the talks, late *and* with insufficient funds, that's nearly fraud.

Thanks for the information.

Steven Ulakovich
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Jennifer Maclean's profile is no longer on the 38 Studio's website, it looks like she was fired, or stepped down.

thay thay
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She is listed as the CEO of the company. No mention of schilling...

Eric Geer
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Schilling is under visionaries....but looks like he was taken off of management.

TC Weidner
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380 employees?, what have they been doing everyday for the last several years? Sad, how can you burn through that much money so quick and have nothing to show for it.

Christian Nutt
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It's extremely unlikely they have "nothing to show for it" -- they have a GIANT freaking MMO in some state of completion.

Eric McVinney
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@Christian - Again, with nothing to show for it :| Honestly, 3-4 years with taking in another studio, maintaining 380 employees, and all they have is a demo. A demo? Really? That's a sign of poor management, amoung other things.

[User Banned]
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This user violated Gamasutra’s Comment Guidelines and has been banned.

Jerome Grasdijk
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Given industry average per-man-month costs you'd expect them to burn through around $50m a year... 400 people is a big studio. But there aren't many games that require that many man hours before shipping, and it does beg the question what have they been up to.

The problem is, a half-complete MMO is not worth much. It's only valuable if you can ship it. They might as well only have a demo.

Terrible management of the resources, timeline and product strategy.

Maria Jayne
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380 people is....a lot of people, no wonder they burned through that much money.

Glenn Sturgeon
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I'd expect Kingdoms of Amalur Reckoning cost them quite a bit. Its not like BHG would or could develope it for free.

[User Banned]
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This user violated Gamasutra’s Comment Guidelines and has been banned.

E McNeill
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This is painful to watch. Doubly so thanks to the internet feeding frenzy. 38 Studios is working on some cool things, and there are a lot of good people there...

Jeffrey Crenshaw
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I imagine any of us could work on some "cool things" if the government just handed us seventy five million dollars. I know I could.

Johnathon Swift
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I wouldn't doubt it. I like KOA well enough, and for a new IP with stiff competition it did well commercially and critically. It just sounds like the studio isn't well run financially. Going independent to spend tens of millions of dollars in the overcrowded MMO market when you've never made a single game before is not a recipe for success.

Joe McGinn
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Subsidizing a new industry is a perfectly valid role for government. As anyone doing it competently (Singapore, Quebe, Ontario) can show you, it pays real cash-positive dividends in the longterm, for both the companies and government.

The real story here should be the idiotic nature of the government support, as anyone could see in the media-circus videos posted yesterday.

In any of those other places 38 could be successful.

Jeffrey Crenshaw
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I'm as anti-right wing as anyone I know, but I don't understand how government subsidizing a game developer is a good thing. Firstly, not that I live in the state, but is it fair to tax payers to have their money given to someone who is already rich to start their dream studio? Is there nothing better to put that money toward? Secondly, is this fair to other studios that are trying to compete in their market that they are being funded with money taken from people with threat of imprisonment (taxes)? Government subsidization of business seems fundamentally wrong.

Not that I think government should stay out of business completely, there are certainly unethical business practices that need regulating -- this just seems like playing favorites.

Now then I can see a world where government subsidies are a good thing, but not in a competitive world where every penny of tax payer money going to one company gives them an unfair advantage over their competition. I also think that we should move to a more cooperative world, but that would require people get over their egos and their sense of deserving billions by cornering entire markets and starving competition. I hope that happens in my life time but I don't expect it to; the rich are too entrenched in their own interests and the general public is too indoctrinated to realize they are playing a game of Monopoly and losing drastically.

Joe McGinn
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"I'm as anti-right wing as anyone I know, but I don't understand how government subsidizing a game developer is a good thing."
Not looking very hard then are you? There are 5000 working game developers in Montreal. As the UK, Vancouver, and various US states industries have collapsed, Quebec has reaped the rewards. No surprise their neighbour province (Ontario) has finally picked up on the trick.

"Is there nothing better to put that money toward? "
Assuming your have basic infrastructure, health care and such covered, quite possibly not. It's an investment in high-tech well-paying professional jobs, and also an investment in an industry that can create new brands, arguably the best economic bet left in the Western world.

Daniel Piers
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What did you expect?

A famous baseball player throws his savings into a company creating products he doesn't understand for an industry he has no knowledge of, uses his fame to prop up the sham with a $75 million government loan, and then burns all of the money in less than 2 years.

Even Schilling admits he had no idea what was going on or how much it cost to make a game:

“I wanted mounted combat on flying pigs,” Schilling said.

The studio’s executive producer, Jason Roberts, calmly told his imposing boss, “I will never tell you no. I will only tell you how much it will cost.”

“It was an eye-opener,” Schilling said. “I realized all these emails I kept sending out cost me money. So I backed off. When it comes to making games, these guys were the pro athletes. I am not.”

...

I mean, really, the guy started out wanting to make an MMO. 'Making an MMO' as your first game project is a cliched mark of inexperience and foolhardy aspiration, usually seen in students, but in this case it's a famous athlete with too much time and money on his hands. Unfortunately most of that money belonged to taxpayers.

Aaron San Filippo
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Wow. Why would anyone think it was a good idea to grow a studio to 379 full-time employees, *before shipping a single game* ?

Steven Ulakovich
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And now Schilling's profile has been removed from the website.

Michael Grimes
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hrrrrrmmmmmmm ....not sure what to say, but I hope the people that I know that work there are in contact with me soon. Potential jobs to be had at my studio (I don't own one)...but still, keeping an eye out for your friends is crucial in this migrant farmer job we have...

David Fisk
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why do they need 379 employees. That's a lot of people considering another developer was actually making the game. That's really dumb. Also, getting a government loan is REALLY dumb. They probably couldn't get private investors to get on board...I'm glad I didn't send them a resume two years ago. I'd be screwed from the game industry yet again.

Glenn McMath
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They were developing an MMO in house... you're thinking of Kingdoms of Amalur: Reckoning, which was a single player RPG developed extertnally (by Big Huge Games who I believe are owned by 38 Studios). Both games are set in the same world, so it's easy to get them confused.

Jesse Crafts-Finch
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I was really upset when I originally saw that the state was loaning a game company money. While I can understand the state providing incentives to locate companies in their state, directly loaning money to a company in a product oriented industry was a really bad move on the states part.

Joe McGinn
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Nonsense. In Quebec, in Ontario, in Singapore, the governments invest vastly larger sums into game development ... and it's still a cash-positive investment for them. You should be upset with the incompetent *nature* of how this investment was administrated, nothing more nothing less.

Joe Wreschnig
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@Joe McGinn,

"Nonsense. In Quebec, in Ontario, in Singapore, the governments invest vastly larger sums into game development"

Not really. Quebec, for example, invested $40 million into Ubisoft. Half as much money into a multi-studio company dozens of times larger and with a 25 year record of success. Most government stimulus for game companies comes in the form of tax credits, not direct investment.

This is a failure at every level. The amount was too high. They allocated it all to a single company. The company they chose had no track record. The collateral is the product they're failing to make. There was apparently not enough oversight.

And then 38 Studios jerked them around by delivering a bad check? And the founder speaks out against government pork?

Adam Bishop
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@Joe McGinn

What evidence are you using to reach the conclusion that Ontario or Quebec have a "cash positive" investment from their subsidies to the game industry? Do you have any figures to back that up?

Carl Chavez
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Error 38. Please try again later.

Derek Smart
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This was a bad move through and through. Since 2006 the MMO landscape has changed and the era of $20M+ MMO games is dead and gone. Between Big Huge Games (whcih they bought and repurposed their game to Reckoning) and 38Studios staff, it is mind boggling why they'd need 300+ employees.

A number of execs (Bill Thomas & Jen McClean) are no longer there. Even Curt's profile no longer appears on the visionaries page. The latter is very odd; I mean, seriously.

http://webcache.googleusercontent.com/search?q=cache%3AcJf36YkK9v
IJ%3A38studios.com%2Fpeople%2Fmanagement+&cd=1&hl=en&ct=clnk&gl=u
s

http://webcache.googleusercontent.com/search?q=cache%3A8LCtwcV02y
oJ%3A38studios.com%2Fpeople%2Fvisionaries+&cd=1&hl=en&ct=clnk&gl=
us

Kyle Redd
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Bring on the Elder Scrolls Online, yeah?

Rob Wright
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I live in Boston and Schilling is getting absolutely killed up here, and from every possible direction (newspapers, local TV, radio, even sports talk shows). It's pretty unreal.

The thing I'd like to know is this: if Reckoning sold reasonably well over the last three months, was there something about 1) the royalties/bonus structure for Big Head Games and, or 2) the publishing agreement with EA that prevented 38 Studios from recouping funds from the the game's sales? I'm guessing it has to be one or the other, since it seems entirely unreasonable that 38 Studios would have been hiring staff at such a fast clip if the company wasn't planning on some type of cash infusion on the horizon to help make payments on the loan.

Joe Wreschnig
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They were hiring at such a fast clip because part of the agreement for the loan was that they create 450 jobs in Rhode Island by the end of 2012.

Michael Rooney
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I think the problem is that they were building an MMO, and KOA was a game set in the same universe. KOA probably made them money vs the investment in KOA alone. The MMO they were developing sounds like it's the huge money sink, and looks like it lost a lot more money than they would have made on KOA even though KOA probably paid for itself.

They should have made KOA and kept their spending reasonable, then leveraged their learning from KOA into an MMO (if they were to make an mmo immediately after). They probably could have rolled KOA into a series of games and then made their MMO off the series after it saw huge success.

I think making MMOs from existing IPs that fit the MMO space is probably the best way to do it. Existing fanbase and lore to work with take a lot of pressure off, and MMOs are so risky it's difficult to start with a blank page and expect results. Even doing everything right a lot of them fail.

Derek Smart
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@Rob

It has nothing to do with any of that. Reckoning apparently sold less than 400K units. They did a distribution deal with EA under the EA Partners program. With that, my guess is that they would have seen 30-40% Net revenue on sales. Yes - it gets to be that low.Factor in hold backs for returns and such, as well as the fact that payments are made quarterly (usually within 30 days from the END of a quarter) and you end up with a bad financial spread on that game.When you have 300+ employees, sales from a 400K selling game amount to gas or smokes money in the general scheme of things. To wit: they can't even make payroll, let alone make a paltry (all things considered) $1.125M loan payment.So in actuality, Reckoning was just a speck in their bottomline.The upside of all this is that due to the fact that a) the $75M was public money and b) the State of RI will end up owning the IP due it being collateral for the loan, everything that went on - numbers and everything - has to be made public. Which probably explains why people are already scuttling the sinking ship; starting with Curt apparently distancing himself at this point.

Derek Smart
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Here's the thing, aside from buying Big Huge Games and getting the game which later was repurposed to Reckoning, 38Studios proper has not completed a game. So taking $75M loan to make an MMO - in THIS current climate - was the dumbest thing to do.

Couple with the fact that nobody outside of them has set eyes on Copernicus (which investors and bankers were told was 6-8 months away!), you have to start asking where the money went. Since they already had Price Waterhouse in there doing an audit - and they indicated that they had doubts about 38Studios ability to continue as a going concern, you end up with a scenario whereby almost $63M (they didn't get all the $75M because about $12M was held back) was blown in such a short period of time.

John McMahon
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@Derek

I agree. In this market unless the IP for the MMO has a huge gaming community I do not see any success with an MMO. Smaller, cheaper MMOs could still be done.

This is why i think Stargate Worlds wouldn't have worked. MGM was already in financial woe and they were sinking money into a far from sure bet. Stargate fans while they play games, there has yet to be a commercially viable Stargate game in the market. Trying to promote a MMO for a property not usually seen in videogame form would have been an uphill battle.

But back on point, what would the state do with the IP rights once the royalties made up for the missing payment? I would gather they would try to sell it than keep ownership.

Isaiah Taylor
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Seeing this and the financial woes of THQ and Sony, really wondering what the future holds for the insular, mid-budget game.

Derek Smart
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They're all called "indies" now. :)

Rob Wright
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@Derek
Wow, if 38 Studios is really only getting a third of the sales revenue back, with EA taking the rest....good lord, then this industry really is broken.

As for the 400,000 copies sold, that figure doesn't paint the full picture. For one, NPD's numbers are only for the first two months, and only for U.S. sales. Also, they don't include digital sales on Steam or Origin. On the other hand, I think VG Chartz is largely full of shit so the 1 million copies sold figure they threw out can't be trusted. Still, let's say Reckoning sold 500,000 copies TOTAL in its first two months for a haul of $30 million in sales. And let's say 38 Studios' publishing agreement entitles them to just 30 percent of that haul (still shocked, but okay). That's still $9 million that's either already been burned through, or hasn't been fully delivered yet to the company.

And let's say that money WAS already burned through in an effort to meet that new hire headcount for the $75 million loan. It boggles my mind that any company, video game or otherwise, would spend what remaining cash it had on hand to hire new employees if it knew it was less than one quarter away from insolvency. Wouldn't 38 Studios have been better off going to the state and asking for an extension on the hiring deadline rather than defaulting on the loan and writing a bad check?

Jeffrey Crenshaw
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"Wow, if 38 Studios is really only getting a third of the sales revenue back, with EA taking the rest....good lord, then this industry really is broken. "

Yeah, so, am I understanding this correctly... A rich athlete colludes with a state government to create the stereotypical "dream" game that has become a cliche joke about over-aspiring novice game developers and signs up with EA in a manner that EA, who has no presence in Rhode Island, gets most of the profits off of tax payer money. Is that about right?

If not, I would love to be corrected. If so, then this is the perfect example of the angst of the populace that watches helplessly as politicians and corporations scheme to steal money from the working poor.

Derek Smart
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There is no way on this God's Earth, that Reckoning sold 1m units. That's just crazy talk coming from those charts.

The fact is that the sale of Reckoning did not meet expectations and therein lies the rub; completely outside of the $63M loan issue itself.

The fact that they couldn't make payroll - barely a few months later - speaks volumes as to the catastrophic financial state of the company. To even think that they couldn't make payroll, let alone make a loan payment (which they knew was due at some point), clearly shows that this was on the way down but only came to a head recently.

Derek Smart
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@ JeffNo, you got that wrong :-)Curt and co created 38Studios. Had no game. Nobody has any idea what exactly the plan was; but we speculate that it involved videogames.Apparently they started working on the Copernicus MMO game.Then, probably seeing that there was no way in hell it was going to get done any time soon, went and bought BHG, thereby inheriting a game already in development and which was later repurposed to be the Reckoning game that was eventually released.During all this, apparently the loan idea was in the works and it was designed to fund the MMO game, while the BHG purchase was just there to create street cred and generate some revenue.Reckoning fails to meet financial expectations. Which - when you think about it - is bullshit. In this day and age, we're scoffing at 400K units. You only get to do that when you are too big (300+ employees) and have a *massive* overhead. Some of us would be celebrating the minute our game sells 400K units - not crying about it.So they got the loan, based on Curt and co's influence apparently with RI.Apparently some of the money went back to repaying all of Curt's investment in 38Studios. This will all be public at some point in the near future anyway, then we'll have concrete numbers.With the company having a large team and the massive monthly burn associated with it, the Reckoning sale failed to make a dent (which was already deep when you consider that they had to pay out money to buy BHG). Copernicus is nowhere near finished. It is my understanding (I have friends at the studio) that to even say that it's in Alpha, let alone 6-8 months away (as some reports say Curt stated to the investors/bankers) is laughable at best.So now, the company has no money, has defaulted on a loan that is collateralized by the IP of both games and will belong to the RI state by the time the dust settles.Here is the problem. Selling an MMO game is the second hardest thing to do. The first being getting your mother-in-law to join a traveling circus and get out of your hair.Depending on the state of the MMO game, it could be next to worthless because it could invariably cost 2x more to finish it than what has already gone into it.This is like RealTime Worlds all over again - except that they finished and shipped a game, which was then bought for pennies on the dollar and released as F2P because it was cheaper for them to bring in some of the original devs to work with the in-house devs to make the switch, clean it up etc. It is nigh on impossible to do that with a game - let alone an MMO - that is not even in Beta, let alone Alpha.The State will eat the loss, the tax payers will foot the bill, people will get fired, resigned (e.g. one of the architects who worked for the State, resigned a few days ago) etc a lot of hard working people at 38Studios will lose their jobs and this will end up being a Black mark on their resumes.Then we'll get so see a bunch of new splinter studios pop-up, Kickstarter projects etc.Then we'll all forget. Until the next train wreck (my guess would be the systematic implosion of EA as a company similar to what has happened to RIM) hits the airwaves. My guess is that EA will be sold before that happens.That's the nature of the biz.

Michael Rooney
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@Derek: I'd expect Activision to implode before EA tbh. They both have similar issues, but EA seems to be much more self aware of the issues they have. Shit may hit the fan, but I feel like EA is at least aware that there is shit in the general vicinity of a fan, with Activision I am not so sure.

Ken Love
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Base-a-Ball has been'a very good to meh.

Derek Smart
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http://www.gamesindustry.biz/articles/2012-04-19-kingdoms-of-amal
ur-reckoning-sells-410-000-in-u-s

http://bostonglobe.com/business/2012/05/17/high-risk-video-game-v
enture-has-rhode-island-curt-schilling-reeling/k5PDK2bNOU0Pn5OnD7
X7HK/story.html

Derek Smart
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So the loan was paid - no word on employees. And Copernicus - according to the RI gov. - is due out by June 2013. A year away.

http://www.stumbleupon.com/su/1U5VJi/www.gamesindustry.biz/articl
es/2012-05-18-38-studios-makes-payment-to-state-of-rhode-island

Kyle Redd
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Also from that latest update:

"Chafee says they have still not paid their employees and estimated that it costs over $4 million a month to operate 38 Studios."

4 million dollars a month! That is insane. I don't know what hope anyone at 38 Studios could have at this point.

Derek Smart
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Nope - those sales were never going to cover that

Nathan Zufelt
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48 million a year for 400 employees isn't outrageous at all. That's about $10,000 a month per employee. Which is about average for salary/overhead.

But you have to be able to pay for that with a steady flow of successful game releases.

Eric McVinney
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@Nathan - That were to be true if those in Senior positions were OK with getting $10K a month :|

Derek Smart
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Their monthly burn rate is currently $4m per month according to statements made yesterday. Yah.


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