(Editor’s note: The sudden dramatic collapse of 38 Studios over the last few weeks has been the subject of a lot of speculation and recrimination. Chris Hornbostel lays out the facts as we know them, gives them some important context, and then draws a few conclusions.)

In October 2006, Curt Schilling begins 38 Studios as Green Monster Games in Maynard, Massachusetts. Fantasy author R. A. Salvatore is announced as creative director, and artist Todd McFarlane is art director. On this site’s message board, you can read Schilling’s comments at the time, including this telling million dollar quote: “I am not sure where revenues and subscription bases will be in a few years, but based on todays economy in the game space it’s safe to say both are going to grow exponentially right?”

After the jump, how it actually turned out

Here’s what the MMO landscape looked like in October 2006. World Of Warcraft was celebrating its second anniversary and doing huge numbers. Lord Of The Rings Online had just launched that spring and was capturing a nice niche of the market. Dungeons and Dragons Online had launched in February and was already sucking air. Dark Age Of Camelot was about at the end of its cycle. Everquest II was running a distant second to World of Warcraft in subscriptions, much to Sony’s chagrin. Sony also had Star Wars Galaxies in the market space, but the bloom was really off that rose. Eve Online was doing well in its market segment. Guild Wars was preparing their first expansion.

In the development pipeline, Mythic was pulling all staff off their ill-conceived PVE Romans in Space game to work on their Warhammer Online, which started in 2005. Age Of Conan apparently had started a bit earlier than that. According to Mythic CEO Mark Jacobs, Warhammer Online would cost $60-70 million (including promotion) to bring to market in a three-and-a-half year development window that ended in fall of 2008. Age of Conan would cost about $50-60 million (including marketing) to come to market on a four to five year development cycle.

That, then, is a best guess at the development strategy for 38 Studios. It seems probable that they were on a three to four year development cycle on plans to spend $60-75 million to get the game to market in that timeframe. Schilling invests about $30m of his own money into the company in the first few years. It now seems clear that there’s also a decent amount of venture capital investment as well. At this point it’s also worth noting that, lofty titles aside, Salvatore and McFarlane were not quite the partners or teammates in this project as initially described; while they may have been creative director and art director, the reality seems to be that both were paid consultants.

One can imagine that 38 Studios had a reasonably solid experience with raising funds during their first 36-42 months of existence. If Curt Schilling shows up at your offices, you take that meeting if you’re a venture capitalist angel. Curt’s career and successes — not to mention personal equity in the company — made the developer and game a better bet than it might have otherwise been. From a marketing standpoint it was likely a dream come true; easy to imagine at this stage the ability to crossover the news and promotion on this project to spaces like ESPN.com and its youthful, male-dominated readership.

Move the timeline ahead to Spring 2009 and we’re at two-and-a-half years in the development cycle of 38 Studios’ MMO. The marketplace is already in some flux in the 30 months since the development house was formed. World of Warcraft continues to be a juggernaut. Warhammer Online, however, is clearly struggling six months after release, and Age Of Conan has failed to carve out the niche Funcom were hoping to find. Lord of the Rings Online is also faring poorly, while Dungeon and Dragons Online and Star Wars Galaxies are both on life support. Sony’s Vanguard soft-launched in January of 2007 and never caught hold. The worldwide economy is in a dreadful state, and subscription-based MMO’s seem to be taking the brunt of the hit in the games segment of the marketplace. In the spring of 2009, 38 Studios acquires Big Huge Games from THQ in a selloff that prevents the Maryland developer of Rise Of Nations from being shut down. Big Huge has been working on a single-player RPG of their own since 2006. When they’re acquired, that RPG is re-dubbed “Project Mercury”, and 38 Studios works with Big Huge to re-jigger the game’s fantasy universe to match the setting and lore of their in-development MMO, which is now “Project Copernicus”. It’s likely at that acquisition that 38 Studios had some expectation that “Mercury” would be ready to launch by Q1 2011.

Fast forward a year. In March of 2010, 38 Studios may have signed their own death warrant by agreeing to a publishing deal with Electronic Arts for Project Mercury, although it may not have been obvious at the time. 38 Studios exchanges all future royalties for sales of the game for a $35 million advance from Electronic Arts. In other words, no matter how well Mercury sold, it would not be a revenue stream for the developer. But it’s a unique and bold marketing concept: release a single-player open-ended RPG to establish the intellectual property and lay the groundwork for the lore and setting of an in-development MMO. In retrospect, it was also a doomed one. Reading the press releases and interviews at the time indicates that both 38 and Electronic Arts expected Mercury by no later than Q2 2011. In reality, it wouldn’t arrive for 23 months.

In the meantime, the marketplace has really changed. Dungeons and Dragons Online, on the brink of collapse, goes “free to play” in late 2009, and even Turbine seems stunned by the success of the revenue model. By the start of 2010, they’re already working on reconfiguring Lord of the Rings Online to a free-to-play game, and that re-launches in June. Warhammer Online, which Electronic Arts had banked quite a bit on, is clearly in ruins. Age Of Conan is stalled in a very small niche market. Star Wars Galaxies and Vanguard are dead games walking. Everquest II continues to enjoy a dedicated subscriber base, and new player Star Trek Online has just launched to favorable initial reviews.

In July of 2010, the title of Project Mercury is revealed as Kingdoms Of Amalur: Reckoning.

It’s also worth noting that by May of 2010, the development cycle for Project Copernicus had reached three-and-a-half years.

Throughout summer and fall of 2010, 38 Studios is negotiating with the state of Rhode Island to relocate. With the Rhode Island suffering some of the highest unemployment in the nation, they’re eager to attract tech companies and jobs, and this must have seemed a great play at the time. In hindsight, it seems clear 38 Studios took this avenue due to difficulty attracting new investment capital. While Curt Schilling can still get a meeting with anyone, the wallets aren’t as prone to opening in 2009 and 2010 as they were in 2006 and 2007. 38 Studios and Rhode Island sign their deal in November, and the developer relocates very quickly by December of 2010. Project Copernicus is four years old. While all this was happening the MMO space gets murkier when Realtime Worlds’ All Points Bulletin launches and then goes into administration within six weeks. It’s easy to see why investment capital in this market space is drying up.

2010 becomes 2011. Still no sign of Kingdoms of Amalur: Reckoning or Project Copernicus. Screenshots and trailers begin to trickle out during 2011 for the single player game, and in August a release date is announced: February of 2012. In the meantime Lord of the Rings Online’s free-to-play model becomes a cash cow for Turbine. Star Trek Online and DC Universe Online have plans in the works to go free-to-play as well. Most industry analysts consider the MMO space to be incredibly risky, if not prohibitive, and the free-to-play model looks like the way of the future.

In November of 2011, Project Copernicus is five years old. The most likely development and financial model for the game already has it probably six to twelve months behind schedule. In December of 2011 EA launches the most-expensively developed MMO ever, Star Wars The Old Republic.

In February of 2012, Kingdoms of Amalur arrives to decent-to-middling reviews. It sells well enough, but is clearly a third priority for Electronic Arts, sandwiched between the launches of Star Wars The Old Republic and Mass Effect 3. Old Republic doesn’t get the sell-through at launch that Electronic Arts had hoped, and begins to hemorrhage subscriptions. If the headsman’s axe was out before, the struggles of this Bioware-developed MMO brought it down.

We kind of know what happened from that point on.

So what went wrong?

1. Time to develop
With 38 Studios in its death throes, it was announced that Project Copernicus (which was never given a release name) could come to market in a year, in May of 2013. While that would seem ambitious for a game which had yet to release screenshots, gameplay footage, any trailers, or even game mechanics, if they’d made that release the game would have had a six-and-a-half year development cycle. That’s at least two to two-and-a-half years longer than what was likely the strategic plan for the game. I’m guessing that had the game gone forward, a more probable release date would have been fall of 2013, seven years after development began.

2. Lack of show-able progress in development
Copernicus was kept under a veil of secrecy normally reserved for nuclear launch codes. Details on the game were non-existent, other than vague but enthusiastic expressions coming from inside the studio itself. Venture capital investors aren’t stupid about the games sector anymore. They know what vaporware is. Without anything concrete to show or in the media, 38 Studios can’t have had an easy time attracting more investment. With the MMO marketplace stratified and the audience having seemingly moved to console action shooters, attracting capital for a new IP MMO would seem to be nearly impossible by the winter of 2012. Perhaps only goodwill towards Schilling kept a small trickle of money coming in.

3. Dead-on-arrival with publishers
This may be the key component of the failure, and the one most overlooked in coverage of this story. In March of 2010, when 38 Studios signed an agreement to publish Kingdoms of Amalur with Electronic Arts, they all but slammed the door on any other prospective publishers for Copernicus. Perhaps the plan all along was to have 38 Studios self-publish their MMO, but by the summer and fall of 2010 the studio was clearly on the hunt for more capital investment which turned into the deal with Rhode Island. Normally in that situation an obvious angle to more capital might be seeking a publishing deal with a major player in the market space. In this case though by having a deal with EA to launch the Amalur universe with Reckoning, those avenues were closed. No major publisher is going to touch a videogame-only brand new IP if half of that IP is in the hands of a competitor. In the eyes of Sony or Warner Bros, for instance, they would be marketing against themselves if they published Copernicus: they’d be promoting a game world and lore priced at $50 plus subscription, while EA would be able to give players an entree into that same Amalur setting with Reckoning sale priced at $20 in their own Origin digital store. Unfortunately in both the fall of 2010 (when the Rhode Island deal was hashed out) and the winter of 2011/2012 (when 38 Studios clearly needed more investment capital), Reckoning’s publisher wasn’t going to be an option for 38 Studios either. Electronic Arts had been so burned by Warhammer Online’s failure and Old Republic’s middling first year that they were unlikely to touch another MMO property with a ten foot pole. When Old Republic failed to set the world afire, it all but insured that Project Copernicus would be self-published or forced to look at lesser-established publishers.

4. The debt to Rhode Island
Anyone who’s spent a few hours watching a TV show like Shark Tank (or Dragon’s Den to our Canadian and UK friends) knows how venture capital works, and how valuation can be framed largely by equity investment, minus debt, modified by the marketplace for the product to be sold. In the case of 38 Studios, a good estimate is that Curt Schilling had $30 million of his own money in the company along with $10-15 million in outside investment, for a $40-45 million total. Rhode Island then financed the studio to the tune of $49.5 million, in what can be seen now as a complete gamble on the part of the developer. Here’s the equation: a company with $40 million in equity against $49.5 million in debt and only an un-established IP as an asset that another entity (Electronic Arts) received all sales revenue from. That’s not a good investment at all, and that’s before you factor in the turbulent MMO market space. When 38 Studios took the financing from Rhode Island and relocated, it should have been obvious they were racing against the clock. The debt the studio took on in December of 2010 all but shut the door for further large scale capital investment. 38 Studios would be a going concern for exactly as long as it took for them to burn through the $49.5 million they received from the state. Sadly that race ended on May 24th.

Chris Hornbostel is a freelance technical writer and occasional restaurant consultant. He posts on the Quarter To Three forums with the terrible user name ‘triggercut’ and blogs occasionally on music, baseball, and whatever else he feels like at Popnarcotic. He invites anyone familiar with the story who’d like to add any clarification or elaboration to contact him at [email protected]