Rhode Island's big bet on Curt Schilling raises a lot of questions

PROVIDENCE, R.I. -- In 2010, the man who'd helped Boston win its first World Series in more than 80 years came to Rhode Island promising the job-starved state something even better: hundreds of good jobs, millions of dollars in tax revenue and a foothold in the booming business of video games.

To former governor Donald Carcieri and top economic development officials, it was an opportunity too good to miss. The state's Economic Development Corp. offered a $75 million loan guarantee to lure Curt Schilling's 38 Studios to Providence.

Two years later, the company defaulted on a $1.1 million payment to the corporation, Schilling has pleaded for additional state help and Rhode Island faces the possibility of being stuck with the company's debts should it collapse.

Lawmakers who never signed off on the loan guarantee said they now have to answer to constituents demanding to know why Rhode Island backed an untested company helmed by a wealthy former athlete when the state grapples with an 11.2 percent jobless rate and chronic budget deficits.

"We have cities and towns on the brink of bankruptcy," said Senate Minority Leader Dennis Algiere, R-Westerly. "The public is looking at this $75 million and saying, ‘What did you do?"'

Schilling's 38 Studios asked the Economic Development Corp. on Wednesday for additional assistance after defaulting on a scheduled $1.1 million payment to the agency May 1. The company then hand-delivered a check for the amount -- but told the corporation the check wouldn't clear. The payment was made Friday, said Gov. Lincoln Chafee.

Himself a vocal critic of the deal with 38 Studios before he took office, Chafee said he doesn't want to give the company any additional taxpayer support.

"This was a very, very challenging investment by the state," Chafee said. "We're just going through the consequences of what we knew right from the beginning."

Industry experts agree that Rhode Island's bet on video games faced long odds from the beginning.

The types of video games 38 Studios creates have upfront development costs in the range of tens of millions of dollars, take years to get to market and their commercial success is not guaranteed, said Doug Creutz, a senior research analyst at San Francisco-based Cowen and Company LLC.

The industry for the moment is concentrated on developing games for social networking sites and mobile devices, while the mainstay gaming consoles -- Microsoft's Xbox 360, Sony's PlayStation 3 and Nintendo's Wii -- are aging and overall the economy is continuing to struggle, observers said.

"In general, there isn't a lot of money coming into the video game space," said Creutz.

Indeed, the agreement between the state and 38 Studios acknowledged that "the business of producing and distributing proprietary video games is highly speculative and inherently risky. There is no guarantee of the economic success of any video game."

38 Studios is in the process of developing a massively multiplayer online game dubbed "Copernicus." Multiplayer online games can support hundreds or thousands of players simultaneously.

This market is dominated by Blizzard Entertainment's "World of Warcraft," which is estimated to have more than 10 million subscribers, according to figures tracked by the website MMOData.net.

By comparison, "Star Wars: The Old Republic" from Electronic Arts Inc. had 1.7 million subscribers as of February, the company said.

"The bar for success for 38 Studios for their own MMO was always going to be pretty high," Creutz said.

The first game launched by 38 Studios, "Kingdoms of Amalur: Reckoning" sold 460,000 copies in the United States during its first three months on the market, said David Riley, executive director of the New York-based NPD Group. The game has received positive reviews.

"It's a strong performer," Riley said.

Leonard Lardaro, an economics professor at the University of Rhode Island, said the state focused on "the long play, the big project" instead of reforming its tax code and business regulations, something which he said could eliminate the need for big incentives to companies looking to come to Rhode Island.

"Most of Rhode Island's problems -- unbeknownst to our state leaders -- are structural," Lardaro said. "But we just treat the symptoms, and we put all our eggs into one highly speculative basket."

Rep. Jon Brien, D-Woonsocket, said he believes Carcieri and others were swayed by Schilling's "star power" and the promise of good jobs in a growing high-tech industry.

"Here was this major leaguer pitching a major league game that he said was going to be the jump-off to a really successful company," Brien said.

Carcieri, who left office last year, could not be reached for comment. Schilling has declined to comment on his company's finances, or what he is seeking in additional state support.

Schilling has spoken often of his political views and has campaigned for Republican candidates, though he's registered as an independent. In a March interview on Fox News, he criticized big government and said he's never sought a handout but praised the loan guarantee his company got in Rhode Island.

"I will tell you that the growth of our company 38 Studios is government doing -- gone right," Schilling said.

Lawmakers said they'd be reluctant to give the company additional support -- though they acknowledged the state might find itself paying even more if the company goes under.

"It's a tough pill to swallow," said Rep. Agostinho Silva, D-Central Falls, whose own city is in the middle of bankruptcy proceedings. "We could be on the hook for the whole $75 million. Now, the question is, do we give them more money to save $75 million, or do you let them go? It's not a good place to be."

Though lawmakers approved the $125 million loan guarantee program, they didn't know what companies might seek to take advantage of it. Several lawmakers said they assumed the state would back small loans to dozens or scores of small businesses instead of one $75 million loan to a single company.

Some lawmakers say they now wonder whether the 38 Studios incident shows that the Economic Development Corporation should be reformed. Algiere said more oversight of the agency is needed.

The EDC now caps loan guarantees at $10 million for any single project. Ehrhardt said he wants to make that policy a state law. The North Kingstown Republican drafted a similar proposal in 2010, but to his "never-ending regret" he was convinced not to proceed with it, he said.

"Now things might be a little different," he said. "Some people will say I'm trying to close the barn door after the horse has gotten out. But there will probably be more horses coming in the future."