Fundamental Questions (as in Business Fundamentals) About 38 Studios Running Aground When It Has
Say you’ve got a company that has 5 products on the market, and plans to release a new one in the next year. Which products should existing teams and new hires be assigned to work on? Maybe your existing customer base is willing, in large numbers, to pay for a new release of one of your older products. On the other hand, maybe a new product would be nearly as popular, and be more likely to bring in new customers. But the less popular upgrade might be more profitable, if a small team can get it to market (and start revenue flowing into the company) in 6 months, while developing the new product would take a larger team and at least 18 months — but then again, if the small team is added the new product effort, maybe its time to market could be cut to 15 months. Figuring out how to balance the kinds of considerations is the job of a “product management” group in a traditional business organization.
For 38 Studios, the troubled Rhode Island software company, the problem should be much simpler. 38 Studios is at a business stage where they have only one product to develop. Their market is a retail one, i.e. they are selling individual units to a large pool of potential customers (though, if successful, their business would eventually involve a subscription component).
To first order, business planning for a company that is focused on one new retail product should be very straightforward. Money doesn’t start coming in until the new product starts being sold. The product can’t be sold until it is finished (to the people in the software biz laughing uncontrollably at that last statement, remember we’re talking about a retail product here, not about getting an existing customer to cough up an extra year of maintenance fees and then giving them a break on their next full upgrade that’s already six months overdue, etc). The cost of building the product should be highly predictable: the cost of programmers and their development hardware and software, facilities costs, and some standard business overhead. Nothing like a spike in the cost of high quality “1”s and “0”s needed to make computer chips work is going to negatively surprise the company.
You don’t need to be a rocket scientist (as they still say in the software industry) to figure out how much money is needed to make a one-product-at-a-time retail business model work. If it’s a year until the next release, enough money is needed to pay your employees and provide them with a place to work for a year. (I said you didn’t need to be a rocket scientist; I didn’t say that an MBA was going to be able to figure this out *rimshot*). Making up some round numbers, if it’s going to take a year to develop a product, and you have a team of 20 programmers making 85K apiece, you need $1.7M to pay their salaries until the next release.
The point is, for 38 Studios to have run out of money in between two major releases, when the earlier release was supposedly successful, is odd to say the least. A few possible causes are:
- They wildly overprojected how successful their last release would be, and didn’t have as much money from it’s sale as they were counting on.
- Some other outside financing that was anticipated and built into their planning either pulled out or never arrived.
- A bunch of folks with product knowledge left the company, and they haven’t been able to replace them, and have fallen so far behind schedule, there’s no hope of catching up.
- The company was mismanaged from the start.
To avoid any confusion, I’ve backfilled the original simple numbers example, based on the average salary figure reported in this Providence Business News staff report from the end of last year. But the immediate concern isn’t the absolute numbers; whether you are discussing the most efficient operation in the world or the least, if your company uses X dollars per month to develop a product, and the product needs Y months of development before it’s ready for the market, then X*Y dollars from other sources is needed, to have any shot of making it to release. Since 38 Studios was focused on producing a single, retail product, this ridiculously simple model directly applies to the company as a whole.
It’s been presumed that 38 Studios had a plan which it shared with the Economic Development Corporation explaining where the X*Y dollars needed to keep the lights on (maybe a bad metaphor to use here) until the new product was ready for market would have come from. Given that costs are very predictable in this industry, what went wrong, with either the planning or the execution?