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:

  1. 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.
  2. Some other outside financing that was anticipated and built into their planning either pulled out or never arrived.
  3. 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.
  4. The company was mismanaged from the start.
If 38 Studios really has run out of money at this stage, the proximate cause has to be something on the scale of the list above.
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?

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10 years ago

I object more to the fact that we are scrutinizing private companies’ finances in the first place, which should be unnecessary as simple taxpayers, but I would like to know why their average employee salary is over $80k. That seems insanely high for a start-up video game company. Keep in mind that game testers make minimum wage across the industry. Seems to be a case of out-of-control headcount and salaries, which of course are incentivized by accepting a massive public loan of this type. My bar napkin calculations a few months ago had their yearly personnel costs at over $30 million.

10 years ago

Amalur didn’t do so well. The last count only had 410,000 units sold. Even at full-price, that’s $25M gross income. The distributor takes a huge cut from that. Then only half as many people have the game as they projected, only a portion of them are buying the DLC (paid ‘add-ons’ that should be making a big portion of the current revenue stream), you end up with a lot less income than you thought.

10 years ago

“why their average employee salary is over $80k”
Remember that most of the talent had to relocated from the Boston area, where IT wages are higher.
Developers make $150K for stuff like this. Artists aren’t cheap either. Benefits probably make up a huge chunk of the costs.
I was speaking to a small tech business owner a year ago about RI’s strange problems with technology industries… Because there’s not a real ‘ecosystem’ of developers here, you actually have to pay a premium to get talent to relocate to RI. If developers knew they could get another job nearby (read: if we had a functioning ‘ecosystem’), the employer wouldn’t have to pay the employee for the ‘risk’. In very healthy markets, you have to pay a premium to keep your people from walking to better jobs, in RI you have to pay them a premium because they CAN’T.

10 years ago

“Developers make $150K for stuff like this. Artists aren’t cheap either.”
On what planet? A handful of the senior developers might make that at established companies like Bioware and Blizzard once they have a number of successful projects under their belts. But certainly the norm in the industry would be closer to 60k-70k than 84k. An average salary of 84k for a start-up gaming company sounds absurdly high. And that’s presumably including receptionists, minimum wage testers, HR, etc., so the developers would on average be making even more than that.
“Benefits probably make up a huge chunk of the costs.”
I heard the 83-84k number reported as “salaries,” which usually doesn’t include benefits. I assumed a typical 36% benefits ratio in calculating $30 million+/year in personnel costs, not including any bonuses or other costs. I don’t see how that’s sustainable unless they get some immensely popular products out the door pronto. Nobody in the gaming community cares the slightest bit about “Project Copernicus,” so they’d better have something better in the works.
“you actually have to pay a premium to get talent to relocate to RI.”
LOL, well that’s a valid point. I’d have to make at least 50% more than my current salary to consider moving back to RI precisely because of the atrocious economic and political situation in the state. Theoretically cost of living should be lower to compensate for that, but we all know that isn’t true either because of tax policy, zoning policy, and various other things.

10 years ago

“A document outlining the agreement between the economic development agency and the company says 38 Studios was working in Massachusetts on developing a massively multiplayer online game dubbed “Copernicus. The initial target market size for the game was estimated to be $3.2 billion in net revenue in North America and $1.6 billion in western Europe, the document said.”
I’m sorry, I have to go die laughing now. I’ve never heard such an absurdly inflated revenue forecast. Only a government board of self-described economic policy experts could be deluded enough to believe a projection like that. No wonder private investors wouldn’t touch this thing with a pole.

10 years ago

Oh man… I just read up on the technicals of Amalur…
They wrote their own game -engine- for this. That’s going all the way back tot he drawing board. This is a big gamble, I’ll bet they were planning on licensing out the engine for revenue, too.
I imagine it’s hard to bring new people on or let experienced people go when you’re running your company on an entirely home-built system.

10 years ago

“Given that costs are very predictable in this industry, what went wrong, with either the planning or the execution?”
That’s an excellent question. It’s certainly something that the state/EDC (and, in due course, the taxpayer) needs to understand in great detail, WHETHER OR NOT they agree to grant 38 Studios additional financial assistance.

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