38 Studios - Crony Capitalism is alive and well in Rhode Island

The crisis at EDC and 38 Studio reflect the problem of crony capitalism at its best. Having written about this while the deal was being negotiated, I can't say that this comes as surprise.

The public's money should never be invested in a start-up in a mature market. All one is doing is buying out the original investors (the capitalist who are cashing in their investment) and replacing it with public money. This is what an IPO, such a Facebook, is supposed to do.

From an economic development perspective public investment should go to infrastructure improvements that will have a longer term value and benefit for the taxpayers and improve the environment into which private investors might decide to locate.

If anyone has been watching the market for video games, it has been shifting. As a start-up, it would make more sense if 38studio had been creating Game APPS for smart phones to reach a wider audience, quicker, at lower risk and cost and used the experience to work out the problems that come to all start-ups. Instead they went for the Big Hit with its high risk, high cost and, untested team.

The video game business is not a new business. It is a variation on the movie business as 38 Studios has claimed as the rationale for applying for the movie tax credits. The movie business isolates the product from the company by creating a corporation for the movie placing the risk in that company and still controlling the upside.

In 38 Studios we had a company with no product at the time of the deal. Today it seems that we may have a product without a company. Is the state considering putting a lien on the box game, to guarantee our investment?

 

Arlene Violet has her take on the situation  She points out that “As reported by Ted Nesi of Nest’s Notes on WPRI’s website, 38 Studios was removed from the list of companies scheduled to present at next month’s Electronic Entertainment Expo, a sort of World Series of offerings in the electronic game industry.” Such cut back in marketing effort is another sure sign that things are not right.

As for the tax credits if granted, they can be sold to raise cash, as the Projo’s story pointed out. But for the tax payers, those credits mean less tax revenue from whom ever buys and uses them. In turn, it means an additional RI tax payer contribution to 38 Studios on top the $ 75M loan guarantee.

Another problem is the potential loss of the human capital that we, as tax payers, have invested in to staff and provide the talent for 38Studios. Now that the wounded animal has left blood in the water, the sharks have gathered to bite off the prime cuts (top talent). Will there be enough talent left if the funding situation can be resolved to have a company? And if not, can we still keep that talent here or will we be exporting it to Massachusetts?

38Studios is NOT GM. Its success or failure is NOT going to destroy the economy. One hopes that some investors will be found to refinance and restructure the company so that it is a success. Governor Chafee is to be commended for getting on top of the problem as quickly as he has in an attempt to protect tax payer interests and by being an active participant in the effort to find a solution to the problems.

But one also hopes that the blind, star struck, politicians in this state have learned something from this. And that lesson is that we, the tax payer, are paying them do their due diligence before throwing tax payer money at deals that no self respecting or even greedy bank would turn down.

Crony Capitalism and Sweetheart Union deals are the cause of our economic problems. I, for one, am happy to see that something is now being done to move us in a sane direction.