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A Schilling Pitch that Went Awry

Rhode Island experiments with Solyndranomics.

Sep 17, 2012, Vol. 18, No. 01 • By ETHAN EPSTEIN
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The course of starting a successful business never did run smooth—particularly for bored, retired athletes. Johnny Unitas blew his football fortune on bowling alleys and a circuit board company. Björn Borg came close to selling his Wimbledon trophies to make ends meet after his fashion label failed miserably. Baseball great Lenny Dykstra lost it all on a chain of car washes, a high-end magazine, and a venture called The Players Club, a brokerage company for other athletes.

Taxpayer funds! What was I thinking?

Taxpayer funds! What was I thinking?

NEWSCOM

But say what you will about these would-be businessmen, none of them ever blew $75 million in taxpayer money. No, that particular ignominy required the entrepreneurial skill of future Hall of Fame pitcher Curt Schilling and the investment acumen of Rhode Island’s politicians.

The tale of the smallest state’s very own Solyndra begins back in 2006. Nearing retirement after 18 extraordinarily successful years in the major leagues, Red Sox pitcher Curt Schilling founded Green Monster Games, a video game company based in Maynard, Massachusetts, about 30 miles from Boston. The idea was to build a “multiplayer online game,” the kind that people from anywhere can play so long as they have an Internet connection. The game (which had nothing to do with baseball) was going to cost $40 to $50 million and take up to five years to develop. Schilling invested $5 million up front and sought other investors for the rest.

Evidently, Schilling’s business pitch was a lot less impressive than, say, his slider. One venture capitalist after another passed on funding the company. And so Schilling continued shoveling an increasing portion of his own $90 million fortune into the business—until early 2010, when Rhode Island governor Don Carcieri came courting.

Carcieri, a Republican, offered Schilling and his company, by then named 38 Studios, a $75 million loan guarantee to move from Maynard to Providence. (Schilling had reportedly sought a similar deal from Massachusetts, which Governor Deval Patrick declined.) Schilling agreed, and in April 2011, 38 Studios moved to the Ocean State.

Rhode Island’s government had only one objective in mind when it lured 38 Studios: jobs. (In April 2011, the state’s unemployment rate stood at 11.3 percent.) Indeed, the loan guarantee was set up with hiring numbers in mind: Only by meeting the state’s arbitrary targets would 38 Studios gain access to the cash. As Boston magazine reported (in a splendid piece about Schilling and the debacle), “the company would unlock $17.2 million for creating 80 new jobs in the state by spring 2011, another $4.2 million for adding 45 more by fall, and $3.1 million on top of that for 125 additional jobs by winter.” The bizarre idea that jobs are the objective of business rather than its happy byproduct seems to have animated the scheme.

The shakiness of this arrangement was obvious to some at the outset. As far back as 2010, Providence-based journalist Ted Nesi had reported, “Sixty percent of the loan money is getting paid out based on milestones that have nothing to do with whether [the computer game] is on track—it’s all based on 38 Studios’s address and local headcount.”

So the size of 38 Studios’s workforce became increasingly untethered to its success as a business. This arrangement yielded predictable results. Nicholas Kole, who worked as a character designer for the company for three years, says it seemed to him wildly overstaffed. “After the move to Rhode Island, we [took] on a LOT of new employees (and, it seemed, not always in the departments that needed the help),” he writes in an email. And then there were the perks: With the state backing up its loans, 38 Studios offered its employees zero-deduction health insurance, lots of free meals, and a huge travel budget.

By early 2012, the company had more than 350 people on staff—and the multiplayer game still hadn’t hit the marketplace. (The company did release a single-player game in February, which sold fairly well.) It was also burning through some $4 million a month, and wasn’t expected to release the game until June 2013. With little revenue coming in, 38 Studios began missing payments, stiffing vendors like Atlas Van Lines and its health insurance provider, Blue Cross Blue Shield.

On May 1, the firm defaulted on a loan payment to the state of Rhode Island. On May 15, it missed payroll. Shortly thereafter, Rhode Island governor Lincoln Chafee (formerly a Republican, now a Democratic-leaning independent) held a press conference at which he declined to extend additional tax credits to keep the business afloat. That sealed 38 Studios’s fate; shortly, all employees were laid off, and the company filed for bankruptcy.

Including interest on the bonds that Rhode Island sold to guarantee the loans, the state’s taxpayers are now on the hook for an estimated $112 million. Rhode Island is attempting to claw back some of that money—late last month, it announced the formation of a “litigation subcommittee” to determine whether any third-party liability exists.

Schilling, for his part, has lashed out at Chafee for holding that news conference, saying it scared away potential private investors. He labeled the governor a “dunce of epic proportions” and a “buffoon.” (Chafee, with characteristic flaccidity, replied that Schilling’s words were “regretful.”) Schilling is seemingly unwilling to admit that, as a baseball player, he was ill-qualified to run a multi­million-dollar technology business. Nonetheless, the state’s ­hiring requirements helped to doom the enterprise. Indeed, as some have pointed out, it was 38 Studios’s success in meeting the employment targets set out by the state that sowed the seeds of its demise. Kole says, “All I know is that, by the time things fell apart, we were far from lean.”

It’s all too easy to see why Rhode Island—a rust-belt economy sandwiched between white-collar and far wealthier Connecticut and Massachusetts—would be eager to land a high-tech company. Throw in the state’s inferiority complex vis-à-vis the Bay State, and it becomes abundantly plain why Rhode Island was so eager to capture the startup of a former Red Sox superstar, even if he had no executive experience. What is less clear is why the voters of Rhode Island—or, for that matter, the nation—would elect politicians so ignorant of economics, and so promiscuous with other people’s money.

Ethan Epstein is an editorial assistant at The Weekly Standard.

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