Finding value of Copernicus

How do you monetize a mythic realm?
Richard J. Land, receiver in the 38 Studios LLC bankruptcy case, is setting out to answer that question this summer.
Unprecedented in Rhode Island economic-development history, the 38 Studios bankruptcy is also relatively unique as a digital-media liquidation thanks to the company’s rapid growth and disintegration.
Although hardly the first American video game shop to go belly up, the size and ambition of 38 Studios was unusual for a startup, as was the type of massively multiplayer online game the company received a $75 million state-backed loan to make.
That’s made finding a blueprint for selling 38 Studios’ intellectual property illusive.
“There were some recent bankruptcies, but nothing really parallel,” Land said. “The problem we have here is they were in the middle of a single, large project that was shut down. And it was almost as if it was shut down without someone making sure everything in the house was OK. It wasn’t anyone’s fault necessarily. It was just the way this happened.”
The proceeds Land makes from each asset sale go to pay off 38 Studios’ creditors, of which the state of Rhode Island is the largest, with an estimated liability, including principal and interest minus reserves of $89 million.
Land sold 38 Studios’ physical property – the computers, electronics, furniture and memorabilia left in the offices – in two auctions that brought in $830,000, of which $400,000 came from leased equipment that went back to the leasing company.
As for the more valuable intellectual property, Land isn’t making any predictions on how much it might be worth.
“I have no idea, and it would be wrong to guess,” Land said. “It would put an expectation out there that could be too high or low.”
After presiding over a lengthy effort to secure and package the creative work of 38 Studios employees, Land is now getting ready to market it this summer.
The assets fit into a few different categories.
The rights to “Kingdoms of Amalur: Reckoning,” the only game 38 Studios ever released, is also the only asset producing revenue.
“Reckoning,” a role-playing game created by the Baltimore-based Big Huge Games company 38 Studios purchased, has sold 1.6 million copies worldwide, according to game-tracking website vgchartz.com. Most of the Reckoning proceeds go to publisher Electronic Arts, which advanced 38 Studios about $30 million in a distribution agreement signed in March 2010.
But electronic distribution is handled by Valve Software and has brought in $713,000 so far, Land said, and $45,000 in a typical month. That revenue can be used to pay back creditors.
Combined with the auction sales, Land has so far recouped $1.14 million.
Big Huge Games was also working on what Land described as a “handful” of other games that were not released, but may be valuable to the right video game company.
But the bulk of the assets are the digital animation, storylines and computer programs 38 Studios workers had been toiling over to build “Project Copernicus,” Schilling’s dream of an MMO that would compete with gaming goliath World of Warcraft.
Unlike traditional games that a single or small numbers of players play on a self-contained computer system, the MMOs are played over the Internet and host large numbers of players competing against each other in real time.
Copernicus assets include the fictional “Kingdom of Amalur” itself, created by fantasy writer R.A. Salvatore and then frozen in a state of suspended imagination on 38 Studios computer systems.
After the bankruptcy, Land brought in former 38 Studios employee Jeff Easley to rescue as much of 38 Studios’ work as he could from the emptied out headquarters on Empire Street in Providence.
For months Easley has been packaging the art, programming and systems that would have driven Copernicus into a form that Land can market and send samples to interested parties.
But who will want to take on such a trove of digital game parts?
MMO’s are a notoriously treacherous business, and Land said there’s a good chance whoever buys Copernicus won’t be looking to finish Schilling’s dream, but will want to break it apart into more easily monetized pieces.
“In my discussions with people who understand the industry, it is possible that it could be developed piecemeal,” Land said.
In that scenario, a video game studio could buy Copernicus art, coding and storylines and then, instead of trying to turn it onto one huge game, shape it into several smaller, traditional games like Reckoning that could be released faster and without the capital costs. Regardless of whether it is sold piecemeal or consolidated, opinions on how much Copernicus assets will fetch from bidders varies widely.
Todd Mitchell, who follows the gaming industry as director of research at Brean Capital LLC in New York, said he wouldn’t know how to value something like the unfinished Copernicus, but would be surprised if it brought in a large amount of cash.
“It seems to me it is not an established franchise and so there is not a lot of residual value,” Mitchell said. “If I was looking for value, I would be first looking for a brand I could leverage, second would be an intact studio with people who have been working together, and third would be the very marginal code. I don’t know how much can be salvaged from that.”
Liam Callahan, an analyst with NPD Group Inc. in Port Washington, N.Y., was somewhat more optimistic, although he also declined to speculate on how much the assets would be worth.
“Assets like these certainly have a monetary value, but the trick is finding a suitable buyer – one that is able to build upon the existing code in order to move the game across the finish line,” Callahan said in an email.
With so much uncertainty surrounding the Copernicus assets, Land this summer plans to hire an expert, or experts, in the video game industry to help reach the right corporate players and market the 38 Studios intellectual property.
Throughout the 38 Studios asset sale, most assume the state of Rhode Island will end up the largest creditor, with the largest losses to be offset by whatever Land collects.
But that won’t be the case if Rhode Island lawmakers decide not to pay the 38 Studios bonds, an option that’s gained traction recently, including House hearings last week and the endorsement of state Republican lawmakers.
Although Gov. Lincoln D. Chafee has been the most outspoken opponent of default and resisted looking into the option, late last month he said he would investigate it.
If Rhode Island defaults, the proceeds from Reckoning and Copernicus would flow to investors or insurers, Land said.
“Ultimately the bondholders have to get paid – it is their lien on the assets,” Land said. “How the moneys will travel through I can’t say.” •

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