Perpetual Litigation

Ten Ton Hammer (and Cameron at Random Battle which is where I saw it) is reporting about the latest chapter in the Perpetual saga. In a nutshell, Perpetual’s PR company, Kohnke Communications, is suing them to get paid and alleging that they fraudulently transferred assets out of Perpetual before initiating the assignment for the benefit of creditors (which is, in greatly oversimplified terms, a common law bankruptcy) thus impoverishing Perpetual and thereby preventing them from paying Kohnke’s bill (at least in full). Lots of other stuff in there too, but that’s the main gist of it.

But why risk mischaracterizing it? Here is the actual complaint in full. Read it yourself here(pdf) and make your own conclusions. Keep in mind this is a complaint and the facts alleged are just that– the facts as alleged by the plaintiff in the case, not necessarily what they may be proven to be. My original post is here with some background.

Seems my speculation on Bildo’s site was pretty close to the mark. Seems Perpetual was playing it pretty close to the vest and being more than a little cute about what they were saying when they were saying it. If the facts in the complaint are true, then indeed the shell game occurred just prior to the assignment for the benefit of creditors, of which the filing of the notice by Gravity started this whole story.

[Update] For those of you scoring at home, P2 Entertainment, Inc., the entity to which the assets were alleged to have been transferred, appears to have been formed on October 3, 2007 according to the Delaware Secretary of State.

desosp2.jpg

The hits just keep on coming for Perpetual.

[Another update: I borked the original linked pdf. Its fixed now]

Perpetual Speculation: Warp Factor Four

Lots and lots of so called information and speculation swirling today about the fate of Perpetual Entertainment, developer of now defunct Gods and Heroes: Rome (not) Rising and Star Trek: Online.  Perpetual’s fat has been in the fire for some time since it announced abruptly in October that it was in effect cancelling G&H.

Suffice it to say that it doesn’t take an industry guru to figure out things must have been going poorly, calling into question what the fate of the STO franchise might be.  More often than not, this mean not enough time or money to bring the project to fruition.

I’ve read some amazingly stupifyingly stupid things today which I wont grace with a link, but in interest of collecting some of the actual facts together, here is what we definitively know. 

This whole latest blogosphere brouhaha seems to have been initiated by the filing of a Form 6-K report with the U.S. Securities and Exchange Commission by Gravity Co. LTD., the South Korean company which describes itself as the developer and publisher of Ragnarok Online.  Read the whole thing here, its short.  The report is dated and was filed November 21, 2007.  I guess no one noticed earlier because of all the tryptophan circulating last week.

A Form 6-K report is a “periodic” report (i.e., something other than a quarterly or annual report) filed by a non-U.S. company which was securities traded on a U.S. exchange.  Over simplifying, its typically used to disclose material information about a company between reporting periods.  Gravity’s American Depositary Shares or ADRs are listed on Nasdaq under the ticker symbol: GRVY (there’s another turkey and tryptophan joke there, but I’m leaving it alone).  For you U.S. securities law junkies out there, a Form 6-K is basically a Form 8-K equivalent for a non-U.S. company.

According to the report, Gravity received a notice from Perpetual Entertainment on November 1 (which was dated October 16) that on October 10 (the day after the G&H cancellation announcement), Perpetual Entertainment had

…made a General Assignment for the Benefit of Creditors (the “Assignment”) to Perpetual (assignment for the benefit of the creditors), LLC (“Assignee”), a California limited liability company, as assignee, pursuant to California Law.  Pursuant to the Assignment, Perpetual transferred ownership of all of its rights in tangible and intangible assets (collectively, the “Assets”) to Assignee for liquidation. Assignee shall liquidate the Assets, wind down Perpetual, and distribute the net liquidation proceeds to creditors of Perpetual.

Try to stay with me here.  According the the California Secretary of State’s website, Perpetual (assignment for the benefit of the creditors), LLC (yes, that’s its legal name),  was formed September 27, 2007 (note the filing date before G&H cancellation) and lists 10250 Constellation Blvd, Suite 1700, Los Angeles, CA as its address.  This happens to be the address of Levene, Neill, Bender Rankin and Brill, a law firm specializing in bankrupcty and insolvency work, and very likely the law firm of the assignee. 

Michael Maidy is listed as agent for service of process at 101 University Avenue, Suite 100, in Palo Alto, CA.  Michael Maidy is a founder of and this is the address of Sherwood Partners, a business consulting firm specializing in tech company, uh, how shall we say, undertaking.  He is partners with Martin Pichinson who is a bit of a famous figure in the dot com undertaking world.  Particularly, Sherwood specializes in assisting companies in a process known as “ABCs” or assignments for the benefit of creditors.  An ABC is a procedure under state law, in this case California, which is sometimes known as a “common law” bankruptcy.  There’s a fair summary of the process on Sherwood’s website here.  Its used by a lot of VC backed companies to avoid delay, extra cost and the notoriety associated with public bankruptcy proceeding, though since the bust, business has been declining.  The process would have been to engage Sherwood, have them set up the LLC to serve as assignee which would be run by Sherwood.

That’s pretty much the facts that I’ve been able to find on short notice.  Here’s what I think it all means.  Investors backing Perpetual likely saw the writing on the wall and decided it was time to fish or cut bait.  In this case it meant going the ABC route rather than bankruptcy for all the reasons noted above and in the links.  The ABC process is voluntary, so the board would have to approve the process and the agreement with the assignee. 

These things can happen quickly, but not likely over night.  Probably, Perpetual’s board met and decided to engage Marty Pichinson and Sherwood Partners to handle the ABC.  Sherwood put the assignment docs together which were probably already approved by Perpetual’s board and executed after the G&H cancellation.

Perpetual cancelled G&H, assigned all of its assets to the LLC and the LLC started administering the sale process.  Note this is a sale of assets.  The assignee acts much like a trustee in a bankruptcy liquidation proceeding– marshall assets, notice creditors, administer claims.  This is essentially a fire sale.  Part of the process is to notify potential creditors to submit claims so they can be paid a portion, if any, of whatever the assignee can get for the assets.  That’s the notice Gravity received.

So, if someone wants to go in a buy G&H or STO (if the license would allow), I’m sure they can call Marty and put in a bid.  That we’re all just really hearing about it now is exactly why VC investors in tech companies like the ABC process.  If it were not for the public filings of companies like Gravity (fairly atypical, in this case), the next thing we would have heard was probably when someone acquired G&H or STO or both from the assignee, and then it would have been all done.

So far, it hasn’t been announced whether anyone will pickup G&H or STO or the people who were working on it, though that’s likely.  When is anyone’s guess…

The Measure of Success

Wilhelm‘s provocative My New Scorecard post and comments got me thinking. What does it really mean to be a successful MMO financially? I’m mainly referring to professionally developed games with “real” funding.

In the wake of WoW’s success, many many studios have put projects in development. Nothing breeds interest in success like success, and a success like WoW’s can sure flush out the dumb money looking for a sure thing. So there is probably more opportunity to get a project off the ground then there was in 1997, but with those opportunities probably come more serious expectations that can dramatically affect a project’s development (e.g., Vanguard, Ryzom or Gods & Heroes).

From what I’ve read, it seems most “real” MMOs are taking anywhere from three to five years to develop. PotBS and Age of Conan have been in development for about 5 years, LotRO (with its sordid past) even longer than that (though admittedly not with the same “owners” if you will). Note these were in the works before WoW launched, let alone became the success it is.

Building these games takes time. Post-EQ2/WoW/Vanguard, they will take even more time since the market is expecting a much more polished and complete product on launch.

To make these games, investors must be patient and risk tolerant. Not exactly abundant commodities in the technolog community. At least if you’re making a movie and have shot the film, you can recut it into something at the end of the day, even if its complete crap to get to revenue (can you say straight to video?).

Not exactly the same case with a software product. Mostly it works or it doesn’t and you can’t really ship if it doesn’t. Couple that with the fact that if you can’t keep the servers running, there’s really no point in launching an MMO (e.g., Auto Assault, Ryzom).

So what’s it take to develop a new MMO? A few wild guesses, but as something between a software company and a services company, I’d be surprised if a real MMO could be developed these days for less than $20 million. With the complexity of the project and the polish required, I’d expect new games to have development budgets (eventually) more along the lines of movies– $100 million+.

If you think $20 million is a lot of money, do the math over a project’s development and see what you think. Its not. That’s only an average $4 million burn each year for each pre-revenue year. Much less at the front end, probably much more at the back end as pre-launch activities ramp up. The near-launch hype machine I’m told, can be millions in its own right.

So assume you’re selling the box for $50 and tagging subscribers for $15 per month. If you sold 250k boxes and held those subscribers for a full year, you’d return a little over $16 million, with the hope of about $3.8 million in recurring revenue for each following year that you could hold 250k subscribers. So if you’re lucky, on a $20 million budget with 250k subscribers for two years, your investors may break even after seven years.

Hardly the value proposition that most of the new crop of investors sniffing around the MMO world would sign up for. Why do that when you could throw $2 million at a web 2.0 widget company and get even 2x or 5x on your investment in 3 years?

No, I suspect that WoW may have really changed the game game. I think we’re beginning to see just how far the bar has been raised. 250k or even 500k users probably just doesn’t cut it as a target for a new game.

Yes, there will always be small games, but until there is really a technological change that can replace dozens of developers, coders and artists working thousands of hours to produce a top notch game, I wonder how many smaller or independent games will be able to grab the attention of the community accustomed to blockbuster releases.

Is this the beginning of the Hollywood-ification of the MMO space?

Rome Sacked!

This is what happens when you go offline for a week or two and stop paying attention– Alaric shows up at the gates and sacks Rome! As Tobold reported (via WarCry) and the G&H website, its official: Gods and Heroes: Rome [not] Rising has been killed (aka put on “indefinite hold”) so that Perpetual can focus on Star Trek Online and its platform business.

All this the very afternoon that I signed up for the beta after reading the closed beta distribution story linked in Virgin Worlds. Not that this is an especially bad thing, but the fantasy MMO market is starting to look a bit like the U.S. sub-prime mortgage market: soft and shaky with foreclosures on the rise. Most often the result of aggressive and questionable development decisions.

Certainly this year’s nonstop stream of continually delayed offerings (Conan, Tabula Rasa, Warhammer Online, Pirates of the Burning Sea and until now Gods and Heroes) has foretold both the industry’s recognition that polish matters *cough vanguard cough* but also perhaps that YAFMMO may not be the sure thing that many companies have been counting on.

Creative destruction may yield many improvements for which we will all be the beneficiaries, but one must lament the commitment of resources to develop a project this far only to send it to the shit can at this late a date. Not to mention the disruption these kinds of events have in the lives of the countless dozens of folks who have devoted endless hours crafting a game not likely to see the light of day.

Glad to see Perpetual is willing to make the tough calls when it comes to preserving a franchise like Star Trek, but such is the bane of such an IP. To achieve less than amazing success with STO would be a complete failure– the blessing and curse of such a well known IP. Ask Turbine or SoE about having a ready made fan base for a game… Past success is a jealous master. At the end of the day, they simply couldn’t afford to half ass STO so they ate their own young in the guise of G and H.

Here’s wishing good luck to all the G&H folks back in the market.