Investing in the Future: a Tax Relief for the UK Video Games

Transcription

Investing in the Future:
a Tax Relief for
the UK Video Games
Development Sector
Second Edition
January 2011
Foreword by Tom Watson MP
Since the inception of home computer gaming in the 1980s, the UK has effectively built an impressive reputation for delivering
quality, innovative and inimitable video game titles. This had led to the development of a highly successful video games development
sector that has revolutionised global interactive entertainment, which until recently had been consistently the third largest centre for
video games development in the world.
The industry and talented people that drive it have forged successful businesses, careers and products with little Government
support. However, the evidence in this report reveals that between July of 2008 and September 2010 the UK’s studio headcount fell
by 9 per cent. During the same period the global industry’s software sales grew by 16 per cent. Whilst we prevaricate at home, other
countries are surging forward, leaving the acclaimed British industry paralysed.
As this report is published, the sector faces unprecedented pressures that affect its future competitiveness. UK video games
producers face competition from overseas, particularly from countries such as Canada, France, USA and South Korea, all of whose
Governments offer favourable tax incentives, investment and support.
The case for Government support has never been more compelling
The Labour Government brought forward proposals in the March 2010 Budget to legislate for a Games Tax Relief. The Coalition,
despite promises from both partners before the election, pulled the plug. They urgently need to reconsider this decision.
The phenomenon the video games industry is suffering is reminiscent of the film industry’s problems in the early 1990s. The UK
Film Tax Relief that was introduced has since led to increased investment, productivity and employment. The Film Council estimates
that without the Film Tax Relief there would have been 75 per cent less production in the UK.
The global video games industry will continue to grow; if the UK wants to remain as a serious player then it needs to have the
competitive conditions that attract new investment, companies and highly skilled staff. The solution is introducing Games Tax Relief.
Tom Watson MP
Co-Chairman of the All Party Parliamentary Group on the Computer and Video Games Industry.
Foreword by John Whittingdale OBE MP
The UK video games sector has quietly and effectively built a proud reputation of producing original, distinctive and exceptional video
game titles since the beginning of home computer gaming in the 1980s. The industry is rightly viewed with respect and admiration
in the global marketplace, and until recently was consistently the third largest centre for video games development in the world.
It’s the exceptional people and businesses that have built this successful industry that deserves the credit for forging a formidable
international reputation for excellence. Furthermore, the positive social, cultural and economic impact on the country has been
tremendous and this report rightly highlights the significant contribution the industry has made to contemporary culture.
TIGA has been a powerful advocate for the industry and has led the calls for the introduction of Games Tax Relief. It is important
to note the difficult economic position the Government has inherited. However, as Games Tax Relief could help reduce the deficit
because it is a net revenue earner for the Treasury, it is worth reconsidering.
The issue of tax relief became apparent when countries such as Canada began making a determined pitch to relocate highly skilled
workers and businesses, by offering tax incentives. The Government is rightly concerned that for tax breaks to be initiated they have
to be properly focused. However, the support is necessary and the industry should not accept that tax breaks are off the table, but
continue to make the argument.
The successes registered by the UK video games development sector are nothing when compared to the global potential of this
interactive industry. We have only just begun to tap into the possibilities of interactive entertainment as a fundamental tool to educate
and inform, as well as entertain.
The games industry is vital to our creative industries sector, which in turn is a crucial area for future economic growth. If we want to
continue at the forefront of the global games industry then Government support is essential.
John Whittingdale OBE MP
Co-Chairman of the All Party Parliamentary Group on the Computer and Video Games Industry.
About the authors and acknowledgements
Dr Richard Wilson
Rick and Nick Gibson
Paul Gardner
CEO, TIGA
Directors, Games Investor Consulting
Partner / Head of Computer Games,
Osborne Clarke
Richard Wilson is the CEO of TIGA, the trade
association representing the UK video games
industry in the UK and in Europe. TIGA
represents over 140 organisations. The majority
of TIGA members are either independent video
games developers or in-house publisher owned
developers. TIGA also has games publishers,
outsourcing companies, technology businesses
and universities amongst its membership.
TIGA’s vision is to make the UK the best place
in the world to do video games business.
TIGA focuses on three sets of activities:
political representation, generating media
coverage and developing services that
enhance the competitiveness of its members.
This means that TIGA members are effectively
represented in the corridors of power, their
voice is heard in the media and they receive
benefits that make a material difference to their
businesses, including a reduction in costs and
improved commercial opportunities
tiga.org
Rick (pictured) and Nick Gibson are
Directors of Games Investor Consulting
(GIC), a specialist video games consultancy
that provides research & analysis, strategy
consulting and corporate finance services
to the video games, media and finance
industries. Since it was founded in 2003,
GIC has established itself as a unique
provider of business intelligence and
advisory services relating to all facets of
the rapidly growing global video games
industry. With a specialty in government
assistance for video games development,
GIC was one of the founders and organisers
of the Games Up? campaign. GIC’s clients
include UKTI / BIS (2007’s Playing for Keeps
report), NESTA (2008’s Raise the Game and
2009’s Time to Play reports), BBC Vision,
BBC Worldwide, RTL Group, Jagex, Turner,
Endemol, FremantleMedia, Sony Computer
Entertainment Europe, Nomura and over
50 others.
gamesinvestor.com
Paul Gardner is a Partner and head of the
Interactive Entertainment Group at Osborne
Clarke. Osborne Clarke is one of Europe’s
most respected and dynamic law firms. The
firm is recognised in legal directories as
Europe’s leading law firm for the interactive
entertainment industry and advises several
leading development studios including
Crytek, Eurocom, Kuju Entertainment,
publishers including Activision Blizzard
and Electronic Arts and also Nintendo of
Europe. Osborne Clarke has offices in Bristol,
Cologne, London, Munich, Silicon Valley and
Thames Valley and through the Osborne
Clarke Alliance in Barcelona, Brescia,
Brussels, Luxembourg, Madrid, Milan,
Padua, Paris, Rome and Rotterdam.
osborneclarke.com
The authors are grateful for the assistance of a range of games studio practitioners, together with organisations with specialties in tax and the film tax relief, in
drafting sections of this report. They are: Grant Thornton, Tenon Group, Games Audit Ltd., Deloitte MCS Ltd. and Blitz Games Ltd. We owe a debt of thanks to Paul
Durrant at Abertay University in Dundee for running a consumer survey at short notice at Dare ProtoPlay as part of the 2009 Edinburgh Fringe.
Finally, we would like to thank NESTA for giving us permission to republish the results of a survey of 30 key games publishers, developers and external financiers,
which was conducted in parallel to this report and which was published on 26/08/09.
Contents
Foreword by Tom Watson MP .................................................................................. 2
Foreword by John Whittingdale OBE MP ................................................................. 2 About the authors and acknowledgements ............................................................. 3 Contents ................................................................................................................... 5 Executive Summary.................................................................................................. 6
Introduction ........................................................................................................... 12 Chapter 1: A case for supporting cultural video games ......................................... 15 Introduction ...............................................................................................................15 Major challenges facing UK video games studios...........................................................15 The cultural value of video games................................................................................22 A: Introduction.......................................................................................................22 B: Definitions .........................................................................................................22 C: The cultural origins of video games .....................................................................24 D: Video games’ reflection of other cultural assets ....................................................26 E: What attributes of video games can be cultural? ...................................................28 F: How have video games impacted upon British culture?..........................................33 G: Cultural impact of video games on other media ....................................................35 H: Support for the claim that video games can be cultural products ...........................40 I: Conclusions ........................................................................................................42 How cultural and other tax credits for video games production have worked...................43 How the cultural tax credit assisted UK film production..............................................44 How the cultural tax credit assisted French video games production...........................45 How tax credits affected the Canadian video games sector ........................................46 Chapter 2: The structure and implementation of the relief ................................... 47 Financial criteria .........................................................................................................47 Eligible products .....................................................................................................47 The cultural test .....................................................................................................47 The scoring exercise ...............................................................................................49 Calculation and amount of the Games Tax Relief ......................................................50 The rationale for tiers of the Games Tax Relief .........................................................52 Two sample applications .........................................................................................52 Estimated cost of the Games Tax Relief....................................................................53 Implementation issues ................................................................................................57 Administration of the Games Tax Relief ....................................................................57 Applications for the Games Tax Relief ......................................................................57 Chapter 3: Impact Analysis .................................................................................... 60 Introduction ...............................................................................................................60 Positive impacts of a Games Tax Relief for cultural video games ....................................60 Estimated impact of the Games Tax Relief on the studio sector......................................63 Goldilocks analysis ..................................................................................................66 Analysis of the distorting impacts of a tax relief ............................................................67 Chapter 4: Response to the Exchequer Secretary to the Treasury ........................ 71 1) Displacement ......................................................................................................71 2) Employment........................................................................................................74 3) Economic efficiency and complexity in the tax system ............................................76 4) Good value for money..........................................................................................77 The cost of inaction ....................................................................................................77 Chapter 5: Conclusions........................................................................................... 77 Appendix 1: Impact of Games Tax Relief on the Scottish Video Games Industry . 81 Appendix 2 How the Report’s statistics were calculated ....................................... 82 5
Executive Summary
The report
This report is an update to the formal response from TIGA, the trade association representing
the UK video games industry in the UK and in Europe, to the Labour Government’s call in
2009 for evidence for a tax credit for cultural video games development in the UK.
Strengths of the UK video games development sector
The UK is a world class location for video games development, taking 3rd place in global video
games sales rankings by country of origin in 2008. The UK boasts a substantial and highly
qualified talent pool, some of the finest video games studios in the world, a rare combination
of both technical as well as creative excellence, and an ongoing ability to generate
blockbuster video games that appeal to a global audience.
Challenges to the UK video games development sector
The UK studio sector faces a range of major challenges:
•
Between July 2008 and July 2009 the headcount at British video games studios fell by 4
per cent. Between July 2009 and September 2010, the UK’s studio headcount fell by
another 5 per cent to 9010, a 9 per cent fall since 2008.
•
Meanwhile, the global industry’s software sales grew by 16 per cent between 2008 and
2010.
•
In turn, between July 2008 and September 2010 the UK video games industry’s direct
and indirect contribution in tax revenues to the Exchequer fell by a total of £55 million
and the sector’s contribution to Gross Domestic Product (GDP) declined by £132 million.
•
Overseas government support for video games development has continued to grow
further destabilising the uneven international playing field. Australia, New Zealand,
Sweden, Finland, Texas and Florida have joined Canada, Germany, Japan and South
Korea and increased their fiscal support for video games development.
•
British-made video games are facing a long-term decline in the global sales charts,
despite a record 2008. The UK was expected to have fallen to 5th place in 2009 and 6th
place in 2010, overtaken by Canada, South Korea and then China.
•
British consumers have a strong preference for British made video games, purchasing
four times more British-made video games than US consumers. Yet decline means that
the British public faces decreasing access to British-made video games.
•
A brain drain to subsidised studios overseas is depleting British studios of skilled and
experienced staff. A TIGA survey in 2009 found that 23 per cent of UK game
development studios had lost staff to foreign countries in the preceding 12 months and
of these 72 per cent said that their staff went to Canada.
•
Poor financial conditions globally have resulted in private funding for video games
companies worldwide falling by over 22 per cent in 2009 compared to 2008. The UK
fared considerably worse with funding down 92 per cent in 2009 versus 2008.
•
British studios have begun adopting newer, more sustainable online business models.
The latest census found 145 new games companies started up since 2008, the vast
majority of whom are focused on network gaming.
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•
The video games industry cycle, dominated by video games console hardware lifecycles,
entered its cyclical slowdown in 2009 and hardware and retail software sales have been
falling.
•
Original intellectual property (IP) development by independent video games developers,
a cornerstone for their long term value growth and that of the industry, is still in decline.
Traditional independent developers rely on a single source of finance, overseas
publishers, for whom work forms an estimated 56 per cent of an average UK
independent studio’s annual projects and an estimated two thirds of their revenues.
Video games can be cultural products
Video games development can be a cultural industry, using creativity, cultural knowledge and
intellectual property to develop products and services with social and cultural meaning.
Video games can be cultural products. Many attributes of British video games can have
cultural facets: reflect the society in which they are created; generate iconic characters (e.g.
Lara Croft); make cultural commentary (e.g. Grand Theft Auto IV); create innovative new
video games genres (e.g. Elite, Populous, Runescape); use narrative in new ways (e.g. the
Fable series); create breath-taking art (On average, 49 per cent of the cost of game
development is spent on artists, animators and designers); convey humour (e.g. Broken
Sword); use science and learning to innovate (e.g. LittleBigPlanet); and act as vehicles for
education (e.g. Buzz! The School Quiz).
Video games are embedded in British life. According to a survey by TNS Technology, two
fifths of Britons over the age of 50 frequently play video games. 73 per cent of the population
regularly play video games. A generational change in media consumption has occurred over
the last decade with video games at the forefront of the change, and people under the age of
16 regard video games as their most important medium.
Video games have a major impact upon other creative media. Video games have inspired
films, (e.g. Tomb Raider, Silent Hill, Final Fantasy), television programmes (e.g. Lost), and
music (e.g. EMI has organised a orchestral tour series called Video games Live featuring
music from video games). Video games have also had an influence on literature, fine arts,
design, museum exhibitions, academia, children’s industries, radio, newspapers and the
Internet.
There is much support for the contention that video games can be cultural products.
Supranational and international organisations such as the EC and UNESCO take this view.
Governments in France, Germany, Scandinavia, South Korea, Japan and Canada also support
this argument. Within the UK, the Digital Britain report, the Arts Council, the British Council, a
number of Regional Screen Agencies, C@binet, BAFTA, Futurelab, and a Conservative
Shadow Minister have either expressed the view that video games can be cultural in nature or
have funded video games-related projects from cultural programmes. A 2009 survey of the
British public found that 86 per cent agreed that video games can be cultural products.
Tax credits can power industrial growth
The UK Film Tax Credit has revived the indigenous film industry. In 2007, the UK Film Council
estimated that, without the Film Tax Relief, film production in the UK would have been 75 per
cent smaller than its size at the time.
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In France, a 20 per cent tax break for video games production was introduced in 2007.
Significantly, Ubisoft increased its staff numbers in France by 20 per cent in 2008 partly
because of the cultural tax break. In Canada, production and other tax credits for video
games production drove studio staff numbers up by 43 per cent between 2006 and 2008 and
33 per cent between 2008 and 2010.
The structure and implementation of the Games Tax Relief
TIGA proposes a Games tax Relief, with the following attributes:
•
Eligibility for the Games Tax Relief would cover any company within the scope of UK
Corporation Tax.
•
Video games would need to pass a cultural test. We present one here, and 44 per
cent of UK-made video games profiled in an exercise for this report would meet the
cultural test.
•
The Games Tax Relief would be calculated and applied in a similar way to the existing
tax relief for British films. A development company would be entitled to an additional
deduction in computing their taxable profits equal to the UK expenditure incurred in
developing a game, or 80 per cent of the total expenditure incurred in developing a
game, whichever is the lower. The development company would then be entitled to
a tax credit calculated on the amount of the deduction, which it would either set off
against the income from the game or recover as a payment from HMRC.
•
The Games Tax Relief is proportionate and designed to help all kinds of studios.
Three tiers of benefit are proposed: 20 per cent of core expenditure for budgets
above £6,000,000, 25 per cent for budgets over £3,000,000 but less than £6,000,000
and 30 per cent for budgets of over £100,000 but under £3,000,000. The three tiers
are designed to reflect average production budgets of video games on different video
games platforms, and correspondingly different sizes of company.
•
An independent organisation with knowledge and experience of video games
production would administer the cultural tests, checking submission criteria are met
and policing the Relief. It would issue interim certificates or letters of comfort
confirming a product has passed or provisionally passed the cultural test to ensure
candidate projects are funded.
•
The cost of the Games Tax Relief has been rebased using new census data on games
releases and is estimated to be up to £54,000,000 in year one (for both current and
new projects). The maximum cost would fall to between £33,000,000 and
£37,000,000 from year 2 onwards. The impact of a Games Tax Relief on the sector
overall is projected to rebate up to 12.9 per cent of the UK’s total video games
development expenditure in year 1, falling to 7.8 per cent in year 2 and onwards.
The Games Tax Relief would create over 1,300 new studio jobs
The Games Tax Relief is expected over 5 years to create a net 1,328 new jobs in the studio
sector, increasing investment by games studios by £138,000,000. 2,427 indirect jobs2 would
2
Definition: Indirect jobs describe indirect and induced impacts of employment in the games development sector,
which are created as a direct result of development sector growth due to its growing requirement for services from
other sectors. Indirect impacts are defined in The economic contribution of the UK video games development
industry (Oxford Economics, October 2008) as: “employment and activity supported down the supply chain to the UK
Games Development industry, as a result of Games Development companies purchasing goods and services from UK
8
be also created with direct and indirect annual tax revenues rising by £126,000,000 and GDP
contribution by £307,000,000. This measure will drive sustained growth in the UK studio
sector, and assist in halting the decline in investment in British studio jobs. Without a tax
relief, current rates of decline would persist, leading to a further 24 per cent contraction in
headcount between 2010 and 2015 (contributing to an aggregate 30 per cent fall since
2008). Over 5 years, the Games Tax Relief is projected to save a further 2,038 direct jobs
and 3,726 indirect jobs, £293,000,000 in development expenditure, £267,000,000 in direct
and indirect annual tax revenues and £649,000,000 in GDP contributions, currently under
threat from continued decline if a Games Tax Relief is not enacted. In total, the Games Tax
relief is projected to create and safeguard over 9,520 direct and indirect jobs, costing over
£20,000 per head over 5 years.
The Games Tax Relief would not distort the video games development market
The UK produces on average between 250 and 350 video games titles per annum (310
between 2009 and 2010), excluding smaller online and mobile video games. 1,500 new video
games are introduced to the market each year in Europe. TIGA’s proposed Games Tax Relief
would benefit 90-100 titles from an applicant pool of an estimated 250 projects. The
proportion of the UK’s total development expenditure that would be financed from Games Tax
Relief would be less than 8 per cent from year 2 of the scheme’s operation onwards. The tax
measure would benefit UK video games developers without distorting the larger European
video games development market.
Impact analysis of the Games Tax Relief
In August 2009 NESTA completed an independent impact analysis of the Games Tax Relief by
surveying 30 key video games publishers and developers (who combined employ nearly half
of the UK’s entire studio headcount) and external financiers (comprising venture capital,
private equity and project finance specialists). Its results, which are still the best and most
accurate indication of major studios’ plans, demonstrate that:
•
The Games Tax Relief would promote employment. All UK development studios
projected definite or potential growth in employment with a tax credit. 76 per cent of
studios projected flat or, at best, modest growth without a tax credit.
•
External finance sources were unanimously positive about the potential for a tax credit to
boost the scale or number of investments in British video games projects. Games Tax
Relief would improve access to finance for British video games companies.
•
The Games Tax Relief would reduce developers’ over-reliance on publisher funding. 75
per cent of independent development studios said that they would seek new external
finance if Games Tax Relief was introduced.
•
70 per cent of publishers and external finance companies said that they would be more
likely to invest in the UK if a video games tax credit was enacted.
•
80 per cent of publishers said that they would increase funding in British video games if
a tax credit was introduced. Global publishers could therefore be less likely to close their
development studios in the UK.
suppliers. This includes, for example, jobs supported through the demand for property/rent, recruitment, and a
variety of activities in the business services sector (legal, accountancy etc).” Induced impacts are described as
“employment and activity supported by the spending of those directly or indirectly employed in the UK Games
Development industry on goods and services in the wider UK economy. This helps to support jobs in the industries
that supply these purchases, and includes jobs in retail outlets, companies producing consumer goods and in a range
of service industries.”
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•
100 per cent of independent developers stated that a video games tax credit would
enable them to adopt new, more sustainable online business models and sell directly to
consumers.
•
Two thirds of studios forecast that a tax credit would help to promote original IP
development. 75 per cent of independent developers said that a video games tax credit
would help them to retain their IP.
•
The survey found that a tax credit could trigger new start-ups, strengthen publisher
investment in the UK and enhance the competitiveness of independent developers.
Finance sources also indicated that a tax credit would result in new games finance
vehicles.
•
One in three respondents concluded that a video games tax credit would help to stem
the flow of talent, investment and IP development overseas.
Response to the Exchequer Secretary to the Treasury
On November 8th 2010 David Gauke, the Exchequer Secretary, made a series of claims about
TIGA’s Games Tax Relief proposal during a debate in the House of Commons. The Minister
claimed that: Games Tax Relief would not be additional to the UK economy; that it would
displace investment from more productive economic sectors; that skilled developers who lost
their jobs in the games industry would find work elsewhere and so Games Tax Relief was
unnecessary; that Games Tax Relief was economically inefficient; that Games Tax Relief
would complicate the tax system; and that Games Tax Relief represented poor value for
money.3 The Minister is wrong.
Games Tax Relief would stimulate additional investment into the UK economy and deter
indigenous developers from investing overseas in response to tax breaks in other
jurisdictions. Inward investment in games development is highly sensitive to fiscal incentives.
Experience from Canada indicates that every £1 of tax relief generates £2 of investment.
Other things being equal, Games Tax Relief would be likely to generate similar levels of
additional investment into the UK economy.
Games Tax Relief would not displace investment from more productive economic sectors.
76% of investment in British games development is provided by undiversified overseas games
publishers that do not invest their development budgets elsewhere in the British economy.
Games Tax Relief would safeguard existing investment and incentivise overseas publishers to
invest new money into the UK games industry.
Contrary to the Minister, the UK games industry is comparable in GDP contribution with other
high value, knowledge economy industries. GDP per employee in the UK games industry
equates to £102,000. By way of comparison, GDP per employee in the UK film industry
amount to £128,358, while the equivalent figure for the aviation industry is £61,290. The film
industry benefits from a tax break for film production and the aviation sector receives multibillion contracts from the Ministry of Defence, RDA grants and other government
programmes. The UK video games industry receives negligible paltry support in comparison
to these sectors.
The UK video games industry is suffering from a brain drain. A survey of UK game developers
in 2009 revealed that 23% had lost staff to foreign countries in the preceding 12 months and
3
http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm101108/debtext/101108-0002.htm
10
of these, 72% lost staff to Canada. The Government’s claim that unemployed game
developers will find similar forms of highly skilled and productive work elsewhere in the UK
economy is false and unsubstantiated. Many unemployed graduates are leaving the UK for
employment in the games industry overseas.
Just as the Film Tax Credit powers inward investment into the UK, so would TIGA’s Games
Tax Relief. The film industry estimates that it would be 75% smaller without the Film Tax
Credit. In the face of gradual but steady decline in British games development, Games Tax
Relief would be highly effective in returning the UK video games development industry to
growth.
Games Tax Relief would not make the UK tax system appreciably more complicated. The
Government and HMRC have successfully operated a Film Tax Credit for a decade. There is
every reason to believe that the Government and HMRC could successfully implement and
manage Games Tax Relief. The addition of one tax relief by itself cannot plausibly be claimed
make the UK tax system impenetrable.
Games Tax Relief is good value for money. It would generate a twofold return on investment
and create or safeguard over 9,520 direct and indirect jobs, costing £20,378 per head over 5
years under TIGA’s proposals.
If the Coalition Government continues to violate the pre-election promises given by the
Conservatives and Liberal Democrats while in Opposition, employment in the games industry
will be jeopardised and a great British digital industry will decline at a time while the global
video game sector continues to grow.
Ends
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Introduction
This report is an update to the formal response from TIGA, the trade association representing
the UK video games industry in the UK and in Europe, to the call by the Labour Government
in July 2009 for evidence for a tax relief for cultural video games development in the UK.
Since its inception in 2001, TIGA has been lobbying the UK Government on the tax agenda,
skills and other issues of importance to the video games industry. TIGA was also a founding
member of the 2008 Games Up? campaign, which highlighted the challenges facing the UK
video games industry, together with practical solutions. Since the Games Up? campaign
finished in late 2008, TIGA has taken the tax agenda to the next level by continued lobbying
of the UK Government and political parties, instigating the establishment of the All Party
Group on the Computer and Video games Industry in the Westminster Parliament, and by the
provision of more data supporting a tax relief for cultural video games. TIGA also urged the
UK Government to give proper attention to the video games industry in Lord Carter’s review
of digital media in the UK.
Digital Britain, which was published in June 2009, acknowledged:
Creative content is not restricted to the traditional analogue industries of the
performing arts, film and broadcasting. Other countries such as Canada extend the
model of cultural tax relief beyond the film industry to the interactive and online
worlds. CGI, electronic video games and simulation also have a significant role in
Britain’s digital content ecology and in our international competitiveness. Each of
these has the same capability as the more traditional sectors, such as film, to
engage us and reflect our cultural particularism. They may in future have a cultural
relevance to rival that of film. The Government has therefore committed to
work with the industry to collect and review the evidence for a tax relief
to promote the sustainable production for online or physical sale of
culturally British video games. This work will balance any potential support
with the need for fair competition and ensure value for money for taxpayers (49).
In late June 2009, Siôn Simon, MP, Under-Secretary of State for Creative Industries at the
Department of Culture, Media and Sport (DCMS), called for the industry to respond with
evidence around why and how a tax relief for the development of cultural video games could
work in the UK. In particular, the DCMS wanted to know:
4
5
6
7
8
9
i.
Consideration of the appropriate relief threshold4.
ii.
Evidence setting out the likely impact on the video games market of the introduction
of such a measure5, including likely numbers of applicants6, impact on different video
games platforms7, and impact on competitiveness of other companies8.
iii.
Evidence of the likely cost to Government, and details of qualifying criteria9.
iv.
A strong case for the cultural value of video games10.
See
See
See
See
See
See
chapter
chapter
chapter
chapter
chapter
chapter
2
3
2
3
3
2
The structure and implementation of the relief.
Impact analysis: Positive impacts of a tax credit for cultural video games.
the Structure and implementation of the relief: estimated cost of a cultural tax credit.
Impact analysis: Market impact analysis.
Impact analysis: Market impact analysis.
The structure and implementation of the relief.
12
This report answers the questions posed by the DCMS in 2009.
Chapter 1 sets out the case for supporting cultural video games. It updates data on the
economic health of the UK’s games studio sector following a census of all British games
companies conducted in September 2010. It identifies the strengths of the UK video games
development industry, the challenges that it faces and the cultural value of video games. It
also shows the positive impact that cultural and other tax credits have had for video games
production outside of the UK.
Chapter 2 explains the structure and implementation of TIGA’s proposed Games Tax Relief. It
describes the products that are eligible, the criteria that need to be met and a cultural test
that a video game would need to pass in order to benefit from the tax relief. The chapter sets
out the different rates of relief available, how the tax relief should be administered and
estimates the cost of the tax measure to the Government. An analysis of the likely cost of the
proposed tax measure has been updated with the latest census data and an estimate of the
proportion of UK video games likely to benefit from Games Tax Relief is presented.
Chapter 3 provides an updated assessment of the impact of the Games Tax Relief for the UK
video game sector, an analysis of the likely economic impact of the proposed tax measure in
terms of growth in investment in UK jobs and tax contribution, and an examination of the
impact of the tax reform on the wider European market for video games development.
Chapter 4 concludes that the Games Tax Relief is a proportionate policy response to the
challenges facing the UK video games development industry, would strengthen the
development of culturally British video games and would enable the UK to maintain its
position as one of the world’s leading video game development centres.
The first edition of this report played a key part in influencing the political debate relating to
the UK video games industry in 2009-10. In particular, it helped to persuade the then Labour
Government to announce a commitment to introduce Games Tax Relief in the March Budget
2010. It also helped to create a cross-party consensus in the weeks after the March Budget in
favour of Games Tax Relief.
The Labour Part in its general election manifesto said: “Subject to state aid clearance, we will
introduce a tax relief for the UK video games industry.”11 The SNP Manifesto 2010, Elect a
Local Champion, stated that: “Our efforts will be focused on promoting Scottish economic
recovery. We will work to ensure that growth industries in Scotland, like the games industry,
are given the same sort of support as in competitor countries”.12 On March 29th, Ed Vaizey
MP, the then Shadow Culture Minister told Develop that the Conservatives “are going to
support tax breaks for the video game industry” in the Conservatives’ first budget”.13 On April
26th he added that “We are fully behind game tax breaks. This is my unequivocal statement,”
he said. “It’s been approved by George Osborne.”14 On April 30th, Don Foster MP, the then
Liberal Democrat Shadow Secretary of State for Culture, Media and Sport, said in a statement
10
11
12
13
14
See chapter 1 A rationale for supporting culturally British video games.
A Future Fair For All (Labour Party, 2010), 7.5
Elect a Local Champion (SNP, 2010), pp.14-15.
http://www.develop-online.net/news/34341/Tories-come-clean-Well-offer-tax-cuts-in-first-budget
http://www.develop-online.net/news/34619/Vaizey-you-have-to-trust-us-on-tax-breaks
13
to TIGA that: "Liberal Democrats support the introduction of a Games Tax Relief. Following
consultation on the details, we would implement the Relief as soon as possible."15
Unfortunately, the cross-party consensus in favour of TIGA’s Games Tax Relief proposal did
not endure. The Conservative-Liberal Democrat Coalition dropped Games Tax Relief in the
June 2010 Budget.
Despite this reversal, TIGA remains convinced that Games Tax Relief would be good for the
UK video games industry and good for the overall UK economy. TIGA therefore commissioned
Games Investor Consulting to update the statistical parts of this report. The 2010 edition of
Investing in the Future contains revised statistical information on the state of the UK games
sector, the impact of Games Tax Relief on the video games industry and the wider economic
impact of the tax relief. Please note that the cultural arguments in Chapter 1, most of the
proposed methodology for the Games Tax Relief in Chapter 2, and some of the impact
analysis from Chapter 3 remain unchanged from the 2009 report in this edition. We trust that
the UK video games sector will find this report to be of interest to all observers, games
companies and policy makers. We hope that politicians in Westminster and Holyrood will use
the report to further their understanding of the games industry and of the firm and highly
topical case for Games Tax Relief. We hope that the UK Coalition Government will review the
case for Games Tax Relief as a proportionate and appropriate means of stimulating this key
creative sector and figurehead for the UK’s knowledge economy.
15
http://www.tiga.org/PressReleaseDetail.aspx?id=c12d4346-17e2-47ce-bb77-12d5b8a4f298
14
Chapter 1: A case for supporting cultural video games
Introduction
The UK is a world class location for video games development. In 2008, the UK returned16 to
3rd place (behind the USA and Japan but above South Korea and Canada) in global sales
rankings by country of origin with the assistance of Grand Theft Auto 4 (GTA IV), a game
developed in Scotland and which became the fastest selling entertainment product of all time.
The UK boasts a substantial and highly qualified talent pool, some of the finest video games
studios globally, technical as well as creative excellence, and an ongoing ability to generate
products that sell well globally, create new genres (i.e. types of video game) and challenge
the orthodoxy of the industry. Developed over 30 years, the UK’s track record, particularly in
generating original video games IP, is second only to the USA and Japan. The sector
represents a success story for multiple regions of the country, with only 16 per cent of staff
employed in London. However, the creative engine of the UK video games industry, its studio
sector, faces significant challenges and has been in decline since 2008. This chapter outlines
the key drivers of that decline, first outlined in GIC’s report Playing for Keeps for UKTI/DTI in
2007, updated by GIC for NESTA in Raise the Game in 2008, reiterated by TIGA, GIC and the
Games Up? Campaign through 2008 and then set out in the first edition of Investing the
Future in September 2009.
Major challenges facing UK video games studios
British video games in decline despite global industry growth
In July 2008, following a census of the sector by GIC for the Games Up? campaign, the UK
video games production sector employed nearly 10,000 people directly and an additional
18,100 indirectly17. The latest TIGA census of the British video games development industry
shows a continuing decline with over 800 UK jobs believed to have been lost between July
2008 and September 2010, a decline of 9 per cent18.
16
British-made video games outsold all but those made in Japan and the USA for most of the history of the video
games industry. In recent years, sales of UK-made video games have gradually been overtaken by video games
made in other, faster growing video games development territories, first Korea in 2005 and then Canada in 2006 and
2007. Despite British-made video games returning to 3rd place in the global rankings of sales by country of origin in
2008, the long-term trend is downwards and the UK is likely to fall to number 6 in global sales, behind US, Japan,
Korea, China and Canada. Source Raise the Game (GIC/NESTA, 2008).
17
Definition: Indirect jobs describe indirect and induced impacts of employment in the games development sector,
which are created as a direct result of development sector growth due to its growing requirement for services from
other sectors. Indirect impacts are defined by Oxford Economics as: “employment and activity supported down the
supply chain to the UK Games Development industry, as a result of Games Development companies purchasing
goods and services from UK suppliers. This includes, for example, jobs supported through the demand for
property/rent, recruitment, and a variety of activities in the business services sector (legal, accountancy etc).”
Induced impacts are described as “employment and activity supported by the spending of those directly or indirectly
employed in the UK Games Development industry on goods and services in the wider UK economy. This helps to
support jobs in the industries that supply these purchases, and includes jobs in retail outlets, companies producing
consumer goods and in a range of service industries.”
18
GIC conducted two censuses in July 2008 and September 2010 of all known British games companies (including
developers, publishers, publisher studios, service companies and broadcasters with games divisions) by telephone,
asking almost all extant studios for their development headcounts (excluding HR, admin, sales, marketing and
commercial staff) and growth expectations.
15
Creative staff in studios
Jobs indirectly supported by
studios
Studio numbers
Investment by studios (pa)
Direct / indirect Tax revenues
(pa)
GDP contribution (pa)
July
2008
July
2009
Oct
2010
Gross
change
2008
vs.
2010
Net
change
2008
and
2010
9,900
9,500
9,010
-890
-890
18,100
17,400
16,473
-1,627
-1,627
264
220
278
+14
+14
£458m
£441m
£417m
-£41m
-£58m
£419m
£402
£381m
-£38m
-£55m
£1,016m
£975m
£925m
-£91m
-£132m
This decline in headcount is severe and reflects a number of studio failures, but, more
importantly, the closure or severe downsizing of a number of studios either owned by global
companies or reliant upon global companies for business. Over the same period, 131 video
games companies (including 78 studios and 32 service companies) have been closed, went
out of business or left the industry altogether, the vast majority (84 per cent) being games
development companies. Nevertheless, the industry has recorded net growth in the number
of games companies with 145 start ups or market entrants. Over 80 per cent of these new
companies are delivering network games as opposed to retail product. Despite this burst of
company growth, the UK’s overall development headcount has continued its downward trend,
and by 2010 annual expenditure by British video games development companies on salaries
plus overheads was £41m less than 2010. In contrast, the global video games industry has
been growing despite the financial downturn and the ongoing falls in retail gaming, with 16
per cent growth between 2008 and 2010, driven by strong growth in online gaming. Although
jobs have been lost and companies closed across the global development industry, the UK
has been hit hard19, versus subsidised territories, which have continued to grow strongly
(Canada has grown its development headcount by at least 33 per cent over the same
period)20.
The main driver of decline is the comparatively high cost of development in the UK, which has
resulted in the closure of recently acquired UK studios by global publishers21, the downsizing
or collapse of British studios22, and the UK’s reliance upon work for hire over self-publishing.
19
Accurate data on job losses in other territories (beyond some indicative data from France mentioned hereafter) is
not available. Data on the impact of overseas support schemes on the development headcounts of other territories is
also not available, particularly in the USA where most of the schemes are still relatively new. GIC is not aware of any
research into the efficacy of schemes in different states within the USA being released in public.
20
Source: GIC estimates that Canadian studio headcount is now over 14,000, based on GIC studio data plus Invest
Quebec data.
21
The NESTA Time to Play survey found that UK costs compared to subsidised territories was the number one
concern of respondents, and cites in several sections publisher head offices concerns about costs as a key issue, with
a particularly forceful example given on p4: ““Production costs are far too high and only make sense if the
developer/franchise is extremely high quality. Our (UK) studio... (has) to do a very, very good job, otherwise we will
move that IP out to one of our studios around the world.” News stories around the closure of publisher studios
frequently cite cost as one of the principal drivers for their closure. Examples include Midway North (closed for cost
reductions, see www.develop-online.net/news/30982/Axe-falls-on-Midway-development-teams), Rockpool, Pivotal
and other Eidos studios (75% cut in UK staff costs and relocation to Montreal, see
www.gamesindustry.biz/articles/sci-to-cut-25-per-cent-of-jobs-cancels-14-projects), Take Two Gateshead (closed but
game moved to another studio, see www.develop-online.net/news/30082/Venom-Games-to-close), Sega Racing
(poor ROI, see www.develop-online.net/news/29598/Sega-Racing-Studio-shuts-its-doors). Many but not all global
publishers’ UK studios have downsized considerably over the same period.
22
Many British studios have closed, with the largest being Realtime Worlds, Code Monkeys, Oxygen, Mere Mortals,
Swordfish, Kuju’s NikNak and Chemistry, Deibus and Atomic Planet.
16
With high workforce mobility, global skill shortages, high salaries and even personal
incentives for emigrating video games experts offered by some governments, lost staff are
more likely to find work in other games companies either locally or overseas than they are to
leave the sector. This high workforce mobility was confirmed in TIGA’s December 2009
member survey, which found that 23 per cent of UK game development studios lost staff to
foreign countries in the preceding 12 months and of these 72 per cent said that their staff
went to Canada.23 This mobility was further confirmed in a survey of British development staff
which found that 68 per cent would consider moving overseas to work in games companies24.
Tax revenues to the Exchequer and games’ GDP contribution still falling
Video games are a major component of the highest growth category of the UK’s creative
industries. The DCMS 2009 statistics25 reveal that Software, Computer Video games and
Electronic Publishing has the highest average growth (8 per cent per annum) between 1997
and 2006, which is over twice that of the UK economy between 1997 and 2006. The
Software, Computer Video Games and Electronic Publishing category is easily the largest
export industry amongst the UK’s creative industries listed in this report. Such exports rely
upon a healthy studio sector creating product for export. Therefore, the loss of over 800
direct and over 1,600 indirect jobs in British video games studios continues to have a major
impact on the UK’s economy, resulting in significant falls in tax revenues and GDP
contribution from the UK studio sector. Using economic impact research conducted by Oxford
Economics in 2008 as a benchmark, declining employment figures equate to a fall in tax
revenues from British games companies of £55m to the Exchequer over the two years to
2010, and a fall of £132m in the UK video games development industry’s contribution to UK
GDP26 over the same period. As the decline is as severe as forecast in 2008 and shows no
signs of slowing over the next few years, the cost to the Treasury in terms of lost tax
revenues is expected to continue to increase.
Overseas government support for video games development increasing
The trends in overseas government support for video games development described in
September 2009 have not slowed in the last 24 months and a supportive policy environment
is still a key differentiator for video games development companies’ investment decisions.
British Columbia has followed Ontario in passing video games tax credits, but Ontario has
succeeded in attracting several global publisher studios (such as Ubisoft and Take Two) by
announcing $130m to attract studios27 and an additional $226m investment28 over ten years
in a new Ubisoft studio (the company is investing $450m). Since 2008, Germany29,
Australia30, New Zealand31, Sweden32 and Finland33 have announced new funding for video
games studios. The US government South Korea provided a $200m fund to boost video
games exports34, as well as the creation of a $144m agency to promote video games,
23
State of the UK Video Game Development Sector (TIGA, 2010).
Develop Magazine Career Survey February 2010.
25
Creative Industries Economic Estimates Statistical Bulletin January 2009, DCMS
http://www.culture.gov.uk/images/research/Creative_Industries_Economic_Estimates_Jan_09.pdf
26
GDP and Exchequer estimates take into account direct, indirect and induced impacts. The economic contribution of
the UK games development industry (Oxford Economics, October 2008).
27
http://www.gamasutra.com/php-bin/news_index.php?story=22963
28
29
Germany’s Culture Minister introduced a national video games development competition for culturally German
video games Deutscher Bundestag, Drucksache 16/7116, 14 November 2007.
30
Prototype funding from Film Victoria http://www.gamesindustry.biz/articles/australian-developers-awardedUSD240-000-prototype-funding
31
32
Gotland Game Awards http://www.gamesindustry.biz/articles/gotland-game-awards-offers-300-000-prize
33
http://www.develop-online.net/news/32323/Finnish-Government-devotes-10-million-to-game-development
34
24
17
animation, online and television content35. In 2009 Japan announced a £93.5bn stimulus
package which includes the promotion of exports of manga, video games and pop music,
possibly including a £75m National Media Arts Centre to promote Japanese pop culture
(including video games) abroad36. Now 12 US states have tax credits or other support for
video games production, the latest being Texas37 and Florida 38. Meanwhile, in the UK the
Labour government announced an investment of up to £10m in centres of excellence in
Dundee and Manchester, including a prototyping fund. In addition, some grants have been
made to a small number of games companies. However, no major schemes have been
forthcoming.
Despite significant currency devaluation and fluctuation, British video games development is
still expensive compared to competitors such as Canada. This is only exacerbated by the lack
of substantial support for games development in the UK, despite the existence of the R&D tax
credits, which have been shown to have limited, albeit positive, impact on games
development companies. More significant schemes overseas have continued to divert
investment, studios and headcount away from unsupported and more expensive territories
such as the UK. NESTA’s Time to Play survey39 in 2009 found that the two major trends
identified by video games company executives were overseas subsidies for video games
development, and a brain drain caused by such subsidies40.
British public has even less access to British-made video games
British consumers value British-made video games IP more than consumers in other
territories. In 2007 British consumers purchased nearly four times as many British-made
video games than those made overseas compared to US consumers41. Accordingly, 54 per
cent of an average British studio’s revenues derived from UK sales42. From a high of five out
of the top ten best-selling video games in the UK in 2001, to one in 2008 and zero in both
2007 and 2010, British video games IP is being eclipsed by video games made in the USA,
Japan and Canada. Therefore, falling levels of original IP created by British studios on major
platforms affect consumers and studios alike. The NESTA 2009 survey found that nearly three
35
http://www.guardian.co.uk/world/2009/apr/10/japan-manga-anime-recession
37
38
http://www.gamasutra.com/view/news/28031/Florida_House_Unanimously_Passes_Game_Tax_Breaks.php
39
The survey interviewed Managing Directors, Commercial Directors, Chief Executive Officers, 3rd Party Development
Managers and senior financial executives at 30 video games and investment companies with operations in the UK.
40
NESTA’s Time to Play survey was very clear on this trend being experienced by practitioners, where overseas
support and brain drain due to overseas support are the top two trends reported by respondents, who represent the
employers of nearly half of the UK’s total production headcount. Analysis in Time to Play shows that while few
studios have moved wholesale, the UK is being outpaced by other territories which are siphoning off the UK’s best,
most experienced staff, with some unprecedented offers. One such quote from an anonymous independent studio:
“Our best technical guy was offered 2.5 times his UK salary, 100% subsidised relocation costs and a comprehensive
support programme not just for him but also his wife and children as well as 2 years' completely free accommodation
to move to Canada. We had to let him go, he would have been mad to stay. We even told him that. With the
Canadian government paying for one in every three employees in Quebec, the likes of EA and Ubisoft can afford to
do this for the best developers. We simply cannot compete with that.” Longer term trends in 2008 showed that
Canadian headcount growth of 43% between 2006-8 is seriously outpacing UK growth of 8% over the same period,
which was analysed in NESTA’s Raise the Game report, 2008. New data shows that Canadian studio headcount is
estimated to have grown 33% to 14,000 between 2008 and 2010, versus a decline of 9% in the UK studio headcount
over the same period. Canada is clearly growing while the UK declines. French headcount appears to be growing
strongly after the tax credit. Growth in these territories is demonstrably being driven by global companies with static
or declining UK footprints (such as EA, Ubisoft and Eidos).
41
UK-made video games represented 16 per cent of 2007 UK retail market versus 5.67 per cent of the 2007 US retail
market. GIC / The economic contribution of the UK video games development industry (Oxford Economics, October
2008).
42
Wilson, R., State of the UK games development Sector (TIGA 2009), p. 5.
36
18
quarters of executives thought that original IP development had slowed or stopped in the last
5 years, and more than half thought the trend would continue over the next 5 years43.
British-made video games falling in global sales charts
The UK faces a long-term decline in its global chart ranking, with Canada likely to have
retaken fourth position from the UK in 2009 (after the USA, Japan and South Korea), and
China threatening to knock the UK out of the top 5 in 2010. The decline in British-made video
games’ chart position was temporarily arrested by the release of the Scottish-made global
blockbuster GTA IV in 2008, but the UK needs more than a small handful of major video
games to retake its position near the top of the global rankings.
New finance for video games companies has fallen sharply
Poor financial conditions globally resulted in the value of private funding for video games
companies worldwide falling by 22 per cent during 2009 compared to 2008. The vast majority
of the private funding in the last three years has gone into ventures in network gaming,
markets in which the UK is significantly under-represented and the USA is often both pioneer
and market leader. This has contributed to the fact that whilst private funding for UK games
ventures fell by 92 per cent in 2009 versus 2008, in the USA such funding actually increased
over the same period by 18 per cent.44 The ability of video games companies of all sizes to
access external finance (whether debt or equity based) has been severely curtailed, and
resulted in the sale, collapse or emergency bail-out of several medium scale video games
companies. Most notable amongst these was Eidos, the largest UK video games company and
one of only 2 mid-range UK independent publishers, which was purchased by Japan’s Square
Enix45, after it had been forced to shed hundreds of jobs in early 200946. The remaining
British publisher, Codemasters, is now 50 per cent Indian-owned, leaving no 100 per cent
indigenous British publishers in the top or even middle tiers of the global industry. While
indications are that 2010 will bring better news for British games companies seeking private
financing, the vast majority of studios work in areas of the games market which have long
struggled to raise finance.
Smaller British studios starting to adopt newer sustainable business models
In recent years, a range of more sustainable business models for games development
companies have been maturing, offering limited online distribution on games hardware, but
driven by the rapid growth firstly of the iPhone games market and then more recently and
43
Until the 2010 census, it had not been possible to quantify accurately how many games are in production, but
studios in the census were asked how many games were released in a 12 month period, which revealed their output
levels, from which GIC has estimated the number of titles with budgets over £100,000 (310). However, it has not yet
been possible to quantify the number of original IPs being generated, nor the expenditure on original IP due to the
large number of titles in production at any given stage, studios’ natural secrecy and the difficulty of establishing
uniform definitions. Informed estimates are currently the only option in this area. However, there are other ways to
show that original IP is in decline. The first way is to look at this stage in the console cycle, where original IP
traditionally declines, which is demonstrable in games charts (See Playing for Keeps GIC/UKTI, 2007). The second
way is to compare industry opinion in surveys. The survey in Playing for Keeps found that practitioner respondents
claimed original IP was difficult to fund, falling in number and would continue to decline. NESTA’s Time to Play
survey demonstrated that practitioners have seen and still foresee major declines in original IP generation. A
minority pointed out that smaller platforms and small companies are experiencing growth, but the vast proportion of
the UK studio sector is not sustained by new platforms, but by console, handheld and PC development, where the
falls have been indicated. New platforms are, as concluded in Time to Play, promising but clearly too small to support
a sector of this size. Canada and some states within the USA have blanket salary subsidies that mostly do not
explicitly target original IP development, instead subsidising all expenditure on production of any games in the
catchment area. In addition, NESTA’s Raise the Game report found that Canada is mostly not very good at original IP
development, with output dominated by franchises and sequels. So, even if measuring that impact were possible,
GIC would not expect to see any specific impact of such support schemes on original IP development.
44
Games Investor Consulting 2010
45
http://www.mcvuk.com/news/33222/Square-Enix-swoops-for-Eidos
46
http://www.mcvuk.com/news/29775/SCis-814m-loss-sparks-restructure
19
most significantly the social network games market. Games studios in this space have a much
higher potential to be stable and profitable, better able to raise finance,47 create original new
games, retain copyright and attain greater financial stability. They take advantage of
international markets for games sold and delivered over a network, rather than via retail.
Network gaming grew in 2009 to represent 38 per cent of the global video games market48.
Today, the largest games audiences and fastest growing games companies the industry has
ever seen are in network gaming, particularly on Facebook. Some of the UK’s larger studios
have begun a slow migration towards network gaming, but their larger headcounts cannot be
sustained by newer models without major restructuring and reskilling. Most of these larger
studios are either owned by, or still heavily reliant upon work for hire for, global publishers.
The UK’s ability to deliver major releases on consoles and PCs is critical for the technical and
creative strength of the UK’s studio sector and must be maintained, but the UK needs more
network games companies to maintain long-term growth potential. Here the news is more
positive. The growth spurt in new company formation previously reported has focused almost
exclusively on network games markets (particularly mobile, online PC and social gaming).
However, with one or two notable exceptions, Britain still has comparatively few major
network games companies compared to other territories, particularly Germany and France.
Traditional UK studio sector under pressure during industry down-cycle
The video games industry cycle, driven by video games console hardware lifecycles, is now in
its cyclical slowdown phase which may last into 2012 or even later, dependent upon the
launch of new games consoles. This phase of the cycle has historically resulted in reduced
investment in video games development, more risk aversion in the principal financiers of
video games (non-UK publishers), less original IP being created and more pressure on
studios. Global video games sales at retail fell sharply in 2009 and during the first half of
2010, and some analysts do not expect retail gaming to return to its peak in 2008. NESTA’s
2009 survey revealed wide scale pessimism about the prospects for the UK studio sector over
the following 2 years, with 50 per cent expecting more brain drain to subsidised territories,
and one in three expecting a continued shrinkage in output and headcount. 76 per cent of
respondents’ projections for their own companies’ headcount growth over the next two years
were modest or flat. As a result, headcount growth in most console game studios is expected
to be under continued pressure, with increased threat to company stability.
Original IP on console in decline as reliance on publishers increases
The amount of original IP being created in the UK on console has been declining for several
years, with senior studio executives first warning of this trend in Playing for Keeps in 2007. In
its place, video games studios have been increasingly reliant upon license work for global
video games publishers. Such work for hire business typically forms well over half an average
independent studio’s annual projects49 and an estimated two thirds of their revenues50. The
creation of original IP builds long term value for both UK companies and for the UK
development sector, whereas work for hire is short-medium term in benefit and can leave
companies vulnerable to competition from cheaper workforces. Hence, the long-term health
of the UK studio sector relies upon a balance of original ideas with third party licence work.
47
Three of the biggest rounds of private financing in the UK video games sector in the last 5 years have been
conducted by Playfish, King.com and Realtime Worlds, all of whom are primarily, if not completely, focused on
online gaming. Realtime Worlds, however, was closed in August 2010 due to the failure of its primary game at retail.
The UK’s largest developer acquisition in recent years was EA’s purchase of the UK/Swedish social network games
developer Playfish for $275m in cash plus an additional $125m in shares and performance related bonuses.
48
Games Investor Consulting 2010
49
On average, 56 per cent of video games produced by developers in 2008 were work for hire projects. Wilson, R.,
State of the UK games development Sector (TIGA 2009), p. 5.
50
Playing for Keeps (GIC/UKTI, 2007).
20
The NESTA survey found that nearly ¾ of respondents thought original IP had been declined
or halted altogether in the last 5 years, and over half thought this decrease would continue.
The eco-system of British video games studios is still unstable
A high quality video games development ecosystem is one that comprises a healthy balance
of independent developers and publisher studios, and has traditionally relied on three sources
of sustenance. First, the UK studio sector has benefitted from a regular flow of new,
innovative and status quo-challenging start-ups and internal investment. The advent of new
business models has triggered very substantial start-up formation over the last 2 years.
Second, the sector has relied upon investment in cutting edge creativity, technology and
production found in large and growing publisher studios. Yet investment by publishers in
these studios has, with some notable exceptions51, either plateaued or fallen sharply, with
some removing all development staff from the UK altogether. Finally, the sector has relied
upon the health of independent studios whose creativity and competitiveness allow them to
win externally contracted development work from publishers and create new blockbuster IP.
However, with license development projects forming over 50 per cent of an average
independent studio’s revenues, falling overall levels of original IP on major platforms, a brain
drain to subsidised territories overseas and a highly uneven international playing field, the
eco-system is still unstable and prone to further contraction as the down-cycle continues.
Recruitment issues no longer acute but brain drain continues
Between July 2008 and September 2010, well-publicised skill shortage problems have been
tempered by the availability of experienced staff released into the market by studio closures
or downsizing. Despite a recruitment feeding frenzy following the demise of Realtime Worlds,
few large studios expect to grow substantially. As projected in 2009, these rushes of staff
onto the market have not halted the downwards trajectory of the sector’s overall headcount
and some experienced staff are understood to have moved overseas to jobs in subsidised
territories52. The most vulnerable to the decline in headcount are junior staff at the bottom of
the ladder, whose positions could be replaced by overseas staff, and freelancers, who face a
much more competitive market. As permanent staff numbers decline, the number of
freelance staff in the UK has risen, driven in part by some studios adopting the ‘Hollywood
model’ (a small core team supplemented by temporary staff). Rising competition for freelance
work means that freelancers are expected to be finding it harder to find work, which also
encourages relocation overseas.
Brain drain is still an issue. One in three video games companies interviewed in the NESTA
survey conducted in parallel to this report named brain drain as one of the top 2 industry
trends, alongside overseas subsidies. The academic skills shortage issue is longer term in
impact but a number of initiatives have been launched. Play Together53 is a TIGA-NESTA
joint project aimed at encouraging collaboration between studios, other creative industries
and educational establishments. Distance learning and post-graduate courses from the likes
of Train2Game54 and Qantm55 are thriving. NESTA is leading a skills review for DCMS headed
by Ian Livingstone and other senior figures. Industry-academia links are being strengthened:
51
A handful of global companies’ studios have been growing healthily, but we cannot name them for confidentiality
reasons.
52
Electronic Art’s Chief Financial Officer revealed in July 2009 that the company wants to increase the percentage of
its worldwide headcount working in low-cost locations. “In terms of the low cost employee composition, it’s at 20 per
cent as of the end of the quarter. We are looking to increase that a bit over time.”
http://www.mcvuk.com/news/35282/EA-redundancies-almost-complete
53
http://www.tiga.org/Play-Together.aspx
54
http://www.train2game.com/
55
http://www.qantm.co.uk
21
25 universities and colleges are now members of TIGA. However, the industry appears united
in saying that universities are not producing sufficient numbers of STEM graduates for the UK
economy in general and for the video games sector in particular. Despite the quality of
graduates trending upwards with more Skillset accredited courses56, there is still a perception
by the industry that the quality of graduates with a degree in video games is variable at
best.57
Piracy
Often overlooked by the media in favour of the more actively litigious music and film
industries, online and offline piracy is a mounting problem for video games companies of all
kinds. As broadband penetration has grown and average internet access speeds have
increased, so too has the ability for pirates to download the sorts of large file sizes that
comprise video games software. Pirated versions of popular UK-made PC video games can
represent over three times the number of legitimate copies sold. There also still exists a
substantial problem with offline piracy with the widespread sale and use of devices that
circumvent copyright protection on video games consoles and allow illegally copied video
games to be played with ease. This study lacks the time and resource to quantify the impact
that piracy has on the UK video games industry but it is likely to be both material and
increasing.
The cultural value of video games
A: Introduction
The contention advanced in this report is that some, but not all, computer and video games
represent cultural products. Our argument is set out as follows:
i.
ii.
iii.
iv.
v.
vi.
vii.
Definitions
The cultural origins of video games
Video games’ reflection of other cultural media
What specific attributes of video games can be cultural?
How have some video games impacted British culture?
Support for the claim that video games can be cultural products
Conclusions
B: Definitions
It is useful to give a frame of reference for what is meant by a cultural industry, high and low
culture, and the features of a cultural product.
Throughout this report, the term ‘video games’ includes interactive digital video games on all
technology platforms, including TV-based consoles, handheld consoles, personal computers,
interactive television and mobile phones.
56
http://www.skillset.org/games/accreditation/
35 per cent of developers believe that the quality of students who have studied video games courses at university
are either excellent or good, while 17 per cent of developers thought that such graduates were either poor or very
poor. 23 per cent thought that they were average and 24 per cent did not know. Wilson, R., State of the UK Video
games development Sector (TIGA, 2009), p. 21. See also Wilson, R., State of the UK Video Games Development
Sector (TIGA, 2010).
57
22
UNESCO definition of a cultural industry
The United Nations Educational, Scientific and Cultural Organisation (UNESCO) gives the
following definition of cultural industries58:
Cultural Industries are defined as those industries which produce tangible or
intangible artistic and creative outputs, and which have a potential for wealth
creation and income generation through the exploitation of cultural assets and
production of knowledge-based goods and services (both traditional and
contemporary).
What cultural industries have in common is that they all use creativity, cultural
knowledge, and intellectual property to produce products and services with social and
cultural meaning.
The cultural industries include: advertising; architecture; crafts; designer furniture;
fashion clothing; film, video and other audiovisual production; graphic design;
educational and leisure software; live and recorded music; performing arts and
entertainment; television, radio and internet broadcasting; visual arts and antiques;
and writing and publishing.
High and Low Culture
There are long-running and vigorous debates about what represents culture, and whether an
activity equates to high or low culture. Such debates over what represents high and low
culture are often defined by highly subjective judgement, and often laden with the
conventions of the society or its commentators, particularly class, wealth, background, and
educational level. ‘High’ culture (often in the form of Fine Arts) tends to be portrayed as
being refined and requiring reflection, study or sometimes educational attainment for its
appreciation, understanding and involvement. ‘Low’ culture can be a pejorative term for less
refined media or pursuits and is often portrayed as involving mass market entertainment,
sport and other popular media.59 In practice, the distinction between the two can be
ambiguous and short-lived, and high and low forms of culture can be equally powerful
reflections of or influences upon society. This report does not attempt to discriminate
between these two categories.
Controversial or age restricted cultural products
While cultural products with adult themes, age rating restrictions and controversial subject
matter form a smaller part of the canon of cultural products than other categories, such
products can have strong, lasting and disproportionate impact on the overall cultural
landscape, often outlasting any outrage upon their release and sometimes eventually
highlighting the changing mores of the societies from which they emerge. This report does
not attempt to adjudicate any different value for such products than more conventional, less
divisive or more orthodox cultural products.
Features of cultural products
Video games are often compared to the main existing forms of cultural media, namely
film/television, music, visual arts and literature. We note that by no means does each form
have the same characteristics as pre-requisite or mandatory for qualification as a ‘cultural
industry’. As an example of this, here is a representation of some of the characteristics of
58
59
UNESCO, 2003
Scruton, Roger, A Dictionary of Political Thought (Macmillan, 1996), p. 123.
23
cultural products (taken from cultural tests by European governments60) mapped to the
different creative industries:
Film and TV
Music
Visual Arts
Literature
Video games
Narrative
Yes
Sometimes
Sometimes
Yes
Sometimes
Graphical
arts
Yes
No
Yes
Rarely
Yes
Language
Yes
No
Rarely
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Rarely
No
Yes
Sometimes
Sometimes
Sometimes
Sometimes
Sometimes
Sometimes
Rarely
Sometimes
Sometimes
Sometimes
Sometimes
Sometimes
Sometimes
Sometimes
Sometimes
Technical
creativity
Audio
creativity
Reflects
heritage
Reflects
science
Reflects
culture
No one creative industry has every characteristic, and this wide range of cultural
characteristics with unequal distribution across different creative industries has resulted in
governments creating cultural tests for media with multiple, if weighted, cultural
characteristics.
C: The cultural origins of video games
In this section we will investigate video games’ derivation from culture, and other cultural
products, tracing the common cultural heritage of traditional video games and video games,
both of which have significant historical roots in the UK.
The cultural value of traditional games
Games are one of humanity’s oldest cultural artefacts, found nearly uniformly across
civilisations from the earliest to the present day. Board games have been found depicted in
the world’s oldest city of Ur in Sumer (3rd millennium BC), and many games were created by
the ancient civilisations of Assyria, Egypt, China, India, Greece and Rome. Games by their
nature defy easy categorisation and dating but the oldest appear to be dice (Ur),
backgammon (Mesopotamia), Go (China), cards (China), chess (Indian), and tile games such
as dominoes and mah-jong (Chinese). Game boards are found buried with their players and
in some civilisations games had religious roles. Games travel from their originating countries,
and have traversed the world, often with soldiers or traders. Games have acted informally
and then, with the rise of international sport, formally as cultural ambassadors (a role echoed
today by international video games tournaments and, to a lesser degree, online video games
played across borders).
The first video game was British
The first video game was created in Cambridge in 1952 on Cambridge’s EDSAC computer,
one of the first practical stored programme computers which represented a historical
60
Primarily the UK Film Tax Relief and the French Games Tax Credit.
24
scientific, and thus cultural, break-through. Ph.D. student Alexander Douglas wrote a digital
graphical tic-tac-toe video game called OXO to illustrate his thesis on human-computer
interaction. However, the commercial video games industry was born in the USA in the 1960s
with the creation of the coin-operated Computer Space video game in 1961 and then Pong in
1962, which was the first to achieve significant commercial success. From its origins in the
1950s and 1960s on university mainframe computers, the video games development industry
spread rapidly globally, and found its strongest footholds in the USA, Japan and Great Britain.
The growth of British video games
The UK’s first period of sustained commercial success came in the early 1980s triggered by
the launch of home computers such as the BBC Micro, Sinclair Spectrum and Commodore 64
(the former two also being created in the UK). These inspired a generation of enthusiastic
young computer programmers to explore their creativity, and write video games code for the
many video games developers and publishers that launched to exploit the new computer
hardware. The heartlands of the global video games development industry were quickly
founded in the USA, Japan and the UK, but seemed to find particularly fertile ground in the
UK, where a spirit of enthusiastic innovation met strong technical skills and a sensibility born
from the UK’s mature traditional media industry in film and television. These home-grown
British video games development companies created software in tiny teams that sold around
the world as home computers and then dedicated video games consoles started to create a
new entertainment industry that steadily began to colonise the living rooms of families in the
western world. These young companies were the foundation of a world class video games
development market in the UK, which created best-selling video games and invented wholly
new video game genres. In turn, this helped attract the largest overseas video games
companies to set up their international and European headquarters in the UK. From the
1970s onwards, computer and video games have become a widespread and, for some
demographics, prevalent form of entertainment in the developed world, being played on
arcade machines, home computers, consoles, handheld computers, phones and interactive
television, most of which are now connected to the internet.
British talents in the invention of new traditional sports and games
Throughout the history of Britain, the invention and propagation of new games and sports
has been a very British occupation, one that has contributed significantly to Britain’s cultural
heritage. Britain lays claim to have invented the sports of lawn tennis, football, golf,
badminton, rounders / baseball, squash, rugby, table tennis, billiards, skittles and cricket
amongst others, as well as other games such as Happy Families, cribbage, quoits, table
football, snap and any number of card games. Along with other artefacts of British culture,
such as its science, bureaucracy and the English language, British-made games were then
propagated globally through colonisation and military and financial power by the British
Empire during the 19th century. Many of these sports are now the mainstays of global sports
media, and many games are still played around the world.
British talents in the invention of new video game genres
The same inventiveness that created novel sports and traditional video games is true of
British-made video games. British video games companies (along with those in the USA and
Japan) have played a central role in the evolution of video gaming, as well as creating many
entirely new genres of video games from the 1980s to the present day. Britain is home to
companies that invented the first 3D racing video game61, MUD62, Real Time Strategy video
61
62
Rev by Acornsoft in Cambridge.
Multi-user dungeons by Roy Trubshaw and Richard Bartle at Essex University.
25
game63, space trading and simulation video game64, indirect control video game65, the first
video game with music66, football video game with multiple divisions in multiple countries67,
‘God’ video game68, theme park management video game69, and more recently the first User
Generated Content video game on console70. Beyond these literal “firsts”, the UK has created
hundreds of video games that have driven the global industry forward, including some of the
most important and best-selling video games of all time, particularly Lemmings, Sensible
Soccer, Elite, Grand Theft Auto, Rollercoaster Tycoon, Tomb Raider, Championship Manager
and RuneScape. These ground-breaking video games also represent significant contributions
to British heritage and are in effect cultural artefacts.
D: Video games’ reflection of other cultural assets
As video games have evolved into a mass-market entertainment medium found in more than
60 per cent of British homes, some have naturally started to reflect their culture of origin as
well as the influence of other, more mature creative industries, from which a wide range of
video games products have been derived. In this section we describe the cultural specificity
of some video games and demonstrate that other cultural media have exerted strong
influence over some video games.
Video games can strongly reflect the culture within which they are created
Video games are the products of teams of creative people that can reflect the culture within
which they are developed. The language, artistic styles, dialogue and characterisation,
humour, music, buildings and landscapes, political persuasion, social mores and ethics (or the
lack thereof), social science and heritage in a video game can strongly reflect the
environment or society in which the developer works. This varies widely depending on the
location of a video game’s creation. For instance, American-made video games often feature
American actors, US music, are located against the backdrops of US cities or landscapes, and
aim for a Hollywood look and feel. Japanese video games are often highly idiosyncratic and
specifically Japanese in cultural terms, because they can develop complex characters and
opaque narrative arcs, mine national myths for stories, feature Japanese music and
architecture, and feature distinctive art styles71 and conventions of facial and bodily
dimensions that are ultimately derived from graphical novels and films known as manga and
anime. The difference between a US-made and Japanese-made video game is usually
immediately evident, and there is commonly a strong East/West cultural divide across which it
can be demonstrated, through sales figures72, that only a small proportion of either side’s
video games output have succeeded. Various studies have suggested that video games can
be cultural artefacts of their originating societies73, but this cannot be considered universal.
One study in Canada found little that was culturally Canadian in Canadian-made video
63
Stonkers by Imagine in Liverpool.
Elite by Frontier in Cambridge.
65
Lemmings by DMA Design in Edinburgh.
66
Manic Miner by Matthew Smith in Merseyside.
67
Sensible Soccer by Sensible Software in Chelmsford.
68
Populous by Bullfrog in Guildford.
69
Rollercoaster Tycoon by Chris Sawyer in Dunblane.
70
LittleBigPlanet by Media Molecule in Guildford.
71
Japanese video games are known for adopting different bodily proportions of characters, most notably the larger
proportion of eyes to the head, and the head to the body, than found in real life. This distinctive art style has been
copied across Asia and is a major component of the East/West cultural divide in video games.
72
For instance, only 1 in the top 100 video games selling in Japan in 2007 was made outside Japan (GIC 2008).
73
A collection of such studies is listed in the article “Video games as Cultural Artefacts”, Patricia Greenfield, University
of California, Journal of Applied Developmental Psychology, 1994, Volume 15.
64
26
games74. Here follows a range of cultural attributes of some video games that sometimes
show archetypal British characteristics.
Film to video games
Video games have for over a decade become an essential part of the release cycle of almost
all major films, particularly Hollywood blockbusters. Most big film releases, from the Lord of
the Rings to the Chronicles of Narnia, are accompanied by a parallel release of a video game,
by the video games publisher that wins the license to exploit the intellectual property (IP).
For instance, the Harry Potter series of films (based on British novelist J. K. Rowling’s global
hit books) are produced by British film production company Heyday Films, and funded and
distributed by Warner Brothers. The films are made in the UK and are recipients of the Film
Tax Relief. Electronic Arts owns the video games rights to, and produces video games based
on, the series, some of which have been created in EA’s Guildford studio or by other British
and American video games studios. Video games developed from films build on the creativity
of the movie concept, adding depth, narrative and interactive involvement to the previously
two dimensional experience while delivering additional artwork and innovation.
Television to video games
Television has been the source of many video games to varying levels of success. There is a
long list but some of the highlights are children’s shows (such as Bob The Builder and Wallace
And Gromit), video game or quiz shows (such as Who Wants To Be A Millionaire or The Price
Is Right), drama (such as Doctor Who and Spooks) and comedy (such as Little Britain).
Music to video games
Video games such as the billion dollar franchises Guitar Hero (over 35m units sold) and Rock
Band (over 9m units and 30m songs sold) make video games out of popular music. Some
bands sell more units through Guitar Hero or Rock Band than they do through digital outlets
such as Apple’s iTunes. The Beatles’ first foray into digital media (none of their music had
previously been officially available for digital delivery) will be via the video game Rock Band.
Sony Computer Entertainment’s London Studios created the video game SingStar which
popularised a new kind of competitive karaoke video game and was one of the first video
games to reach a new, older and more female audience. As video games scores get more
accomplished and complex, celebrated film composers such as Danny Elfman, Howard Shore
and Hans Zimmer have begun working in video games.
Literature to video games
Video games have long borrowed indirectly or directly from literature and popular myth75.
Blockbuster novels that are turned into films often feature video game versions, be they the
thrillers of Tom Clancy or the children’s novels of British author Philip Pullman. Many video
game adaptations of literature exist, from Conan Doyle’s Sherlock Holmes, Pratchett’s
Discworld series, Robert E. Howard’s Conan, many versions of H. P. Lovecraft’s stories, to
multiple characters from the seminal British comic 2000 AD. An entire genre of video gaming,
role-playing video games, could not exist without J. R. R. Tolkien, which is source of continual
inspiration for video games designers and writers. Another repeatedly-used source is Bram
Stoker’s Dracula, which has spawned countless video game versions and characters. More
directly, James Patterson’s Women's Murder Club originated as a murder mystery book series,
74
According to Leonard Paul, a researcher from the Vancouver Film School, “Currently, there appears to be little
distinction in content for video games which are produced in Canada and the lack of any sort of “national identity”
that can be drawn from the content of Canadian video game products”. See Leonard Paul, “Canadian content in
Video games”, (Vancouver Film School, 2005).
75
Douglass Perry writes engagingly and at length about the influence of literature and myth on video games
http://uk.xbox360.ign.com/articles/704/704806p1.html.
27
was adapted for a short-lived television series but was resurrected as a hugely popular series
of casual online video games, spawning a genre that has subsequently borrowed from the
books of Agatha Christie and other British mystery novel writers. The video game Bioshock,
which features a decaying art-deco underwater city, was praised as dramatising Ayn Rand’s
Objectivism76. The most recent announcement in this field is a video game based on Dante’s
Inferno.
Politics to video games
There have been dozens of political simulation video games and video games in which the
gameplay revolves around political decision-making and its ramifications. Examples include
Balance of Power, Republic: The Revolution and Political Machine. Some providers of
massively multiplayer online video games have found that issues within their video gamer
communities can gain political dimensions that require an active response, or even the
institution of political structures. The most advanced example of this is Eve Online77, which
has an elected Council that interfaces between players of the video game and its creators,
allowing them to register new faults to be fixed and suggest improvements to the video
game. The Council is elected twice yearly, has a minimum age restriction of 21, a maximum
of two terms per player, and all 9 Councillors are flown to the developer’s offices in Iceland
twice a year to meet the video game’s creators. Some online video games have even seen
industrial action, the most notable example being sit-ins78 by thousands of players of the
Chinese online video game ZTOnline, which resulted in substantive changes to the video
game’s rules.
E: What attributes of video games can be cultural?
If some video games are to be considered cultural products, they would be expected to
display features that are cultural in nature, some of which can be traced to a specific culture
of origin. Video games can display some or all of the trappings of cultural products. Here is a
selection of those cultural attributes of video games, some of which combine multiple artistic
and technical disciplines in creative works comparable to those in film or television in quality,
complexity, maturity and expressiveness.
Iconic British video game characters
Culturally British media such as film and television have created iconic characters with long
shelf-lives which reflect something intrinsic and specifically British. Film has countless
enduring characters such Harry Lime from the Third Man, Charlie Croker from the Italian Job,
or perhaps Renton from Trainspotting. British television has Basil Fawlty, the Prisoner and
Doctor Who, to name a few. The list of iconic characters from British literature and graphical
arts is too long to list here. British video games have also created their own set of iconic
characters such as the Worms, the Kid or Nico Bellic from the Grand Theft Auto series, or
Willy from Manic Miner / Jet Set Willy. However, clearly top of the list is Tomb Raider,
originally produced by Eidos and Core Design, which features the inimitable Lara Croft,
probably the strongest and most iconic British video game character of all time. A female
version of Indiana Jones, Lara Croft is an aristocratic action figure with a cut glass accent, a
trademark figure and sometimes even a Union Jack costume. She has graced the covers of
publications ranging from The Face to the Financial Times79, was given “Millennium Product”
76
http://www.telegraph.co.uk/culture/books/bookreviews/5291671/Endpaper---Fiction-reaches-a-new-level.html
http://wiki.eveonline.com/wiki/How_the_CSM_is_elected#The_Election_Process
78
http://www.virtual-china.org/2008/01/02/chinas-exploitative-mmo-zt-online- per centE5 per centBE per cent81 per
centE9 per cent80 per cent94/
79
Playing for Keeps (GIC / UKTI 2007).
77
28
status by the Design Council in the Millennium Dome and has even been nominated an
ambassador for British scientific excellence by the government80. British video games have
clearly created lasting cultural icons that reflect our society.
World-beating British creativity meets cultural commentary
Until 2009, the world’s biggest entertainment product launch of all time came from the UK. In
2008, Scottish-made Grand Theft Auto IV took £150m in its first 24 hours and sold £250m in
its first week (easily outstripping the biggest opening day or even week of Hollywood’s most
successful film up to that point). With over 70m units sold, the series had generated in excess
of £3bn at retail by 2009. The video game was originated in 1997 in Dundee by DMA Design
and continues to be developed primarily by Rockstar North in Edinburgh (handheld
conversions are undertaken by a sister studio in Leeds). The video game has achieved a
controversial success, enabling players to become criminals, drive and shoot their way around
a navigable environment based on fictional North American cities. Despite its American
subject matter, the series evolved into a uniquely British video game, characterised by ironic
humour, seminal music and arch cultural commentary on snapshots of moments in American
history (such as 1980s Miami, 1990s Los Angeles and 2000s New York)81. The video game
series has been the subject of academic study and political debate, and the series set
numerous video games design and development precedents82 (such as, controversially, its
criminal subject matter, its rich use of the free roaming sandbox design83 and the increasing
sophistication of humour) that were to be widely adopted by other developers. Video games
can make as profound a cultural commentary as other media, perhaps with more lasting
impact on players when video games can be enjoyed for many hours more than other media.
The unique creative discipline of gameplay design
Video games production involves many disciplines such as music, sound design, lighting and
scriptwriting that have strong analogues in film and television production. However, the one
discipline that is unique to video games, and critical to a video game’s success, is gameplay
design. Perhaps closest to film direction but with a very different skill set, games design is the
process of designing the flow of interactive elements across an entire video game world that
first teaches, then hooks but must entertain the player during the 5-100 or more hours that
players will typically play a video game. The UK is extremely strong in this discipline, which
takes a great deal of time and talent to learn. Like film, video games can have their auteurs,
and some of the world’s most acclaimed, best-selling video games designers are British, such
as David Braben (Elite), Dave Jones (GTA), Chris Sawyer (Rollercoaster Tycoon) and Andrew
Gower (RuneScape). One of the most celebrated designers, and one continuously trying to
push the boundaries of the industry towards ever-greater emotional engagement with its
audience, is Peter Molyneux, now Creative Director of Microsoft games Studios, who was
awarded an OBE for his contribution to the arts84. Molyneux is widely credited with inventing
80
“I want Lara Croft of Tomb Raider to be an ambassador for British scientific excellence." Lord Sainsbury, November
1998.
81
“The video game began to conjure memories of bygone days such as Vice City’s 1980s Miami theme, and San
Andreas’ 1990s Los Angeles gang theme. GTA gradually added humorous “those were the days” features which both
lauded and satirised US culture including radio stations, commercials, popular music and a dysfunctional urban
environment.” See Playing for Keeps (GIC / UKTI 2007).
82
“Production values rose sky high as well-known actors were involved in playing characters, 3D perspectives
brought the player deeper into the action, narrative became more compelling, and the video gameplay widened to
include more and more activities including pimping hookers and fighting fires.” See Playing for Keeps (GIC / UKTI
2007).
83
“Video gamers have the freedom of movement in large cities with huge numbers of activities including a range of
linear missions, driving cars, shooting guns and entering a wide variety of buildings. The player could conduct
assassinations, rob banks, drive taxis, shoot strangers and jack cars.” See Playing for Keeps (GIC / UKTI 2007).
84
Also awarded Chevalier de l’Ordre des Arts et des Lettres by the French government in 2007.
29
the ‘God’ simulation video game, a new genre of video game which introduced an ethical
dimension to video gaming by forcing moral choices upon players, in video games such as
Populous, Black and White and, more recently, the Fable series which is set in the world of
Albion. Molyneux typifies the ambition of some of the best games designers to move the form
of video gaming forward by taking the best from other media and adding it to the unique
interactive framework provided by video games.
The rising power of narrative in video games
Another partial analogue to traditional entertainment media is video games scriptwriting and
narrative. While by no means as central to the success of video games as a good script is to a
film or television programme, a good narrative is, in certain genres of video game, becoming
increasingly important to the commercial success of some video games. Video games have
become more cinematic over recent years as they have adopted higher definition and more
realistic graphics. As video games have risen in graphical quality, so consumers have begun
to expect a commensurate improvement in the characterisation and narrative that
embellishes, provides context for or simply accompanies the gameplay. Increasingly, video
games with strong narrative and realistic, complex characterisation (such as Bioshock, Fallout
3, Half Life 2, DreamFall, Farenheit, Uncharted or the Broken Sword series) have outsold and
gained better reviews than video games where studios have simply focused on graphics and
gameplay. This gradual raising of the bar has seen increasingly complex multi-linear narrative
arcs, Hollywood luminaries such as Steven Spielberg and Jerry Bruckheimer making video
games, and literary themes covered in video games such as relationship break-down85, 1984style thought crimes86, and several versions of 1950s-style dystopian futures87. The presence
of narrative in a video game can increase its cultural impact.
The expressiveness of video game art
The quality of art within video games has started to equal that in the best animated films, but
art in video games is more than simply a rising scale of fidelity or photorealism; it is an
fundamental characteristic of the creative vision of a video game, and encompasses both the
art style, the animation, the lighting and the design of the video game environment or world.
Like cinematography and set design in film, art in video games can be breath-taking, moving,
strongly manipulative of the player’s mood and, at its heart, a vehicle for the artists’
emotional expression. Leo Tolstoy observed that, “Art is a human activity consisting in this,
that one man consciously by means of certain signs, hands on to others feelings he has lived
through, and that others are infected by those feelings and experience them.” Unsurprisingly
for a creative medium with such prevalence for the young, some of the most talented arts
graduates work in video games, according to Jonathan Yeo, one of the UK’s leading portrait
artists88. Up to 85 per cent of the costs of a video game developed in the UK can be spent on
artists, animators and designers89.
Unique British humour within video games
Humour, a quality of some of the best British creative media, can form an intrinsic part of
some British video games. Humour, that has repeatedly been described by cultural
commentators as a fundamental part of the national character, can find many and varied
ways to be expressed in video games. It can be found embedded in scripts and voiceovers,
85
Tangentially in many video games but central to Heavy Rain by Quantic Dream.
Such as in the Half-Life series.
87
Such as in the Fallout and Bioshock series, both of which were heavily influenced by literature
http://uk.xbox360.ign.com/articles/704/704806p1.html.
88
Ahmed, Murad, “Festival of culture shows that the video gamers are not just playing around”, The Times,
25/10/08
89
This includes outsourced work, but not management costs (TIGA 2009).
86
30
can inform the movement of animations, can be overt or covert in environments and can
even be fundamental to some video games’ design. Humour in video games ranges from the
anarchic, quirky playfulness of Worms, the deep ironies of GTA’s radio stations and graffiti, to
the charmingly amusing animations of LittleBigPlanet, the puns and witticisms of Charles
Cecil’s Broken Sword series and the bleak, sardonic catchphrases of Rebellion’s Judge Dredd.
Hard to suppress, humour can represent a unique cultural signature of video games made in
Britain.
Science in video games
Video games development teams consist of writers, designers, artists and programmers, the
latter two being the largest in number. Programming is a highly scientific discipline, one that
usually requires degree-level maths or physics. These programmers must create relatively
high levels of verisimilitude including realistic video game environments, real-world physics
simulation and artificial intelligence. Science can be the subject matter of video games, most
recently in Will Wright’s Spore, which allows players to create and share organisms that
evolve by Darwinian laws. Some video games use developers’ deep knowledge of scientific
principles to create new gameplay, one of the most recent examples being the award winning
LittleBigPlanet by Media Molecule in Guildford. The video game evolved out real-time physics
simulation technology, which lends objects within the video game realistic physical properties
that take account of gravity, motion/force and other physical stimuli. The video game involves
a series of challenges, usually physical obstacles such as chasms or ledges, that a team of
players must surpass using other objects in the video game. A gentle, witty voiceover from
Stephen Fry guides players to explore multiple solutions to a single problem, all of which
involve some understanding of gravity, mass and physical properties of objects. Multiple
potential solutions to problems, some of them not anticipated by the designers, result in
gameplay that is described as emergent, e.g. created by players themselves rather than
prescribed by the developers. This is a trick pulled off by few creative media, allowing an
audience to create for itself. In-game puzzles can involve scientific conundrums such as
trading, economics, probabilities and the use of mathematics. In this way science, a prerequisite for the creation of video games, can also become a gameplay mechanism. As
science is one of the criteria for cultural tests for film and video games, these aspects of
some video games are therefore cultural.
Soft and hard learning outcomes
One of the most common skills utilised in video game design is, perhaps surprisingly for those
unfamiliar with video games, teaching. All video games have a rule-set that has to be learned
before they can be played and when a player starts a new video game, (s)he must be taught
how to play it. This creates a pedagogical design challenge for the developers, how to show
players the video game controls and gameplay mechanisms by setting simple challenges
representative of later, more difficult challenges in a video game without giving the video
game away or diminishing the entertainment value of later sections of the video game. Video
games designers achieve this in many different ways, but all of their solutions rely upon
understanding players’ tendencies and behaviour, many of which are cultural in origin. Some
designers use non-player characters as mentors to teach players in the opening segments of
a video game. Others use the video game’s narrative to introduce players to the video game,
with pop-up prompts or other obvious clues in the video game environment. As a result,
research has demonstrated that video games actively promote learning.90 Some video games
90
Gentile, D.A., Gentile, J.R. (2008), "Violent video games as exemplary teachers: a conceptual analysis", Journal of
Youth and Adolescence, Vol. 37 No.2, pp.127-41. For a summary of this subject, see Tappeiner, Elizabeth and Lyons,
31
make a feature of learning, such as Nintendo’s Brain Age. Relentless’s Buzz! The School Quiz
is a successful quiz video game adapted to create a series of curricular video games in
conjunction with the Department for Education and Skills. Both these video games were
designed in collaboration with teachers or neuroscientists to actively promote puzzles, logic
and word video games which in turn strengthens thinking skills. The former was designed to
help older people maintain active brains while the latter to assist young people in achieving
curricular learning tasks. A number of studies suggest that video games may develop
particular visual and motor skills, strategic thinking and relationship building, social
integration, and some job-specific skills91. In another, video games were used to cultivate
emotional intelligence92 and more generally to become more computer literate. These
attributes of some video games can be cultural.
Player collaboration and user generated content
Video games have always been played by multiple people in the home, and this participative
tendency has increased as the video game industry moves inexorably onto the internet,
where video games designers are increasingly encouraging players to work with each other to
overcome obstacles. Today, most video games have components that encourage
collaboration and a sense of community. Most of the top rated applications on Facebook for
instance are video games93. Accordingly, video games accentuate skills that are valuable to
employers: collaboration, communication, competition, multi-tasking and experiential
learning.94 For example, massively multiplayer online video games, such as the forthcoming
All Points Bulletin by Realtime Worlds in Dundee, encourage players to collaborate to succeed
and progress in the video game. Players are also encouraged to create new content and even
entire new video games, to share it with friends online, and some particularly creative users
have been recruited by industry, as found in other media. The area of user generated content
has yet to be debated as a cultural product, but, like YouTube or MySpace which visually
represent the lives and creativity of their contributors, user generated content, such as the
level creation in LittleBigPlanet, the user created fashion in APB or even entire video games
created by users of British sites such as YoYo Video games, can have profoundly cultural
outcomes and impact.
Educational and serious video games
Most video game developers produce video games for entertainment purposes but some
create educational video games or serious video games (video games with a purpose other
than entertainment alone). According to TIGA’s research, 92 per cent of video game
developers make entertainment video games, 24 per cent make educational video games and
20 per cent make serious video games95. Serious video games seek to engage and motivate
users through offering the same rewarding gameplay mechanisms and immersive experiences
found in video games. They may offer the opportunity to rehearse and engage with
Catherine, “Selection criteria for academic video game collections”, Collection Building, Volume 27, Number 3, 2008,
pp. 121-125.
91
J. Skatsson, ‘Video games “good for visual ability”’, AAP, 29 May 2003; Kebritchi and Hirumi, 2008, “Examining the
pedagogical foundations of modern educational computer video games”, Computers & Education. 51, 4 (Dec. 2008),
1729-1743; D. Kingsley, ‘Action video games can boost cognitive skills’, ABC News in Science, 29 May 2003; KPMG
for the Danish Ministry of Culture, “The Interactive Culture Industry”; Gee, 2003, ‘What Video games Have to Teach
Us About Learning and Literacy’, Palgrave Macmillan, New York.
92
Eduteams was created by Team Play Learning Dynamics and funded by Dundee City Council to encourage young
people to work in teams to overcome challenges. The video game was distributed in 9 schools in Dundee, is designed
to use multiplayer collaborative play to develop emotional intelligence skills amongst young people. The video game
utilised core curriculum content and was specifically designed for use by teachers in the classroom.
93
http://www.appdata.com/facebook/mostpopular/redirect/category/all/mau/1/group_by/1/page/1/sort/mau
94
Kirriemuir, J., McFarlane, A. (2004), “Literature review in video games and learning”, FutureLab Series, Report 8,
http://www.futurelab.org.uk/resources/publications_reports_articles/literature_reviews/Literature_Review378.
95
Wilson, R., State of the UK Video games development Sector (TIGA, 2009), p. 5.
32
potentially costly or dangerous procedures in a safe, virtual and less expensive reality.
Serious video games range from bespoke video games built specifically to deliver learning
outcomes, such as TruSim’s Triage Trainer, commercial video games like Pixelearning’s The
Business Video game, to experiential simulators like Kuju’s RailWorks. There are also webbased applications, such as PlayGen’s Flood Sim and training simulations within virtual worlds
like Forterra’s Olive Platform. An increasing number of studies have demonstrated the value
of serious video games.96 Several US hospitals97 have found that surgeons who play video
games before performing surgery performed significantly better and made fewer mistakes
than those who did not, arguably because of the hand-eye coordination training that playing
video games provides. Video games have helped encourage cancer patients to follow their
medicinal regimes98. In controlled trials in the UK, TruSim’s Triage Trainer was more effective
in supporting first responders to accurately prioritise casualties for treatment than a tabletop
exercise. A USA study of a learning video game also currently in use in UK schools99 showed
that gaming group improved their test scores over those of a control group and that the
video game provided the motivation to learn. Elsewhere video games have been used to help
battle obesity100, maintain mobility in the elderly101 and some UK schools using ‘Brain Trainer’
report improved maths scores. These educational attributes can be cultural.
F: How have video games impacted upon British culture?
Cultural products do not simply derive from or reflect a culture or another cultural product,
but in time they also will have an impact on the culture that derived them. It could even be
argued that this reciprocal stage, where a cultural product starts to exert its own influence on
culture, is a critical evolutionary step in the development of a new medium, almost a “coming
of age”. Few could argue that television or radio, particularly public service broadcasting,
have not made a significant cultural contribution to the UK. We maintain that video games
have begun to reciprocate in the same way, with some making important cultural
contributions.
Video games are embedded in British life
It is argued here that “Video games as a cultural or cognitive artefact have tremendous social
importance because of their nature as a mass medium102”. According to a survey in 2005,
there are at least 26.5m103 video gamers in the UK, 8.5m of whom are over the age of 36.
Video games have now attained such a high degree of penetration into British people’s homes
and lives – just under 60 per cent of people in 2005104 with an average of 6.6 hours played
per week105 – that it is difficult to see how video games could not be exerting a cultural
influence. 91 per cent of 6-24 year olds play regularly, and half the UK population plays
96
For a useful summary of this area, see Tappeiner, Elizabeth and Lyons, Catherine, “Selection criteria for academic
video game collections”, Collection Building, Volume 27, Number 3, 2008, pp. 121-125.
97
Surgeons from the Banner Good Samaritan Medical Center in Phoenix who played Kororinpa: Marble Mania for an
hour before performing virtual gall bladder surgery performed 48 percent better than those who did not Medical
Center in Phoenix. Source: Modern Healthcare (2008), "Can surgeons improve skills by playing a video game? Study
says: Wii", Modern Healthcare, Vol. 38 No.4, pp.36. A study at Beth Israel Medical Center in New York City found
that “a surgeon's video game skills, or lack thereof, explained 31 percent of the variance in laparoscopy
performance”. Rossner, J. (2007), "Nurse, joystick!", Atlantic Monthly, Vol. 299 No.5, p. 36.
98
In the USA, Hope Lab’s ReMission video game improved compliance with drugs regimes for young cancer patients.
99
‘Inquizitor’ from 3MRT.
100
‘Dance Dance Revolution’
101
‘Wii Fit’ is being used by Age Concern to keep pensioners active.
102
“Video games as Cultural Artefacts”, Patricia Greenfield, University of California, Journal of Applied Developmental
Psychology, 1994, Volume 15.
103
BBC State of Play, 2006.
104
105
According to a survey of British consumers aged between 14 and 75. See Media Democracy (Deloitte).
33
weekly. Gaming is now firmly a family activity and represents 40 per cent of an average
parent’s annual entertainment expenditure per child, larger than any other entertainment106.
Video games are not simply the preserve of children. In 2005, the average age of a video
gamer was 28, and 48 per cent of video gamers were women107. According to a 2009 survey
by TNS Technology, two fifths of Britons over the age of 50 frequently play video games. 73
per cent of the population regularly play video games. Video games are now ranked alongside
or above other cultural products such as film and music, and are projected to overtake them
in 2009. This graph charts the inexorable rise of video games in the UK market.
Year on year growth in UK entertainment media 2007-2008108
A generational change in media consumption has occurred
For under 35 year olds, video games have become a major – if not the major – form of
entertainment. Gaming is now more popular amongst under-16 year olds than television and
all other traditional media109. This represents a fundamental and seismic shift in
entertainment media consumption away from linear media towards interactive media. It is a
shift that is rocking traditional media establishments, causing them to invest billions of
pounds in video games, particularly in online video games which allow media owners to
connect directly with their audiences in new ways110. As the number of connected interactive
platforms increases (from television set top boxes, mobile phones, video games consoles to
televisions themselves), video games are at or near the top of the most popular online
activities111. This can only increase as internet connectivity becomes increasingly ubiquitous.
Hence, through the global downturn, video games were the only entertainment medium to
record substantial growth112.
106
£98 of the sample group’s expenditure of £247 per year per child is spent on video games. According to an online
survey of parents with children aged between six and 16 years old conducted by Harris Interactive.
http://www.mcvuk.com/news/33836/Mums-and-dads-spend-nearly-2bn-a-year-on-entertainment.
107
108
Figures are in £millions. Sourced from TNS Worldpanel, British Video Association, GfK-ChartTrack/ELSPA, Official
Charts Company, UK Film Council.
109
6-15 year olds say that video games are their favourite entertainment medium, above all other media. 16-24 year
olds say that video games are their second favourite entertainment medium after TV. See BBC State of Play, 2006.
110
Investment by major media companies such as Disney, Warner Brothers and Viacom in video gaming has reached
into the billions since 2005. The three companies spent over $1.7bn in acquisitions of video games companies and
well over $1bn in video games development (GIC 2009).
111
Video games were comScore’s fastest growing retail category in 2008 for the USA (up by 29 per cent on 2007)
and the second fastest growing overall category for internet users in the USA in 2008.
http://www.comscore.com/layout/set/popup/Press_Events/Presentations_Whitepapers/2009/2008_Digital_Year_in_R
eview
112
6.6 per cent CAGR outpaced all other media in growth in Price Waterhouse Coopers Global Entertainment and
Media Outlook 2009-2013: No place to hide from the digital transformation.
34
British consumers buy more British-made video games
The European Union considers that “the characteristics of cultural and creative goods are that
they cater essentially for a local audience, its languages and cultures113.” UK video game
developers make video games for a global market, but their domestic market is vitally
important. On average, 54 per cent of independent developers’ turnover is generated from
British sales of video games114. Video games made by independent UK video game developers
in 2007 had nearly four times the market share of the UK retail market than the same video
games had in the USA retail market during the same period115. This indicates that UK
consumers have a stronger preference for British-made video games in comparison to
American consumers. These sales figures portray a strong cultural affinity between British
consumers and some video games made in Britain.
G: Cultural impact of video games on other media
If “a culture is common to a society when there is a shared familiarity with its product and
practices, so that widespread reference is made to it, causing it to be a significant
determinant of the form and content of communication116”, then we have shown how some
British video games have been strongly influenced by UK culture. But cultural products’
relationship with society is bi-directional. Creative industries can exert influence upon society
in return, particularly when they reach high penetration levels into the population. The impact
of television, for instance, on language, social mores, politics, financial system and other
creative media is massive and widely studied. However, video games have long been
influencing cultural and other creative media products, creating positive spill-over effects.
Here are some examples of how video games have influenced other creative media, proving
that video games have earned their place in the canon of cultural media.
Video games to film
Best-selling video games are often turned into films, with the billion dollar-grossing Tomb
Raider film series being a notable example. Other film versions of video games have been
Silent Hill, Final Fantasy, Resident Evil and Pokemon. Video games are constantly being
converted into films117. Video games have inspired screenwriters to write films based around
video game themes, in movies such as Tron, ExistenZ and WarGames. Video games
pioneered special effect technologies such as computer animation and motion capture which
are all used prevalently in film and video games. Some video games companies (such as
Ubisoft) create Computer Generated Imagery (CGI) for the film industry. Video games
publishers have ambitions to make films, and film studios have begun releasing video games
as prequels to the movie118. A deeper cultural influence of video gaming is found in the
113
The Economy Of Culture In Europe for the European Commission (Directorate-General for Education and Culture)
October 2006
114
Wilson, R., State of the UK Video games development Sector (TIGA, 2009), p. 5.
115
In 2007, video games made by UK independents took 6.7 per cent of the UK retail market compared to 1.7 per
cent of the US retail market. The Economic Contribution of the UK Video games Development Industry (Oxford
Economics, October 2008), p. 26.
116
Scruton, Roger, A Dictionary of Political Thought (Macmillan, 1996), p. 123.
117
A recent example is the Broken Sword series from Revolution Software. Vanquish Motion Pictures explained why
they want to convert the video game to a film in an interview due to be published by the Guardian: “Modern video
games are becoming more intelligent, with deeper stories and more interesting characters. All of these things make
it much easier and exciting for a screenwriter to adapt and translate into a more authentic film... Broken Sword is
one of those video games that shattered convention. It was the first video game that really challenged your intellect
with an intriguing storyline riddled with puzzles and mysteries like nothing I'd ever seen. Another Broken Sword first
was its characters. The creator, Charles Cecil, brilliantly introduced ‘flawed’ characters, rich with quirks, back stories,
and desires. It was like a well crafted mystery novel in video game format, and I'm really excited to see this
nostalgic video game on the big screen.” Jay Douglas, Vanquish Motion Pictures 2009.
118
The Watchmen video game by Warner Brothers.
35
tendency of action movies since the mid-1990s to borrow sequences, set pieces and even
structure from video games. Films such as The Matrix, Terminator II, and later films in the
Star Wars and Indiana Jones series have been widely perceived as borrowing heavily from
video games119. A new wave of blockbuster movies based on video games are in production,
including Prince of Persia (being created by British director Mike Newell), and Warcraft, a
movie based on the hugely popular massively multiplayer online video game, World of
Warcraft (being directed by Sam Raimi).
Video games to television
Television is also being influenced by the conventions, structure and creativity of video
games. For instance, writers / directors J. J. Abrams and Damon Lindelof have stated that
they deliberately modelled one of the biggest television series of recent years, Lost, on a
video game world120. Some video games have an even closer relationship to television,
launching as video games then spreading across multiple media including television. One
example is Wakfu, a French massively multiplayer online PC video game which appeared first
as a video game, but launched as an animated TV show, a series of online and mobile
animations and eventually will come full circle back to a console video game. And more
pervasively, video games are often referenced in TV programmes – such as Grand Theft Auto
in a recent episode of South Park.
Video games to Public Service Broadcasting
The influence of video games has been growing within the UK’s public service broadcasters,
the BBC and Channel 4, which have long invested in video games development. The BBC has
hundreds of video games across its web sites, and has invested in virtual worlds, video
games with soft learning outcomes for children and adults, as well as pure entertainment
video game products. Channel 4 also funds video games production and has shifted its entire
education budget online, a significant proportion of which is expended upon video games.
Similarly, the 4IP Fund has a focus on video games amongst other cultural media. Both of
these organisations appear to be increasing their efforts in video games, as a way to fulfil
their remit, which is unarguably cultural in impact. They must reach the widest possible
British audience, which is increasingly turning to video games as a primary medium
sometimes over and above more traditional forms of media. As Ofcom stated in its Second
Public Service Broadcasting Review, delivering effective, high quality public service media in
an increasingly digital age is a real challenge. Subsequently, we believe it can be strongly
argued that involvement and excellence in video games be seen as essential to the future
relevance of public service broadcasters to the UK population.
Video games to music
As video games budgets rise, the music of video games has become increasingly important,
to the point where some video game composers, such as Nobuo Uematsu (composer for Final
Fantasy), Jerry Martin (The Sims) and Koji Kondo (Zelda), become celebrated in their own
right. EMI has organised a tour series called Video games Live, which features top orchestras
and choirs including the London Philharmonic Orchestra. The concerts, the first of which was
attended by 11,000 people in the Hollywood Bowl, include video footage and musical
arrangements, synchronized lighting, solo performers, electronic percussionists and
interactive segments121. Countless pop songs feature video games in their lyrics. The impact
of video games on music can be significant.
119
http://news.bbc.co.uk/1/hi/technology/3188873.stm
http://www.wired.com/gaming/gamingreviews/commentary/games/2006/02/70276
121
Bruce, Allison, “Now getting respect: video games are becoming known for their artistry”, Ventura County Star,
July 16th 2008.
120
36
Video games to literature
Several books have derived from video games franchises, most notably the Halo series of
books and novels about the video game Eve Online. However, authors have long chosen to
work in video games. Douglas Adams wrote an interactive fiction video game based on the
Hitchhikers Guide to the Galaxy in 1984 that sold well and helped kick start the adventure
video game genre, and later created Bureaucracy and the Starship Titanic video games.
Popular author James Patterson is now producing video games as well as books, television
shows, and movies. And there have been countless examples of novels which have taken
video games as a passing or central theme, the most recent being the Broken World by Tim
Etchells, in which the main character is immersed in a massively multiplayer online video
game world. In addition, there has long been a symbiotic relationship between comics and
video games.
Video games to fine arts
Artists such as Cory Arcangel, whose work has been exhibited at the Guggenheim Museum
and the Museum of Modern Art in New York, have been influenced by video games122. Into
the Pixel is a travelling exhibition of art from video games curated by the Academy of
Interactive Arts and Sciences and the Los Angeles Museum of Art. A range of video game art
exhibitions have been featured in galleries such as the San Francisco Museum of Modern
Art123 and Whitney Museum of American Art.
Video games to design
The Design Council has written about the impact of video games on design, and has
examined the design principles of Nintendo’s Wii console to assess what it can tell its readers
about innovation124. Video games have also been the subject of exhibitions at London’s
Design Museum, which has also written about the artistic origins of video games in artists,
sculptors and designers of the 19th and 20th centuries125. The Victoria and Albert Museum has
a Residency in Digital Design126 which includes video game artists, and runs digital design
workshops including video games for young people127.
Video games to museum exhibitions
Video games have been the subject of travelling exhibitions such as Video game On, which
was supported by the British Council (the UK’s cultural ambassador funded by the Foreign
and Commonwealth Office), exhibited at the Science Museum and the Barbican Centre. Video
game On investigated the history and culture of video games since the industry’s inception to
the present day128, and toured the world, including a European Capital of Culture event in
France. Manchester’s National Video game Archive collects and preserves video games and
video games consoles129. One of the Archive’s founders, James Newman from Nottingham
122
Ahmed, Murad, “Festival of culture shows that the video gamers are not just playing around”, The Times, 25
October 2008.
123
Which hosted a symposium entitled "ArtCade: Exploring the Relationship Between Video games and Art”. Kendra
Mayfield "Once It Was Atari, Now It's Art," Wired, 19 July 2001.
124
http://www.designcouncil.org.uk/en/Design-Council/3/Design-Council-Magazine/Design-Council-Magazine-issue2/The-new-rules-of-gaming/
125
One example being Enzo Mari: http://www.designmuseum.org/design/enzo-mari.
126
http://interventtech.net/2009/04/19/residency-va-digital-deign-bursary/.
127
http://www.vam.ac.uk/activ_events/young_people/index.html.
128
One reviewer of the Melbourne exhibition stated that: "Video game On presents an incredibly diverse range of
items and information to those that wander its floor space. The exhibition is a great gathering of the cultural items
that have created the imaginative alternate worlds video gamers have immersed themselves in over the age.”
http://palgn.com.au/10625/we-visit-acmis-game-on-exhibition/
129
The National Video game Archive in Manchester in the UK celebrates and records the development of video games
(see http://www.nationalvideo gamearchive.org/). For an example about the preservation of the history of video
37
Trent University's Centre for Contemporary Play, believes that "The National Video game
Archive is an important resource for preserving elements of our national cultural heritage...
video games should be archived in the same way that music, books and film are preserved,
as we often use them as markers in our culture and history... Video games influence film and
television as well, so they are important parts of popular culture”. Another example is the
Video game Nation exhibition in Manchester which charts the history of the medium and
examines its cultural impact130.
Academic study of video games as culture
Video games have long been considered worthy of study and have been the subject of many
academic theses in the disciplines of both Humanities and Science. For instance, the
Humanities Laboratory at Stanford in the USA has begun to catalogue video games. It has
launched a research project called How They Got Video game, which explores the history and
cultural impact of video games, including video games’ influence on art, cartography and
interactive fiction131. Another academic initiative is GameCODE, a research initiative founded
to look at the cultural impact of digital video games132. The sociologist who runs the course,
Bart Simon, states that “video games... (are) a medium on a continuum with literature,
television, film and so on. This field emerged in the last 10 years, and has attracted
communications and literature people; video games are like literature, video games are like
stories. Because of the boom in popularity and market penetration of video games, today
they form an important part of the cultural landscape”. Many books and studies on video
games as culture exist, perhaps one of the more interesting being My Tiny Life by Julian
Dibbell, which is credited as creating a virtual ethnography of online worlds133.
Video games to children’s industries (toys and theme parks)
Numerous major video games have resulted in toys, figurines and other merchandise being
created and sold to the public, the most pervasive being Pokemon. In 20007, Disney acquired
the video games-powered virtual world Club Penguin, and has started to introduce Club
Penguin characters into its theme parks134.
Video games to radio
Radio has also been influenced by video games. Several radio stations online are dedicated to
video gaming. Many editorial and analytical programmes have been broadcast on video
games. One of the most interesting discussions on video games and culture came in the
Long View from Jonathan Freedland on Radio 4 in January 2007. The journalist and
broadcaster put the panic over video games in historical perspective by looking at a scandal
over the arrival of the early English novel, Samuel Richardson’s Pamela, in 1740s London135.
Some radio presenters share their favourite video games on air, or even challenge other
presenters to better their scores136.
games in the USA, see “Is that just some video game? No, it's a cultural artefact”, New York Times
(http://www.nytimes.com/2007/03/12/arts/design/12vide.html?_r=1).
130
http://www.urbis.org.uk/page.asp?id=3296
131
http://www.stanford.edu/group/shl/cgi-bin/drupal/?q=node/7.
132
The project has attracted scholars from UQAM and Universite de Montreal, http://ctr.concordia.ca/200304/mar_18/04/.
133
For lengthy discussions on video games, culture, literature and art, see http://firstwallrebate.com/
134
http://www.attractionsmagazine.com/blog/2009/05/02/club-penguin-characters-arrive-at-disneys-hollywoodstudios/
135
http://www.bbc.co.uk/radio4/history/longview/longview.shtml
136
Such as Chris Moyles on BBC Radio 5 Live, http://chrismoyles.net/mw/coranto/Radio_Reviews/Radio_Reviewsarchive-8-2005.shtml.
38
Video games to newspapers
Video games are treated like other cultural products by newspapers, which have long
featured reviews of video games in their colour supplements and review pages alongside
reviews of other cultural media such as television, radio, film, and theatre.
Video games to internet
The video games industry was one of the UK’s first digital media, coming into existence
nearly a decade before the invention of the World Wide Web in 1990. It is therefore
unsurprising that video games design, in terms of design, art, animation, user interfaces and
sometimes even gameplay, has heavily influenced the design of the internet since its popular
adoption in the mid-1990s to the present day137. Video games are one of the most popular
activities online138. Video games were comScore’s fastest growing retail category in 2008 for
the USA (up by 29 per cent on 2007) and the second fastest growing overall category for
internet users in the USA in 2008139. The influence of seminal online video games such as
World of Warcraft on the internet and vice versa cannot be clearly charted but should not be
underestimated.
Video games to machinima
Machinima is a type of animated digital media, produced by capturing video of video games
characters manipulated by the creators to make short films, tell jokes or even narrate
documentaries. These creations are enhanced by the addition of new sound tracks and
voiceovers, and have appeared in mainstream media, advertisements and television. British
video games studio The Creative Assembly effectively used machinima in a BBC television
series called Time Commanders, in which players re-enacted historic battles using the studio’s
real-time strategy video game Total War140. Blizzard and the creators of South Park
collaborated on a machinima-driven episode which won an Emmy award141. Often the vehicle
for humour, this form was judged worthy of grant funding by the National Endowment of
Science, Technology and the Arts142.
Video games to politics
Video games have begun to be vehicles for politics. The trend appears to have been started
by US politician Howard Dean143 during a 2003 bid to become the Democratic nominee for
president which used grassroots campaigning backed by a major online community drive that
included casual online video games. Barack Obama spent some of his advertising budget on
virtual hoardings in online video games144, whereas John McCain tried casual online video
games such as Pork invaders145. The Tate Museum and the Rockefeller Foundation’s Media
Arts programme have funded an online video game project146 to simulate an alternative
global political system using the conventions of a massively multiplayer online video game
and the input of thousands of people.
137
http://www.springerlink.com/content/21310601305572u3/
One of the largest categories of online activity is gaming, with 50m visitors in June 2009, ComScore,
http://www.comscore.com/Press_Events/Press_Releases/2009/7/comScore_Media_Metrix_Ranks_Top_50_U.S._Web
_Properties_for_June_2009. One of the top 5 Yahoo search terms in 2008 directly related to video games and
another indirectly http://buzz.yahoo.com/yearinreview2008/top10/
139
http://www.comscore.com/layout/set/popup/Press_Events/Presentations_Whitepapers/2009/2008_Digital_Year_in
_Review
140
http://www.bbc.co.uk/dna/collective/A3601063
141
http://www.emmys.tv/awards/2007pt/nominations_crtv.php?action=search_db
142
http://www.mprem.com/e107/comment.php?comment.news.45.
143
www.deanforamericagame.com/
144
http://www.guardian.co.uk/world/deadlineusa/2008/oct/15/uselections2008-barackobama
145
http://www.ecampaigntrail.com/2008/06/20/mccain-launches-pork-invaders-web-game/
146
http://agoraxchange.net/
138
39
H: Support for the claim that video games can be cultural products
The UK video games industry is not alone in claiming that video games can be cultural
products. Here follows a selection of supranational, government, non-government and
academic bodies that maintain that video games can be cultural.
International governmental bodies
1. The European Commission: After a year-long investigation, the EC gave its decision
on the legality of the French tax credit system147: “We can, therefore, conclude that
certain video games could constitute cultural products.” It also noted that Article 87.1 of
the Treaty should be applied to other EU countries: “each Member State shall ensure that
the content of the production which benefits from the aid is cultural, in accordance with
verifiable national criteria”. Since at least 2006, the European Union has classified cultural
industries as “including film and video, video-video games, broadcasting, music, book and
press publishing”.148 The European Commissioner for Information Society and Media,
Viviane Reding has emphasised the cultural dimension of digital video games and
stressed “the need to promote this industry as a cultural industry”.149
2. UNESCO: The cultural nature of some video games has been recognised by UNESCO150.
UNESCO has also stated that creativity and artistic dimensions involved in video games
can give rise to cultural expressions151.
Overseas governments and legislatures
3. The French Government: France is the first EU government to instate a tax relief for
cultural video games which qualify under a cultural test agreed by the European
Commission.
4. Korean government: The Culture, Sports and Tourism Minster Yu In-chon announced a
government investment programme to assist with the export of Korean video games152.
The government also has announced an initiative in which several Korean cultural
organizations including the Video game Industry Agency, the Culture and Content
Agency, and the Broadcasting Institute, combine to create a single Creative Content
Agency to develop and promote video games, animation, online and television content153.
5. Japanese government: The cultural affairs agency has requested funding for a £75m
National Media Arts Centre to promote Japanese pop culture (including video games)
abroad154.
6. The German Government: In a similar vein, in 2008 the German Cultural Council
officially accepted video games as a form of culture, and a constituent of the film and
147
Commission Decision of 11.XII.2007 concerning State Aid C 47/2006 (ex N 648/2005) tax credit set up by France
for the creation of video games (The Commission of the European Communities) Brussels, 11.XII.2007, C (2007)
6070 final.
148
The Economy Of Culture In Europe for the European Commission (Directorate-General for Education and Culture)
October 2006
149
Vivian Reding, “Video games: Let’s Go for PEGI Plus!”, Speech at the Annual Conference of the Interactive
Software Federation of Europe, Brussels, 7 May 2008.
150
http://portal.unesco.org/culture/en/ev.php-URL_ID=2461&URL_DO=DO_TOPIC&URL_SECTION=201.html.
151
Convention adopted by the General Conference of UNESCO on 20 October 2005 and introduced into Community
Law with Council Decision 2006/515/EC of 18 May 2006 relating to the conclusion of the Convention on the
Protection and Promotion of the Diversity of Cultural Expressions (OJ L 201 of 25.7.2006, p. 15). See Article 4, point
3 and Article 4.2.
152
153
154
http://www.guardian.co.uk/world/2009/apr/10/japan-manga-anime-recession
40
audiovisual media subsector.155 The Council urged the government to support video
games development, which prompted the Minister of Culture, Bernd Neumann, to
announce an annual prize for video games development worth €300,000 for video games
content of German origin conforming to a high standard of cultural quality and
pedagogical values156.
7. Nordic Governments: The Nordic Council of Ministers (Denmark, Finland, Iceland,
Norway and Sweden) have funded the development of culturally diverse video games
from their region in order to correct an imbalance in the number of culturally Nordic video
games available in their region157.
8. Canadian government: Telefilm Canada is a federal cultural agency dedicated to the
development and promotion of the Canadian audiovisual industry. Telefilm funds the
Great Canadian Video Game Competition, as well as administering the Canada New Media
Fund on behalf of the Canada Heritage Department which has funded numerous video
games projects.
9. The Spanish Parliament’s Cultural Committee: In 2009, the cultural committee of
the Spanish Parliament voted in favour of putting video games in the same category as
film, music and the visual arts.158
UK government reports, UK cultural institutions and other organisations
10. Digital Britain: Digital Britain (BIS/DCMS June 2009) noted that: “CGI, electronic video
games and simulation also have a significant role in Britain’s digital content ecology and
in our international competitiveness. Each of these has the same capability as the more
traditional sectors, such as film, to engage us and reflect our cultural particularism. They
may in future have a cultural relevance to rival that of film.”
11. The Arts Council: This cultural funding body funds a series of digital media festivals
which bring various creative industries together including video games developers159.
12. The British Council: The British Council, the UK’s cultural ambassador funded by the
Foreign and Commonwealth Office, supported the travelling exhibition Video game On,
which celebrates the cultural value and history of video games.
13. Regional Screen Agencies: Screen England and the RSAs exist to develop the culture
and industry of the moving image. Various RSAs have funded video games development
as well as cultural video games festivals such as EM Media’s funding of Gamecity in
Nottingham160.
14. The London Development Authority: The LDA released ‘London – A cultural audit’ in
March 2008. The report defined and quantified the various cultural industries located
therein, and attacked the following “error of judgement”: “Although computer and video
games have been a fixture in many of our lives for four decades now, they are often
ignored as part of our cultural environment.”161
15. C@binet: C@binet was founded by the Labour government to help foster international
dialogue about the creative economy. Several of C@binet’s ‘ambassadors’ are video
games industry leaders, such as J Allard from Microsoft’s Xbox Division and Peter
Molyneux from Lionhead.
155
Deutscher Kulturat, http://www.kulturrat.de/detail.php?detail=1371&rubrik=2 August 2008.
Deutscher Bundestag, Drucksache 16/7116, 14 November 2007.
157
http://nordicgameprogram.org/
158
“Making video games high culture”, El Pais, March 30th 2009.
159
http://www.artscouncil.org.uk/pressnews/news_detail.php?rid=0&sid=&browse=recent&id=1286
160
http://www.em-media.org.uk/pages/Home?t=business
161
London A Cultural Audit, Alan Freeman, GLA Economics for the London Development Authority,
http://www.lda.gov.uk/server.php?show=ConWebDoc.2538
156
41
16. BAFTA: The British Academy, whose mission is to “support, develop and promote the art
forms of the moving image, by identifying and rewarding excellence, inspiring
practitioners and benefiting the public” has long recognised video games as a medium
worthy of awards, handing out its first awards in 1998. In 2006, BAFTA formally
announced that video games were “one of the principal art forms” and that it would give
“video games equal status with film and television”.162
17. Conservative Party: The Shadow Minister for the Arts from the UK conservative party,
Ed Vaizey, has set out the party’s views on video games as cultural products: “I would
see video games as art, they are creative, and they have by now their own heritage and
cultural significance, which is one element of art.”163
18. Futurelab: In a 2004 study of video games and learning, the non-profit educational
organisation claimed that “Computer video games are a growing part of our culture”164.
Miscellaneous
19. The Connecticut General Assembly: This US state enacted legislature in 2006 to
introduce a tax credit for video games production, which is now being administered by
the Connecticut Commission on Culture and Tourism.
20. The US Seventh Circuit Court: The US Court of Appeals was asked to adjudicate the
case of American Amusement Machine versus Kendrick. In 2001, Judge Richard Posner
argued that the video game should be considered an art form, since it shows thematic
and expressive continuity and is at least as effective as other popular arts that are
considered protected speech under the First Amendment of the US Constitution.165
21. A 2009 survey of the British public: In a survey of 361 attendees of all ages (and a
broadly even gender divide) to Abertay University’s Dare ProtoPlay event166 (at the
Edinburgh Fringe Festival, part of one of the UK’s largest cultural festivals) in August
2009, 80 per cent of respondents rated video games as either an important or very
important part of their family’s media consumption. 86 per cent believed that video
games can be cultural products like some movies or novels (versus just 7 per cent that
did not believe video games could be cultural and a further 7 per cent that did not have a
view). 69 per cent thought that British video games distinguished themselves from video
games from other countries (versus just 8 per cent that did not and 23 per cent that did
not know).
I: Conclusions
Video games can be cultural products. Like any other mature creative industry, video games
will always stray between high and low culture, and will feature some but not necessarily all
of the characteristics of cultural products.
Video games derive from the same lineage as the ancient cultural tradition of gaming, in the
creation of which the British have historically excelled. The first video game was created in
162
http://www.guardian.co.uk/technology/2006/mar/09/news.video games1
http://www.bruceongames.com/2009/07/27/exclusive-interview-ed-vaizey-uk-shadow-minister-for-the-arts/
164
http://www.futurelab.org.uk/resources/publications-reports-articles/literature-reviews/Literature-Review378/
165
Professor Aaron Smuts from the Department of Philosophy, University of Wisconsin, Madison, November 2005,
conducts a detailed analysis of whether video games can constitute art in Are Video games Art?
http://www.contempaesthetics.org/newvolume/pages/article.php?articleID=299#FN17link
166
http://www.daretobedigital.com/protoplay. While this undoubtedly will have been skewed by the fact that the
sample base comprised attendees to a video games event, the survey did reveal interesting information about video
gamers’ (and their families’) attitudes to the cultural relevance of British video games. Just over 10 per cent of the
3,000 attendees to the event were surveyed.
163
42
the UK, and, after commercialisation in the USA, the UK became one of the global centres of
video games development, continually giving rise to pioneers who have challenged the
industry’s orthodoxy and created new genres from the 1980s to the present day.
Video games have a rich heritage in harvesting IP from film, television, music and literature.
Video games’ attributes can strongly reflect the culture in which they were created. Some
accomplished video games demonstrate attributes with strong and explicitly cultural
dimensions similar to those found in film or television, such as characterisation, cultural
commentary, design, narrative, graphical arts, humour, science and education, as well as
some of the newer interactive disciplines of online collaboration, user generated content, and
serious or educational video games. In many of these disciplines, British video games
developers excel, producing products that can be cultural in nature and derivation.
Video games have overtaken most other entertainment media in growth and consumer
expenditure and now reach into the majority of British homes. Video games have impacted
significantly upon British culture, and have shown that video games are at the forefront of a
massive, generational shift towards interactive entertainment in the entertainment media
consumption habits of the British public. British people born from the 1990s onwards consider
video games to be the single most important entertainment medium. In many ways, this new
generation of Britons expect much of their culture, education and entertainment to be
interactive, a trend which is surely accelerating. British consumers of all ages buy nearly four
times more British-made video games than consumers in other countries, suggesting a strong
cultural affinity. Video games have begun to influence film-makers, television, public service
broadcasting, music, literature, fine arts, design, museums, academia, the toy and theme
park industries, radio, newspapers, the internet, politics and even spawned the new creative
medium of Machinima.
A wide range of organisations agree that video games can be cultural, including the EC,
UNESCO, French, German, Nordic, Korean, Japanese and Canadian governments. The Arts
Council, British Council, several regional screen agencies, the LDA, the BIS/DCMS report
Digital Britain and the Conservative Party amongst others either explicitly state that video
games can be cultural products or fund video games within cultural programmes.
We believe that this comprises strong evidence that our argument that video games can be
cultural is both correct and widely perceived to be valid in the context of fiscal support for a
cultural industry.
How cultural and other tax credits for video games production have worked
Tax credits for creative media production are used by many governments (including the UK
government) to assist in building, protecting or reinvigorating different media sectors. In part
this is because creative industries often deliver faster GDP growth than other sectors167. For
instance, the DCMS noted in its Creative Industries Fact File in 2002168:
The Creative Industries are a significant contributor to the UK economy - accounting
for 7.9 per cent of GDP, and growing significantly faster than the economy as a
whole.
167
This has been noted in Singapore http://app.mica.gov.sg/Data/0/PDF/6_MTI%20Creative%20Industries.pdf and
Germany http://www.innovasjonnorge.no/Landbruk_fs/Germany.pdf.
168
www.culture.gov.uk/PDF/ci_fact_file.pdf;
43
This chapter169 provides a brief analysis of the context, nature and impact of 3 different tax
schemes in the UK, France and Canada.
How the cultural tax credit assisted UK film production
Context
Like video games, film production is a highly competitive and globalised industry, and
countries worldwide compete on labour and location costs, quality of the local talent pool,
and their physical and cultural assets. Since the mid 1990s, various governments have
incentivised film production using tax breaks, subsidies, marketing and other incentives. The
British film industry as a result was in a highly weakened state by the early 1990s, with
investment in British film production consisting of a negligible £58m in 1992. New cheaper
locations, alternatives to the established centres of film production in the USA and UK, were
opening up in Canada, Asia and Eastern Europe, and the skilled, highly mobile workforce had
largely followed the money to where films were actually being made, outside of the UK.
Tax relief
A first scheme for ‘British-qualifying’ films with budgets over £15m was made available in the
early 1990s, but in 1997, the government introduced a second tax relief for film production,
which kick-started a range of film projects in the UK. The existence of two parallel schemes
contributed to some abuse of the system via a practice known as “double dipping”, where tax
relief was claimed twice for the same project / budget. The media reported this as the trigger
for a change in legislation however insiders believe that the main reason for the changes was
that the tax relief benefit was being taken by lay investors rather than the film production
entities for whom it was originally intended. After lengthy negotiation between government
and an industry with high profile representatives and lots to lose, the legislation was
amended in 2007 to institute a single film tax relief system for film production companies of
20 per cent or 25 per cent (depending on production size) on up to 80 per cent of a project’s
eligible costs as long as the project passed a cultural test. Despite the hue and cry from the
film industry, film production continued to grow.
Impact
Such tax relief was estimated by the UK Film Council to have been the major factor in
massively increasing investment in UK film production, which reached £842m in 2006.
Following the tax relief, the British film industry is estimated to have created over 30,000 new
jobs, 75 per cent of those in London, which paid an average salary of £31,700 in 2006.
Unsurprisingly, the UK Film Council considers the Tax relief "vital to the recent resurgence of
film production in the UK170". The UK film industry estimates that in 2006 it contributed
£4.3bn to UK GDP and £1.1bn to the Exchequer. Without it, the UK Film Council estimates
that the film industry would contribute £1.3bn less to GDP and £350m less to the Exchequer
each year171. The Film Council also estimates that, without the Film Tax Relief, film
production in the UK would be 75 per cent smaller. Recent government figures show that tax
relief on British film production between January 2007 and March 2008 amounted to £104m
for 100 films, with 82.5 per cent of applicants during the period having received the relief by
March 2008. The then Financial Secretary to the Treasury Stephen Timms said “These figures
169
Sourced from the Economic Contribution of the UK Film Industry (Oxford Economics, July 2007) and Raise the
Game (GIC/NESTA, December 2008).
170
http://news.bbc.co.uk/1/hi/in_depth/uk/2001/budget_2001/1207832.stm
171
The Economic Contribution of the UK Film Industry (Oxford Economics, July 2007).
44
reinforce the role film tax relief is playing in strengthening the British film industry and
encouraging the production of high quality home-grown films. This is a dynamic industry that
has continued to be resilient in the face of difficult economic times. The then Culture Minister
Barbara Follett said: “The importance of film tax relief in supporting one of our most
successful and culturally important creative industries should not be underestimated.”172
How the cultural tax credit assisted French video games production
Context
The French video games industry had been relatively unstable for years but was decimated
by commercial non-viability, the down-turning console cycle and by Montreal government
sales representatives targeting viable French firms between the late 1990s and 2005. During
this period, an increasingly wide range of funding sources was made available regionally and
nationally in the form of grants and subsidies. These hand-outs did little to encourage
applicant studios’ commercial viability. France’s studio sector, weaned on subsidies but
typically weak in global sales, was hit by both global studio consolidation and the brain drain
to Canada. France lost nearly 60 per cent of its developer headcount as thousands of
experienced staff migrated to Montreal. The industry lobbied for more assistance from
national government from 2005, persuading the French Parliament to legislate for a
production tax credit in early 2007, which was ratified by Brussels in late 2007. The
assistance takes the form of a hand-up rather than a bail-out, and the tax credit rebates 20
per cent of a qualifying project’s costs.
Tax relief
The first round of tax relief through 2008 resulted in 45 video games being approved for tax
relief worth between £26m-£35m between 2008 and 2010. 45 out of 120 applying projects
(37.5 per cent) were successful. 45 per cent were Nintendo DS projects with an average
budget of £250,000, 20 per cent were Wii projects with an average budget of £2.3m, 16 per
cent were PC projects with an average budget of £2.2m, and 15 per cent were PlayStation 3
and Xbox 360 projects, averaging at £9.9m. 90 per cent of the £167m total production
budget for these titles will be spent within France with 4 per cent spent in other EU countries
and 6 per cent further afield.
Impact
Product development time frames and product shelf-lives mean that it is too early to fully
quantify and assess the impact of the French scheme. However, Ubisoft staff numbers in
France increased by 20 per cent during 2008 and Ubisoft representatives say that the cultural
tax relief is a significant factor behind such growth173. As the French studio sector is heavily
reliant upon Ubisoft, for whom 60 per cent of the sector works either directly or indirectly174,
Ubisoft’s growing headcount in France is an effective bellwether for the health of the French
studio sector, and indirectly the impact of the French relief.
172
Both
ministerial
quotes
are
sourced
from
a
Treasury
press
release:
http://www.hmtreasury.gov.uk/press_109_08.htm
173
Quote from Gareth Edmondson, Managing Director, Ubisoft Reflections, July 2009.
174
Guillaume de Fondaumière, President of the French video games developers association, SNVG, Develop, July
2007, http://www.develop-online.net/features/35/The-Crying-game.
45
How tax credits affected the Canadian video games sector
Context
In the mid-1990s, Canada was a minor video games development location, only just starting
to benefit from its location next to the world’s largest video games market (the USA). In
1997, revenues generated by Canadian-made video games were well below those of video
games made in the USA, Japan, UK, France, Korea and Scandinavia. Canada had good
graduates, a strong cultural affinity with the USA and Europe (the two largest video games
markets globally) and was on the doorstep of the largest grouping of global video games
companies. By 2006, Canada had leap-frogged Britain to take 3rd place in the global sales
rankings by a combination of mostly organic growth in the west coast and massive pump
priming in the east coast, primarily Quebec and Ontario.
Tax relief
The main type of relief are tax credits for production staff salaries and other costs, which are
set at 37.5 per cent in Quebec, 30 per cent in Ontario, 35 per cent in Prince Edward Island,
45 per cent in Manitoba, and 35 per cent in Nova Scotia. In addition, British Columbia has an
Interactive Digital Media Tax Credit of 17.5 per cent. Quebec and Ontario send
representatives around the world to video games development conferences to recruit studios
to relocate. The resulting playing field in Canada for video games studios is so competitive
that companies have been caught in bidding wars between provinces175. Ontario and Quebec
have released larger funding to secure huge investment through bilateral deals with the
major studios, notably Ubisoft and Electronic Arts. Additional by-products of such deals have
been investment in valuable educational establishments and cross-media relationships.
Although the generic nature of the tax credits available in a number of Canadian provinces
has favoured all kinds of companies, with no cultural filter applied, the chief beneficiaries
have been larger studios that either work for hire for global publishers, or are global
publisher-owned studios themselves.
Impact
The rise of Canadian video games development is unprecedented in its speed and scale of
inward investment growth. That investment has consistently delivered good returns, and a
repeated formula for government investment in video games in Canada typically results in a
two for one return on investment for the province. Quebec’s massive injection of funding into
video games, £500m in tax credits over several years, has generated an estimated additional
£1bn in new investment into Quebec by global video games companies such as Ubisoft,
Electronic Arts and Eidos/Square Enix. Ontario recently followed Quebec’s lead by securing
$450m in investment in a new Ubisoft studio in return for $226m in tax breaks. In turn, this
has resulted in the founding and growth of the world’s largest studios, and one of the fastest
growing development headcounts in the world. Canada’s studio staff headcount overall has
grown 43 per cent between 2006 and 2008, and 33 per cent between 2008 and 2010, to
reach 14,000176. Montreal’s development community has grown by 960 per cent from 500 to
5,300 over ten years to 2008. Investment in development in Montreal has grown by 1280 per
cent in ten years from £21m in 1999 to £290m in 2008. The major Canadian studios have
cited tax breaks as the principal differentiator in their location decisions177.
175
In 2009, Nova Scotia tried to poach a developer from Prince Edward Island by offering bigger incentives:
176
Source: GIC 2010.
177
“We work hand-in-hand with local governments and, although we have to be prepared for the possibility of doing
business without tax credits, I think it’s quite clear that they create a win-win situation for both business and
government – and ultimately the industry as a whole.” Executive Director of Ubisoft Worldwide Studios, Christine
Burgess-Quemard, Develop November 2008. http://www.develop-online.net/features/319/French-Revolutionary
46
Chapter 2: The structure and implementation of the relief
Financial criteria
Eligible products
The Games Tax Relief will apply to any interactive product or service, irrespective of the
platform for which it is designed to operate or the manner in which it will be distributed or
used. The Games Tax Relief will therefore not be limited to entertainment products and
services, but will also include products and services that have more direct educational or
commercial applications. Similarly, the Games Tax Relief will not be limited to stand-alone
products (whether distributed in a box or electronically), but will also include interactive
services, such as massively multiplayer online video games.
Qualification criteria
In order to qualify for the relief, the product must meet the following criteria:
i.
ii.
iii.
UK-registered companies: An eligible company will simply be any company that is
within the scope of UK Corporation Tax. This will therefore include UK registered
subsidiaries of companies that are not registered in the UK and non UK companies
with a UK branch. The company claiming the relief will need to be the company that
is actually responsible for the production of the relevant product.
Pass a cultural test: Obtain a minimum of 19 points out of the possible 37 points in
the cultural test and a minimum of 9 points out of the possible 25 points in sections A
and B of the cultural test.
Nature of product: The product is not of a pornographic nature and does not
feature extreme violence.178
Setting and raising the pass rate
The threshold for the cultural test has been designed to broadly conform to the levels of
support available for cultural video games production under the French Tax Relief and
approved by the European Commission. We have endeavoured to set the level to expedite
the passing of any legislation through the European Commission. In that, we have learned
from the French experience. The first French test was too loose and Brussels, arguing that
the higher the proportion of games to pass, the lower the likely incidence of truly cultural
games, asked France to tighten it up to pass fewer titles. So the French test and pass rate is
one benchmark. However, this is a British test for a studio sector that is very different to the
French studio sector. The UK film tax relief’s cultural test passes around half the projects that
apply, and so we have pitched the level of the Games Tax Relief at somewhere in between
the two. The cultural test thresholds and weightings can be adjusted to pass more titles
should the Government want to support a higher proportion of titles and a greater number of
developers.
The cultural test
We propose the following cultural test with which to define the eligibility of individual projects applying
for the Games Tax Relief:
178
It follows that video games that are rated "18" will not be excluded from the scheme for Games Tax Relief, but
only those video games that are of a pornographic nature or that feature extreme violence. This reflects the
approach of the UK system for tax relief for British films and also the French tax relief for video games development.
47
A
A1
A2
A3
B
B1
B2
B3
B4
C
C1
C2
D
D1
D2
D3
D4
D5
D6
Cultural Content
The video game is based on locations in Europe (including fictionalised
versions of locations in Europe) or on peoples of Europe.
The video game is inspired by or based upon: (i) European underlying
material (such as a film, a book or artistic work); or (ii) a sport (or sports)
that originated in Europe; or (iii) an event (or events) held (or previously
held) within Europe; or (iv) any other European subject matter.
The in-video game dialogue and in-video game text is mainly in the
English language.
Cultural Contribution
The video game is an original video game (as opposed to being a sequel
to a previous video game).
The video game is based on or strongly features a narrative (as opposed
to being a purely abstract or non-linear video game).
The video game incorporates any clear technical or creative innovations
such as innovations in: (i) gameplay; (ii) graphics; (iii) user interface; (iii)
artificial intelligence, audio or physics; or (iv) online or multiplayer
functionality.
The video game represents or reflects; (i) diverse European culture; or
(ii) European heritage; or (iii) European creativity.
Cultural Hubs
At least 50 per cent of the production budget is incurred within the UK.
The in-video game text is translated into at least two other official
languages of the EEA.
Cultural Practitioners
Executive Producer.
Lead Programmer.
Lead Artist.
Scriptwriter.
Lead Designer.
Lead music and audio composer.
Total Achievable Points
Number of points
From 0 to 4 points
From 0 to 4 points
2 points
3 points
From 0 to 4 points
From 0 to 4 points
From 0 to 4 points
From 0 to 4 points
2 points
1 point
1 point
1 point
1 point
1 point
1 point
37 points
Key
Scores: For this and other relevant criteria, it is not a case of being awarded all or none of
the available points. Instead, a number of the points would be awarded depending on the
percentage of the video game that meets the criteria. So in this case of A1, if (say) 75 per
cent of the video game is based in these locations 4 points would be awarded; 66 per cent, 3
points; 50 per cent, 2 points; and 25 per cent, 1 point.
A1: We have used the word "video game" for simplicity. However, we envisage that in the
final version we would use a broader term so that educational and "serious video game"
applications" might be able to come within the ambit of the Games Tax Relief. The Games
Tax Relief will need to include a definition of "video game". Locations in Europe would for
example include fictional European locations or even those in science fiction.
A2: European underlying material would be European if (in the case of a film) it qualifies as a
European film or (in the case of other copyright works) the author is a citizen of or resident in
an EEA country. European events would for example include a well known event held in
Europe even if the underlying event did not originate in Europe. European subject matter
would for example include a video game based on a European non-fictional event or about
European cultural figures, such as historical, scientific or fictional characters.
48
B3: Innovations in graphics would encompass art, animation or rendering.
B4: Diverse European culture would include European political, social or cultural issues or
values.
C1: This would encompass outsourced production services in the UK.
D: In this section, points are awarded if those listed are citizens of or resident in an EEA
country.
The scoring exercise
The exercise: In July 2009, TIGA conducted a profiling and scoring exercise for a range of
video game titles in order to benchmark its proposed cultural test against real video games
production. The exercise allowed us to assess whether the proposed test scores, weightings
and methodology was effective in screening out video games with fewer cultural credentials
while passing those with more cultural credentials.
The sample: 18 video games created or in production in recent years by TIGA members
were profiled by means of a telephone questionnaire, taking data relevant to the criteria for
our proposed cultural test. 3 titles by publisher owned studios and 15 titles by independents
were profiled. The games chosen were a random sample and therefore we have assumed
they are as close as possible to a representative sample. Current practical difficulties in
accurately profiling the total number, platforms and budgets of UK titles in development
mean that assessing how representative this or a larger sample may be could not be
performed in the time frame of this report.
Criteria: The criteria for the 18 titles profiled were threefold:
i.
ii.
iii.
Minimum production expenditure level of £100,000.
For independents, the selection included at least 1 license contract for a publisher.
If possible, the selection should include titles on several different platforms.
Cultural titles: To obtain a more representative sample, titles were deliberately not chosen
to be skewed towards being “cultural”.
Circulation / confidentiality: Companies agreed to share information, which includes
ballpark financials for some projects, with TIGA, its working group of specialists and some
government departments, but for reasons of confidentiality the companies did not agree to
share this information more widely. As such, we will only report headline results herein.
Headline results: The scoring exercise resulted in 44 per cent passing the cultural test and
56 per cent failing the cultural test. This is roughly analogous to the French cultural test for
video games production, in which 37.5 per cent of the first round of applicants were
successful. Although all studios were asked for their production budgets, not all could reveal
those for reasons of confidentiality. Therefore we cannot estimate the cost of a tax credit for
these cultural video games. However, we have conducted a costing estimate of the entire
measure later in this chapter.
Detailed results: The proposed cultural test is split into two sections: A cultural content and
B cultural contribution; C cultural hubs and D cultural practitioners. Titles must achieve a
minimum score of 9 in A and B, and a total of 19 out of a total of 37 available points.
49
Aggregated scores
Title
Title 1
Title 2
Title 3
Title 4
Title 5
Title 6
Title 7
Title 8
Title 9
Title 10
Title 11
Title 12
Title 13
Title 14
Title 15
Title 16
Title 17
Title 18
A&B
C&D
Total
3
15
8
6
5
8
15
5
8
9
9
12
13
5
4
4
9
9
11
12
11
11
12
12
12
12
11
11
12
12
12
11
11
11
12
11
14
27
19
17
17
20
27
17
19
20
21
24
25
16
15
15
21
20
Pass/fail
Fail
Pass
Fail
Fail
Fail
Fail
Pass
Fail
Fail
Pass
Pass
Pass
Pass
Fail
Fail
Fail
Pass
Pass
Headline results
Total passes
Total fails
8
10
44 per cent
56 per cent
Conclusions
We believe this random sample of video games from multiple studios on multiple platforms
and a wide range of budgets is representative of the likely pass/fail rate for the cultural test
that we propose. TIGA’s cultural test represents an effective filter for cultural products and
produces results roughly analogous to the French video games tax credit.
Calculation and amount of the Games Tax Relief
Introduction
The Games Tax Relief should be calculated and applied in a very similar way to the existing
tax relief for British films ("Film Tax Relief"). The Film Tax Relief is well established and well
understood by HMRC, and so following the broad approach of the Film Tax Relief will make
the Games Tax Relief relatively simple to implement and operate.
Calculation
It follows that the way that the Games Tax Relief would work is that a development company
would be entitled to an additional deduction in computing its taxable profits or, where that
additional deduction results in a loss, to surrender losses for a payable Games Tax Relief. As
with the Film Tax Relief, we propose that both the additional deduction and the payable
Games Tax Relief would be calculated on the basis of core expenditure up to a maximum of
80 per cent of the total core expenditure by the development company. The Games Tax
Relief would therefore be applied to either 100 per cent of the UK core expenditure or 80 per
cent of the total core expenditure incurred by the development company, whichever is the
50
lower. This calculation will produce the "enhance-able expenditure", i.e. the expenditure for
which an additional deduction is provided.
Core expenditure
The core expenditure to which the Games Tax Relief would apply would be the production
budget for the relevant product, being the total costs of developing the product (including the
cost of any work sub-contracted by the company), but after deduction of specified categories
of costs. These excluded costs will be those costs that do not relate specifically to the
development of the product and will primarily consist of items such as finance costs, the costs
applicable to any completion bond, and distribution and marketing costs. In relation to
products and services that have ongoing development, service and maintenance costs (such
as online video games), the core expenditure will only be the costs of developing that product
or service up to commercial release, and will not include any of those ongoing costs. The UK
core expenditure will be the goods and services included in the production budget that are
incurred or used within the UK.
R&D Tax Relief
At present, it is possible for small and medium-sized (SMEs) to obtain R&D tax credits in
respect of some of the costs involved in video game production. In order to avoid any
potential overlap between the Games Tax Relief and the existing R&D tax relief, we propose
that any expenditure that is subject to a claim for R&D tax relief would be excluded from the
definition of UK core expenditure. Equally however, we envisage that R&D tax credits will still
apply to the early stage pre-production costs involved in video game production that will not
form part of the production expenditure to which the Games Tax Relief will apply. Some
additional consideration will need to be given the interface between R&D tax credits and the
Games Tax Relief to avoid any possible duplication or distortion. For example, it may be
better to provide an "opt out" from Games Tax Relief where the R&D tax credits is the more
appropriate route for a development company to follow.
Minimum UK core expenditure
The Games Tax Relief would not apply to products that have a core expenditure that is less
than £100,000 (in order to avoid the number of potential applications creating an undue
administrative burden).179 In addition, as with the Film Tax Relief, at least 25 per cent of this
core expenditure would need to be incurred within the UK.
Rates and nature of benefit
We propose three rates of Games Tax Relief depending on the amount of the production
budget:
i.
ii.
iii.
20 per
budget
25 per
budget
30 per
budget
cent of the UK core
in excess of £6m.
cent of the UK core
that is less than £6m
cent of the UK core
that is less than £3m
expenditure in respect of products with a development
but in excess of £3m.
but in excess of £100,000.
Having calculated the "enhance-able expenditure", then either an enhanced revenue
deduction will be available for an appropriate sum, or, if a loss exists or is created, this may
179
£100,000 is a similar level to the minimum amount under the system in France (where the minimum amount is
€150,000).
51
give rise to a ‘surrender-able loss’ (which would be the lower of the enhance-able expenditure
and the trading loss). This loss could then be surrendered for a cash-back credit at the
appropriate rate. As with the Film Tax Relief, where a product generates a loss, the Games
Tax Relief will be calculated either on the amount of the net loss or the amount of the
qualifying expenditure, whichever is the lower.
The rationale for tiers of the Games Tax Relief
We propose 3 tiers to reflect the nature of video games production. The UK film tax relief has
2 tiers, which are designed to help independent film production studios with smaller budgets
more than the major studios with larger budgets. France has a single 20 per cent support
level for 100 per cent of games production expenditure. However, French studios (it appears
particularly the smaller ones) have complained that their tax credit is not as effective as it
could be. Productions and studios in the UK video game industry are more stratified than UK
film and French games, both in terms of scale of company but also in terms of wider variation
of budget on different platforms. The 3 tiers are designed to assist different sized studios
across the industry working on different scales of game on different platforms. The tiers are
weighted as follows:
The three tiers, £100,000 to £3,000,000, £3,000,000 to £6,000,000 and over £6,000,000 are
designed to reflect average production budgets of video games on different video games
platforms, and correspondingly different sizes of company. The lowest budget threshold
(£100,000 to £3,000,000) is designed to assist smaller video games on online platforms, PCs,
handheld, small-scale console video games, mobile, interactive television and other emerging
platforms. This threshold is designed to provide smaller companies and possibly start-ups
with weaker cash flow, more limited access to finance and shorter track records in
comparison to larger companies with higher levels of relief. The medium level of budget
threshold (£3,000,000 to £6,000,000) is designed for larger online and offline PC titles, and
medium-scale console video games, created by medium to large studios. The level of relief is
designed to assist independent studios and smaller publisher studios. The highest level of
budget (above £6,000,000) will capture the “AAA” budget video games which usually cross
multiple video games platforms, and the rarer big budget massively multiplayer online video
games. This level of relief is primarily designed to help publisher studios and the larger
independents working on licenses or other contracts for publishing partners.
Two sample applications
Here are two sample calculations for video games. The first is for a video game with a large
budget which has successfully applied for the 20 per cent Games Tax Relief:
•
A video game has development expenditure of £10m, all of which is UK expenditure.
The video game generates income of £12.5m and therefore a trading profit on this
game of £2.5m. The development company is entitled to an additional corporation
tax deduction of the amount of the qualifying expenditure of £8m (i.e. 80 per cent of
£10m total expenditure) resulting in a post-deduction loss of £5.5m (i.e. £2.5m
trading profit less the £8m deduction). The development company will be entitled to
a corporation tax benefit of £0.7m (i.e. 28 per cent of the £2.5m trading profit that
would otherwise have been taxable), plus a tax credit of £1.1m (i.e. 20 per cent of
the post deduction loss of £5.5m) and therefore a total tax benefit of £1.8m (i.e.
£0.7m plus £1.1m).
52
Where the game makes a loss, the amount of the credit will be calculated against either the
amount of the qualifying expenditure or the amount of the net loss, whichever is the lower.
Here is an example of a video game with a more modest budget which has successfully
applied for the 30 per cent Games Tax Relief but whose release results in a trading loss:
•
A game has development expenditure of £2m, all of which is UK expenditure. The
game generates income of £1m and the development company therefore a trading
loss on this game of £1m. The development company is entitled to an additional
corporation tax deduction of the amount of the qualifying expenditure of £1.6m (i.e.
80 per cent of the £2m total expenditure) resulting in a post-deduction loss of £2.6m
(i.e. £1m trading loss less the £1.6m deduction). The development company will be
entitled to a tax credit of £480,000 (i.e. 30 per cent of the £1.6m qualifying
expenditure, as the qualifying expenditure is less than the amount of the post
deduction loss).
Estimated cost of the Games Tax Relief
We do not propose any cap on the Games Tax Relief as this would create considerable
administrative and procedural challenges and costs.
Since we first estimated the cost of the Games Tax Relief, we have run a census of British
games studios and uncovered data on how many games titles are produced on each platform
each year180. We have used this to rework our projections of the cost of the Relief between
2011 and 2015 with more confidence. Instead of calculating the costs banded into 3
scenarios based on a rising number of applications, we have used the 2009-2010 data on
numbers and types of titles released through all three scenarios while changing the total
number of applications and the average development project expenditure benchmarked
against a top-down analysis of overall video games development expenditure in the UK181. We
have expanded the Wii category to include motion sensing games on Xbox 360 (Kinect) and
PlayStation Three (Move), which can vary widely in cost. We have also reused data from the
French tax credit allocations as benchmarks, while adjusting for the different scale and
composition of the British studio sector182. Despite the increase in data on titles, please note
that the cost of a Relief is particularly difficult to estimate accurately due to the number of
variables, principally the lack of precedent in the UK games industry, the wide potential
variety in number of applications on different platforms with different costs, the pass
threshold of the cultural test (which we have assumed to 40 per cent), the numbers of
projects in progress retrospectively claiming for tax relief in Year 0 and the proportion of
applications that would not have existed without the Games Tax Relief. Please also note that
these figures have not been adjusted for inflation, nor for different application dates through
the year. Here we depict the high case scenario as our base case, before conducting a
sensitivity analysis with medium and low case scenarios.
The high case scenario
The high case assumes a large number of applications, across a spread of platforms that
reflects the scale and composition of the current UK studio sector’s output on different
platforms (with production budgets over £100,000). We have forecast the production budgets
180
GIC estimates that 310 titles over the value of £100,000 were released between September 2009 and August
2010.
181
Development expenditure is based on a census conducted in 2008 and repeated in 2010. Indicative staffing costs
plus overheads were gained from a number of studios in 2008, from which we have estimated the total development
expenditure of British studios.
182
Please note these figures are rounded to the nearest million.
53
of applicant projects by calculating the average expenditure on each of a range of major
video games platforms, and then weighting the number of projects based on the platform
specialties of British studios. We note that average development budgets on some platforms
(Wii, PC and high-end console) have been falling since 2009 due to efficiencies of scale and
technology re-use. This scenario uses the following weightings:
The high case scenario is costed as follows:
Number of projects applying: Our high case scenario forecasts that each year between
230 and 260 projects will apply183, with between 92 and 104 projects (40 per cent)
successfully passing the cultural test as defined in this document. As it is proposed that the
scheme will apply to projects in mid-development as well as new development projects, we
have estimated a one-off Year 0 sum that comprises applications for tax relief on
development costs incurred up to the introduction of the Games Tax Relief, as well as new
projects starting in Year 1. We estimate that some companies experiencing failed applications
in year one will not try again, resulting in a temporarily reduced number applying in Year 2.
However, subsequent years will see the number of applications gradually rise as studios get
to grips with the approval criteria and application process. Similarly, it is reasonable to
assume that a number of speculative projects designed exclusively for the tax credit will apply
for a Games Tax Relief in the UK. We acknowledge that the lack of precedent makes the total
number of applicant projects very difficult to forecast accurately at this stage, but we have
assumed that 80 per cent of British games will apply.
Total production budgets of applications: In France, the first year of their games
production tax credit scheme saw the combined production budget of applicant projects
exceed the projected annual development expenditure by all French games studios184.
183
These averages use the results of the French tax break as a guide. In 2007, the French authorities announced
that 45 projects out of 120 applications were successful in winning up to €40m (£35m) over 2 years with an average
credit value per project of €890,000 (£765,000).
184
Studios are assumed to have speculatively put in applications for games that might not otherwise have been
planned.
54
However we are proposing less generous applicability criteria so the proportion will be lower
185
. Correspondingly, our high case scenario forecasts that Year 1’s applicant production
budgets represent 108 per cent of total UK development expenditure in 2010 but this
proportion will fall to between 97-8 per cent of total UK games development expenditure in
subsequent years186, once the criteria become better understood by applicants.
Number of successful projects: The proposed cultural test resulted in the successful
applications of 44 per cent of the sample group of video games, which percentage has been
benchmarked against the French acceptance rate in year 1 (37.5 per cent). We have taken a
40 per cent success rate for these calculations.
Total production budgets of applications: This is simply a function of the percentage of
successful projects.
Annual cost of the Games Tax Relief to government: We have listed the project
lifetime costs, rather than the annual costs, in each year but assume that applicants will make
annual applications for every product they are seeking to secure the tax relief for. In practice,
we expect the bulk of the Games Tax Relief’s costs to be incurred by games with 18-24
month production schedules, which will result in two applications and two tranches of
payment per title. As previously defined, the proposed measure would provide three different
levels of relief (20 per cent, 25 per cent and 30 per cent) of 80 per cent of qualifying
development expenditure. The estimated costs have been weighted according to the levels of
relief and the production costs on different platforms, as proposed elsewhere in this report.
Sensitivity analysis
Clearly these numbers could fluctuate significantly depending on number of applicants, any
adjustments to the levels of relief depending on project size or any changes to the scoring
thresholds and weightings should Government want to support a higher or lower proportion
of titles or number of developers. The Games Tax Relief could also trigger faster growth than
anticipated, particularly in larger publishers (some of whom have substantial annual
development budgets), which could result in a larger number of bigger applications. However,
we have to assume sensible maximum thresholds based on the relative proportion of
projected development expenditure. We provide here a low and medium case sensitivity
analysis by changing some of the key variables as follows.
Low case scenario
The low case assumes a lower number of applicants, with lower production budgets than the
high case. Lower numbers of applicants would be encouraged by the governing agency
working with studios to ensure that only the strongest applications are put forward. This
scenario uses the following weightings:
185
The total production budgets of applicant projects are forecast to represent 108% of the projected UK annual
development expenditure in 2011 (see Chapter 3 Estimated impact of the games tax relief on the UK studio sector).
In comparison, total production budgets of applicant projects in France in year 1 of their tax credit scheme
represented roughly 108% of annual French games expenditure in 2009.
186
See Chapter 3 Estimated impact of the Games Tax Relief on the studio sector for projected increases in
development expenditure with a Games Tax Relief.
55
In this scenario many studios are again dissuaded from applying in year 2 after unsuccessful
applications in year 1, but will slowly increase the numbers of applications from year 3
onwards. The overall production value of games applying for the Games Tax Relief is
between 49-56 per cent of the projected total annual expenditure187. The low case scenario is
costed as follows:
Mid case scenario
The mid case assumes more project applications on higher budget platforms than the low
case. This scenario uses the following weightings:
The overall production value of games applying for the Games Tax Relief is between 72-84
per cent of the projected total annual expenditure188. The mid case scenario is costed as
follows:
187
See Chapter 3 Estimated
development expenditure with
188
See Chapter 3 Estimated
development expenditure with
impact of the Games Tax Relief on the studio sector for projected increases in
a Games Tax Relief.
impact of the Games Tax Relief on the studio sector for projected increases in
a Games Tax Relief.
56
Implementation issues
Overview
We set out in this section an overview of how we propose that the Games Tax Relief will be
administered and implemented. As noted above, we propose that the Games Tax Relief will
operate in a similar way to the Film Tax Relief.
Administration of the Games Tax Relief
As with the Film Tax Relief, an organisation will need to be given the responsibility of
administering applications on behalf of DCMS in assessing whether or not a particular product
passes the cultural test (i.e. a very similar role to that of the UK Film Council in connection
with the Film Tax Relief).189 The DCMS could assume this responsibility directly or empower
another organisation to do so. On balance, the best approach would probably be for DCMS to
administer Games Tax Relief directly. This would dispense with the need to establish a new
non-departmental body or quango.190
Although we are proposing that the Games Tax Relief will operate in a similar way to the Film
Tax Relief, it is important to recognise that the nature of interactive entertainment products
and services are very different to that of films. For the Video game Tax Relief to be effective,
it is therefore essential that the organisation with this responsibility has a detailed knowledge
of the nature of interactive entertainment products and services and the processes involved
in their creation and production.
Applications for the Games Tax Relief
General procedures
We anticipate that the process for making an application for the Games Tax Relief can be
very similar to the existing process for making an application for Film Tax Relief and will
therefore be as follows:
i.
It will be possible for a development company to apply for an interim certificate at
any time before or during the development of a product. An interim certificate will
confirm that the product passes the cultural test (based on the proposals set out in
that application) and will enable a development company to submit a claim for tax
relief to HMRC before the product is completed. An interim certificate will be valid for
189
For a film to be eligible for film tax relief it must qualify as British, by passing a cultural test administered by the
Department for Culture Media and Sport, or under an agreed co-production treaty. At the same time, 25 per cent of
the total production expenditure must be incurred in the UK. HM Revenue & Customs have a dedicated Film Tax
Credit Unit, which deals with claims for relief. In 2009, over the preceding 12 months, over 95 per cent of payments
were made within 6 months of the claim being received. See http://www.hm-treasury.gov.uk/press_83_09.htm
190
There is little public or political appetite to create new quangos. Indeed, the UK Film Council is one of a large
number of quangos being abolished.
57
3 years from the date specified in the certificate.
ii.
Once a product has been completed, the development company will make an
application for a final certificate. Once the development company has obtained a final
certificate, it will be able to submit a claim (or final claim) to HMRC. The development
company will need to make full disclosure on its UK Corporation Tax return. The
return that relates to the period in which the product is completed will clearly need to
include a final "true-up" calculation in order to verify the final levels of relief available.
iii.
In order to make an application, either for an interim certificate or a final certificate,
the development company will complete a form and then send that form together
with relevant supporting documents to the administering authority. This form can be
similar to the form that is used to make an application for Film Tax Relief, but
modified to reflect the cultural test applicable to the Games Tax Relief. As part of this
form, a director or secretary of the applicant will need to make a statutory declaration
to confirm that the details given in the application are correct and provide a strong
disincentive to providing inaccurate or misleading information.
iv.
The administering authority for the Games Tax Relief will consider the application and
decide whether or not the product passes the cultural test and, if it does, issue the
appropriate certificate. It would clearly be important for the administering authority
for the Games Tax Relief to be sufficiently well resourced in order to process
applications promptly and we would anticipate that this should ideally be no longer
than 21 working days. We understand that the UK Film Council normally aims to
process applications within 21 days of receipt of a completed form, but that due to
the high number of applications they are receiving they currently estimate this to be
28 working days.
v.
If the administering authority believes that the proposed product does not meet the
cultural test, the development company will have a right to make representations to
the administering authority and, ultimately, a right of appeal to the Secretary of State
for Culture, Media and Sport.
vi.
We envisage that each product will be treated as a separate trade for the purpose of
the Games Tax Relief. Accordingly, we anticipate that a development company will
establish a separate entity for each individual product.
Letters of comfort
In addition, as with the Film Tax Relief, we propose that applicants can make a draft
application and receive a letter of comfort confirming that a product will pass the cultural
test. This will assist a development company that is seeking to secure a publisher partner or
other investment for a proposed development project (and therefore not yet at the stage
where the development company is able to apply for an interim certificate).
Some additional issues
i.
Calculation of core expenditure: As noted above, core expenditure will be limited
to the costs of actually producing the product. Accordingly, as with Film Tax Relief,
careful consideration will need to be given to the definition of core expenditure, in
particular in order to distinguish between early stage prototype work (i.e. work of a
58
speculative nature with the aim of determining whether the product is commercially
feasible) and the work on the full production of the product (i.e. work undertaken
once the decision to proceed with the full development of the product has been
made). We anticipate that there will be a greater challenge in drawing this distinction
in relation to the Games Tax Relief than there is in relation to films under the Film
Tax Relief given that video games development is a more continuous process than
film and does not fall into clearly defined stages (unlike film production which broadly
consists of pre-production, principal photography and post-production). However, this
is an issue that to a degree has been encountered in relation to the Film Tax Relief,
since the production of animated films generally does not fall neatly into the
categories of pre-production, principal photography and post-production and in some
respects has more similarities with a video games development project.
ii.
Definitions: As we mention above, some terms will need to be defined carefully,
and in particular what is included by the term "video game".191 (Under the Film Tax
Relief, a "film" is to some extent defined by the requirement that the film has to be
intended for theatrical release.) Similarly, there will need to be a definition of "Video
game Production Company" (being the development company responsible for the
production of the video game) and "Completion" (so that it is clear when a video
game has been completed).
iii.
Cancelled projects: A significant proportion of development projects get cancelled
during the development process (unlike films which are generally completed once the
decision to go into production has been made). We propose that the Games Tax
Relief can be claimed for products that are cancelled (just as Film Tax Relief can be
claimed for those films that are aborted).
iv.
Timing of relief: Under the Games Tax Relief, for a film to qualify for relief for a
particular accounting period, it must be intended, at the end of that period, for
theatrical release. If it is not so intended, then it cannot qualify for Film Tax Relief for
that or any subsequent accounting period (but any relief given for previous periods is
not withdrawn). This will need to be adjusted for the Games Tax Relief, given that
the development of a video game will, in general, take longer than the production of
a film. We would therefore propose that a claim for the Games Tax Relief can be
made during the development of the product, even if the product will not be
completed until after the accounting period in respect of which the claim is made.192
Some additional consideration will need to be given to the situation where a
development company does not surrender a loss, but instead takes an enhanced
deduction. We anticipate that restricted loss relief rules will need to apply, similar to
those in the Film Tax Relief, to ensure that losses are only properly utilised against
future "video game" income.
v.
Commencement of relief: There will need to be a commencement date for the
Games Tax Relief. In order to reduce potential distortions, we anticipate that the
Games Tax Relief will be made available to products that are commenced after the
191
This definition will be particularly important, not only in defining the scope of the Games Tax Relief but also to
ensure that it reflects the related definition that has been agreed between interactive entertainment publishers for
other purposes.
192
If it was felt to be necessary, it might be possible to limit this so that the product would need to be scheduled for
completion before the end of the accounting period following the accounting period in respect of which the claim for
relief is made.
59
commencement date, or that were commenced before that date but which have not
been completed by that date.
Implementation process
TIGA would be able to provide the services of a core team comprising leading representatives
from the UK video games industry and also appropriate legal and accounting professionals in
order to assist with the resolution of the necessary details and then with the preparation of
the draft legislation that would be needed to implement the Games Tax Relief.
Chapter 3: Impact Analysis
Introduction
This chapter analyses the likely impact of a Games Tax Relief for cultural video games by the
following methodology:
i.
ii.
iii.
An analysis of the results of research conducted by NESTA in August 2009 into the
impact of a tax credit for cultural video games, mapped against the key drivers of
decline identified in Chapter 1.
An analysis of the likely cost of a Games Tax Relief for cultural video games.
An analysis of potential negative market impact.
Positive impacts of a Games Tax Relief for cultural video games
In an earlier chapter we identified key trends and drivers affecting British studios. In this
section we will use data from a recent survey of 30 video games publishers, developers and
external financiers to assess the impact of the proposed Games Tax Relief for cultural video
games. The Time to Play survey, conducted by GIC between July – August 2009 on behalf of
NESTA, consisted of an interview programme seeking the perspectives of multiple
stakeholders including senior studio managers, senior publisher staff responsible for sourcing
video games IP and contracting to independent studios, senior publisher executives with
global agendas and, uniquely for a survey of this kind, the view from external finance
sources, including private equity, financial advisors and venture capital companies based in
the UK. The video games companies surveyed employed nearly half of the UK’s entire studio
headcount. Highlights of the results are reprinted here with permission from NESTA. Full
details and analysis of the results of the survey are available in the Time to play Report at
http://www.nesta.org.uk/areas_of_work/creative_industries/assets/features/time_to_play.
Impact of a tax credit on the falling number of creative staff in British studios
Issue: Between July 2008 and September 2010, there was a 9 per cent fall in the UK studio
sector headcount, from 9,900 to 9,010 staff. The knock on impact was a loss of 890 jobs in
British studios and over 1,600 jobs indirectly supported by British studios. 2009’s Investing in
the Future projected a fall of 5 per cent, and the 2010 census shows the UK sector was
marginally worse than that projection.
Survey response: Although leading studios have seen growth in recent years, they are not
representative of the entire industry, particularly neither those studios that have folded nor
the majority of studios with weaker IP and smaller teams. However, the surveyed studios
projected a significant slow-down in growth over the next 2 years without government
60
intervention (which was borne out by the 2010 census which showed that most major
studios’ headcount either grew only marginally or declined), but with a tax credit for cultural
video games 100 per cent of studios projected definite or potential growth in headcount.
Impact analysis: The strong response from the surveyed companies, who represent nearly
half the UK’s creative workforce, suggested that the Games Tax Relief would have a positive
impact on the number of video games development staff employed in the UK. Without a tax
relief, has been shown to result in an ongoing decline in British studios.
Impact of a tax credit on the closure of internal UK studios by global publishers
Issue: With global publishers employing the largest teams of developers in the UK and
roughly half the UK’s development headcount, the closure of recently acquired UK studios by
global publishers had a huge impact on the UK studio sector between 2008 and 2010.
Although for reasons of confidentiality we cannot list the publisher studios which closed or
downsized between 2008 and 2010, shrinking publisher studio headcount was responsible for
a significant proportion of the fall in overall headcount.
Survey response: 80 per cent of senior publishing executives interviewed said that
publisher funding for British video games will increase with the advent of a tax credit, with
the remainder saying growth was possible.
Impact analysis: Global investment decisions by senior publishing executives are driven by
cost and quality, and the survey demonstrates that these executives expect that they would
look more favourably on the UK after the advent of the Games Tax Relief.
Impact of a tax credit on the competitiveness of British video games studios
Issue: High development costs make British studios less competitive than their colleagues in
subsidised territories. Sales of British-made video games are gradually losing ground to South
Korea, China and, in particular, Canada.
Survey response: The two leading trends identified by respondents were overseas subsidies
and the effect of an accelerating brain drain to subsidised territories. Most respondents did
not portray a tax credit as solving the industry’s problems with competitiveness. However 97
per cent of respondents believe that a tax credit would provide a substantially positive
impact, with many forecasting headcount growth, new investment and increased innovation.
70 per cent of publisher and external finance company respondents thought that a tax credit
would make the difference between investing in and passing on a video games development
opportunity in the UK. 3rd party development managers unanimously said that a tax credit
would increase their companies’ funding of externally contracted development.
Impact analysis: The Games Tax Credit for some video games development projects
cannot compete with nearly 40 per cent of all production costs (or, as one interviewee put it,
one in three jobs in Quebec’s studios) being subsidised by the government. While overseas
subsidies clearly exercise British companies, the majority of funding sources of British video
games development (both publisher and external finance) clearly think that a tax credit will
make a difference, while those making the decisions about which studios to contract to (3rd
party development managers) were unanimous in a tax credit triggering greater expenditure
in the UK.
Impact of a tax credit on falling levels of new finance for video games
Issue: Private financing for global video games companies fell 22 per cent in 2009 vs. 2008
whilst for UK video games companies it collapsed by 92 per cent. The ability of UK video
61
games companies to access external finance was already limited but has now been more
severely curtailed193.
Survey response: 75 per cent of independent studios surveyed thought that a tax credit
would increase their likelihood of seeking new external financing. Finance sources
unanimously said that a tax credit would boost the scale or number of investments in British
video games projects. The majority of external finance sources consider current opportunities
to fund British video games companies as limited by scale, traditional commercial models and
the lack of network gaming and direct to consumer propositions (in which some investors are
solely interested). Half of the respondents would change their attitude towards investing in
British video games companies, while an additional third were already positive. Some
reported the potential for new financial vehicles for funding video games arising following the
introduction of a tax credit.
Impact analysis: External finance sources are clear that a tax credit is a measure that,
while not forming a major decision criterion for investors, will drive increased investment into
British video games companies. In addition, it seems likely that a tax credit will trigger new
funding vehicles, particularly more activity in the completion bond market, with the overall
impact of raising video games companies’ access to finance194.
Impact of a tax credit on encouraging British studios to adopt more sustainable
models
Issue: British studios have begun to adopt more sustainable business models facilitated by
the maturation of the network video games market and a high rate of start-ups has been
observed in the last 12 months. However, Britain is still conspicuous for having few major
network video games companies (with some notable exceptions) compared to other
territories, particularly those in Europe.
Survey response: All independents thought that a tax credit would assist them in adopting
new, more sustainable online business models and go direct to consumer.
Impact analysis: This finding is one of the most encouraging and important of the survey,
revealing both that leading British studios understand the potential of network gaming and
will use the Games Tax Relief to access these new channels but also tying neatly into the
finding that a fair proportion of external finance sources would only consider investing in such
new business models.
Impact of a tax credit on the ongoing decline of original British IP
Issue: The decline of new original British IP deprives the UK of a vital currency that
represents the engine of the video games industry. In addition, the falling levels of Britishmade IP are disproportionately affecting the British public, who buy nearly four times as
many British independently developed video games as US consumers do.
Survey response: Nearly three quarters of executives thought that original IP development
had slowed or stopped in the last 5 years, and more than half thought the trend would
continue over the next 5 years. Two thirds of studios thought that a tax credit for cultural
video games would definitely help original IP development, and 75 per cent of independents
were positive about the measure’s impact on IPR retention.
Impact analysis: Original IP creation, one of the cornerstones of the British studio sector,
appears still to have been falling but studios expect it to rise following a tax credit.
193
Source, GIC 2010.
Some organisations are reporting an increase in the growth of Completion Bonding (which is extensively used in
film production). These are now being applied to video games by organisations such as International Film Guarantors
and Film Finance. These schemes facilitate bank loans to companies engaged in video games production. The
indications are that the Games Tax Relief could result in new business models and structures being developed.
194
62
Impact of a tax credit on threats to the video games eco-system
Issue: A high quality video games development ecosystem is one that comprises a healthy
balance of independent developers and publisher studios, but with license development
projects forming over 50 per cent of an average independent studio’s revenues, falling levels
of original IP, and the competitive and uneven international playing field, the eco-system is
still unstable, despite rising levels of start-ups.
Survey response: Respondents portrayed a tax credit as stimulating all sides of a viable and
sustainable video games development eco-system, triggering new start-ups to challenge the
status quo, strengthening the vital publisher studios case for growth in the UK, and assisting
the competitiveness of independents.
Impact analysis: To be sustainable in the long run, and retain the attributes that have
made the UK a success story historically, the industry’s proposed solution of the Games Tax
Relief for cultural video games is considered by funding sources and studios alike to assist in
rebalancing the sector’s eco-system.
Recruitment issues are long-term and still acute despite initiatives
Issue: British studios still find recruitment difficult and subsidies have resulted in a growing
exodus of senior, experienced and high quality staff from UK studios to studios in
government-subsidised territories195.
Survey response: One in three survey respondents thought the tax credit could perform a
critical role in helping to stem the flow of talent, investment and value overseas, over half
thought a tax credit would help level the international playing field and half thought a tax
credit would help the whole UK sector to grow.
Impact analysis: Other policy levers are required to assist more materially with this issue
but a number of respondents believe that a tax credit can only assist British studios in
resisting brain drain.
Estimated impact of the Games Tax Relief on the studio sector
Growth scenario with a Games Tax Relief
The Games Tax Relief is thus expected to result in growth. This is supported by the
respondents to the NESTA survey. 100 per cent of studios projected definite or potential
growth in headcount. Its financial impact196 is projected using estimates based on current and
historic data, as follows, assuming that the Games Tax relief is instituted in 2011:
195
. TIGA survey in 2009 found that 23 per cent of UK game development studios had lost staff to foreign countries in
the preceding 12 months and of these 72 per cent said that their staff went to Canada. When correlated against job
losses over the same period, these figures imply that the brain drain accounted for more than half of lost jobs to the
UK studio sector.
196
Please note these figures are rounded to the nearest million, which may produce minor discrepancies in
reproduction.
63
The gross impact of the Games Tax Relief is to create 1,300 new studio jobs and 2,400 new
indirect jobs.
Decline scenario without a Games Tax Relief
Without a tax relief, the UK studio sector is projected to experience a continued decline of 5
per cent per annum over the next 5 years. This is driven by the significant chance of further
studio closures and downsizing as the console cycle continues the downward momentum
already evident in 18 months of falling retail games software sales. In the midst of the downcycle, games companies begin to plan for the next generation of console hardware, which
triggers major investment and major risk aversion. However this next generation is still
unannounced, suggesting the down-cycle will be longer than past generations. This downturn
has been widely profiled by analysts with sharp falls in 2009197 and, to date, in 2010198.
Indeed, some analysts199 see retail as having reached its historical peak in 2008, to which it
will never return. The 2009 NESTA survey found that respondents expected to reign back on
formerly strong growth with most expecting only modest growth. As these most successful of
British games studios outperform the remainder of the market, this indicates that the decline
was expected to (and subsequently did) continue through 2010 and onwards. Major impacts
were felt when larger studios closed down, the worst of which was independent Realtime
Worlds, with the loss of 230 staff, over 60 per cent of the important Dundee cluster.
As such, GIC projects the UK studio sector to fall as it has done for the last 2 years by
roughly 5 per cent per annum as follows:
Without a tax relief, current rates of decline would persist, leading to fall in 2000 studio jobs
and 3,700 indirect jobs supported by the studio sector. This equates to a 24 per cent net
contraction between 2010 and 2015 (contributing to an aggregate 30 per cent fall since
2008).
Net economic impact
The Games Tax Relief is expected over 5 years to create 1,328 new jobs in the studio sector
and save a further 2,038 jobs under threat from decline. The Games Tax Relief would also
create 2,427 indirect jobs and safeguard 3,726 indirect jobs under threat from the decline.
Including indirect jobs, the net impact over 5 years is that a total of 9,520 jobs would be
created and saved. By 2015, a tax credit could result in increasing investment by games
studios of £138,000,000 and deliver a saving of £293,000,000 that would have been lost
without the Games Tax Relief. Over the same period, direct and indirect annual tax revenues
will increase by £126,000,000 and the tax relief will deliver a saving of £267,000,000
197
Chart Track data shows that UK games software sales were down 15% during 2009 compared to 2008. NPD data
shows that US games software sales were down 11% during 2009 compared to 2008.
198
Chart Track data shows that UK games software sales were down 10% during the first half of 2010 compared to
2009. NPD data shows that US games software sales were down 8% during the first half of 2010 compared to 2009.
199
GIC 2009, Screen Digest, Edge Sept 2010 issue.
64
threatened by ongoing decline. GDP contribution will also increase by £307,000,000 and the
measure will result in a saving of £649,000,000 in GDP contributions that would have been
lost without the Games Tax Relief. For ease of use, here is the combined net economic
impact:
We also note that many of these new studio jobs will be level 4 jobs (i.e. graduate level or
the vocational equivalent).
Methodology
Our methodology in calculating these figures is as follows. We have merged top down and
bottom up analysis to create these projections. We started with the NESTA survey responses
from employers of nearly half the UK’s workforce. We factored in the census data from 2008
and 2010 where most UK studios told GIC how much they would grow under good conditions.
These were then tempered by GIC growth models based on observing historic rates of decline
and growth in the UK industry since 2000, and GIC’s historic headcount estimates that take
into account both growth in surviving studios’ headcount and the loss of jobs from failing
studios. We could not use the scoring exercise to help with this estimate because, although
65
we can estimate the projected cost, we cannot estimate what proportion of projects would be
triggered solely by a tax credit, as opposed to those that would already be underway. The
ceiling is defined by the maximum growth experienced between 2006-2008 by the UK studio
sector at the fastest growing stage of the most recent console cycle. The UK’s development
headcount declined by 4 per cent in 2009 and 5 per cent in 2010, which seems to set the
floor for decline at 5 per cent in any given year. Tax and GDP estimates rely upon and are
proportionate to the economic impact analysis conducted by Games Up? and Oxford
Economics in 2008200.
Timing
In calculating the above figures, we have assumed that the Games Tax Relief is instituted by
2011 rather than delayed much further, stemming the ongoing decline in the sector and
halting the loss of more jobs and tax revenues. We project the Games Tax Relief will trigger
modest growth in year 2 and more strong growth in year 3 and onwards.
Proportion of annual development expenditure rebated
The Games Tax Relief is expected to rebate a total of 12.9 per cent of total UK video games
development expenditure in years 0 and 1, and then 7.7 to 7.8 per cent from year 2 onwards.
The relief will thus take a fairly modest proportion of overall expenditure on video games
development in UK studios.
Return On Investment
Over 5 years (using our high case scenario), the ratio of cost versus return on the
government’s investment in a Games Tax Relief is projected to be £194m in tax relief versus
£431m in both new development expenditure by industry as well as ‘saved’ development
expenditure that is projected to be lost due to the ongoing decline. The positive impact on
tax receipts (including new and saved tax contributions) is projected to be £394m, whereas
the positive impact on GDP contributions (including new and saved GDP contributions) is
projected to be £956m. Over 9,500 direct and indirect jobs will be created and saved from
the ongoing decline, which yields a cost per head of £20,378 for the measure over 5 years.
This is balanced by the average UK games studio job delivering over £100,000 to the UK’s
GDP per annum, and supporting nearly 1.83 indirect British jobs.
Goldilocks analysis
TIGA has sought to strike a balance in the proposed levels of tax relief. In particular, TIGA
has aimed to avoid proposing levels of tax relief that are so high that they exceed the
benefits generated: i.e. they fail to deliver value for money. Equally, TIGA has not proposed
levels of tax relief that are so low that they will fail to have a positive impact on the video
games development industry. TIGA has instead adopted a common sense approach, trying to
balance the different factors and propose reasonable levels of relief, based on the following
rationale.
•
200
Not too high: TIGA is not asking the UK Government to match the levels of tax
relief and fiscal support available in Canada. In fact, the levels of relief proposed in
this report are a fraction of those available to games developers in Canada. We have
also looked at the first tranche of French applications, whose proposed expenditure
amounted to more than the total French annual development expenditure. This
means that lots of speculative projects applied, resulting in roughly half of all French
The economic contribution of the UK games development industry (Oxford Economics, October 2008).
66
games projects being supported by the tax credit, with 15-20 per cent of total French
games development expenditure rebated. Our projections for the value of the tax
credit in relation to overall sector expenditure are more modest from year 2 onwards
(once the first year’s round-up of existing projects is included). Value for money is
harder to estimate but the above return on investment demonstrates good returns
broadly proportionate with other schemes. These comparisons and the modest and
historically proportionate growth we project should demonstrate that the proposed
level of relief is not too high.
•
Not too low: The NESTA survey201 shows that a 20 per cent tax credit will deliver a
range of positive impacts. The NESTA survey was independent. Therefore the
detailed tier options proposed in this report were not put to the studios surveyed in
NESTA’s submission to the Government. However, the tiers of relief proposed by
TIGA clearly offer more assistance to smaller productions than a blanket 20 per cent,
which we fairly assume would be welcomed by studios. NESTA’s survey did get
detailed feedback from industry on a 20 per cent tax credit along the lines of the film
tax relief. Some respondents actually calculated the real and positive impact of a 20
per cent relief on game pitches, explicitly saying it would definitely help UK studios.
The NESTA survey strongly showed that a 20 per cent tax credit would drive
headcount growth overall, could trigger external investment, halt company
liquidations and so on. We have proved that the 20 per cent level worked for film in
the UK and appears to have triggered headcount growth in French games studios.
The much lower level of relief provided by R&D tax credits has been shown to have
minimal real impact and has not stemmed the decline in headcount in the UK games
development sector. Thus, we have demonstrated by these comparisons that the
proposed level of relief is not too low.
Analysis of the distorting impacts of a tax relief
Here is an analysis of the impact that the Games Tax Relief could have on the market for
video games development and video games publishing in the UK and further afield.
The European Commission position
First, there is the important precedent from the European Commission on tax credits for
cultural video games202:
...the Commission believes that the aid would not have the effect of reinforcing the
market power of the beneficiary companies, or preventing the dynamic stimulation of
operators on the market but, on the contrary, it would increase the variety of the
products offered on the market. We can, therefore, conclude that the distortion of
competition and the effect on commerce are limited, so that the overall balance of
the aid is positive. The tax credit for the creation of video games is, therefore,
compatible with the common market, on the basis of article 87.3.d) of the treaty...
201
Time to Play (NESTA, August 2009). See http://www.nesta.org.uk/time-to-play-2/
Clause 105, Commission Decision of 11.XII.2007 concerning State Aid C 47/2006 (ex N 648/2005) tax credit set
up by France for the creation of video games (The Commission of the European Communities) Brussels, 11.XII.2007,
C (2007) 6070 final.
202
67
Impact analysis: As we are proposing a nearly-identical tax credit to that available in
France, we believe that most of the argument around the legality of the proposed measure
has already been won with the European Commission.
Market power of European video games publishers and developers
The top ten publishing companies in the UK video games market by share of retail in 2007
were Japanese, North American and French companies. Out of the top ten, none could be
described as being dominant
203
, European (French) companies represented just over 15 per
cent of market share, and none of them derived from the UK
204
.
Market shares for UK 2007 retail video games market
205
Country
of origin
Retail market
share
USA
23.3 per cent
Japan
6.2 per cent
USA
6.0 per cent
France
5.6 per cent
USA
5.3 per cent
Atari
France
5.2 per cent
Nintendo
Japan
4.6 per cent
Ubisoft
France
4.5 per cent
THQ
USA
4.3 per cent
Take 2
USA
4.3 per cent
Company
EA
Sony Computer Entertainment
Microsoft
Vivendi Universal Video games
Activision
The development market had smaller concentrations of market power in individual companies
in 2007. Below is the retail market share of the top 50 best-selling studios in the UK in 2007
broken down by country of origin. The largest studio by market share was Nintendo which
206
took 12.6 per cent of the top 50 best-selling studios . Studios based in the UK won a 13 per
cent market share by value at retail in the same study. As such, no one studio is dominant.
Market shares for top 50 best-selling studios by country of origin 2007
Studios’
location
US
Japan
Canada
UK
France
Sweden
207
Market
share
37 per cent
32 per cent
14 per cent
13 per cent
2 per cent
1 per cent
203
Dominance >25 per cent of the market.
Following the acquisition of the UK’s largest publisher, Eidos, by Square Enix of Japan in 2008, the UK has only
one small-medium publisher in Codemasters.
205
Source: GfK/ChartTrack 2008.
206
Source: Develop 100 2008.
207
Source: Develop 100 2008.
204
68
208
in December 2008 concurs: “The available evidence does not suggest
A study by NESTA
the existence of market power, either at the publisher or developer level”.
Impact analysis: We maintain that due to an absence of market power amongst video
games publishers and developers, the low market share of specifically British video games
publishers, there is little chance that the Games Tax Relief will distort the European or global
market for video games publishing or development.
Impact of the tax credit on the national studio sector
The UK produces between 250-350 video games titles per annum of all kinds excluding online
and mobile video games. We estimate from new data in the 2010 census that 310 titles with
production budgets of over £100,000 were released in the 12 months to September 2010.
1,500 new video games are introduced to the market each year in Europe209. The proposed
measure would assist between 60-80 titles from year 2 onwards, from an applicant pool of an
estimated 200 projects. The proposed cultural test will ensure a maximum success rate of 44
per cent, as described elsewhere in this report. This is a relatively small proportion of the
overall number of titles produced in the UK, and released in Europe. The qualifying budget
represents 80 per cent of the total development budget, and, with a credit of 20-30 per cent
of qualifying expenditure (depending on the budget), the proportion of the UK’s total
development expenditure that will be financed is less than 8 per cent from year 2 onwards.
Impact analysis: By supporting modest proportions of the budgets of a limited percentage
of the total number of titles produced in Europe per annum, the Games Tax Relief should
result in minimal distortion in the European studio sector.
Impact of the tax credit internationally
The video games publishing market is global, and the video games development market is
fragmented between the major territories of USA, Japan, South Korea, Canada, UK, France,
Germany and China. A tax credit in the UK is unlikely to result any raised level of
competitiveness inside Europe, but is a measure designed to make European studios more
competitive versus studios based in subsidised territories such as Canada and Korea. The
level of assistance currently available in France (20 per cent of the total production budget)
and the proposed Games Tax Relief (between 20-30 per cent of eligible expenditure) are
modest compared to the most heavily subsidised territory, Canada, where the average relief
is between 30 and 40 per cent of all studios’ production costs. Tax assistance and grant
funding are available in France, Germany, Finland, Sweden and across all Nordic territories,
while comparatively no major support exists in the UK. Therefore, this measure would raise
the base level of support for UK studios to no more than the levels available in other
European countries.
Impact analysis: As the level of support is the same as other European territories but below
non-European state assistance for video games development, this measure is primarily an
outward facing measure beyond the borders of the European Community rather than
between other Member states. As such its impact is expected to be minimal.
British developers and publishers see little potential for market distortion
When asked in the 2009 NESTA video games survey that ran parallel to this report’s
production whether there were negative impacts of a tax credit for cultural video games, the
respondents were not concerned. 87 per cent of respondents thought that there would be no
208
http://www.nesta.org.uk/assets/Uploads/pdf/Programmes/market_failure_presentation_NESTA.pdf
Clause 37, Commission Decision of 11.XII.2007 concerning State Aid C 47/2006 (ex N 648/2005) tax credit set up
by France for the creation of video games (The Commission of the European Communities) Brussels, 11.XII.2007, C
(2007) 6070 final.
209
69
negative impacts, with concerns primarily about the administration and eligibility of the tax
credit, rather than any directly negative market impact.
Impact analysis: Practitioners questioned explicitly on the subject of a tax credit for cultural
video games expect there to be no negative market impact if administered correctly.
The Games Tax Relief is designed to help all kinds of studios
The proposed measure has been chosen to represent video games budgets with three
different levels of relief, which increase as the production budget falls to a threshold of
£100,000, below which level of application administration costs would become too high for
the governing body, therefore representing poor value for money. Start-ups working on lower
value but higher growth platforms (such as online games, social network games and larger
scale mobile games) need to be encouraged; mid-sized, more established independent
studios working on mid-high tier platforms (such as handheld, PC and console) need
assistance in competing for externally contracted development work from global publishers;
and the larger publisher studios and major independent studios working on big budget
platforms (such as consoles) need to justify their continued location in the UK versus
comparatively cheaper studios in other territories.
Impact analysis: The relief is designed to help stimulate almost the entire games
development eco-system, in effect all but the smallest of UK studios, whose development
budgets are under £100,000 and who are better assisted via more targeted measures such as
the government’s prototype fund210. Higher levels of relief for games with smaller budgets
assist smaller studios (predominantly independents) more, with 25 per cent to 50 per cent
more relief than that available to larger, better funded studios. With permitted budgets of
between £100,000 and £3,000,000, a wide range of online games businesses will benefit if
they pass the cultural test. Equally, a wide range of online games genres can be envisaged to
pass a cultural test, and there is no inhibition for games that intend to utilise any of the latest
business models in use in the network games business, including microtransactions and
virtual goods.
Impact of a Games Tax Relief upon the consumer
The Games Tax Relief is set at levels which have only a marginal impact on British consumers
due to the modest level of support proposed, the low proportions of total annual
development expenditure rebated by the measure and the low percentage of overall titles in
development that would be supported (under 20 per cent of the total titles in development in
the UK in any given year). British consumption of British-made independent games has been
shown to be higher than that by consumers in the USA, but the total percentage of such sales
is still under 10 per cent of the total UK retail market, so any modest increase in availability of
such games is still unlikely to distort the market. In the NESTA survey, some British
developers said they would produce more cultural games, but others disputed that cultural
games could not be commercially successful, a common assumption in this area. The
European Commission noted that the increased production of cultural games was one
objective of the French tax credit for cultural games211.
210
Any relief should be seen within the portfolio of measures designed to assist British games development, rather
than as a panacea. The minimum sum available from the proposed relief is £24,000 (30% x 80% x £100,000). The
Abertay prototype fund delivers grants of up to £25,000. This means that smaller studios have options for projects
under the £100,000 threshold.
211 “(91) A tax credit based on the criteria described in section 5 of the present decision would favour the
production of video games with a cultural content over games which are purely for entertainment, by reducing the
production costs of the former. We can, therefore, conclude that the measure is likely to have a sufficiently
encouraging effect to achieve its aim.” Commission Decision of 11.XII.2007 concerning State Aid C 47/2006 (ex N
648/2005) tax credit set up by France for the creation of video games (The Commission of the European
Communities) Brussels, 11.XII.2007, C (2007) 6070 final.
70
Impact analysis: The proposed levels of relief are modest with assisted titles representing
less than 20 per cent of the total titles in production. Some games’ shelf lives mean that more
titles are available at any given time for purchase so such supported titles would represent
well below 20 per cent of the total in any given year. Although it seems likely that more
cultural games would enter production, the NESTA survey was equivocal about the potential
commercial impact of more cultural titles. Significantly, the European Union sees the
increased production of cultural games as a positive impact of such a tax credit.
Conclusion of market impact analysis
We maintain that the proposed Games Tax Relief will result in very limited distortions of
competition due to the wide range of measures already available, few disadvantages to other
companies due to the absence of market power of eligible UK or European publishers or
developers, and a minimal effect on commerce, due to the small number of projects and
companies the measure will be able to assist financially.
Chapter 4: Response to the Exchequer Secretary to the
Treasury
Response to the Exchequer Secretary to the Treasury
On November 8th 2010 David Gauke MP, the Exchequer Secretary, made a series of claims
about TIGA’s Games Tax Relief proposal during a debate in the House of Commons.212
1)
Displacement
The Exchequer Secretary to the Treasury stated as follows:
“The research commissioned by the industry implicitly assumes that the investment
incentivised by the subsidy is entirely additional to the UK economy. In reality, it is likely that
the relief will displace investment from elsewhere in the economy, so the net impact on total
UK investment could be limited. For example, it is possible that such a tax subsidy would
divert investment from more productive sectors to the detriment of the productivity of the UK
economy as a whole.”
The Minister’s projections are not backed by any data. Moreover, the Minister appears to
misunderstand how the vast majority of UK games development is funded. He also
underestimates the industry’s level of productivity. Additionally, the Minister’s stance is
inconsistent with government funding for other similar knowledge-economy industries where
the UK is both as productive and as close to the top of the global industry as the UK’s games
development industry is to the global industry.
•
212
Games development funding sources: British games development is heavily reliant
upon financing by global games companies. 42 per cent of British development staff are
directly employed by companies and studios owned by major global games publishers,
none of whom are wholly British-owned and most of whom are US, Japanese or French
owned. These staff account for 53 per cent of total UK games development expenditure
(a total of £221 million in 2010). In addition, nearly 50 per cent of British independent
http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm101108/debtext/101108-0002.htm.
71
•
•
games studios wholly rely upon work for hire contracts from these global games
publishers (an additional £98m in 2010). In total, up to 76 per cent of investment in
British games development is derived from global companies. The remaining 24 per cent
is self-funded by British games companies, who largely rely upon existing cash resources
and, to a much smaller degree, private investment to fund development. Although no
formal studies exist to quantify British-owned companies’ use of debt, the unusual nature
of games development, current limitations in UK SME’s access to debt finance and GIC’s
15 years of experience of games company financing lead us to believe that debt financing
of UK games development is extremely limited.
Diversion: The diversion argument makes another erroneous assumption about how
companies fund games development, namely that investors in games decide either to
invest in British games or to invest in other British services. The reality is that only an
immaterial proportion of global games companies’ investment focuses on non-gaming
initiatives and few major games companies globally have diversified into other media or
industries. The major exceptions are Disney and Warner Brothers, but both companies
ring-fence games development expenditure in interactive divisions rather than draw down
funding from a central pool available to other UK projects. Many global games publishers
retain sales, marketing and customer support units in the UK, but the scale of these
operations does not rely upon the degree of games development that takes place in the
UK, and global games publishers sell products made in multiple different territories. So,
given the singular source of investment that drives 76% of games development in the
UK, any assertion that investment in games development would be diverted away from
other industries is unsupported by the facts.
Additionality: The UK is experiencing another kind of diversion – that of funding away
from British games development towards subsidised and overseas games development
territories. Some UK studios are putting expansion plans on hold or are investing abroad.
One Scottish developer is opening two studios outside of the UK. If Games Tax Relief had
been introduced he would be tripling the size of his existing Scottish studio. In other
words, indigenous UK developers are beginning to shift investment overseas. At the same
time, inward investment is at risk. Inward investment in games development (much like
that for film production) is a multi-billion pound sub-sector that is highly sensitive to fiscal
support measures. The UK Government explicitly uses the Film tax credit to win
investment in film production in the UK and the lack of a games production tax credit has
been shown repeatedly to damage the UK’s ability to win a greater share of this valuable
inward investment, which, through headcount decline and continuing studio closures by
global publishers, is falling. Much as Warner Brothers has put £100m into Leavesden
Studios, global games publishers do invest in or acquire studios located in other
territories, and a wide range of data, much of it reported here, demonstrates that such
investment, which can be generous when fiscal support is available, would deliver
significant, new and additional investment to the UK were such measures adopted213.
213
Danny Bilson, executive VP for core games at one of the world’s largest games publishers THQ, said 19/10/2010
in Gamesindustry.biz he would build a UK super-studio with Government support but the final decision comes down
to economics. "Well, it's all about money," he said. "The talent in the UK is extraordinary - I actually spent a couple
of years of my career when I was helping out with the early days of the Harry Potter franchise with EA, I worked
closely with the team there on the first three games. I got to know a lot of teams in the UK - it's one of the greatest
talent centres in the world. So there's no issue with talent; it's just economics - and if the government finds subsidies
there, absolutely we would build out. We have a studio up in Warrington that's an excellent studio, working on our
Xbox Live/PSN digital games, so we do have a studio in the UK... but I'm sorry, it's all about money at the end of the
day. And talent - but the UK has always been, and still is, one of the greatest talent pools in the industry... there's
phenomenal talent out there… If it was in Manchester we'd be building out there. If it was in Lyon, we'd be building
out there. We're a global company with a global audience” Source: http://www.gamesindustry.biz/articles/2010-1019-thq-wed-build-a-uk-super-studio-with-govt-support 19 10 2010.
72
•
•
Unlike TIGA’s arguments, the Minister’s arguments about additionality are grounded
neither in fact nor in hard data.
The Patent Box: The Government announced at the beginning of December that it will
go ahead with a tax incentive called the patent box. This tax break will provide a 10 per
cent corporation tax rate on income derived from patents held in Britain. Since patent
applications are dominated by the pharmaceutical and biotechnology sector, in effect the
Patent Box is a sector-specific tax break estimated to cost £1.1 billion over two years214.
Few video game developers take out patents.. The Government's decision to press ahead
with the Patent Box demonstrates the complete inconsistency of the Treasury with
respect to business taxation. Why is it right for the Government to retain the Film Tax
Credit and now to introduce what is in effect a sector specific tax break for the
pharmaceutical industry and biotechnology sector but oppose Games Tax Relief for the
video games industry? When pressed repeatedly in the House of Commons, the
Chancellor described the Games Tax Relief as poorly targeted; yet the Institute of Fiscal
Studies suggested that the Patent Box “…will lead to a large reduction in UK tax receipts
from the income derived from patents, is poorly targeted at promoting research, will add
complexity to the tax system, and it is far from clear that any additional research
resulting from the policy will take place in the UK.”215
Net impact on UK investment: No data has been provided by the Minister or the
Treasury to back up his assertion that the net impact on total UK investment would be
limited. In contrast, there is a wealth of data about the return on investment created by
territories that offer such fiscal measures for games and other media, some of it provided
herein, but also in several other reports216. Canada achieves a 2:1 return on investment
from global games companies that are exclusively or almost exclusively focused on the
games industry and which would not have invested in other Canadian industries without
tax breaks for games production. The UK film industry, which relies upon similarly mobile
but global sources of finance, estimate that its headcount would fall by 75% were its tax
credit to be abolished. Nor have we seen any data to support the contention that film’s
cultural tax credit is diverting investment from more productive sectors of the British
economy. On the contrary, much of Warner Brother’s investment in Leavesden studios
has already had significant net impact on the UK economy217. We note that this deal was
reportedly218 assisted by the Culture Secretary Jeremy Hunt meeting Warner’s Chief
Executive in Los Angeles just before the investment was announced to reassure Warner
Brothers that the film tax credit would remain in place. We assume the Culture Secretary
would argue that the film tax credit has significant net impact on the UK economy, but
the Government’s position appears to deny that would occur for games. Nevertheless,
senior executives at global games companies have repeatedly and publically said that the
UK would receive a greater share of their development investment were a tax credit to be
214
“Who will benefit most from the patent box? The distribution of patent holdings is highly skewed; the majority of
patent applications are filed by a small group of firms. For example, if we look at patent applications made by UKheadquartered firms at the EPO in 2005 (the most recent year for which complete information is available), we see
that the four firms with the largest number of patent applications (GlaxoSmithKline, AstraZeneca, Unilever PLC and
BT Group PLC) accounted for over a fifth of all patent applications filed by UK firms – see Table 10.1. The 10 largest
firms together, which represent only 1% of UK firms applying for a patent in 2005, accounted for one-third of patent
applications. The share of patent income received by the largest firms is likely to be even bigger.” Source: Chapter
10 Support for research and innovation, 2010 Budget Analysis, Institute of Fiscal Studies November 2010,
http://www.ifs.org.uk/budgets/gb2010/10chap10.pdf
215
Source: Institute of Fiscal Studies November 2010 http://www.ifs.org.uk/publications/5362
216
Playing for Keeps DTI/UKTI 2007; Raise the Game, Nesta 2008; State Aid for Digital Games and Cultural Diversity:
A Critical Reflection in the Light of EU and WTO Law, NCCR 2009; Time to play Nesta 2009.
217
Warner’s involvement in Leavesden over the previous decade has resulted in 40% of inward investment in British
film, or £1.9 billion. Source: Thomson Reuters 08 11 2010.
218
Source: Guardian 09 11 2010.
73
•
instituted219. The experience of Canada is that a tax break for games production will lead
to an increase in net investment.
Productivity: The Minister dismisses a tax credit for games production because it would
divert investment from other more productive sectors of the UK economy. Yet video
games development is comparable in productivity and GDP contribution with other high
value, knowledge economy industries220:
All these other industries receive fiscal support from government, whereas video games
development does not. The UK space industry receives £270 million per annum from the
civil space budget221. UK Film receives a tax credit and additional funding worth £256
million per annum222 and UK aviation benefits from multi-billion pound contracts via the
Ministry of Defence, RDA grants and other government programmes223. The video games
development workforce has a highly specialised skillset, high education levels and high
average salaries. It has high growth and revenue potential in a market whose global sales
have grown 16% between 2008-2010 through the recession. It is unclear what higher
productivity industries from which investment would be diverted due to the existence of a
games tax relief that the Minister had in mind.
2)
Employment
In the same debate in the House of Commons the Exchequer Secretary to the Treasury
stated:
“It [i.e. TIGA] does not appear to recognise that…. highly skilled graduates would not remain
unemployed if they did not find work in the video games industry. We are therefore sceptical
about the TIGA analysis.
•
General graduates: The games development industry has never claimed that any
highly skilled graduate who fails to find a job in a games studio would remain
unemployed. We do know that graduates will go to great lengths and spend significant
sums to train for paid games development work. One of Scotland’s most successful
mobile games developers, Digital Goldfish, was founded by two entrepreneurs who
worked part-time in paid jobs in supermarkets and hospitals for 5 years after graduating
to fund the release of their first game224. Train2Game, the distance learning company,
teaches games development skills to UK graduates wanting to win a job in games
development. It currently has over 3,400 UK students, which is twice the total 2008
output of all the UK’s dedicated games degree courses225. Its recently announced
219
Nesta’s 2009 survey revealed strong support from these companies for a games tax relief.
Sources: The Economic Impact of the Film industry (Oxford Economics 2007), The Economic Impact of the UK
Space Industry (Oxford Economics 2010), The Economic Impact of the Aviation Industry in the UK (Oxford
Economics 2006), The Economic Impact of the UK Games Development Industry (Oxford Economics 2008).
221
Source: http://www.ukspaceagency.bis.gov.uk/About-Us/8012.aspx
222
Source: UK Film Council Statistical Yearbook 2010
223
Source: http://www.publications.parliament.uk/pa/cm201011/cmselect/cmbis/memo/561/gai03.htm
224
Source: http://www.bbc.co.uk/news/technology-11378852
225
“UK universities produce a growing number of graduates from games-specific degrees. In 2008 there are likely to
have been 1,700 graduates from 81 games-specific degree courses run at 46 universities. However, only 18% of
220
74
•
•
Incubator scheme and Student placement program is more than 10 fold oversubscribed226. Demand is clearly significant.
Games graduates: Despite less than 20 per cent of these degree course graduates
winning work in games companies in 2007, the number of courses and graduates from
these popular courses has continued to increase in recent years. It is indisputable that a
career in games production is a popular choice for many students, who are attracted by
high average salaries (£31,964 in January 2010227) and the allure of working on a
medium most have grown up with and value higher than any other media. This is all the
more remarkable since graduate recruitment has been falling in parallel with the
continuing decline in games development headcount.
Redundancies: If the Minister is claiming that jobs lost to British games companies will
not result in a net loss for the British economy, we refer him to the several data sources
already cited that demonstrate the demand for and mobility of the British games
development talent pool:
o According to a 2009 survey, 23 per cent of UK game development studios had
lost staff to foreign countries in the preceding 12 months and of these 72 per
cent said that their staff went to Canada228. Brain drain thus accounted for
hundreds of high value, experienced staff leaving the UK for subsidised
territories, some of which roles would not have been replaced.
o There is continuing demand for, but shortages of, experienced games
development staff in all games development clusters including those with fiscal
support from local or national government and the few which have experienced
growth in recent years229.
o These clusters have targeted British games talent with personal incentives which
was the joint top concern of major UK studio executives surveyed in late 2009.
o British games talent is highly mobile and open to work overseas, as
demonstrated by a survey which found that 67.6 per cent of UK development
staff surveyed would be attracted to work overseas230.
o A large proportion of experienced UK games development staff already work
overseas and during a time of decline, positions vacated by staff leaving the UK
to work in overseas games studios are not guaranteed to be replaced.
o Staff that are made redundant from UK studios do not necessarily gain as well
paid jobs in the UK, nor do they necessarily stay within the UK. To give one
example, a senior member of a recently closed games studio told the authors of
this report: “Most of the staff we unfortunately had to let go have found jobs, but
the majority are not in this country any more, and spread as far afield as
Australia, Canada, Singapore, and Norway. In fact, over three quarters of the
staff who were made redundant are no longer working in the UK. Most of these
were contacted by foreign recruiters or the companies themselves within 5 days
of the studio closure. This shows that the hunt for talent is very proactive by
foreign companies and they understand the value and worth of UK trained talent.
These countries do not have a shortage of resident talent available, but they
were pretty much aware of events at our company as they unfolded, so must be
games specific graduates in 2007 succeeded in winning jobs in the industry”. Source Raise The Game, GIC/Nesta
2008.
226
Source: Clive Robert, Train2Game, November 2010.
227
Source: Develop Salary and career survey, January 2010.
228
Source: TIGA survey, December 2009. See also State of the UK Development Sector (TIGA, 2010).
229
PP 6-7 of this report.
230
Source: Develop Salary and career survey, January 2010.
75
keeping a very close eye on the UK dev scene, and obviously prize the talent very
highly.”
3)
Economic efficiency and complexity in the tax system
The Exchequer Secretary to the Treasury also stated in the debate in the Commons:
“It is question of economic efficiency and where we believe the role of Government can be
best used-and that is in providing a favourable climate for businesses.”
•
•
•
•
•
231
Cancellation of games tax relief attacked by leading inward investors: The
games industry’s response to the Government’s plans for providing a favourable climate
for business has been universal. The CEO of the world’s largest games company by
revenue and employment, Activision Blizzard, who has just announced the sale or closure
of one of the UK’s largest games studios (Bizarre Creations), is emphatic. Bobby Kotick
described in the FT231 the harm that the cancellation of UK tax credits had done to its
investment in UK development “For us to continue to invest in the UK there needs to be
an incentive provided for us to do so... The talent pool in the UK is among the best in the
world for what we do. But we really need to see some more incentives.”
Decline of a world-leading British digital industry: As British games studios
continue to decline in scale, the Government’s refusal to support a great British digital
industry threatened by overseas government support appears to be deliver little in the
way of economic efficiency and much more in the way of reduced tax revenues, falling
employment and declining GDP contributions. Where other governments have
demonstrably benefitted from fiscal stimulation and attracting global companies in one of
the most revenue-generative industries in media today, the Government’s strategy, while
providing some fringe benefits, seems unlikely to deliver significant inward investment
from, nor provide the favourable climate for business overtly requested by, global games
companies.
Consistency: The Exchequer Secretary to the Treasury attacked the viability of a tax
relief for cultural games development as inconsistent with its approach towards helping
all sectors and the economy as a whole rather than specific sectors. A week later, the
Prime Minister reaffirmed the government's commitment to sector-specific tax relief for
the film industry. All the Minister’s arguments would appear to be valid for games but
invalid for film, a position whose consistency is at the very least debatable. It appears
clear from Jeremy Hunt’s intervention with Warner Brothers that the Culture Secretary is
willing to fight to win investment in British film but refuses to do so for British games.
Time frame: In both editions of this document, TIGA has assumed a period of at least
12 months to prepare the ground for launching a new relief based on the existing Film
Tax Credit, which would include notification to and approval from the European
Commission. The Exchequer Secretary to the Treasury, when mentioning ‘such a short
period’, seems to assume that TIGA’s proposal expects an instant solution without
offering assistance in preparation, both of which assumptions are mistaken.
Complexity: While TIGA’s proposed measures do not underestimate the administration
required for such new legislation, the Exchequer Secretary to the Treasury appears to
ignore the considerable precedent already established by Britain and France for similar
schemes. The European Commission has already agreed the principle and institution of a
tax credit for cultural games production in France, which represents a precedent for any
http://www.ft.com/cms/s/2/92b5e4c6-839d-11df-b6d5-00144feabdc0.html#ixzz15fHHMNEs.
76
British application and concerning which we are unaware of any further claims of market
distortion. The European Commission’s assessment process took 18 months to hear
representations from both sides before assenting to the French request for such a State
Aid. Such representations appear extremely unlikely to be repeated and therefore a
British proposal for a cultural games development tax relief would be significantly
accelerated through the Commission. It is also reasonable to assume that any Bill for a
Games Tax Relief would utilise significant proportions of existing legislation and
administration for Film. The games industry has offered assistance to Government from
associated accountancy and legal firms who were instrumental in setting up the Film Tax
Credit and whose assistance would help ensure that its early flaws were not repeated.
4)
Good value for money
The Exchequer Secretary to the Treasury stated as follows:
“We do not think that such an intervention would represent good value for money for the
Exchequer or be conducive to providing a simple and competitive tax system.”
In fact, TIGA’s Games Tax Relief would bring a twofold return on inward investment, create
or safeguard 9,520 direct and indirect jobs at a cost of £20,378 over five years and would
stimulate inward investment by global games companies into the UK.232
The cost of inaction
Starting with the Playing for Keeps report for DTI/UKTI in 2006, multiple reports and surveys
concerning the games development industry including two censuses and other surveys and
reports from NESTA (amongst other bodies) have laid out the looming threat to British games
development jobs from overseas subsidies. The decline in British games development jobs
started in 2008 and has been accelerating since then. Over 200 more jobs (in Liverpool and
Nottingham233) have publically been put under threat of redundancy in the 12 weeks since
the 2010 census was completed. Government arguments about the lack of viability of tax
credits for games development appear to fail to pass their own criteria since Government
argues in favour of near-identical tax credits for Film. Inaction will simply result in further falls
in creative headcount. The industry must brace itself for more decline while British consumers
buy more games made overseas and the global games industry continues to grow.
Chapter 5: Conclusions
Challenges
The UK studio sector faces some significant challenges over the coming years, challenges
with impacts more acute than the industry projected in 2008 in the Games Up? Campaign and
TIGA projected in August 2009. Staff loss in the sector is accelerating (from 4 per cent
between 2008 and 2009 to 5 per cent between 2009 and 2010), which has resulted in falling
investment in the UK, lower tax revenues and a decline in the sector’s contribution to UK
GDP. As these jobs are lost, TIGA research has shown that many British-trained creative staff
232
Return on Investment section on p65.
In November 2010 Monumental Games announced cuts to an undisclosed number of jobs (http://www.developonline.net/news/36339/Staff-axed-as-Monumental-loses-project) and 200-man Bizarre Creations has been put up for
sale or closure by Activision Blizzard (http://www.develop-online.net/news/36396/Rumour-200-jobs-go-as-Activisionaxes-Bizarre).
233
77
newly made redundant will leave the UK for subsidised territories, particularly to the most
subsidised territory of all, Canada.
At the heart of these challenges is the issue of cost and the impact of rising government
subsidies for video games development overseas, which distort the market, degrade the
competitiveness of our outstanding studios, siphon staff from the UK’s world-class talent pool
to subsidised territories, damage the UK’s ability to create original IP and hold the UK studio
sector back. Despite rising numbers of start-ups since 2009, the industry eco-system – which
has historically relied upon thriving independent developers and major publisher studios as
well as a constant flow of start-ups for the UK’s world-class status – is still destabilised by
ongoing decline.
Solutions
TIGA has long argued for fiscal stimuli to assist the studio sector, and each year of inaction
since 2008 has resulted in serious declines in creative British jobs. TIGA still proposes both
the rationale and the methodology of such stimuli. The most effective measure is a tax relief
for cultural video games. The UK studio sector is not asking for hand-outs to match the huge
subsidies in Montreal where government pays the salary of one in three studio staff. Nor is it
simply asking for a kind of bribe to stay in the UK, since studios have shown they will remain
here, despite the threat of continued decline. The Games Tax Relief represents both a handup for the sector to help it fight the twin threats of rising costs and falling skills, and also a
means of stimulating new investment, employment growth and innovation within UK studios.
An emphatic cultural argument
In calling for such a measure, it has been necessary to show the cultural value that some
video games exhibit, which we have emphatically demonstrated. We have charted the roots
of video games as one of civilisation’s oldest cultural activities and the invention of the world’s
first video game in Britain in the 1950s. We have traced the evolution of British excellence in
Britain’s first digital medium from the early 1980s to today, where a British-made video game
overtook all other media to become the fastest-selling entertainment product ever of its time.
Video games can have many attributes of other cultural products such as reflecting and
commentating on society, creating iconic characters, art, design, narrative and humour. They
can also convey science and have strong potential for hard and soft learning. They have
introduced new artistic disciplines such as video games design and animation. Video games
often reflect other creative media such as film, television, music and literature.
Video games have impacted widely across UK culture
Nowhere is the cultural impact of video games more apparent than in the extent to which the
British public have embraced this new medium, so much so that a generational change in
British media consumption has occurred over the last decade. Video games, now the most
important entertainment medium for under-16s and leading the entertainment expenditure
amongst families, are at the forefront of this change. Unsurprisingly, other media are being
strongly influenced by video games, whose influence is found from film to literature, from
music to design, from museum exhibitions to academia. Again and again we find that video
games can have significant cultural impact.
A wide range of governments, supranational organisations and arts funding bodies either
explicitly or implicitly support the contention that video games can be cultural artefacts and
78
the European Commission resoundingly found in favour of the French tax credit’s proposed
cultural exemption in 2007.
The most appropriate measure
The right measure for supporting the British studio sector is TIGA’s proposed Games Tax
Relief. Modelled upon the film and Games Tax Reliefs in the UK and France, British-based
companies would submit projects to an experienced body to test against TIGA’s cultural test,
which scores a project against a range of cultural and geographical indicators. Our scoring
exercise resulted in 44 per cent of sample projects passing the cultural test.
The proposed measure is designed to provide relief to a wide range of companies, with tiers
of relief pegged to production budgets for different video games platforms. In this way, the
video games studio eco-system is stimulated to provide more assistance to smaller studios
and start-ups, while helping independents become more competitive for externally contracted
development, and strengthening the case for publisher studios to conduct blockbuster
development in the UK.
Our Goldilocks analysis shows that the proposed measure is proportionate to the
requirements of the sector. The measure’s cost is modest compared to the government’s
other supportive measures for industry, representing under half of that provided to the film
sector, despite British-made video games grossing only 20 per cent less than British-made
films in 2008234. The support is not designed to match higher levels of support in other
countries, representing under a third of that provided to studios in Montreal from year 2
onwards.
The Games Tax Relief is expected over 5 years to create 1,300 new jobs in the studio sector
and save a further 2,000 jobs under threat from decline. It will result in increasing investment
by games studios by £138,000,000 and deliver a saving of £293,000,000 that would have
been lost without the Games Tax Relief. Over the same period, direct and indirect annual tax
revenues will increase by £126,000,000 and the tax relief will deliver a saving of
£267,000,000 threatened by decline. GDP contribution will also increase by £307,000,000 and
the measure will result in a saving of £649,000,000 in GDP contributions that would have
been lost without the Games Tax Relief.
Unlike Canada’s subsidies, the measure’s modest proportions and relatively small number of
projects supported will not have a distortive impact on competition in the video games
development or publishing markets.
Quantifying the Relief’s positive impacts
The highlights of NESTA’s 2009 survey of video games development, publishing and financing
companies demonstrate the potential impact of the measure. Collectively, these studios
employ nearly half the UK’s total creative headcount.
The respondents overwhelmingly welcome the measure, with all studios projecting definite or
potential growth with a tax credit, but flat or only modest growth without. Independent
studios unanimously stated they would use the tax credit to access new, more sustainable
business models and most indicated they would seek new financing. External finance
companies were unanimously positive about the potential for the tax credit to boost the scale
234
UK-made films grossed $4.2bn (£2.55bn) in 2008 versus UK-made video games grossing £2.03bn in 2008; 2009
Statistical Yearbook (UK Film Council), Raise the Game (GIC/NESTA, 2008).
79
or number of investments in British video games companies and most said they were more
likely to invest in UK video games projects with a tax credit. Publisher executives and those
responsible for contracting independent studios also reported that a tax credit would trigger
more investment in British-based video games development.
Thus, we have strong reason to believe that the Games Tax Relief is the right measure to
face the UK studio sector’s challenges, that it rests on a strong case for the cultural value of
some video games, that it would trigger growth in investment in UK video games, and
promote the UK’s world-class studio sector.
TIGA thanks all those associated with drafting this updated report and looks forward to
working with all political parties and other interested organisations to advance the case for
Games Tax Relief.
© TIGA - The Independent Game Developers’ Association Limited 2011.
All rights reserved. No part of this report may be reproduced in any material form (including
photocopying or storing it in any medium by electronic means and whether or not transiently
or incidentally to some other use of this report) without the written permission of The
Independent Game Developers’ Association Limited, except in accordance with the Copyright,
Designs and Patents Act 1988.
80
Appendix 1: Impact of Games Tax Relief on the Scottish
Video Games Industry
The contribution made by the Scottish video games industry to both the Scottish
and UK economy235
Scotland has produced some of the world's most successful video games including the Grand
Theft Auto, Lemmings and Crackdown series. This has reinforced Scotland’s image as the
home of one the world’s most important clusters of innovative knowledge economy
companies, and attracted employees from around the world to work on cutting edge creative
technology. The Scottish games sector is diverse, with companies working in games for
mobile, online, casual, educational and console markets.
The presence of a strong Scottish games industry strengthens the appeal of Scottish
universities, providing direct employment and business start-up opportunities for graduates in
suitable disciplines. The video games industry sustains a ‘digitally literate’ workforce whose
skills are valued in other sectors including health, financial services, education, film, TV and
music.
Scotland has 593 staff working in 47 games development, publishing and service companies,
representing 10.1 per cent of the UK’s total games companies and 6.6 per cent of the UK’s
creative headcount.
Scotland’s games development sector supports an additional 1,087 indirect jobs.
Annually, Scottish games companies are estimated to invest £27.5 million in salaries and
overheads, contribute £25.1 million in direct and indirect tax revenues to HM Treasury, and
make a direct and indirect contribution of £61 million to the UK’s Gross Domestic Product
(GDP).
What potential impact the decision to abolish Games Tax Relief will have on the
video games development industry in Scotland
Between July 2009 and September 2010, the UK’s games studio creative workforce declined
by 5 per cent. Scotland has suffered a deeper fall than the rest of the UK, due to the collapse
of Realtime Worlds. Scotland’s games development workforce has declined from 798 in April
2010 to 593 by September 2010, a fall of 25.7 per cent. Over the same period, Scotland’s
share of the UK developer headcount has fallen from 8.7 per cent to 6.6 per cent. Few of
these lost staff have yet been picked up by Scottish companies, with companies from other
UK regions competing fiercely for newly released staff. However, overall headcount falls
across the UK’s studio sector mean that it is inevitable that many of these lost jobs will not be
replaced by UK studios at all. High workforce mobility, demand for experienced staff (such as
those from Realtime Worlds) in other territories and high propensity for British creative staff
235
The figures in this section are based on a telephone survey of 75 per cent of Scottish games companies
commissioned by TIGA and undertaken by Games Investor Consulting (GIC) in August and September 2010. GIC
calculated the economic impact of the games industry based on Oxford Economics 2008 study of the games
development industry’s economic impact: The economic contribution of the UK games development industry (Oxford
Economics, October 2008).
81
towards relocating to games companies outside the UK means that many studio staff will
leave the UK altogether.
Some Scottish developers are putting expansion plans on hold or investing abroad: one
Scottish developer plans to open two studios outside of the UK over the next 12 months; if
Games Tax Relief was in operation the studio would be tripling the size of its existing Scottish
studio. There is a significant risk of a brain drain of talented game development staff leaving
for other countries.
Other things being equal, in the absence of Games Tax Relief, the decline scenario for the UK
studio sector projects that over the next five years a further 130 development jobs could be
lost and investment by games companies in Scottish jobs could fall by a total £19 million
(between 2010 and 2015) to £21 million per annum. Over the same period, the Scottish
games industry’s contribution in direct and indirect tax revenues is predicted to fall by a total
of £18 million (to £19 million per annum) and the industry’s contribution to GDP by a total of
£43 million (to £47 million per annum). Without Games Tax Relief it will be harder to attract
talent and investment to Scotland.
Conversely, estimates based on the growth scenario for the UK studio sector suggest that
Games Tax Relief over five years would create 90 development jobs, trigger £9 million in new
investment in Scottish development jobs by games businesses, fund 36 game projects, result
in a total of £8 million in new tax revenues and contribute £20 million to GDP.
If Games Tax Relief was implemented it would also forestall the predicted decline, so the net
position is that the tax credit could safeguard or grow a net 222 jobs, £28 million in
investment, £26 million in tax revenues and £63 million in GDP contributions. Games Tax
Relief would enable companies to take more risks and create more new and original titles.
The Games Tax Relief for Scotland would cost £12.8 million.
Appendix 2 How the Report’s statistics were calculated
At various points in the report we have described how these statistics have been calculated
but we include a single guide here for ease of reference.
Step 1: Census of British games development companies
In July 2008 and again in September 2010, GIC conducted a census of all known British
games companies including developers, publishers, publisher studios, service companies and
broadcasters with games divisions. The census was conducted by telephone and email and
reached 84 per cent of known British games companies. The census sought to discover the
following information from extant studios236:
•
236
Their full-time development headcounts (specifically excluding HR, admin, sales,
marketing and commercial staff, but including all creative staff including relevant
management, support, QA, engineering and production staff involved in developing
games for their own company or third parties). Companies working on non-games
projects were asked what proportion of their last 12 month’s work comprised games
development, and their headcounts were pro-rated accordingly.
Information that was given under condition of being published in aggregate form only.
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•
•
•
The number of part-time development staff (including contractors and freelancers but not
3rd party companies) on their books and an indication of how frequently this temporary
resource was utilised through the previous year (which averaged 25 per cent).
Where their company’s full time development headcount (as above) might be given a
growth scenario in 12 months’ time.
How many titles had been or were to be released in the 12 month period during which
the census was conducted.
GIC utilised its proprietary games company databases as well as data such as press releases,
publically available material, company profiles and competitors to scale the non-responding
companies’ headcounts, freelancer pools and release counts.
Step 2: Aggregate data on developer and release numbers
This 2010 census allowed GIC to scale the following indicators in September 2010, in
comparison to July 2008 census data and July 2009 estimates:
•
•
•
•
Total UK games studio full-time development headcounts.
Total UK full-time positions taken by freelancers.
2011 growth scenario for full time development headcount (taken as a maximum due to
the natural level of optimism amongst respondents).
Total number of games titles over the £100,000 budget level released in an average 12
month period. To reach this figure, GIC categorised studios by platform and type of game
they develop, and then excluded those developing smaller-scale games.
Step 3: Development expenditure estimates
The Treasury does not yet classify games companies in a separate category, nor do
companies publish actual development expenditure because that is commercially sensitive
information and so no direct data on actual company expenditure exists. GIC calculates
development expenditure estimates using the following methodology:
• In 2008 GIC gathered actual and detailed company data for average salaries plus
overheads from a small but representative sample of large, medium and small publisher
and independent studios.
• All companies from the 2008 census were categorised into the different classes based on
the sample, resulting in development expenditure estimates per company, a total UK
development expenditure estimate and subsequently a development expenditure
estimate per creative staff member.
• Development expenditure was then pro-rated for 2010 census data.
Step 4: Economic impact, GDP and tax estimates
In 2008, Oxford Economics (the same team of economists that calculate the economic impact
of and tax revenues deriving from the Film Industry for the British Film Council) was
contracted to calculate the games studio sector’s economic impact, utilising headcount,
development expenditure and other data from GIC and other sources. The resulting figures,
including direct, indirect and induced impacts such as multiplier effects, described the
industry’s economic impact in a publication The economic contribution of the UK games
development industry (Oxford Economics, October 2008). As all OE’s statistics were ultimately
based on headcount, GIC has pro-rated these 2008 figures to estimate the UK studio sector’s
2010 headcount figures.
83
Step 5: Growth and decline scenarios
GIC staff have gathered data on multiple facets of the global games industry including
monitoring games companies’ headcounts, investment in games companies, revenues by
platform and commercial model and many other types of data, since 1995. This data is culled
from well over 1,000 formal games company interviews and assessments of games
companies (including the two censuses), continuous formal and informal contact with
individual companies as well as access to published 3rd party analysis. This data has allowed
GIC to scale and project the industry’s growth and decline figures for a wide range of clients,
including six different UK Government departments, NESTA, trade bodies such as TIGA as
well as many games and media industry clients. GIC uses a wide variety of data, but primarily
the development headcount to provide the earlier projections for growth and decline
scenarios for the UK sector. The NESTA 2009 survey was particularly useful because the 31
respondents represented the employers of nearly half the UK’s workforce, and were in a
unique position to signal growth levels with and without a Tax Relief. Historical growth levels
(which have not exceeded 5 per cent per annum for over a decade) were used to establish a
growth limit, whereas decline levels are based on actual decline since 2008. GIC notes that
the UK’s headcount in 2010 declined to almost exactly the level projected in 2009.
Step 6: Estimating the cost of the Games Tax Relief
TIGA has proposed the levels of the Relief in the first and second editions of this report. TIGA
ran a sample group of 30 British titles (with the permission and data from their originating
studios) through the proposed Cultural Test to indicate how many titles might pass and
whether the criteria were effective. Since GIC first estimated the cost of the Games Tax Relief
(in the first edition of this report in 2009), we have run a census of British games studios and
uncovered new data on how many games titles are produced on each platform each year237.
We have used this to rebase our projections of the cost of the Relief between 2011 and 2015.
We have calculated the costs of the Tax Relief based on the new data on release numbers by
platform each of which have different estimated average development project expenditure238.
They are grouped into 3 sensitivities based on different numbers of applications for games.
We have benchmarked these figures against the overall video games development
expenditure in the UK. We have again used data from the 2008 French tax credit allocations
versus GIC estimates of overall French development expenditure as benchmarks, while
adjusting for the different scale and composition of the British studio sector239.
We note that the cost of a Relief is particularly difficult to estimate accurately due to the
number of variables, principally the lack of precedent in the UK games industry, the wide
potential variety in number of applications on different platforms with different costs, the
actual pass threshold of the cultural test in future legislation (which we have assumed to 40
per cent), the numbers of projects in progress retrospectively claiming for tax relief in Year 0
and the proportion of applications that would not have existed without the Games Tax Relief.
For more detail on how the Tax Relief was costed and estimated, please see the relevant
sections of this report.
237
GIC estimates that 310 titles over the value of £100,000 were released between September 2009 and August
2010.
238
Average development costs have been altered to reflect current average development budgets, which on some
platforms (Wii, PC and high-end console) have been falling since 2009 due to efficiencies of scale and technology reuse.
239
Please note these figures are rounded to the nearest million.
84

Investing in the Future: a Tax Relief for the UK Video Games

Transcription

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