Special Report: Crossing borders, part one

Part one of a two-part in-depth report into how Canada is making games development work--providing an attractive haven for publishers looking to lower development costs.

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The games industry is no longer a niche market. Top-selling games such as Halo 3, Grand Theft Auto: San Andreas, and The Sims franchise sell millions of copies, and worldwide the industry is currently estimated in excess of $30 billion. According to a report released earlier this year by PricewaterhouseCoopers, by 2011, the global gaming market will be worth $48.9 billion. The two biggest producers of games contributing to that figure are, not surprisingly, the US and Japan, but a new contender has come along to grab third place: Canada.

A view games developers are finding increasingly attractive?
A view games developers are finding increasingly attractive?

The huge surge in growth in the games industry in Canada has recently seen the country surpass the UK to become the third-largest producer of games, nudging old Blighty into fourth place. Last year, Canada generated 13.2 percent of Western retail revenue in the sector, compared to 12.4 percent in the UK, according to a study by Games Investor Consulting.

International companies such as Electronic Arts, Koei, Capcom, and Ubisoft have set up bases in Canada, and recent games including Tom Clancy's Splinter Cell Chaos Theory, Rainbow Six Vegas, Assassin's Creed, and Need for Speed: Carbon have been developed there.

In February, UK publisher Eidos Interactive announced it would be opening a new studio in Montreal with Stephane Dastous at the helm. The studio is currently working on Deus Ex 3. Homegrown companies include Silicon Knights (Too Human), BioWare (Mass Effect), and Digital Extremes (Unreal Tournament series).

As of October 2007, according to an ESA Canada report titled Entertainment Software: The Industry in Canada, the country boasts 260 entertainment software companies--some with multiple studios--which employ approximately 9,000 people and bring in an estimated CA$1.5 billion to CA $2 billion ($1.5 billion to $2 billion). By comparison, UK Trade and Investment has pegged its local industry at £2 billion in retail ($4.1 billion), with 150 companies employing 8,000 people. Down under, Australia's gaming market totaled AUS$1 billion ($876 million) in 2006, with 40 game companies employing 700 people.

What can other countries do to keep up? Should the US be worried? Can the UK claw back into third place? And how can emerging markets such as Australia get a look in this increasingly competitive market?

WHAT CANADA OFFERS

Canada has used R&D credits and tax breaks to attract games companies, and its foresight seems to be paying off. Canada is made up of 10 separate provinces (and three territories), which operate much like the different states in America, and as such each province offers a different deal for the games industry. For example, in Ontario, combined federal and provincial tax credits can cut the cost of CA$100 to less than CA$44.

Tax credits include The Ontario Interactive Digital Media Tax Credit, which refunds 30 percent of the costs for labour, marketing, and distribution of games created in Ontario, and The Ontario Computer Animation and Special Effects Tax Credit. This refunds 20 percent of the labour costs for computer animation and special effects, and there is also The Sound Recording Tax Credit, which refunds 20 percent on production and marketing costs of sound recording.

Darius Basarab, senior business consultant for Ontario's Ministry of Economic Development and Trade, says that the help doesn't end there, though, and that aftercare was a big part of the Canadian deal. He said, "Companies can come to us and say 'I don't know where the lawyers are, where to set up my office, how to connect into the network,' and we help them with that. For instance, we connect companies with the universities here, so they can draw staff from there."

Darius Basarab, senior business consultant for Ontario's Ministry of Economic Development and Trade.
Darius Basarab, senior business consultant for Ontario's Ministry of Economic Development and Trade.

As to why Canada chose to invest in games, Basarab believes that the country has always been forward-thinking, and that the foundations for the system of tax breaks and R&D credits started around 30 years ago. Basarab explains, "Ontario is a route into Hollywood. It's called the Hollywood of the North. A lot of movies get filmed here because it's easy to make it look like New York or wherever, along with all the bonuses like the tax credits and the cheaper health care. Digital media was a natural next step."

R&D CREDITS AND TAX BREAKS: DIRTY WORDS?

Naturally, many game developers in other countries have been lobbying their respective governments to offer similar R&D credits and tax breaks in their own countries. However, so far, it seems that no one is willing to copy the Canadian model. Margaret Hodge, minister of state in the UK's department for culture, media, and sport, told industry executives at the Entertainment & Leisure Software Publishers Association annual general meeting, "While we are a member of the EU and this gives huge opportunities to industry, it also does mean restrictions on state aid. As I understand it at present, it is those restrictions which rule out the Canadian model."

Furthermore, Hodge told Channel 4 that instead of considering the model for the UK, the UK government was looking to challenge the legality of the Canadian tax-breaks system through the World Trade Organisation. She told the British TV company in an interview, "We're looking at what Canada has done. We're not sure that what they have done sticks by the WTO rules on competition and will have to think about challenging what they are doing if they are, in our lawyer's views, breaching those rules."

However, developers aren't convinced that taking the issue to the WTO is going to be of any help. David Braben, chairman of UK-based Frontier Developments, and codesigner of classic space trading game Elite, said, "This is not a solution--if for no other reason than it will take five to 10 years."

Andy Eades, development director at fellow UK studio Relentless Software, suggested that discussions with politicians about tax credits are often over as soon as they begin. "I've noticed that the government listens for something that fits with their own strategy," Eades said. "If they hear something that echoes their own thoughts, then they will listen. Otherwise there is no point in talking. I've gone into meetings where I've been told that I shouldn't bother talking about R&D tax credits because it's a no-go area. Well, thanks a bundle!"

FRANKLY, MY DEAR, WE DON'T GIVE A DAMN

Philip Oliver, CEO of Blitz Games, a UK developer founded in 1990 that currently employs over 200 people in its Leamington Spa office, thinks that the UK government is sympathetic, to a certain extent. He said, "I think they do take the video games industry seriously. My experience has been that individuals in government do listen and are sympathetic, but nothing much ever seems to happen as a result of that."

Philip Oliver, CEO of Blitz Games.
Philip Oliver, CEO of Blitz Games.

Braben puts it another way. He told the audience at Nottingham's GameCity event last month that he believed, "The government has made it very clear that it doesn't give a damn about the games industry." When asked to expand on his point, Braben told GameSpot that, "As an industry we have largely slipped between the cracks until now as far as government is concerned. Certainly as an industry, we have a low profile within government; there is a lack of appreciation of the size and revenue generated by our industry, and a similar lack of awareness of the issues we face."

In Australia, the fledgling homegrown-games industry has also been denied support from the government compared to the film industry, a fact that has made many Australian developers angry.

In October, the Game Developers' Association of Australia received a response to its request for a 40 percent investment rebate for the games industry--the same deal as is currently offered to the country's film industry. The answer from the arts minister, Senator Helen Coonan, was considered by many to be a rebuff, "While games will not be eligible for the tax offsets announced as part of the Package, the introduction of a Location Offset is expected to have positive indirect flow-on effects for screen businesses, as digital and visual companies develop larger and more skilled workforces."

GDAA CEO Greg Bondar responded by telling GameSpot AU, "We have been trying to bring our situation to the attention of the Federal Government for a long time now, and this sort of response is disheartening to say the least. The Minister is not offering anything tangible to our industry."

The second part of this article can be found here.

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