Investment


The delegation from the Games Developers Association of Australia (GDAA) were assured that the government, should it be returned to office at the November 24 election, would review the eligibility of games for the tax offset scheme currently provided to the film industry.

The promise was made by Senator George Brandis, Minister for Arts and Sports at a meeting with industry delegates on the 2 November. PALGN quoted GDAA CEO Greg Bondar as saying “Senator Brandis was most sympathetic to our concerns and also undertook to ensure that a review of GDAA’s call for a 40% tax rebate for the games industry in Australia would be undertaken if the Coalition was returned to government.”

The coalition government’s move to reassure the games industry comes two weeks after the industry delegation met with Labor communications shadow minister Senator Stephen Conroy, who also was ‘sympathetic’ to the games industry and promised to recommend that the GDAA get a seat at the review of the 40% tax rebate for the film industry, stating that it was time ‘to recognise the contribution of the games
industry to the Australian cultural landscape, and the conomy as a whole.’ (see press release on GDAA website)

It is fortunate for the GDAA in one sense that the upcoming election has provided the political competition necessary to generate such promises and expressions of support. Yet it also means that the issue may be given more attention (albeit pre-election) than it otherwise would have, and both political parties are being careful in the construction of their promises. Offering to recommend the association is given a seat at the table of a review of the tax rebates gives very little tangible support indeed. Post election of course, both parties are likely to give less attention to games than they are to inflationary pressures and the odd $50 billion plus of additional spending that they have promised. Even within the portfolio, expediting the roll-out of broadband is bound to be a much bigger funding issue.

Rather than go for the cultural angle, I wonder if it would have done the industry any better to approach the Department of Industry rather than Communications. AusIndustry and InvestAustralia have previously taken considerable interest in the games industry, but surely this path has been tried already.

The UK Government has ruled out tax breaks for the games industry, although commended the industry on its progress.

An MCV article reports Minister for Culture Media and Sports Margaret Hodge let the industry know that the government sees them as leading the creative industries pack financially but that they would not be seeing and development assistance in the way of tax concessions.

The Minister’s comments illustrate the reluctance of governments to give funding to an industry that may be perceived negatively by certain interest groups, and in particular, vocal voters.

Games in the UK arguably face the same issues that the games industry in Australia faces (see previous posts ‘could triple‘ and ‘Aus govt turns down games‘). There is no ‘threat’. Games lack the unique ‘cultural’ identity, and as they are a fast growing industry, they do not display any ‘infant industry’ characteristics.

The obvious critique of such a policy stance is that it is conservative and reactive. Shouldn’t governments be looking for new, high growth, high skills industries to develop rather than propping up old and inefficient ones?

While the answer would seem a clear “yes”, one question in response could be “should governments promote any industries at all?”

Industries that can anchor themselves in a rhetoric of culture and national identity arm themselves with an effective shield, based on the premise that economics (and ‘globalisation’) does not discriminate between qualitative differences in cultural goods. (This is not necessarily the case of course). There are still (if I remember correctly) exceptions in WTO articles for cultural goods, which eases international pressure on states from protecting them.

A second question, is whether governments intent on supporting industries should be looking to unlock the institutional barriers to investment by clarifying IP, tax, and inward foreign investment legislation, and aim their spending efforts at capacity building by investing in human capital formation and infrastructure development rather that giving financial incentives to any one industry.

Following on from a recent post, the Game Developers’ Association of Australia believe that the industry could triple in size if the government introduces two key policies, according to an article in the Brisbane Times.
The first is offering the industry the 40 percent tax offsets/rebate and other funding schemes that is currently available to the film industry.

The second is the introduction of an R18+ rating for games (as movies have) that legalise the sale of games that do not make the MA15+ grade.

GDAA president Tom Crago says local games studios are flourishing but the industry is being driven by overseas funds and in turn the profits from Australian developed titles ultimately end up overseas:

“A better investment and regulatory environment here would see more Australian-owned intellectual property, more jobs in the local industry and increased exports of Australian games.”

– Tom Crago, GDAA President

Crago believes that it is “somewhat incongruous that this ‘cultural value’ argument should result in the film industry receiving maybe 1000 times the funding and support that the video-game industry receives.”

This comes despite games employing many of the same skilled workforce in areas such as animation and special effects that are used in the production of film and TV. “It’s a sign of a government behind the times in terms of how Australians are spending their leisure hours and dollars,” says Crago.

Many within the development community believe the Australian industry is at the crossroads and will soon lose most “work for hire” contracts to cheaper countries such as India and China, or countries with more government assistance, such as Canada and France. It needs to cement its future with original franchises such as the recent global hits, Heroes of the Pacific.

So does the government’s rejection of the industry’s request come down to a cultural argument? Is the government unwilling to support a healthy, growing industry (which could be a fair call)? Do they not see the ‘danger’ of this industry being lost to low-cost offshore production locations? Are they too short-sighted in the euphoric rise of the minerals boom being fuelled by China to care about supporting new and innovative industries? Or does support for games industry not secure the same number of jobs and more importantly, votes, than supporting the film industry will garner?

The fact that many games are not recognisable as “Australian” makes it more difficult to attract policymakers attention. There is nothing visibly and uniquely “Australian” that will be lost in the domestic market if existing games development shifts offshore. Despite this being a sticking point for their lobbying of conservative politicians, it is no doubt a big positive for the games they develop and possibly a reason why their work is well received by American and other overseas investors/publishers.

 

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Some data on industry size (sales) in Australia:

GfK data showed Australians spent more than $1 billion at retail on video games and console hardware in the 2006-07 financial year – $200 million more than cinema box-office takings.

Sales for the first half of 2007 were up 30 per cent, with more than 5.5 million games and half a million gaming consoles bought in six months.

Last month, Halo 3 enjoyed the biggest opening-day sales of any entertainment product in the world, easily eclipsing the likes of Spider-Man 3 and the final Harry Potter novel.

CEO of Synergy Media Eugene Kang has issued a press release detailing some of the challenges and opportunities in the Korean animation market. (see Newswire Today)

While the Korean animation market is facing rising cost for OEM production meaning production has become cheaper in other countries, Kang believes Korea is becoming a place for producers to turn to for original content.

Another challenge Kang mentions is new distribution channels such as IPTV, which make the distribution environment ‘obscure’. This is a valid point, given that while IPTV and other internet channels are often looked to as proliferating the number of channels thereby increasing distribution options, the audiences of each of these channels is likely to be small. Therefore unless they have a well established niche viewership that is attractive to potential advertisers, these channels are likely to be filled with low-cost content that has already recouped it production costs rather than new and original content that has yet to earn revenue. Because the channels are not yet established, the operators would be unlikely to pay pre-sales for a new production unless they have very deep pockets.

Further, despite the shrinking of the domestic market, due to its talent in producing high-quality animation and supportive government programs, it is an ideal country to engage with for co-productions.

This certainly seems consistent with my impression of this industry in Korea. While there seemed to be a lack of talented scriptwriters, the sophistication of many animation studios combined with the entrepreneurship of producers suggests that a co-pro that employed foreign writing talent with Korean design and technical skills may produce properties that are successful internationally.

The Game Developers Association of Australia (GDAA) have had their request for tax rebates for the film industry to be extended to investment in games developing rejected by Federal Government Communications IT and Arts Minister Senator Coonan.

In a previous entry, >>Howard Government to ‘bring Hollywood home’ through tax breaks<< I mentioned the new package the federal government was providing the film industry to ‘bring Hollywood home’ which included a 40 percent refundable tax rebates for film production.

The entry was also critical of the package and its ambitious goal:

…on first glance the tax incentives appear somewhat short-sighted or parochial on the policymakers front by exacerbating an artificial division between supporting “Australian stories” and allowing international films to use local locations and talent.

Quoted on Builder AU news, the Minister said in a written response to the GDAA:

“The Screen Media Support Package announced in the Budget has the potential to benefit screen content producers of all kinds. 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.”

Builder AU quotes GDAA CEO Greg Bondar saying the introduction of a rebate would have led to an additional AU$25 million in new investment into Australian-developed titles.

Raising the game developers’ interest in receiving government support to encourage investment, the aforementioned DISCONTENTS entry asked the question “why film and not games?”

On the game / film divide, one could argue that the film industry still has the justification of “culture” on its side, having enjoyed a long history of support from a cultural policy approach. Film and television policy has long supported the production of “Australian” programs to ‘protect our culture and national identity.’ Like nobody would watch Australian programs if there was not a 50 percent local content quota on free-to-air broadcasts? Games in contrast are rarely distinguishable as ‘Australian’ (and probably export better than films for that very reason!)

But if the goal of the film industry package is to increase economic growth, then games developers have a very cogent argument for the package being extended to them.

Undoubtedly, the Minister, and Treasury, would be anxious about extending tax incentives beyond the industry that the policy was originally designed for. Fears that such a move would open the flood gates to lobbying from any number of industry bodies claiming that they are no different to the industry sector receiving benefits. With this in mind, it is not all together likely that the tax incentives will be extended to the games sector if Labor wins office this election, despite their being “very sympathetic”.

It is an indictment on industry [industrial] policy that an industry should need to show it is in danger of dying – that capital will dry up and jobs will be lost, before a government offers any kind of support. One has to wonder whether if the Minister’s response would be any different if the GDAA showed that they were being undercut by programmers and developers in China and were set to lose x number of jobs without government intervention. That is not meant to be a statement advocating the propping up ailing industries, nor one that supports the indiscriminate provision of tax dollars to high-growth industries.

One does wonder though, whether the recent ‘lull’ in industry policy in Australia is not so much a sleeper as it is the conservative continuation of prevailing protection for inefficient industries.

It seems that more and more governments at the provincial/state level are increasingly interested in supporting game development.

Games are a high-growth industry and fit well into the rhetoric of ‘knowledge economy’ and ‘information economy’. The industry requires ‘creative’ inputs, relies heavily on advanced software and information technology, and employs a workforce that are well trained, (relatively) young, and with high discretionary income relative to some manufacturing sectors.

For jurisdictions with waning manufacturing industries, games represent a tool to create jobs, or at least absorb losses (on a net basis rather than directly) from declining industries. Reducing unemployment can not only be a key economic concern, but is often a key target of political campaigns and a tangible measure of a government’s ‘success’. As well as creating new jobs, it has the potential to reduce ‘brain drain’ as locally educated graduates move elsewhere.

A healthy or at least visible games industry in a jurisdiction can also be used by local and provincial governments in their location marketing activities to signal an attractive climate for potential investors. Having games in an industrial portfolio can give a regional economy ‘currency’ and suggest the existence of high growth industries, skilled and flexible workforce, and an advanced ICT infrastructure.

Not everyone looks at games as a desirable industry. Several stakeholders and interest groups such as those formed by parents view computer games, the products the industry produces, as having a negative impact on their children’s lives and on society in general. This prevailing view, while fading, is still present, and as these groups form a potentially large voting pool, governments are no doubt sensitive to their concerns and may not want to appear to be supporting the games industry directly by allocating funds.

The argument for games is seen in the U.S. state of Georgia, where tax credits have been approved for the industry, and local developers see that state as a potential facilitator for attracting both venture capital and major games publishers. The following quotes are from a Georgia Tech News Release.

Georgia General Assembly recently passed tax credits aimed at game developers and film companies that base production activities, such as editing, animation and coding, in the state.

Now, the stats on industry size:

• Sales of video-game software in the United States totaled $8.2 billion in 2004 – not far behind the music industry, which generated $11.4 billion the same year.
• By 2010, U.S. sales of video games are expected to grow to $15 billion.
• Video gaming is expected to generate more than 250,000 jobs by 2009, a 75 percent increase over the industry’s 144,000 full-time positions in 2004.

The industry helping the economy:

For one thing, the industry provides high-paying jobs that could help ease the economic sting of Georgia’s eroding manufacturing base.

with a skilled and flexible workforce:

According to ESA statistics, entry-level game developers earn $67,000 per year. Video-game development is high science, providing white-collar, intellectual jobs, Lowe notes. Today’s game development teams must have expertise in a wide range of skill sets, including 3-D graphics, architectural engineering, artificial intelligence, computer networking, databases, mathematics, physics, digital sound and more.

 

but graduates are leaving for other areas:

Strengthening Georgia’s video-gaming industry would not only improve the state’s economy, but also prevent brain drain. “If graduates are getting into video games, they’re more than likely relocating to the West Coast,” says GGDA’s Lowe. “That’s a tremendous loss of human capital for the state of Georgia. We’re spending tax dollars to educate students and then letting them go.”

So there is the argument for stemming the flow – or the leak – of talent that has been trained locally and moves interstate or overseas, either due to a lack of local jobs or being recruited by major firms. Not to advocate the view, but if education were fully self-funded, there would of course be no argument for reducing the ‘waste’ of tax revenue on walking human capital, and hence no argument to spend more tax dollars in order to retain it. The institute does see itself as a mecca for game training though:

“When game companies hire employees, Georgia Tech is one of three schools that they turn to,” says LCC’s Murray, noting the other two schools are Carnegie Mellon and the University of Southern California. “We’re supplying the next generation of game designers and we’re training them in a way that employers can’t get elsewhere.”

The need for (venture) capital and ‘anchor’ publishers:

To bolster gaming, Lowe would like to see more venture capital flowing toward video-game startups. That’s because the average cost of developing a video game today has soared from about $40,000 to $10 million during the last decade. “One of the things GGDA is doing is to help companies learn to speak the language of capital sources and learn how to approach venture capitalists,” says Lowe.

Attracting a major video publishing company would also be a plus, Lowe adds. Publishers have muscle in managing intellectual property – an area where small design studios typically are weak.

How much in money, tax concessions, subsidies, and other incentives would the State need to proffer to attract a major publisher though? Wouldn’t it be better for an industry-university collaborative effort to provide the first forays for publishers to set-up locally? If the training institute is the ‘selling point’ for Atlanta from a publisher’s perspective, then such an arrangement with Georgia Tech may provide them with better access to graduates.

But regarding industry structure, are local developers all independent? Or are any owned by major publishers? Are they currently doing sub-contracting work for major developers or publishers or are they producing their own IP? How many graduates find employment locally? How many start up their own firms locally? Answers to these questions are key considerations for policy formulation.

Nova Scotia’s film industry is to get the tax incentives it sought (see previous DISCONTENTS entry).

A news release from the Premier’s office on 13 September indicates that the industry will receive its requested 50 percent tax credits for films shot in Halifax, and a 60 percent tax credit on films shot in rural areas. Any company who films 3 or more films in a year will receive an extra 5 percent on top of the applicable rate.

The tax credits, calculated on the number of local residents employed, is aimed at boosting employment in the industry. According to the press release however, it is not just the tax credits that make the province attractive for filmmakers:

Nova Scotia is known for many positive attributes that help attract film production including experienced film production crews, talented actors, impressive locations and a solid infrastructure.

The release also quotes Ann Mackenzie’s analysis of the need for government assistance:

“A number of factors are coming into play this year including a short ACTRA strike, a stronger Canadian dollar, and more attractive incentives in other jurisdictions. We do not want to lose our position as the fourth largest film centre in the country, a position we have held for the past ten years.

David MacLeod, chair of the Nova Scotia Motion Picture Industry Association believes the increased tax credits will allow the film and television industry to be “intensely competitive and ensure employment for hundreds of Nova Scotians.”

There is no mention of making ‘Canadian films’, no policy drive for local companies to retain the copyrights for the productions being made. Are there any data on the numbers of foreign (including U.S.) versus Canadian productions shot in Canada disaggregated to the provincial level?

Tax credits for labour might keep a certain number of locals employed and technically trained, but just how sustainable is that? Does it encourage or enable these employees to eventually make their own commercially viable productions? Or does the model lock the industry into a fee-for-service model indefinitely?

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