Leveling the Playing Field

Back at the 2008 Develop Conference in Brighton, a lovely beachside city just an hour south of London with a thriving game development community, I got into a bit of a shouting match with Chris Deering, a long-time Sony alum and key participant of the Games Up? initiative. He was on a panel discussing the plans and progress of Games Up?, a short-term, industry-led effort to lobby the British government for tax breaks to the game development industry, as well as address the skill and staff shortages in the country.

Deering essentially admitted that the chances of succeeding were nil. Still, he said, it was the right fight to fight, and they trudged forward, mostly on principle. I accused them of wasting resources and being myopic to the areas and initiatives over which they had control. I also called them lazy and argued that they were using the tax break fight as an excuse, an obfuscation to avoid real work on other initiatives. Let’s just say I didn’t make any new friends on that panel.

Aside from the reality that getting a tax break approved is so unlikely, what’s particularly frustrating is that the lobbying paints the industry’s challenges, a massively complex ecosystem of issues, into a single silver-bullet solution. There is no certainty that changing one variable in the system will have the effect we hope for, or even produce an effect similar to tax breaks implemented in other regions. So many different levers can effect change; pulling on just one or two of them is unlikely to result in much success. And industry lobbyists and politicians apply some very dubious logic from time to time when determining which of those levers to throw: Some countries, for example, earnestly believe that if they could get EA to set up a studio in their region, they would be able to build a booming game industry. It’s not uncommon for governments to pile countless resources into these efforts, the equivalent of employing a fishing rod to land a whale – and usually with similar levels of success.

Look more closely at the U.K.’s Games Up? initiative and you find an effort largely born from a sense of inequity: that developers in other countries have an unfair advantage, and that Games Up? would work to level the playing field for U.K. studios. There was even a failed attempt to challenge the legality of tax breaks in Canada, the current poster-child for such incentives, via the World Trade Organization.

To get a better sense of the vibe on the ground, I polled 20 thought leaders and studio heads from across the U.K. Their responses were mixed to say the least. Barely half felt that the tax breaks were needed and would have a positive impact. About a quarter were outright opposed to the idea of chasing the government for a tax break, and felt that it was simply not needed. The remaining quarter were all over the map.

Looking deeper into the anti-tax break camp, we see a group that is extremely proud of the British game development scene and wary of coming across as a charity case or an industry in “need.” In fact, looking at some of the numbers from 2008, the game industry contributed £1 billion to the U.K.’s gross domestic product, £419 million in tax revenues to the Treasury and supported 28,000 jobs (10,000 of which are directly in production). Plus, they point to the existing R&D tax credits that studios have only recently begun to leverage.

So, why is it that a majority believe in the need for a tax break? Again, many will point to Canada as a country with generous incentives. But is the sense of an unfair advantage justified?

While the true economic impact of industry-specific tax breaks on a given country or region is beyond the scope of this article, we can explore some broader factors. For starters, the global fluctuation of exchange rates can have a much greater impact on business flow into the U.K. For example, the current euro exchange rate is largely negating the impact of the recently implemented tax breaks in France.

Further, most tax break schemes are borrowed from the film industry; in fact, many governments will simply extend the existing film scheme to cover games. But the nature of game production (i.e., mainly done by full-time, salaried employees working for a single company) makes it very hard to show up in a region with tax incentives, make a game and then move back home, unlike in film where you can move a shoot to a certain location to capitalize on the region’s incentives. While this is perhaps less an issue for the U.K. given the relatively close geographic proximity of the industry, it does diminish the extent to which studios can shuttle around from country to country, seeking the best handouts.

And, unlike film, the financing models for games are immature. In film, you can monetize your tax credit via special funding and insurance agencies so that you can have the money in hand at the start of the project. No such funding mechanisms yet exist for game studios, so it remains a largely “post-spend” benefit (meaning you have to have the money to begin with, spend it, and then at the end of the year factor in your tax relief). Thus tax breaks do little to encourage the creation of wholly new projects or studios, but mainly serve going concerns.

Along similar lines, studios often take a conservative approach to tax breaks by simply doing more of the same, or the same but cheaper. Rather than helping to create a buffer to enable the creation of new IP, studios would likely be pressured to simply use the tax breaks to cut their prices – not exactly the vehicle of new value generation that most would hope for.

Perhaps most critical is the concern over cultural control. In providing a tax break scheme to French developers, games were (rightly) classified as cultural products in France to get around the European Union’s rules against intervening with failing industries. However, that official cultural classification now comes with the burden that any French developer that wants to leverage the incentive has to pass a scorecard based on a test applied by the Ministry of Culture.

There was a similar situation in Texas in 2007, when the state government was going to extend the film incentives to cover games. Unfortunately, the legislature wanted to impose eligibility rules for games that limited the types of content they could contain if the developers wanted to receive tax assistance, a position the Entertainment Software Association fought to prevent at the expense of losing the incentives altogether. In the end, cooler minds prevailed and the incentive was implemented with dramatically reduced game-specific restrictions (i.e., games cannot disparage Texas or Texans).

When confronted with these challenges and limitations, it’s a wonder that there’s such a fight for tax breaks in the first place. I’m not suggesting they are bad per se, or that if the government comes to your door tomorrow with bags full of money, you should refuse it. Still, it provides more nuance to the issue and begs the question: What other kinds of programs would make a difference?

Turning back to our local U.K. experts, one of the most oft cited issues was the government’s complete lack of respect for the industry. When you take into account the poor and usually negative coverage of games in the mainstream media, a strong pro-games PR campaign would go a long way to changing the overall vibe. Ironically enough, many point to this particular challenge as the greatest success of Games Up? to date. Despite the unlikelihood of getting the tax break, the topic serves as an entry point to engage with government on a tangible issue, gaining mindshare with politicians and the media.

Many others spoke of the need for better education programs and ongoing training for existing talent. Several talked about fostering the same entrepreneurialism that was at the origins of the U.K.’s bedroom coders scene. A few mentioned the need to better support local communities to accelerate the informal sharing of knowledge. Some suggested simplifying and extending the existing R&D tax credit scheme to be more accessible.

In the end, the best advice came from one U.K. studio head who simply said, “If we just stop being so complacent, and focus on continuing to make great games, we’ll be fine.”

Jason Della Rocca is the former executive director of the IGDA, and now advises international governments on how to grow their game industry ecosystems. He blogs at RealityPanic.com, no thanks to any Canadian tax breaks.