Video Games: It’s time to play

Fascinating taxpayer funded research commissioned by NESTA on what leading figures in the games industry think the effect of a cultural tax credit might be. It’s Time to Play: A Survey on the impact of a tax credit for cultural video gamesin the UK development sector (pdf format) The executive summary says it all:

A world-class sector under pressure
Survey respondents describe a world-class creative industry under increasing pressure. Experience, creativity and quality have been the traditional advantages of UK video games developers, while high costs and skill shortages are their main disadvantages. The availability of government subsidies overseas is making the UK even less competitive as a video games development territory, not only from the point of view of costs, but also of skills -Strong government support in competitor countries (particularly Canada) is attracting key senior staff in a ‘brain drain’ which intensifies existing skill shortages and threatens the quality of the UK’s output.

Original IP development seems to be in decline
Nearly three quarters of respondents claim that original Intellectual Property (IP) development has slowed or stopped in the last 5 years, and more than half think that this the trend will continue in the future, with the potential exception of emerging networked gaming platforms. Risk aversion by publishers is making it harder for UK developers to be creative and innovative, areas where they have excelled in the past.

A slow-down in the UK video games sector
Most respondents report growth of some kind over the past 2 years. This growth is expected to slow down, or halt altogether in the coming 2 years. The survey sample includes some of the UK’s most successful video games business. This means that the growth prospects for the rest of the industry could be expected to be significantly worse. A shift in publisher strategy might benefit some UK developers Although 3rd party development managers report low levels of investment in UK-based original IP production over the last 2 years, they claim that there will be a steady increase in the funds available for original IP in the years to come. This is a consequence of a shift in some publishers’ development resources from internal studios towards external contractors, who are often seen as more efficient. This increased demand will, however, need to be matched by an increased supply of original IP from the UK. There is optimism about the potential impact of a tax credit for cultural games Almost all respondents believe that if introduced, the tax credit for cultural games currently under discussion would have a positive impact on the sector, as long as it is designed to take into account the specific requirements of the industry, and administered effectively. The tax credit for cultural games would help to ‘level the international playing field’, and make it easier for UK studios to retain their talent. In regards to direct impacts, 89% of studios responding to the survey believe that a tax credit for cultural games would lead to increases in their staff numbers. 70% of publisher and external finance company respondents state that a tax credit could make the difference between investing in and passing on a games development opportunity in the UK.

The tax credit for cultural games would kick-start original IP development and encourage experimentation with new business models. Two thirds of studios claim that a tax credit for cultural games would have a definite, positive impact on original IP development, while 75% of independents believe that the measure would help them to keep hold of the original IP that they produce.

All independent studios state that a tax credit would encourage them to adopt new business models based on digital distribution, with the potential to establish direct relationships with their consumers and generate steadier revenue streams. In order to fund these new ventures, they would be more likely to seek financing from sources outside of the video games industry, such as venture capital or project financing. The tax credit would boost publisher investment in the UK video games sector All 3rd party development managers claim that a tax credit would increase their companies’ funding of externally contracted development, and could make the difference between investing in and passing on a UK games development opportunity. Similarly,80% of senior publisher executives claim that tax credits would boost their funding of development by both internal and independent studios in the UK.

The investor perspective
The majority of external finance sources consider the UK video games sector to be an unattractive prospect for investment at the moment. The reasons for this are lack of scale, and an excessive emphasis on traditional, high-risk retail business models instead of network gaming and direct-to-consumer propositions. They are unanimously positive about the impact of a tax credit on the scale and/or number of investments in UK video games projects. Half of respondents would change their attitude towards investing in UK video games companies if the tax credit for cultural games was introduced.