Video games industry in Scotland - Scottish Affairs Committee Contents


1  Background

The video games industry in the UK

3. Since their emergence in the 1970s, video games have grown from a niche market into a global entertainment industry. The part played by UK video games studios in this expansion has led to the sector being described as the "jewel in the crown of the UK's creative industries."[2]

4. The UK has the highest number of games development companies and publishers in Europe, with approximately 280 development studios in the UK employing 9,500 people.[3] Dr Richard Wilson, CEO of the Independent Game Developers' Association (TIGA) told us that "economically, the UK video games industry contributes £1 billion to UK GDP and generates about £400 million in tax receipts for the Treasury."[4] Until 2008, the UK held third position in the world on development rankings by turnover.[5]

5. Globally, the video games market was worth $52.5 billion (approximately £33 billion) in 2009.[6] The National Endowment for Science, Technology and the Arts (NESTA) estimates that the video games markets will experience annual growth rates of 10.3% between 2008 and 2012—twice as much as the film industry is expected to grow.[7]

6. Traditionally, the strengths of the UK video games industry have been creativity and innovation in the development of original intellectual property (IP). Levels of relative labour costs are considered the UK's main competitive disadvantage.[8]

7. The industry is undergoing significant changes, with the traditional market of boxed retail products for home consoles and computers being supplemented by the rapid growth of games for mobile and handheld devices, as well as social network gaming and online gaming. In addition, "technologies and business models developed in the video games industry are being applied to areas such as health, defence and architecture."[9] It is estimated that more than 70% of the UK population now play video games in one form or another.[10]

8. Since 2005, the Department for Culture, Media and Sport (DCMS) has shared the policy responsibility for the video games industry in the UK with the Department for Business, Innovation and Skills (BIS), and its predecessors.

THE VIDEO GAMES INDUSTRY IN SCOTLAND

9. Evidence from Department for Culture, Media and Sport and Department for Business, Innovation and Skills explained that "Scotland is world renowned for excellence in computer games design. With hubs in Edinburgh, Glasgow and Dundee it is responsible for an impressive list of iconic, globally successful games."[11] The Association for UK Interactive Entertainment (UKIE) state that Scotland is home to nearly 25% of UK video games companies.[12] Scotland has 46 development companies employing 651 development staff, with the games development sector supporting an additional 1,190 jobs.[13] Annually, Scottish games companies are estimated to invest £30.2 million in salaries and overheads, contribute £27.5 million in direct and indirect tax revenues to the Exchequer, and make a direct and indirect contribution of £66.8 million to the UK's Gross Domestic Product.[14]

Challenges currently facing the industry

10. On 16 June 2009 the Government published the Digital Britain report, "a guidepath for how Britain can sustain its position as a leading digital economy and society."[15] The report noted that the UK's strong position in the world games market was being challenged in three key ways:

  • it is competing for investment against lower-cost countries;
  • there is a shortage of skills, due to both a brain drain and lack of adequate graduates;
  • there are too few indigenous UK intellectual property [IP] owners.[16]

In addition, DCMS and BIS listed "difficulties in attracting finance" as a priority issue for the industry. [17]

Public opinion

11. Some perceive the video games industry as having no wider benefit than in entertainment, and question both the sector's output and whether such an industry should receive financial incentives. During the Committee's inquiry it was noted that the term 'video games' embraces a larger field of activity which includes the highly positive and widely beneficial work, such as undertaken at Abertay University, which has been described as 'pervasive technology.' Technology such as accident simulation is but one example of the innovative nature of the industry. Such technology also has massive implications for medical research and medical science.

12. The Independent Game Developers' Association's report State of the Video Games Sector, published in 2010, argued that:

[...] the video game development sector is accustomed to adversity. It has grown up largely unloved and ignored by the political and economic powers in our country. Until recently, the only times the sector featured in the wider press was when it was being condemned for creating poisonous and addictive products which corrupted all who touched them.[18]

13. Although our inquiry focuses on the video games industry itself, rather than the nature and content of the games it produces, any wider discussion of the industry will invariably raise the issue of the sexual and violent content of some video games.

14. In evidence, Mr Rawlinson, Director General of UKIE, told us that "it is very important for the Committee and Parliament to know that video games are regulated, like films."[19] The Digital Economy Act 2010, passed in the previous Parliament, amended the Video Recordings Act 1984, so that "the industry's self-regulatory system for the age-content classification of video games, which is called PEGI, is enshrined in law."[20] This is due to be implemented by the spring of 2011 introducing a "stand-alone classification system for video games that makes the classification from 12 upwards mandatory and legally enforceable. It will be the first time that video games are covered by such a benchmark".[21]

15. Mr Rawlinson also said that:

We are a mature industry, so we should be free to tackle mature topics and mature subjects with our content and output, provided that it is correctly classified, regulated and signposted [...] the industry has acted, and it continues to act, very responsibly in relation to adult content [...] as part of the introduction of the new regime, which will come in next spring, the industry is committed to an education and awareness campaign to ensure that parents, gatekeepers and carers understand that video games are not just for children and that there is a content classification system.[22]

Finally, Mr Rawlinson said that "in the last year for which I have figures, 18-rated products accounted for about 8% of the market."[23]

16. Regulating and enforcing the sale of boxed products for consoles and computers is, arguably, largely achievable. A greater challenge is the policing of online games, the availability and popularity of which has increased in recent years. Ed Vaizey MP, Minister for Culture, Communications and the Creative Industries, told us "it is a whole issue about how children are kept safe online and how parents monitor what they are doing online, and how parents in particular get the kind of instructions and education they will enable them because, let's face it, not all parents are as tech savvy as their teenage children and they do need clear guidance."[24]

17. In September 2007, the then Prime Minister asked Professor Tanya Byron to conduct an independent review looking at the risks to children from exposure to potentially harmful or inappropriate material on the internet and in video games. The report Safer Children in a Digital World was published in 2008,[25] followed by Do we have safer children in a digital world? A review of progress since the 2008 Byron Review, published in March 2010. The follow-up report noted that:

[...] there has been excellent progress made on video games since 2008, particularly the clarification to the video games age classification system [...] For phase two I have made recommendations to help this excellent progress accelerate through: widely publicising the single classification system once it becomes law; looking at the issues around online gaming; ensuring that mobile and internet-enabled device manufacturers are involved in the development of parental controls and include them on their devices; ensuring that awareness of parental controls is included in the UKCCIS [UK Council for Child Internet Safety] public awareness raising campaign; and developing minimum standards and independent review for parental control standards on all internet-enabled devices.[26]

18. The wider issue of access to video games and more specifically the regulation of access to online games is one in which the industry as a whole is well placed to research further and we believe that further research in this area would be beneficial. Mr Durrant, University of Abertay, Dundee, noted that "the whole area of analytics around users and the audience is a really important one, obviously for child protection issues [...] it's been very hard to secure research funding in this area, because of the interdisciplinarity of it."[27] He also noted that "it is an area that is fertile ground for people to understand more."[28] The Minister told us that funding for looking into the area was "something [he] would certainly happily look into [...] It would certainly be an interesting way to test technology to see whether you could monitor, as it were, the age of people playing games."[29]

19. All creative industries, including the film and music industries, are faced with concerns and challenges over adult content. The Byron review notes the "excellent progress" made by the video games industry on the issue of classification, and it is worth noting that adult content represents less than 10% of the content either produced or consumed.

20. We note that much improvement has been made by the industry, particularly in relation to classification, however more needs to be done to future proof age verification for video games accessed online. The industry and universities are well placed to research how best to go about ensuring children cannot gain access to inappropriate adult content. Therefore we recommend the Government look into supporting such research, and ask the industry to see how they too can invest in such research as a part of their corporate social responsibility.

Decline in the UK industry

21. The sector, both in the UK and in Scotland, has declined over the last couple of years. Between July 2008 and July 2009, 15% of all video games companies in the UK went out of business.[30] So far in 2010, the UK has experienced a 4.4% decline in workforce.[31] It is predicted that the UK has fallen from third place in the global development rankings to sixth place.[32] Scotland has suffered a decline in the development workforce of more than 18% in 2010, mainly due to Realtime Worlds, one of the biggest development studios in Scotland, going into administration.[33]

22. This decline has been primarily attributed to the generous subsidies for games companies available overseas in certain countries such as Canada and France. As Dr Wilson, Chief Executive of the Independent Game Developers Association, told us that "over the last few years, game developers and publishers have been saying that the UK is competing on an uneven playing field and that we are losing jobs and investment to overseas jurisdictions."[34]

23. However, NESTA said that:

Video Games are thriving in other countries without generous public support: it is worth bearing in mind that other arguably 'expensive' development territories are managing to compete without the sort of subsidies and incentives available in Canada or France. Japan and South Korea remain at the top of global rankings without targeted large-scale support, and German games studios have become a force to be reckoned with in emerging online and mobile markets in spite of a marked lack of government support. Likewise, the Nordic countries and Australia have attracted significant levels of foreign investment without the sort of measures available for their Canadian and French competitors. This suggests that tax credits are not the only explanation for the challenges that the UK video games sector is currently facing.[35]

24. NESTA also believe that there are other factors in the UK's decline, noting that "studios in the UK face competition from both emerging markets with natural cost advantages, such as Eastern Europe, China and Singapore."[36] Skills shortages, unsustainable business models and a lack of innovation were also given as reasons why the UK is becoming a less attractive place to invest in video games development.[37] However, NESTA also told us:

It is crucial to improve access to external finance for the sector [...] Lacking funds to reinvest on innovation and growth, or to buffer themselves against market uncertainty, they [businesses] fall in an 'IP Poverty Trap' which is hard to escape [...] NESTA believes that external finance focusing on projects rather than companies may have a role to play in enabling the sector to access capital for innovation and growth.[38]

25. Futhermore, the UK Industry has difficulty with intellectual property retention. The consequences of this is that concept innovation and creativity within the UK often generates activity and jobs overseas.

GOVERNMENT PROPOSALS TO SUPPORT THE INDUSTRY

26. The Government has set out its policy for video games:

[...] we want UK video games businesses to be particularly well placed to respond to the new opportunities offered by the rapid growth in global demand for interactive entertainment, the new routes to market we see from the growth of online delivery, the broadening demographic for games and the potential for SME games businesses to create new business models.

DCMS and BIS are talking to the video games industry regarding what Government, industry and others might do to promote the sector's competitiveness, including by ensuring the games sector is fully considered in broader ongoing exercises such as Government's focus on supporting growth and on business access to finance.[39]

27. Since the Government's announcement to not introduce the games tax relief, the Government has initiated:

  • the appointment of Ian Livingstone OBE, Life President of Eidos, as a skills champion for video games, building on his role as Chair of Skillset's Games Council to drive forward work to produce a better skilled workforce for the sector;
  • an independent review, led by Mr Livingstone and Alex Hope, and carried out by NESTA and Skillset, of education and training in the UK games and visual effects sectors. This is likely to report in January 2011;
  • a series of ministerial roundtables with the sector on themes such as finance and skills; and
  • work with UK Trade and Investment, the industry and others to update and better define the proposition the UK offers for video games inward investors/potential inward investors.[40]

THE CALL FOR FINANCIAL INCENTIVES

28. The UK's fall in the global rankings and decline in workforce has led to a call for the introduction of financial incentives for the sector, both to retain and to encourage investment. Dundee City Council believed that "even with all else being equal, investment capital of all types will continue to flow towards areas with active investment incentives and away from the UK."[41]

29. When asked why the industry should benefit from such incentives, Mr Livingstone argued that:

[...] the games industry is very much misrepresented in the world's perception. It's the largest entertainment industry in the world—bigger than DVD, music, box office and books—yet there has always been a sort of negative connotation. It's an industry that we are particularly good at in the UK, and we want to incentivise games makers, wherever they are in the world, to make the UK their destination of choice when it comes to making games.[42]

30. The video games industry is a highly mobile and relatively young industry, with predicted annual growth rates double that of the film industry. Scotland has an outstanding reputation for excellence in video games production, but in reality the sector is of great economic benefit to the whole of the UK. The UK industry, however, is currently contracting. It faces an uneven international playing field, disadvantaged by subsidies from governments overseas, notably France and Canada, and cheaper labour markets elsewhere, as well as by skills shortages, unsustainable business models a need for innovation and investment vehicles. The Government has a responsibility to help create an economic environment in which the creative industries can flourish. Impediments for growth in the UK are emerging and we believe the Government should make the future of this industry a priority.



2   Ev 49 Back

3   DCMS, Computer and video games, www.culture.gov.uk Back

4   Q 2 Back

5   Ev 52 Back

6   Ev 45 Back

7   Ev 52 Back

8   NESTA, It's Time to Play, A survey on the impact of a tax credit for cultural video games in the UK development sector, August 2009, Back

9   NESTA, Level Up-Building a Stronger Games Sector, December 2008 Back

10   Q 2 Back

11   Ev 45 Back

12   Ev 49 Back

13   Ev 55 Back

14   Ev 55 Back

15   "At a glance: Digital Britain", BBC News Online, 16 June 2009 Back

16   DCMS and BIS, Digital Britain Final Report, Cm 7650, June 2009  Back

17   Ev 45 Back

18   TIGA, State of the UK Video Game Development Sector, 2010 Back

19   Q 85 Back

20   Ibid. Back

21   Ibid. Back

22   Ibid. Back

23   Q 87 Back

24   Q 211 Back

25   Department for Education, Safer Children in a Digital World; the Report of the Byron Review, April 2008 Back

26   Department for Education, A Review of progress since the 2008 Byron Review, March 2010 Back

27   Q 120 Back

28   Q 124 Back

29   Q 212 Back

30   Ev 52 Back

31   Q 57. The witness later provided information stating the workforce had declined 5% between July 2009 and September 2010. Back

32   NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010; see also written evidence from DCMS and BIS Back

33   Qq 57-59 Back

34   Q 75 Back

35   Ev 52 Back

36   NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010 Back

37   NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010 Back

38   Ev 52 Back

39   Ev 45 Back

40   Ev 45 Back

41   Ev w1 Back

42   Q 10 Back


 
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