House of Commons - Scottish Affairs Committee

Video games industry in Scotland - Scottish Affairs Committee Contents

Written evidence from the Department for Culture, Media and Sport (DCMS) and the Department for Business, Innovation and Skills (BIS)

INTRODUCTION

1. This memorandum is jointly submitted by the Department for Culture, Media and Sport (DCMS) and the Department for Business, Innovation and Skills (BIS) which since 2005 have shared the policy responsibility for the video games industry. It aims to provide background that might be helpful to the Scottish Affairs Select Committee's inquiry into the video games sector in Scotland. The paper does not respond directly to questions relating to tax policy, which is the responsibility of the Treasury.

BACKGROUND

2. The video games sector is inherently innovative, IP-rich and offers good opportunities for growth and high-value, high-tech job creation in Britain. Estimates from PWC suggest the global market for video games will grow from $52.5 billion in 2009 to $86.8 billion in 2014, representing an estimated 10.6% CAGR.[1] This makes video games the second largest growing entertainment and media sector after online advertising. The UK computer games industry is part of the wider creative industries which contributed £59.9 billion to our GVA in 2007 or 6.2%. These industries have continued to grow through the economic downturn and the software, computer games and electronic publishing sectors showed growth of 5% per annum between 1997 and 2008, the highest across the creative industries.[2]

3. The wider context to any discussion about public policy for the games sector is the Government's overarching aim to tackle the deficit, rebalance the economy, and create a stable platform for long-term, private sector-led economic growth. At this point it is not possible to set out detailed plans for pursuing these aims; the Comprehensive Spending Review is ongoing and Government is currently in an intensive policy development process which includes several public consultations.

4. Government is considering options for ensuring that the UK is not so dependent on a narrow range of economic sectors, with a particular focus on supporting areas of comparative advantage including advanced manufacturing, low-carbon manufacturing, the life sciences, and service and the creative industries (including video games). BIS is developing a strategy in this area over the summer with a view to publishing a cross-government White Paper in autumn 2010.

5. Priority issues for the UK video games sector include difficulties in attracting finance, problems for small companies in creating and exploiting IP, ensuring a steady supply of appropriately skilled employees and growing global competition. These problems are not unique to video games companies—access to finance for example is reported as a problem in the wider creative industries and indeed by small, creative businesses in other sectors, such as biotech.

ACCESS TO FINANCE

6. Several UK schemes offer additional finance for SMEs. The Enterprise Finance Guarantee scheme provides bank lending to viable businesses lacking collateral to secure a normal commercial loan. The Enterprise Capital Funds address a market weakness in the provision of equity finance by using Government funding alongside private sector investment to establish funds that operate within the "equity gap". The UK Innovation Investment Fund (UKIIF) is a UK wide Fund of Funds that will invest in underlying technology funds that target businesses in advanced manufacturing, clean technologies, digital and life sciences.

7. The Government is working with businesses and the financial community to consider all the options for ensuring that access to finance is not a barrier for companies looking to invest and boost growth in the economy. A Green Paper on business finance was published on 26 July by BIS and Treasury.[3] We hope to see a substantial response from the games sector to this consultation.

BUSINESS SUPPORT

8. Business support and its delivery in Scotland is a matter for the Scottish Government which offers a number of support measures, such as Regional Selective Assistance.[4]

9. For businesses located in England, BIS is currently reviewing the Solutions for Business portfolio and also the services provided by Regional Development Agencies, including business support delivery via Business Link. The outcome of this review will be dependant on the conclusion of the Comprehensive Spending Review.

BUSINESS TAX

10. The Emergency Budget announced that the Government would not be introducing a tax relief for the UK video games industry. The sector will benefit from the wider package of reforms to business taxation announced in the Budget, which included reducing the main rate of corporation tax to 24% by 2014 and the small profits rate to 20% from April 2011. The changes will reduce the corporation tax rate for nearly one million companies. One of the principles underpinning this reform is that a simpler tax system with lower rates for all is usually the most effective way to support economic growth and investment. As part of the next steps in reform, Government will consult with business in autumn 2010 to review the taxation of IP, the support R&D Tax Credits provide for innovation and the proposals of the Dyson Review. The Government will welcomeevidence from the video games industry in response to this consultation.

11. The Budget also confirmed a relaxation of the IP rules for the SME R&D tax credits scheme which will be of benefit to many innovative companies, including independent games development studios working on projects on a work for hire basis.

THE UK VIDEO GAMES INDUSTRY

12. The UK has a reputation for innovation, creativity and talent in video games development. A number of highly successful games and technologies have originated in the UK including franchises like Tomb Raider (from Eidos) and, created in Scotland, Grand Theft Auto (from Rockstar North). The UK has a large mix of independent and publisher-owned studios in clusters all around the UK, including in Guildford, Brighton, London, Dundee, Edinburgh, Sheffield, Leeds, Newcastle, Liverpool, Manchester, Cambridge, Oxford, Leamington Spa and Birmingham. It has been the location of choice for the European HQs of many of the large video games publishers, such as Activision and Sony Computer Entertainment Europe.

13. Definitive data on the UK's video games sector has been hard to source, particularly in the absence until recently of a separate Standard Industrial Classification (SIC) relevant to the sector and varying distinctions between games development and other computer software and services activities. Data published by trade association Tiga and analysts Games Investor Consulting (GIC) estimates that in 2008 the UK's games industry employed 28,000 people including over 9,000 in games development and UK studios made £2 billion in global sales.[5] In a separate publication for NESTA, GIC suggested that in 2008 there were 47 publisher-owned and 166 independent games development studios in the UK.[6]

14. Following agreement at European level in 2007 of revised SIC codes, some more specific official statistics are beginning to emerge. The Inter Departmental Business Register (IDBR) offers an assessment of the size of the sector though it has limitations. The IDBR snapshot for June 2010 estimates that there are 635 video games "local units" in the UK employing around 6,000 people (the number of local units in the UK for all sectors is 2,548,630 employing around 27,708,300 people). However, it seems likely that these figures may feature significant undercoverage. Each business in the IDBR is allocated an industry classification based on the companies' predominant business activities. Therefore where video games activity is undertaken but it is not the primary activity, employment and business estimates for the video games sector would be underestimated.[7]

THE VIDEO GAMES INDUSTRY IN SCOTLAND

15. 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. Grand Theft Auto IV for example reportedly sold some 6m copies in just the first week of release and is argued to be a key reason why the UK was placed third in the world rankings for games development in 2008.

16. The IDBR snapshot for June 2010 estimates there are 20 video games "local units" in Scotland employing around 200 people. However, as previously noted we believe the figures feature significant undercoverage. The snapshot shows the number of local units for all sectors in Scotland is 192,170, with employment of 2,392,200.

17. Dundee has had a particular reputation for excellence in games development. Recent redundancies in Dundee and particularly the news in August 2010 that major local employer Realtime Worlds had experienced far less than anticipated sales of its game APB and subsequently had gone into administration was obviously very disappointing.

18. Dundee is recognised for the close, productive relationship between the University of Abertay and local games businesses. The University was the first to achieve sector skills council Skillset's accreditation for games-related courses back in 2004. To date four of the nine courses to be awarded Skillset accreditation are in Scotland—three at Abertay and one at the University of West of Scotland.

19. In December 2009 BIS announced a £2.5 million Strategic Investment Fund grant to the University of Abertay to support a new video games centre of excellence. Total investment in the centre—including aid from the European Regional Development Fund—will total more that £8 million. The project includes the creation of a new prototyping lab and other facilities at Abertay, scheduled for completion this year.

20. Key to this project is the creation of a £2 million fund—formally launched by Abertay in July 2010—to help small companies develop new games prototypes, address issues with attracting finance and improve their prospects for bringing their new games concepts successfully to market. The fund offers valuable help to Scottish companies but eligible companies elsewhere in the UK can also apply. An innovative aspect of the project is the opportunity it offers to undergraduates to work on games development projects using Abertay's very successful "Dare to be Digital" model, helping increase the supply of "industry-ready" new entrants to the workforce.

GLOBAL COMPETITION

21. Like all sectors, the UK games sector is challenged by competition for investment from overseas territories. Measured in revenue, the UK was for many years the world's third largest producer of games placed behind the US and Japan until 2007 when, according to GIC, it fell to fourth place, displaced in the rankings by Canada.[8] GIC's ongoing monitoring claimed that the UK regained third place in 2008 though they suggested it was likely to have fallen to fifth place in 2009, overtaken by Canada and for the first time South Korea.[9]

22. In 2007, GIC's Playing for Keeps report for UKTI and BERR listed aid available to games companies in several territories, including Canada.[10] Though this information is now out of date it may be of historic interest.

POLICY FOR VIDEO GAMES

23. The Emergency Budget announced a package of reforms as a first step in the Government's long-term aim to create the most competitive corporate tax system in the G20, promoting the UK as a more compelling environment for both our indigenous and inward investor games companies.

24. Additionally 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.

25. 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. Specific new activities initiated to date include:

— 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.

9 September 2010