The Video Games Industry in Scotland

Written evidence from Dundee City Council (VID 02)

1. Introduction

This paper has been produced by Dundee City Council for the Commons Scottish Affairs Select Committee inquiry looking at the potential impact on Scotland's video games industry of the recent announcement of the Chancellor of the Exchequer not to proceed with tax relief for this sector. It outlines the contribution the video games industry makes to Dundee within the context of the Scottish and UK economy and the potential benefits to be gained for the industry from the introduction of tax reliefs.

2. Dundee - a centre of games excellence

World class games companies are based in Dundee. As one of Europe’s’ foremost gaming hubs, Dundee is an international centre of excellence.

Dundee is unique to the UK and Europe as it has a diverse range of operators within the city, crossing many sub sectors of the games market. Dundee has over 50% of Scotland video companies and 60% of Scotland's development studio employees. This pinpoints the importance to the city's economy. The seventeen companies listed below demonstrate the diversity across the city. These companies work across a wide variety of platforms and use variety of business models.

Ruffian – Traditional Model

Cohort – Traditional Model

Denki – Traditional Model/Xbox live Development/ Self Publishing

Cobra – Mobile Developer Digital Distribution – Traditional Model

Real-time Worlds – Self publishing (currently in administration)

Proper – Xbox Live Arcade

Electric Top Hat – Mobile game developer

TPLD – Educational Games developer

Digital Goldfish – Mobile/Ipad Developers

Waracle – Application development /Iphone

Play2improve – Education – Multi platform

Tag Games – Publisher and PSP/DSI Mobile Developer

4J’s – Conversions/Multi platform

Dynamo Games – Mobile Games

Jack Hoose music – Production of music for Games

Game Ops – Consultancy/Recruitment

BBB Games – Mobile Development

The traditional games development studio works on a "work for hire" based business model that is funded by the publisher to create a game for them. This can be a strict flat fee or royalty based structure. There is a shift from traditional off the shelf publication to digital download and many companies are moving towards co-publishing or self publishing models. Some games companies in Dundee self publish and these companies have been shown to have the greatest potential for growth.

Below shows the average wages paid within the games industry, these highly paid jobs not only help circulate money within the local economy, but the money is based upon exports of products significantly contributing to Scotland’s GDP.

MCV UK 2010 Survey of average wages within the UK games Employees

AVERAGE SALARIES BY DISCIPLINE

PUBLISHING & MARKETING £44,643 (2009: £43,000)

RETAIL £27,738 (2009: £26,960)

SERVICES & DISTRIBUTION £32,250 (2009: £31,973)

GAMES DEVELOPMENT £31,964 (2009: £30,442)

GAMES MEDIA £18,056 (2009: £18,125)

PR & COMMUNICATIONS £28,928 (2009: £26,153)

Computer games entertainment is leading the digital revolution with gaming now the most popular form of online media consumption in the UK surpassing the downloading of music and video. Games consoles are also helping to prop up the TV industry by becoming key platforms in the distribution of video, with one in ten household accessing the BBC I-Player through the WII or PS3 consoles. This collaboration of digital media and games compounds the importance that the games industry makes to all methods of digital media. Furthermore digital media and computer games firms work very closely, for example a games company could work on an animation or on a games sequence for TV/Film. Games firms will also outsource elements of their business to digital media firms, for example website maintenance, data warehousing or server and application support. Thus the spin off business from these companies is great. The crossover value spills over into the local economy so the growth within the games industry has exponentially increased the digital media support network.

3. Digital Media in Tayside (Source: Scottish Enterprise 2008)

Number of Businesses

· 354 digital media businesses in Tayside

· 52% in Dundee

· 30% in Perthshire

· 18% in Angus

Employment

· 3400 FTEs employed

· 80% of the sector male

· Average size of business is 8.4 FTEs

· Low staff turnover >5%

Sales

· Combined turnover of £185m

Growth of 140% has been seen in the period 2000-2007 with a growth in employees of 225% for the same time period.

Investments such as the $80 million to Realtime Worlds in 2008 and companies like Cohort estimating they have pumped around £8 million into the local economy over the last four years is further evidence that the contribution to the Dundee economy is significant.

The global entertainment and media industry, according to Price Waterhouse Coopers was worth $1.6 trillion in 2007 and is forecast to keep growing at an average rate of 7% to 2012, with particularly strong growth in mobile, wireless and computer games sectors. This forecast was reinforced in a recent Entertainment Software Association report from North America, the worlds biggest games market, showing annual growth 2005-2008 of 16.7% and through the global downturn a growth rate of 10.6% 2005-2009, still posting $10.5 million dollar of sales in 2009.

Dundee's talented workforce and their creativity means the city has the potential to harvest a share of this growth

4. Dundee Academic Excellence - Creating a pipeline of talent and innovation

The Academic sector in Dundee is a fundamental influence on the development of computer games and digital media throughout the UK.

The University of Abertay Dundee has been at the heart of the computer games industry in Dundee since it launched the world’s first degree in computer games technology in the 1990’s. Since then they have led the way in providing industry- relevant and industry inspired games related courses. The University of Abertay Dundee now hosts the first Centre for Excellence in Computer Games Education with the recent investment of £3 million by Skillset and the Scottish Government. Prototype funding has been announced for the University to deliver new companies and products to market. The Institute of Arts Media and Computer Games offers 6 undergraduate and 3 post graduate programmes and there are around 250 graduates from these programmes each year. This year’s recruitment is high, with an expected 330 new entrants on to these programmes. As a complement to the games courses there are many computer related science degrees on offer between the two University institutions.

5. Dundee City Council support to the Sector

The Council has supported the games and wider digital media sector for many years with considerable investment over time of staff resource and financial contributions to innovative initiatives in order help maintain the city's leading role in this sector. Currently Dundee is involved in the creation and support of several projects to support the computer games industry. The following are a few current examples:-

6. Interactive Tayside

Interactive Tayside was launched in 2000 as a unique way to support games and digital media in the region. A key part of Dundee City Council and Scottish Enterprises digital media strategy. This partnership of public and private and academic sectors supports the Digital Media sector with a range of marketing and support activities. So respected is the model created by Interactive Tayside that it has recently been replicated at a national level with the development of Interactive Scotland.

7. Dare to be digital

Dare to be Digital was established by partners Scottish Enterprise Tayside, Dundee City Council and the University of Abertay Dundee in 2000, when the competition was piloted to students at Abertay. The following year, Dare opened its doors to all students in Scottish Universities and Colleges of Art. It remained so until Dare 2005, when the competition became international. Dare has grown from a local competition with local sponsorship to an international competition with multinational sponsorship. Dundee City Council has contributed financially each year to this project since its inception.

8. Games in Scotland

Game in Scotland is the national gaming recruitment fair and has been centred in Dundee since it began. Developed by the then local Scottish Enterprise team, Dundee City Council has sponsored this event each year. The event is a great opportunity for potential recruits to meet Scotland’s top development companies and learn of the variety of jobs available in the Scottish Games Industry. Companies have access to Scotland’s best recruits, and can explain their needs and the variety of excellent jobs available within this industry from games design through to quality assurance. Over 500 people attend this event annually.

9. Neon Digital Arts Festival

This ground-breaking digital arts festival showcases the world’s best technologies, involving studios and artists from the interactive, online, videogame, music, movie, broadcast and digital media sectors. NEoN annually lights up the city of Dundee in November. Dundee City Council is a partner in this event and sits on the steering group.

There are other initiatives supported by the City Council, all with the common objective of ensuring we provide the relevant environment to enable this sector to flourish. Other examples include Dare Schools Challenge, Digital Dundee and the city's innovative Digital Observatory which brings together key digital media experts to explore how digital media generally can be used to the city's advantage.

Alongside this Dundee is also home to a Digital Media Park, this is a 20-acre site adjacent to Dundee’s City Centre. This area is home to several digital media companies and is another element in the city's digital media and games proposition.

10. Dundee - a "world leading" city

Dundee is renowned in the world for games development and is a "world leader". Dundee is viewed as a role model in the development of this industry and many other cities and regions throughout the world have visited Dundee to examine how the city has successfully build this new industry.

This has gained Dundee significant value in terms of an international reputation and also in providing a positive perception of the city, and indeed Scotland, as a leader in this industry. It is impossible to put a financial value on this reputation. Clearly however, anything which is a disadvantage to this reputation will have long term effects on the perception of the city and its economy going forward.

11. The Need for Intervention

With the introduction of tax incentives in key geographies we are no longer able to compete on an even playing field. Overseas government support for indigenous games development companies is increasing as countries including Canada, Germany, Japan and South Korea all increase their fiscal support. The impact of these incentives is beginning to bite and countries like Canada have made direct approaches to several companies in Dundee to consider relocating in their area. At the moment, 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. Without some action now we are in danger of eroding all the investment made by government, academia and the companies themselves which got us to the point of being recognised as "world leaders".

One of our games company leaders puts it

" if I'm an investor with $1m to invest in Digital Media, and putting it in Dundee buys me a team of 20 for 12 months, but putting it in Canada buys me a team of 20 for 18 months, or a team of 25 for 12 months, then I'd be crazy to invest in Dundee. This perception is already affecting Dundee and Scotland and is a self fulfilling prophecy by self perpetuating the decline as the perception of doing business in the region is sliding".

Discussions with local companies within Dundee indicate that many would benefit either directly or indirectly from tax breaks. For many the benefits are viewed longer term. Many firms agree a major benefit would be reducing the risk to any potential investor interested in project funding. This longer term impact is likely to be considerable. Without the tax incentives investment will be harder to secure - whether in the form of project finance, corporate finance, or work-for-hire, because the skills that were only available in Dundee 10 or 15 years ago are now actively being replicated around the world.  This means that having the skills required is no longer the competitive advantage it once was. 

12. Other financial support options.

One option proposed by sector representatives is the extension of the current R&D Tax Credits system to include "the creation of intellectual property suitable for export" instead of the somewhat limited "technology" scope it currently has would be a helpful measure.

Other support recommendations include the following:-

Support which encourages self sufficiency through self publishing

Development of management team skills

Funding for R+D - especially in online and social areas

There is also a sense within the industry in Dundee that the Canadian model seems to work and that their model is worth exploring not just from the tax incentives but their whole strategy of courting overseas games opportunities.

Additionally it is felt that there is a need to look beyond money and tax breaks and ensure that the infrastructure and competitive environment in the UK and Scotland remains conducive to the continued growth of this sector.

It would be tragic if after all the investment and work to date we fail the sector now, when it continues to grow at one of the fastest rates in developed economies. With some crucial support now this industry will pay dividends for our economy in the future.

7 September 2010