The British Film and Television Industries - Communications Committee Contents

Examination of Witnesses (Questions 853-961)

Mr Jonathan Smith, Mr Ian Livingstone, Mr Michael Rawlinson, Mr Richard Wilson and Mr Simon Gardner

10 JUNE 2009

  Q962  Chairman: Welcome. I think you know perfectly well what we are doing. We are trying to make some assessment of the importance of this area, including very much your own, as far as the UK is concerned, as far as the economic contribution it makes, the cultural contribution, and really to see what else, if anything, can be done or you would like to see done by government and policy makers. That is really the area that we are in. Perhaps the most useful thing is if you could all just say literally a word or two about where you come from and the kinds of things that your companies are doing, starting from Mr Gardner.

  Mr Gardner: My name is Simon Gardner. I am the CEO of Climax Studios. We are a small to medium sized independent developer, privately owned. We make computer games for American publishers, European publishers and Japanese publishers, so we bring foreign currency into the country directly from abroad.

  Mr Wilson: I am Richard Wilson, the CEO of Tiga, the trade association that represents video game developers. We have approximately 150 member companies and organisations that include game developers, publisher owned studios, universities and some training providers. We work to lobby government on behalf of our sector and we develop benefits and services for our members to make them even more competitive.

  Q963  Chairman: How old are you as an association?

  Mr Wilson: We were established back in 2001. I took over in March 2008.

  Mr Rawlinson: I am Michael Rawlinson. I am director general of ELSPA, which is the trade association representing publishers of video games. We were established 20 years ago. In fact, we were the world's first trade association for our sector. I took over as director general in March this year.

  Q964  Chairman: Does that mean we have two trade associations sitting side by side?

  Mr Rawlinson: We have.

  Q965  Chairman: Is that a good idea? You have distinct roles, do you not?

  Mr Rawlinson: We do, which we might explain later as we go through the inquiry.

  Mr Livingstone: I am Ian Livingstone. I am the life president of Eidos, until recently a public company and the largest independent UK developer and publisher of games. We were bought in May by Square Enix of Japan. We are most famous for Tomb Raider, Lara Croft. Before Eidos, I started a company called Games Workshop and launched Dungeons and Dragons, so we have been part of the interactive entertainment industry for 30 years.

  Q966  Chairman: Why did you sell to the Japanese company?

  Mr Livingstone: That is one of the issues we might have to address today. Clearly it is good for our balance sheet and the future of the company and its employees, but there are other issues about foreign companies seeing greater value in our industry's intellectual property and our skills than we do in our own country.

  Mr Smith: Jonathan Smith. I am head of production at TT Games, which is a UK company incorporating developer Travellers' Tales and publisher TT Games. We were an independent group until we were acquired by Warner Brothers at the end of 2007. We employ 300 people in the UK and we are most famous for our range of Lego games which are focused at families and young children. We have sold about 30 million of those over the last five years.

  Q967  Chairman: Your company has been sold as well?

  Mr Smith: That is correct.

  Q968  Chairman: Give me some idea of the size of the UK video game sector in terms of the revenue, number of firms and things of that sort.

  Mr Rawlinson: Thank you for inviting us here today. We believe that our industry is sometimes overlooked against more established forms of media in the cultural sector of this country. We have in the UK a retail market for video games worth £1.9 billion last year. When you add in games-specific hardware and peripherals, that rises to over £4 billion. Richard will tell you in a moment about the development sector and how much we create of that content here in the UK.

  Q969  Chairman: That is the total UK market?

  Mr Rawlinson: The total UK market as sold through retail shops. In addition to that, people are consuming games online and paying subscriptions.

  Q970  Chairman: That is the market in which everybody from all over the world can be competing?

  Mr Rawlinson: Yes indeed. We are the third largest market in the world and the largest market in Europe. The American market is the largest at just over £11 billion followed by Japan at just under £4 billion, software only. We are approximately a quarter of the size of the Japanese market. In terms of our consumer, our consumer is aged from three to 93. The average age of a gamer in this country is over 30-33—so it is no longer the preserve of young children and boys, particularly teenage boys, but we do cater for the total market.

  Q971  Chairman: What about the UK industry itself? We have this £4 billion UK market. We have other markets overseas. What is the revenue that the UK industry generates?

  Mr Wilson: Our figures show that we generate about £2 billion per annum into global sales. To give a little more detail on the firm size of the games development community, we have about 213 studios in the UK. Of those, 166 will be classified as independent game developers. Another 47 are publisher-owned studios and about another 73 are service companies that provide technological support, servicing activities to help games businesses. In terms of firm size, the overwhelming majority would be classified as small or medium sized enterprises. Our research shows that only about two per cent will be classified as large businesses. We estimate that about 48 per cent of our businesses have been in existence for at least six years and they are very export orientated. A typical games development business in the UK earns about 46 per cent of its turnover from the export of its product.

  Q972  Chairman: If you have two billion revenue, roughly a billion comes from UK sales and a billion comes from export. Would that be right?

  Mr Wilson: I do not know the breakdown of figures. My research shows that we have £2 billion in terms of global sales.

  Q973  Chairman: Global meaning the UK and the rest of the world?

  Mr Wilson: Yes.

  Q974  Chairman: Is this industry going up in terms of revenue if you compare it to the position five years ago?

  Mr Rawlinson: In terms of retail sales and people buying the product globally, yes. We are a growing market. Clearly we are in difficult economic times at the moment but against other entertainment forms we are holding up well.

  Q975  Chairman: If we took it five years ago, the revenue being earned by the industry would be less than it is now?

  Mr Rawlinson: Yes.

  Q976  Chairman: If the UK is doing well in this respect, why is it that UK companies are being bought by companies from overseas? Why are we not just developing our own industry?

  Mr Livingstone: Foreign countries' publishers and investors see greater value in what we do than we do ourselves. It has always been difficult for creative industries to raise capital and finance in the UK and yet we are the most creative nation in the world. Look at the success of music, fashion, film, advertising, TV and, more latterly, computer games. We are perceived as an industry that does not have as great a value as traditional industries. All that is changing because we are the future. We are the marriage of art and technology. The problem that we are experiencing is particularly with skills. We have a skills problem. You were mentioning the film industry earlier and I would like to talk in great detail about the skills problems that we have, but we also compete on an uneven basis. We do not have a level economic playing field. A country like Canada is offering a 37.5 per cent production tax credit. France is offering a 20 per cent production tax credit. We do not have those benefits here at all. The film industry does. Whereas somebody working in film only generates £50,000 to UK GDP, someone in games generates £200,000.

  Q977  Chairman: When you were independent, did you find this a matter of frustration to yourself?

  Mr Livingstone: Because of various factors, we have moved a lot of our production overseas. Tomb Raider was developed in California. We have a studio in Montreal developing two games. As publishers, we are country agnostic. We go where the skills are high and the production costs are low. Unfortunately, the UK is one of the most expensive countries in which to develop computer games and also the universities are doing a great disservice in not supplying the skill graduates that we need.[6]

  Q978  Chairman: Presumably, when the company was sold, the shareholders of the company got a reasonable profit from the deal, did they?

  Mr Livingstone: Absolutely not. Some did in the early days of the company. We had a market capitalisation in 1999 of over £1 billion but we were sold for £84 million in 2009. You could say in some respects that the markets have not really understood the changing nature of the business, the fact that it is an ethereal process. It is not two blokes in a garage making games any more for £20,000; it is teams of 150 people, highly skilled computer scientists, artists and animators working hard for two years to budgets of £15 million to £20 million to make a blockbuster title. If you look at a game like Grand Theft Auto 4, which was released last year, it has been vilified in the press but it sold six million units in its first week of sales. That generated half a billion dollars in revenue at retail. That is bigger than any entertainment release in any other medium. It was developed in Scotland, again by a company that is owned by a US publisher, and yet, rather than praise that achievement, it was largely criticised in the press. We feel the government has not helped us to change the perception of games. They are not all about violence. Brain training, online games, casual games, puzzle games, sport simulations, pony games for children. There is something for everybody now. It is a broad church of content on broad, diverse platforms. 75 per cent of the population now plays games.

  Q979  Chairman: The Japanese company that bought your company has a bargain, basically?

  Mr Livingstone: Yes. It is great for our company's balance sheet but again it points to the UK not recognising the value of its intellectual property. We are very good at creating IP in this country; we are not very good at hanging on to it. The real value of any kind of digital company comes from its ownership of IP. If it is sold off, we are in danger of becoming a work-for-hire nation.

  Q980  Chairman: We have the creative talent but we do not seem to be able to develop it properly. Mr Smith?

  Mr Smith: We have extreme creative talent here, based in the UK, which we have been able to foster over 18 years of development at Travellers' Tales. The reason we sold to a North American publishing organisation was about preserving the value here, the question of the entertainment business being able to fund the degree of investment required to make modern games and to take the risk in the creative environment that is necessary. We felt that Warner Brothers were able to give us the global reach, the global impact at an entertainment level and were willing to take the risks that were necessary to fund us to be competitive and relevant.

  Q981  Chairman: Any reservations?

  Mr Smith: Apart from the fact that they are not UK? We were for a long time one of the UK's strongest, independent developers. At least we are still employing great people here and bringing on their talent, trying to keep them working here in the UK.

  Q982  Chairman: The corporate profits go elsewhere?

  Mr Smith: They do.

  Q983  Lord Inglewood: Could you explain the process of developing a game?

  Mr Smith: It will vary from company to company depending on culture and history and, crucially, depending on the investment that they have been able to make over many years in their own in-house technology processes and people. For instance, our company can make certain types of games much more easily than other people can because of the investments that we have made over many, many years. In very broad outline, the idea for a game tends to come from the publisher, when we are talking about external IP, often tied to a licence, a movie property or a relevant toy property for children or families. That will be briefed to a creative team who will start to work, who will flesh out their ideas for how the game can be made within a timescale and a budget, which is then negotiated and usually driven down. Then a period of time will be taken to develop the game. It is quite complicated. In general terms there will be conventionally a pre-production process, a production process, where the team grows to its largest size, and then a post-production process where all the errors in the games are found and fixed.

  Mr Livingstone: The difference between making a movie and a game is that a movie is a linear experience where the director controls the actors and there is no variance on that. Making a game is an interactive experience where the consumer controls the action. Therefore, the skills required to make a game are a lot more demanding, in my opinion, than making a movie. There are movie sequences within games, usually cut and created through CGI, computer generated imagery, but the core of a game is creating a 3D engine which creates an experience in real time. That is the real skill. Frankly, we are losing our skill at doing that. We have dropped from third to fourth in world development.

  Q984  Lord Macdonald of Tradeston: In terms of the origin of the successful game, is there a particular affinity with the film industry or is it more to do with magazine publishing? Are you really stand alone and you do not need a particular strong partner from a larger industry?

  Mr Livingstone: Historically, some games were made on licences like film licences, sports licences and some on books, but the real values have been created by creating our own intellectual property like Tomb Raider, Lara Croft, for example. That is an original IP that started as a game and then we can leverage that IP through a merchandising and licencing to create additional, incremental revenues. We licensed the movie to Paramount Studios and they made two blockbuster movies generating $450 million at box office. Therefore, Hollywood have seen the value of the IP that we have created and more and more films are being made based on computer characters because we have taken over from comic books and novels as being an important source of well known, recognised, global characters.

  Q985  Lord Macdonald of Tradeston: You have obviously changed the aesthetic nature of watching screens for a lot of people—in particular, the younger generation—and we hear that a lot of films now begin to look like video games. Does that mean that your future lies at the top end with the marketing power of the big film companies and their global reach?

  Mr Livingstone: A lot of media and film companies are getting into our space because they recognise that the compelling nature of interactivity is much more fun for children in particular. If you look for example at Disney, they recently acquired Club Penguin, which is a massively multiplayer online for children, five years and older. They bought it for approximately $500 million and the reason they did that is, through their own research, they realised when people went to the Disney website what they were doing was playing the games rather than looking at the usual content, so they wanted to acquire an MMO, a massively multiplayer online game, which had a large audience of children enjoying the interactivity of gaming. Not all games are violent. This is for a five year old with Avatar penguins, enjoying life in a community.

  Q986  Lord Macdonald of Tradeston: You obviously suffer from a cultural lag in that the opinion forming classes have not quite caught up with video gaming. I remember ten years ago, when I was on the Scottish Enterprise Board in Scotland, we were very enthusiastic and the politicians were very enthusiastic to grow your industry. We were not hostile to it. I suspect that the problem of sustaining and growing the industry in Britain is something more fundamental than just general hostility.

  Mr Livingstone: You make a great point about Scotland. They have been very supportive. Scottish Enterprise and the Scottish Government have been great. The University of Abertay is perhaps the best university in the UK for providing graduates both in programming and in art and animation. It is no coincidence that companies like Rock Star North that develops Grand Theft Auto and Real Time Worlds that has built a huge MMO exist in Scotland. They have created a culture where businesses work with academia and government to create a great initiative to go forward, but that has not been reflected in the rest of the UK unfortunately. I would like to talk in some detail about the skills crisis that we are now encountering.

  Q987  Chairman: Mr Gardner, do you share all these concerns which are being expressed?

  Mr Gardner: Yes, I do, on the whole. We are obviously in a different situation. We sold one of our studios to Disney a couple of years ago, so that kind of backs up your premise that there is a convergence of the industries.

  Q988  Chairman: You are not UK owned either?

  Mr Gardner: We are now. We sold one of our studios. Five years ago when I joined the company we had seven studios employing about 450 people. One of the biggest problems that hit us was the currency exchange rate and the UK became one of the most expensive places to develop in the world. That affected our business. We had to downsize our business down to what it is today, which is one studio and about 110 people. At one point we were down to 50 people. With the weakness of the pound against the dollar, we have been able to become more competitive but obviously the dollar is going back up the other way, so that has concerns for us at the moment. The other thing as a studio that we had to do was to focus on quality because the other development places in the world like China and India are able to compete on a work-for-hire basis. We have had to realign our business and head exclusively for quality, which is paying dividends, but that obviously costs a lot more, so our costs are rising.

  Q989  Lord King of Bridgwater: The pound was overvalued at two dollars. It was undervalued probably at 1.35. I got the impression from you that if it stops around 1.60 or 1.65 that raises problems for you. Does it?

  Mr Gardner: It is okay at the moment.

  Q990  Lord King of Bridgwater: Some people take the view that 1.60 or 1.65 might be a more normal rate. If that is the case, what are the prospects for the industry at that level?

  Mr Gardner: Better than they were at 2.10. It peaked at 2.10 which made us totally uncompetitive. At the current exchange rate, it is probably doable.

  Q991  Lord Maxton: Is not one of your problems that you are an international industry in a way that the film industry and certainly the television industry is not? The television industry makes programmes for a British audience. The film industry makes films at least with British content, very largely. You are international.

  Mr Gardner: That is our great strength.

  Q992  Lord Maxton: It is, but it does make it more difficult for the government to understand why it should make you a special case.

  Mr Gardner: The interesting thing is that we bring in hard, foreign currency into this country.

  Q993  Lord Maxton: I am on your side.

  Mr Gardner: In effect, we build things that we sell abroad. We are not limited by our location to the types of product that we can build. We can build a game based in New York or Los Angeles as well as anybody else. Okay, so can other people, so we have to compete on creativity and ability, but I see that as a great strength, not a weakness.

  Q994  Lord Maxton: The only ones I can think of, to be honest, are golf games based on British courses and British golfers but outside of that are there any games which have basically a British content?

  Mr Gardner: We have made games in the past like Robot Wars, things like that, which are based on British IP that was created by the BBC.

  Mr Livingstone: We made one called Championship Manager, a soccer management game which was developed in our studio in London and it is largely for a UK market. It is not an action game. It simulates management of a soccer team.

  Q995  Lord Maxton: I notice that the latest Microsoft game, the activity game you play in front of the television set without a machine at all, was developed by a British company. Is that right?

  Mr Gardner: Some of the software concepts they are going to use with it were definitely developed—

  Mr Livingstone: It is Israeli technology.

  Mr Smith: That British company is owned by Microsoft.

  Q996  Chairman: In passing almost, you said at the beginning—perhaps this is to the two trade associations—that you rather resented the feeling that video games were all about violence and having this impression. How do you rebut that argument?

  Mr Rawlinson: The facts, actually.

  Q997  Chairman: That is the best way.

  Mr Rawlinson: In the last five years, over 6,000 video games have been classified for the nature of their content under the Pan-European Games Information rating system called PEGI. Of those 6,200 games, 84 per cent were rated as being suitable for players aged 12 and under and only six per cent of them were for adults only. In terms of the actual quantity of product, the numbers are quite low for adults. The sales of the adult product are higher but, on the basis that the average of a gamer is 33, that is not unreasonable. If we look at our comparative media markets such as film, the film industry is not characterised by one or two highly violent films such as Saw or Hostel, but unfortunately our industry is totally characterised by one or two violent video games such as Grand Theft Auto. This really is a total distortion of the facts.

  Q998  Chairman: Is it also a distortion, the charge that your content is based on United States or Japanese values?

  Mr Rawlinson: There are two distinct markets. There is a definite Japanese market, Japanese content, some of which travels into this UK market, some of which does not and stays very much locally based. Certain products that received some notoriety quite recently such as Rayplay, an online video game that really has no market in this country and, even if it were available to the market, it would not have been given a classification here. The rest of the market is a broad entertainment market. I would say a product that sells in the US sells in the UK and vice versa. Our products, our intellectual property, travel across to the United States as characterised by the sales that Richard has outlined for our inward trade.

  Q999  Chairman: You sound as though you feel more strongly about the violent products having an impact upon the whole of the business than most people.

  Mr Rawlinson: A negative impact?

  Q1000  Chairman: Yes.

  Mr Rawlinson: Only in perception.

  Q1001  Chairman: You are fighting against that negative impact.

  Mr Rawlinson: What we are trying to do is to be positive and promote the new games, the new styles of game play that allow interactivity, easy access. The Wii product hardware particularly allows anybody in this room who has never played a video game before to pick up a controller and play with games instantly. That is what we are promoting.

  Mr Wilson: I do feel the public perception of video games is improving, despite some of the comments we have expressed this morning. For example, when Grand Theft Auto was released last year, it was interesting to see that The Times ran an editorial, on page two I think it is now, praising the product. A few years ago that would not have happened. To have a mainstream, what was a broadsheet paper, praising the product was a major breakthrough. I think public perceptions are changing. They are changing in most parts of the media. As far as our trade association is concerned—it is probably true of Mike and ELSPA's position as well—we are more concerned about government policy and the relative indifference of government policy, towards helping the industry, rather than government ministers not being familiar with the sector or painting the industry in dark colours. We are much more concerned about the fact that we could provide a much more favourable tax environment for the games industry and we do want to improve skills and training within the sector.

  Q1002  Baroness Eccles of Moulton: You have described how the market has moved up the age range. I wonder whether there is a future potential market for the retired, for the elderly, on three counts. First of all, they have the time. Secondly, pretty well everybody now understands how to operate a video game or whatever. Thirdly, there is a great emphasis on the elderly keeping their brains active so you might have a wonderful market there. Is there any emphasis on that?

  Mr Rawlinson: We do already have that market and it is wonderful for you to recognise exactly those three points. Many properties are used in old people's homes. Fitness games and brain training games are used in exactly the way that you have outlined. We are seeing a growing market there. If you characterise the market for video games as being the old, traditional, core market of young people, hard core games playing long hours, that market has not changed significantly but our growth has come from this massive expansion up the age range, particularly into seniors.

  Q1003  Baroness Howe of Idlicote: You obviously feel pretty upset about the way in which the whole of the industry has been labelled as violent. I think one understands that. Equally, I have seen some of these very violent and pornographic films, so I do know they exist. Thinking about something that might help the image, PEGI is a little bit, shall we say, owned by the industry itself. Might it not be rather more accepted certainly by the UK if you also had the other, more recognised standard, the British Film Institute standard, on these films, because I think there has been disagreement about what came within the appropriate age range. Why not have both?

  Mr Rawlinson: We have submitted evidence to the government on their consultation on this issue. The PEGI system, although established by the industry, as was the film ratings system back in the beginning of the 20th century, is independently administered totally separately from the industry. The research that we conducted of ratings carried out in 2008, where the British Board of Film Classification rated a number of products, the same products as PEGI, found in 50 cases that they rated at a lower classification age than the PEGI system. We believe that PEGI is more stringent than the British Board of Film Classification. More importantly, as our products are interactive and our players are playing across borders, across boundaries into Europe, the PEGI system provides the correct solution for products sold both in retail stores in the high street but also sold and played online and works for gaming today and into the future. We do believe that it is the right solution and we are hopeful that in the Digital Britain report the government will make some pronouncement on this next week. If that pronouncement is favourable to PEGI, the industry is ready to invest heavily in marketing and education of the system to ensure that consumers are fully au fait with all that it stands for.

  Q1004  Baroness Howe of Idlicote: Having said all that, I still do not see why you could not have both.

  Mr Rawlinson: The issue there is confusion. To have two logos on the package—this fact was recognised by Tania Byron in her report—causes consumer confusion. What we need to do is differentiate linear film and TV products from interactive products. Starting with a different age classification symbol that immediately can enable the consumer to identify that this is an interactive product is a great place to start. Then we can go on and further explain the age classification and the content descriptors so that they full understand the nature of the content, which is not just about content but is also about the conduct and the contact between players because we have an interactive experience.

  Q1005  Baroness Bonham-Carter of Yarnbury: Mr Livingstone and Mr Smith, should you perhaps be focusing more on UK content in your games?

  Mr Livingstone: The investment to make a game is between £15 million and £20 million and we are a global company with global distribution and we have to address a global market. Whilst it is great to have a UK-centric game like Championship Manager, if we are going to recoup our investment we need to sell probably in the region of 1.5 million units of a game to get our money back before making any major contribution. We need to have a global market. The US market is as big as the European market, so we cannot afford to dismiss that market.

  Q1006  Baroness Bonham-Carter of Yarnbury: Does that mean you are targeting the US market rather than the UK market?

  Mr Livingstone: No. We are looking for intellectual property that will address the whole market. Lara Croft, Tomb Raider is sold in every country just about on the planet because she has global appeal.

  Q1007  Baroness Bonham-Carter of Yarnbury: I thought she was American.

  Mr Livingstone: No, she is British. You probably thought that because of Angelina Jolie.

  Q1008  Lord Macdonald of Tradeston: Can I come back to this question of what would appear to be the biggest problem of your business model as an industry? You suffer from the same threats as the film industry in trying to develop portfolios. As Mr Livingstone says, this is a 20 million development. I do not know what your success rate is for those developments that you start, how many are in your portfolio and how many are successful, but it looks to me as though you are clearly not capitalised well enough. The British film industry never has been, so almost from the start it is very difficult to see a future for your industry based on that business model, unless something is going to change.

  Mr Livingstone: There is certainly a future for the industry because we happen to be very good at making games.

  Q1009  Lord Macdonald of Tradeston: Can an indigenous, British industry become the global champion?

  Mr Livingstone: We have not been able to get the backing from the financial markets in the UK to capitalise on our intuitive creativity. Our own company, Eidos, has been acquired by foreign publishers because they have seen the value.

  Q1010  Lord Macdonald of Tradeston: That is understandable if you have to put £20 million at risk and the game might not be a success. I am still not clear whether your portfolio success is one in five or one in ten. How much do you have to put at risk until you get the breakout and get the money back? The business model is a very risky one and that is probably why Britain has never been able to find that capital to give you the product line flowing forward that you would need.

  Mr Livingstone: We are more risk averse in this country, especially in the creative industries. In the US you get Ebay, Google, Facebook, etc., coming out. You do not have that happening in this country. It is the same mindset for approaching video games which are seen predominantly as a negative thing and I do not think the government has done anything to put its arm around us in the 20-odd years that we have been going. They have kept us at arm's length because of the negative press and they have not understood the costs involved. They thought everything was bad about games. They did not think about the fact that you learn about how to solve puzzles and problems, choice and consequence, intuitive learning, community online, learning about just how to operate a computer. These are all positive things, to my mind.

  Q1011  Lord Macdonald of Tradeston: The capital markets are risk averse about film because they have lost a lot of money in making films. You seem to have the same flaw, perhaps more so, in your basic business model.

  Mr Livingstone: We are certainly a long term business. Whilst the Americans are more likely to take a few hits in the short term, they know they will win in the long term as consolidation takes place which inevitably happens like it did in the music and the film industry. All these independents will in turn be either bought or merged together to create bigger entities with more capital behind them.

  Q1012  Lord Macdonald of Tradeston: I am very sympathetic to your dilemma. I am just trying to put it in an international, economic context.

  Mr Livingstone: Our case, having said that, is not helped by the skills problem which I would like to address later on and also our inability to convince the government that we are the future and we should be backed financially.

  Q1013  Lord King of Bridgwater: Can we get an answer to the question about the success ratio? Can you give any sort of figure for that? Is it one in five? How many flop?

  Mr Livingstone: It is a case of roast duck or no dinner in most respects. In the charts, the top ten will be making quite a lot of money for the publishers. Anything below probably 10 to 20 you will get your money back. It is like a share portfolio. The ones that really hit big more than pay for your flops.

  Q1014  Lord King of Bridgwater: How many fail in relation to the number?

  Mr Rawlinson: A lot. We can find that figure for you. It is complicated because for every title that comes out it may appear on a number of different platforms.

  Chairman: That would be a very useful figure to have. Let us get on to what the government can do for you or what you would like to see them do for you.

  Q1015  Lord Gordon of Strathblane: Mr Wilson, in your report you were lamenting the fact that Britain has been slipping in the world rankings in terms of revenue from third to fourth and I think you said this year to fifth. Are you saying that the UK games development industry is competing with one hand tied behind its back? Would you like to expand on that?

  Mr Wilson: The principal point here is that some of our key competitors—for example in many states in the United States, in Canada, especially Quebec, in France and other jurisdictions, for example in Singapore and Australia—offer tax breaks for going into production or very generous research and development tax credits or grants. The most egregious example from a UK perspective would be Quebec, where it is quite extraordinary. Whereas the UK games industry has grown in terms of employees by about eight per cent over the last two years, in Quebec the workforce has grown by about 52 per cent because of the very generous tax breaks. At a federal level, there is a tax break for going into production that amounts to about 37 per cent. In Quebec itself the government, incredibly, will pay the salaries of game developers to the tune of 37.5 per cent of their wage costs. These are extraordinary benefits. Additionally, to help attract key personnel from other countries to locate in Quebec, the government offers income tax holidays. There are very powerful incentives for game developers and individual workers to locate to Quebec. It is very hard therefore for the UK games industry to attract international investment when some of the competitor countries offer such generous support.

  Q1016  Lord Gordon of Strathblane: One of the points you mention in a recent statement is that the Canadian Government generates much more than that in inward investment. In other words, it is not simply a tax break; it is something that comes back with jam on it.

  Mr Livingstone: Quebec have invested $500 million in attracting companies to invest in Canada. They do not see that as a handout; they clearly see that as an investment because publishers like Eidos have invested $1.5 billion by way of inward investment into setting up shop there.

  Q1017  Lord Gordon of Strathblane: Specifically, what would you like the British Government to be doing? I imagine you would like to be treated like the film industry rather than differently in terms of regulation.

  Mr Wilson: It would be fantastic to have the very generous tax breaks for going into production that our compatriots overseas receive for example in Quebec, but at a bare minimum we would like the UK Government to adopt a tax break of 20 per cent for going into production.

  Q1018  Lord Gordon of Strathblane: How would the tax break apply?

  Mr Wilson: It would be set against corporation tax.

  Q1019  Lord Gordon of Strathblane: That would only help games that are successful and paying tax on profits?

  Mr Wilson: That is correct. There is a scheme in operation in France—I think it has been in operation since 2007—which we would very much like the UK Government to adopt. That provides a 20 per cent production tax break for games production. The first results of the production tax break have been announced. About 120 French companies put in a claim for the tax break. About 40-odd benefited from it. The French Government decided to support their sector. At the very least, we would like the UK Government to support the UK games development sector.

  Q1020  Lord Gordon of Strathblane: I understand you have been lobbying DCMS to that effect. Any success?

  Mr Wilson: My impression is that DCMS ministers and civil servants are very sympathetic to the video games industry. The overwhelming impression I get is that the problem really lies with the Treasury. The Treasury clearly does not want to introduce that tax break.

  Q1021  Chairman: The Treasury said—I am grateful to The Guardian for this——Following approval of a cultural tax relief for games in France, the government is now working with the UK gaming industry to collect and review the evidence for introducing such a credit in the UK." Why is it working with the gaming industry?

  Mr Rawlinson: I think they mean us.

  Q1022  Chairman: Are you part of the gaming industry?

  Mr Livingstone: It is a problem of perception.

  Q1023  Chairman: Are you bracketed with the gaming industry?

  Mr Rawlinson: We are totally separate and have nothing to do with that industry, but sometimes video games are confused with gaming.

  Q1024  Lord Inglewood: Going back to the question of the various forms of public sector support available elsewhere in the world, what does the WTO have to say about all this?

  Mr Wilson: The government did say that it would address this issue by going to the WTO to see whether the Canadian subsidies for example violated WTO rules. They found out there were no grounds for criticising Canada on that particular issue.

  Q1025  Lord Inglewood: Is that because they were promoting domestic, cultural considerations or it just happened to be outside the rules?

  Mr Wilson: It is outside the rules.

  Q1026  Lord Gordon of Strathblane: Obviously, nobody will give you a tax break without some strings attached. What strings do you think would be appropriate? Would it be simply made in Britain or British culture or both?

  Mr Wilson: The simplest thing for the UK Government to do would be to adopt the French criteria for allowing a games company to benefit from a production tax break. The French criteria include things such as originality, technological advancement in the way the game is developed, original IP and also a cultural element as well. For example, if such a tax break was introduced in the UK, if there were some points in the criteria whereby a UK games business might make a historically based video game, if it was using some new form of technology to create the game, they should receive points for that. In terms of some of the strings attached or some of the benefits that could float back, industry research shows that if we introduce a tax break of 20 per cent on games production in the UK over a five year period we would anticipate another 1,600 graduate level jobs being created and an additional £220 million in investment. We believe that a tax break for games production would create dividends for the UK games industry and help the UK economy.

  Q1027  Lord Inglewood: In terms of the product you produce, how much damage is done to you by theft—i.e., piracy—of the products that you make? Secondly, in terms of the value of the businesses in this country making video games, how much of that is based on intellectual property they own? Is there a threat of leakage there? We heard about the visual effects industry earlier. Although people develop software, it soon becomes public knowledge.

  Mr Rawlinson: The level of piracy and its effect will be determined by the hardware platform that the game is operating on. A platform such as Play Station 3 has not been cracked yet and therefore there is no piracy on that platform. If you take a platform such as the Nintendo DS where there is a device that can plug into the DS, into the memory slot, this can circumvent the copy protection that exists and a game such as the latest instalment of Grand Theft Auto for the DS was widely pirated. The commercial success of that product was completely decimated. It is dependent upon the hardware platform as to the effects and it is dependent on the title. I guess a My Little Pony type of title will suffer less from piracy than one of the hard core gaming products that is probably selling to technically savvy players. Piracy is a big issue. I would characterise it in this way: in the past, piracy was affected by criminals selling our product from tables at car boot sales and markets, one person selling a lot in a criminal way. Now we have millions of people sharing one or two files in a free way. The effect is exactly the same. The characterisation of it is quite different. The difficulty we have is that no one wants to say that the pseudo consumer is a criminal. However, that unauthorised sharing of intellectual property is hugely damaging to the industry. We do have the advantage of technical measures to slow that down in certain cases, but once that is cracked that is a big problem.

  Q1028  Lord Maxton: Does that need a change in the copyright laws? If you look at copyright, to allow someone to copy something for their own personal use is allowable but to copy it for sale is not. A lot of the copying that goes on—the piracy you are talking about—is for personal use. It is lending to friends, your brother or whoever it might be, is it not?

  Mr Rawlinson: There is certainly some updating required to the copyright law that picks up that very point that you make. Also, the penalties accruing to online infringements do not match the penalties accruing to offline infringements. We have issues there. Detecting and bringing to book criminal behaviour on the internet is incredibly difficult. Unfortunately, the very people who provide the conduit, the ISPs, hide behind their conduit status and fail to get involved in helping to provide the solution. In fact, the very traffic that harms our industry benefits them because it becomes a sales benefit for people to sign up for internet access. In the earlier days of broadband, companies such as BT were using the very fact of downloading films, television programmes and games as a sales benefit for signing up when they did not own the rights to that content. They were not interested.

  Q1029  Baroness McIntosh of Hudnall: This is your moment, Mr Livingstone. I did not see anybody dissenting from your view that there is a serious issue about skills training for this industry. We have heard this also in relation to some of the types of technology skills that are required for the film industry as well. We have heard it from one of our witnesses earlier. Whose responsibility is it to up the ante when it comes to creating the skills that are necessary for this industry? You have said in your evidence—and indeed, Mr Livingstone, you mentioned it earlier—that the universities are in some way failing to step up to the plate as far as this goes. It is quite clear that the kinds of skills that you need for your industry are in very short supply anyway because they are mathematical and computer science skills. We know that the whole education system is failing to generate enough people who can then, having acquired skills, come back into the education system to teach them. How do you see the relationship between the industry itself and the basic educational skills that you are looking for working together to address the issue that you are so concerned about?

  Mr Livingstone: I do not think we can just expect the universities to churn out graduates that we require without any help. If you step back a bit, there are 81 courses in the UK offering computer games studies. Only five of those courses have been accredited as fit for purpose. The remainder have not passed or tried to pass the accreditation scheme offered by Skillset. Because universities are funded via a quota system, bums on seats, if they can cut out the tough part of the subject matter and relabel media studies courses as computer games studies, they are going to get a lot more applicants. All these students learn about is the social relevance of games and games design. Of course we need designers but we need the technologists much more in number. They are doing these students a great disservice because they are coming out thinking they are going to get a job and quite clearly they are not. What we need is computer scientists, digital artists and animators. It is better for us to go to somewhere like Imperial College where they do not even have a computer games course and hire straight out of there because they have learned C++ programming language. They can start work tomorrow. The fact that these courses have the word —games" in them should be investigated by the trades description people because they are clearly not giving the games students the skills they need. We have to change the perception of games to get people to understand that at school, if you learn mathematics, you might be able to make the next Tomb Raider, to have some relevance in their lives for studying mathematics. That will feed all the way up and then we can work with universities, with government, to create the courses that we need. We can help teach the universities. Local students can work with local companies so they can tell them about the technology, what is happening in content, what is happening in the market place and then do some lectures and some mentoring and give some work experience. This will help the studios to get the students that they require. If government can work with universities and the industry, as is happening in Scotland, in Dundee, it will benefit everybody. You cannot expect it just to happen magically. We are in a huge crisis at the moment because these poorly trained students coming out cannot do the job that we require. We have to retrain them for about two years.

  Q1030  Baroness McIntosh of Hudnall: You refer to it as a huge crisis. That is pretty apocalyptic language. There is some evidence that you have put forward that it is having an impact on the industry now. What is your worst case scenario for the industry as a whole if this issue is not addressed by government and by the universities?

  Mr Livingstone: We will not be able to make the games that historically we have always been great at doing.

  Q1031  Baroness McIntosh of Hudnall: Over what period of time?

  Mr Livingstone: We recently opened a studio in Montreal because of the production tax credits but, secondly, there is a great skill base there. The government has worked hard to create universities that create content for students to learn so that we can hire straight away. It is creating this ecosystem with academia, with investment, with a positive government to create the culture—

  Q1032  Baroness McIntosh of Hudnall: I am sorry to interrupt you. I do understand what the ideal would be like and I understand that there are models for it. What I am asking you is: how near are we to the edge of the precipice as you anticipate it for the industry if this issue is not addressed?

  Mr Livingstone: I do not think we can say we are at the edge of a precipice, but we are in decline. If you talk to these guys about how they find graduates who can start work tomorrow they are going to say it is not easy.

  Q1033  Chairman: There are 81 courses, which I must say are news to me, offering computer games?

  Mr Livingstone: That is right.

  Q1034  Chairman: How many of those would you regard as fit for purpose?

  Mr Livingstone: Five have been accredited by Skillset. There are probably another dozen that could be accredited by Skillset once they have met the criteria and had the graduates come through their system. A lot of them are just offering these generalist courses to get bums on seats. These graduates are coming out with no value at all.

  Q1035  Chairman: Three quarters of the courses on offer are pretty useless?

  Mr Livingstone: I would say so.

  Mr Wilson: I do not think that is fair. I think we do need to clarify that slightly. There are some university courses, for example, by Bournemouth University, which are not accredited by Skillset. We know for a fact that Sony recruits very heavily from Bournemouth University even though that particular course is not accredited.

  Q1036  Chairman: How many courses do you think are useless?

  Mr Wilson: I genuinely do not know but I do not think it is fair to say that every single course that is not accredited by Skillset is rubbish. That is simply not true.

  Mr Livingstone: I did not say that. I said five are. 12 probably could be but the rest are not doing what they should be doing. It is just generalist media courses with the name crossed out and —computer games studies" inserted.

  Q1037  Chairman: Do you agree with that?

  Mr Wilson: To be honest, I think the main issue is not so much the games courses and whether they have been accredited by Skillset or not. The main issue really goes back to the question which I think you put, the implicit one about supply. A lot of games businesses like to recruit computer science or mathematics graduates and of course, as you know from figures from the Higher Education Funding Council, the number of people studying computer science has fallen by about 20 per cent between 2002 and 2006. That is the bigger issue. So many other industries like manufacturing, the City up until about 12 months ago, are keen to recruit people with mathematical and computer science skills but it is the creative shortage. That is the more fundamental issue facing the industry.

  Mr Gardner: There is also the issue that Skillset say that just under three-quarters of the graduates that come out of those games courses do not get jobs in our industry.

  Q1038  Lord Macdonald of Tradeston: What do you pay to your graduates that you take on, because you cannot offer them security and clearly other industries in short supply for the scientists and mathematicians might pay more. Is there a lifestyle choice going into the games industry if you are a very bright graduate or do you pay them well?

  Mr Livingstone: It is a lifestyle of course and we pay well. Obviously we are a lot more fun than banking.

Lord Maxton: And more rewarding.

  Q1039  Baroness Howe of Idlicote: Everything is at the higher education level. Surely there is a gap too as far as apprenticeships are concerned? What is your view on that?

  Mr Gardner: We have two interns in our studio, so we bring them in for a year's placement with us. They are going into their final year. They are both in computing. They are in further education anyway doing degrees in computer science. One of the big problems is that people think, if they play and enjoy games, they can make them and I am afraid they cannot. Even on designers, where you would think it is all about fun and all the rest, the two best designers I have ever worked with both had first class degrees, one in English, one in maths, from Oxford and Cambridge respectively. There is an issue there.

  Mr Rawlinson: There is an apprentice scheme for games testers that has been piloted down in Brighton, which is supported by Skillset. There are some apprentice opportunities within the industry but they are very defined and they are within that testing area generally. Otherwise, within development, our skills base is at the higher end.

Chairman: Thank you very much. We define this as an area of critical importance to you although there is a slight division between you on the cure for it and we will look at that further. Could I thank you very much indeed for putting the case so clearly and so well and with so much experience? Thank you very much and perhaps if we have any other questions we can come back to you.

6   -The witness has added the clarification that the computer games industry needs computer scientists, artists and animators, not generalists. Back

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