Policy briefing: February 2010 The Money Game Project finance and video games development in the UK Executive summary Seemingly everyone agrees on the importance of the video games sector to the UK economy. Yet the fiscal environment may prevent policymakers giving the sector what it most wants – a tax credit that helps to level the international playing field. Policies to improve the quality of university video games courses are crucial, but they will not stave off the industry’s near-term decline in global development rankings. Fresh thinking is urgently needed on what government can do. This briefing – the first in a series on this topic from NESTA – looks at one such idea, encouraging external project finance. Video games studios in the UK rely on global publishers for the financing of their development activities. Although this has helped to channel funds into the video games sector, it has also made it difficult for UK studios with high growth potential to scale their businesses – under this model, publishers retain ownership over the Intellectual Property (IP) that is generated, a crucial source of long-term value in the sector. And there is recent evidence showing that publishers are commissioning less original IP. This puts UK studios in a tight spot – they can’t compete on costs, particularly against territories overseas where development is publicly subsidised, and leveraging their creative talent and ingenuity seems to be getting harder, at least with publisher-backing. Excessive reliance on publisher funding might also be hindering UK studios’ transition to booming online and mobile gaming markets. This is because business models in these new markets are less suited to traditional models of publisher finance. There is evidence that UK studios are already lagging behind in these markets. New financing instruments are needed if UK studios are to remain innovative in established markets, and take advantage of the opportunities presented by new ones. More mature creative sectors like film and television offer production companies a wider range of financing options, including project – as well as corporate – finance drawing on external investors. External project finance models can make the video games sector more attractive to investors because they allow them to manage their risks in a more controlled manner than if they had to take an equity stake in a whole business. Studios, in turn, are able to retain more of their original IP, and generate additional revenues that can be invested in growth and innovation. Finally, publishers are also able to share with other investors the risks of financing more innovative and original projects in the UK. It is estimated that over £23 million has been invested in the UK games sector in the last five years using external project finance instruments. But this is a tiny fraction of overall investment in UK video games development – there are significant barriers to the wider uptake of external project finance. Awareness of project finance NESTA models, particularly among studios, is low. External project finance can be complicated, and the fixed legal and administration costs are currently too high for many studios. The main tax 1 Plough Place schemes to encourage investment in the UK – the Enterprise Investment Scheme and Venture London EC4A 1DE [email protected] Capital Trusts – are not as well suited to project as they are corporate finance. Policy has an important role to play in lowering these barriers. The television and film industries also receive www.nesta.org.uk some public project finance in the form of broadcaster and Lottery money. It is time that some of this was redeployed towards video games development. 2 The Money Game 1. Chatfield, T. (2010) ‘Fun Project finance and video games development in the UK Inc: Why Games are the 21st Century’s Most Serious Business.’ London: Virgin Books. 2. The global market for video games, which was worth £30.9 billion in 2008, is expected to grow at an annual rate of 10.3 per cent over the next four years – almost twice as fast as filmed entertainment (see PwC (2008) ‘Global Media and Entertainment Outlook 2008-2012.’ London: PricewaterhouseCoopers). In the UK, there is a video game console in half of all households. Video games revenues surpassed the revenues for film (including box office and DVD sales) in 2009 (see Wallop, H. (2009) ‘Video games bigger 1. A creative success story for the UK UK development studios have a worldwide than film.’ Daily Telegraph, 26 December). The UK was, faces its greatest challenge reputation for their ingenuity, talent and in 2008, the third largest technical prowess – indeed they have been development territory in the world after the USA and In recent months the UK video games behind some of the sector’s most innovative Japan, with global revenues sector has become the focus of a great deal and commercially successful Intellectual worth £2.03 billion, and 10,000 people directly of attention from policymakers across the Properties (IPs) – Grand Theft Auto, Tomb employed by video games political spectrum. Seemingly a consensus Raider and Fable are but three classic studios (see Games Investor Consulting (2008) ‘Raise the has been reached on its economic (and examples. Their renowned capacity to innovate Game.’ London: NESTA). cultural) significance. Last June an All Party should leave studios well-placed to reap the 3. NESTA (2009) ‘Time to Play.’ Parliamentary Group for the sector was commercial opportunities of new and fast- London: NESTA. 4. Crossley, R. (2010) UK spent established with over 20 MPs and Lords. It growing gaming markets. £280m on casual games in is now widely accepted that, just when video 2009. ‘Casual Gaming Biz.’ 11 February. Available from: games have become a mass entertainment Like other creative industries, video games http://www.casualgaming. medium,1 the UK video games sector faces are undergoing a revolution as more and more biz/news/29813/UK-spent- 280m-on-casual-games- a serious risk of losing its position at the people use online platforms to access content, in-2009 [Accessed 11 forefront of global development.2 and come together on the Internet to enjoy February 2010]. social and multi-player gaming experiences. 5. Graft, K. (2010) Valve: Steam Broke 25 Million Active Yet, the dire straits of the public finances Video games companies have been ahead of Users In 2009. ‘Gamasutra.’ means that no party has yet been able to the curve in reaching and monetising these 29 January. Available from: http://www.gamasutra.com/ commit to what many in the sector have online audiences through innovative business view/news/27011/Valve_ called for: a tax credit to level the playing models such as micro-transactions, virtual Steam_Broke_25_Million_ Active_Users_In_2009.php field with competitors such as Canada, France markets and ‘freemium’ strategies. Britons [Accessed 9 February 2010]. and Singapore, where the industry receives spent £280 million on casual video games 6. Ogden, G. (2010) Xbox Live 3 4 Arcade Revenue Hit $100 significant public subsidies. Policies to further in 2009. Steam, a digital platform for the Million in 2009. ‘Edge Online.’ improve the quality of graduates coming out distribution of PC video games, reached 25 6 February. Available from: 5 http://www.edge-online. from video games courses are crucial, but they million global users, while Xbox Live Arcade, com/news/xbox-live-arcade- will not deliver the immediate benefits which Microsoft’s dedicated online platform for its revenue-hit-100-million-2009 will stave off the industry’s decline in global Xbox360 console, generated $100 million in [Accessed 9 February 2009]. 6 7. The New Statesman (2010) rankings. worldwide revenues that same year. Global smartphone shipments surge 30 per cent in Q4, says Strategy Analytics. ‘The Fresh thinking is urgently needed on how The mass adoption throughout the world of New Statesman.’ 2 February. the government can support the sector. This smartphones with enhanced processing and Available from: http:// www.newstatesman.com/ report, on external project finance for video graphics capabilities, and easy access to online technology/2010/02/market- games development, marks the first in a series marketplaces for the purchase of ‘apps’ has share-smartphone [Accessed of pieces NESTA plans to publish in coming also created enormous audiences for mobile 9 February 2010]. 8. Perez, S. (2009) ‘The months to address this issue. games. 173.8 million smartphones were State of the Smartphone: shipped in 2009,7 and almost a third of their iPhone is Way, Way Ahead.’ Available from: http:// Staying ahead as new markets emerge users report playing video game applications www.readwriteweb.com/ Ultimately, creativity and innovation will daily on these devices. This represents a archives/the_state_of_the_ smartphone_iphone_is_way_ determine the sustainability and growth of market of almost 60 million new users last way_ahea.php [Accessed 9 the UK video games sector – they are what year, larger than the installed base for any of February 2010]. made it a global leader in the first place. the major consoles.8 New business models are 3 also emerging in this area: for example, it is video games consoles. Instead, they have had estimated that the market for virtual currencies to draw on other sources of finance. and goods in mobile applications – including mobile video games – will reach a staggering Access to corporate finance is difficult £9 billion in 2014.9 In principle, these studios could resort to corporate finance, structured as debt – such The purpose of this report: finance, as a bank loan or corporate bond – or equity, innovation and growth in the UK video with an investor providing them with funds in games sector exchange for a share of their overall profits.10 But in order to remain strong and innovative, particularly as the competitive environment But like other creative industries, the video shifts with the arrival of new gaming markets, games sector presents certain features that UK studios need access to the right kind of make corporate investments an overly risky finance.