Submission to Senate Committee Inquiry into the Future of Video Game Industry in Australia
Lachlan Kingsford
18 September 2015∗
Abstract
Firstly, this submission posits that video games are and could be a powerful artistic medium, and examines the video game industry by ref- erence to government accommodations given to other artistic mediums such as film and television production Secondly, this submission discusses the state of game development more widely in Australia. Thirdly, this submission addresses some of the issues facing game de- velopment in Australia. The issues addressed are taxation issues related to crowdfunding, the effects of geographic remoteness and the effects of the so-called ’Australia Tax’. Fourthly, this submission addresses the investment and employment opportunities within the games industry.
1 Author
Lachlan Kingsford is currently employed as a programmer for Cornerstone So- lutions Pty. Ltd. working on non-video games software and hardware. This submission does not necessarily reflect the opinions of Cornerstone Solutions.
∗Minor amendments made 21 September 2015.
1 Independent to his employment, he has completed and released two small, open source games under the banner of ’Nerdy Gentleman Games’ - being At- las Warriors (available as a pay-what-you-want game) and The Chase (available freely). Lachlan’s formal qualifications are a Bachelor of Laws and Finance from La Trobe University (completed 2012) and a Graduate Diploma of Legal Practice from Australian National University (completed 2013). Lachlan was admitted on 10 December 2013 as an Australian Lawyer and Officer of the Supreme Court of Victoria.
2 Video Games as Entertainment and Art
2.1 Demographics Over the past few years, video games have become as significant part of the lives of Australians. A study in 20141 by Bond University in association with the Interactive Games & Entertainment Association (IGEA) revealed:
• 65% of Australians play video games;
• the average age of video gamers in Australia is 32;
• 47% of Australian video gamers are female; and
• 19% of Australian video gamers are over the age of 51.
This demonstrates that video games have a wider demographic then is often considered, and form a significant form of entertainment alongside traditional forms of entertainment such as film and television.
2.2 Uniqueness of Video Games as an Artistic Medium Like film and television, video games provide a variety of experiences for play- ers. Like some action movies, there are action games which provide fast paced action with only the thinnest of plots - for instance, Doom (ID Software, 1993).
1Jeffrey E. Brand, Pascaline Lorentz and Trishita Mathew, Digital Australia 2014 (2014) IGEA
2 There are adventure comedies that are built entirely around visual and vocal gags - for instance, Tales from the Borderlands (Telltale Software, 2014). There are dramas designed to elicit an emotional response from the player - for in- stance, To The Moon (Freebird Games, 2011). Games such as these can work in a similar way to television or movies in eliciting a similar response or emotion - albeit, in a very different manner. Whilst it may be stating the obvious, video games are unique in offering players interaction which can be responded to by the medium. By virtue offer- ing the player choices, the player can be made to feel emotions or cast a critical light on the real world. For example, Papers, Please (Lucas Pope, 2013) places the player in the position of being an immigration official at a fictional coun- try in eastern Europe. The player makes decision as to whether people should be permitted to enter the country on the basis of a constantly changing set of rules given by that countries government, the documents presented by those people for inspection, and through interviews with those people. The player is frequently placed in the position of having to decide whether somebody who – strictly speaking – would not be permitted into a country by that countries laws should be admitted to the country by virtue of their obvious need (such as requiring political asylum) – despite creating risk for a player. Such experiences have the possibility of allowing players to examine points of view from a very different perspective to what would be examined by mere passive observation (as on TV or film). That same interactive component allows video games to provide unique education possibilities. By experiencing and influencing complex interactions in an interactive manner, players can learn difficult concepts that those same players would (or have) found difficult to comprehend. For instance, Kerbal Space Program (Squad, 2015) presents a scaled down solar system with a small race of little green men, and allows the player to build rockets and space-planes to explore that solar system. The rockets and space-planes are subject to real- istic (if scaled down) orbital mechanics and rocket mechanics. Players are pre- sented with a sandbox where can recreate real missions2, or freely experiment with rockets and in the process discover why rockets are built the way they are. Mr Shamus Young presents an example of the experience of an average player:
2A tutorial recreating and explaining the Apollo 11 mission is available on
3 My introduction to the game was the most educational hour of videogaming I’ve ever played. I learned why, in real rocket launches, they do a vertical burn that gradually curves east, then they do noth- ing for a while before doing another burn parallel with the equator. I’d always wondered about that. I mean, I could have looked it up, but I never got around to it. Then suddenly I had game mechanics that nudged me into this understanding though simple experience and experimentation. Along the way I got a sense of how geosyn- chronous satellites work and why we have so much junk in space.3
2.3 Over-representation of International Video Games in Aus- tralia IGEA compiles lists of the best selling games during a year. Such a list for 2014 (including a compiled list of the most successful games each week) was published to http://www.igea.net/2015/01/best-selling-games-2014/. Both lists reveal that Australia has a major under-representation of involve- ment in the production of the games that Australians purchase. Indeed, the only game that had any significant Australian cultural influence or emphasis on production mentioned on either the top 10 lists or most successful games per week was Borderlands: The Pre-Sequel! (2K Games, 2014) (Borderlands). Borderlands represents Australian culture and humour in a way that was nearly unprecedented in the gaming medium – despite being set on a fictional moon. Borderlands was created by the now defunct 2K Australia. This international over representation - at least at the AAA4 market stands in stark contrast to the other Australian media and arts markets where signifi- cant amounts of Australian fare are found at every level of production value. In television, the weekly top 10 shows are consistently filled with Australian pro- ductions, regularly with assistance from government agencies such as Screen Australia and Film Victoria. Movies like ’The Castle’(Working Dog, 1999) have been supported and have not only exhibited but become part of the Australian
3Shamus Young, Kerbal Space Program: Something Different (15 April 2013) Twenty Sided
4 culture. Popular music is consistently dominated by Australian musicians. As the youngest of these media, video games are yet to have an opportunity to permeate the Australian culture in such a manner. The lack of Australian games in the AAA space means that many younger Australians have no oppor- tunity to explore Australian culture in their preferred medium, instead being entirely dominated by media from other countries. It should be noted that this absolute dominance does not completely extend to every market.
3 The State of Video Games in Australia
3.1 AAA Games At the time of writing, there are no AAA game studios currently operating in Australia. 2K Australia (who created Borderlands as discussed above) were Australia’s last operating AAA studio. 2K Australia ceased production during 2015.5 2K Australia’s owner, 2K Games made statements to the effect that the cost of de- velopment and remoteness were chief causes for the cessation of activities.6 Team Bondi is another example of a successful Australian AAA studio which went defunct. Team Bondi was responsible for creating the critically acclaimed and extremely well sold LA Noire (Rockstar Games, 2011). LA Noire used unique facial capture technology to allow actors to portray their characters – in a sim- ilar manner to how feature films use CGI. The technology, rather then a mere gimmick, was integral to the gameplay allowing players to determine in the role of a detective as to whether suspects and witnesses were being honest. As a third party studio who happened to be published rather then owned by another company, Team Bondi apparently collapsed by an inability to find a publisher for their next game. On collapse, Team Bondi attributed that the lack of gov- ernment support was detrimental to the industry in Australia, with CEO Brian Macnamara stating that ’[w]e have to compete with places like Canada where 40
5Mark Serrells, 2K Australia In Canberra Closes Its Doors (16 April 2015)
5 per cent of the budget of the game is provided by the government.’7
3.2 Indie Games Australia has a very strong independent (and smaller studio) game develop- ment scene, with significant amounts of development occurring in Melbourne. A couple of case studies are discussed. Hipster Whale is a small Melbourne based studio who have two hugely suc- cessful mobile games8 in Crossy Road (Hipster Whale, 2014) and Pacman 256 (Hipster Whale, 2015). Crossy Road was, during 2014, one of the single most successful games on the iOS store gaining more the 50 000 000 downloads and more then $10 000 000 in revenue.9 Crossy Road is an outlier but is also a demon- stration of the potential gains from a low initial investment. Crossy Road is also an interesting experiment into monetisation and revenue streams of and from games. Unlike many games, Crossy Road derived most of its funding from op- tional, cosmetic only items that had no effect on gameplay rather then adver- tising or be paid for upfront.10 Hipster Whale made their revenue by players who wanted to pay the company for a game that they appreciated. Fragged Empire (Design Ministries, 2015) demonstrates that non video game games are feasible to produce with alternative funding techniques in Australia. Fragged Empire is a pen-and-paper role playing game made in Melbourne which was published in the form of two significantly lengthed books, multiple e-book, dice and custom printed boards to supporters in 2015. Design Ministries was able to secure an alternative form of funding in the form of selling pre-orders
7Andrew Ramadge, ’Team Bondi, developer of LA Noire, shuts its doors’, news.com.au (online), 2 September 2011
6 on Kickstarter (Crowdfunding11) to raise the money to complete the game.12 A variety of other games with generally indie developers have been funded using crowdfunding in Australia. Full lists of Australian games funded partially or in full by using Kickstarter and Pozible are provided as Appendix A and Ap- pendix B respectively below. Kickstarter and Pozible have, as of time of writing, been responsible for a total of 107 games raising 2 497 904 AUD, 131 762 USD and 484835 GBP13. It is therefore evident that crowdfunding has produced a major source of both conventional revenue and capital for research and development for small studios providing opportunities beyond those offered by a traditional publisher.
3.3 PAX Australia PAX Australia (PAX) is a significant trade show for Video, Board and Role Play- ing Games. PAX, or Penny Arcade Expo, has been established in the US from 2004 and was first run in Australia in 2013. PAX Australia is the only PAX that is run outside of the US. PAX has provided the Australian gaming industry with significant opportu- nities to market itself particularly to Australian Consumers. Uniquely, PAX has set aside large swathes of floor space to smaller independent developers who would have otherwise limited opportunities to present their products to a local audience. As a trade show, PAX also brings representatives of several large and small gaming companies from overseas and interstate providing significant op- portunities for Australian game developers to network.
11Crowdfunding is a general term for the form of funding that involves selling to customers before the product is completed. The project is completed utilising (in part or full) the funding raised during crowdfunding. Crowdfunding is usually done on sites like Kickstarter (http: //www.kickstarter.com) or Pozible (http://www.pozible.com). 12See Wade Dyer, Fragged Empire, Tabletop RPG (June - August 2014) Kickstarter
7 4 Issues with Video Game Production in Australia
4.1 Tax liability with preorders (Kickstarter) As discussed in 3.2, crowdfunding now forms an important part of the funding of video games in Australia. This can pose a significant issue in relation to tax liability which can hinder the development of games and increase the chance of a studio facing liquidity issues. Traditionally, a product is firstly designed, then built, and then sold. Practi- cally, this means that liquidity is initially gained via credit or investment. That liquidity is spent developing the product and producing the product. The pro- duced product is brought to market where it is sold with the revenue being used to repay the investors, repay the loans, be retained as earnings or invested into further development. In this traditional tax, income tax14 is accrued at the sale stage where profits/losses have properly crystallised. Fixed expenses have at this point been paid, and expenses variable with the size of production are well established. Preorders, as used on a scale to fund a project entirely, throw the tradi- tional paradigm on its head. Funding is sought initially where, for taxation reasons, it is immediately treated as income. The expenses then over the term of the project (which may extend beyond one financial year) are then paid for out of the income. The result is developers are hit with an immediate tax ex- pense which may be followed in successive years by tax losses (as money is paid to complete the project). Whilst the overall tax implications in the long term should theoretically be the same, the preorder paradigm results in far less freedom with liquidity and requires developers to ensure that all expenses are paid as immediately as possible. This is exaggerated further where developers are not registered as a corporation (as is the case with many smaller develop- ers). A potential solution to this would be providing facilities for developers to be ’amortise’ preorder income for tax reasons in the same way that they can deduct the cost of a large asset over many years. Practically, this would mean that developers claim their wages (which would become regular income) and expenses for developing the game against the preorder revenue until either the game is released (at which point any additional preorder revenue becomes reg-
14Income tax here is used as meaning both personal income tax and corporate income tax.
8 ular revenue) or the preorder revenue has been completely spent in develop- ment. The practical result of this solution is that the same amount of tax would be paid, but the liquidity issues that preorder developers currently face would be reduced.
4.2 Remoteness The game industry suffers from the same crippling effects of Australia’s geo- graphic remoteness as many other industries. The closure of 2K Australia15 specifically listed the remoteness of the studio as a factor in its closing. Whilst lots of the work in the videogame industry can be done remotely, tasks such as production of the physical elements of videogames (such as boxes and media) remain geographically distant and reliant on external shipping. The publishers for many of the games produced in Australian studios are based internationally and therefore may be cause for management and meetings to involve signifi- cant travel. Many of the issues with remoteness can be resolved with fast and readily available internet connections. A characteristic of development of video games is that they can involve extremely large files. The most recent release of The Witcher 3: Wild Hunt (CD Projekt RED, 2015) had a download size16 of over 22.5 GB. At the average TPG speed (during August 2015) of 3.36 Mbps17, download- ing The Witcher 3 would take over 15 hours. If a studio had Telstra Fast Cable at 30 Mbps18, the same download would take about 1h 45 minutes. If a studio had access to a 100 Mbps fibre-to-the-premises connection (such as that available on the NBN), the same download would take about 30 minutes. The Witcher 3 is a typical (rather than exceptional) example of the size of a AAA title. The development of a game will involve files significantly larger then the ul- timate size of the installer due to factors such as development tools, versioning and a lack of compression. The lack of fast internet (where it would otherwise
15Discussed in 3.1. 16A download size for a game like The Witcher 3: Wild Hunt is usually significant smaller then the ultimate installed size due to compression. 17As of August 2015 - ISP Speed Index (August 2015) Netflix
9 mitigate the issues of remoteness) may prevent studios from operating in Aus- tralia.
4.3 The ’Australia Tax’ The House of Representatives Committee inquiry into IT pricing confirmed the existence of the so-called ’Australia Tax’.19 The Australia Tax is, in summary, an effect where software and IT products suffer from geographic price discrimina- tion in excess of that which is reasonable due to increased expense of selling or maintaining the product in Australia. The Australia Tax effects game development in Australia in two ways: it in- creases the cost of the tools that are used to develop games, and it increases the relative cost of consuming games in Australia. Examples of two tools that are used in game development as listed by The IT Pricing Report as examples of the Australia tax are Autodesk’s Maya and Mi- crosoft Visual Studio. Autodesk Maya is a tool that is used for creating graphics in games (and other visual art forms). The IT Pricing Report presented evidence that it was priced to take advantage of their Autodesk’s monopoly on that type of tool - being charged 45% more for the software by virtue of operating within Australia.20. Microsoft Visual Studio is a tool for coding software of all forms and is almost a requirement for any type of software development targeting Mi- crosoft Windows software or some consoles. The IT Pricing Report presented evidence that the software cost more then $8600 more for Microsoft Visual Stu- dio Ultimate with MSDN membership.21 These type of pricing discrepancies make Australia a less competitive mar- ket to produce software in by increasing the cost of expenses - often by very significant amounts. Like tools, games themselves tend to be subject to pricing discrepancies. Borderlands: The Pre-Sequel! 22 as of 18 September 2015 costs 69.99 USD for Australian consumers, and 39.99 USD for United States consumers from the
19House of Representatives Standing Committee on Infrastructure and Communications, Parliament of Australia, At what cost? IT pricing and the Australia tax (2013) (’The IT Pricing Report’). 20Ibid [2.60-2.61]. 21Ibid [2.64]. The figures given are an Australian price of 20 776 AUD and a US price of 11 899 USD. The discrepancy listed does not take into account the difference in exchange rate. 22Discussed in 3.1.
10 Steam store. Sid Meier’s Civilization Beyond Earth (2K Games, 2014) was priced at 89.99 USD for Australian consumers, and 49.99 USD for United States cus- tomers from the Steam Store until August 2015. In both cases. the products received by consumers from both countries are identical and are delivered us- ing the exact same mechanism (being the Valve Steam client, delivered over the internet). The IT Pricing Report made a series of recommendations23 that would severely limit the ’Australia Tax’ if again considered by this committee, and applied in statute.
5 Employment and Investment
Video Game Development of AAA games provide opportunities for very large scale employment and international investment within Australia. crowdfund- ing It was reported that the cost of development of Grand Theft Auto V (Rock- star, 2013) (’GTA V’) exceeded 137 000 000 USD24, with the cost of marketing ex- ceeding 265 000 000 USD.25 Over 1000 staff were employed in GTA V’s produc- tion.26 GTA V is an extreme case, demonstrating the extent of investment and employment that a large game can produce. Like most software businesses, a large percentage of the cost of a video game is to the cost of staffing rather then the cost of materials or resources. The development staff for a game can include:
• programmers;
23The IT Pricing Report xii-xiii. 24Brendan Sinclair, GTA V dev costs over $137 million, says analyst (01 February 2013) GamedIndustryInternations. Originally published to (but no longer available from)
11 • testers;
• 3D/2D artists and UI designers;
• voice and motion capture actors;
• writers;
• video directors;
• producers; and
• sound artists, composers and musicians.
Game development staff members may incur a reasonable fixed cost on the de- veloper, but the remainder of the costs are generally limited to staffing. Variable costs on the final product (for physical production, for instance) are compara- tively small. An example breakdown of the costs of development was provided by Lab Zero who crowdfunded an expansion to their existing game Skull Girls (Reverge Labs, 2012). The breakdown of the 150 000 USD to be raised was as follows27: Cost (USD) Item 48 000 Staff Salaries – 8 people for 10 weeks 30 000 Animation and Clean-up Contracting 4 000 Voice recording 2 000 Hit-box Contracting 5 000 Audio Implementation Contracting 20 000 QA Testing 10 000 1st Party Certification28 10 500 Indiegogo29 and Payment Processing Fees 20 500 Manufacturing and Shipping Physical Perks The table demonstrates how high of a proportion of the cost of video games goes to the employment of staff. As such, video games can have a very strong effect on the economy - as most of the expenses can be internalised to the coun- try developing the game.
27Jessica Conditt, Skullgirls character crowdfunding breakdown: What that $150K is for (25 February 2013) engadget
12 Appendix
A Backed Kickstarter Games in Australia
Notable Statistics: • 90 games (using the given criteria, below) have been successfully funded;
• the maximum amount of funding was 461 333 GBP to Satellite Reign;
• the average amount of funding (excluding USD and GBP entries) was 25 461 AUD; and
• the total amount raised on Kickstarter for Australian Games has been 2 138 798 AUD, 131 762 USD and 484 835 GBP.
Notes The following data was entered from the product pages linked to Kickstarter ’discovery’ page with the following details on 17 September 2015:
• successfully funded;30
• made in Australia; and
• categorised as Games.
The search can be replicated on https://www.kickstarter.com/discover/ advanced?state=successful&category_id=12&woe_id=23424748&sort=most_ funded&seed=2404151. Discretion has been taken to eliminate ’joke’ entries, entries that are clearly not related to games, and entries that did not result in a product (such as those to fund a bar to play games in). The list is not listed to video games. The list includes:
• video games (on console and PC);
30Kickstarter requires project creators to set a minimum funding level for their project. The backers only pay the creator of the project if it reaches above that minimum funding level. A successfully funded project is one that has reached the minimum funding level. The success of funding does not depend on the ultimate success of the project being delivered.
13 • board games;
• card games;
• pen and paper role-playing games;
• live action games;
• gaming accessories; and
• customised playing cards.
The list is presented with the currency chosen for funding by the project’s de- veloper. The USD and GBP are used for some projects where they either chose an alternate currency, or where the project predates the official launch of Kick- starter Australia (13 November 2013)31.
Data
Game AUD USD GBP 101.1 8352 Alchemist Academy 9058 Armello 305360 Ascent 35334 Bearzerkers 8049 Beast’s Fury 47256 Bedlam 38284 Bermuda 4060 Blackwake 171422 Capaign Coins 50843 Castle Beneath Forest 96 CatTube Famous 12794 Cellar Door 1001 Choose Your Crew Pirates 2655 Choose Your Crew: Rockband 898
31Michael McGregor, Kickstarter in Australia & New Zealand (13 October 2013) Kickstarter
14 Game AUD USD GBP Cogz 23523 Collateral 16057 Conjure Trading Card Game 8390 Creative Story Stones 6046 Cursed Sight 6192 Darkfield 13073 Defect 43088 Dragon Racer 23388 El Luchadore Fantastico Grande 7545 Elevenses 26535 Entropy 69590 Eyes of Ara 17170 F**k. The Game 13100 Fart Attack 1510 Fate Tokens 48715 Final Breath 7286 First Visual Basic Game 23 Fragged Empire 113975 Goblin Hunters 7191 Goblin Quest 20711 Grapple Knight 12067 Guns & Steel 13153 Hand of fate 54095 Hedron 3464 Hitman Holiday 19606 Hobby Bastion Gaming Space 806 Hollow Knight 57138 Ibe Zeri Ibe 13850 Infinity 626 Joker and the Thief Playing Cards 22604 Kahuna Surfer 2601 Labyrinth Outbreak 1945 Laser Touch 26693 Lunar Colony 5314 Max’s Big Bust 25120
15 Game AUD USD GBP MiniCiv 4578 Monster Town 6525 Monsters’ Den: Godfall 33105 Moonman 46078 Ninja Pizza Girl 38694 One Dreamer 25400 One Final Breath 1649 Ortus 21740 Paradigm 36557 Pixel Starships 22020 Playing Cards Wizard Software 2464 Ploybuilder 5616 Polyhero Dice 92182 Prism: Night Playing Cards 27208 Rise to Power 26801 Rivalry (PAX Stand) 2011 Rock Rock Rocket 6010 Satellite Reign 461333 Science Deck Playing Cards 16453 Smash 1533 Sneaky Bastards 2791 Sol Tabletop RPG 9791 Sprite Lamp 30353 Super Indie Karts 17816 Tahira 68755 Tavern Fame 19578 TeaTime Silhouette Playing Cards 9455 The Phantom of the Opera Playing Cards 13631 The Road 6708 The Shrekoning 122 Trainz: A new era 191771 Unhack: Destruction 1726 Vanguard 6930 Viking Horde 15704 Viridian Playing Cards 14192
16 Game AUD USD GBP War in the Pacific 15268 Wildfire 20166 Without Within 2640 Wooden Deck Boxes 1829 Zombie City 560
B Backed Pozible Games in Australia
Notable Statistics: • 17 games (using the given criteria, below) have been succesfully funded;
• the maximum amount of funding was 359 112 AUD to Irl Shooter: Lazarus;
• the average amount of funding (excluding USD and GBP entries) was 26 218 AUD; and
• the total amount raised on Pozible for Australian Games has been 445 722 AUD.
Notes Pozible is an alternative crowdfunding system to Kickstarter based in Melbourne with an emphasis on Australian products. The following data was entered from Pozibles ’explore’ page as of 17 Septem- ber 2015 narrowed to successfully backed games. The search can be replicated on http://www.pozible.com/list/suc/9/ all/0. Discretion has been taken to eliminate entries that are clearly not related to games.
Data
Game AUD Fatal Theory 1025 Irl Shooter: Lazarus 359112 Loopy Lost Hist Lettuce 1503
17 Game AUD Ninjitzoo 4180 Pink Stumps App 6030 Samitomoto Drawing Game 1186 Samitomoto Drawing Game - Edition 2 688 Tasty Tasty Grandpa 6511 The Awesome System 1612 The Hurricane Paisley Project 710 The Island of Funk 2005 The Unique Ipad Experience 15214 Track King - The Home Straight 4065 Triangle Man 2336 World Of The Wild: Game Changer 7708 Zero Latency - Inversion VR 29700 Zombies, Aliens & Monsters (Oh My!) 2137
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