Talking Points for Michael Gallagher, President and CEO, ESA

Mobile Games Forum Talking Points for Michael Gallagher, President and CEO, ESA October 20-21, 2015 – Seattle, Wash.Introduction  Good morning. Thank you for that introduction, and to the Mobile Games Forum organizers for inviting me here today. I am always amazed by the range of innovative thinkers this event pulls together and this year is no different.  Today, I will discuss the evolving regulatory pressures our organization is tackling in the mobile space, namely the concerns and policy implications surrounding virtual currencies and data localization. Before I speak to our public policy work around the explosive growth of mobile, I would like to take a moment to introduce myself and our organization.Entertainment Software Association I am the president and CEO of the Entertainment Software Association, the Washington, D.C.- based trade association dedicated to serving the business and public affairs interests of the U.S. video game industry.  As you can see by this slide, our membership is comprised of industry-leading video game companies that range from major players like Sony, Microsoft and Nintendo to international newcomers and mobile-only developers and publishers. We represent this diverse coalition of industry voices before Capitol Hill in Washington, D.C., in state houses across the country and on the international stage, offering a wide range of services to our members. This includes a global content protection program, business and consumer research, and intellectual property protection efforts.  We also engage lawmakers on a range of policies, including, of course, virtual currencies and data localization issues. Finally, we own and operate E3, the premier global trade show for video games and related products. As our most recent E3 proved, this is an incredibly exciting time for our industry. More Americans play video games than ever, traditional consoles are experiencing a renaissance and exciting new technologies like virtual and augmented reality are pushing the boundaries of game play. Mobile technology in particular has had a tremendous impact on our industry over the last decade. Entertainment Software Association We also given back to communities in innovative ways. To date, the ESA Foundation, which serves to improve the lives of America’s children, has raised more than $20 million.  In addition to providing scholarships for women and minorities who are obtaining college degrees in video game design, we partner with groups like HopeLab, the Boys & Girls Clubs of America, and the National Museum of the American Indian. All these groups create video games that educate and inspire young people.  Many of you, no doubt, also see our work with Extra Life, a project of the Children’s Miracle Network Hospitals. Extra Life is a video game marathon where gamers obtain monetary pledges based on video game play. Together, the ESA Foundation and Extra Life has raised more than $14 million.  We also bring to life the “Video Game Voters Network,” which is a grassroots army of more than900,000 voting-age gamers who are committed to being politically active on behalf of video games.  This is a passionate and responsive group of gamers who step up and defend video games against biased media attacks and uninformed political proposals. I encourage everyone here to take out your phone and join the VGVN by accessing videogamevoters.org.  The VGVN takes action on issues like the proposed Chicago Amusement Tax.  This past summer, the City of Chicago’s Finance Dept. issued twin rulings extending the application of current taxes on “amusements” and “personal property lease transactions” to video games, streamed entertainment, and cloud services. The modified “amusement tax,” which became enforceable September 1, may reach some game subscription fees, charges for streamed game services, and possibly the purchase of virtual currency. Game downloads are not covered by the tax, however. This tax directly impacts publishers, who must collect and remit the tax, that have an Illinois physical presence—even if it is an office or a server farm. ESA is working through a coalition of other tech companies and industries to persuade Chicago to reconsider its approach.State Tax Incentives  ESA is also engaged actively on passing and defending state tax incentives for video game development.  This matters to everyone in this room because it impacts directly your bottom line. We make the case to local legislators that these incentives are investments in their local communities and 21st century job creation.  Currently, 21 states and Puerto Rico have incentives available to the industry, but this is a constant battle and we need your help.  I’ll talk later about how to stay informed about ESA’s work and I ask everyone here to get in contact with us about these incentive programs that are vital to industry growth. The Future of Play As all of you know, we have seen remarkable advances in the speed and sophistication of wireless and mobile technologies. Broadly, these developments have transformative implications – including how our industry reaches and interacts with consumers.  Consider these statistics: o Currently, there are more than 7 billion people on Earth. o According to the United Nations, nearly half of that population, or 3.15 billion people, have regular access to and use the Internet today. o Moreover, research firm GSMA Intelligence reports that there are – for the first time ever – more mobile devices in the world than there are people. o Many of these devices are connected to the internet. According to Strategy Analytics, by the end of this year, the number of smartphone users will grow to 2.5 billion. o A majority of these connected consumers also play video games. In fact, 1.7 billion people worldwide play games today – that is nearly a fourth of the global population. Further still, 1.5 billion gamers play on a smartphone or other mobile device. Taken together, it is clear that video games – especially mobile experiences – are in high demand in nearly every corner of the globe. ESA’s own research has reached similar conclusions about American players. According to our Essential Facts About the Video Game Industry, 35 percent of American gamers play on their smartphones, and 31 percent play on other wireless devices, such as tablets.  We are also about to release a first-of-its-kind whitepaper examining how mobile technologies affect what hardware consumers purchase and how they play on the go.  Among its findings: game play capabilities are a major factor influencing Americans’ hardware purchases. According to the paper, 70 percent of respondents rated the ability to play games on their smart phone as “extremely important” when it came time to purchase a new device.  The research also showed that commuters with the longest round-trip commutes (more than three hours a day) spend almost of a third of their commute time playing games. For these commuters, smart phones are the platform of choice.  This is good news for console and PC video games, too. Our research found that nearly half – 42 percent – of mobile gamers purchased a console or PC version of a mobile game because of their mobile experience. And 46 percent of mobile gamers report getting back into video games with mobile devices.  These findings underscore and reaffirm the outsized and growing role mobile technology plays in the modern video game industry. These numbers will only continue to grow as we press forward with further technological innovation and broadband access expands. With so many opportunities to connect and play across wireless devices, we can reasonably imagine a future generation in which everyone will play games.Dominance of Global Games  Paid mobile apps represent significant sales opportunities for our industry. In the first week of 2015, customers spent nearly half a billion dollars on apps and in-app purchases. New Year’s Day 2015 marked the single biggest day ever in App Store sales history.  These milestones follow a record-breaking 2014, in which App Store billings rose 50 percent and apps generated over $10 billion in revenue for developers. To date, App Store developers have earned a cumulative $25 billion from the sale of apps and games. Seven of the top ten paid apps on the App Store are games, and games make up 63 percent of the storefront’s overall revenue. According to Distimo, game developers represent the majority of top publishers in all three major app stores – the Apple App Store, Google Play, and the Amazon App Store. Social games continue to grow in depth and richness, and appeal to a broader audience of gamers.  Industry analyst Colin Sebastian with RW Baird expects this trend will continue to develop and expand, with annual growth rates surpassing 10 percent for the next three to five years.Dominance of Mobile Games  To underscore the dominance of mobile game play, one needs to look no further than this year’sE3.  On June 14, Bethesda Softworks held their first-ever E3 press conference. During their media event, they announced the availability that week of Fallout Shelter, the first mobile game produced by the leading video game publisher. And, consumers responded in a big way.  In the first two weeks of the game’s availability in the App Store, Fallout Shelter generated more than $5.1 million in revenue.  That is a remarkable achievement and a ground-breaking tool to keep consumers engaged and build excitement for Fallout 4.  Mike, this is a good place to discuss your Fallout Shelter Daniel anecdote. That story will personalize this slide and help make for an engaging presentation. IARC Today’s digital world is redefining the ways that content of all types is created, delivered, consumed and shared. Downloadable games and mobile apps are published on various platforms and in many countries simultaneously.  As a result, content rating systems around the world must evolve to meet the reality of the marketplace and deliver practical solutions for informing consumers in a consistent, reliable manner. To that end, various game rating authorities have been working collaboratively to establish the International Age Rating Coalition (IARC), which collectively administers a streamlined, global system for assigning locally-relevant age ratings to downloadable games and mobile apps.  IARC has been adopted for use in the Firefox Marketplace and Google Play, and Microsoft’s XboxLive store, Nintendo eShop, and the PlayStation Store are expected to follow.  The IARC rating system was devised through close collaboration among numerous rating authorities and in consultation with developers, app storefronts and game platforms—and the concept is simple.  A single, comprehensive questionnaire jointly developed by all participating rating authorities is integrated into a digital storefronts’ game or app submission process. The IARC system establishes a unified process that simultaneously generates separate ratings for multiple territories which preserve each of their distinct local standards. US-EU Safe Harbor • Personal data defined broadly to cover any information from which an individual can be identified, including business contact information and IP address. • Processing also defined broadly to include any operation performed on personal data – e.g., collecting, using, disclosing, storing, or destroying personal data.• Safe Harbor created a framework for the transfer of EU personal data to the US in order to guarantee adequate protection for European personal data. Companies had to certify to the framework’s principles and agree to enforcement mechanism, making a public statement on theDepartment of Commerce site, subject to annual renewal and enforcement by the FTC. Useful compliance method to transfer the same types of data repeatedly, or on behalf of multiple clients. • The EU Data Protection Directive establishes minimum requirements for any “processing” of “personal data” and is implemented through national legislation by EU member states.• Schrems ECJ decision was based on the June 2013 Snowden revelations and included many factual inaccuracies about the PRISM program.• Model contracts – contractual clauses pre-approved by the European Commission. Two types of contracts: Data Controller (i.e., owner) to Data Controller (if company has independent rights to the data); and Data Controller to Data Processor (processor just working on behalf of original Data Controller). • BCRs – must be approved by each DPA where data is to be transferred from • For now, companies are reviewing existing agreements and implementing Model Contracts with all relevant entities and watching the negotiations between the US Commerce Department and EU Commission for a revised version of Safe Harbor 2.0• Getting agreement on Safe Harbor 2.0 has gotten more difficult with the Schrems decision, harder for Commission to concede points, and with the ECJ decision as the backdrop.• ESA is closely monitoring this development and exploring ways to ease the compliance burden for game publishers. Virtual Currencies The proliferation of a technology this transformative – in barely more than a decade – has invariably brought new challenges for regulators and companies alike, as new business models and opportunities for consumer engagement have emerged. As Bitcoin, for example, surged in popularity, it was inevitable regulators would start taking a closer look at the policy implications. Bitcoin is a convertible virtual currency that can be used as a substitute for fiat currency (i.e., traditional money), in some situations. By “convertible,” I mean that it can be exchanged with U.S. dollars or other currencies. Concerned about potential money laundering and consumer fraud risks, federal and state regulators have tried to walk a fine line between encouraging the further development of this novel payment option and putting in place some safeguards to protect against abuse. So far, these efforts have focused on imposing certain monitoring and reporting requirements to minimize the risk of money laundering and licensing requirements to protect consumers from bad actors. These are laudable and appropriate goals, but we need to be careful that these new rules are not written so broadly that they encompass play currencies that have no real-world utility. Unlike Bitcoin, game currencies exist within a closed universe and cannot be “cashed out.” They do not pose nearly the same level of risk as “convertible” virtual currencies that can be used as a medium of exchange in the real world. ESA has submitted comments to regulators in California, New York, and the U.S. Treasury Department highlighting this critical difference, among other points.  So far, at least, those seeking to regulate virtual currencies seem receptive to excluding non- convertible game currencies. New York included a game-specific carve out. And a bill introduced in California earlier this year would have done the same. We hope that the Treasury Department’s Financial Crimes Enforcement Network will reach a similar conclusion as it evaluates ESA’s pending request.Data Localization Virtual currencies are not the only emerging issue we are closely monitoring. Privacy and data security issues have moved to the forefront of mobile policy debates as countries move to implement strict “data localization” laws. Last month, Russia began enforcing its “data localization” law, which requires companies that collect personal data from Russian citizens to store that data on servers located within Russia. Repeated failure to comply could result in the service’s local IP address being added to a registry(essentially, a blacklist) that Russian ISPs would be required to block. Essentially, companies could be frozen out of the Russian online market. Numerous implementation questions surrounded the rollout of the law: Would server mirroring be permitted? What about data collected prior to the effective date? If the data is anonymized, does it no longer count as personal data? Gradually, the Russian regulator has issued some clarifying guidance. What prompted these laws? It may not be a single factor. It could be a reaction against the Edward Snowden revelations and an effort to curb future snooping by the U.S. government. Or, from the opposite perspective, data localization makes it easier for local law enforcement to gain access to the electronic data of its citizens. From a more “dollars and cents” perspective, it could be a bid to build up the local jurisdiction’s IT economy by requiring foreign Internet firms to build or lease server farms locally.  Whatever the rationale, the effect on foreign Internet firms is potentially severe. While these Internet companies may continue to collect personal data, the requirement to house that data locally adds both cost and complexity in back-end system integration. For example, it is possible the personal data may be stored in servers locally but would have to integrate with other servers in other countries for other aspects of providing the service. All of this would need to be done in a seamless manner. Brazil considered a similar measure last year but ultimately abandoned it.  If many countries impose these “data localization” requirements, it would greatly complicate the ability of Internet services to operate efficiently cross-border. ESA continues to update its members on developments in this area and will look for opportunities to minimize the burdens imposed by these laws.Trans-Pacific Partnership  The Trans-Pacific Partnership seeks to promote innovation and economic growth among its partner nations. The TPP’s 12 members are seeking to enhance trade and investment among the partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs. Final text of agreement has not been released yet, but direction of discussions points to helpful developments for the IP and tech communities The agreement requires TPP partners that their laws protect against the infringement of rights owners from other member nations The agreement will include a general obligation to allow free transfers of data across borders and not to require data to be stored locally.  The agreement will also prohibit TPP governments from requiring a company to locate a data center in its country as a condition of serving customers there.  The data transfer and server location provisions will cover not just IT and cloud-based businesses, but all service suppliers and manufacturing investors  The next big step is implementation and the President must give Congress 90 days’ notice of his intention to sign. Congress must then vote up or down on TPP and they are not allowed to offer amendments.  For our part, ESA plans to be supportive of TPP, assuming the text of the agreement tracks the signals sent by the United States Trade Representative. Stay Connected  I wish I could have spoken longer today and provided a more in-depth overview of ESA’s work and the issues we are engaged on.  I encourage everyone here to follow us on our social media channels and to stay engaged.  If you have questions or want to follow up on any of the topics raised, please reach out to us. We always want to hear from leaders like you about potential ways of working together. Conclusion Certainly our industry will continue to face legal and regulatory obstacles, beyond those just discussed. Conducting business in an interactive entertainment space can be a challenging endeavor.  I am confident that our industry is poised for continued growth well into the future, and that enhanced collaboration with policymakers, business leaders, and gamers themselves, will lead to even greater advancements, beyond what we have already seen.  Thank you again for inviting me here today. I am now happy to take your questions.

Talking Points for Michael Gallagher, President and CEO, ESA

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