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In search of excellence: a comparative business model assessment of value-creation capabilities in the computer games industry September 2009

Prepared by: Dr. Richard Phillips, MBS William Latham, Games Audit Dr. Damian Hodgson, MBS Jane Corden, Money Penny Jon Jordan, Games Audit Tony Minshall, MBS Incubator Ltd. Leigh Wharton, MBS Incubator Ltd.

Sponsered by: Northwest Regional Development Agency

In search of excellence: a comparative business model assessment of value-creation capabilities in the computer games industry

TABLE OF CONTENTS

REPORT STRUCTURE

1

2 2 2 4 9 18

SECTION 2. PROFILING AND COMPARATIVE ANALYSIS

2.1 Overview

2.2 All Firms are not Created Equal: specialisation in the sector

2.3 Comparative Analysis of Game Developers

2.3.1 Regional Comparison of Game Developers

2.3.2 Growth Strategy of Game Developers

20 20 23 25 26 30

SECTION 3. Recommendations

3.1 Synopsis

3.2 Support Options

33 33 35

APPENDIX 1 APPENDIX 2 APPENDIX 3 APPENDIX 4 APPENDIX 5

39 42 62 64 65

Bibliography

69

SECTION 1. INDUSTRY AND POLICY REVIEW

1.1 Sector Context and Value-Chain Operation

1.1.1 Market context

1.1.2 Value Chain overview

1.2 Policy Context and Literature Review

1.3 Review Summary

MBS Incubator Ltd, Manchester Business School, The University of Manchester, Booth Street West, Manchester, M15 6PB, UK Tel: +44 (0) 161 275 6487 Email: incubator@mbs.ac.uk Web: http://www.mbs.ac.uk/incubator

In search of excellence: a comparative business model assessment of value-creation capabilities in the computer games industry REPORT STRUCTURE This report presents the results of a study into the North West computer games sector, tender number X01085PR. The main objectives of this study were to profile games companies in the North West of England, map out their prevailing value chain, and review relevant national and international literature on the sector with two basic objectives in mind: •

To provide a comparative assessment of games suppliers with reference to their critical business processes, technology usage, culture, people and skills employed. The aim was to generate insights into possible sources of best practice, drivers of competitive performance, and the identity of capabilities critical to enabling the resilience and adaptability of the sector to market changes and new technological innovations.

•

To provide an assessment of prevailing support initiatives and institutions for the computer games sector and generate recommendations as to the options for support likely to be both receptive by the industry and effective in terms of improved processes and capabilities of games producers.

The content of the report is structured in the following manner. Section 1 is essentially the literature review. It is partitioned into two basic discussions. The first summarises the current industry research and evidence-base this project has been able to amass in order to build a clearer picture of the sector context and value-chain dynamics affecting businesses in this space. The second half summarises the policy context and key literature informing current debates over what the perceived development concerns of the games industry are, as well as current thinking and initiatives intended to support the sector. The section ends with a summary of the literature and the critical issues that effective policy interventions have to grapple with.

Section 2 presents the results of our analysis which sought to profile the current activities occurring in the North West cluster and a comparative analysis to assess its relative performance. The data acquired for this purpose was a combination of survey results solicited from the industry to gain a basic picture of activities, interviews with members of the games industry in the region, potential venture capitalist and other commercial stakeholders critical to the issues being discussed, as well as organisers of national initiatives occurring elsewhere in the country that could help feed into future activities in the North West. This was supplemented with detailed comparative information gleaned from the financial accounts of leading UK developers with corresponding market sales data to evaluate firm level and regional level differences in performance. As the project developed, it became apparent that our efforts in data gathering and comparative analysis was resulting in a type of assessment which could help build the much-needed evidence to corroborate many concerns that were being raised in prior policy research but were not being effectively tackled in the policy environment. It also became apparent that a major opportunity existed in the region which we have attempted to capture in our recommendations outlined in Section 3. The overall logic and flow of this report has been subsequently drafted so as to unfold the evidence base, logical justifications and the grounding of our recommendations within both the existing policy research and framework, as well as ongoing initiatives within the region surrounding the Centre for Excellence in Games and Media City initiatives.

The source data tables for all the quantitative information presented in this report, along with the summary table of reviewing the major policy documents and other key information discussed in the report are included in the appendices at the end of the document.

Acknowledgements All work involved was jointly developed through the support of staff of NWDA and Northwest Vision and Media, the regional cluster organisation for the Digital and Creative Industries. Their active engagement and positive response to the process and outputs has been vital to the delivery of this report.

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SECTION 1: INDUSTRY AND POLICY REVIEW 1.1 Sector Context and Value-Chain Operations Review 1.1.1 Market Context The traditional market for computer games revolves around the sale of dedicated hardware or ‘consoles’ and the associated retail sale of gaming software produced for consoles as well as personal computers. The two are generally interrelated as hardware sales helps drive software sales (see Figure 1).1 As very few game developers are able to completely self-finance major development projects, let alone cover the associated marketing spend needed to ensure recoupment, producing games for the high-end gaming consoles has long been the primary route to growth for an aspiring developer (discussed further below). As such, understanding the predicaments faced by these businesses require that we start with the market that feeds this activity, retail sales.

Figure 1. Global Value of Game Hardware and Retail Software Sales, 1998-2008 $40,000M

Hardware Retail Software

$30,000M

$20,000M

$10,000M

$0M

1998

1999

2000

2001 2002 2003 Source: Euromonitor

2004

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Retail sales remains the dominant sales and distribution channel for computer games software. While online gaming and other online sales channels are growing, no other source of industry income is expected to offset the value generated by retail sales in the immediate future. Looking at the retail software market, the global value of retail games software in 2008 was US$36.46 billion with 87 percent of the market revolving around major retail centres in North America (US), Western Europe (UK, France and Germany) and Asia-Pacific (Japan, China and South Korea). In pure value terms, the UK is the second largest retail market in the world with sales driven by a fanatical domestic market with the highest value spend per household in the world (see Figure 2 & 3). Furthermore, of the current market leaders, growth in the value of sales is strongest in Western Europe and North America with the principle emerging markets in Asia being China and India (the value of the Japanese market being relatively constant over the last 10 years and South Korea seeing much more modest growth rates compared to US and European counterparts).

Unfortunately, domestic producers are currently not able to take advantage of this critical home country advantage, or international growth for that matter. Rather, the inverse appears to be happening, namely, the value of the market domestically and internationally is growing, while the share of development spend going into the UK development sector is waning. In short, development spend is gradually being dis-invested from the UK and redistributed elsewhere.

1 The base data tables upon which these international trends are based at included in Appendix 1.

2

Figure 3. Household Spend (US$) on Computer Games per Household in Leading Markets, 1998 - 2008 200

150

100

50

0

1998

1999

2000 USA

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2002 2003 United Kingdom

2004 Japan

2005 2006 France

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Figure 4. Value of Top 4 Games Software Retail Markets, 1998 - 2008 $30,000M

$22,500M

$15,000M

$7,500M

$0M 1998

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In the current climate, spend going into UK games development is estimated to be roughly £450 million per annum and expected to decline in the immediate future (NESTA 2008). Development spend is critical to understanding the growth potential of the games development sector and its ability to absorb the labour market.

This is because it directly determines the budget and margins that the developer can work with (discussed below). But it is also critical because at an aggregate level, sales performance should be highly correlated with development spend, reflecting the fact that the industry’s main investors, games publishers, will be benchmarking their development budgets based upon sales performance trends (were it not publishers would be going bust en masse).2 It is to be expected that decreases in development spend will, on average, have a similar impact upon the aggregate sales levels of UK game developers. The problem is that without a change in the commissioning behaviours of publishers within the games value-chain, lower spend will likely lead to lower sales performance that, in turn, will affect capital budgeting decisions in the same way, tending towards a disinvestment cycle if higher levels of sales performance does not immediately return on subsequent projects.

As we discuss below, a critical feature of this dynamic revolves around the traditional commercial models used to finance games development. These models leave developers in the weakest bargaining position, with the least information about markets and access to markets, and handicaps them from accessing the feedback necessary in order to manage the innovation and new product development processes in the sector. While the increasingly strong position of the UK market should place the development and innovation of the local supply system in a strong position, it does not do this in practice and the lion’s share of the value generated by the growth in the UK market is being claimed by foreign competitors. Furthermore, given the high degree of foreign ownership of local producers that has taken place in the acquisitions that have shaped the UK scene in recent years, growth in UK market value is being gradually re-distributed to development clusters elsewhere.

This re-investment problem is a critical context one must start from in order to begin explaining the findings that are emerging in the research literature such as the recent Oxford Economics (2008) observation that while there is a rapid growth of the UK and global games retail market, there is also a real possibility of a long term decline in the UK based industry. Furthermore, the reader should recognise that this re-investment problem currently dominates much debate within the UK games sector and must be the starting point from which we interpret the observed behaviours and findings that this project team is able to see. Finally, investment into development is a concern that is increasingly apparent in the research literature and background policy reports reviewed here, but it is not at all clear how the current UK policy framework as a whole, or those of the North West or any other region for that matter, are actually dealing with it head on in their support measures--motivating much of the frustration in the gaming community regarding the misalignment between policy support and industry needs.3 Redressing these concerns represents a core message that permeates throughout this report and in the pragmatic recommendations and opportunities for the North West that we will demonstrate in later sections.

1.1.2 Value Chain overview As with the market side of the industry, the mainstream computer games value chain can be divided into two interrelated halves, hardware and software production (see Johns, 2006). Hardware production is generally the exclusive domain of the major console manufacturers all of whom are foreign owned with different stages of hardware production located in North America, Japan, China and Taiwan. Accordingly, in this report, we will only concentrate on the software development half of the picture which represents the traditional space within which a games developer would operate. 4 Overview diagrams of the games development value-chain, typical 2 For instance, UK produced games took roughly 17.6 percent of UK retail sales in 2007, virtually identical to Canada (Britain’s most like for

like Competitor) share of the UK market at 17.5 percent (Develop 2008). Both countries, in turn, have similar levels of development spend (see NESTA 2008) with Canadian spend estimated at £400 million (not including its large tax credit and cheaper labour costs which effectively places Canadian spending in a stronger position than the UK).

3

The most starkest illustration of this is the strong emphasis upon training and mentorship in the policy community, yet the unanimous verdict in the BERR (2007) industry survey which had not one single response affirming an academy or mentorship scheme as being what the industry wants from government. This does not mean that these interventions are not important (there are many positive responses from some of the pilot schemes currently being trailed by NESTA and others). However, these must be contextualised within a creative economy support framework that has some strategy for tackling the underlying structural problems in the sector.

4 It should be noted that this discussion only holds for the traditional console games development sector.

While this is currently the area within which the largest firms in the region operate, it is also the area within which much discussion is already concerned with the unviability of traditional commercial models. Indeed, a number of companies in the region and elsewhere are actively looking to break away from this particular view of how the games industry is organised and hence it should not be taken as the only view of the value-chain within which the North West operate. For firms attempting to find a different route to market for their products and services that leverage skills and technologies born out of a gaming mindset, the value-chain will be very different.

4

development stages and costs incurred over the development cycle, and diagram of the typical games publishing process are included in Appendix 5 as background references.

As depicted in Figure 4 below, there are essentially five main agents involved in the production of computer games: developers, console manufacturers, publishers, distributors, and retailers. The degree to which any of these positions are independent or internalised within a company depends upon the scale of operations of the company in question. Generally speaking, the larger the company, the greater will be its attempt to internalise a broader range of these activities. Equally, the smaller the company, the more specialised it will be to one or two particular activities in the value chain.

Games developers or development studios represent the life-blood of the content production aspect of the industry. Managers of these studios pool technical and creative talent into production teams that transform ideas and technologies into final gaming products. In employment terms, development (production) is the most labour intensive stage of the value chain with developers ranging from the one-man band home programmer (a dying breed), to the development studio with several hundred individuals working on a complex development project. Independent developers are a particularly important feature to the games value chain as the major console manufacturers such as Sony, Nintendo and Microsoft, despite having in-house development teams, publishing operations as well as distribution divisions, will still depend upon a large number of third-party developers in order to build an eco-system around their console platform whereby a networks of applications help to reinforce hardware sales. Equally, independent developers represent a critical revenue source in and of itself for the major console manufacturers as they will take a share of the gross sales on all games sold for its platform through licensing fees.

Independent publishers essentially act as agents for pre-developed products or as financiers who procure the services of a developer where they will partially or wholly finance project costs. For self-financed products and/ or independently produced products, a publisher then concentrates either on distributing products to retailers if they are large enough, and/or they go through an independent distributor specialised in dealing with greater range of retailing outlets than the publisher could themselves reach.

The distributor, in turn, deals with the retailer who actually sells the product to end consumers through physical or online retail sites. Both of these agents cover the logistical side to the business: the manufacturing of boxed product, the infrastructure of distribution, retail sales, inventory costs, point of sale marketing, and the sale or return agreements. The finer details of how products will be marketed, priced, sold and the fees/percentages of sale that each participant claims from the unit sale price are the result of negotiations between publishers, distributors and retailers with console manufacturers exercising their right to tax all sales of products utilising their platform.

As with film and television, the sale price is diluted by all participants further ‘down-stream’ in the supply-chain with any residual net profits (called ‘overages’ in the games industry) only returned to the developer if the initial terms of the development contract offered the developer some pre-arranged percentage of the net profits as royalties. The degree to which sale price is diluted by respective participants is a function of the negotiating position of the respective parties and their degree of control over resources critical to monetising the value of an underlying intellectual property. In essence, value is determined by producing content the market wants and then minimising the distance between the rights holders and the end consumer in order to claim a higher proportion of the sale price. The extent to which this cannot occur completely generates the degrees of independence and specialisation of firms found in the computer games sector.

5

Figure 4. Key interactions between agents in the computer games value chain

Source: Johns (2006) From a regional perspective, growing the sector is a function of growing firms able to establish positions within these different roles. It is beyond the scope of this overview to consider the particular dynamics of business development for each of these different vantage points. Continuing with a review focussed upon the traditional games development sector, we will only briefly review current insights into the challenges that the development side of the industry faces.5 For the games developer, much of their ability to grow depends upon finding a commercial model that can sustain this growth. These models determine the particular ways in which percentages of unit sales are carved up by different participants in the value-chain (the publishers having the largest claim of the pie as they take most of the initial risk in financing production). At present, there is much concern over the viability of the traditional independent games developer.

These concerns and the current range of policy options recommended to tackle them are discussed in the next section. Here, we only seek to add more context to understanding those debates and the development problems that policy-making bodies must respond to. This context is largely provided by the BERR 2007 report entitled “Playing For Keeps” which provides the current best resource to encapsulate and survey current concerns over commercial models in the UK. Much of the concern revolves around the “advance model” where the publisher part-funds the costs of development in advance. This is reported to be the most common business model in operation between publishers and third party developers when the game is based on the developer’s own IP. In short, the 5 Virtually all of the literature on the computer games industry operations from the perspective of the traditional console games development

value-chain. This bias needs to be addressed in future research as this study will help demonstrate the variety of ways in which businesses in the computer games sector in the North West are already trying to branch out into different positions both within the traditional console and newer online gaming arenas, as well as into new types of specialist publishers, service providers and “cross-over” companies developing products for the non-gaming markets. These entrepreneurial experiments are likely to be the principle sources of the industry’s ability to adapt to emerging market changes and to divorce themselves from existing constraints on traditional developer roles. As we will also demonstrate, these experiments also appear to have a greater potential for absorbing those in the regional labour market in the North West at present.

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arrangement is one where the developer must self-finance the building of a prototype (often called a ‘vertical slice’). This is essentially a complete demonstration of all key gameplay elements scaled down to one or more playable levels of the game. This prototype is the first key stage in securing a larger development contract and it is one that, at present, the majority of developers must self-finance in order to have something that can demonstrate its sales potential and technical feasibility to the publisher. In short, it is a part-financing model where the developer covers initial prototype costs (helped perhaps by a smaller seed fund by the console manufacturer to develop a purely conceptual proposition) and only after “proving” itself through market testing.

This is usually done by contracting a specialist company, such as PlayBox Games in the North West context, to run focus group testing on the product and feeding back results to the publisher to inform their internal ‘green lighting’ decision.6 Then, if the publisher is satisfied with the test results, they then enter into an agreement to fund a negotiated share of the remainder of the game’s development cost via a series of royalty advances paid to the developer over the life of the title’s development. Typically these advances also allow for a small profit margin for the developer (reportedly between five to ten percent of the budget). Accordingly, in this commercial model, growth for the developer is synonymous with growth in the ability to secure higher budget production projects coupled with growth in their ability to finance a larger share of the product costs so as to claim a larger share of the royalties (reportedly enabling developers to secure profits of around 20-30 per cent for production budget).

The basic advantages of this model are that it enables the company to keep control over intellectual property, claim a minor share of any royalties should the game become a big success, yet pass on financial risks to the publisher who cover the majority of the development costs as well as marketing and other expenses to generate sales. This model is of particular interest to the console manufacturers as every game sold using their system entitles them to a share of the gross sale. For publishers, the model represents a ‘safer’ way of tapping into innovations in the market place and getting third parties to finance a product development process to an advanced proof of concept stage before they take over its development.

The basic downside of the model is that developers need a product to generate income in excess of the in-built service fee (given that the costs of developing the next prototype to an advanced enough stage to win a new contract is potentially larger than the in-built margin they received on the last project). The ability to do this again and again to sustain a development company is the problematic aspect of the model. Growth in income for the developer is a function of the size of the budget and the degree of success of the product. Yet greater budgets mean more challenging performance targets to reach with each successive project iteration. This, in turn, means that royalty payments (triggered once a product sells more than it costs, hence the terms ‘overages’) are thus increasingly harder to achieve. This is particularly true of independent developers compared with in-house titles of the publishers. For instance, in the BERR (2007) industry survey, overages only represented 12% of the total revenues for independent developers, much less than the 25 percent reported by publishers. Yet it is these overages that are critical to the development of the business. As these dry up, independent developers are forced down the value chain towards less expensive games which, traditionally, means less expensive platforms or games developed on the non-proprietary end of the market. This then creates the problem of having to find major commercial success at the lower cost end of the market where competition from other developers is generally highest, returns are on average lower, and thus the pockets to finance production and marketing spend is also generally smaller.

The inherent instability of this model also stems from the fact that a number of variables are effectively out of the control of the developer and in the hands of other business agents within the value-chain. For instance, if publishers decide to commit less spend to independently sourced product--such as in the situation where a rival console manufacturer, Nintendo, has been able to reach an unexpectedly high share of the market with a lower cost, lower performance console--other publishers whose products are tied to the weaker performing consoles (in the current console war, this looks to be Sony’s Playstation 3) are forced to tighten their production budget to compensate for any losses in revenues or sales projections. This means developers looking to finance new developments can never be sure that there is actually a budget of a certain level waiting for them were the prototype stage they have self-financed to prove itself in market tests. Furthermore, it is at the discretion of the publisher whether they opt to exercise their relative market power over developers by cancelling milestone payments, forcing the developer to scale down its cost structure (largely based upon its wage bill) and effectively giving the developer a smaller salary than expected for a part-finished product that the publisher will then complete with its own in-house development capabilities. Consequently, not only do UK investors have to worry

6 It should be noted that there is general tendency for this market information to be kept close to the financiers of games given that it is the

financier that pay for the market testing. This tends to leave developers more in the dark as to the finer details of what works and does not work. We will return to this point in the recommendations section.

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about the limited number of revenue streams that independent developers have, but there is always the potential that the Publisher could exercise their power to terminate a development contract at will (known as “termination of convenience” based on marketing reasons which normally results in 1 or 2 milestones being paid (ie. 2 months wages) with no penalty, and worse this can be “dressed” as a Termination for non performance. In this scenario, companies can and have been pushed into closure.

In spite of longstanding industry concerns that this model, and its minor variations, is essentially ‘broken’, the BERR (2007) report concludes that it is still, nonetheless, likely to remain the dominant commercial model for original, independently generated intellectual property (IP) as both publishers and console manufacturers, the main power centres in the value chain, have a strong preference for this arrangement.

Much of the reason this model is likely to remain dominant also stems from the fact that its alternative, a commercial model where the developer completely self-finances production costs, depends upon an ability to cash-flow development (generally only possible for smaller projects at the lower-cost end of the gaming platforms). Now this condition does not exist for the majority of existing UK developers as they are starting from a position of revenue dependency on publishers (a point that has been confirmed in our own survey of developers in the North West region - see section 2). Also, it does not exist for new start-up enterprises given that an independent source of financing, i.e. from venture capitalists or business angels, also is not well established in the UK context at present. Without this independent source of financing to foster new business development within the traditional developer space, new generations of developers are effectively precluded from pursuing a commercial model that enables the business the greatest scope for claiming a higher portion of net receipts, generate this revenue sooner in the trading cycle of the product, and retain the rights to the IP for future use.

In absence of independent sources of financing or the opportunity to pursue new innovations in gaming from a position of balance sheet strength, the other commercial arrangement open to the current developer is the “work-for-hire” deal. This arrangement is effectively one where the developer operates as a pure production service firm, claiming a higher percentage of the production budget as their service fee, yet retaining no rights to any intellectual property. In this arrangement, the business is only able to grow in a market where publishers need to outsource production capacity to specialist producers (not unlike the ‘contract manufacturing’ model widely employed in the electronics manufacturing sector). The stability and value of that outsourcing demand is likely to be a function of how interdependent the specialist capabilities of the developer are to particular types of games currently in fashion.

This is because the other source of growth for a contract manufacturer, standardised operations and increased volume of deal-flow, is not yet possible given the technical tools for games creation are not yet standardised enough to reduce the dependency of the business on using ever larger amounts of manpower to deal with the novel problems and the increasing complexities of games development that are being driven by technological change in consoles (see section 2 for more detailed analysis). At present, the growth of a developer has been based upon increasing headcount commensurate with increases in production budgets. This creates a premium on the management skills to organise diverse production teams and retain this talent base over long periods of time as a development studio grows. These processes must also be supplemented with an ability to retain critical staff so as to limit the costs sourcing high-end, often highly specialised talents, as well as the costs of re-training a broader range of new technical and creative employees into the particular processes used by the company with each 18-24 month project iteration cycle.

For developers with such strong internal processes and good reputations for delivering on time, on budget, and delivering to requisite quality standards, a premium on top of the reported service fee norms of between 15 to 20 percent of the production budget may be possible. This may often come through variations in the work-forhire model that allow their premiums to be paid out of a minor revenue share in the net receipts (a share based upon a contractual specification rather than a right as an IP owner).

While these variations in commercial models influence the actual degree to which unit sales are apportioned to respective participants in the value chain, the BERR 2007 study nonetheless offers a benchmark for the typical revenue splits for developers working within the part-funded, IP retaining model (see Figure 5). With developer fees (to cover production costs as well as their own margins remember) estimated to be approximately 11 percent of the retail sale price (net of tax), and an estimate of UK developers producing products that claim approximately 17.6 percent of the value of the UK retail market at present, we can produce a rough estimate of the share of value distributed to UK development (independent and foreign owned) attempting to retain IP through a part-funded commercial model. With a gross retail sales value of £2.064 billion in 2008, minus 17.5 percent VAT, an 11 percent revenue split estimate leaves UK developers seeking to own their IP likely to claim a a mere 1.9% (roughly £40 million) of the UK pie. Such relatively small amounts of money necessitate attempts to access the growth opportunities in other European and US markets in order to find much hope of sustaining any 8

significant independent development sector in the UK. Such conditions help further contextualise the pressures behind the limited examples of successful developers that have remained independent in the UK, as well as the need to pursue work-for-hire arrangements to provide more stable revenues and higher profit margins.

Figure 5. Typical Revenue Split on Unit Sales by Value Chain Activity Console Manufacturer Retailer Physical distributor Publisher Manufacturing Marketing Developer 0

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Source: BERR 2007 We now turn to the policy literature and the current debates over what the perceived development concerns of the games industry are as well as current thinking in how to support the sector.

1.2 Policy Context and Literature Review The immediate policy context within which UK games development finds itself emerged at a time when the sector was undergoing a particularly difficult period of restructuring (between roughly 2001 and 2003). Over this period, the breadth of UK independent developers effectively halved as firms became insolvent and/or were acquired with prior intellectual property, as well as production teams, bought, sold and restructured, often multiple times over, in subsequent years (BERR, 2007). These changes appear to have reflected the dominant ‘console cycle’ dynamic underlying this sector. This refers to the historical tendency for technological change-brought with the mass transition between major gaming console generations (see figure 6)--to lead to a heightened period of industrial turbulence as developers whose accumulated programming assets, intellectual property and skill-base tend to lose their value as markets shift to the newer gaming platforms (historically tending to render prior gaming software obsolete). It was out of this context that the first major UK computer games sector report, entitled “From Exuberant Youth to Sustainable Maturity: Competitiveness analysis of the UK games software sector”, was commissioned by the DTI (now BIS – Department for Business, Innovation and Skills). The DTI and the DCMS would, in 2003, work to develop a “Creative Economy Programme” which over the next five years would work towards a policy platform for supporting the creative industries as a whole. Yet for the games sector, the DTI report appears to have resulted in very little uptake in subsequent government research and policy development in the years immediately following its publication in 2002--this despite the growing interest in the ‘creative industries’ over this period. Indeed, it would take another five years before a significant burst in government interest would emerge in 2007 and 2008--the period when the majority of research reports and policy documents underlying the contemporary UK games policy environment were produced. This growth spurt appears to have been a last minute catch up to bring computer games in line with other subsectors of the creative industries, such as Film/TV and design, which had tended to receive much stronger priority in research output over the years leading up to the 2008 release of the Creative Britain policy platform.

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Figure 6. Historical Timing of Console Cycles in the Computer Games Industry

Source: Johns (2006) What is immediately striking when reviewing the various industry research reports and policy documentation produced over recent years is that the basic problems raised do not appear to have changed. The current wave of sector reports have a high degree of consistency in the problems identified to those raised in the initial DTI report, as well as a large degree of similarity in the broad types of strategies recommended to redress structural sector development concerns. In the discussion below, we attempt to capture this through a thematic overview synthesised from the major reports. This discussion serves both to layout the prior work that has informed this study, but equally, serves to inform the reader as to the context behind much of the bespoke data gathering and assessments generated in this study which we present in section two. As such, this review is critical for grounding the areas in which this study both corroborates and extends prior policy research and thinking, but also deviates from it in some of the assessments, rationales and recommendations for effective policy support to the games sector, particularly in the North West of England which is the core focus of our concerns. More detailed tabular summaries of each of the major research and policy reports reviewed in this project are summarised in Appendix 2. These summaries have been broken into 8 recurring themes around which development concerns and policy recommendations appear to have been focussed. Each theme will be discussed individually below.

THEME 1: Lack of information / Poor public perception and understanding One of the most frequent themes underlying the current policy context is lack of sufficient awareness by government (but also the capital markets in general) as to the economic operation and impact of the sector as well as the differences in commercial strategies, business models and profile of firms operating within this space. This ‘image problem’ underlying the UK games industry has been a relatively constant theme raised throughout the published reports, signalled as strongly in the DTI report in 2002 as in the recent 2008 report by Oxford Economics commissioned by NESTA. The poor degree of public perception and understanding about the sector, in turn, reflects the fact that there is the lack of available information on the sector, particularly in terms of the nature and quality of information necessary to make strategic decisions about how to invest scarce resources to support company and sector growth. With a limited understanding of the economic importance and potential of the games industry, it is not surprising, therefore, that both the government and financial markets have tended to have limited interest in and commitment to investing in the UK games industry (these concerns are discussed further in Theme 8 below).

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Behind many of the concerns expressed about the lack of information is not simply a lack of data available on the games sector as a singular aggregate, but on both comparative data to differentiate performance of markets and suppliers in an international context, as well as critical sub-sectors within the games industry. Despite calls for a pooling of global markets and industry data, collective commissioning of industry level research, and a focus of data gathering to build a greater understanding of the “value chain” in a more holistic manner, all expressed in the 2002 DTI report, very little progress along these lines appears to have been done to date.

Part of the reason reflect the fact that international conventions for generating official statistics to produce economic data have followed a standard industrial classification (SIC) systems which do not differentiate computer games from other forms of software development in national trade statistics. Consequently, with computer games merged with software as a whole, there has been no official (non-estimation) means of differentiating the relative contribution of the games sector in particular given that its is widely understood that games will be a minor share of these figures. This is likely to have been a major reason for the delays in attracting policy attention the computer games sector relative to other segments of the creative industries in general despite the fact that it is well known that Software, Computer Games & Electronic Publishing sector has represented both the highest growth in value-added as well as accounting for the single largest share in export value of any segment of the creative industries. 7 This concern was raised in the initial 2002 DTI report as a key action necessary to increase the visibility of the sector/sub-sector for policy-makers. Progress has been made in this regards and a new classification system is due to be implemented throughout Europe starting in 2009.

Another problem with the lack of data and awareness stems from the fact that other critical types of industry data often mentioned in reports are difficult to collect and problematic to interpret in the context of a highly variable, project-based context of the games industry. For instance, beyond the already problematic task of measuring the economic benefits of the industry are calls to measure the ‘spill-over’ effects of the games industry on other sectors as well as calls for more extensive research into qualitative concerns with business practices of the sector, labour market issues, R&D activities and the existence of other innovative capabilities.

Some of these issues will be highly specific to companies and differ between regions making data-gathering both expensive and problematic for generalisation and planning. Others are problematic simply because the games industry, as with other project-based industries, often operate in ways that resists the standardised classifications needed to conduct many traditional forms of economic measurement.

For example, in the case of R&D measures (a critical official proxy for measuring innovation), attempts to gather this kind of information on the games development sector runs into the reality that it is currently difficult to consistently distinguish operational expenditures from R&D expenditures.

In a project-based games development business, everything may, in practice, be effectively research and development. In this situation, there is likely to be little or no R&D for many in the games industry simply because official accounting conventions are linked to taxation and the interest not to open the flood-gates to a whole sector to seeking complete tax relief on all development--a problem that manifests itself in the problematic access games developers have traditionally had to one major blanket fiscal support measures available in the UK, R&D tax credits. This is one area that the “Creative Britain” report appears to have make explicit mention of in their attempt to simplify the R&D tax credits to aid the games sector.

This raises an important implication for any attempt to gather data on the games industry. Innovations are needed in terms of the types of measures and the purposes those measures fulfil in planning a strategy for investing in and supporting the development of the games sector. Some innovation has already been taking place. For instance, one of the earlier data-gathering innovations occurred with Skillset and the publication of Skillset Labour Market Intelligence Digests for the computer games sector with recent attempts to develop new methodologies for measuring innovation and creativity in the sector provided by National Endowment for Science, Technology and the Arts (NESTA). However, both these innovations are fundamentally based upon industry surveys that are, necessarily therefore, designed around particular prompted responses and more problematically subject to participation and perception considerations. This makes them useful as a comparative measure to gauge relative differences, but problematic when used without comparative purposes in mind, such as interests to measure just the size of the labour force in the region or track changes over time. For example, in the case of the North West, while we can be confident that the region is actually one of the smallest in terms of headcount in the games industry in the UK (confirmed in this study’s own comparative analysis of the latest official financial accounts for the largest developers in the UK - see section 2) the actual number of people currently (as of the last Skillset survey in 2005) reported to be employed in the 7 Creative Industries Economic Estimates Statistical Bulletin (DCMS 2009)

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computer games industry in the North West of England is only 266! This is likely to grossly underestimate the labour force employed simply in development let alone all the other businesses that actually participate in different capacities within the computer games value-chain.8 Another key context for understanding the limited information and the need for innovations in information gathering stems from the fact that games development has always relied primarily upon ‘trade capital’, with development costs largely financed from within the industry by larger publishers or by larger independent developers financing development to some degree out of retained earnings. This means much information about costs and performance are themselves not public nor standardised for sector-level aggregation. Rather they are usually closely guarded by industry participants and accounted for in different ways depending upon how a particular business is constructed. It stands to reason that if the purposes of gathering data is to aid in the effort to raise public or private investment to support the growth of businesses and sectors, periodic surveys based upon standardised perception reporting will always be a highly problematic basis for building a viable strategic framework to support this segment of the “creative economy”. This is because reporting is always partial and of value for comparative purposes only rather than fit for purpose to aid in targeting interventions into particular enterprises. It is also because the use of perceptual reports by organisations who have to invest in those agents generating the perceptual reports in the first place raises obvious problems of conflict of interest and one should expect biases in reporting if it is known by the industry that such surveys are linked to public investment.

In this context, the ability to gather information within a policy framework looking for hard data to make evidence-based judgements as to the payback potential of any given support investments--a basic policy paradigm set in the original DTI report and repeated in the DCMS (2007) report “Staying Ahead: The economic performance of the UK's creative industries”--implies that innovations in information-gathering must also take a form relevant to making evaluations into particular enterprises for some form of investment purpose. This essentially means that innovations must include data-gathering that approximates some method of profiling firms into types based upon their means of generating value and the gap in activities likely to be critical to the ability of the business to generate that value. This move would enable data-gathering to support measures aimed at differentiating firms into those able to repay some form of investment interest and those needing specific modifications in behaviour or operation in order to be more ‘investment ready’. Such innovations also imply innovations in data-gathering, the most critical implication being an innovation in who gathers the data and how they get it. This is because performance data requires those able to make assessments and a context within which firms would see value in giving sufficient access to these evaluations.

There are already signs that the current wave of experimentation in policy support is already beginning to look at innovations of this kind. For instance, one area being piloted to meet the DCMS’s current “Creative Britain” policy framework is NESTA’s “Creative Business Catalyst” pilot programme which began late 2008 and is currently being trialled with five business schools including one in the North West region (MMU). This project essentially looks to use business school resources, MBA students in particular, to conduct a ‘health check’ assessment of games companies to spur innovations in strategic behaviour by their directors, as well as create a structure for further university-industry business support relationships (UKTI, another key DCMS agency for implementing its Creative Britain strategy, is also beginning to explore similar avenues). The reason is straightforward--this is a well established model for tapping into business expertise at a low cost which is offered by most if not all business schools in the UK. Indeed, Manchester’s own MBS Business Incubator is unique in the world for providing a more developed and integrated structure for this activity with case-based business development research offered to companies being integrated into an MBA programme and organised on a commercial basis with commercial partners and networks to support their research. The issue is that these services have not necessarily been specialised to any particular sector which is important in the context of assessing firms from non-traditional industries like computer games.

8 For instance, in just the partial set of responses received in this project’s own survey, reported headcounts are currently at 344 and this

does not include some of the largest studios in the region such as Sony. This number is not likely to reflect any recent growth spurt in employment as there appears to have been a consolidation in the North West in recent years with a shrinking pool of companies listed in prior studies on the region’s game sector, as well as reports in the press as to different acquisitions, relocations and closures of development studios in the region over time. Furthermore, interview responses attest to common problems with hiring talent from the region and attracting talent from outside of the region, and industry reports point to layoffs in employment due to the financial crisis for at least one developer in the region, Juice Games.

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THEME 2: Difficulty for UK firms to create and secure new intellectual property One consequence of the prevailing business models within the industry, and specifically the relationship between publisher and developer, is that it is increasingly difficult for UK game developers to retain ownership of intellectual property. Indeed, consolidation trends in the industry have been strong in the UK in recent years, with independent developers being acquired and vertically integrated into the operations of (foreign) publishers. Other reported trends are an increasing prevalence of the ‘work-for-hire’ model where studios work on IP owned or leased by a third party (typically the publisher). This results in a situation where fewer firms are creating proprietary IP and for those that do, the ownership of this is retained by the publisher or parent company. These issues are strongly linked to other industry concerns about the unsustainability of business models addressed in Theme 3 below.

One of the oft-reported reasons for this trend is the fact that at present, work-for-hire arrangements appear to offer independent developers a higher profit margin and greater stability of revenues. In the survey conducted for the BERR study in 2007 entitled “Playing for Keeps”, responses suggested that only 12 percent of the revenues of an independent developer derived from “overages” (net profit royalty payments) and that the majority of revenues stemmed from work-for-hire advanced service fees. Anecdotes in the same report suggest that work for hire is consistent, scaleable and currently in a situation where demand outstrips supply. Yet the concern is that this option is a short term measure that leaves the business with no assets in the longer term. As noted in the report, the possibility of independent studios to invest in IP is increasingly limited as “publishers (…) use highly experienced third party developers for 25-30 per cent of their important IP, and (…) use internal studios, which will continue to grow in size both organically and via acquisition” (BERR, 2007: 40).

Solutions to this problem are seen to lie in the transformation of business models by creating relationships which are more supportive of growing independent developers. All these interests rely heavily upon identifying alternative modes of financing game development. Calls to create stronger venture capital markets, to catalogue and broadcast these the industry, and to offer training and support for companies wishing to bid for finance, periodically raise themselves in policy reports. Indeed, unlike current conditions in the UK, the US games industry reportedly has a much stronger ability to attract VC investment to co-finance games projects.

Yet incentives to offset the risks that inhibit private investment to a UK sector do not currently exist and the City are still reported to be averse to the games industry following multiple episodes of leading UK publishers and developers going public only to fail to generate expected returns or even going insolvent while taking high levels of executive compensation in the process. For instance, investor appetite for games was strongly damaged by companies such as: Argonaut who floated in 1999 and went into receivership in 2004; Elixir who raised a good amount of investment yet closed in 2005; Warthog which was AIM Listed closed only to be sold cheaply to Gizmondo 2004; and VIS Entertainment who also raised investment before going into bankruptcy in 2005.

Similarly UK Games Publishers Eidos and Codemaster’s poor performance have not helped perceptions given these are some of the largest publishers in the UK. An alternative suggestion raised in reports point to a need for focussing support innovations upon two basic fronts: attracting inward investment and “pump-priming” innovations in an as yet underdeveloped domestic games industry. Both were mentioned as critical fronts in which UK government strategy must make progress in the DTI 2002 report. Both are equally represented in the more recent DCMS policy position for ‘Creative Britain’ as well. Currently, responsibilities for each front is allocated to the UKTI (for leading a national effort to promote capabilities internationally to attract investment from foreign publishers) and regional agencies on the one hand, and to the newly created Technology Strategy Board (TSB) and NESTA for supporting the ability of companies to pursue innovation.

However, the second option, a more expensive proposition, has generally been more fragmented and exploratory in nature. Most importantly, a notable line of exploration appears to have gone undeveloped: measures that increase developer ability to ‘market test’ projects at earlier stages in the development process.

Indeed, after tax breaks, some kind of support process for prototype creation is already one of most desired forms of government intervention generated by the industry survey in the BERR report. As one director from a major UK independent developer (one that is also referenced as a major independent firm to have converted into a work-for-hire mode of generating income) was quoted: “It’s very difficult to protect developers who in the early days of their new original IP can get beaten up in negotiations with publishers. If there were funding available to ring fence the developer at the prototype stage, it might stop them being forced to sign away the rights to the IP. You’d need a good industry panel to judge which projects are worthy of getting support. -Martyn Brown, Studio Director, Team17 Software” (BERR, 2007:63) 13

It should be recognised, however, that it is unclear how problematic the work-for-hire trend actually is for industry sustainability. For instance, reports of an increased tendency for developers to opt for work-forhire relationships with publishers may reflect a strategic reaction of developers believing that the current console cycle is coming to a close (another contentious point debated in the industry) and that it makes more sense to take a higher wage than hope for royalties on sales which may be short-lived by technological changes.

Similarly, trends may also reflect the fact that developers are less sure about the returns to IP, particularly for products developed on the more expensive high-end console platforms (XBox, Playstation). As the value of future contracts is dependent upon perceptions as to the underlying health of the publisher/gaming platform, work-for-hire trends may reflect yet another way in which developers are cashing in now rather than gamble on the value of IP royalties in the future. Finally, trends may reflect the risk aversion of the publishers and their current strategies of building upon prior ‘franchise’ brands with incremental innovations to successful gaming genres. These strategies create opportunities for specialist developers with strong internal processes to implement a degree of standardisation and efficiency in production processes critical to a strategy of capitalising on the immediate service fee premiums they could get in the current market for “buy-out” deals (discussed in section 1). Hence, for all these reasons which need further investigation, it is unclear whether work-for-hire arrangements signal a temporary response by the industry or a longer-term constraint on the ability of developers shift out of that commercial position. What is more problematic, however, is that in adopting workfor-hire arrangements on mass, developers are actively choosing not to pursue new innovations in gaming and concentrating only on bringing pre-existing ‘franchises’ to the market--a short term strategy that may reduce the stock of intellectual property that can be built upon by the independent sector in the future (see BERR 2007).

THEME 3: Unsustainable business models of games developers The asymmetrical relationship between publisher and development studio is highlighted increasingly in reports through the last decade, reflecting in part a number of global shifts in the game industry; specifically, the increasing cost of producing games for the major consoles in the current console cycle, and the accelerating trend towards consolidation via vertical integration. In 2007, BERR noted that “The games industry has been consolidating at a rapid pace in 2005 and 2006, with an unprecedented number of acquisitions and liquidations of independent developers and games companies. Over half of the acquisitions in the industry have been publishers buying developers, while a great extinction of independent games developers has occurred largely between 2000 and 2005.” (BERR, 2007: 36).

Independent development studios are typically faced by a limited number of viable commercial models to structure their dealings with publishers, who represent the predominant source of financing for game development in the UK. In a detailed study, BERR notes the shift towards the ‘work-for-hire’ model for developer-publisher agreements, noting “This model is the prevalent model in the industry, and is largely driven by publishers who want competitive rates from developers while conceding a low level of sharing of postadvance receipts.” (BERR, 2007: 10). The same report warns of the long-term competitive risks to the sector of this development, as the “Work-for-hire (model) often represents a treadmill for studios with limited growth potential, and the UK faces increased competition from lower cost territories with rising levels of experience.” (BERR, 2007: 9).

Subsequent reports by BERR (2007) and NESTA (2008) develop this further, describing prevalent commercial models as “broken”) and warning that “unsustainable business models and barriers to finance reduce the scope for innovation” (NESTA, 2008: 1) for UK game development studios. The weak position faced by independent game development studios is widely cited in the industry online journals as well, with all of these sources pointing to the lack of finance in the early stages of developing prototypes or ‘vertical slices’ of games are being a key step in securing finance for the full development of games across consoles and other platforms (see Theme 7). Indeed, the industry survey conducted for the BERR (2007) report found a fairly unaninmous industry voice in terms of its preference for government support. While the industry first and foremost wants tax breaks to bring in new investment into the earliest stages of games development, a close second is a funding mechanism for prototype development with commercial successes replenishing the fund on a commercial basis (Canada’s ‘the Great Canadian Games Competition’ referred to as a model in this initiative). We will return to this in the concern in more detail in the recommendations section (Section 3).

A strategy of supporting the development of prototypes also fits well with the need to target interventions on growing new businesses past the start-up and early stages of development. At present, an estimated 75 percent of businesses in the computer games industry are of a small scale operating with 50 staff or fewer (Figure 7). In contrast, our own analysis discussed in section 2 clearly demonstrates that all of the leading UK 14

developers able to generate significant retail sales in the domestic market have been of a scale of operation ranging between 56 and 261 staff with an average games developer employing 127 staff.

Figure 7. Distribution of UK Computer Games Companies by Size 1-5

Headcount

6-10 11-20 21-50 51-199 200+ 0

0.075

0.150

0.225

0.300

Source: Skillset Labour Market Intelligence Digest, 2008 Consequently, driving business growth of the current development sector is likely to depend upon an ability to nurture the lion’s share of the industry that is not yet able to operate at the scales required to generate significant retail sales. As one recent report commissioned by North West Vision and Media (2007) concluded: “Experience across many sectors suggests that it is this kind of cohort of businesses – past startup and early stage, 10-50 employees – that will drive business growth in a sector, so any public interventions focused on generating economic outputs needs to support and nurture these companies. Most appear to have come to a turning point in their development: they have survived the dotcom boom and bust and are now confident and skilled at running their businesses according to the traditional ‘creative services’ model. However, many are now actively seeking to develop alternative revenue and wealth generating strategies that often involve the retention and exploitation of IP. Others have ‘exhausted’ their growth model in terms of mining a predominantly local and regional client base and are looking to win higher value contracts at the national and international level. Many of the businesses admit that to successfully realise these ambitions will require company development and an improvement in the business management and financial skills of the owner/managers. ...A brief analysis of some of the financial data provided by the companies would also suggest that, in even the larger businesses, agencies are struggling to drive revenue and profit growth. (…) With projects increasing in size and complexity, it is likely that micro businesses in particular will be increasingly disadvantaged by standard risk assessment and due diligence procurement procedures.” (NWVM, 2007: 41)

THEME 4: Persistent skills gaps and failure of HE to develop employable students The problem of skills gaps, particularly relating to the technical roles within game development, is one of the most persistent themes through the last decade with several reports stressing this as critical to the inability of British game developers to grow. Yet the issue is not so straightforward. For instance, the latest round of Skillset survey’s (2007) with computer games companies produced mixed views on whether skill gaps existed in their current workforce. Some report that there were enough skills in-house to face their business challenges (not including any successful recruitment activity to fill vacant roles) while others felt that high level skills such as programming, art and producing roles were critical to meeting challenges. Of those identifying skill gaps, they were generally in problematic areas that would not be developed by itself over the next 12 months. Of these areas, online developments for Massively Multiplayer Online Games (“MMOs”), network development and business management generally were regarded as key problem areas the industry will face in the future.

Analyses of the difficulties firms face in recruiting technical staff regularly mention the failure of Higher Education (HE) institutions to provide graduates who are able to perform without lengthy induction periods. The activities of Skillset in the last five years have focused on improving the quality of training and development for the sector, 15

but progress in encouraging the creation of degree programmes that are perceived by the industry as being ‘fit for purpose’ has been slow; currently, only 5 programmes are accredited by Skillset across the UK, none of which are located in the NW. The lack of credibility of the programmes provides some explanation for the failure of such graduates to enter the industry, despite the pressing skills shortages. For instance, NESTA (2008) found that of 81 courses across 46 universities sampled, only 18% of the 1700 graduates succeeded in gaining employment in the industry in 2007. In contrast, one of the best-case exemplars frequently cited lies in Scotland where University of Abertay Dundee (and its “Dare to Be Digital” Competition as well as its recent pilot of the NESTA “Dare to Grow” internship scheme) has helped produce one of the strongest links between the development of a UK regional cluster of game development activities and a ‘hub’ HE institution.

In the North West, research published in 2007 suggested that the region is not generally lacking in producing large numbers of skilled graduates but that the problem, as perceived by employers, was more one of attracting and retaining talent in the first place. Rather than (or at least in addition to) concerns about the failure of higher education institutions (a point we will return to in the recommendation section), much industry perception in the region has been focussed on a need to attract a large and/or iconic employer in order to attract talent. In lieu of importing a major source of employment for games developers, common alternative strategies are to support mentoring, company development and high level strategic business planning activities as only growth in these firms will improve their ability to provide stable employment and a broader base upon which to retain graduates within the North West labour market. It should be noted that such concerns are not specific to games but a generally held view about problems the North West has in stemming the tendency for students to relocate to the South of England following graduation. Current strategies emanating from within the North West region broadly appear to mirror national level initiatives of organisations like NESTA which have implemented a range of similarly focussed pilot projects within its ‘Raise the Game’ programme. The majority of its £450,000 budget is divided into projects targetting recruitment and skills gap concerns such as pilot projects on mentoring (Creative Business Mentor Network) or measures to attract talent (the “Dare to Grow” internship scheme trialled at the University of Abertay and a “Shared Resources” scheme that arranges job swaps between companies in different sectors yet with comparable skillset requirements). All of these projects are currently being trialled and evaluations are not due to be produced until later in 2009/2010. 9

THEME 5: Narrow view of business/lack of business skills within UK studios Alongside the reported lack of technical training, the lack of formal business and commercial training, and the limited cross-sector business experience of management and senior management in the game development sector is regularly cited in reports. In early reports this is described variously as ‘immaturity’, ‘lack of professionalism’; later reports refer more broadly to a failure of firms to develop business leadership, limiting their ability to think strategically and identify market opportunities (several reports cite the failure of studios to grasp the potential of online gaming as a indication of this strategic weakness). Related issues include weaknesses in project and portfolio management capabilities and failures to target a broader cross-section of consumers with game products.

Remedies to these issues typically focus on a combination of business mentoring and networking initiatives; included in this area would be the activities of TIGA, and also events organised and run by Game Horizon in NE England, Games Eden in Eastern England and Game Republic in Yorkshire (see Theme 6).

Similarly, two of NESTA’s Raise the Game pilot projects target business skills of company executives with projects based around mentorship and a pan-industry workshop or ‘lab’ type event that fosters executives exploring cross-over benefits between their businesses and other forms of economic activity through new idea generation and feedback. In the North West region, a similar move with the “Get in the Game” ideas-pitching session was trialled in November 2008 with 5 of 25 participating businesses winning £10k awards to fund the development of their ideas. 10

9 None of these projects involve the North West. At present, the only NESTA project that may have opportunities for the North West games sector is the Creative Business Catalyst pilot discussed earlier. This project is not games specific however.

10 One of these award winners, Bollington-based The Games Creators, pitched a simple IPOD-based game which reached the top spot in

the Apple App store top free games in mid April 2009.

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THEME 6: Relative insularity of sector and failure to build/utilise intra-sector and crosssectoral relationships The fragmented nature of the industry was highlighted as early as 2002 by the DTI and linked to the weakness of industry-level infrastructure; the need for a pan-industry forum (involving major developers, publishers and independent studios, alongside HE institutions, TIGA and ELSPA) is a key action point here, although this has not transpired in any formal manner in the subsequent decade. This is related to a general failure of the sector to form strong links with adjacent fields, such as the interactive digital sector. This situation persists despite repeated indications that firms in the sector share “a desire to share best practice though little consensus on how to do it” (BOP, 2007).

This failure to effectively network runs counter to the broader economic analyses, which provide evidence of clustering across 8-10 regions in the UK, where a significant labour pool exists of experienced technical staff. In addition to the local networks mentioned above (Theme 5), which mainly emerged in the last five years, the formation of a Technology Strategy Board for creative industries and the broadened remit for some regional screen agencies to cover game development appear to represent the main governmental initiatives in this area.

Attempts by NESTA to run ‘cross-over’ workshops represent a prime example of policy attempts to spur crosssector spillovers (a critical measure in justifying the spillover benefits and payback of investment into the games sector). The proposed “Centre for Excellence” in Computer Games also marks a key attempt to provide an institutional focus for networks in this sector. We will return to the importance of the Centre for Excellence in Section 3.

THEME 7: Absence of independent financing/investment The heavy reliance of game developers on publishers, both for full funding and for the funding of prototyping, is regularly raised as a key issue for the industry as a whole. A key factor here is the unwillingness of private capital to become engaged in the financing of game development in the UK, which compares negatively with the ability of North American game developers to acquire finance from a range of sources; some reports linking this with the lack of knowledge and experience of UK game developers in this regard, and their consequent inability to present themselves as an attractive investment opportunity to capital markets, reinforcing their dependence on publishers. Consultancy supported by regional development agencies, often managed by the regional bodies such as Games Eden and Game Horizon, appears to constitute the main attempt to address this weakness. Central government initiatives focus on support for representing the industry internationally, alongside funding via the TSB for new research collaborations, funding for Enterprise Capital Funds and Research and Development tax breaks (although the latter have had limited impact in the game development sector, reportedly due to the complexity of the application process, according to some reports).

THEME 8: Lack of investment from UK government compared to financial support of competing countries A final recurrent theme, and one which has received a significant amount of attention from industry bodies such as TIGA and game developers themselves in recent years, is the failure of the UK government to put in place a system of financial support akin to that in place in countries such as Canada and France. Among the industry, there is a strong perception that in Canada, and Quebec in particular, the strategy at a federal and national level has been to prioritise the game development industry through tax credit schemes, with a view to supporting job creation and also the creation of original intellectual property. The consequence has been the rapid growth of the sector, and the relocation of several major game developers to Canada. Several of the most important schemes, particularly in Quebec, will elapse shortly, at which point the effectiveness of this policy will be reviewed. It should be noted that there are currently concerns that the tax support has benefited large developers/publishers arriving in the region rather than the indigenous game development sector and independent studios. A sustained campaign to institute a similar system within the UK has continued, and several reports make reference to the competitive weakness of the UK industry against more heavily-subsidised French and Canadian firms. Most recently, however, NESTA (2008) highlight the need for the sector to produce ‘hard evidence’ to justify this kind of policy intervention.

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1.3 Review Summary The North West games sector is facing issues that are no different to those faced in other clusters around the UK. The underlying development problems that face new content generation and the supply-chain and labour market that supports this activity, are structural and appear, at present, to be getting worse. The question the industry is asking is what government has to offer. An answer has not yet come in a clear message. To understand why requires a look at the policy side.

The policy framework and underlying research that has emerged in recent years has captured many of these concerns, but has not been able to identify any concrete strategy for addressing them. In absence of this, the policy community has done the best they could under one of the most important constraints they face. Public investment into games is very low and stretched thinly between games and other creative sectors. Games has never been a high priority partly because the necessary information needed to argue its case is lacking.

Recommendations as to the types of data that need to be collected in order to work with the underlying rationale of UK creative industries support, namely that support must be conducted as an investment with economic and social payback, do not appear to have been gathered as of yet with gross inconsistencies in reported figures only hindering the ability of regional as well as national agencies like NESTA to be able to present a clear case to central government. The result is that industry has focussed largely on tax credits as the driver of change, arguing that Canada is taking away their livelihoods. Yet many of the schemes put in place by Canadian provinces such as Quebec will soon elapse, and there are question marks over the effects of these schemes (see NESTA report on Canada in Raise the Game, 2008).

The result appears to be a misalignment between many of the most important messages already captured within the policy trail leading up to the 2008 Creative Britain strategy document. These messages detail important facets of the UK development problem and often repeat basic messages again and again, and the programme of interventions that are to support growth. Programme interventions are understandably bereft of direct funding mechanisms and appear to channel much of the direct investment into the sector via the Technology Strategy Board (again with a £10 million budget distributed among all the diverse creative industry sectors) and NESTAs modest £3 million to run a Creative Innovators Growth Program. The underlying principles of these strategies appear to boil down to experiments in matchmaking and event-based interventions. These attempt to open up an industry widely regarded as insular, technically driven and lacking in business and managerial skills, to people and places perceived to be able to fill in these gaps: higher education to provide internships, trained students, collaborative research and business advice; industry veterans to provide mentorship; competitions to try to get developers to think outside of the box and identify new opportunities within their sector as well as cross-over opportunities outside of their sector; and event-based initiatives that look for ways to network, share resources and improve best practice. Innovation and new business growth is the principle upon which these policy interventions are based. And they do appear to have had some success in tackling the usual stubbornness of a sector to respond to change.

Yet the basic reality is still that such supports attempt to pour resources into the holes that are drying up faster than resources attempting to fill them in. Interventions are focussed upon the games industry largely in terms of a traditional software production mindset. Interventions are focussed on tackling the industry’s problem by trying to drive resources into the supply system, be they better trained students from higher-education institutions or advice and knowledge in one form or the other. But most importantly, interventions are focussed upon on the supply-side with the developer as their primary target. This is completely at odds with a large piece of the policy research library built up in recent years which clearly shows that the traditional games developer, as with producers in the film and television context, are not in a position to enact many changes because they are wholly dependent upon investment choices of external agents in the value-chain for all of their revenues. In short, the government is asking developers to think and act differently without due consideration that the project commissioning system that these companies are in will actually want to pay for these changes.

And why should they? The critical variable here is growth in the market. These are not times of market downturn that require changes in direction, they are problems arising at a time of market strength. This is market failure, not in the traditional form where monopolistic advantages enable non-competitive pricing through output control. It is an “information asymmetry” problem coupled with the high signaling costs that are required in order to get access to finance (both critical tests that appear to have been overlooked due to ‘lack of information’ by the Oxford Economics study). External investors as well as developers do not have access to the information necessary in order to gauge the suitability of a product. Yet they are required to finance the initial development of an idea to an advanced proof of concept stage at a time when they are not given the chance due to revenue 18

constrains and no securities that enable the funding of this activity through traditional lending mechanisms. The current practice is that even for those companies who can do this, detailed proof of concept information generated through methods like focus group testing, are not information privy to developers (unless they themselves pay for this information). Given high costs of such services on top of the much higher costs of initial prototype development, both expenditure items are essentially costs the domestic supply side of the industry cannot afford to pay at market rates. Yet they are critical costs required to signal to investors the suitability of their innovations--therein lies the market failure. These failures were implicit in the original recommendations of the DTI 2002 which called for a pooling of market data on behalf of the industry, joint commissioning to enable this to occur, and pump priming the growth of an underdeveloped domestic industry that is now in a weaker position than it was at the time of the original drafting. Yet the operationalisation of these messages do not appear to have been followed up.

In working to redress this market failure, a strong policy message that appears to have gone unnoticed in the cries for tax credits is the second best option, means of supporting prototype development. The qualification not given in previous reports, however, is that this support needs to work within existing structures rather than be interventions that finance innovations with no hope of being commercialised through current channels. Given that developers are effectively asked to prove their ideas work before they can enter into the structure commercial structures for financing game development with a publisher, without a policy aimed at changing these commercial structures, policy must work within these structures. It stands to reason that to make a focus on the games developer work as a support policy platform for the games segment of the creative economy, policy must find a mechanism to not just support the ability of firms to think outside of the box, but to have ways of proving their innovative concepts to the standards required to enter into traditional commercialisation arrangements.

Proving this case was not the intent of this study. Profiling companies in the region, reviewing the policy literature, and providing a comparative analysis to gauge strengths, weaknesses and opportunities that may exist in the region were the core focus. As it so happens, much of the analysis that this project was able to conduct does help build the evidence base to corroborate such conclusions. To better understand how such a policy position represents a highly pragmatic and much demanded intervention ideally suited to kick-starting in the North West of England, we now turn to the profiling and comparative analysis results of the study.

19

SECTION 2. PROFILING AND COMPARATIVE ANALYSIS 2.1 Overview The computer games industry in the North West of England is currently made up of approximately 34 companies (see Appendix 3). The majority of these companies operate at some form of games developer (see figure 8). Based upon their published contact information, all firms identified were geographically plotted and can be seen clustered within the ‘triangle’ connecting Liverpool, Manchester and Macclesfield (see figure 9 and 10).

Figure 8. Breakdown of Firms by Business Type Developer Publisher Services Technology 0

5

10

15

20

Figure 9. Geographical Distribution Close-Up

RealTime UK GlobiGames

MediaCityUK

Addictive 247 SCE Liverpool (Sony) Lateral Visions Rusty Nutz New Concept Games 3D Creation Studios Magenta Software Onteca Spiral House Catalystos Bizarre Creations (Activision)

Monumental Games Blade Interactive Studios Eclipse Interactive Connect 2 Media Tiretex Design Studios Team 3 Games WhitePark Bay iHobo The Games Creators

Jester Interactive Publishing

Chillingo

Traveller’s Tale (Warner Bros) Juice Games (THQ) FaceTec Real Time Race Epic Studios (Sony) Rebellion Liverpool

20

Figure 10. Geographical distribution of the North West computer games sector, 2009

21

All firms were contacted via email and phone (if available) to request their participation in the study. Twelve completed initial questionnaires via phone interviews and of these four were met in face-to-face interviews to discuss issues further during the timescale of the project (Feb - April 2009). The project was able to get input from at least two companies in each area of business activity: developers, publishers, service providers or technology providers. Some of those who participated did not complete questionnaire but were involved in interviews either face to face or over the phone instead.

The initial questionnaires were designed only as a first stage canvas of generate basic information about the activities of business in the region. While incomplete, as a surface scan, the responses to the survey confirmed some basic general findings about the industry in the region.

Firstly, the region’s games sector is clustered at two very different scales of operation (see Table 1). One group manage multimillion-pound production projects (£5-10 million) while the rest are clustered around projects at the £200-500K or the £30k mark. Similarly, company sizes appear to be polarised between the smaller 5-10 person enterprises, or 25-40 person ventures, and those operating at the other end of the spectrum employing over 200 full-time and part-time staff. As would be expected, all the larger companies are veteran console game specialists.

Table 1. Demographic Trends by Company Type Avg Age

Avg FT staffing

Avg PT staffing

Avg Project

Avg Clients

% Rev From Largest Client

8.2

54.2

4.6

£3,450,000

2

50% – 100%

Publishers

6

12.5

2

£325,000

8

15% - 100%

Technology/Service Provider

4.3

7.6

0.3

£31,667

13

50% - 65%

Company Type

Developers

Secondly, the majority of the companies surveyed are regional business with no operations outside of the North West. Moreover, they tend to operate as self-contained enterprises with little need for strategic partners in most cases. Most are businesses that do not utilise any non-executive directors as business mentors. Most businesses surveyed do not have investors nor have ever approached one. And to our surprise, most, including the game developers who participated, showed very limited signs of any outsourcing/subcontracting. Most of the respondents which outsourced games development work did so at very limited levels and primarily outside of the UK with most reporting the value of outsourcing to be around 10 percent of the cost of the development projects. The two respondents who reported significantly higher levels were at the other end of the spectrum, contracting out 100 percent of their development requirements. As would be expected, these cases reflect the fact that the businesses were designing products for which there is no in-house capabilities to either program or physically manufacture their products.

The region appears to only have three or four companies set up to do some form of subcontracting work with the Liverpool based development studios. However, it is also likely that the subcontracting that actually goes on within the region is essentially an outcrop of activities and people who were once inside the established development studios. In short, much subcontracting in the region is likely to be little more than a change in employment contracts. Nevertheless, it should be noted that this relatively small number of potential outsourcing points is not simply a deficiency in the region, but a trait of the UK in general with Britain reported to have the fewest number of service providers as a proportion of the size of the development sector of all the developer countries in its peer group (Canada, France, Germany) (see NESTA 2008). This is likely to be a historical legacy based upon times when Britain was the world’s most expensive place to develop games (the US is now reportedly the most expensive, bolstered especially with the weak pound).

Thirdly, the industry operates on a very informal, insular basis. The exclusive method of attracting employment for the overwhelming majority of companies is word of mouth (only the larger developers report using any other method). The majority of executives do not have any professional membership. There is somewhat variable attendance at major industry events, and yet a near universal interest in some form of regional event for the North West games sector to build awareness and opportunities (although prior attempts to create a more formal network such as the “the M62 Network” or NorthWest chapter of the International Games Developers Association appear to have gone dormant in recent years). Coupled with reports of very few businesses having strategic partners, very limited subcontracting and little recourse to non-executive directors, business operations in the region’s games sector appear to be relatively isolated enterprises; again outside of the larger developers.

This appears to be true with two notable exceptions. Firstly, most report having some pre-existing relationship 22

with a higher-education institution, particular the technology providers and start-ups in the sample. Secondly, virtually all firms in the sector appear to have a high level of dependence upon a particular client. Furthermore, that relationship not only tends to account for 50% or more of their revenues, but also appears to be relatively longstanding in the life of the business. Most report this relationship to be between 40 and 100 percent of the current trading life of the business with a client base generally not growing any greater than 1-4 other clients.

The exceptions to this tendency are all businesses with a more traditional business profile who grow by drawing in income from a greater range of clients. These firms tend to be either a niche publisher whose income is based upon an extensive network of different sales channels, or a service-based company (sometimes referred to as the ‘serious gaming’ or ‘games-based learning’ sector) where the firm leverages game industry skills and/ or technologies to service non-gaming markets and organisations.

Finally, the reader should be aware that the games sector is not simply about software development houses employing large volumes of labour to produce multi-million pound projects for the major proprietary gaming platforms. While the single largest area of business at present, a roughly equivalent number young businesses in the region are pursuing roles in value chains that often have nothing to do with those of the traditional console games segment that preoccupies many industry reports. This appears to be particularly true of technology providers who have often found it difficult to develop technology to license to developers (discussed further below in section 3).

2.2 All firms are not created equal: Specialisation in the sector A critical point to understand in the context of designing policies to support the North West games sector is that firms differ quite dramatically in terms of how they try to make money. While the most common (just over half of the sample) pursue an attempt to make money by developing games in one form or another, the other half is divided up in roughly equal proportions among companies that attempt to make money as either a publisher of games produced by others, as specialised service providers (some looking to service firms within the games development sector and some diversifying into the non-games sector), or technology providers similarly looking to leverage that asset within and outside of the games sector. Given the limited interactions between firms in any sort of ‘supply-chain’ sense, these differences in business models essentially mean there is no one size fits all strategy that is likely to grow the sector organically. To begin understanding the different businesses in this space, one must begin by understanding the way firms in this sector appear to specialise around a highly specific way of generating income.

All businesses in our survey derive between 80-100 percent of their income within an exclusive category (interestingly, none of the companies report earning any income from advertising). In other words, firms are highly specialised around a particular avenue for generating income. The region’s businesses derive their income: directly from publishers, from attempts to generate retail sales themselves, or as service provided to non-publishers (and even a non-games industry clients).

This differentiation in sources of revenue has an important effect upon the way the business works and the resources it needs to function. A closer look at their responses to questionnaire items helps to illustrate this point.

• PROFILE 1: The Games Developer Half of the respondents to the questionnaire were developers of one sort or the other. Of these, five are developers exclusively dependent upon a games publisher. These businesses are the region’s ‘traditional games developers’ each specialised in a particular “genre” of games (e.g., online, racing/action arcade, role playing games, children and film-related games) which they produce for a larger publisher. Most of these developers are well established, trading in their current form for 10 to 15 years, or in a newly reconstituted or recently acquired form. These traditional developers all depend upon a single publisher for between 50 and 100 percent of their income.

•

For those wholly dependent upon just one publisher for their income, clients are relatively new for the company, having established that relationship for 10 percent of their trading life. This level of exclusivity is likely to reflect a younger firm attempting to find its foothold in servicing the games publishers.

23

•

For those firms that are not completely dependent upon one publisher, the business still only work with a small number of publishers, servicing between 1 to 3 clients other than their primary publisher. The search for other sources of income all appears to done by looking internationally, primarily to European games publishers, and to a lesser extent, North America publishers. This may help to explain why most firms report that their greatest competition emanates from outside of the UK rather than from firms in the country (no firms reporting competition within the region). Also, as none of the region’s developers report servicing any more than one UK-based client, the need to diversify internationally suggests that UK publishers prefer to have a more exclusive relationship with their domestic suppliers. This corroborates anecdotal accounts that publishers prefer to have exclusivity deals when financing the innovation of a specialist producer that help ensure initial successes can be built upon in the future into a franchise.

Ultimately, even though developers are looking to diversify their client base internationally as well as diversify their product to different technology platforms, there is a strong element of ‘relational contracting’ as prior relationships with their main publisher appears to remain critical for the business for much if not most of their trading lives--diversifying developers still maintaining their core client relationship for the majority of their trading lives to date.

For the North West’s traditional games developers, ownership of IP is not critical to the growth of their business operations (corroborating trends reported in the literature about the dominance of work-for-hire mode of operation). Most developers report that pursuing proprietary technologies is actually not key to their growth strategy. This is true even for two of the five companies which report both some ownership of IP and that they already receive some sort of revenue from them. Indeed, the only traditional developer that reports owning IP other than copyright (a patent no less) report that proprietary technology is not key to their growth. Relatedly, none of these firms report utilising any source of commercial financing (VC investment or bank lending) and only limited recourse to any public source of financing (two reporting R&D tax credits and only one reporting any other form of public financing.) Accordingly, only one developer reports any interest in getting investment and none have ever approached a private investor (although most report some perhaps speculative interest in getting more support to attract investors).

One of the most unexpected responses is that the NorthWest’s games developers report very little recruitment from the region. Three of the five companies in this category report that they effectively do not recruit from the North West labour market at all. The largest firm reports only 5-10% (approx 10-20 individuals) of its staffing as sourced from the region. Only one developer reported that most or in this case all of their recruitment stemming from the region. Yet given the small number of individuals working in that company, it appears that no more than 8 percent of all individuals working for the region’s developers are being recruited from the region into traditional development studios.

Through a comparative analysis of the region’s leading developers relative to other leading UK studios we can gain a deeper understanding of the growth strategies and constraints faced by the traditional games developer.

As this requires a dedicated discussion, we will first round out the other major profiles that differentiate the North West games sector before returning to this profile.

• PROFILE 2: The Independents Another area of specialism are firms wholly attempting to make their money independently through a more direct relationship to the end market. Four companies in the sample are doing this. Some attempt to do this as specialised publishers. Others attempt to generate revenues from the retail sale of their own developed products, often a “middleware” tool or relatively inexpensive game produced for the IPhone. Only one company in the sample appears to have raised VC investment exclusively for the purpose of bringing a new product to the market. Nonetheless, unlike the games sector in the region in general, some recourse to external relationships such as investors or other business partners is strongest in these types of companies.

Furthermore, companies in this category also share a unique profile in relation to the importance of intellectual property to the business. The independents are, as a class, the only firms where owning intellectual property and generating revenues from the sale of that property is recognised as critical to growth. One notable difference, however, is the degree to which these firms are actively looking to grow their proprietary assets through recourse to external investment. Some firms report wanting investment, have approached investors and some have already secured investment. In contrast, others appear to have no interest or experience in soliciting external investment, only ever utilising R&D tax credits. For those that do no establish relationships 24

with publishers or have external investment, growth is difficult as the business is entirely dependent upon retained earnings. New IP development will consequently tend to be difficult with these firms tending to seek out incremental improvements to a pre-existing asset.

• PROFILE 3: The Technology-Based Service Providers The third cluster of firms in the sample derive their income through leveraging a range of technical skills and technological applications. Some appearing to do so as a specialist subcontractor for the development sector, while others are attempts to cross-over from the games world to into a more interactive media context. Those seeking to target external markets with their technologies generally reflect the fact their technologies that do not easily fit the routine activities of a developer. Hence, growth will generally have to come from a ‘break-away’ strategy of growing their businesses through innovations that cross-over into more mainstream markets. This is done by targetting traditional training, education and online services offered to companies and public-sector agencies. For these firms, the aim is not to produce or sell games, but to leverage games-related skills and technologies to address a wide range of bespoke service needs. Accordingly, these firms also do not perceive of IP ownership as key to their growth. Yet unlike traditional games developers, these firms have a more ‘traditional’ business development profile not only in their efforts to service a general business and public sector organisation market, but also in their experience in seeking and acquiring traditional sources of commercial finance (VC or Bank Lending) alongside public supports. Equally, these types firms tend to be at the stage and scale of operation (around 500k revenues) where investment become a critical feature to further growth.

As with ‘the independents’, these business equally are much more dependent upon and capable of utilising the existing stock of labour in the region with the majority if not all of their recruitment reported to stem from the region. The notable exceptions come from those firms that service the traditional console developers where the requisite skillsets for these activities have evolved to the point where they are generally not available in the region (a point we will return to below).

2.3 Comparative analysis of games developers A deeper view of the underlying growth constraints faced by the traditional console-based developer requires an evidence-base that companies in the sector are generally not willing to give of their own accord, that is, financial accounts. It is particularly important to have them over time to be able check for trends and to strengthen interpretations of their current situation. For this purpose, the study sought to collect the financial accounts of all the leading development studios in the UK based upon four basic criteria.

Firstly, the selection of the comparator group was not random but based upon an attempt to capture every UK developer whose products reach enough sales in the domestic retail market to appear in the top 100 companies as tracked annually by the publication, “Develop 100”. This list identifies the studio that produced the game, the nationality of the studio operation, and the total retail sales value achieve by their game over the year. Secondly, the comparator group was determined by the practicalities of data access and data quality. The key evidence sought after was the studio’s turnover, headcount and wage bill, two or more of these data types available in time-series to check for any irregular patterns in the data, and a recent enough account filing to roughly match either period covered by the sales data available from the last two publications of Develop 100 publication (roughly correlated to the 2006 or 2007 accounting year). Turnover, in the case of a traditional developer, should essentially be composed of the production budget plus any royalties collected from previous product sales. Head-count and wage bill expenditures enable the study to look at the relationship between labour size and average wages relative to the size of the production budget (generally reflecting the complexity of the project). Given that the most successful developers are medium-sized firms or are subsidiaries of larger often publicly listed firms, accessing financial accounts through the FAME database was possible. Indeed, given that when studios were acquired, the companies were often still kept as independent but wholly owned companies legally, their financial records were also still kept independent as well. This enables their analysis to provide a strong estimation of the operations at the level of the development studio and not of the whole of the parent group. Finally, by manually looking up the office locations and getting post code addresses, all the UK developers responsible for particular games listed in Develop 100 could be reasonably classified into their geographical region, enabling regional comparisons to be made around a common performance benchmark.

25

For the purposes of this study that performance benchmark reflects key choices a developer could opt for in the process of generating a margin: what salary level (hence skill/age proxies) are they setting and how many staff does the business use in order to produce its games. With labour being the largest cost in the production of games, it is also the most critical variable a business will control to help maximise its margins--given current commercial models (see section 1), maximising margins is the foundation of the growth strategy employed by a traditional developer.

The dataset generated captured 21 studios with one or more studio in most regions of the UK, giving the analysis a high degree of geographical breadth. Furthermore, as UK firms in the Develop 100 list have consistently been in the range of 26 or 27 firms, a sample size of 21 is a very representative sample that enables some firm claims to be made about patterns of business behaviour at the developer level. The base table upon which the follow results were derived is included in Appendix 4. We now turn to the findings of this comparative analysis.

2.3.1 Regional comparison of game developers In overview, the leading developers in the North West region pay on average as much as those of developers in London/South East (see figure 11). There is not likely to be any significant difference between an average of £41,249 and an average of £41,939, the respective difference between the North West and the South East.

Given the cost of living difference between the region, this effectively means the best paying jobs in the whole of the UK development sector are to be had in the North West.

The North West is primarily defined by a comparatively small but high-end labour market. The latest Skillset labour market intelligence digest (2008) suggest the North West labour market to be one of the smallest in the country, on par with the South West as the second smallest labour pool (see figure 13). This is reflected our own analysis which show the North West’s leading developers as second from the bottom in terms of average studio size at 88 persons compared to the very large 250-300 strong studios in the West Midlands, South East and the East (see figure 12). From a performance perspective, this is actually a good thing as North West firms appear to have pursued a general strategy that targets the most experienced staff, pays them the best in the country, and utilises one of the smallest teams to produce not only the most sales, but a significantly better sales performance per person than any other regional cluster. Of the leading regional clusters--the South East (including London), West Midlands, Yorkshire and the North West--the South East and Yorkshire clusters have identical performance levels, one pursuing models that absorb high amounts of labour and higher sales, yet identical per/person sales performance levels as the other pursuing a model based on the smallest team sizes and comparably lower sales levels. The West Midlands is by far the least efficient of the top 5 regions with a model that uses the largest teams, average wages not far below the highest paying regions, and yet achieves sales per person at only a fifth the rate of the South East and Yorkshire studios. The North West studios on the other hand lead the pack generating over a third more sales per person than its closest rivals (see figure 14). Indeed, in 2007 (the most recent year covered in the Develop 100 series), the North West actually generate the most domestic retail sales of any regional cluster in the country (see figure 16). This helps account for the fact that all of the North West studios in the comparative analysis have been acquired in recent years and are foreign own by publishers like Sony, THQ, Warner Bros, and Activision where other regional clusters have more independent developers represented.

The problem posed by this performance profile in the North West is that from an employment perspective, the North West cluster actually does not seem to able to grow significantly in headcount terms to absorb greater amounts of labour. It stands to reason that concerns over skills-gaps in the region are not actually a problem with the supply of young graduates per se, but a reflection of the fact that the veteran studios are so advanced and utilised a higher degree of experience than can be expected to otherwise be available in the labour marketplace, hence why these class of firms are the ones that have to cast more elaborate recruitment nets compared to smaller firms which use word of mouth.

Part of the reason for the inability of North West developers to increase their scale may reflect concerns highlighted in section 1, namely investment. In spite of the growth in the market and even having the best performing studios with comparatively small teams, investment into the North West sector is not much greater than the lower tier clusters in our analysis (investment is proxied here by the wage bill which averages at around

26

60-65 percent of report company turnover in our sample).11 The North West attracts less than half the amount of investment allocated to developers in the West Midlands and nearly a quarter less than rivals in the South East (see Figure 15). Again, as with the UK industry as a whole, investment patterns to not appear to be linked to growth patterns but reflect the strategic choices made by foreign publishers. While beyond the ability of this study to confirm, such investment patterns may reflect the fact that the major force in the North West, Sony, has as a company been having performance problems in recent years and losing market share to other publishers (see figure 17). Given the dependence of the North West’s developers upon foreign parent companies who may choose to cut costs in places that suit their own cross-national interests on where to allocate resources, measures to introduce means of enabling independent developers to prove their own innovations and take successful proof of concepts to publishers in a more open market has to be a critical policy intervention to mitigate the market failures that lead to otherwise abnormal investment patterns.

Table 2. Business Profile Regional Summary Table Region West Midlands 1

Avg Headcount 283

Total Employment 848

# of Firms 3

% independent 66%

South East 2

260

1299

5

40%

East East Midlands Scotland North East North West Yorkshire Notes:

258 183 171 103 88 66

515 366 342 103 352 132

2 2 2 1 4 2

100% 100% 0% 100% 0% 50%

1. West Midlands headcount will be exaggerated by the fact that Codemasters will have studios outside of the region yet this information is not disaggregated in their company accounts 2. South East headcount will be exaggerated by the fact that Electronic Arts will have studios outside of the region yet this information is not disaggregated in their company accounts. Equally, staffing will reflect its publishing operations.

Figure 11. Average Yearly Wages of Selected Developers by Region (circa 2007) South East North West West Midlands Scotland East Midlands Yorkshire East North East £0

£12,500

£25,000

£37,500

£50,000

11 The general proportion of the wage bill for developers found here closely corroborates perceived industry norms of labour cost generally representing around 70-80 percent of the production budget. Indeed, given that turnover will have royalties included, if we consider that reported averages in BERR (2007) find that 12% of turnover represents overages, the average wage bill found here closely corroborates existing reports, providing strong support for the accuracy with which reported wage bills give a effective estimation of investment levels into development.

27

Figure 12. Average Firm Size of Selected Developers by Region (circa 2007) West Midlands South East East East Midlands Scotland North East North West Yorkshire 0

75

150

225

300

Figure 13. Regional Distribution of the UK Computer Games Workforce South East West Midlands North East London Northern Ireland Yorkshire & the Humber Scotland East East Midlands North West South West Wales

0 0.05 0.10 0.15 Source: Skillset Labour Market Intelligence Digest, 2008

0.20

Figure 14. Average UK Sales Generated Per Person, 2006-2007 North West Yorkshire South East West Midlands East Midlands Scotland East North East £0

£375,000

£750,000

£1,125,000

£1,500,000

28

Figure 15. Total investment into development by region South East West Midlands North West East East Midlands Scotland Yorkshire North East £0

£15,000,000

£30,000,000

£45,000,000

£60,000,000

Figure 16. Annual UK Retail Software Sales by Region of Developer Studio, 2006-2007 80,000,000 60,000,000 40,000,000 20,000,000

st th

Ea

st Ea

nd la ot

N

or

Sc

Ea

W es

st

M

tM

id

id

la

la

nd

nd

s

s

re hi ks Yo r

on nd Lo

th or N

So

ut

h

Ea

W es

st

t

0

2006 2007 Figure 17. Estimated UK Market Share of Parent Companies of North West Games Developers 0.500

0.375

0.250

0.125

0 2001

2002

2003

Sony Computer UK

2004

2005

Electronic Arts

2006

THQ

2007

2008

Activision 29

2.3.2 Growth constraint on game developers In spite of the aforementioned differences in the market performance of UK developers there are some underlying constants that can also be detected through comparative analysis.

Firstly, regardless of developer strategies, a traditional developer is currently constrained in some basic ways they can configure business operations. This constraint can be seen in an analysis of the wage bill relative to turnover across all the leading UK developers. In the absence of data on the history of each firm through its life, a cross section of all the top UK studios helps to demonstrate this relationship. Displaying this graphically, one can see that there is a near perfect linear relationship between growth (for a developer, this means growth in production budgets) and wages (see figure 18).

Figure 18. Growth and Employment: Turnover and the Firm’s Wage Bill £9,000,000

Wage Bill

£6,750,000

£4,500,000

£2,250,000

£0 £0

£5,000,000

£10,000,000

£15,000,000

£20,000,000

Turnover

Secondly, given that this pattern holds across independent firms, this strongly suggests that current developers are not yet able to replace human labour through technological innovations to produce games at lower cost (or at least, the largest UK firms are pursing models where this cannot be done). As the complexity of console platforms increases, cost increases are a function of the need to use human labour to work through unique problems that plague every production project. For the developer, this mean their strategic choice to construct a business model is hugely constrained. Product choice is largely a function of what the publisher wants to invest in: track record, meaning franchises. Game franchises like Grand Theft Auto are generally produced by specialists in that franchise. Control of franchises through ownership of IP or exclusivity contracts that lock developers into the publisher restricts exit. As a developer initially discovers a successful formula and that gets repeated, they are effectively locked-in to an exhaust the franchise strategy. So long as costs keep increasing, the only variable at their discretion are operational manoeuvres: creating better internal processes to yield efficiency gains, adjust wages or change staffing levels. There is evidence to suggest that average wages are themselves constrained as firms must pay for ageing staff and keep competitive to fill vacancies, creating no clear relationship between average wages and growth (see figure 19). The result is an ability to only do minor adjustments to either headcount or wage-level. The higher the headcount, the lower the average wages. The lower the headcount, the higher the average wages. Either way, firms still tend to stay close to the underlying structural coupling between employment and growth of the firm (see figure 20).

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Figure 19.

Average Wages are Not Linked to Firm Growth £16,000,000

£14,000,000

£12,000,000

Turnover

£10,000,000

£8,000,000

£6,000,000

£4,000,000

£2,000,000

£0 £25,000

£30,000

£35,000

£40,000

£45,000

£50,000

£55,000

£60,000

Average Wages

Figure 20. Firm Growth and Employment: Detailed Composite Summary

West Midlands

250

Scotland

Avg Wages

Rare

South East

Blitz Games

Rockstar North

Kuju Entertainment

Realtime Worlds

200

Rebellion Developments

Employment

Creative Assembly Lionhead Studios

150

50,000

North East

40,000

30,000

Reflections

20,000 100

North West Bizarre Creations

50

Traveller’s Tale

Yorkshire

Juice Games

Team 17 Studio

Evolution Studios

Rockstar Leeds

0

£0

£5,000,000

£10,000,000

£15,000,000

£20,000,000

Turnover

31

The implication of this understanding of the constraints that the console developer faces is clear--developers simply do not have the control to influence their future. This basic point permeates the background literature and research being done on the games sector. This is why they can be highly efficient and generate high sales performance per unit of labour, and yet still not receive greater investment in new products the next time around.

Both are predicaments of the UK as a whole, and the North West and Yorkshire are the strongest exemplars of this trend. This is the evidence base for market failure. Consequently, policy measures to support innovations at the level of the developer through mentorship, training or any other of the common methods currently employed to support the sector risks becoming a short-term way of throwing good money after bad in the longer term. Until the time when a creative economy framework either targets the commercial practices that constrain developers to their current arrangements, or works within the existing system by enabling developers to demonstrate their innovations are worth funding, government support of the sector should be expected to produce diminishing returns and limited spillovers to the region or the economy.

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SECTION 3. RECOMMENDATIONS 3.1 Synopsis Given the analysis above, we can now comment upon a few key policy areas that are currently being considered as avenues for supporting the Games industry in general, and the North West sector in particular.

Firstly, regarding skill gaps. The analysis conducted here suggests that the skill gap issue often cited but always under-evidenced is likely to be a red herring as a policy support priority. In the North West, the problem of student flight post-graduation is pandemic and not special to this sector. The issue of the quality of graduates and particularly the quality of ‘games’ courses advertised as HE institutions is an issue, but it is not actually mission critical and efforts to quality control this area are already being pursued nationally through Skillset. Furthermore, until there is a larger cluster of game developers in the region, which is likely to be dependent upon attracting them into the region rather than purely organic growth, the game developers that are already in the NW are either too far into the high-end of the console market for HE institutions to supply, or too far at the lower-end of the market where the level of returns do not generate a business capacity to absorb a larger labour market.

Regarding higher-end management and business skill gaps, we are essentially dealing with highly specialised project management and business development issues that are either already being done at the high-end of the market (such as Sony working with Cranfield Business School to provide its own bespoke training needs), or the low end of the market where there is no economic incentive to mobilise a dedicated offering. Equally, it would be simpler to dove-tail upon existing national efforts in this regard, particularly NESTA’s current range of pilot projects. There is currently the Creative Business Catalyst project which has Manchester Metropolitan Business School already acting as a resource for MBA internships to any creative industry business that is attracted to the pilot project’s value-proposition. At the smaller scale side of the games sector, interested parties could, if they are not already, simply be referred to NESTA or their approved agency administering the program in the region, Inspiral. Furthermore, there appear to be other NESTA initiatives which the region could tap into. One, the ‘shared resources’ scheme, is a project that looks to identify overlaps between games firms and film/tv sector in order to enable job swaps and other pooling of resources. The contact person for that pilot expressed interests to extend it to the North West believing it to be a natural fit with the industry and with the Media City initiative.

Such experiments should be encourage as the offer the possibility of generating greater insights into the possibilities for MediaCity to support other sectors, particularly as they entail minimal resource commitment from the region.

Secondly, regarding the Centre for Excellence in Computer Games. We understand that while the original concept of the CFECG involved something between a ‘finishing school’ for graduates in the game development industry and a research centre, this idea has been dropped following industry consultations that experienced significant resistance. The latest incarnation we understand to be building upon suggestions about a usability lab with a shared facility open to other developers (using other console platforms), with a view to building up a larger comparative dataset and skillbase. Such an idea would also have some cross over benefits to the BBC and an ‘exploratorium’ facility bundled into the proposal may be of interest to the BBC’s interactive education/ entertainment division along with interest from local universities. This study corroborates the move away from a training centre to a more commercial research centre. In principle, usability testing is indeed a critical activity in the product development processes. In line with established project management thinking, the number of market tests at earlier stages of product design and development is strongly correlated with more efficient projects and better performing market outcomes.

What should be born in mind, however, is that there are many ways to configure a commercially minded research centre that works for games as well as having different tie-ins to the film/tv side of MediaCity activities.

At present, the model discussed in the BOP (2009) report is a good start, but as an exclusive option, in present form it does not tackle the sector development problem for independent developers very strongly, even though it would be opened up to other console developers not just those in the region. For instance, Sony has a very advanced internal methodology it is trying to work out to better standardise the games development process internally before rolling this process out externally to its third party developers. The specific concept of ‘usability testing’ is, as you would expect, highly linked to similar attempts by large console developers to standardise processes. While this is a good thing, it should be recognised that as an initiative it is not exclusively designed to address the constraints that the independent sector are under per se.

33

A better approach would be to for the CFECG to be a broader research/commercial testing centre for all stages of production independent of any particular type of game. At present, there are many different possible technological futures for the computer games industry. To claim a stake in that future, a broad range of game types need support in a form that enables companies to prove their particular vision for future innovations are viable commercial propositions. Virtually all developers at present need to raise funding to develop these innovations and given the technological race is uncertain, public investment is best placed upon efforts to help evaluate, test, and refine respective propositions generated by the industry so that these enterprises can go more directly to the open market on better commercial terms than exist at present. This may include earlier stage forms of usability testing which is important for development, but also the critical proof of concept prototype or ‘vertical slice’ testing which is critical for winning new publishing contracts (we will outline this option in more detail below). Equally, there is the possibility of tying in and growing the much needed VC funding angle through innovative funding structures around the prototype testing concept which is not only already the leading interest of the games sector as a whole next to tax credits (discussed in Section 1), but there is also some precedence and ongoing commercial interests in pursuing these opportunities that we have detected as part of this study. This interest is coming from key commercial partners already involved in the sector: insurance, legal, and banking communities as well as a specialist games investment company looking at different models for how this could work. On these grounds, the Centre for Excellence business plan should be looking to explore these variations in order to leverage the joint CFECG/Media City offering to its greatest effect as a sector support and inward investment device.

Thirdly, regarding the role of HE institutions. As discussed in relation to skill gaps, there is at present little clear role for HE institutions to play on the games training side outside of supporting existing initiatives to improve the quality of service through certification schemes through Skillset. Another possibility is the role of HE institutions as collaborative R&D centres with the games industry. The problem here was alluded to earlier in the report. To better gauge general reports, this study had a more detailed look at one particular company case experience in regards to commercialising technology into the games sector. One of the basic problems with university based R&D and the scope for licensing the technology into the sector stems from the growth model of developers. As the developer builds value by getting a publisher to pay up front and then building an ever more specialised team, a critical manoeuvre to improve their commercial prospects is to develop internally some bit of technology that they can use as a leveraging tool to negotiate better terms on the royalties share. This search has a knock-on effect on the opportunities for third-party technologists trying to license-in kit to the games sector; limiting demand to only those technologies that are necessary and cannot be developed in-house. Were technology firms to break through that resistance, demand will often be project specific, limiting the value of a license and thus making it difficult for the technology developer to recoup development costs in the first place.

Furthermore, the high degree of specialisation at the top end of the UK game development community also tends to mean that technology developed independently will not be advanced enough to meet their needs, competing against internal industry R&D, particular amongst the larger publishers, or simply running into the problem that the HE research environment cannot keep up with the pace of change necessary to stay interesting to developers that will only license in the technology once its ready. Again, another source of the strong resistance to licensing in technology is the perception of the credibility of the technology supplier to be able to not only stay solvent, but to develop the technology in timing with the needs of the project. This higher risk that comes from increasing the dependency of a project upon an external company again tends to reinforce the use of technology from trusted sources with internal sources always being preferred. Consequently, as some technology firms have had to learn the hard way, it often makes more commercial sense to do a cross-over strategy and look for markets less demanding of the technology and more stable in its service requirements. As such, we would recommend against having HE positions as R&D centres for the Games industry other than through natural processes or perhaps greater networking to identify joint opportunities. At this level, there is strong interests simply from our own survey in this regard.

Another opportunity is linked to the Centre for Excellence initiative. As a ‘testing’ and attractions centre, there is already precedence for involving universities both as specialist on the research that goes into usability and prototype testing with educational environments already being used as a key resource used by some commercial testing firms. For example, Babel Media, a specialist firm in this area in the South East, has an arrangement with Sussex University and Brighton University for using students for testing. Within the North West region, PlayBox does some of its market testing out of John Moores University and at secondary school level. With Britain’s dense population of students along the Oxford Road corridor and Salford, the possibilities to scale up and compete as a commercially viable operation at MediaCity in conjunction with the Universities as providers of expertise and suppliers of market research material is very strong and should be explored. for instance, ongoing initiatives such as the Institute for Social Media, a joint initiative between the ONE-Manchester partnership--which is led by the Manchester Digital Development Agency, Manchester Business School and 34

other HE and industry partners--could be utilised to help identify and/or provide research inputs into a future Centre for Excellence in Computer Games initiative.

3.2 Support options Supporting the North West sector effectively is a task of grappling a number of basic problems. Firstly, there is no single intervention that will work for everyone. As highlighted in the previous section, this is because the sector is not a single coherent value-chain, but a fragmented one with businesses operating with different profiles depending upon the particular context surrounding how they specialise in attracting a specific type of revenue stream and client-base. Secondly, interventions must be sensitive to the constraints at work in the process of commercialising innovations that are being generated by game industry entrepreneurs. Thirdly, these constraints will differ depending upon the position in the value-chain that is being targeted.

Based upon the information gathered in this study, the most pragmatic way of approaching the situation is to concentrate on the region’s assets by differentiating the support strategy along two basic lines: •

a strategy of concentrating support to the activity that is currently having the greatest impact on the region and where the same intervention set can also have the possibility of reaping multiple benefits to the region’s inward investment concerns as well as seeing cross-sector benefits for cost effectiveness.

•

a strategy of better targeting existing resources and structures in place for those games companies that fit within a traditional business support rubric.

The initial profiling and comparative analysis conducted here suggests that this will boil down to concentrating on two different groups: games developers that cannot self-fund prototype development and proof of concept testing, coupled with IP developers and/or serious investment seekers attempting to connect directly with a broad consumer/client base. The latter group essentially represents either a publisher working in one of the emerging priority growth areas for the games industry in general (especially one looking to exploit some of the many rival opportunities in online gaming and IPhone style mobile applications rather than traditional mobile gaming), or a technology spin-off clearly focussed either on a ‘holy grail’ type technology solution for the games industry (such as a technology to generate photorealistic 3d image based upon a 2d image source), or doing a cross-over strategy to take gaming technology and skillsets to traditional markets.

Of these two camps, the latter group generally already recognise the importance of IP, the need for investment, and the need to find their own way to the end user. According to our survey, what they often lack and want is more help in raising this investment or in identifying and going to respective markets outside of the games space which is outside their comfort zones. These types of problems can be tackled through existing business referral and supports to help make companies ‘investment ready’.

The former group, the developers, is much more problematic and needs a concerted effort in order to have any major impact upon building publishing contracts, growing employment, attracting inward investment from publishers and other studios. At present, there is very little scope and much hard work to develop an innovative idea and get it to the point of being able to access commercial channels. Unlike in film or TV where a script may be enough, in Games, a significant effort to build a completely working model, just scaled down, is what publishers look for. This makes the procurement of contracts at the high-end console segment of the games value chain a highly expensive process. The problem is both the funding of this activity, but just as importantly, being able to access the information and expertise to enable developers to get better at taking a more marketbased view of product development so that they can adjust game design specifications before they incur unnecessary costs. Any mechanism that can help companies grapple with this problem is likely to be a major attractant as no structure for this currently exists in the UK. The opportunity in so far as the North West is concerned is as follows: At present, only relocation costs and limited cash flow 'lock-in' games developers to their current locations within the North West. Given that the majority of major studios in the North West are now under foreign ownership and, as demonstrated in the previous sections, that investment decisions of multinational publishers are not guaranteed based upon the performance of the individual studio location, this presents a serious risk of divestment from the region.

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Indigenous developers do not have access to significant seed funding for new product development from either commercial or public funding streams. RDA support, therefore, needs to focus on using 'mainstream' business finance products already available within the public sector to leverage commercial buy in from the investment community and associated commercial partners. This may be achieved in the following ways: Firstly, this is possible through a policy intervention based upon usability and prototype testing. This activity is already a well established commercial practice, the problem is about lowering the costs and sharing the learning generated with the broader developer and investment community, rather than the exclusive preserve of the publishers.

Secondly, much of the critical resource for this activity exists in the region.

• The region’s studios already contain the most concentrated pool of the highest-end skill set in the country.

•

The region’s demographics offer an ideal target market in which to scale up product testing along numerous dimensions (age, language, ethnic groups, national origin, etc) to enable a greater evaluation of international opportunities for domestically produced products.

•

This, coupled with concentrations of HE research communities for whom such activities are a natural area of involvement, and the resulting increase in market awareness may have a further ‘positive spillover’ in the form of future technology spin-offs from existing HE research activity.

•

Companies themselves are beginning to specialise in this activity (e.g., PlayBox in Liverpool).

•

There is a regionally-based specialist games investment community looking into different models for leveraging the benefits of testing in the form of new and investment-ready IP.

•

There are a series of flagship interventions which offer a platform for this activity, namely the proposition to collocate a ‘centre of excellence’ for Computer Games alongside significant HE-led R&D activity within the Media Enterprise Centre at MediaCityUK, included in the feasibility report prepared by WM Enterprise and BOP on behalf of NWDA, BIS and DCMS. (This would have the additional benefit of strengthening the MediaCityUK proposition which lies at the heart of the region’s sector investment offer.)

•

Finally, supply chain benefits will be multiplied by linking games developers to commissioning opportunities in television, in particular to BBC Children’s department, where there is high degree of potential overlap between prototype testing activity in product development of both sectors, particularly in the Web and IPlay interfaces that can make or break usability of online services. These areas are highlighted in the diagram below which outlines the traditional activities that go into the testing of game prototypes, and the areas where there is a strong possibility for scale where it integrated into the region (see figure 21). Games developers and broadcasters enjoy natural synergies in their overlapping interest in online content evaluation.

The very high prices currently changed by independent testing companies present the opportunity for this activity to be a self-funding commercial enterprise. For example, basic Focus Group testing tends to cost between £10K to £50K depending upon the complexity of the project. This cost is incurred for each and every game title that gets tested (be they a software or hardware based product such as the combinations used in Guitar Hero). The cost of localisation (the recording of voice overs using actors from different European languages) is another major activity that cost around £40K in the current market. Music and Sound Effects generally runs at between £30K - £150K. These costs, which are activities also involved in the Film/TV production process, can culminate to a bill of between £800k and £1.3 million on the major XBox360 type games where all these services are needed and the complexity of the games (driven by console manufacturer always trying to outdo each other on the hardware) can be so great that the number of bugs found runs into the tens of thousands, creating massive amounts of work.

Given these high costs, anything that can scale these operations greater than an independent company could do alone will have a strong position in the current marketplace and help attract more work to the region. This scale may be achievable given the combination of greater volume of products being tested, coupled with cost reductions achievable by broadening the service to film and television production segments, ensuring there is a structured way of regularly accessing a supply of young (and old) gamers drawn into the testing activities of a MediaCity site and/or at University locations with high concentrations of students (e.g., along the Oxford Road Corridor), and further reduced costs through HE research capability support which is generally at much lower cost (especially if joint funded through the research councils) than purely using commercially salaried specialists.

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A more detailed evaluation however is beyond the scope of this report. recommend be explored in further detail in subsequent investigations.

These opportunities we strongly

In summary, the Centre for Excellence in Computer Games needs to support proof of concept / prototype development on two fronts: • Ensuring a significant proportion of spend on the Centre is committed to underwriting the cost structure behind proof-of-concept testing and associated research activities on things such as the usability of prototypes. This is critical to pump-priming this activity in the start-up phase, and to ensure the service could be offered to the national industry as a whole at more accessible rates than present.

• Pursuing the creation of an ‘evergreen’ fund with a significant private investment share to ensure commercial focus and focus on financial sustainability, as well as to extend the scale at which the fund could support game developers throughout the UK to help to reach an advanced proof of concept stage with retained IP. By linking new sources of funding to a structure for commercial assessment and development support, an alternative model of de-risking the development project is possible. The proposal here is a way of integrating proof of concept funding with an advanced pool of capabilities and resources to provide various forms of market and usability testing for a broad industrial base.

To achieve this goal, a number of threads are being pulled together around an new evergreen fund: a mix of private and public investment, completion bonding and project monitoring, as well as academic and industrial expertise, centred on an exciting new Centre of Excellence. The network surrounding the Centre of Excellence is expected to become a central hub of resources for developers across the whole of the UK working to fuel the growth of UK business to compete internationally on a platform of true strength and innovation in product development. Critically, the fund should be set up to augment the seed-funding practices already established in the industry rather than seek to replace or institute such practices from scratch. Two ways to do this are as follows: • Firstly, the fund’s appraisal and due-diligence procedures should be designed to fit with current practices. The fund managers should include industry specialists as part of the team. Outside of the expertise of the fund managers, due-diligence should be at least at the quality and content of assessment already conducted by completion bonding (insurance) companies and would likely involve commercially recognised independent assessors in order to assure the best scope for an uptake of VC participation. Finally, a critical due-diligence concern should revolve around assessment of applicants that have already received early stage seed funding from publishers. This concerns an evaluation of the publisher contracts that IP would be subject to were an advanced proof of concept stage reached and pre-existing commercialisation options exercised. Assessment should ensure that terms are at or (ideally) better than existing norms to reflect the investment and quality control processes that fund managers and Centre research activities are adding on top of the publisher’s initial seed-funding level which, in current practices, would not be sufficient to reach a proof of concept level.

• Secondly, the evergreen fund should be integrated into current plans for Venture Capital Loan Funds (which are supported by ERDF and European Investment Bank and will be operated by the NWDA through a contract with a private equity firm). This integration is likely to mean including the angel and VC funding stream managers that will be part of the VCLF structure as arms-length partners in the financing of prototype development and/or in the subsequent commercialisation of the IP/development company once proof of concept demonstrations have been met. This arrangement should represent a good fit given that VCLF fund management is designed to be sector neutral and thus will likely require specialist expertise and co-financing partners to be found to help ensure commercial returns of VCLF investments into non-traditional creative industry sectors like computer games. This integration between the evergreen fund and the VCLF would also help increase the scale of support investment already being provided by the government through the Centre for Excellence, and those of the Centre’s own evergreen fund.

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Figure 21. Conceptual Model of how a Prototype Testing Intervention built around Media City and pre-existing regional resources could work

38

APPENDIX 1 Table 3. Int l Games Hardware and Software Retail Market Base Table, 1998 - 2008 (Total US$ spend) Games Hardware Sales (US$ million, Year on Year Exchange Rates) World Asia Pacific

6851.8 1694.6 China 39.5 India Japan 1381.6 South Korea 76.2 Taiwan 49.5 North America 2862.3 USA 2752.4 Western Europe 1588.1 United Kingdom 253.6

7364.4 2074.3 52.5 1612.9 134.4 81.2 3038.6 2912.9 1621.2 284.9

7905.1 9875.4 10371.3 10858.5 10020.7 12529 16802.4 2270.5 2168.8 2325.2 2521.9 2826.1 3153.2 3562.7 72.5 105.1 157.5 250.7 413.2 605.2 839.7 1.9 2.5 3.4 6.1 8 10.7 13.8 1730.8 1572.7 1505.3 1551.1 1619.3 1563.7 1456.3 149.6 159 183.9 214.1 249.4 301.3 342.6 70.9 22.3 56.2 75.9 100.8 121.5 127.5 3332.8 4584.7 4392.6 4308.9 2953.6 4040.8 6714.9 3210.3 4430.6 4238.2 4111.6 2795.9 3827.3 6293.2 1626.7 2282.4 2629.4 2975.6 3006.6 3678.7 4342.8 314.4 772.3 844.6 758.4 557.1 1025.4 1504.6 Games Software Retail Sales (US$ million, Year on Year Exchange Rates)

24743.3 4105.5 1096.2 21.2 1433.5 433 163.8 10269.4 9470.5 7158.8 2045.3

30017.3 4814.2 1424.6 27 1548.7 497.5 229.7 12090.8 11076.3 8484.6 2441.2

World Asia Pacific

10307.6 2261.2 5.7 3.5 1865.6 124.9 20.9 4245.5 4023.1 3108.6 1206.1 379.8 415.5 237.6 220.3 167.3 136.5

11203.7 2435.5 9.1 16.2 1935.4 148.1 25.5 5181.4 4965.2 2843.2 1107.5 330.3 376.3 228.3 222.7 155.5 115.7

27897.6 4242.7 602.2 94.3 1718.8 499 81.9 9315.8 8673.2 10929.4 3441.6 2638.5 1239.1 985.5 764.3 487.9 334.7

36466 4784.8 784.8 120.2 1860.4 581.8 110.6 13685.7 12680.2 13220.8 4090.8 3114.7 1512.1 1385.5 971.1 557.5 393.2

9286.1 1906 China 4.2 India 2.7 Japan 1607.9 South Korea 80.7 Taiwan 25.9 North America 3835.4 USA 3633.6 Western Europe 2819.8 United Kingdom 964.4 France 335.3 Germany 417.1 Spain 233.1 Italy 222.8 Netherlands 171 Sweden 134.7

11512.8 2252.1 17.3 17.7 1698.2 147.9 23 5267.6 5016.4 3181.6 1314.3 483.8 332.4 270 195.8 168.3 100.6

13463.7 2357.8 51.1 19.8 1667.9 174.8 23.6 6252.9 5974.3 3913.2 1609.7 631.4 373.2 342 237.6 186.6 135.6

15240 2599 117.3 26.8 1790 211 29.6 6562.4 6205.3 4980.8 1877.3 847.6 536.5 525.2 324.1 254.1 161.7

18745.2 3215.9 219.9 34.6 1899.4 254.8 50.9 7878.6 7425 6219.4 2282.4 1062.9 672.2 639.9 444.2 298.2 212.7

19324.9 3517.8 349.4 45.4 1848.6 327.7 59.8 7420 6985 6537.4 2215.6 1169.2 717.6 667.8 524.4 319.5 224.1

20492.1 3901.9 460.1 57.4 1745.1 414.8 63.3 6882.4 6455.3 7317.3 2511.7 1301 820.5 720.8 595.7 352.5 233.9

Source: Euromonitor International 39

Table 4. Int l Games Hardware and Software Retail Market Base Table, 1998 - 2008 (Annual US$ spend per household) Games Hardware Sales (US$, Year on Year Exchange Rates) World Asia Pacific

4.6 2.2 China 0.1 India Japan 30.2 South Korea 5 Taiwan 8.1 North America 25.2 USA 26.8 Western Europe 9.3 United Kingdom 10.2 France 9.7 Spain 15.6 Netherlands 16.2 Italy 9.6 Sweden 4.5 Germany 9.5

4.8 2.6 0.2 34.8 8.7 12.9 26.4 28 9.4 11.4 10.2 15.6 15.6 9.6 5 8.9

5.1 2.8 0.2 0 37 9.5 10.9 28.7 30.7 9.3 12.5 10.4 15 14.4 8.6 6.3 8.8

World Asia Pacific

6.7 2.8 0 0 40.3 8.1 3.3 36.9 38.7 18 48.2 16

7.2 3 0 0.1 41.4 9.4 3.9 44.6 47.4 16.3 43.9 13.7

6.2 2.4 China 0 India 0 Japan 35.1 South Korea 5.3 Taiwan 4.2 North America 33.7 USA 35.4 Western Europe 16.5 United Kingdom 38.8 France 14.2

6.2 6.4 6.6 6 7.4 9.8 2.6 2.8 2.9 3.2 3.6 4 0.3 0.4 0.7 1.1 1.6 2.2 0 0 0 0 0.1 0.1 33.3 31.6 32.4 33.6 32.2 29.9 9.9 11.2 12.8 14.6 17.4 19.5 3.4 8.3 11 14.3 17 17.6 38.3 36.3 35 23.8 32.4 53.2 40.9 38.8 36.9 25 34 55.2 12.9 14.8 16.5 16.6 20.1 23.6 30.4 33 29.5 21.5 39.3 57.4 16.3 17.3 20.9 24.7 27.7 30.4 17.6 22.9 25.7 22.8 26.7 29.5 15.4 16.9 22.1 25.3 28.3 30 10.2 11.3 14.9 14.8 14 14.8 12.8 17 22.2 21.7 17.7 18.3 6.7 8.3 11.3 13.1 13.9 13.8 Games Software Retail Sales (US$, Year on Year Exchange Rates) 7.3 2.7 0 0.1 36 9.2 3.5 44 46.4 18 51.8 19.9

8.4 2.8 0.1 0.1 35 10.6 3.5 51.7 54.7 22 63 25.7

9.3 3 0.3 0.1 37.3 12.6 4.3 53.3 55.8 27.7 73 34.2

11.3 3.7 0.6 0.2 39.4 15 7.2 63.5 66.3 34.3 88.1 42.4

11.4 4 0.9 0.2 38.1 18.9 8.4 59.4 62 35.7 85 46.2

12 4.4 1.2 0.3 35.8 23.6 8.7 54.5 56.7 39.7 95.7 51

14.2 4.5 2.9 0.1 29.3 24.4 22.3 80.4 82.2 38.6 77.5 59 64.9 46.3 29 26.6 18.9

16.8 5.3 3.7 0.1 31.5 27.7 30.8 93.6 95.1 45.6 91.9 67.8 66 45.1 42.8 36.1 23.6

16.1 4.7 1.6 0.4 35.1 28.1 11.1 73 75.3 58.9 130.4 102.4

20.4 5.2 2 0.6 37.8 32.3 14.8 106 108.9 71 154 119.8 40

Sweden 33 Spain 17.2 Netherlands 25.7 Italy 10.4 Germany 11.1

33.4 17.2 24.8 10.3 11

28.2 16.3 22.9 10.3 9.9

24.4 18.9 24.5 9 8.6

32.7 23.6 26.9 10.8 9.6

38.7 35.6 36.3 14.6 13.8

50.7 42.8 42.2 19.9 17.2

53.1 44 44.9 23.4 18.3

55.1 47 49.2 26.4 20.8

78.3 63.5 67.8 33.6 31.4

91.5 88.4 77 42.5 38.2

Source: Euromonitor International

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APPENDIX 2 Table 5. DTI (2002) Evidence-base and findings summary from “From Exuberant Youth to Sustainable Maturity: Competitiveness analysis of the UK games software sector”

Development Problems Faced by the UK Games Sector

Findings highlighted •

The industry continues to suffer from a lack of recognition, given its size and value, and understanding, especially within the financial sector and government bodies.

•

UK development companies and the UK games industry as a whole, risks becoming simply a creative and technical "bodyshop" for overseas publishers and developers.

•

Without access to funds, games developers operate in a continued hand-to-mouth existence with increased financial frailty within the domestic sector

•

Majority of the fruits of the UK's labour retained overseas

Narrow view of business /lack of business skills within UK studios

•

Lack of global players and comparative immaturity of the industry

Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships

•

Highly fragmented nature of activities

•

Poorly developed industry-level infrastructure

Lack of information / Poor public perception and understanding

Difficulty for UK firms in creating and securing ownership of Intellectual Property

Unsustainable business models of games developers

Persistent skills gaps and failure of HE to develop employable students

Absence of independent financing / investment The UK industry and Government strategy must make balanced progress on two fronts; Lack of investment from UK government compared to financial support of competing countries

•

continuing to attract inward investment in the UK's games sector and

•

"pump-priming" an as yet under-developed domestic games investment industry.

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Table 6. DTI (2002) Strategies and recommendations summary from “From Exuberant Youth to Sustainable Maturity: Competitiveness analysis of the UK games software sector”

Development Problems Faced by the UK Games Sector

Strategic Need / Recommendations Improve the external perception of games as a "serious" industry •

Creation of a distinct SIC code for the industry

•

Establish higher public profile UK games award

•

Improve industry data availability-data flow along value chain

•

Pooling of global markets industry data

•

Collective commissioning of industry level research

Difficulty for UK firms in creating and securing ownership of Intellectual Property

•

Draft standard or benchmark contracts and deal terms

Unsustainable business models of games developers

•

Spread best practices within the industry

•

Define and adopt industry standards

•

Define career paths for industry

Narrow view of business /lack of business skills within UK studios

•

Promote improved business and management training

Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships

•

Establish pan-industry forum

•

Establish other cross-industry events

•

Industry briefings for the financial community

•

Guidance for games companies about accessing finance

•

Directory of private sector games-related investment funds

•

Promote the UK development sector to encourage inward investment by overseas publishers

•

Establish DTI backed UK development industry presence at E3 and other major industry events

•

International commissioning programmes

•

Co-ordinated international promotion and market development

•

Continued Government and ministerial briefings

•

Ensuring best use is made of already available financial support

Lack of information / Poor public perception and understanding

Persistent skills gaps and failure of HE to develop employable students

Absence of independent financing / investment

Lack of investment from UK government compared to financial support of competing countries

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Table 7. Media Training North West (2002) Evidence-base and findings summary from “The Games Industry in the North West” Development Problems Faced by the UK Games Sector

Findings highlighted

Lack of information / Poor public perception and understanding Difficulty for UK firms in creating and securing ownership of Intellectual Property •

Over-reliance on publishers

•

As publishers are often platform holder, developers are dependent upon console cycles

Persistent skills gaps and failure of HE to develop employable students

•

Existence of skills gaps in programming

Narrow view of business /lack of business skills within UK studios

•

Existence of skills gaps in management

Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships

•

Insularity and failure to network

•

Increasing budgets and production costs yet difficulty in accessing finance

Unsustainable business models of games developers

Absence of independent financing / investment Lack of investment from UK government compared to financial support of competing countries

44

Table 8. Media Training North West (2002) Strategies and recommendations summary from “The Games Industry in the North West”

Development Problems Faced by the UK Games Sector

Strategic Need / Recommendations •

Need for further research into the size, structure and employment patterns of the industry. Very little data exists nationally or in any UK region, this report provides only a snapshot sketch, and support services cannot be finely targeted without accurate labour market intelligence.

•

Draft standard or benchmark contracts and deal terms

Lack of information / Poor public perception and understanding

Difficulty for UK firms in creating and securing ownership of Intellectual Property Unsustainable business models of games developers

No Recommendations •

Persistent skills gaps and failure of HE to develop employable students

Encouraging access into the industry via educational institutions providing: 1 Children’s courses 2 Foundation courses 3 Portfolio development 4 Conversion courses

Narrow view of business /lack of business skills within UK studios

•

Offer consultancy support

Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships

•

Develop industry networks As the development sector is over-reliant upon publishers:

•

Establish venture capital funding specifically aimed at supporting the industry or providing access to venture capital and business angels,

•

Establish training and support for companies wishing to bid for finance (exemplar: a model developed by Wired Sussex).

Absence of independent financing / investment

Lack of investment from UK government compared to financial support of competing countries

No Recommendations

45

Table 9. North West Vision (2007) Evidence-base and findings summary from “North West Vision Digital Content Sector Research” Development Problems Faced by the UK Games Sector

Findings highlighted

Lack of information / Poor public perception and understanding Difficulty for UK firms in creating and securing ownership of Intellectual Property

Unsustainable business models of games developers

Persistent skills gaps and failure of HE to develop employable students

Narrow view of business /lack of business skills within UK studios Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships Absence of independent financing / investment

•

Over-reliance on publishers

•

As publishers are often platform holder, developers are dependent upon console cycles

•

Few of the studios are ready to take advantage of online opportunities

•

The majority of training is done “on the job” and focuses on technical skills, and consequently formal training provision is more or less nonexistent with some rare exceptions.

•

There is a skills shortage in all roles which is becoming critical

•

Induction courses for new recruits are very rare.

•

University Graduates from games courses are rarely fit for purpose

•

Few of the companies have set up any leadership/ management development initiatives of any real note

•

There is some desire to share best practice though little consensus on how to do it

•

Increasing budgets and production costs yet difficulty in accessing finance

Lack of investment from UK government compared to financial support of competing countries

46

Table 10. North West Vision (2007) Strategies and recommendations summary from “North West Vision Digital Content Sector Research”

Development Problems Faced by the UK Games Sector

Strategic Need / Recommendations

Lack of information / Poor public perception and understanding

No Recommendations

Difficulty for UK firms in creating and securing ownership of Intellectual Property

No Recommendations

Unsustainable business models of games developers

•

Need to develop alternatives to the existing business models but no recommendations

•

Rather, report view games development businesses as being too transient and the only lasting and sustainable part of the sector is the overall games cluster, that is, the labour and knowledge pool that is located in the region.

•

The region is not generally lacking in producing large numbers of skilled graduates. Rather, the one real business need that was identified across all of the different kinds of companies that participated in the research was the difficulty of attracting and retaining talent.

•

Industry perception is that there is a need to attract a large and/or iconic employer in order to attract talent.

•

Support mentoring, company development and high level strategic business planning activities with a number of the well established interactive agencies in the region.

•

Improvement of the industry-specific training infrastructure for practitioners available in the region.

•

Need better connected knowledge networking: While there is no real lack of networks in the region, particularly in Manchester, however, the technology-based networks which do exist lack reach and ambition.

•

North West Vision could consider developing a joined-up response for both games and interactive sector.

Persistent skills gaps and failure of HE to develop employable students

Narrow view of business /lack of business skills within UK studios

Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships

No Recommendations

Absence of independent financing / investment

Lack of investment from UK government compared to financial support of competing countries

•

Support North West companies to win a greater share of work that is commissioned in London/ nationally.

•

Promoting and signposting the best companies and work to potential clients in the region.

47

Table 11. UKTI/BERR/TIGA (2007) Evidence-base and findings summary from “Playing for Keeps – Challenges to Sustaining a World-class UK Games Sector” Development Problems Faced by the UK Games Sector

Findings highlighted

Lack of information / Poor public perception and understanding

Difficulty for UK firms in creating and securing ownership of Intellectual Property

•

Significant barriers to entry for new IP generation with tendency for UK publishers to focus on developing games that follow on a strong ‘franchise’

•

Tendency for games developers to be caught in a purely service-based ‘work for hire’ arrangement which currently offers higher profit margins in the short term but no assets in the longer term.

•

The Traditional Games Developer is working on a ‘Broken’ Commercial Model

•

Rising development costs and Platform proliferation both make the ability of firms to recover costs harder.

•

This problem is being partially alleviated by increasing degrees of outsourcing/subcontracting of production which has lengthened the games supply chain.

•

This problem is also being partially alleviated by new distribution channels slowly maturing with the greatest potential offered by online gaming

•

Yet the UK is relatively weak in the area of Online Gaming with Jagex (Cambridge) being the notable UK exception.

•

With little VC funding available in the UK at present, this lack of independent finance presents a strong constraint on the ability of developers to shift towards a more sustainable commercial model based upon IP retention and a greater share of the retail sales net profits.

Unsustainable business models of games developers

Persistent skills gaps and failure of HE to develop employable students Narrow view of business /lack of business skills within UK studios Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships

Absence of independent financing / investment

Lack of investment from UK government compared to financial support of competing countries

48

Table 12. UKTI/BERR/TIGA (2007) Strategies and recommendations summary from “Playing for Keeps – Challenges to Sustaining a World-class UK Games Sector” Development Problems Faced by the UK Games Sector

Strategic Need / Recommendations

Lack of information / Poor public perception and understanding

No Recommendations

Difficulty for UK firms in creating and securing ownership of IP

No Recommendations

Unsustainable business models of games developers

No Recommendations

Persistent skills gaps and failure of HE to develop employable students

No Recommendations

Narrow view of business /lack of business skills within UK studios

No Recommendations

Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships

No Recommendations

Absence of independent financing / investment

No Recommendations

Lack of investment from UK government compared to financial support of competing countries

No Recommendations

49

Table 13. North West Development Agency/TIGA (2007) Evidence-base and findings summary from “NWDA Skills and Training Survey Report: Game Developers in the North West” Development Problems Faced by the UK Games Sector

Findings highlighted

Lack of information / Poor public perception and understanding Difficulty for UK firms in creating and securing ownership of Intellectual Property Unsustainable business models of games developers Persistent skills gaps and failure of HE to develop employable students

Narrow view of business /lack of business skills within UK studios

•

There is a critical skills shortage that shows no signs of abating

•

Training and personal development are neglected

•

Game development studios operate in a reactive state

•

There is a potential lack of suitably qualified leaders and managers

Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships Absence of independent financing / investment Lack of investment from UK government compared to financial support of competing countries

50

Table 14. North West Development Agency/TIGA (2007) Strategies and recommendations summary from “NWDA Skills and Training Survey Report: Game Developers in the North West”

Development Problems Faced by the UK Games Sector

Strategic Need / Recommendations

Lack of information / Poor public perception and understanding

No Recommendations

Difficulty for UK firms in creating and securing ownership of IP

No Recommendations

Unsustainable business models of games developers

No Recommendations

Persistent skills gaps and failure of HE to develop employable students

•

Assist games studios to conduct a series of workshops to explore ways of addressing the skills shortages. This will lead to an action plan, which will need to be implemented subsequently.

•

Develop a detailed plan for the Games Centre of Excellence.

•

Develop a training and development plan linked to the vision and the culture of the games business

•

Use the Sector Skills and Productivity Alliances SSPA to undertake a thorough needs analysis, which includes linking employers’ agenda, and to set up mechanisms to other relevant regional local initiatives. The SSPA would be expected to present at regional & national level.

•

Explore the training requirements of Game Studios Need to provide game developers with assistance to allow them to spot the latest challenges and developments and to think more strategically and competitively.

•

Develop an Online Readiness Benchmarking Tool by reviewing market leading online game companies to understand best practice in this area

•

Assess Games Studios against this benchmarking tool to identify any gaps they may have

•

Assist Games Studios to formulate an action plan to address these gaps

Narrow view of business /lack of business skills within UK studios

Relative insularity of sector / failure of firms to utilise intra-sectoral and crosssectoral relationships

Need to help game developers to share their knowledge and collectively articulate best practice to learn from each other.

•

Invest in an effective cluster organisation to explore methods of collaboration working through the SSPA. This includes identifying areas of best practice and leveraging existing work in this area.

Absence of independent financing / investment

No Recommendations

Lack of investment from UK government compared to financial support of competing countries

No Recommendations

51

Table 15. DCMS (2007) Evidence-base and findings summary from “Staying Ahead: The economic performance of the UK's creative industries” Development Problems Faced by the UK Games Sector

Findings highlighted

Lack of information / Poor public perception and understanding Difficulty for UK firms in creating and securing ownership of Intellectual Property

•

The need for greater understanding of the value of intellectual property to the industry

•

The rising cost and complexity of games development is leading to increasing pressure to consolidate both independent teams and publishing companies and is making it harder for smaller independent production companies to break into the console market.

•

Yet there are sign of a growing prominence of online subscription gaming and prospects that digital retail may change the face of retail in the industry to create new opportunities.

•

There is a strong need for business and project management skills in games development, particularly in light of the pace of change in the sector and the need to reduce development costs.

•

Businesses need to target and engage a more diverse cross section of consumers.

•

Overseas governments offering incentives to games companies threaten the creative base and strength of the UK industry.

Unsustainable business models of games developers

Persistent skills gaps and failure of HE to develop employable students

Narrow view of business /lack of business skills within UK studios

Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships Absence of independent financing / investment Lack of investment from UK government compared to financial support of competing countries

52

Table 16. DCMS (2007) Strategies and recommendations summary from “Staying Ahead: The economic performance of the UK's creative industries”

Development Problems Faced by the UK Games Sector

Lack of information / Poor public perception and understanding

Difficulty for UK firms in creating and securing ownership of Intellectual Property

Strategic Need / Recommendations •

Need more work to be undertaken in understanding the complex linkages and spill-overs within the core creative industries and between them and the wider economy

•

Need hard data and systematic statistics on which evidence-based judgements can be made.

•

Strengthen, the policy architecture, including the copyright, competition and financing regimes – that are essential to building sound business models within the creative industries but No Recommendations

Unsustainable business models of games developers Persistent skills gaps and failure of HE to develop employable students

No Recommendations

Narrow view of business /lack of business skills within UK studios

No Recommendations

Relative insularity of sector / failure of firms to utilise intra-sectoral and crosssectoral relationships

No Recommendations

Absence of independent financing / investment

No Recommendations •

Lack of investment from UK government compared to financial support of competing countries

The single most important step is to move from a paradigm in which support for the creative industries is interpreted in terms of subsidies and grants, to one where it is instead understood in terms of investment with important economic and cultural paybacks.

53

Table 17. DCMS (2008) Strategies and recommendations summary from “Creative Britain: New talents for the new economy” *

Development Problems Faced by the UK Games Sector

Lack of information / Poor public perception and understanding

Strategic Need / Recommendations •

The Department for Innovation, Universities & Skills will commission research to better quantify the economic benefits of the creative industries with special attention to the value added by innovation in those industries.

•

UK Trade & Investment will lead a five-year strategy to enhance the international competitive position of the UK’s creative industries by investing in new marketing materials to promote the strengths of the UK's creative capabilities at key international events.

•

In March 2009, a new £5 million collaborative R&D funding programme (Themed "Accessing and Commercialising Content in a Digitally Networked Age") has been created by the Technology Strategy Board to support targetted creative sectors, including computer games, to fund R&D projects with market potential.

•

Attempting to make the current R&D Tax Credit Scheme more ‘user-friendly’ for small businesses, particularly those in the computer games sector.

Difficulty for UK firms in creating and securing ownership of Intellectual Property

Unsustainable business models of games developers

Persistent skills gaps and failure of HE to develop employable students

Narrow view of business /lack of business skills within UK studios

No Recommendations •

By 2013 we expect that the creative industries will provide up to 5,000 formal apprenticeships a year.

•

DCMS will work with its Non-Departmental Public Bodies, and through them with its sectors, to agree actions to promote a more diverse workforce

•

We will create a talent pathways scheme to support and inspire young people from all backgrounds to pursue careers in the creative sectors.

•

We will conduct research to ensure that academia is equipping students with the skills they need to make the most effective contribution they can to the creative economy.

•

We will encourage employers and skills providers to set up ground-breaking new innovative places of learning

•

We will explore the impact of a brand new ‘academic hub’ supporting collaboration between schools, further and higher education to provide end-to-end development of creative skills for people aged from 14 through to 25.

•

The RDAs will establish a network of regional beacons to leverage the Business Link infrastructure to service the business support needs of the creative industries.

54

Development Problems Faced by the UK Games Sector

Relative insularity of sector / failure of firms to utilise intra-sectoral and crosssectoral relationships

Absence of independent financing / investment

Lack of investment from UK government compared to financial support of competing countries

Strategic Need / Recommendations •

The Technology Strategy Board will launch a Knowledge Transfer Network for the creative industries.

•

Creative economy strategic frameworks to be piloted in two regions (North West and South West)

•

The UK Film Council, in association with Arts Council England and the Arts and Humanities Research Council will help develop ‘mixed media centres’.

•

We will encourage bids for Enterprise Capital Funds (ECFs) from the creative industries and help generate increased investment flows to the sector.

•

The Technology Strategy Board will provide £10 million to inspire new collaborative research and development ideas for the creative industries.

•

The National Endowment for Science, Technology and the Arts (NESTA) will launch a £3 million Creative Innovators Growth Programme.

•

DCMS believe that the UK must take the lead in opposing practices that unfairly distort competition are working with European counterparts to determine whether the incentives offered by Canada to video games companies contravene World Trade Organisation (WTO) rules.

* includes consideration of the “Update on implementation of Creative Britain – February 2009”

55

• • • •

Table 18. NESTA (2008) Evidence-base and findings summary from “Beyond the Creative Industries: Making policy for the creative economy” “Raise the Game: The competitiveness of the UK’s games development sector and the impact of governmental support in other countries” “Level Up – Building a Stronger Games Sector” Development Problems Faced by the UK Games Sector

Findings highlighted

Lack of information / Poor public perception and understanding Difficulty for UK firms in creating and securing ownership of Intellectual Property

Unsustainable business models of games developers

Persistent skills gaps and failure of HE to develop employable students

•

The UK development sector is projected to decline in the coming years

•

Unsustainable business models and barriers to finance reduce the scope for innovation

•

Not enough activity in the online market

•

Balancing original game creation with third party licence work

•

Managing rising development costs

•

Skills shortages constrain growth

•

Generally low quality of graduates

•

Knowledge transfer with other creative sub-sectors is limited

•

Competition from subsidised territories is drawing away investment and talent

•

Lack of governmental support

Narrow view of business /lack of business skills within UK studios Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships Absence of independent financing / investment Lack of investment from UK government compared to financial support of competing countries

56

• • •

Table 19. NESTA (2008) Strategies and recommendations summary from “Beyond the Creative Industries: Making policy for the creative economy” “Raise the Game: The competitiveness of the UK’s games development sector and the impact of governmental support in other countries” “Level Up – Building a Stronger Games Sector”

Development Problems Faced by the UK Games Sector

Strategic Need / Recommendations •

Policymakers are warming up to the economic potential of video games but the sector needs to produce more hard evidence to justify similar support policies to those in Canada and France

•

Action must be taken in order to stimulate the UK sector’s intellectual property generation and online capabilities but No Recommendations

•

Exploit synergies between converging media, especially to help grow the online games services sector

•

Encourage the development of video game technologies for learning and ‘serious games’

•

Need to increase the calibre of graduates and to improve the industry-readiness of game course graduates but No Recommendations

Lack of information / Poor public perception and understanding

Difficulty for UK firms in creating and securing ownership of Intellectual Property

Unsustainable business models of games developers

Persistent skills gaps and failure of HE to develop employable students Narrow view of business /lack of business skills within UK studios

Relative insularity of sector / failure of firms to utilise intra-sectoral and crosssectoral relationships

Absence of independent financing / investment

Lack of investment from UK government compared to financial support of competing countries

No Recommendations •

The Devolved Administrations and English RDAs should consider the importance of business-to-business linkages when supporting creative clusters

•

The Technology Strategy Board’s work on creative industries should also support exchange of knowledge and ideas between firms in different sectors

•

Enhance knowledge transfer flows between academia and the video games sector

•

Maintaining a flow of new company start-ups to refresh the sector

•

Depends upon increasing access to finance

•

Simply R&D tax credits to make accessing tax reliefs easier for the games sector. As developers have difficulties separating R&D activities from other spending, accessing tax credits has been problematic for the games sector where much innovation remains ‘hidden’.

57

Table 20. Creative Industries Observatory (2008) Evidence-base and findings summary from “Game On! A Report on the Interactive Leisure Software Subsector in London”

Development Problems Faced by the UK Games Sector

Findings highlighted

Lack of information / Poor public perception and understanding Difficulty for UK firms in creating and securing ownership of Intellectual Property

Unsustainable business models of games developers

•

Tendency for a relatively few large companies which are vertically integrated controlling costs and the market by taking direct control of development, publishing, manufacturing, distribution, and sometimes retail.

•

Games represents a volatile and risky business sector with profits to be made, in an expanding world market requiring substantial investment.

•

Increasing “cross-over” potential: Lines are increasingly blurred between companies engaged in designing and manufacturing of hardware with the interactive leisure software games publishing companies.

•

Increasing world competition with other countries subsidising the activity as a form of market intervention.

Persistent skills gaps and failure of HE to develop employable students Narrow view of business /lack of business skills within UK studios Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships Absence of independent financing / investment Lack of investment from UK government compared to financial support of competing countries

58

Table 21. Creative Industries Observatory (2008) Strategies and recommendations summary from “Game On! A Report on the Interactive Leisure Software Subsector in London”

Development Problems Faced by the UK Games Sector

Strategic Need / Recommendations •

Lack of information / Poor public perception and understanding

There needs to be a greater understanding of the industry’s business activities and a more detailed classification system which will improve visibility in government.

Difficulty for UK firms in creating and securing ownership of Intellectual Property

No Recommendations

Unsustainable business models of games developers

No Recommendations

Persistent skills gaps and failure of HE to develop employable students

No Recommendations

Narrow view of business /lack of business skills within UK studios

No Recommendations

Relative insularity of sector / failure of firms to utilise intra-sectoral and crosssectoral relationships

No Recommendations

Absence of independent financing / investment

No Recommendations

Lack of investment from UK government compared to financial support of competing countries

•

While Industrial bodies such as TIGA and ELSPA provide critical guidance and support that stitch together these seemingly disparate businesses, more could be done at the level of central government.

•

The UK government needs to consider a tax relief scheme which will encourage the best of the UK’s development talent to stay, and in turn reverse the downward trajectory of the industry today.

59

• •

Table 22. Oxford Economics (2008) Evidence-base and findings summary from “The Economic Contribution of the UK Games Development Industry” “Video Games Development Industry – Assessment of Market failure” Development Problems Faced by the UK Games Sector

Lack of information / Poor public perception and understanding

Findings highlighted •

The UK Games Development industry helps to support a total of 28,100 jobs in 2008, contributes £1,016 million a year to UK GDP and an estimated £419 million to UK tax revenues, as well as contributing to the economy and Exchequer in a number of other ways by stimulating the performance of other industries.

•

The Games Development industry is an R&D intensive industry – estimated to invest 14% of its turnover on R&D. R&D investment generating a social return of around 70% i.e. every £100 million invested in R&D leads to an increase in GDP of £70 million in the long run.

•

Despite rapid growth of the global games retail market, long term decline in the UK based industry is a real possibility.

•

If the lower growth path materialised, the total value added contribution to GDP of the Games Development industry would be £350 million lower in 2013 and it would support 10,000 fewer jobs.

Many of these losses are likely to be permanent, as the highly skilled and specialised games developers are actively recruited by foreign companies as UK based opportunities disappear.

•

Skills gaps problems may be exacerbated if the trend of global publishers downsizing in the UK continues, with the relocation of the most threatened low level jobs to other territories.

•

Clear evidence that clustering effects are present in the Games Development industry, with most companies located around 8 main hubs. This implies that if the industry would decline, and some companies would leave the cluster, there would be negative productivity effects on the remaining companies.

•

Increasing world competition with other countries subsidising the activity as a form of market intervention.

Difficulty for UK firms in creating and securing ownership of Intellectual Property

Unsustainable business models of games developers

Persistent skills gaps and failure of HE to develop employable students Narrow view of business /lack of business skills within UK studios

Relative insularity of sector / failure of firms to utilise intra-sectoral and cross-sectoral relationships

Absence of independent financing / investment Lack of investment from UK government compared to financial support of competing countries

60

• •

Table 23. Oxford Economics (2008) Strategies and recommendations summary from “The Economic Contribution of the UK Games Development Industry” “Video Games Development Industry – Assessment of Market failure” Development Problems Faced by the UK Games Sector

Lack of information / Poor public perception and understanding

Strategic Need / Recommendations •

There appears to be little or no factual evidence available to assess different ‘market failure’ conditions.

•

What limited evidence they found suggests there are no market failures in the computer games sector

•

There are no grounds for increased government support due to market failure.

Difficulty for UK firms in creating and securing ownership of Intellectual Property

No Recommendations

Unsustainable business models of games developers

No Recommendations

Persistent skills gaps and failure of HE to develop employable students

No Recommendations

Narrow view of business /lack of business skills within UK studios

No Recommendations

Relative insularity of sector / failure of firms to utilise intra-sectoral and crosssectoral relationships

No Recommendations

Absence of independent financing / investment

No Recommendations

Lack of investment from UK government compared to financial support of competing countries

No Recommendations

61

APPENDIX 3 Table 24. The Computer Games Sector in the North West Company

Role

Web

Team 3 Games Ltd

Developer

http://www.team3games.com/

Evolution Studios (Sony)

Developer

http://www.evos.net

SmashMouth Games

Developer

http://www.smashmouthgames.com

Rusty Nutz

Developer

http://www.rusty-nutz.co.uk/

Addictive 247

Developer

http://www.addictive247.co.uk

Playbox Limited

Developer

http://www.playboxgames.com

Juice Games (THQ)

Developer

http:// www.juicegames.com

Rebellion (Liverpool)

Developer

http://www.rebellion.co.uk

Tiretex Design Studios

Developer

http://www.tiertex.com/

Spiral House

Developer

http://www.spiralhouse.co.uk/

Monumental Games

Developer

http://www.monumentalgames.com/

Magenta Software

Developer

http:// www.magentasoftware.com

The Games Creators

Developer

http://www.thegamecreators.com

Bizarre Creations

Developer

http://www.bizarrecreations.com/

Shoecake Games

Developer

http://www.shoecake.com/

New Concept Gaming

Developer

http:// www.newconceptgaming.com

Travellers Tales

Developer

http://ttgames.com/

Blade Interactive Studios

Developer

http://www.bladeinteractive.com/

Connect 2 Media

Publisher

http:// www.connect2media.com

Chillingo

Publisher

http:// www.chillingo.com

Emote Games

Publisher

http:// www.emotegames.co.uk

GlobiGames

Publisher

http://www.globigames.com

Jester Interactive Publishing

Publisher

http:// www.jesterinteractive.co.uk

WhitePark Bay

Publisher

http:// www.whiteparkbay.com

Catalystos

Services

http:// www.catalystos.co.uk

RealTime UK

Services

http:// www.realtimeuk.com

Eclipse Interactive

Services

http:// www.eclipseinteractive.co.uk

IHobo

Services

http:// www.ihobo.com

3D Creation Studio

Services

http://www.3dcreationstudio.com/

Lateral Visions

Services

http://www.lateralvisions.co.uk

Simul Software Ltd

Technology

http://www.simul.co.uk

Real Time Race

Technology

http://www.realtimerace.com/

Facetec (ex Genemation)

Technology

http://www.facetec.com/

Onteca

Technology

http://www.onteca.com

Contacted Survey

x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x

x

x x x x x

x

x

x x

x

62

Appendix 4: Comparative Analysis of Leading UK Games Developers Business Profile Base Table Company Jagex Ltd Frontier Developments Eurocom Developments Sumo Digital Reflections Traveller s Tale Juice Games Evolution Studios Bizarre Creations Realtime Worlds Rockstar North Relentless Software Creative Assembly Lionhead Studios Rebellion Developments Kuju Entertainment Electronic Arts Ltd Gusto Games Codemasters Blitz Games Rare Rockstar Leeds Team 17 Studio

Ownership

Studio Location

Avg Wages

Employment Turnover

Reporting Wage Bill Year

Wage Gross UK Turnover Develop Share of Retail Share of 100 Year Turnover Sales Gross

Independent

East

£26,366

369

£32,294,000

03/2008

£9,729,000

30%

n/a

n/a

n/a

Independent

East

£28,279

146

n/a

05/2008

£4,128,734

n/a

£3,800,000

2008

n/a

Independent

East Midlands

£35,402

261

n/a

01/2008

£9,239,922

n/a

£9,740,000

2008

n/a

Independent Infogrames Warner Bros THQ Sony Activision Realtime Worlds Inc Take 2 Independent SEGA Microsoft

East Midlands North East North West North West North West North West Scotland Scotland South East South East South East

£24,082 £21,726 £40,918 £39,959 £53,985 £39,013 £27,957 £36,600 n/a £34,927 £53,478

105 103 98 65 36 153 157 185 n/a 83 134

n/a £6,224,766 £11,533,000 £5,591,912 £9,185,462 £9,817,000 £5,469,042 £12,482,000 £4,154,170 £7,180,000 £16,066,000

12/2007 03/2006 12/2007 03/2008 06/2007 03/2008 12/2007 10/2007 10/2007 03/2007 06/2007

£2,528,566 £2,237,781 £4,010,000 £2,597,311 £1,943,463 £5,969,000 £4,389,312 £6,771,000 n/a £2,898,941 £7,166,052

n/a 36% 35% 46% 21% 61% 80% 54% n/a 40% 45%

£6,760,000 £3,650,954 £27,060,000 £6,870,000 £9,120,000 £7,430,000 £8,100,000 £4,960,840 £7,240,000 £7,209,918 £3,731,638

2008 2007 2008 2008 2008 2008 2008 2007 2008 2007 2007

n/a 170% 43% 81% 101% 132% 68% 252% 57% 100% 103%

Independent

South East

£29,271

102

£8,651,528

06/2007

£2,985,642

35%

£3,584,633

2007

241%

Independent Electronic Arts Inc Independent Independent Independent Microsoft Take 2 Independent

South East South East South East West Midlands West Midlands West Midlands Yorkshire Yorkshire

£30,750 £46,178 n/a £39,854 £28,657 £41,519 £33,088 £31,092

248 732 n/a 479 159 210 56 76

£14,714,000 12/2007 £255,072,000 03/2008 £1,407,072 06/2007 £85,459,000 06/2008 £8,573,399 07/2006 £15,152,000 06/2008 £3,229,587 10/2006 £3,053,203 12/2004

£7,626,000 £33,802,296 £800,919 £19,090,066 £4,556,463 £8,719,000 £1,852,928 £2,363,000

52% 13% 57% 22% 53% 58% 57% 77%

£6,074,156 n/a £4,401,277 £11,730,000 £3,809,307 £5,360,000 £25,279,940 £4,190,000

2007 n/a 2007 2008 2007 2008 2007 2008

242% n/a 32% 240% 225% 283% 13% 73%

Source: Derived from Company Accounts (Various Years) and Develop 100 2007/2008 editions 63

UK Retail Sales Regional Profile Base Table Develop 100 2007 Edition

Develop 100 2008 edition

Region

Value

# of UK Developers

Value

# of UK Developers

Average Per Developer

Regional Total

South East

£74,555,324

10

£61,130,000

8

£7,538,074

£135,685,324

£26,295,661

Traveller’s Tale

£27,060,000

Traveller’s Tale

£8,048,645

Relentless Software

£9,120,000

Evolution Studios

£3,853,433

Magenta Software

£7,430,000

Bizarre Creations

£3,126,856

SCE Liverpool

£6,870,000

Juice Games

£2,510,047

Juice Games

£5,650,000

SCE Liverpool

£8,950,387

£107,404,642

£3,750,000

Blade Interactive

£3,690,000

Magenta Software

North West

UK Retail Sales Summary

£43,834,642

5

£63,570,000

7

London

£36,751,670

3

£29,380,000

2

£13,226,334

£66,131,670

Yorkshire

£33,431,150

2

£17,940,000

2

£12,842,788

£51,371,150

West Midlands

£26,737,339

4

£19,860,000

3

£6,656,763

£46,597,339

East Midlands

£10,707,845

2

£16,500,000

2

£6,801,961

£27,207,845

Scotland

£4,960,840

1

£8,100,000

1

£6,530,420

£13,060,840

East

£5,729,204

2

£6,660,000

2

£3,097,301

£12,389,204

North East

£3,650,954

1

-

0

£3,650,954

£3,650,954

Source: Develop 100, 2007 & 2008 Edition 64

APPENDIX 5

Figure A1. Overview of the Games Publishing Process

The Publishing Process. Formats:PS3, Xbox360. Wii Boxed Retail Product.

Publisher does Marketing & Press.

Milestone $$ Payments

Games Publisher.

Games Developer (Independent)

Milestone Deliverables Milestones 1 to 18, then Alpha, Beta, Master, Gold Master.

eg. Ubisoft, EA

Focus Groups.

Gold Master

Localisation / voice over.QA Test

Manufacturing.

Shop / Retail.

Consumer

SONY / MS / Wii Approval

POST Release Patches.

Disc Duplication, Manuals, packaging,

Distributor.

Supplies Shops / retail.

65

Figure A2. Overview of the Games Development Process

Games Development Process.

Formats:- PC, PS3, Xbox360, Wii.

Inception

Business Parameters

Game Concept

Concept Document

Game Design Duration:12 months to 36 months

Demo

Technical Design

Implementation

Vertical Slice

Alpha

Beta

Release Candidate

Gold

POST Release Patches.

66

Figure A3. Typical Costs Incurred at Each Stage in the Life of a Games Development Process

Typical Costs for Leading Console Game across 3 Platforms

UK+ Europe:- Costed at £5K per month person approx (Inclusive of Salary, Rent, NI, Rates, Hardware / Software)

67

Figure A4. Hardware and Software Value Chain activities in the Console Games sector

Source: Johns (2006)

68

BIBLIOGRAPHY BERR (2007). Playing for Keeps – Challenges to Sustaining a World-class UK Games Sector. London, Department for Business Enterprise and Regulatory Reform/Games Investor Consulting.

BOP CONSULTING (2009) GAMES SPACE: Business model for a centre of excellence for games usability IN NWDA (Ed.). Manchester, BOP Consulting,.

Creative Industries Observatory (2008). Game On! A Report on the Interactive Leisure Software Subsector in London. London, School of Creative Enterprise, London College of Communication (University of the Arts).

DCMS (2005) Creative Industries Economic Estimates: Statistical Bulletin London, Department for Culture, Media and Sport.

DCMS (2006) Creative Industries Economic Estimates: Statistical Bulletin London, Department of Culture, Media and Sport.

DCMS (2007) Creative Industries Economic Estimates: Statistical Bulletin London, Department for Culture, Media and Sport.

DCMS (2007) Staying Ahead: The economic performance of the UK's creative industries. London, DCMS. DCMS (2008) Creative Britain: New talents for the new economy. London, Department for Culture, Media and Sport.

DCMS (2009) Creative Industries Economic Estimates: Statistical Bulletin London, Department of Culture, Media and Sport.

Develop (2007), Develop 100. Intent Media. http://www.develop100.com/ Develop (2008), Develop 100. Intent Media. http://www.develop100.com/ DTI (2002) From Exuberant Youth to Sustainable Maturity: Competitiveness Analysis of the UK Games Software Sector London: DTI IGDA (2004). Human Resource Forum: Trends and Directions, International Game Developers Association.

IGDA (2004). Quality of Life in the Game Industry: Challenges and Best Practices International Game Developers Association.

IGDA (2005). Quality of Life Summit: An IGDA Think-Tank International Game Developers Summit.

IGDA (2006). Casual Games White Paper, International Game Developers Association.

Johns, J. (2006). “Video games production networks: value capture, power relations and embeddedness”, Journal of Economic Geography, 6(1): 151-180.

MEDIA TRAINING NORTHWEST (2002) The Games Industry in the North West. Lizzie Haines Research,.

NESTA (2007) Entrepreneurship Education for the Creative Industries. IN NESTA (Ed.) Policy Briefing. NESTA. NESTA (2008) Beyond the Creative Industries: Making policy for the creative economy London, National Endowment for Science, Technology and the Arts.

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NESTA (2008). Raise the Game: The competitiveness of the UK’s games development sector and the impact of governmental support in other countries. London, NESTA. NWDA (2007). NWDA Skills and Training Survey Report: Game Developers in the North West North West Development Agency.

NWDA (2008). Digital and Creative Industries Enterprise & Skills: Sector Strategy and Action Plan, North West Development Agency.

Oxford Economics (2008). The Economic Contribution of the UK Games Development Industry. Oxford: Oxford Economics.

Oxford Economics (2008). Video Games Development Industry - Assessment of Market Failure.

SKILLSET (2008) Computer Games Sector: Labour Market Intelligence Digest. IN SKILLSET (Ed.). London, Skillset.

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