Executive Summary

This report, commissioned by NESTA from Games Investor Consulting, assesses the competitiveness of the UK's games studio sector in an international context. The report profiles the games development sectors of the UK, Canada, France and Germany, with a particular focus on policy measures from national and regional governments, identifying challenges and opportunities that have emerged as a consequence of the evolution of video game markets and technology.

Key findings

This report shows that in spite of its high levels of technical and creative skills and its continued production of world-class games, the UK games studio sector faces important structural weaknesses. They include a lack of global scale publishers, limited access to finance and skill shortages. These factors constrain the UK's capacity to generate new games ideas and innovative genres. UK developers are very talented and at the technological cutting edge, but many independent studios have to rely on third party licenses to survive. The revenue flows generated with this business model are insufficient to develop original ideas.

This situation will be difficult to sustain as the industry becomes more globalised. Creativity and innovation are where UK studios have always excelled, but these two sources of competitive advantage are being severely tested by the aforementioned constraints. It is unclear how well UK studios will be able to compete with cheaper overseas developers who are improving the quality of their output.

The situation is worsened by international competition from countries, such as Canada, where developers receive government support. Generous subsidies make it increasingly tempting for studios (particularly those owned by publishers) and developers to relocate there. This has initiated a process of decline in the UK's studio sector that is projected to intensify in the coming years, unless the sector receives more support from government.

But support needs to be properly targeted. Our analysis of those countries that have implemented policies to support the video game sector shows variable results. Some Canadian provinces have implemented generous support policies that have accelerated its studios to world-class status in a very short time. However, France found that some initiatives exacerbated problems around the French studio sector's inability to create commercially viable products. While tax incentives have been very effective in encouraging investment into Quebec, they have not been targeted at the creation of new intellectual property by Canadian-owned studios, whose original ideas remain weak. All these questions need to be taken into consideration when assessing which potential policy initiatives should be adopted to support UK studios.

Yet immediate action is needed. Video games have achieved a mass medium status, with new genres, hardware and modes of playing contributing to a rapidly expanding global market. At the same time, globalisation has created a uniquely competitive and uneven commercial landscape for video games where UK developers face serious challenges. Studios, government support agencies and universities all have a role to play in helping overcome these barriers, so that the UK sector remains at the forefront of creativity, innovation and growth in video game development.

Country profiles and policy support

There has been an 8% growth in staff working in the UK's studio sector since 2006. But numbers are now falling from a peak of 9,860 following studio closures, relocation and downsizing. This trend is expected to accelerate.

UK studios are projected to spend £450m in development in 2008, retaking third position in the global sales rankings on account of the success of one blockbuster video game, after having been overtaken by Canada in 2006 However, the UK development sector will fall to 5th position in 2009, overtaken first by Korea and Canada, and then China. This decline is tied to shortages in skills, high costs of development, lack of access to finance, limited capabilities in online development and limited government support.

In spite of this, the UK has developed a world-class games development sector which has survived consolidation and industry down-cycles. Yet even at the peak of the current cycle, the UK's studio sector started to shed jobs and faces barriers to the creation of new ideas - Intellectual Property the engine of the industry.

Meanwhile, Canada's development headcount has grown by 42% since 2006 to 10,500 employees, with Canadian studios spending £400m in 2008, and the country set to reach fourth place in global sales rankings, before being overtaken by South Korea and China. Regional government support for games is strong, and has encouraged major relocation of studios in Canada, particularly from France but also from the UK.

France's employee headcount has grown 14% to 2,500, largely driven by online games companies. French studios will spend £111m on development in 2008, and remain in seventh place in terms of sales. Government support for games development is widespread and increasing, but its impact on studio location is expected to be small. Following an exodus of studios to Quebec, France's studio sector has remained stagnant, despite such large-scale injections of capital. It is too early to assess the impact of a new national games development tax credit, but it seems unlikely that the French development sector will become a global leader in the near future.

Germany has 2,900 developers, and spends £107m in development. German studios will grow healthily to 2013 as a result of a booming online games sector, but its eighth position in global sales rankings will not change. The German studio sector has grown organically with no public support, but is imbalanced towards the single platform of PC gaming.

An assessment of policy initiatives in other countries shows significant government support for the games development sector in Australia, China, Singapore, Korea and five US states.

Future competitive environments

Video games are now a global mass-market medium. This creates opportunities for UK developers willing to target new demographics, platforms and regions. Online gaming and cross media ventures constitute particularly promising areas.

Threats to the UK studio sector come from the diversion of development resources into cheaper or subsidised territories, as well as the sector's slow response to online gaming, falling levels of new IP and rising labour costs. In this context, government support can become a defining factor, as large publishers relocate to subsidised territories, and qualified labour migrates with them.

Globally, the industry will be defined in the future by

• the sector's capabilities to create strong original new ideas;
• the degree of balance between independents and publisher-owned studios;
• resilience to console cycles;
• strong skills in traditional and online games production;
• creative and technical expertise;
• the availability of a skilled labour pool;
• improvements in efficiency through outsourcing and other development strategies; and
• the level of support from national or regional governments.

By 2012, the UK's studio sector will be smaller and more consolidated but will have begun to exploit opportunities for profitability, stability and IP creation in online gaming.

Key challenges for UK studios will be:

• Balancing original ideas with third party licence work
• Managing rising development costs
• Increasing access to finance
• Maintaining a flow of new company start-ups to revitalise the sector
• Improving the quality of graduates
• Accessing new markets and demographics
• Promoting a supportive policy environment

To respond to these challenges, key strategic goals for the UK studio sector should be:

• Increasing the flow of original new ideas
• Exploiting the massive potential of online gaming
• Exploiting synergies between converging media
• Protecting UK creative jobs while exploiting international development capabilities through outsourcing
• Increasing the calibre of graduates
• Increasing diversity in development teams
• Increasing support from public funds

Introduction

Report rationale

In September 2008, NESTA commissioned Games Investor Consulting (GIC) to assess the impact of major competitor games development markets on the UK's studio sector. Many national and regional governments substantially assist their games development industries. This report profiles and assesses each of four major games development territories, the UK, Canada, France and Germany ("the target territories"). We analyse a selection of trends, provide an update on the policy measures in use in each territory and assess their impact. In the light of this intelligence, we then consider the capacity of the UK to remain as a major player in games development now and in the future. Our update contains new research, data and analysis, but we have deliberately not replicated the level of detail found in our 2007 report Playing for Keeps, commissioned by UKTI, BERR and TIGA.

This new report has the following goals:

1. Assessment of the UK sector vs. competitors: Assess and quantify the UK games development sector's strengths and weaknesses in comparison with its major current and future competitors.
2. Policy measures: Profile the range of policy measures, including tax breaks, in place in these competitor territories.
3. Impact of policy measures: What evidence is available of the impact of those policy measures on the games development sectors of these countries?

Chapter overview

This report takes the form of five chapters:

• Chapter 1: Updated profiles of the UK, Canada, France and Germany, with scored capabilities in key areas.
• Chapter 2: Updated profiles of governmental support for games development in the UK, Canada, France and Germany, with brief updates to the availability of governmental support in other countries
• Chapter 3: Analysis and evidence of the impact of these government support measures
• Chapter 4: Future competitive factors required for a successful games studio sector, mapped against projections of each target territory's capabilities.
• Chapter 5: Conclusions, challenges and strategic goals

Chapter 1: Assessment of the UK versus its competitors

This chapter provides updates the country profiles of the games development sectors of the UK, Canada, France and Germany. The choice of territories was driven by availability of governmental support for games development (Canada and France), and to illustrate how a booming online games sector is improving future German competitiveness.

United Kingdom

Sector snapshot

The UK sector has been growing modestly¹ in recent years, and its world-class studio sector maintains a high level of high quality output across most genres and platforms. While the UK will return to third place in the sales rankings by country of origin in 2008, it faces significant challenges. There are already worrying signs of decline.

The studio sector today presents a healthy balance between highly talented independent and publisher studios. But there are serious structural weaknesses. The UK has only a small presence in the booming online games market. There are too few indigenous UK publishers of global scale. The sector as a whole faces skills shortages, poor access to finance, too few original new games and almost no governmental support in a global market where such support is increasingly commonplace. As a result, the UK sector is expected to decline over the next five years, in stark contrast to most of its competitors whose development sectors are expanding rapidly in parallel with growing international games markets.

Historical outlook

The UK sector has undergone significant upheaval in the last decade. It suffered from a global oversupply of studios in the transition between console generations, exemplified by the PlayStation 1 and PlayStation 2. Over-sized, poorly-run, weakly financed, inefficient, non-viable or plain unlucky developers went to the wall between 2000-2006, with no access to the lifelines or bail outs available in more subsidised countries such as France. But this was no bad thing. The result was a leaner, more efficient sector with studios that had learned to manage their costs, plan for the gaps between projects, utilise outsourcing to keep rising development costs in check and effectively sell their studios' services to global publishers by demonstrating track records of globally strong product, experienced and highly creative teams, and well-tested proprietary technology. So, even as large numbers of staff were made redundant when nearly half of the UK's studios went out of business, experienced staff were more likely to stay in the UK to join other, more viable and growing studios.

However, more recently, these viable studios have come under growing pressure from structural problems that make competition increasingly difficult. First, costs have risen, exacerbated by the weakness of the US dollar. Recent fluctuation in the dollar exchange rate and the fall from the peaks of the last few years have made the UK more competitive, but the long term trend in rising production costs is bound to impact the sector negatively. Recruitment issues have reduced UK companies' ability to grow. The industry has relied on an advance recoupment model, where a project's development costs are paid upfront and then recouped by the publisher before the originating studio receives any royalties. But rising production costs have made this model increasingly unsuitable for the viability of independent studios. The result is that most independent studios are creative service companies working for hire with another company owning the copyright. These studios rely on production margins rather than royalties, which are usually not enough to allow the investment in innovation that made the UK sector's name. The result is that the number of new UK-created games and products – the engine of this industry – has been falling.

Scale of UK games development sector

Development staff: 9,860. There are currently 4,350 staff in 47 publisher studios, 4,150 in 166 independent studios, 550 staff in 73 services companies and an estimated 800 freelancers working in active development roles.

Although the number of staff working in games development has grown by 8% since 2006, the numbers are set to fall in the future. A period of stability in development staff numbers in 2008-2009 hides some high profile studio closures or downsizing (an estimated 400 development staff job losses in 2008²) that should be largely balanced out by growth in other studios. As the table shows, this is likely to result in a small fall in staffing numbers. However, as the console cycle³ downturns and more studios come under pressure from international competition, the trend for overall numbers for development staff in the UK is downwards, with an estimated net 1,250 job losses projected by 2012. By contrast, most other games development territories are project either to grow or retain the size of their indigenous development bases. The anticipated UK decline reflects overall growth trends in the UK industry that are outlined later in this chapter. Although both independents and publisher studios will see job losses in aggregate, it is expected that publisher studios will be most affected, as global companies relocate lower value staff to more subsidised territories. These 1000 jobs – primarily in quality assurance and testing, represent around 10% of the work force. Importantly, they are also the first rung on the games career ladder for many budding games developers. The departure of such jobs risks eliminating a gateway for new talent for the industry, as well as driving up average wage costs in the UK.

Development expenditure

The above chart outlines estimated development expenditure in the UK by games studios over the next five years. This expenditure includes salaries and overheads, but not major capital expenditure. Again, this reflects the growth trends outlined later in this report.

Global ranking (sales by country of origin)

In 2007, the UK ranked fifth amongst the largest games development territories in the world, by share of global network and retail software sales. The long-term trend for the UK has been to fall from third to fifth place since 2004, driven down by the rising success of Korea and Canada as centres for video game development. 2008 should see the UK retake third place in the rankings following a record year for UK studios, with revenues from UK-made games projected to reach over £2 billion, driven by the impact of Grand Theft Auto (GTA) IV from Rockstar North in Edinburgh. Although UK developers will be releasing new and promising franchises in the near future, none of them currently seems likely to reach GTA's levels of commercial success.

The UK will jostle with Canada for position between 2009 and 2010. The next GTA (assumed to be released in 2010) should push the UK back up the rankings, but the meteoric rise of China to fourth in 2010 will see the UK's overall rank peak at fifth in 2010 before revenues fall back behind Canada.

Talent pool

The UK's games industry is clustered around ten regional centres spread right across the UK, each of them dominated by a couple of large studios: Edinburgh, Dundee, Newcastle, Liverpool, Manchester, Guildford, Cambridge, Oxford, London and Brighton.

Industry recruitment sources

The UK's talent pool includes a slow but steady stream of recruits from other European countries who come to the UK attracted by the prospect of working on high profile games and earning much higher salaries than elsewhere in Europe. On the other hand, the UK loses many more experienced staff to US studios. The net effect of these two brain drains is currently still in the UK's favour.

Graduate recruitment sources

This proportion of graduates in the UK developer population is slowly increasing.⁴ UK universities produce a growing number of graduates from games-specific degrees. In 2008 there are likely to have been 1,700 graduates from 81 games-specific degree courses run at 46 universities. However, only 18% of games specific graduates in 2007 succeeded in winning jobs in the industry. Graduates from some higher quality courses, particularly those accredited by Skillset,⁵ are more likely to win jobs in the industry: Skillset graduates are nearly three times as likely to get a games job than those from a non-accredited course, mostly because the courses are up to date, of better quality and developed with the industry. The number of Skillset courses has been unchanged since the sector skills council was established in 2006.

UK games companies also recruit from those with generalist degrees, favouring computer science, maths, visual arts and general science courses. In recent years, the UK has experienced falling numbers of science graduates. The CBI recently released a survey showing that overall numbers of science graduates had fallen by 15% between 1998 and 2008, resulting in a recruitment crisis for British firms in many sectors. However, there has been some improvement in recent years. The number of mathematics students in higher education has risen 30% between 2003 and 2006 from 26,000 to 34,000⁶,⁷, and UCAS acceptances in mathematics have risen by 9.2% in 2007 and 8.1% in 2008.⁸ The number of computer science students in higher education fell by 20% from 134,000 to 107,000 between 2003 and 2006, and acceptances fell marginally in 2007 before increasing by 5.7% in 2008. Although now on the rise, longer term statistics suggest that the number of applicants for mathematics and computer sciences fell by 23% from 34,000 in 2002 to 26,000 in 2005,⁹ in a period when the number of applicants for creative arts and design rose by 23% from 48,000 to 59,000.

Skills availability

The Playing for Keeps report highlighted the problems that UK studios have when recruiting highly qualified personnel, particularly experienced senior staff, but also promising trainees. Since 2006, skills shortages have persisted, with a number of studios reporting that these bottlenecks have hampered their growth potential. This problem is intensified by what is widely perceived by the industry to be a low calibre of games course graduates. The industry has been vocal in complaining about these degrees and wants more Skillset accredited courses. However, the gradual decline in UK games development staff numbers over the next five years is expected to reduce the intensity of the skills shortage.

Labour costs

The UK no longer has the highest average development costs in the world (the US is currently more expensive), although the rapid rise in the strength of the dollar could lead to changes in the situation¹⁰. The salary of a console developer¹¹ in the UK in 2008 is £30,316, which is 5.5% higher than in 2007 (£28,725). Senior salaries rose by 9% year on year, reflecting higher demand for experienced staff. On average, it is estimated that publishers' salary and overheads costs are substantially higher than those of independents (39%). This is driven by higher salaries (particularly for senior staff), greater expenditure on property and overheads in publishers, as well as cost inefficiencies. Downtime between projects can also be longer for publisher studios because of the longer turnaround times of large organisations; independents tend to control their costs more tightly, and ensure shorter downtimes between projects (which could put them out of business).

Creativity

Track record in developing new games

UK developers specialise in particular genres, including driving, action, simulation / management, role playing and mass-market entertainment titles (such as SingStar and Buzz). New studios have traditionally emerged from these older studios, usually remaining focused on the same genres. Although this kind of specialisation is common worldwide, UK developers have also been highly successful in the creation of innovative genres such as space simulations / trading games (Elite), God games (Populous or Black and White), karaoke games (SingStar) and sports management games (Championship Manager). Playing for keeps predicted, under current growth trends, a global fall in of the production of new games and breakthrough genres. Evidence for this has accumulated, as the number of games based on original new ideas in the 2007 charts falls (only one title was not a sequel or a franchise) and the amount of original new products released in 2007 decreases (only ten of the top 100 best selling studios in terms of UK games sales released any original games in 2007). This could explain the declining presence of UK developers in the charts. For example, although the UK games retail market recorded a remarkable 26% growth in 2007 to reach an all-time high of £1.7bn, for the first time this decade, there was no UK developed game in the British top 10 selling retail games. 2008 has seen a few major new franchises produced in the UK (the most anticipated being Little Big Planet from Media Molecule) but the downward aggregate trend has continued.

Technical strengths

The UK has a world-class technical base, with a broad range of skills across many disciplines. Most major studios have their own proprietary games engines, and many develop their own bespoke tool chains¹². Although the proportion of service companies versus overall headcount is the lowest of the territories profiled in this report, there are plenty of games technology companies delivering specialised solutions in physics, animation, programming, graphics and peripherals. UK studios, particularly independents, have strived to optimise development efficiency through new technology and by the sort of outsourcing strategies that are now a standard feature of games production.

Technical weaknesses

The UK lacks a broad presence in online game markets. This is particularly acute with emerging casual genres. UK studios have embraced online gaming as an extension of their core focus gameplay on consoles and PC - but dedicated online gaming companies that exploit these booming new markets are still relatively rare, though Jagex, Miniclip and UK/Swedish King.com are exceptions. In addition to being experts in game development for their given fields, these companies have also developed capabilities in managing live games services. UK companies have traditionally deferred such activities to their publishers, a potential handicap in the future, as online gaming demands closer attention to the customer and an evolving range of live services. This situation contrasts with other European countries that have not only established strong footholds in online gaming but are attracting significant external investment to accelerate their already rapid rates of growth.

Platform / category skills status

Strength of UK-owned companies

Independents: The UK has a strong independent sector, which is consolidating after a period of growth, with some larger development companies acquiring struggling studios and those that were sold by their publisher owners. At the same time, some independent studios were acquired by American and other global publishers between 2005-7, reflecting the strength of their IP and their experienced teams. Some of these independent studios were subsequently sold in 2008, and the pace of studio closures is growing as global publishers rationalise their IP portfolios and channel more development resources towards subsidised territories. While start-up studios continue to form and revitalise the sector, their ability to create successful new global games on major platforms is diminishing as production costs rise.

Publishers: UK publishers have traditionally struggled to amass the financial strength to break into the higher echelons of the global publishing world via organic growth or growth by acquisition. Instead, they have often become willing acquisition targets, something frequent in the independent sector. The UK has only two medium-scale publishers – SCi/Eidos and Codemasters, both of which, in spite of owning some large brands, are outside the top twenty global publishers by turnover. SCi/Eidos has had a very difficult few years, with the departure of most of its senior management team, restructuring (25% downsizing) and the announcement of substantial losses. On the other hand, Codemasters has been recruiting new staff and expanding its online operations. Jagex is also worthy of note, as a developer/publisher of online games with a rapidly growing audience, expanding portfolio and complete independence from traditional value chains that constrain most UK publishers' growth potential.

Flexibility and sustainability of local studios

The UK has one of the strongest talent pools in the world today. However, UK studios that specialise in particular (often heavily saturated) genres such as racing and action, may find it hard to adapt as faster and cheaper development regions emerge, and online service delivery becomes more important. The UK's independent games developers' historic ability to create original games with global appeal has been threatened by the increasing costs and risk of games development, and limited access to sources of funding. This has led to fewer original games and more work for hire (where an independent studio produces games that are owned by someone else for lower shares of future revenues). The UK's most successful independent studios derive two thirds of their gross revenues from work for hire. ¹⁴ A reliance on this work is a long term threat to the UK sector's sustainability because it allows only a marginal profit (rather than a royalty cushion from proprietary IP), is patchy (unlike the steady cash flow from online games models) and relies on increasingly cost-conscious clients with incentives to contract projects with cheaper studios in Eastern Europe and Asia. Some UK games companies are beginning to scale back their UK teams while investing in lower cost, subsidised markets. This is not surprising, given the escalating costs in the UK, and the absence of state support.

Access to finance

In 2007, nearly £1.42bn was spent on acquisitions in the global games markets. 7.7% of the transactions originated in the UK, 13.8% of the target companies were UK studios, 12.4% of sums received were targeted at UK companies, but only 0.4% of the sums spent were by UK companies. Nearly £640m was raised for games companies in private financing rounds globally in 2007, of which 3.6% was raised by UK games companies in five funding rounds. Limited access to finance for UK companies to develop new games or make large-scale acquisitions is still a major problem. The UK has experienced almost no fundraising rounds above £25m. This is partly a consequence of the lack of large UK based publishers, most of which have either been acquired before they have been able to reach global scale or failed to raise enough capital to keep pace with a rapidly growing and increasingly international market.

Availability of government support

The UK receives relatively little government support; the current government normally prefers to provide blanket, one-size-fits-all assistance to industry, without additional support for special cases. There are important exceptions in other creative media, such as the tax break for films, and significant rebates for commercial broadcasters, each of which are worth hundreds of millions of pounds.¹⁵ The games industry has failed to make its case as forcefully or successfully to the Exchequer as these other sectors. Despite improved engagement between various Ministries and the industry, the level of assistance remains minimal.

Even where the industry receives funding through the generic Research and Development tax credits scheme, a strict interpretation of eligibility by HM Revenue and Customs means that the industry's continuous production of games assets, technology and other games features is only rebated by 4-5% on average. Many smaller studios complain that the opportunity cost of filling in the paperwork required is higher than the value of any rebate. Additionally, a range of other generic schemes such as export assistance and some tax credits for early stage investors in start-ups have limited benefit for games companies. Tighter eligibility for the Enterprise Investment Scheme – one of the more useful investment incentive schemes to which games companies have resorted in the past - has reduced the number of companies able to apply.

A few smaller-scale schemes have provided modest assistance for the industry in specific areas. Skillset runs an accreditation scheme which has signed up four out of 81 games-specific degree courses. Courses are given accreditation after reaching industry-agreed standards. The accredited courses are located in Scotland (Abertay and Paisley) and Wales (Glamorgan), rather than being co-located with the bulk of games clusters. Four more courses are being assessed for accreditation but the industry has complained that the number is still too low. Over the last three years, graduates from Skillset-accredited courses have been three times more likely to get a job in the games industry.

Previous funding to help games studios exhibit at trade shows overseas has all but disappeared but partially subsidised trade missions for games companies still occur annually.

However, two new central grants schemes are now available for studios. The first is awarded by the Technology Strategy Board, and has a value of £10m in 2007 for creative industries, including games. The scheme has invested £1bn since 2004 in collaborative R&D projects across all industries. To date, a number of games-related projects have been funded, the most significant being a £1m Department of Trade and Industry (DTI)¹⁶ grant to Blitz Games. There have also been smaller DTI allocations, including one to Eidos. In 2008, two projects worth a total of £660,000 were awarded to two games companies, Monumental and tools company, Geomerics. Others are in the pipeline. Games have thus received a relatively healthy proportion of TSB funding given the broad definition of creative industries.¹⁷ The other scheme is 'Raising the Game', a recent initiative launched by NESTA which is making targeted interventions in games studios country-wide, piloting recruitment, mentoring and graduate internships schemes, as well as running workshops to bring various media (including games) together to discuss and promote collaboration.

Public funding assistance for games is largely channelled by regional bodies such as Screen Agencies, Regional Development Agencies and devolved national governments. Bodies such as EM Media, ITI Techmedia, Screen Yorkshire, Northern Ireland's DETI and the Creative IP Fund in Wales have established grants to fund games projects in the last five years. EM Media has disbursed over £30m in matched funding between 2006 and 2008 to media projects including games, and it plans to support five new games projects between 2008 and 2011. Only one of ITI Techmedia's games programmes survives. Screen Yorkshire has given £100,000 towards the creation of the UK's first Games Academy, introducing bursaries and internships for MSc students. During 2006-8 it has disbursed £250,000-£400,000 to local games companies for production and business development (such as rights acquisition) grants, and intends to target serious games in future. Both DETI and the Welsh Creative IP Fund have each supported a games company in the last five years, but there are very few other candidates in their regions, so future grants for the sector seem unlikely. Some of the other regions of the UK with games clusters (North West and North East England) have games business support agencies that run conferences, training and networking events, but don't currently offer funding.

Canada

Sector snapshot

The Canadian sector nearly doubled in size in the last two years alone, taking an increasing share of global revenues and housing some of the world's largest studios. While Canada was pushed out of third rank and into fifth place by the UK and Korea in 2008, its long term position in the top echelons of the world's great development territories seems assured. Canada's sector is dominated by US and French-owned companies, and its independent sector's potential to create globally successful new games is limited. The lack of indigenous publishers therefore leads to a very imbalanced games sector. The government support that has powered Canada, particularly Quebec, high in the global rankings shows no sign of slow-down; indeed it is increasing.¹⁸

Historical outlook

In the late 1990s, the Canadian games industry was scattered across a few provinces but had only a handful of studios able to create global hits. Canada's only sold a fifth of the games it sells today, and the industry employed fewer than 2,000 developers. In 1997, the Quebec government closed bilateral discussions with Ubisoft, who decided to open a new studio there. This deal was the blueprint for subsequent incentives to attract other global firms. In 1998 these initiatives were formalised into a package of tax breaks and incentives, as well as a marketing campaign to bring major studios into the region. As a by-product, US and French companies acquired Canadian firms, to benefit from this support.

In the past decade, Montreal's development staff numbers have grown from around 500 to over 5,300, with an estimated billion pounds in inward investment into Montreal (including developer salaries, overheads, infrastructure and other capital expenditure). The estimated cost to Quebec in terms of tax credits and grants is estimated to have been £332m. In the past four years, Quebec's growth rates have accelerated as other companies started investing heavily in a territory that has now achieved critical mass. Quebec is expected to attract an additional £2bn in inward investment over the next five years, at a cost of £660m in tax breaks and grants.

Scale of Canada games development sector

Development staff: 10,500. There are currently 6,700 staff in 25 publisher studios, 2,500 in 130 independent studios, 900 staff in 50 services companies and an estimated 500 freelancers working in active development roles. Canada's development sector industry has grown from a handful of major studios in the late 1990s located in Vancouver, Edmonton and Toronto, to three major clusters in Vancouver, Toronto and Quebec. The total number of staff working in games development has grown by 42% since 2006, a growth largely driven by Quebec. Of the total headcount, just over half of all development staff are in Quebec, where companies have grown by 52% from 3,500 staff in 2006 to 5,300 in 2008. The widespread availability of generous tax incentives for games development companies in Quebec has seen global games companies relocating there. With 1,800 staff each Ubisoft's Montreal studio and EA's Burnaby studio are the world largest and fastest growing studios. Ubisoft has announced that its Montreal studio will grow to 3,000 staff by 2012, and overall Canada's games development community is expected to grow by at least 25% by 2010.

Development expenditure: £401m in 2008. This expenditure includes salaries and overheads, but excludes major capital expenditure and the 30-37.5% tax credit on developer salaries available in Quebec.

Global ranking (sales by country of origin)

Canada currently ranks fourth amongst the largest games development territories in the world, by share of global software sales (after US, Japan and Korea). Canada rise from fifth to fourth place since 2004 has been driven by successful recruitment efforts aimed at attracting global companies with tax incentives. Canada's continuing growth in global sales is a consequence of the increasing number of studios producing world class games with the support of tax credits that seem to have acquired a permanent status in several Canadian provinces. However Canada is facing a gradual fall in sales rankings: projections suggest it will be beaten by the UK in 2008 (as a consequence of Grand Theft Auto IV's commercial success) and 2010, and after regaining fourth position in 2009, it will be beaten to sixth place by China's inexorable rise, back behind the UK in 2010.

Talent pool

Canada's games industry is centred in four major clusters: Alberta (Edmonton and Calgary), British Columbia (Vancouver), Ontario (Toronto) and the largest cluster, Quebec (Montreal). There are minor clusters in Manitoba (Winnipeg) and Prince Edward Island (Charlottetown).

Industry recruitment sources

Canada's talent pool includes a positive flow of developers from French studios (which were decimated by Quebecois tax breaks) as well as a revolving door of staff from global publisher studios, particularly Ubisoft which rotates its staff through the rapidly growing number of studios it has located in lower cost territories. Like most development territories outside of Asia, Canada loses experienced staff to the US.

Graduate recruitment sources

Canadian universities produced 25,914 graduates from science, maths and computer science, and 7,845 from visual and performing arts courses in 2005.[^19] There were 134,970 enrolments in science, maths and computer science courses in 2005/6, and 37,242 in visual and performing arts. Canada saw a 21% fall in applicants for maths and computer science degrees between 2001/2 and 2005/6, but a 21% rise in general science applicants. Visual and performing arts applicants rose by 33% over the same period.

In 2008, 1,100 graduates will be graduating from games-specific degree courses run at 48 universities, most in Ontario, British Columbia and Quebec. The most celebrated course is run in Quebec by a joint venture between Ubisoft, Cégep de Matane and the Université de Sherbrooke. The Ubisoft campus trains 100-120 students each year over a 45 week course in cutting edge technology and production techniques. The courses are closely tied with Ubisoft's Montreal studio, and Ubisoft hires the majority of the graduates, covering their tuition fees as long as they stay with the company for a set period. Over five years, Ubisoft and the Quebec Government have respectively invested £8.4m and £2.8m.

Skills availability

Competition for experienced staff in Canada is generally high, with the major studios run by publishers like EA, Ubisoft, Activision, Eidos and THQ generally taking the cream of the crop. Access to experienced staff is supported in Montreal by additional government incentives to foreign specialists including five-year income tax holidays and salary tax credits (tapering from 100% over 4 years). In Montreal, expatriates are estimated to number around 30% of the workforce. The availability of graduates is relatively high, but competition for them is fierce. Montreal's success in recruiting global publishers has put pressure on the skills supply, and led to rising salaries.

Labour costs

Despite such rising salaries, Canada's labour costs remain competitive, despite the Canadian dollar gaining against the US dollar in recent years. The average games development salary in Canada in 2008 is now £29,200. Despite Canada's cost of living remaining lower than its neighbour, Canadian developers' salaries are expected to rise above inflation on a yearly basis. Although entry level salaries remain very competitive, experienced staff costs are closing on the US average in a bid to prevent staff migrating south of the border for better paid jobs, and as a consequence of competition between major publisher-owned studios with high budgets.

Creativity

Track record in developing new games

Canada's studios do not specialise as intensely in particular genres as those of other territories. Major studios prefer to focus on increasing their internal capacity and accumulating experience across a wide range of genres. Canada has produced world class games in the role playing, action, driving, sports and strategy genres. Due to the its weaker independent sector, the dominance of the publisher studios and its relative youth as a global centre of games development, Canada's overall capacity for the creation of innovative genres and independently produced new games is relatively weak. Tax breaks in various Canadian provinces do not target original IP generation by Canadian-owned businesses; this has benefited studios owned by foreign publishers. Instead indigenous studios have tended to inherit or build on existing genres and franchises to create best sellers. The relative weakness of the independent sector does not bode well for the potential for new game creation in the future, although government-funded national games competitions have enjoyed some success.

Technical strengths

Canada has strong and broad technical skills, particularly in the well-funded and cutting edge publisher studios. Although the independent sector is slightly more reliant on third party technology, the larger studios dedicate significant resource to technology research and development, creating cutting edge engines and toolsets. Canada has a strong tools and services sector, particularly in Montreal, with many world-leading providers such as Autodesk (development tools), Qazal (multiplayer middleware), Bug Checker (testing) and Babel (localisation and testing). Canadian studios have been slightly slower than other territories in adopting outsourcing strategies, due to their lower cost base.

Technical weaknesses

Canadian-based studios focus predominantly on current generation console development, rather than on developing games for handheld and PC (including online gaming). The proportion of development staff working in services companies is relatively low, but the range and strength of cutting-edge technology companies based in Canada is good.

Platform / category skills status

Strength of Canadian-owned companies

Independents: Canada's independent sector has been raided by global publishers, and the stronger studios have been acquired by US companies. Formerly independent studios such as Bioware, Relic, New Horizons Interactive, Radical and Beenox have all accepted multinational bids. A few more mature companies cling to their independence, notably the Foundation 9 co-founder Backbone. The generous funding environment has also strongly benefitted many independents, with large studios growing rapidly from relatively humble beginnings. Many of the larger studios, such as A2M, Frima-Humagade, Propaganda, Next Level, Digital Extremes, HB Studios and Ludia, have survived difficult times. While some have built viable businesses, others are expected to depend on government support for their survival. Only a few of these independent studios are actively engaged in the creation of original new IP, while most of them work on licenses.

Publishers: Canada has almost no significant indigenous publishers. A number of medium-scale publishers were acquired by global companies in the early 2000s as a way of gaining a foothold in the Canadian market, but almost none remain. In the online space, Canada produced one of the world leaders in virtual worlds, New Horizons Interactive, (creators of children's phenomenon Club Penguin). Disney's £380m acquisition of NHI in 2007 represents one of the largest transactions in Canadian games history. An outcome of this structural imbalance is that Canada does not retain the value of the games copyright created by studios located in the country.

Flexibility and sustainability of local studios

Despite being skewed heavily towards working either for hire or in internal publisher studios on US and French-owned copyright, the Canadian sector seems to have a healthy future both in terms of its flexibility and future growth potential. Its studios have been able to rapidly become global leaders in a wide range of genres. Quebec's long-term investment in games shows no signs of decline, but it is debatable whether Quebec could retain such high levels of games studios without the tax credits. Certainly some Canadian-owned studios have survived longer and grown larger than they would have otherwise. The creation of original new games is a challenge in every western territory, and in this regard Canada's tax regime has not encouraged an increase in original IP creation, particularly in the independent sector. This may be due to a combination of factors including culture, the territory's relative immaturity as a development centre, the high proportion of the work force retained by publishers, the fact that the tax breaks do not target IP creation specifically as well as a global context that does not favour the development of original games on consoles and offline PCs.

Access to finance

Access to finance in Canada is good, largely due to local government assistance for games studio costs in key provinces, which has attracted a number of large studios run by global publishers. The wide array of public financial support in key provinces such as Quebec has suppressed the need to access non-public sources of finance, and the relative weakness of indigenous games companies has resulted in few mergers and acquisitions. In 2007, nearly £1.42bn was spent in acquisitions in the global games markets. 1.5% of the transactions originated in Canada, 7.7% of the target companies were Canadian studios, 47.4% of sums received were targeted at Canadian companies, but 0.1% of the sums spent were by Canadian companies. The wide array of federal and provincial financing schemes has allowed a burst of company start-ups in Canada, which have largely not needed to rely on private finance either in Canada or across the border. As a result, of the £640m raised for games companies in private financing rounds globally in 2007, only 0.3% was raised by Canadian games companies in one funding round.

Availability of government support

There is only limited federal funding available for games. Until 2008, Telefilm awarded comparatively generous (£200,000-£400,000) production grants and loans for games through the Canada New Media Fund. In 2007, Telefilm organised the £1m Great Canadian Games competition, and another government department ran the Trade Routes cultural export assistance programme. However, such support is now falling. A conservative government first elected in mid-2006 has been cutting government spending on a range of programmes. In 2008, it cut the Canada New Media Fund and the Trade Routes export assistance programme, amongst wider cuts to cultural support initiatives. No further rounds of the games competition are expected.

However, Canada's provincial governments are second to none in their support of the games industry, and they have publicly announced games as a high priority. Video games are perceived as a high growth target for inward investment and are being supported through generous tax credits for games production, as well as other assistance. Topping the list is Quebec, which has run a wide-ranging support programme specifically targeting games for a decade. Quebec is estimated to have spent over £500m in tax credits and grants between 2004 and 2008 on just three companies – Ubisoft, Electronic Arts and Eidos, releasing an estimated £1.5bn in new investment in Quebec.[^21] A provincial sales team travels the world to attract games studios to locate or relocate to Montreal. It offers specific Francophone benefits, including an enhancement of 7.5% in the tax credits for French-speaking companies. Quebec is not alone. Four other provinces offer tax credits specifically for games whilst another cuts bipartisan incentive deals for games companies. British Columbia's support is more limited, although local games firms have successfully lobbied for a provincial R&D tax credit definition covering games developers specifically.

France

Sector Snapshot

The French sector has been growing in recent years, largely due to the advent of a handful of online games companies, but remains fragile following the mass exodus of developers to Montreal after 2000. Since 2004, the sector has grown driven largely by a young but thriving online games sector. The development industry is heavily reliant upon Ubisoft and its contractor studios. A recent national tax break should have a positive influence, but the sector's high costs, its dependence on widely available hand-outs and its inability to create globally successful products are still significant challenges.

Historical Outlook

The story of France's games development industry is a tale of two cities. One, the independent sector story, is of subsidies distorting and exacerbating a weakness in the sector's average[^22] ability to create global product. The wide range of French grants and subsidies helped produce a generation of commercially unviable studios reliant on public funding, thus laying the sector open for its mass exodus to Quebec. The other story is of a French publishing sector that through access to massive private finance was able to build itself into a world class, globalised industry, mostly developing outside France.

The publishing story is of a few tiny, regional publishing companies being transformed by access to hundreds of millions of pounds of mostly (convertible) debt finance, which they used to acquire large global publishing companies, thus rising to global stature. When government support became available in other territories, particularly Canadian provinces, these companies were amongst the first to locate or acquire studios. There they largely remain today. Ubisoft is the only publisher retaining a major presence in the French market, but even it is expanding more rapidly overseas.

The dotcom collapse saw a global consolidation of games studios with high studio mortality in every major development territory. Those that survived continued in the business with improved efficiency, selling more work for hire services to publishers and not growing so much as to risk collapse in the downtime between projects. Quebec's sales drive was perfectly timed for a global studio sector struggling with rising development costs, consolidation and the need to invest strongly on the next generation of console hardware. France development sector lost more staff between 2000 and 2004 than any other territory – 60% of developers were either laid off by collapsing studios or went to work overseas. Many ended up in Montreal.

Today, the sector remains weak and completely imbalanced due to the independents' reliance on Ubisoft, for whom 60% of the sector works either directly or indirectly.[^23] The viability of original new IP is still weak, and the independent sector is still receiving grants and subsidies from regional agencies, albeit at a lower rate (due to the lower number of surviving companies). However, the consolidation has also improved their viability by removing weaker studios. This is particularly the case with the larger studios, who work for hire on global products.

Scale of the French games development sector

Development staff: 2,500. There are currently 800 development staff in 38 publishers and their studios, 1,200 development staff in 75 independent studios, 350 development staff in 28 services companies and an estimated 150 freelancers working in active development roles. Although the number of staff working in development has grown by 14% since 2006, most growth has been in support staff for online games companies like Ankama and Prizee, rather than developers in the traditional games sector. The total number of staff is still well off its peak of around 4,000 in the early 1990s. French development was massively impacted by targeted Canadian recruitment as well as the dotcom crash after 2000, when 45% of French studios and 60% of its staff were lost. The traditional games sector is still struggling, despite large injections of grants, subsidies and a new 20% tax credit for the development of cultural games introduced in 2007. The sector is imbalanced, with three large publishers' studios, ten large scale independent studios and most others employing fewer than 30 staff. As already noted, 60% of the work force is employed directly or indirectly by Ubisoft (the largest French publisher, Activision Blizzard, majority owned by France's Vivendi, does not employ large numbers of staff in France). Ubisoft grew its French headcount by 20% in 2006 alone, largely through recruiting newly available staff following the collapse of some independent studios.

Development expenditure: £111m in 2008. This expenditure includes salaries and overheads (overheads are higher in France than any other territory profiled herein), but not major capital expenditure, and does not include the 20% tax credit on some games' development costs.

Global ranking (sales by country of origin)

France currently ranks a distant seventh amongst the largest games development territories in the world, by share of global software sales (after US, Japan, Korea, UK, Canada and China). France is not projected to grow substantially, although the release of games partially funded by the tax credit may lend a slight increase. Even this seventh place is likely to be threatened by Germany's rapidly growing online games companies from 2011 onwards.

Talent pool

The French games industry is centred on four major clusters of Paris, Lyon, Nanterre and Montpellier. Paris is easily the largest cluster, with over 50% of French companies and 40% of the staff.

Industry recruitment sources

The French industry's growth is split between traditional studios and online studios. Traditional studios have been growing very slowly as a result of competition, the supply of graduates, and the slow return of staff from Canada. Online studios have been growing very fast, mostly through support staff recruited from outside normal industry sources whose development skills are negligible.

Graduate recruitment sources

There are around ten degree-level games courses producing around 100 graduates per annum, with a further 70 short courses from 30 educational institutions in France, producing an estimated 200 additional people per annum. There are many more 'multimedia' courses in France, but they focus largely on web development and offer little value to aspiring games developers. 167,000 students were enrolled in general science degrees in French universities.[^24]

Skills availability

Studios find it hard to recruit talented developers from a relatively small talent pool. A contributing factor is that job mobility in France is generally low, due to labour market rigidities linked to French workers' expectations of job longevity, described by one development worker as 'job for life'. There are also high regulatory barriers to exit for French companies which need to downsize. This often means that companies have to go into receivership to shed staff. These regulatory challenges have limited average studio sizes, contributing to low output on current generation consoles, which require large teams that are uncommon in French studios.

Labour costs

Although France's salaries compare relatively favourably with its competitors, with an average developer's salary of £29,000, the cost of doing business in France (statutory benefits and social security total at least 55% on top of basic salary and bonus) raise the total costs of labour above UK levels.

Creativity

Track record in developing new games

France's track record in generating new games is poor for a country with 25 years of development history, with only a handful of million sellers. Opportunities for success have been further reduced by the collapse of the independent sector more recently. This has substantially reduced France's games output, particularly original new games. However, these structural difficulties are not the whole story. Language and cultural barriers have made it difficult for an undoubtedly creative industry to connect with global markets. French studios have created adventure, racing, comic, narrative, action and, more recently, online titles, but there are only a few successful examples in each genre. Therefore, France's ability to create entirely new genres and new independent games is currently weak. Many of the remaining developers work for hire, many on Ubisoft titles, which reduces the amount of new IP that can be generated. The government's latest support for games development should make French studios more competitive. As the tax credit targets games owned by French companies, this should also stimulate original ideas. However, there is no indication that easing the financial burden of developing original games in France will solve the deeper issue of creating original new games with global appeal.

Technical strengths

The French sector's technical skills have been weakened by studio collapses and the major brain drain to Canada. Ubisoft's 450-strong internal studios have cutting edge technology, and the few larger independent studios do have well-developed technology and tools. However, skills and jobs have been transferred to the multimedia sector, and many former games studios are now web development or advertising agencies. In contrast with the studio sector, the services sector is relatively strong, with a range of high quality games tools and middleware providers, one of which (Kynogon, an artificial intelligence games middleware provider) was recently acquired by US tools giant Autodesk. A group of technology companies recently won national and local government funding to create a suite of games middleware and tools in Paris.

Technical weaknesses

The lack of large studios outside Ubisoft-owned or partnered studios (such as Ubisoft's four studios, Infogrames' Eden Games, Lexis Numerique, Darkworks and Quantic Dream) means that the majority of studios have less experience working on games for the latest generation of consoles or the associated, up-to-date technology. French studios unfamiliarity with the latest generation of games engines, and, to a lesser degree, tools and middleware is a long-term risk to their survival. Many French studios have moved downstream to specialise in handheld development. A handful of studios have specialised on online development and service management, but these have had little impact on the wider games studio sector, which remains generally weak in online games.

Platform / category skills status

Strength of French-owned companies

Independents: The state of the French independent studio sector is fragile.[^26] Although some larger developers are working for hire on licences for global publishers, French companies' capability to develop original new globally appealing games is weak. French studios are often started or maintained through government grants without ever reaching commercial viability. The sector hopes that the targeted tax credit will create a more fertile environment for games development. But real questions remain about whether products will be commercially viable, and whether games developers working for hire will benefit from it?

Publishers: France has three major publishers, Activision-Blizzard (52% owned by Vivendi), Ubisoft and Infogrames, all of them majority French-owned. Activision-Blizzard is the world's largest publisher by turnover, Ubisoft in the world's top ten, and Infogrames in the top twenty publishers in the world. Ubisoft has been expanding rapidly and is now the third largest publisher by headcount, with 20 studios on five continents and over 3,600 staff (of whom 450 are based in France) Infogrames plans to divest its powerful distribution network and focus exclusively on games distributed online. These companies' historic access to substantial finance[^27] is one of the critical factors that has allowed French publishers to rise to the top of the world stage, sometimes from unlikely beginnings. Vivendi was a utilities company before it diversified into media and games. The latter has only a small development presence in France, with most studios located in the USA and UK, although it has been divesting staff since its merger with Activision.

Flexibility and sustainability of local studios

The French sector is imbalanced and still relatively fragile after the major studio and developer exodus to Canada. It heavy reliance on Ubisoft raises questions of long-term sustainability. Future growth will require stronger ties with other publisher clients, increasing the number of globally successful products created in France, and learning from the online sector. Already benefitting from a wide range of national and local assistance schemes, French companies will be further sustained by the tax credit. The degree to which state agencies will define which games receive funding will impact on companies' viability. The cultural test is defined so loosely that a fair proportion of French-made games are expected to benefit, bringing the costs of development in France in line with other European territories. The result will be that the tax credit will effectively defray the large cost in statutory benefits and other overheads of doing business in France.[^28]

Access to finance

Access to finance in France is good, with government, industry and financial sources. While Ubisoft has until now favoured organic growth, Infogrames has been restructuring and Activision-Blizzard is very active in the acquisitions market. Its majority owner Vivendi has repeatedly accessed the financial markets for billion dollar sums, and its current financial health relies on a major restructuring of €35bn in debt after two years of €10bn+ losses. However, 2007 was a relatively quiet year for French companies. In 2007, nearly £1.42bn was spent in acquisitions in the global games markets. 7.7% of the transactions originated in France, 1.5% of the target companies were French studios, 0.1% of sums received were targeted at French companies, but 1.6% of the sums spent were by French companies. In 2007, no French games companies raised private financing.

Availability of government support

The French government vies with Canada in its provision of wide ranging support for games development companies, not least because the Quebecois have drained a large proportion of France's formerly strong games development community through a programme of marketing and incentives. The 2007 tax credit allows some games made by French-owned or based studios to receive a rebate on production costs (though its implementation had to wait until December 2008 because it required European Commission agreement in December 2007 that some games were worthy of the cultural exception to state aid.) In the interim, the Ministry of the Economy commissioned a report into how R&D tax credits would be implemented. Once the tax credit was cleared by Brussels, France implemented the new system and began setting up the bureaucracy to manage the tax credit via the French Film Centre.

For several years France has offered games companies a wide range of assistance from games-specific federal programmes, including prototype funds, R&D grants and IP funds. The generic tax credits and a tax credit to stimulate start-ups are useful vehicles for French games companies. In addition, the Sarkozy government that has been in power since 2007 has committed itself to lower the social security and mandatory benefit burden for French employers.

The departmental funding for games is largely limited to the two major clusters of Paris and Lyon. Departments such as Paris benefit from a range of national funds disbursed through regional funding bodies. The main programme to support games in Paris is the Cap Digital, which has targeted tens of millions of euros of support for games companies over the last decade. Lyon's more modest Imaginnove programme has not generated as much financial support.

Germany

Sector snapshot

The German sector has grown organically. It now focuses heavily on PC gaming, largely to the exclusion of other important games platforms. Its rank as eighth in the world's development territories over the next five years belies major growth in its online games companies, some of which are leaders in the European market. Despite the lack of global scale console studios, publisher-owned studios and publishers, the sector is healthy and growing, in part because German studios are more likely to retain their copyright than those in other territories.

Historical outlook

The German games industry has grown without any targeted government support. The result has been a small, frequently self-sustaining but ultimately insular industry that has largely serviced its domestic games market, which is dominated by hardcore PC gaming. In part due to the social stigma still attached to games in Germany as well as the relatively poor performance of the German console sector, German studio staff have focused on developing games for themselves, which could explain why the sector has not matured, and diversified into wider platforms and demographics. German talent has suffered a modest brain drain to stronger territories but the insularity of the sector has shielded it from the ravages of wider international competition.

Scale of German games development sector

Development staff: 2,940 in 161 development and publishing companies. There are currently 950 staff in 26 publisher studios, 1,550 in 68 independent studios, 440 staff in 28 services companies. There are 39 publishers in Germany without development resources. Although we estimate that Germany has seen over 20% of its independent studios close over the last five years, we believe that the total number of development staff nationwide has increased. This is due to two factors: firstly, Germany's independent studio sector has historically comprised small, PC-focused studios whose closures have not impacted the overall employment figures; secondly, during the same period but in the last two years in particular, Germany has seen substantial growth in the number and size of its online games (primarily massively multiplayer online games or MMOGs) studios. Indeed, Germany's development headcount can be considered one of the fastest growing in Europe (7% CAGR to 2012) almost entirely due to its MMOG companies. Germany's 17 MMOG companies (most of whom are categorised as publishers or publisher studios, as most self-publish) represent 11% of the total number of games companies in Germany but employ 20% of the country's development staff. We believe this latter number will grow to over 30% by 2012. Unlike France and the UK, Germany has very few publisher-owned studios. EA (Phenomic), Ubisoft (Blue Bytes) and Disney (Living Mobile) are all relatively small publisher studios (the result of acquisitions) and none is being grown aggressively.

Development expenditure

£107m in 2008. This expenditure includes salaries and overheads, but excludes major capital expenditure.

Global ranking (sales by country of origin)

In 2007, Germany was the eighth largest games development territory in the world, by share of global retail and network software sales. There is a substantial gap between eighth and seventh in the global rankings and despite the forecast growth in the value of German developed games, Germany is expected to remain in eighth position until 2010 at least.

Talent pool

Germany's games industry features five regional clusters although these only represent 53% of the development base by employee number (and 35% by company number) with the rest spread evenly across the rest of the country. The centres are largely based around major metropolitan districts: Hamburg (17% of employees), Berlin (14%), Frankfurt (11%), Karlsruhe (6%) and Munich (5%). These clusters tend to house the country's largest development studios including the single biggest (Crytek, with 200 employees) in Frankfurt.

Industry recruitment sources

With the exception of a small number of the largest development studios in the country, Germany's talent pool is largely comprised of local German-speaking staff. On the other hand, some larger studios such as Crytek operate in English, a decision which has allowed it to attract developers from 31 different countries reducing its proportion of national staff to less than half (Crytek also owns a studio in the Ukraine). Germany's high average salaries and additional statutory employment benefits reduce incentives to work overseas although the high standard of English spoken by Germans as well as the appeal of larger, more established and better known employers in other European territories (as well as North America) has led some developers to migrate.

Graduate recruitment sources

Germany has few formal academic courses based around games development. A number of courses have been initiated and subsequently shut down and although aspects of games development may feature in the curriculums of some information technology courses, there are no dedicated games development degree courses offered in any of the state-run universities. The reason for this is attributed by German games developers and academics to a combination of the poor social image of games and their non-recognition as a sufficiently serious or sizeable industry. Aspiring developers have to turn to private institutions such as Berlin's Games Academy and the German branches of QANTM in Munich and Berlin. These private schools barely produce 300 graduates each year.

Germany is, however, an effective producer of graduates from more general disciplines which are relevant to games development. Its respected UAS7 applied science universities train some 75,000 students at any particular time and a small number, notably in Hamburg, include optional games development streams, usually in partnership with local games companies. Similar but smaller initiatives are run at universities in Berlin, Cologne and Braunschweig. The UAS7 universities contribute to Germany's 40,000 pure science graduates each year.

Graduates comprise a large proportion of German development staff, in particular those with Computer Science and Maths degrees. Thus, the vast majority of German games development staff receive their games development training on the job. Some receive more formalised skills training (including in programming) from larger companies outside of the games industry (betriebliche Ausbildung) which helps their integration into development companies.

Skills availability

In general, there are few signs of skills shortages in Germany. Given the disproportionate focus of Germany's indigenous development sector on PC games (around 55% of its companies and staff versus around 35% for multi-platform development), one might argue that there is a shortage of console games development skills. However, since few of the multi-platform developers create games for high-end current generation consoles (which arguably require the highest quality development skills), we do not believe that such a shortfall should be problematic. In addition, the casual MMOG focus of many of the fastest growing studios in Germany requires a diverse range of skills which can be readily sourced and adapted from adjacent industries such as web and graphic design.

Labour costs

German labour costs are above average within Europe due to the relatively high cost of living and the greater statutory benefits. The average games development salary is £26,400, a figure which reflects the increasing reliance on less specialised and lower cost developers for PC gaming and the booming casual MMOG sector. However, the relatively high statutory costs of employment in the country raise the total costs per games developer up to a level parallel to most other western games development territories. There does not appear to be the sort of competitive wage inflation found in other Western games development territories.

Creativity

Track record generating new games

Germany has a very limited track record generating globally successful new games. This is in part due to the fragmentation of the PC games market on which most of its development studios are focused. The few German console developers are mainly focused on porting and lower-end platforms (such as handhelds and last generation consoles). Arguably the most globally successful global game to originate from Germany has been the first person shooter Far Cry. The original PC version was developed by Crytek whilst console ports were handled by Ubisoft. The game achieved over three million unit sales and was due to spawn a sequel in late 2008. However, the copyright to the brand name was retained by Ubisoft rather than Crytek in the original publishing agreement and the game has been developed by Ubisoft (in Montreal) instead. Crytek's follow-up title, Crysis, reputedly the most expensive game ever made in Germany, has managed over a million unit sales despite being PC only, and requiring high specification hardware. Apart from Crytek games, most of Germany's other notable IP success stories have been in the Real Time Strategy genre; Sunflowers' Anno franchise and Blue Byte's Settlers series are two PC exclusive titles that have sold millions of units over multiple iterations. Germany's booming MMOG development sector[^29] is also beginning to spawn titles with wide international appeal such as Travian, Gameforge's Gladiatus and Ogame, and Bigpoint's Seafight.

Technical strengths

Germany's technical strength lies in PC games development and increasingly online games development. There is also a console development sector specialised in porting. Germany is well represented in the online arena, with dozens of mobile, casual online and MMOG developers. Although Germany's development services sector comprises a large proportion of the overall development headcount, it is less mature, featuring a small number of international outsourcing companies and a range of middleware companies.

Technical weaknesses

Germany lacks high-end console development expertise with only a dozen studios creating Xbox 360 or PS3 titles. Of the three studios owned by major international publishers, only one, EA Phenomic, is creating games for current generation consoles. The absence of a globally competitive console development sector has undoubtedly reduced the ability for Germany to rise up the global rankings ladder.

Platform / category skills status

Strength of German companies

Independents: Germany's independent developer sector has seen a significant number of small companies failing over the last five years. There are 68 independent studios at present with the largest 10 companies employing some 45% of total development staff. There have been few mergers and acquisitions involving independent German developers and almost no private equity funding.

Publishers: The European headquarters for Nintendo and Konami are located in Germany, although neither company operates development studios in the country. Most of the largest international console games publishers have sales and marketing offices in Germany but only three operate studios there. Germany has no indigenous publishers of global scale although it does have a number of smaller publisher/distributors with growing international aspirations such as Koch Media. The most significant trend in recent years has been the remarkable rise of Germany's casual MMOG companies. Classified for the purpose of this report as publishers (as they are self-funding and self-publishing), these companies have not only fuelled the growth of the indigenous German development market, but have also begun to change the shape of the European MMOG market. Their growth has been a mixture of organic (such as Travian) expansion, private equity backing (such as Gameforge and Bigpoint) or and through the support of substantial media company parents (Hubert Burda Media's Alaplaya and Axel Springer's Gamigo).

Flexibility and sustainability of local studios

The relatively high proportion of self-funding and self-publishing indigenous games developers and publishers in Germany has made the country considerably less reliant on overseas publisher finance than the UK or France. The most important reason is the financial success of the online games companies, most of which have been able to fund ongoing development from existing cash flow or venture/parent company capital. Although there are still a large number of independent studios that operate a work for hire model, it is expected that any independent studio failures will be compensated for by the continued rapid growth of the indigenous MMOG companies. These companies' skills requirements do not appear to have been impacted by the low numbers of game-specific graduates and, given the population size and generally high level of general education in Germany, we believe that the number of games development staff in Germany will grow steadily over the next three years.

Access to finance

Of the £1.4bn spent on 65 games company acquisitions worldwide in 2007, less than 1% was attributable to German companies either as acquirers (twice) or as targets (on three occasions). Of the £640m raised privately by 61 games companies worldwide in 2007 only 3% by volume and less than 1% by value was attributable to German companies. There are currently three listed games companies in Germany: publishers CDV and 10tacle, and games peripherals company Splitfish. 10tacle has recently gone into liquidation.[^31]

Germany is also home to a small number of dedicated games production funds. These funds offer generous tax breaks for high net worth German citizens and although original conceived as games development funds they now encompass intellectual property rights acquisition, licensing and international marketing as well as development. German investment firm BVT in conjunction with German alternative games funding specialists Attaction are currently operating their fourth games fund (the £35.3 million BVT Games Fund IV Dynamic). The funds have historically been used by European publishers (rather than developers) such as French Infogrames and Austrian JoWood to reduce their production risk and manage their cash flow (by delaying the outlay for games production until the games have been completed).

Availability of government support

Central government support specifically targeted at games development in Germany is limited to sponsorship of trade missions and conference representation (such as the Made in Germany stall at GDC 2008 in San Francisco sponsored by the Federal Ministry of Economics and Technology, BMWi). Germany also provides a standard slate of generic funds, subsidies and tax breaks mostly funded by the EU (and governed by its rules). Some of the most generous schemes are reserved for Eastern Germany, where investment allowances for new companies can return up to 50% of their start-up and R&D investment. German developers contacted for this research pointed out that many of the generic support schemes are too convoluted to be practical, with the application costs surpassing the expected returns. Germany, one of the biggest investors in R&D in the world, has no R&D tax credit system that can be exploited by games companies.

Games have historically had a poor image within German government, whose interaction with the indigenous industry has been limited when compared to other countries. Strict guidelines regarding the portrayal of violence in games (as well as Nazi imagery) have been imposed. This has made it necessary for many publishers to release versions of the game specially modified for the German markets, and some games are not released in Germany. However, this is beginning to change. Following lobbying by G.A.M.E. (Germany's games development trade body) the German Cultural Council finally accepted that games were a valid media industry (rather than a technology industry, as it had been classified previously). In August 2008, they were formally included as a state-recognised part of Germany's cultural heritage and future. According to G.A.M.E., this is a crucial first step towards receiving a greater level of central government support and possible tax breaks.

The only local government initiative for games companies is Gamecity Hamburg, designed to support the city's games industry. Hamburg represents the single largest cluster of games publishers and developers in Germany, by number of both companies and development employees. Gamecity Hamburg provides regular lectures, networking and developer/publisher “speed dating” events. In addition to promoting its local games companies nationally and internationally, it also operates a prototype funding scheme allowing local developers to access up to €100,000 in interest-free loans for early-stage development work. Gamecity Hamburg has also teamed up with the local Hamburg University of Applied Sciences to launch GamecityLab, a games development academic programme. Whilst not a degree course in itself, the programme aims to improve the games development skills of its applied science graduates.

Competitive indicators table

In 2008, the leading development territories have the following competitive features, each scored in comparison to its peers. These scores are a subjective assessment by this report's authors based on current data on each territory's strengths and weaknesses.

[^32] Key for scoring:

Chapter 2: Update on policy measures

Target territories