gaminginc TORONTO GAMING INCUBATOR FEASIBILITY STUDY

Transcription

1 gaminginc TORONTO GAMING INCUBATOR FEASIBILITY STUDY 1

2 PROJECT LEADER Luigi Ferrara, Director, Centre for Arts & Design, GBC REPORT AUTHOR Paul de Freitas GRAPHIC DESIGN Tom Short Melissa Medwyk CHARTS AND GRAPHICS Paul de Freitas RESEARCH SUPPORT Jean-Paul Amore Margaret Stagg George Brown College, 2010 All rights reserved No part of this work may be reproduced or transmitted in any form or by any means electronic or mechanical, including photocopying and recording, or by any information storage and retrieval system without written permission from the publisher except for a brief quotation (not to exceed 200 words) in a review or professional work. CONTACT For more information please contact: George Brown School of Design 230 Richmond Street East Toronto, Ontario, M5A 1P4 Tel: ext

3 ACKNOWLEDGMENTS Particular thanks to Luigi Ferrara for his overall guidance of this report and for his vision and commitment to the concept of a Toronto gaming incubator; Cynthia Lynch (OMDC), Scott McKinnon (OMDC) and Judy Dunstan (City of Toronto Economic Development & Culture) for overseeing the development of the report; and, Michael Williams (City of Toronto) for spurring greater interest in incubation in the city of Toronto. The author would also like to acknowledge all those who participated directly in this study for their time and insight and to the following in particular: Centre for Social Innovation, Devencore Realties Corp. Canada Ltd., Interactive Ontario, Toronto Business Development Corporation, Niagara Interactive Media Generator (ngen) and MaRS. Sincere thanks to all those who participated in interviews and surveys and deep gratitude to: Jean- Paul Amore (Coordinator, Game Design and Development Programmes, GBC) for sharing his extensive knowledge of the gaming industry and general input; Margaret Stagg for providing her design survey data; Tom Short and Melissa Medwyk for the layout of this report; Jane Weber for her keen editing eye and Priscilla Li for all her project support. Paul de Freitas paul@defreitas.ca Support for this study was provided by George Brown College, the Ontario Media Development Corporation and the City of Toronto. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author and do not necessarily reflect the views of George Brown College, the Ontario Media Development Corporation or the City of Toronto. 3

4 CONTENTS 01 SUMMARY 6 02 INTRODUCTION OVERVIEW 14 Industry Overview - National 15 Provincial/Regional Industry Overview 16 Gaming Clusters 19 Toronto Cluster Analysis 29 How the Toronto Region Rates 31 Key Recommendations for the Toronto Region INCUBATOR ENVIRONMENTAL SCAN 42 National Scan 43 Toronto Region Incubators 47 Essentials for Incubator Success FEASIBILITY OF TORONTO GAMING INCUBATOR 60 Demand Analysis 62 Stakeholder & Partner Analysis 95 Real Estate Analysis 105 Financial Feasibility 116 Assessment 120 4

5 06 GAMING INC Conclusion 146 Sample Model 148 Key Recommendations 150 Next Steps 152 Concluding Note References Appendix 156 Incubator Models 157 Incubator Selection Criteria 158 Incubator Operations Criteria 164 5

6 6 SUMMARY

7 Toronto is a region with a vibrant and emerging digital gaming sector. The region is blessed with first-rate talent and is home to the largest creative cluster in Canada which is an invaluable source of ideas, content and innovation. Although the Toronto gaming sector is growing in size and complexity the sector s growth rate is projected at a very robust 31% over the next three years (ESAC 2009) it has many barriers to surmount in becoming the global gaming cluster that it has every right to aspire to. In various reports on improving the competitiveness of the Toronto digital industry, better linkages and cluster development are among two of the strategic recommendations that repeatedly emerge. The success of the Toronto gaming industry relies on the joint efforts of industry, government and academia and while a gaming generator or incubator would not have the scale to resolve structural issues on its own, it would have the capacity to implement key parts of best practices and recommendations as its contribution to the development of a successful digital gaming cluster. One of the key challenges in Ontario s gaming sector is the over dominance of small companies which leads to the sector s scale imbalance 1. Start-ups are expected to be a continuing major source of the sector s growth; however, smaller and emerging companies tend to have less stability and capability. Their smaller scale means they are less likely to invest in newer or expensive technologies, have limited resources to put into research & development and have difficulty competing with larger firms for talent and funding. A gaming incubator can support the gaming sector and, primarily, emerging and smaller-sized gaming companies with the type of infrastructure, services and technologies that could most advantageously serve the needs of those companies. Small gaming companies express a strong demand 2 for business planning, financial and professional services. Respondents revealed an extremely strong demand for pre-qualified and affordable human resources. The incubator, with its academic partner(s), would offer its clients access to a ready-to-go labour pool of short-term student resources to help companies overcome their current struggles in finding and affording specific human resources. The strongest identified demand was for programmers and designers. In regards to technology, respondents identified the value of access to servers and software especially advanced development kits which can be expensive or hard to attain for smaller firms. The study further confirms the relationship between small company size and reduced technology investment. Respondents showed limited interest in advanced technologies (e.g., motion capture) revealing that, for reasons of practicality, smaller gaming companies focused almost exclusively on the technologies that served their 1. The sector is overly dominated by small companies (90% of Ontario gaming companies have less than 30 employees) followed by a smattering of medium-size companies and only one company with more than 100 employees though this is expected to change in the short-term with the arrival of Ubisoft. 2. Demand based on interviews and surveys with small and early-stage gaming companies. 7

8 immediate needs. They have limited time, financial or technical resources to investigate or invest in other tools and technologies. One of the identified causes behind the recognition that small market size and the small scale of Ontario firms can make it difficult for them to grow into internationally competitive players (OMDC 2008) is the challenge smaller firms have investing in advanced technology 3. An effective incubator must support more than just the basic tools that companies need for their day-today operations. In order to support innovation and growth, it needs to have the ability to also expose its clients to the diverse and advanced tools and technologies that those firms cannot access on their own. A gaming incubator that can support emerging companies stands on its own merits but, secondarily, it can also have a role in helping to close the gaps in the Toronto gaming sector. It can serve as a catalyst or hub in the development of a larger cluster and the creation of a stronger gaming ecosystem. A lack of a fully realized gaming ecosystem is one of the primary reasons that Toronto has not yet become a leading player in the gaming industry. While the underlying ingredients are abundantly there for Toronto to lead in this sector they have not yet been arranged in such a way that the sum of the ingredients are greater than the parts. 3. Typical Ontario companies lack the scale to enter the console market as it requires substantial investment and resources and are, instead, focused on online and mobile platforms which are rife with competition and come with highly challenging monetization issues. 8

9 A sustainable and effective Toronto gaming ecosystem should contain the elements listed below. Though a gaming incubator cannot solve all the problems facing the gaming sector, it can make major and minor contributions to the gaming ecosystem specifically in the items highlighted (n). n n n n n n n n n n n n n n A technology playground ; exposing gaming companies to advanced technologies and tools Strong support for research and development Vibrant companies of various sizes Better support for emerging and small gaming companies which are currently underserved in business services and financial assistance helping SMEs (Small and Medium Enterprises) become MNEs (Multi-National Enterprises) Large companies with global scale and leadership; larger companies attract resources and serve as management schools (they produce qualified managers and producers with global perspective and understanding of industry best practices these skills are strongly lacking in Toronto and are difficult for academic institutions to produce on their own) Greater participation from and with console manufacturers (particularly since the three largest have Canadian headquarters in the Toronto region); access to hardware Improved access to technology A more concentrated cluster; more hubs and catalysts around which to grow and focus the cluster Academic institutions committing to greater integration with the cluster industry; more collaboration between academic institutions and elimination of silos Academically-driven incubators; academically and industry-led research centres Strong brand with global visibility Room to grow and coalesce; both buildings and districts Direct links between the art and design community and the gaming sector Access to the diverse content sources in the region (all languages) Coordinated government policy in support of the sector; regional strategy A focus on innovation and potentially disruptive future technologies Collaboration between all sector players (industry, academia, government, customers ) Access to multiple sources of capital, both private and public Retention of top talent Greater involvement of women in the gaming sector Firm ties to other incubators in the region Integration with compatible key 4 Toronto clusters such as design, film & television and ICT. Integration with other City of Toronto-identified key clusters such as aerospace; biomedical and biotechnology; business services; fashion/apparel; financial services; food & beverage; and tourism in pursuit of new products and innovations 4. Identified as key clusters by the City of Toronto. 9

10 The gaming incubator, as proposed, is a hybrid facility that can provide space, services and technologies for the support and growth of emerging and small digital and gaming companies, providing its clients with: Stable and affordable rents Improved physical space and amenities Access to shared services (business, financial, marketing) Access to technical resources (personnel, equipment and software) Business advisory support (e.g., mentoring and coaching) Incubation and research & development support A hybrid facility delivers support and services for smaller companies while also providing market-rate space for compatible digital and gaming companies (small to mid-sized or larger anchor tenants). The key challenge for any incubator is how to pay for the development and operation of the facility. Canadian incubators only recover one quarter of their annual costs from internal operations and are dependent on government and outside sources for the rest of their operational funding (Statistics Canada 2006). This report strives to maximize the facility s long-term sustainability and proposes the hybrid model with key service and technology partnerships as a way to increase internal revenue while decreasing delivery costs. Fundamental to achieving long-term sustainability is identifying a financially appropriate building or property that is also large enough to accommodate the hybrid model (20-50,000 sq. ft.). Toronto s real estate market is uniformly priced to a remarkable extent and this report highlights increasingly critical concerns around real estate and future sustainability of space for growth of Toronto s creative sector. A gaming incubator should ideally be located within a purchased building or under a long-term lease (15+ years) to ensure sustainability. Critical to the proposed model is an academic partner(s) with a shared vision for the Toronto gaming sector. George Brown College (GBC) has agreed to be a founding stakeholder in the development and operation of a Toronto digital gaming incubator and can provide gaming sector expertise, pre-qualified student resources, access to shared technologies, support for research and development along with stability as a key tenant. The relationship between the facility and GBC would be arms-length. 10

11 A Toronto gaming incubator is necessary, feasible and financeable 5. There is currently no facility that can support the wide spectrum of digital and gaming companies in the research and early stage of development with the business, technical and resource supports required to create more mature and stable enterprises which can, in turn, add to the growth of the overall industry. Key next steps in the evolution of a gaming incubator would involve the creation of a comprehensive business plan primarily focused on detailing the financial sustainability plan and identifying appropriate facility locations. 5. Private investors indicate that the proposed hybrid facility with GBC as a stakeholder or with anchor tenant(s) (e.g., industry associations, other incubators, government institutions, large digital companies or service providers ) would be attractive and financeable. 11

12 12 INTRODUCTION

13 As part of an ongoing commitment to excellence in teaching and applied learning, George Brown College has experimented with Living Labs over the forty years of its existence. These labs have been used as both practical training grounds for students and have also been run as real businesses contributing to the social, cultural and economic life of Toronto. George Brown College s School of Design has, over the last seven years, experimented with such Living Labs in its StudioLab (Graphic Design program) and at the Institute Without Boundaries in its think tank activities and charrettes. These labs include participation from industry partners who interact with students and work on real world challenges. The net result has been a fertile exchange between the design industry and students to benefit clients. The interaction between students and industry has helped students understand professional skills and helped industry become current with emerging trends in technology and society. As well, four new graduate certificate programs and a new advanced diploma program have curricula that encourage students to develop major projects that respond to societal needs and generate social, economic and cultural innovation. The new digital media programs such as Game Design, Advanced Digital Design, Game Development and the very unique Design Management program are graduating students who have developed comprehensive projects with an intellectual property component. The students who have created these projects have increasingly begun to start their own businesses or have taken their ideas to industry to help them secure employment. Overall, there is a sense that the employment market that students are entering is made up increasingly of contract positions, freelancing or virtual clustering for special projects as has been the case traditionally in the film industry. Building on this vision of stronger relationships between industry and education, the School of Design has investigated models for unique partnerships forming in places like Finland, Austin and Singapore. Schools are increasingly taking leadership roles and are getting involved in the incubation of new companies and working on special projects with economic and social development repercussions. At the School of Design there has been a nascent vision of the school being situated within a complex or cluster to serve and interact with industry and the public. The School is currently colocated in two separate buildings that share space with two leading GTA companies Starz Animation and Autodesk and sits within Toronto s overall media design cluster. This allows the School of Design to increase connections, to network, initiate field placements and to work on special joint projects. It allows staff from those companies to become involved with the school as advisors, guest critics and occasional teachers. To create a dynamic hub for an emerging industry with the school as an integral player we developed a vision for a new kind of hybrid incubator that combines human resources, business affairs support, technology resources and innovation; plus physical space that can mix large, mid-sized and small companies together to help generate an amplifier for the success of our digital media companies. We decided to focus especially on gaming companies as we are leaders in gaming education and to build links to the types of related companies that could assist in developing a healthy ecosystem for the region. We sought out the support of the Ontario Media Development Corporation and the City of Toronto for a more detailed research study of the proposed vision to understand its feasibility, to test it financially and to verify and plan the resources required to facilitate such a project. To be successful such a project will need the support and assistance of many parties and this study goes a long way towards identifying who should be involved and what role the College, industry and government could take in such an endeavour. Luigi Ferrara, Director, Centre for Arts & Design, George Brown College 13

14 14 OVERVIEW

15 INDUSTRY OVERVIEW NATIONAL Digital media is seen as the next technology boom, with a potential global market of US$2.2 trillion by (2009. Fields of Dreams. Financial Post Magazine, December) Canada is home to many well known companies and global gaming studios. The Canadian gaming industry is an important segment of the national knowledge or creative economy. Though a nascent industry, it is already a significant contributor to the Canadian economy and has tremendous growth potential. Today, The Entertainment Software Association of Canada s report (ESAC 2007) claims that Canada is one of the top three countries globally in terms of video game development with most jobs in the developer space. It is expected that Canada will continue to be one of the world s leaders in both gaming production and consumption as the industry grows. The Canadian gaming industry is currently dominated by Quebec and B.C. which contain large and highly established gaming hubs. Even though Canada has significant global gaming hubs the industry s speed of growth and constant evolution make it challenging to meet the on-going demands of the industry in terms of support and responsiveness. As a prime example, aggregation of data on the size of the Canadian gaming industry was first measured only as recently as 2007 (ESAC 2007). ILLUSTRATIVE DIGITAL GAMING LANDSCAPE # OF DEVELOPMENT JOBS Eastern Europe India China Korea Australia Scandinavia Mass. Texas Florida France B.C. UK Japan California Washington Quebec New Entrants Contenders Hubs INDUSTRY MATURITY Source: SECOR 2008 QUICK FACTS Total employment: 14,043 Estimated revenue: $1.7 B Past annual growth: 23% Expected annual growth: 29% Source: ESAC

16 PROVINCIAL/REGIONAL INDUSTRY OVERVIEW The Canadian gaming industry is established across nine provinces but is not equally distributed. The industry is highly concentrated in two provinces British Columbia and Quebec together made up more than 80% of the industry in 2007 (by employment). BC, which is home to most of the country s largest game developer studios, accounts for over half of the industry s total employment (ESAC 2007). Ontario: The Scale Problem Interestingly, Ontario accounts for over 40% of all the gaming firms in Canada but represents only 16% of total industry employment (ESAC 2007). This indicates that Ontario has substantially more smaller-sized firms then the national norm. The issue of scale is relevant in terms of both firm and market size. Smaller firms have less stability and less capability to respond to market changes. In turn, the small Canadian market cannot, on its own, sustain growth over time the Canadian industry must be able to compete globally in order to grow and achieve larger economies of scale 6. The scale problem is compounded for creative media industries because it means they can t pay as much for their key resource: talent (OMDC 2008) which is also the case for the gaming industry. Though late entrants to the global market, British Columbia and Quebec have developed the appropriate scale and/or competitive advantage to position them on the international scene. (SECOR 2008, 4) Ontario has not yet developed the same scale as BC or Quebec. Ontario s digital game industry is subscale though highly diversified and is predominantly composed of small companies...over 90 per cent of Ontario s digital game companies have fewer than 30 employees...and only 1 company is larger than 100 employees. (SECOR 2008, 21) SECOR (2008, 21) further notes that with the emergence of new technologies, Ontario has seen an increase in the numbers of development studios with the vast majority being small studios focused on lighter platforms, with particular emphasis on mobile and online gaming. In terms of console development, no large-sized console developer currently operates in the province; Ontario console developers are mid-sized only. This may change in the near future with Ubisoft s recent establishment of a development studio in Toronto. Console games make up half of the global digital gaming market a competitive market that smaller companies do not have the scale to enter as console game development requires substantial investment and resources. Many Ontario companies focus, instead, on lighter gaming platforms such as PC, online 6. Smaller firms and firms with smaller domestic markets have higher unit costs than firms which can spread their expenditures (including distribution costs and investments in new technologies) over larger production runs and across larger consumer markets. Small market size and the small scale of our firms can make it difficult for them to grow into internationally competitive players. 2008, Ontario Media Development Corporation: Towards a Strategic Plan Helping Ontario Firms Compete in the Global Creative Media Market 16

17 and mobile which have less onerous investment and resource requirements. These companies may, over time, develop capacity and climb up the gaming value chain towards more complex platforms. The ability of a developer to successfully compete in a particular platform market over the long run is a function of its organizational size and capacity. Some developers in Ontario have demonstrated a tendency to pursue advanced projects before obtaining the required scale and capability. While many developers are able to succeed in the short term with this strategy, the pressure this model places on infrastructure, human resources and capital makes it difficult to achieve long-term sustainable growth. (SECOR 2008, 22) CANADIAN DISTRIBUTION OF THE ENTERTAINMENT SOFTWARE INDUSTRY Employment % of total Firms % of total % OF NATIONAL TOTAL BC QC ON AB NS Source: ESAC

18 Employment in Primary Clusters (% OF TOTAL) GTA 9% G GTA (9%) VAN M Montreal (32%) MTL V O Vancouver (42%) Other (17%) H OTHER Source: ESAC

19 GAMING CLUSTERS Geographically, much of Canada s entertainment software industry is remarkably concentrated in three urban regions: Vancouver, Montreal and the Greater Toronto Area. (ESAC 2009, 7) The Canadian gaming industry is highly concentrated in three urban clusters. Vancouver, Montreal and the GTA make up 83% of the entire Canadian industry. Seven secondary urban clusters make up the remaining 17% of the industry. 7 The categorization of the GTA as a primary cluster is immature. The reality is that the Canadian industry is really clustered in two cities Vancouver and Montreal, together, make up three-quarters of the entire industry and deserve to be considered primary clusters. The GTA, at 9%, should really be classified, at this time, as a key secondary cluster. The other seven regions would more realistically fall somewhere between minor secondary and major tertiary clusters. Today, only Vancouver and Montreal have the scale to compete globally and attract the required resources to continue to grow and compete. Both these regions also have highly concentrated clusters. The majority of British Columbia s gaming companies, for example, are located within a few blocks from one another in downtown Vancouver. This degree of co-location suggests that the industry exhibits distinctive clustering tendencies similar to other innovation intensive science and technology based clusters from which the concept of an industry cluster was developed. (ESAC 2009, 7) Along with being highly concentrated, Vancouver and Montreal are also greatly integrated into nearby post-secondary institutions, and both benefit from anchor companies that are global leaders in gaming Vancouver with EA Canada and Montreal with Ubisoft and, recently, EA Mobile. 7. Quebec City, Edmonton, Calgary, Charlottetown, Winnipeg, Ottawa and London. (ESAC 2009, 8) 19

20 VANCOUVER CLUSTER ANALYSIS Vancouver companies are among the most innovative, relying more on new products for revenue generation. An average of 72% of revenue is generated from products and services introduced in the last three years, the highest level of the three primary clusters. Its most critical resource, the talent pool, appears to be under strain given current growth rates. (ESAC 2009, 10) Vancouver benefits from its location and is well connected and integrated to the film, animation and game development industry that stretches down into the US west coast. Vancouver sees itself as an integral part of this creative region and as an important film and game development centre. In its own right, Vancouver is well-positioned to benefit from opportunities in related sectors. Until recently, however, Vancouver s gaming sector was receiving minor provincial government tax credits and financial support in comparison with other Canadian regions. 8 As well, as a smaller centre, Vancouver is highly dependent on talent from outside the region to sustain its cluster. Increasing access to a talented workforce is the Vancouver cluster s greatest challenge. In 2007, Electronic Arts announced a $1 million grant to the Masters of Digital Media program (MDM) in collaboration with four of BC s leading educational institutions: University of British Columbia, Simon Fraser University, British Columbia Institute of Technology and the Emily Carr Institute of Art and Design. 8. In February 2010, the BC government introduced the BC Interactive Digital Media tax credit of 17.5% for the interactive gaming sector. 20

21 EMPLOYMENT LEVELS Employment 0 Levels No data No data FIRM SIZE Firm Size Very Small Very Small Small Small Medium Medium Large Large Very Large Very Large NOTABLE VANCOUVER COMPANIES: Notable Vancouver companies: EA EA Canada Propaganda Games Radical Entertainment Radical Entertainment Deep Fried Entertainment Next Deep Level Fried Games Entertainment Next Level Games Source: ESAC 2009 Source: ESAC

22 MONTREAL CLUSTER ANALYSIS In Québec there is a talented and creative workforce. Leading developers, world-class software publishers and innovative studios all play a central role by creating a dynamic gaming environment. Also, the industry can count upon the presence of 32 professional training colleges, 34 private technical colleges and seven universities offering multimedia programs that promote creativity that send more than 4,000 computer science and multimedia-related programs graduates on the labour market every year. Luc Carignan, Director of Investissement Québec s London office While Vancouver is the largest Canadian gaming cluster by employment, Montreal, in many ways, is the model for the rest of Canada. It has seen its cluster grow from almost nothing to an internationally recognized gaming hub in a space of just over ten years. The seed for the Montreal gaming cluster was the pool of talent that evolved from Montreal s success in 3D software and animation that goes back to the establishment of Softimage in the late 1980 s. The strength of the region has helped Montreal attract two of the largest global gaming companies to the area Ubisoft and EA. In fact, Montreal has the largest average firm size, a reflection of the fact that it is home to the majority of large (12) and very large (2) firms in Canada (ESAC 2009, 12) and is considered to have the most stable cluster due to size and number of companies it contains. Montreal has benefitted from the concerted effort of the provincial and local governments to establish and maintain a globally competitive gaming industry. Other Canadian provincial governments have mimicked the Quebec governments generous labour tax credit that is credited with having attracted Ubisoft and helped support the creation of the Montreal cluster. Though Montreal has access to more local talent than Vancouver, it is nonetheless, a victim of its own success the ongoing growth of the industry has lead to a shortage of programmers and artists. The challenge is recognized by all the cluster partners industry, government and academia and is being met head on with new investments. The Quebec government is now focussing its support for the industry by committing to new training initiatives (ESAC 2009, 12). Three key industry players, plus universities, colleges and specialized schools are investing their money in the creation and expansion of training programs. In 2005, Ubisoft created the Ubisoft Campus in partnership with the Cégep de Matane and the Université de Sherbrooke. EA and Artificial Mind and Movement (A2M) later followed with their own announcements of multi-million dollar investments in training. 9. Assistance can reach up to 37.5 per cent of labour costs. 22

23 EMPLOYMENT LEVELS Employment 0 Levels No data No data FIRM SIZE Firm Size Very Small Very Small Small Small Medium Medium Large Large Very Very Large Large NOTABLE Notable MONTREAL Montreal COMPANIES: companies: A2M A2M Ubisoft Ubisoft EA Mobile EA Eidos Mobile Interactive Eidos Gameloft Interactive Gameloft Source: ESAC 2009 Source: ESAC

24 TORONTO CLUSTER Remarkably, several of the most prominent firms in Ontario are located outside the GTA, including Silicon Knights (St. Catharines) and Digital Extremes (London). (ESAC 2009, 13) The Toronto cluster differs from the Vancouver and Montreal clusters in two very distinct ways. There are more gaming companies in Toronto despite the fact that it has a third of the employment levels of the other two clusters. This indicates that Toronto gaming companies while more numerous, are more likely to be small or even very small by comparison. Until recently, the most obvious difference between the three clusters was Toronto s lack of a large global studio such as Ubisoft and EA which dominate the Montreal and Vancouver clusters. The government of Ontario recognized the value of large global studios serving as cluster anchors and worked hard to attract Ubisoft to Toronto. Ubisoft is still in the early days of establishing itself in Toronto and its effect on the cluster is yet to be determined but, historically, anchors have the powerful ability to boost a cluster s international profile; increase its ability to attract talent and resources; and accelerate the development of new companies. A less obvious difference is the Toronto cluster s lack of a cluster. That is, Toronto s cluster is extremely dispersed especially when compared with the concentrated clusters found in Vancouver and Montreal. While Quebec has other secondary clusters such as Quebec City, its industry is highly concentrated in Montreal as is BC s in Vancouver. Ontario, however, has a broadly distributed industry. SECOR (2008, 22) points out that while Toronto remains the largest digital game hub (in Ontario), over 60 per cent of Ontario development jobs are headquartered outside of the region 10 and the largest firms are located outside of the Toronto cluster. Surprisingly, even within the City of Toronto itself, the gaming industry finds itself dispersed. Only three sets of three development studios are within the same postal code region, indicating that the development jobs in the Toronto region are broadly distributed throughout the city. (SECOR 2008, 22) The benefits of clustering are now well-known: Innovation performance among clustering firms can be enhanced as a result of benefits that stem from being in close proximity to market leaders, from being able to access a pool of highly skilled and talented employees, and from the learning and knowledge sharing that comes from being in a community where social interactions can take place inside and outside of office hours. (ESAC 2009, 7) 10. Niagara, Ottawa, and London, with 20 per cent, 18 per cent and 13 per cent of the development jobs in Ontario respectively, can be considered secondary industry hubs, although Niagara s large developer population is largely attributable to a single studio in St. Catharines. (SECOR 2008, 22) 24

25 The high rate of change in the gaming industry makes exposure to innovative market leaders and technology an important factor in the continuing success of the overall industry. In an ESAC survey (2009, 7) half of respondents report generating all their revenue from new products and services introduced in the last three years. The ESAC report goes on to note that, unlike other technology-based industries, the gaming industry relies primarily on non-technological innovations and inputs particularly creative content and talent. Vancouver has taken advantage of its film industry and proximity to the creative cluster that runs down the US West coast to feed content into its gaming cluster. Toronto s creative cluster (film, television, design, fashion, publishing, advertising, music...) is, by far, the dominant creative cluster in Canada and is a major global cluster. Toronto has the potential to match or surpass Vancouver s success in integrating its creative cluster with the gaming industry. Among the unique, but untapped, elements of the Toronto cluster is the existence of key console manufacturers (Microsoft Canada, Sony Computer Entertainment Canada and Nintendo Canada) with Canadian headquarters in the GTA; and the large amount of multimedia cultural content (non-english or French) produced by the diverse communities in the region. By far the greatest advantage of the Toronto cluster is its deep creative talent pool. Only the Toronto cluster comes close to satisfying its talent requirements from within 93% of GTA employees were reported to come from within their cluster, compared with 73% for Montreal and 59% for Vancouver (ESAC 2009, 10). Toronto s talent pool is also broad it extends to related creative talent such as artists, designers and animators, that are key elements of the gaming industry. The ability to sustain talent requirements from within the region may be stretched as the local cluster grows or anchor studios get established but, today, Toronto is a key talent supplier to other clusters and the growth and evolution of its own cluster may help retain talent that would have otherwise left, draw back talent that left originally to more evolved clusters, or attract new talent as the profile of the cluster grows. 25

26 EMPLOYMENT LEVELS Employment 0 Levels No data No data FIRM SIZE Firm Size Very Small Small Very Small Medium Small Large Medium Large Very Large Very Large NOTABLE GTA COMPANIES: Notable GTA companies: Bedlam Games Dream Catcher Games Koei Canada Koei Canada Rockstar Toronto / Take 2 Interactive Rockstar Silver Birch Toronto Studios / Take 2 Interactive Silver Birch Studios Source: ESAC 2009 Source: ESAC

27 TORONTO CLUSTER ANALYSIS The CONCERT (2008) report 11 rates Canada s gaming industry as a leading region with strong niche areas. Where the Canadian industry lags is in its lack of MNEs or transnational corporations. While Canada is an important producer for other MNEs (EA, Ubisoft) it has yet to produce its own global gaming company with multinational operations. Canada s international rating is really a reflection of Montreal and Vancouver s success. While Toronto shows growth potential it rates behind these two clusters due to the small size and still emerging nature of its industry. CONCERT s (2008) SWOT analysis focussed on the digital media industry as a whole but is still useful for revealing strengths and weaknesses applicable to the gaming industry. Toronto strengths are related to talent, the broad nature of the area s digital and related industries plus the diversity of content sources. The Toronto region s truly unique advantage is that while it is not a global leader in any one particular digital media sector, it has strengths across all five of those sectors (i.e., gaming, mobile & wireless, film & TV, animation and next generation internet). (CONCERT 2008) The analysis reiterates the issue of the lack of large firms and reveals the issues of talent retention and the lack of collaboration. Utilizing the opportunities that reside in the convergence potential between creative industries, content and academia gives Toronto the possibility of competing globally as a leader or strong niche player in a variety of digital industries including gaming. 11. Consortium on New Media, Creative, and Entertainment R&D in the Toronto Region (CONCERT), a partnership of universities, colleges and industry that developed a comprehensive regional innovation strategy in 2008 regarding the game and digital media cluster and the convergence of content, services and platforms. 27

28 TORONTO REGION DIGITAL MEDIA SWOT ANALYSIS Strengths Weaknesses Size - largest in Canada, 3rd largest in North America Diversity - across digital media market segments; across content, services and platforms: cultural and ethnic International leadership in animation and microelectronics for display technologies Research base Human resources Design, advertising, and other enabling sectors are strong in Region Access capital Firm size and sustainability - the sector is largely comprised of SMEs. Noticeable lack of large firms in some segments, e.g. console games Stakeholders work in silos with little collaboration Not retaining top talent No overall regional strategy for digital media Lack of competition in some segments, i.e., wireless communications Regional lifestyle Opportunities Threats Market is rapidly growing Innovation is creating new market segments, such as alternative realities New opportunities based on convergence content, services, and platforms Increased leverage of region s strengths in creative industries, design, information and communications Technology (ITC), and academic research Traditional business models in creative industries are challenged by disruptive technologies Other regions in Canada and abroad have identified digital media as a strategic sector and are designing and implementing proactive strategies Foreign digital media companies are capturing Canadian customer base, e.g., Google Source: CONCERT

29 AREAS OF OPPORTUNITY AND TORONTO REGION GLOBAL COMPETITIVENESS Digital Media Growth Areas Potential for Global Competitiveness Products High: Global Leader or Strong Niche Player Limited Presence but Niche Player Games Mobile and Wireless Digital Cinema and Digital TV Animation Production and Digital Special Effects Next Generation Internet Gameware, new casual/ serious games Mobile content and applications AV hardware and digital special effects Software for animation and special effects User-experience design, interactive narrative and niche on-line content, alternative realities, on-line communities and visualization Mobile, online, and console games Mobile handsets and components Digital TV and services Animation and special effects services, animation production Source: CONCERT 2008 HOW THE TORONTO REGION RATES Digital Media Sector Toronto Region s Competitiveness Rating vs. Rest of Canada Canada s Competitiveness Rating vs. Rest of World Games C B Mobile and Wireless B C Digital Cinema and Digital TV A B Animation Production and B B Digital Special Effects Next Generation Internet B B A dominates sector, internationally-recognized SME and MNE firms, and significant employment. B among leading regions in sector, dominant in niche areas, and strong SME base but limited number of MNEs. C sector demonstrates growth potential, but is not currently a dominant in markets, and a limited number of innovative SMEs recognized for leadership in their niche areas. Source: CONCERT

30 KEY RECOMMENDATIONS FOR THE TORONTO REGION In order to achieve its potential, Toronto needs to focus on minimizing its deficiencies and maximizing its opportunities. A variety of reports have made specific recommendations on what is needed to grow Toronto s digital cluster or Toronto s innovation in general. The OECD (2009) lists as one of its key recommendations that Toronto boost its innovation 12 by focusing on niches; better linkages between firms and universities; and cluster development. In analyses and reports on improving the competitiveness of the Toronto digital industry, better linkages and cluster development are among two of the strategic recommendations that repeatedly emerge. The success of the Toronto gaming industry relies on the joint efforts of industry, government and academia and while a gaming generator would not have the scale to resolve structural issues on its own, it would have the capacity to implement key parts of best practices and recommendations as its contribution to the partnership developing a successful digital gaming cluster. The following best practices and recommendations are essential if Toronto s digital gaming industry is to achieve global success: Cluster Development (Critical Mass) In an era of global competition, proximity provides significant competitive benefits, such as increased productivity, better access to skilled employees, improved networking, and overall market knowledge. The pressure of operating in close proximity to competitors creates constant pressure to innovate and differentiate. Regions that have successfully implemented a digital game growth model have often done so around a major urban cluster concentrating efforts and investments in a single area. (SECOR 2008, 20) A cluster of creative enterprises needs much more than the standard vision of a business park next to a technology campus. A creative cluster includes non-profit enterprises, cultural institutions, arts venues and individual artists alongside the science park and the media centre. Creative clusters are places to live as well as to work, places where cultural products are consumed as well as made. They feed on diversity and change and so thrive in busy, multi-cultural urban settings that have their own local distinctiveness but are also connected to the world. (Creative Clusters Ltd.) 12. Innovation is of particular concern for the Toronto region. OECD, on its website ( Toronto Must be More Competitive ), states that the region s GDP per capita and GDP growth are lower than the Canadian average and its annual economic and labour growth are lower than average compared to other metropolitan regions in the OECD. A major manufacturing hub, with automotive, biomedical, computer/electronics and entertainment companies, Toronto is nonetheless facing strong competition and losing manufacturing jobs. 30

31 Attracting a multinational publisher to open a studio in Ontario in the short term would be highly beneficial; in particular, the greater scale, capital influx, and legitimacy that a large publisher would bring to Ontario could considerably shorten the industry s development timeline to achieve critical mass. (SECOR 2008, 13) It is now well documented that creative entities flourish in the presence of like-minded enterprises. In Toronto, there are clear examples of clustering in such industries as fashion, new media, film and biotechnology. As clusters grow and become more visible they achieve critical mass and develop into concentrated centres of activity. Unfortunately, clusters cannot be manufactured by decree. They can, however, be encouraged and nurtured by understanding the needs of the specific cluster. In gaming, Toronto is strong on the production side (many smaller-sized companies plus a large talent pool) but is much weaker on the consumption side (i.e., large companies, publishers and global markets) which is consistently identified as a key brake on the cluster s growth. The Toronto gaming cluster needs major global publishers; better networking and collaboration opportunities; larger-scale companies; incubation of small-scale companies; industry/academia partnerships; technology transfer and R&D support; and further talent development. In the near-term, the Toronto cluster is not yet large or sophisticated enough to grow its own anchor companies. The attraction of Ubisoft to Toronto is a critical accelerator of the cluster s critical mass as talent, which is highly mobile and tends to gravitate to centres of consumption. Without large studios and global publishers as potential consumers of local production, Toronto talent will always be susceptible to moving out of the cluster. Clusters that achieve critical mass produce enormous dividends. Critical mass is a factor of size and reputation. Once a cluster has international visibility and credibility it in turn attracts more talent, capital and opportunities leading to the self-sustainability of the cluster. 31

32 Creative Clusters There is a substantial literature analysing clusters which broadly agree that clusters confer competitive advantage on their constituents because: proximity sharpens competition and drives up standards proximity encourages collaboration and diffusion of good practice between firms a sophisticated local market can develop around a cluster, stimulating innovation and improving marketing clusters can develop place-based branding, benefiting all firms in the cluster proximity enables small companies to band together into alliances and networks, giving them some of the advantages of larger ones for example, by giving them better access to suppliers and resources an infrastructure of specialized professional support services is encouraged to develop clusters become a focus and a magnet for outside investment Creative clusters are hard to develop (and perhaps harder to define), but the characteristic features of successful clusters are widely agreed: connectivity to the world: creative entrepreneurship thrives where local and global cultural forces interconnect cultural diversity, free trade and free expression: openness and a through-flow of new people, new ideas and new products production and consumption: the beginning and end of the supply network (maybe not the middle); more than business: art, education, culture and tourism Policies for the creative industries are relevant to all sectors of the global economy: places without strong creative clusters will lose their creative people and businesses to places that have them locally rooted creative clusters are highly resilient to global competition building creative clusters requires that cultural and economic development come together and act in concert cultural diversity is an economic asset and a source of competitive advantage Simon Evans, Creative Clusters Ltd. 32

33 Gaming Cluster Collaboration In a rapidly changing industry such as digital media, collaboration is a key requirement for the efficient exchange of innovative ideas and technologies. However, the lack of collaboration within the digital cluster is consistently listed as a key barrier to growth and innovation in the industry. Further, there is a lack of collaborative environment at two levels: within industry, within academia, within government and between industry, academia and government 13. Toronto s gaming cluster is much too quiet for its size and there is a need for more networking, communication and collaboration which can lead to more innovation and coordinated regional strategies. SECOR (2008, 24) notes that Ontario s development studios have tended to remain relatively isolated from each other and from potential partners in the many complementary industries located in Ontario. Both SECOR and the OECD which claims that Toronto can boost innovation by encouraging greater collaboration between the region s industries, small businesses and universities and strengthening links between firms (OECD 2009 website, Toronto must be more competitive ) identify the need for greater collaboration at multiple levels. Greater collaboration needs to occur not only within the gaming industry itself but, also, with complementary sectors and with GTA academic institutions. GTA universities and colleges offer more than 80 ICT-related educational programs and run over 100 ICT research centres 14 (e.g., Human Computer Interaction Lab, Centre for Learning Technologies, Cognitive Robotics Group, Mobile Experience Innovation Centre...) and are a key and continuing source of innovation. Branding For a region to become truly competitive, it must be recognizable on the world stage as a destination for content and expertise. (SECOR 2008, 20) Toronto is a city without a brand in gaming; no one would see it as a game centre... only after the Ubisoft announcement did European companies start to notice Toronto. 15 Ian Kelso, Interactive Ontario 13. CONCERT (2008, 13) refers to industry and academia alone but the same argument can be made for different orders of governments that may be tackling digital issues with overlapping or even cross purposes results. 14. Greater Toronto Marketing Alliance; does not include the 70+ ICT programs run by private GTA institutions. 15. From October 2009 discussion regarding the state of gaming in Toronto with Ian Kelso, Luigi Ferrara and Paul de Freitas. 33