Game Development and Digital Growth

Transcription

1 Game Development and Digital Growth 1

2 For further information, please contact: Dr. Malte Behrmann, Secretary General European Games Developer Federation (EGDF) Katariinankatu Helsinki Finland t (0) f (0) I European Games Developer Federation (2011) 2

3 Executive summary EGDF stresses that video games are: - A cultural driver at the heart of digital culture. Video games are played by young and old, male and female alike, and are now widely recognized as cultural. Thanks to constantly evolving content and the perpetual invention of new services by the sector, video games are becoming the main vehicle to popularize culture; - An economic driver. The video games market is the most dynamic entertainment market, has still a huge growth potential and a natural ability to overcome cultural and linguistic barriers. The replacement of the traditional retail driven value chain by digital value chains is an enormous opportunity for Europe, as it leaves a bigger share of the revenue to European content creators and offers a way to keep European Intellectual Property (IP) in European hands; - A driver of innovation, at the centre of digital entertainment industry, video games constantly engender new business models, create ground-breaking content and germinate unique services that are driving groundbreaking technological discoveries leading the way for many other sectors. The first truly integrated digital ecosystem of the entertainment sector, the games sector is placed ideally to be the focal point of the coming transmedia era. and outlines that: - Unlike European publishers, European development studios have been highly successful on online markets; - but game development involves high technological, creative and business risks, has never has been easy to finance and studios have usually little working capital; - European game developers compete on a worldwide scale against highly subsidised competitors. - The innovation ecosystem of the video game sector is now more and more content driven and less technology centred; Innovation and new IP generation is driven principally by SMEs, not by large corporations; - It is essential to make the development of video games especially prototyping legally eligible to public funding in order to ensure the emergence of start-ups and guarantee cultural diversity; - Although European innovation policies do acknowledge the crucial role of SMEs as a flourishing field of innovation, programmes supporting innovation have rarely been able to reach the most innovative SMEs in the video games sector; Consequently, we believe the European Commission should: - Recognize games officially as a form of cultural expression, and make them eligible in all member states for public funding with no restriction, at it is the case in a growing number of non-european countries; - Make video games a pillar of the upcoming MEDIA programme, or create a video game specific programme; - Balance European funding schemes for SMEs between loan guarantees and project prototype development / IP creation funding; introduce a 50% SME-quota for EU RTD projects (e.g. the successor to FP7) because SMEs are the driving force in innovation and employment; - Open the definition of innovation to content, services and business models, not only pure technology. All four elements are closely intertwined and only together can enable the emergence of a successful European digital content industry, competitive on a worldwide scale; - Simplify the paperwork associated with funding programmes for SMEs, promote such programmes better (for example by using the Media Desk network as contact points for other related programmes of the European Union or by making sure that innovation programmes are promoted during major games industry events). 3

4 1. Video games are a cultural, economic and innovation driver When video games appeared in the mid-70s, development costs were minimal, teams small, gamers were perceived as teenage nerds, and the market was seen as marginal. As video games became more sophisticated, to reach the massmarket and become mainstream, the size of development teams increased, structured companies (development studios and international publishers) were formed to create interactive entertainment with Hollywood style production values and so a fully fledged industry emerged; a large economic sector involved with the development, marketing and sale of video games and reaching more than 30 billion Euro turnover worldwide. Europe has since the early 90s been home to some of the brightest and most successful developers on the global scene. However, growing production costs also mean a need to fund increasingly large projects, and in the traditional retail driven value chain international publishers fully finance the developers, and consequently own the creations. With the exception of Ubisoft (France), all major publishers today are either Japanese (Nintendo, Sega, Sony, SquareEnix, Konami, Namco Bandai, Capcom) or American (Microsoft, Activision- Blizzard, EA, Take 2, Disney; Warner Bros Games, THQ, etc.). Video games can be a very successful business. However, the revenue generated is shared very unequally along the value chain. While the sales and marketing of the video games (publishing) is a highly scalable international business, the actual making of games (game development) never has been easy to finance. The main reason for this is that in the traditional retail driven value chain, the developers only receive around 8% of the price paid by consumers to enjoy their creations. Leading global publishers 2010 Name of Publisher position 1 Nintendo 2 Electronic Arts 3 Activision Blizzard * 4 Ubisoft 5 Take Two 6 Sony 7 ZeniMax Media 8 THQ 9 Square Enix 10 Microsoft 11 Konami 12 Sega 13 Capcom 14 Nexon 15 Namco Bandai Games 16 Warner Bros. Interactive 17 Namco 18 Valve Corporation 19 Atlus 20 Zynga * Although partially owned by Vivendi, Activision Blizzard is entirely run from the US and traded on the Nasdaq) 4

5 The most common value chains of video game industry Retail driven value chain Mobile driven value chain Online value chain The difference in online distribution models open attractive opportunities for developers. Online and mobile games development are less cash hungry and thus a number of games can be self-funded by development studios. Also, the shortening of the value chain means developers earn between 70% (distribution through an online shop such as App Store, PSN, and XBLA) and 100% (direct sale to consumers through the developer s own online shop) of the price paid by the consumer. The online business model is thereby more attractive to private investors. The traditional European development studios on one hand were for the most part established in the 1990s in the UK, France, and the Nordic countries. They are today predominantly creating games for the 7th generation of home and portable console systems and derive their incomes mostly from the traditional retail business. Over the years, they have gained considerable know-how (mastering complex production pipelines, creation of international IPs, and development of sophisticated core technologies) in making high-definition games. They have obtained international recognition and created some of the industry s most recognizable brands and IPs. Funded predominantly through international publishers, they are preparing themselves for the distribution shift from retail to online, and should be able to position themselves better in the value chain when this shift really reaches its tipping point (today, more than 95% of sales of home and portable console titles still remain retail driven). 5

6 Size of leading online games studios in Europe Bigpoint (DE) Gameforge Ankama (FR) Jagex (GB) Sulake (FI) (DE) Founded Employees about 700 about 450 about 460 about 375 about 270 Turnover 140 million (2010) Over 100 million (2009) 40 million (2010) 40 million (2010) 56,2 million (2010) Registered users 194 million 200 million 30 million 170 million 210 million This shift is forecast to happen by 2015, during the next home console cycle. Newly founded European development studios have on the other hand naturally adopted the potential of the online paradigm shift from the ground up and have in a few years become strong players in the online, mobile and browser based games sectors. The European industry is well positioned to take advantage of the growth of the games sector as it shifts to online and to gain independence from international media groups. This shift is in particular offering traditional and well experienced game studios a historical opportunity to turn the tide. However, game development remains, both on and offline, a very risky venture with high technological, artistic and business risks in a rapidly and ever-changing environment. Due to multiple risk factors, the failure rate is not low and only little private capital is available to fund new ventures or projects. A true hit-driven business, only about 5% of inititiated video games projects become profitable in the traditional retail driven market. In the online market, the exact figures are very difficult to source, however chart analyses from several different sources seem to indicate a demand centred on a limited number of key franchises (such as Angry Birds) and thereby a high failure rate here too. Reducing development risks has thereby become critical for studios. Outsourcing to emerging countries or localisation of production efforts in countries offering tax incentives has as a result become an important trend in recent years. Source: ICO Partners 2011 In this context, public intervention, be it through tax credits or prototype development / IP creation funding, has proven extremely efficient to woo investments in the sector and nurture a strong local creative scene. Montreal and the Quebec region were first to offer strong incentives to the games sector (50% tax credit between 1998 and 2005, today 37,5%) and have since become the world s premier development hub. The French publisher Ubisoft in particular has been quick to grasp this opportunity: while the French-based Ubisoft studios have been continuously shrinking in size over the past 10 years, their Montreal and Toronto studios have literally exploded and today employ over 3, 500 people in development alone. From a market perspective, a vast majority of the video games are today imported from overseas, mainly from the Americas (USA, Canada) and Asia (Japan, South Korea). Over the past decade, Europe has measurably lost much ground to countries such as Canada and South Korea where the video games industry receives strong public support. Also, while some video games are developed in Europe, large parts of the revenues leave Europe. This means that Europe does not benefit from its production efforts, its cultural heritage, and its technical skills. We therefore believe that if the European games industry is to remain competitive on a global scale we must make video games eligible for public funding in order to secure both cultural diversity and to promote continued content and technological development. 6

7 12 Expected compound annual growth rate by component in Europe, Middle-Eeast and Africa from 2009 to 2013 (%) Global video game market by region Source: PwC Furthermore, the EGDF would like to place emphasis on the need to support the sector also in light of the considerable spillover effects that games have on the whole economy; more and more of our high-end IT and software engineering competencies are put to use in a number of highly strategic industries such as aerospace and defence; our creative competencies, in particular computer generated images and special effects are used in other media such as film and TV; innovative business models are introduced in the games space and later applied in a variety of sectors. Last but not least, the sector requires highskill jobs that are critical to Europe s growth. -2 Console/handheld games PC games Total end-user spending Online games Mobile games Countries like Canada, Singapore, China, Korea, as well as a growing number of US states, like Georgia and Texas, have understood these critical aspects and have taken measures (read: tax incentives and prototype development / IP creation funding) to help support their local video games industry. Source: PwC

8 2. Video games as cultural driver Share of the population playing video games (%) All studies available today show that video games have become a cultural sector to be taken seriously within Europe. Little understood and long dismissed, video games have still by now influenced the imaginations and media habits of two generations. In addition to almost all Europeans aged 7-25 (male and female alike), now about 50% of adults are playing video games on a regular basis. Thus it is no surprise that during the last decade, video games have become an important part of daily life for the majority of Europeans and are no longer a marginalized form of culture. Instead, they are quickly becoming a central medium of culture with their innovative interactive digital content and services. Game developers now perceive themselves as full-fledged creators in their own right. A true new language emerges interactivity with its own grammar and vocabulary, a form of expression that transcends cultures and races and is experienced by billions worldwide. It today embraces all screens (TV, PC, Handheld consoles and mobile phones). The influence of video games on the way people perceive values, structure organizations, express themselves creatively, and learn (through serious games ) is more and more significant. Source: Newzoo

9 Consumer spending on entertainment media ( m) Source: IHS Screen Digest, 2011 If 10 to 15 years ago video games were often adapted from films or books, today the vast majority of video games are genuine original creations, many leading to film or book adaptations. Many video games do not only inspire major motion pictures or books, but influence a wealth of other forms of cultural expression (films, books, paintings, comics, music, and advertising). In EGDF s opinion, it is therefore high time that video games are recognized officially as a true form of cultural expression by the European Commission and that subsequently, video games become a member in its own right of the MEDIA programme. Or that a separate programme be put in place to specifically support video game development. Games are becoming the leading, general medium, and replacing TV in this function. 9

10 3. Video games as economic driver The video games sector has enjoyed two-digit growth per year since two decades and is expected to continue to be the most dynamic digital content industry in Europe. $114 Billion: total public company market cap for global game sector The reasons for this dynamic is to be found in the always increasing diversification of platforms, and the constant development of new content and peripherals making games accessible to an always broader range of audiences, both by age and gender, as well as the rapid time-to-market and virtual piracy proof nature development of online gaming. We have repeatedly noted how the online business models are bringing about a paradigm shift for the games industry and are the reason why video game developers could become the big winners of the changes affecting the value added chain. If European SMEs can compete on a level playing field globally, the EGDF expects a rapid growth of our sector s SMEs over the next five years and as a result a doubling of the 25,000 strong employee base to between 50,000 and 60,000. The fact that games creation will be less and less funded by non- European multinational entertainment giants also means that IP may to a larger extent remain in the hands of European SMEs, and that consequently any revenues generated from the exploitation of these IPs will remain European. Just in 2010, several high profile European IPs have been optioned for film adaptation, including Rovio s Angry Birds, Remedy s Alan Wake and Quantic Dream s Heavy Rain. Note: USD$ millions, as at 9th of May 2011 Source: 2011 London Venture Partners LLP 10

11 The technological and creative convergence of video games on the one hand, and TV and Film on the other, also means that more and more transmedia projects will not only be conceived from ground up based on these IPs, but also entirely developed in-house by European studios. Ankama s developments in this area (the developers of Dofus the game, the animated series, the comic book, etc.) or Ubisoft s recent announcement in this direction is a clear indication of how close we are to seeing video game studios become fully fledged transmedia companies, and thus create even more value for the European economy. European consumer spending on games ( m) Europe has strengths, many recognized studios, a score of highly productive schools and recognized universities, but Europe does not exploit its strengths. The European production outcome is clearly modest, with a global market share of only 5%. By fostering content diversity, taking a greater share of the revenues and diversifying our sources of revenues, we will be able to double this market share to 10% in the coming five years and reach 20% by Hence, we believe it is essential that Europe becomes far more proactive in encouraging its SMEs in this field, so they can compete on equal terms with their main competitors. Only the adoption of unrestricted sector-wide tax credits, such as they exist in Canada (and other measures to support prototype development / IP creation funding) will enable the European games development sector to reach its true potential. Notes: Online games include all consumer spending on massively multiplayer online games, PC casual games, social network games, online console, on-demand, and PC digital retail Mobile games include all consumer spending on games delivered by mobile network operators services and leading mobile application stores. Source: IHS Screen Digest,

12 4. Video games as innovation driver Video games is the only media sector that has been digital from the beginning. As such, video game companies are the forerunners of a multitude of innovative content, services and business models driving today s digital economy. The first real innovation ecosystem of the Digital Era, the video games sector should be recognized as such, and thus more often listened to when it comes to defining digital business, cultural or technology-related policies. It is widely acknowledged that video games have contributed in the past to the worldwide development of computer hardware more than any other application. So far video games have been the most demanding massmarket application for computer hardware and they will also be in the foreseeable future. The development of the microchips at the core of the hardware, as well as the development of graphics cards and other elements, like displays, is deeply related to the increasingly demanding architecture of modern video games. Today this approach spreads to the networks themselves, as the video games played on the networks are a high technical challenge for them. Therefore video game developers and companies can be seen as a driver for innovation in general for computer based systems and networks. It is also important to note that video game technologies are used more and more in other industries. games, which today are more and more commonly used in all sectors to educate and train. Videogames are also more and more driving the sales of traditionally non-gaming-related devices such as TVs (for their HD and now also 3D capabilities) or Smartphones. (A Samsung Galaxy phone advertisement entirely focused on the fact that it features Angry Birds.) Thus video games are not only revolutionizing the field of art and media. With the content and services based on non-material goods business models they are preparing the way for the other sectors that still have not undergone the digital shift. A process, called gamefication, is currently introducing both the applied games and the new business models to the fields of education, geriatrics, training, policy making etc., and it is reshaping them to face the needs and challenges of the new era. In this context, we believe that public funding aimed at the video games sector in Europe should better take content, interactivity, new user oriented services and business models into account, instead of limiting itself to purely technology-oriented R&D projects. In particular, we believe that a large prototype development / IP creation funding scheme aimed at fostering the efforts of the vibrant European video game scene would have a very positive impact on innovation and enable the emergence of tomorrow s transmedia champions in Europe. For two decades now, some of the industry s core tech (artificial intelligence, physics simulation, biomechanics, behavioural models etc.) have been used for defence and aerospace applications, but now tends to spread to more civilian applications, such as in the medical or automotive fields. Not to speak of the serious 12

13 Viral innovation process Traditional innovation process Source: Institute of Technology & Innovation Management, Hamburg University of Technology (TUHH) Viral innovation process 13

14 5. Policy recommendations An introduction of a specific EU game support programme would be the best answer to the new challenges. Alternatively existing programmes should be more open for game development : - The MEDIA programme should include a substantial game prototype development / IP creation support scheme; - A programme replacing CIP programme should have realistic and robust setup based on directing 75% of the funding for SMEs. Therefore a new framework programme should introduce: - Games as a specific model category; - A threshold, for example, by placing the maximum EU contribution per project to about five million Euro; - A SME-quota for EU RTD projects so that at least 50% of the funding goes to SMEs; - Support for many small projects with about four consortium partners (two at the minimum and five at the maximum). Furthermore, the European Commission should consider: - Opening the definition of innovation to innovations related to content, services, and business models, and thus create an intelligent European innovation strategy that is both flexible and a combination of the different but necessary elements of the innovation ecosystem; - Making sure that a strong variety of content also reflects the cultural values and traditions of member states; - Guaranteeing that support mechanisms have a capability to actually identify real innovations behind the formal quality of applications and also otherwise simplifying its funding structures; - Redirecting the focus of innovation funding for SMEs from loans and loan guarantees to direct funding for the projects of SMEs; - Offering direct and concrete support and consultation for SMEs, for example by using a network of Media Desks throughout Europe as contact points also for other related programmes of the European Union or by making sure that innovation programmes are present in major industry events; - Not to unintentionally give advantage to competing digital economies by over- or under-regulating its own markets. 14

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16 The European Games Developer Federation (EGDF) is committed to the stimulation and development of a stable, vibrant and creative European games development sector that is competitive globally and recognized culturally. The EGDF will act to advance the political and economic interests of the European computer and video games industry by providing a platform for collaboration and discussion between European institutions and game developers. Katariinankatu Helsinki Finland t (0) f (0)