The Video Games Industry in Scotland

Written evidence from Abertay University (VID 04)

Executive Summary

· Abertay University is making this submission in order to provide written evidence to the Scottish Affairs Committee regarding the above.

· Our submission is made in the context of our high level of involvement with the games development industry in Scotland and the UK through a range of activities and our leadership in computer games education.

· The games development sector has high growth potential with opportunities for both positive economic impact and cultural leadership.

· Games development requires a significant upfront investment before revenues are generated. Content IP is less attractive to conventional equity investors than, say, technology IP. There are challenges associated with the sufficiency of working capital. For these reasons we continue support Games Tax Relief.

· We also believe that additional financial incentives could be developed to grow the availability of working capital. These include project finance funds using private capital, encouraged by an existing instrument such as EIS, if such a scheme were to be modified to promote this area.

· We have noted the relevance of a number of these areas to the BIS Green Paper Financing a private sector recovery which although UK focused could have an impact in Scotland.

1.0 Credentials

1.1 Abertay University’s Institute of Arts, Media and Computer Games is the UK centre of excellence in computer games education. The Institute’s taught portfolio includes highlights such as three Skillset accredited programmes and a Masters in Professional Practice in Games Development with forty publicly funded places allocated for UK and EU students. All courses reflect the high level of industry involvement in our activities, underpinned by academic rigour and innovation. The Institute is also the home to Dare to be Digital, the international talent competition that provides the exclusive pathway to the BAFTA Ones to Watch Award, which this year attracted entries from students from over eighty universities world-wide. Abertay University also has a portfolio of innovative interdisciplinary research associated with the visualisation of complex data associated with games technology and also new models for new media audiences. This work spans the whole University and also includes disciplines within Arts, Media and Computer Games. The Institute’s new business support project is run by a team recruited from industry and draws on all of the successful facets of Abertay University’s activities described above.

2.0 Context

2.1 The context in which this submission is made is the University’s high level of interest in the stability, survival and growth agenda for games developers and related businesses in Scotland. This interest is driven by a number of factors:

· Direct employment and business start up opportunities for our graduates

· Our close relationship with industry via accreditation, programme design and input, guest lecturers, University Court membership and visiting professors.

· The Developer Accord – an association of games developers and related organisations that contribute mentors and other support to the Dare to be Digital competition, the international talent competition that is the pathway to a BAFTA award.

· Our significant experience of supporting fledgling creative teams and small companies.

· Recent public investment in our Centre for Excellence in Computer Games Education and our Business Support projects providing prototype grant funding for SMEs, matched by significant investment by Abertay University.

· Our studio-based learning approach and distinctive workplace simulation activities which provide real-world experience for students and contribute to the widely recognised, positive attributes of our graduates.

· Interdisciplinary and research dimensions, for example where we have used games technology in the visualisation of complex data demonstrating the spill-over potential of this sector.

3.0 Submission

3.1 We recognise that the Committee will already have significant evidence regarding the contribution made by the Scottish video games industry to the Scottish and UK economy. We also recognise that the Committee will be well aware of the competitive threat of incentives in competitor countries. We wish to highlight the following, based on our direct experience:

· The Scottish and UK strengths in original IP generation. However, more new starts and original IP are needed to feed this growth opportunity and reach critical mass.

· Changing business models (e.g. online, short lifecycle apps, proprietary platform dominance) as representing both threats and opportunities.

· The inseparability of talent from IP evidenced by the history of creative teams and IP moving ownership in tandem.

· The different nature of this business in terms of business failure. Failed development businesses do not leave a long tail of unemployment because it is driven by talent and the talent is hired elsewhere. Better ways of retaining talent in Scotland are required.

· Our ambition to promote greater IP retention and ownership (alongside properly resourced routes to market) – this could be in the context of anything from direct online sales to enhanced developer/publisher relationships (to ensure maximum buy in) as evidenced by our prototype grant fund.

· The particular characteristics of content development businesses – e.g. long lead in to revenue but costs primarily labour.

· The evidence contained in the CIHE Task Force Report on the Creative Industries

3.2 A consistent theme in our wide-ranging engagement with industry is the challenge of sufficiency of working capital for games and other interactive content development businesses. Our support for the Games Tax Relief scheme outlined by the previous government was given in recognition of the contribution that such a scheme could make to liquidity for medium-sized and well established developers. We would continue to advocate such a scheme.

3.3 A further reason why we continue to support Games Tax Relief is the potential for such a measure, when combined with the distinctive and vibrant development cluster in Scotland and the availability of talent, to drive future inward investment.

3.4 Our work with small creative teams and emergent companies has shown the difficulties faced in securing up-front funding for content development ahead of commercial deals. Equity finance models have limited potential in funding content creation for small companies. The limitations of equity funding, including the equity funding gap, are highlighted in the BIS Green Paper Financing a private sector recovery.

3.5 Interestingly, the emergence of start-ups in the heart of a vibrant games cluster exposes additional frailties because of the potential for key team members of start-ups to be hired to more secure jobs before a commercial deal is secured for the start-up and because working capital in the start-up is limited. Games Tax Relief would not help such start-ups so we believe that additional measures are necessary.

3.6 We have secured £5m of funding to operate a UK prototype grant scheme (which includes a £1.5m contribution from Abertay University) to help improve working capital in small companies and start-ups. We are also actively seeking private investment partners to establish project finance funds which are not equity based and provide returns from an upside through sales revenue sharing. We anticipate that our prototype grant fund will help to de-risk private project finance investments if we can link with such a fund. We are keen to encourage the investigation of stimulating the establishment of such private project finance funds through tax incentives. This could be achieved by creating and carefully defining an eligible category within the EIS scheme for example. There is presently a blanket exclusion on financial activities as an EIS eligible business.

3.7 We note that the BIS Green Paper Financing a private sector recovery also highlights supply chain finance, primarily in the context of Buyer Driven Receivables Programmes and the like. Consideration of supply chain finance stimuli should extend to digital content businesses where the challenges are different from advanced manufacturing etc in that the pre-sales costs are nearly all related to labour.

4.0 Relevance to terms of reference

4.1 Our submission notes our continued support for Games Tax Relief but is also particularly relevant in the context of the term of reference regarding alternative financial incentives for the industry. We are particularly keen that ways to stimulate a greater availability of private project finance are investigated.

9 September 2010