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Can Canada Support Indies? A Critical Look At Canada's Incentives Model

Canada is famous for tax breaks and other forms of support for the major publishers -- with Montreal being home to huge studios from Ubisoft, EA, Square Enix and more -- but can and should the country do more to build up the indie movement? Jason Della Rocca speaks to developers.

[Canada is famous for tax breaks and other forms of support for the major publishers -- with Montreal being home to huge studios from Ubisoft, EA, Square Enix and more -- but can and should the country do more to build up the indie movement? Jason Della Rocca speaks to developers.]

The Canadian game development community has been going from strength to strength in recent years. With a growing reputation for producing blockbuster titles, like Ubisoft Montreal's Assassin's Creed franchise, and an expanding workforce currently tagged at 16,000 directly employed in game development, Canada has a lot to be proud of.

But as the business continues to be disrupted by a shift away from games as retail products to games as services primarily for digital platforms, is Canada poised for ongoing success?

The annual state-of-industry report by the Entertainment Software Association of Canada (ESAC) outlines in great detail the status of the Canadian industry, boasting nearly $2 billion of economic activity and the nation's third place ranking behind the U.S. and Japan for game production.

The growth and success of Canadian game development has been so marked that the country has come under fire for its government's aggressive support of the industry. In particular, the UK has accused Canada of creating an uneven playing field via the heavy use of tax incentives.

Whether as part of political rhetoric or simply other regions looking to model the achievements of Canada, the recipe for success often gets reduced down to the application of tax breaks.

While government tax-related incentives have indeed played an important role within Canada, there is much more at play within such a complex ecosystem as the game industry: deep pipeline of talent, strong history in visual simulation and animation, quality of life and favourable cost of living, full range of value chain partners, robust non-profit association support, funding of academic research, etc.

As has happened in several cases, the singular application of a tax break -- without an accompanying vibrant ecosystem -- rarely results in much progress. The recent debacle with the Michigan tax break is an unfortunate example of an incentive scheme envisioned to catalyze economic activity in a depressed region going nowhere. Famously, this was articulated by EA's European SVP Jens Uwe Intat with the quote: "Tax credits are good for people who are good at making money."

Even in the case of Canada's strong incentives regime, it is not a one-size-fits-all solution. Montreal-based indie developer Laurent Mascherpa of Massive Finger elaborates: "Various tax breaks are more appropriate for big companies because you need lawyers, specialized accountants, and time. There is the technology R&D tax incentive (SR&ED), which is very helpful especially when you are targeting new platforms. The drawback to this incentive is that you have to spend extensive time and money before knowing if you will get the tax return or not."

With successes like Shank and Eets to bank on, Jamie Cheng of Klei Entertainment in Vancouver still challenges the usefulness of such incentives in every context: "Government support is solid for established studios through the use of tax breaks. However, tax breaks are insufficient and ineffective as a source of funding for new projects where companies are not established, and thus cannot spend on salaries in order to make use of the breaks."

Canada 3.0

Not content to sit on its digital laurels, Canada has been embarking on efforts to rethink its national strategy towards the knowledge economy, content creation, digital media and so on. This has been driven by efforts such as Canada 3.0 events bringing industry, government and academia together, as well as calls for input directly into the government.

Late in 2010, the Social Sciences and Humanities Research Council of Canada (SSHRC) funded "knowledge synthesis" reports to feed into this process. One such report looked specifically at the game industry, the implications of government incentives, the role of academia and potential threats to the ongoing success of the Canadian game industry. [Full disclosure: I was part of the research team for the SSHRC report.]

A key finding of the SSHRC report was that the majority of the Canadian game development workforce was employed by foreign-owned publisher studios. In the most extreme case, it was estimated that nearly 90 percent of workers in Montreal were employed by foreign "masters" (e.g., Ubisoft, EA, WB, Funcom, THQ, Gameloft, etc.)

The report delved deeper into the implications of foreign ownership in regards to the effect on the creation of innovative intellectual property (IP) and the ongoing suitability of government tax/support schemes -- particularly for use by independent studios.

"I don't take advantage of nearly as many government programs as I should mostly because I'm lazy and because I hate doing paperwork," noted Matt Rix, the Toronto-based indie behind iOS hit Trainyard. "At the end of the day, I really just want to be making games and not filling out forms, which is probably true for a lot of indie game devs."

It is important to note that the major game development hubs in Canada (i.e., Vancouver, Montreal and Toronto) have each evolved in distinctive manners. Further, the specific provincial support programs (or lack thereof) and federal schemes have helped to nudge each hub in unique directions.

For example, the Vancouver region has mostly grown organically via an "acorn" model, without the help of tax breaks, which were only introduced in early 2010. Many of the studios in Vancouver were "splintered" from EA Canada's (originally Distinctive Software) presence in one way or another over the years -- similar to the effect that Origin Systems had in Austin, Texas.

By contrast, in Montreal, studios have taken advantage of the tax incentives to grow alongside Ubisoft. Looking back a decade, after several block-buster hits, Ubisoft's Montreal studio attracted the attention of Electronic Arts, which was motivated to open a nearby studio to gain access to the "magical" talent in the region.

As more successes came, other studios followed and kicked the clustering effect into high gear. Ubisoft served as an "anchor tenant," its success attracting other large studios to invest in the region. Unlike the acorn effect of EA in Vancouver, Ubisoft has yet to spawn many independent offshoot studios in Montreal.

With so many whales swimming within Montreal, it is hard for smaller studios to get noticed: "Maybe I'm just unaware of what's going on here, but I don't feel like the government is doing anything for indies, or takes us seriously, or is aware we exist," lamented Phil Fish of Polytron Corporation, the IGF award winning Montreal studio working on the much anticipated Fez.

Across to the other coast in British Columbia, Andy Moore of Radial Games, most famously known for SteamBirds, is feeling similarly neglected: "The government is not meeting my needs at all. I can't find a single person that's been able to apply for the incentives here, never mind get them. I believe they are all geared to larger studios, and it's very difficult for me to find any information or take any advantage of it."

In the case of Toronto, historically, there was no anchor tenant to attract other studios, nor an oak tree to seed the city with start-ups. Instead, there is a large community of small developers. A number of these companies, including Metanet, Capy, and Queasy Games, have developed highly successful games for XBLA, iOS, etc. These developers and others have created a hotbed of independent game development in and around the Toronto area which is taking advantage of the lowered barriers to entry of digital platforms.

Rix praises the vibe in Toronto: "The whole industry is switching towards digital-only games, which is what indies have basically been making the whole time anyway. There is a great indie gaming community and culture here that is growing constantly. It's a fantastic place to be making indie games."

In addition to a local creator society, several yearly game jams and camps all nurturing the independent community, the Ontario Media Development Corporation (OMDC) offers a targeted production funding program that developers can access to complete their project financing.

"I believe the OMDC were an absolutely essential part of why the independent game community has been so vibrant in Ontario," stated Guillaume Provost, formerly working out of Toronto, and now heading up Montreal-based indie studio Compulsion Games.

Despite the success of this organic "incubation" model in Toronto, the Ontario government chose to aggressively pursue Ubisoft to serve as their "anchor tenant," luring them with a $260 million tax incentive package with the intent to create 800 jobs within 10 years.


More than Jobs

As with most economic interventions, much of the government support around games has been geared towards job creation (especially when looking at the role of tax breaks). But this is a limited metric, and other meaningful measures like the creation of Canadian-owned and controlled IP, the extent of knowledge transfer from academic R&D, or the number of game studio start-ups should all be more explicitly part of the agenda.

Moore speaks to the lack of awareness unless you have a sizable headcount: "I've spoken with Vancouver-based government reps in industry booths at various shows, and they only seem to have information for studios with 25+ people as a minimum. They had no concept of an indie game or that our studios even existed."

More to the point, while the extent of foreign investment into Canada has created many great jobs, the vast majority of value generated by this talent leaves the country (i.e., profits, brands, IP). Even the talent itself, sometimes transient foreign workers, is at risk of leaving. All of which limits innovation and the generation of long-term wealth.

In a hit-driven business like games, the creation of new IP is a risky endeavor. To a large extent, the burden of taking such risk falls on the shoulders of the small independent studios as the production capacity of foreign-owned publisher studios, many times, leans toward work on sequels and existing franchises.

One of the biggest challenges in managing the risk of new IP creation is the "peak overhead" problem: the delta between staffing needs at the conceptualization phase (lowest) and full production (highest). The industry continues to struggle with the ramp-up and ramp-down needed on projects, and most of the challenges in sustaining and growing studios rest with the question of how to manage the peak overhead issue.

While the production phase requires the largest investment, most of the innovation occurs in the earlier prototype and pre-production phases. However, given continuous pressure to minimize time on prototype and pre-production efforts, even the largest studios may be forced to favour multi-title franchise development with overlapping out-of-sync production cycles that allows for a more or less steady always-in-production mode for staff. This business optimization comes at the cost of new innovative IP.

Conversely, indie-ness is a relative measure of a game developer's degree of creative and financial autonomy and control over the IP of their game. Thus, promoting the independent game development community within Canada is a way to address these challenges, with a focus on IP creation taking priority over pure job creation.

Being Indie

Given the risks, independent game development is something of a precarious business, though recently there has been new enthusiasm given the lowered barriers to entry on digital-only platforms and more routes to self-publishing. In fact, independent game development has become something of a social economic movement amongst small-scale developers around the globe.

Indies pride themselves on being more creative, more innovative, and more socially and culturally progressive than the large game publishers that dominate the market. While some equate the independent game movement with art house film making, this is not quite accurate. Independent games are not by definition any less of a mass medium than mainstream games.

The difference between the independent game scene and the traditional government-assisted clustering is that the objective of game industry workers in a cluster is to move into (and between) employment for large studios, whereas the objective of indie game developers is to establish studios independent of the economics and creative constraints of the large industry clusters.

If done right, the role of governmental intervention could be critical, Rix said. "You'll find that because games are supported by the government, that indies in Canada will actually be willing to take more risks with their ideas, and won't just do the safe bet every time. The support really does help to get games made that would never have a chance any other way."

However, the results are perhaps less immediate and harder to measure. Building an environment that allows small independent Canadian studios to thrive is more challenging and time-consuming than luring a single large company into an area through direct tax incentives. Not to mention that a ribbon cutting ceremony for a new major studio of an international publisher is much more politically attractive than sustaining dozens of indie failures to reach every Doom-like success.


New Models

To the extent that Canada wants to move beyond only "creating good jobs," ultimately it is going to require a fresh approach to government intervention. The nurturing of an indie community requires different incentives than those used to promote the clustering of large studios. For starters, focusing on the earlier stages of development (i.e., conceptualization and prototyping) for new IP -- whether via a reoriented tax scheme or access to seed funding programs -- would help to directly catalyze more innovation and risk-taking on new projects.

"In my opinion, Canada's industry needs early stage game businesses funding," said Mascherpa, while noting the ongoing challenges. "So far, financial institutions and private funds lack the game expertise and are only financing big names of the industry. Whereas web/tech-oriented funds investing in social games know the process of digital business creation, but lack the video game knowhow. I believe there is a lot to do at this very important early stage."

The Canadian Media Fund (CMF) is a good example of this, having already handed out tens of millions of dollars for experimental game/interactive projects at early stages of development. (However, it should be noted that the fund is primarily a linear media fund, awarding nearly 10 times the funding for traditional TV content, and with rules/process greatly derived from how TV is produced.)

Provost elaborates: "The CMF is infinitely more valuable in my mind to an independent studio than the tax credits. While it is difficult to access at an earlier stage of development, because they require the developer to be able to provide matching capital (and hence cannot act as an original catalyst or seed fund), they provide to those that can obtain it a level of financial independence that is extremely critical."

Beyond funding, often all it takes is facilitating deal-making and providing exposure. For example, supporting indies via travel assistance and pre-coaching to attend key events like GDC can enable life-changing experiences. Such B2B style "missions", often paired with an expo floor booth or a hosted reception/party offers a great amount of leverage at the indie level. While Canada and various provinces have been quite active with these types of activities, more exposure and support could always be used, especially in the absence of direct funding.

"If the government doesn't want to risk investments in specific companies/projects, it could at least look to openly sponsor more game jam/game pitch competitions or festivals," noted Nick Rudzicz, cofounder of the Montreal-based Mount Royal Game Society group for indies. "Doing so would not only mitigate the dependence on one particular project, it would simultaneously (publicly!) show the government's interest in supporting indie game developers, and encourage indies to put their unique talents to work immediately."

Moore concurs: "I personally believe Canada has always had an amazing stance on supporting the arts… The first government-sponsored indie game art festival would be an amazing sight to see."

Another model to support more aggressively is incubation, with a focus on the creation of new IP. Providing an environment that combines tools, seed funding, mentorship and marketing savvy with the raw creative talent of developers in a systematic manner is more likely to generate innovative new games (that indie studios can own and control) than doling out tax breaks a year after production closes.

Incubation and acceleration programs of various shapes and sizes have emerged in recent years -- some more geared toward supporting student talent (e.g., Ryerson Digital Media Zone in Toronto, Concordia/Dawson Montreal Game Incubator) or are more general in nature (e.g., GrowLab in Vancouver, Year One Labs in Montreal). A commercial incubator focused on games has yet to emerge, as has been seen in the U.S. (e.g., Joystick Labs).

"In my experience, tax credits have virtually no impact on startup indie developers: you have to be in a position to spend money to get money back, and these teams typically self-fund themselves on very, very little money, and a lot of dedication and passion," clarified Provost.

"The general overhead and cost of applying and 'getting into the system' is high, and the ROI for doing so -- when you can barely afford to pay yourselves minimum wage, isn't very appealing. At the earliest stage of an independent studio's development, the absolute most critical thing is gaining access to seed capital that proactively encourages creativity and innovation. We want to ensure that we're breeding the next visionaries and a one size fits all policy of applying tax credits can certainly encourage industry growth, but it doesn't put us in the driving seat."

Further, encouraging a legal environment where experienced developers are not afraid to jump off the corporate ship (due to non-compete and non-solicitation clauses) is a necessary ingredient to fostering new start-ups and micro-studios. Creating more fluid networks of talent can not only encourage a higher degree or entrepreneurialism, but can address the peak overhead problem at a community level (i.e., many small projects with out-of-sync development cycles within a given region for talent to move between).

Balancing Act

For all of the progress Canada has made in the past decade -- some attributable to the support of government, some in spite of it -- the country is at risk of losing its leading position. And, more importantly, without a more balanced approach to its interventions, Canada is at risk of losing the visionary talent that it is going to need to stay ahead in the future…

"I personally don't feel there's any reason to stay here," bemoaned Fish. "As soon as I'm done with Fez, I am out of here."

Given the complexity of the game industry ecosystem, it is hard to predict the effect of any one variable (or incentive) on the overall system. What is clear is that all of the moving parts do interact and a more balanced approach to sustaining large job-creating studios alongside indies focused on creating innovative IP is needed.

Mascherpa brings the point home: "It's very important to foster an active indie community because the industry goes through cycles of massive change. Big studios have trouble adapting to new markets and business models. Indies have a critical role of expanding the industry by going in directions that big studios can't take."

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