Interview: Della Rocca On Breaking Tax Breaks' Hold

Well-known within the industry from his stewardship of the International Game Developers Association, Jason Della Rocca has since been working closely with governments and industry bodies in his position as the founder of Perimeter Partners, a consultancy focused on developing game industry clusters around the world. Gamasutra recently caught up with Della Rocca to talk about his opinions on the direction international governments are taking towards growing their games industries, the Canadian industry and emerging markets. Della Rocca questions, in particular, governments attraction to going "whale hunting" noting that in Toronto, "No disrespect to Ubisoft … but [if I were in government] I wouldn't necessarily have invested in them so heavily." Do you think tax breaks are as valuable as most governments seem to think? If you already have an established industry, you want to do something that's more about sustaining it. In that case a tax break may be the most suitable thing. One of the challenges of a tax break is that it comes "post spend." Developers have to make the game, spend all their money, and at the end of the year when they file their taxes they get a relief. That doesn't help if you don't have an industry and you're trying to get start-up companies to come together. If you and I decided to make a game the fact we could get a tax break in a year isn't going to help us. There, what you want to do is have an incubator model or a prototype fund model, where you're actually giving a grant or preferred loan so companies can get going. But then, that's a riskier proposition; now you're making investment decisions as opposed to saying "you spend all your money, do all your stuff, we'll help you at the back-end." But, you know, it depends on what your goals are and what kind of region you're operating in. Why do you think governments get so fixated on offering tax breaks? It's hard to say. It's certainly more attractive to go "whale hunting." If you score a whale, oh my goodness, you've got it made; the press release is going to be wonderful. But many regions will struggle year after year just trying to get a meeting with EA or whoever, and it goes nowhere. Instead of spending five years chasing the whale, during those five years they could have been building an incubator, setting up prototype funds, working with the schools. They could have been doing real stuff in the span of five years, and assuming they weren't idiots, that would have produced results, even just in terms of attracting bigger companies to the region. I have noticed that there are many American states announcing tax breaks for game developers, but nothing else. People kind of oversimplify; they say, "Oh, Canada! Canada has so much success, why? Oh, because of tax breaks!" so they create a tax break and think their job is done. They don't take the time to understand that maybe yes, Canada has tax breaks, but it also has Telefilm, which does pre-production funding, it has schools with links between training and academia, R&D credits… there's all this other stuff, plus there's an overall critical mass of the existing companies that draws others in; there's all these other ingredients in the ecosystem. You can't reduce any massively complex system down to one part of it. It's like saying the earth's ecosystem works because there's rain…. In many of those U.S. states that have tax breaks there has really not been any progress at all. Do you think Canada's in a good place? Yeah, kind of in a good place. I mean, it was recently announced it was third in terms of production. But it's definitely at risk that perhaps as a region we're overly emphasized on the console and old school retail model. We're maybe not doing enough as a country to make sure that we're diverse enough to be able to adapt, so that when that crossover does occur, you know, we saw it coming, and we've got enough folks creating content and working iPhone, Facebook and other social networks. I look at Montreal; to me, Montreal is over-weighted in the console triple-A space. They're having success there, but if tomorrow the meteor drops, all those dinosaurs are going to die. Well, I don't mean to call them dinosaurs; they're doing awesomely creative work, but these are the things that if you don't pay attention to them, there's a shift and all of a sudden, "Damn, where did it all go?" The problem is that the government buys into it. The nature of Quebec is to overly focus on "how do we get THQ to set up, Warner Bros, how do we keep Ubisoft and EA?" If the ecosystem shifts, and the whales are not as relevant as they were, then… It's interesting because even within Canada there's so much competition between the provinces, with communities of smaller companies in places like Prince Edward Island. Yeah. I like the indie thing that Ontario, Toronto put together. If I was the Ontario government, I would be doing a lot more to foster that. No disrespect to Ubisoft, I'm sure they're going to come here and do wonderful things, but I wouldn't necessarily have invested in them so heavily. I imagine someone in the government was probably compelled to score a whale. They just worked their butts off to get Ubisoft in town. And that'll probably be fine, because Ubisoft is a good company. But if it were me, I would have set up an incubator with that money. I would have done stuff to more seed indie development; set up a program to provide a business mentorship to all the indies and start-ups, and really leverage that reputation Toronto has for being more this arty, indie hotbed. But isn't a straight up promise of 800 jobs in ten years a much easier sell within government? The issue is there's no understanding that you could instead end up with that 800 across a hundred companies making hundreds of products. But to some extent, betting on Ubisoft is a sure bet. It's a less risky move. I'm saying "let's take a risk, set up incubators where we grow indie talent and leverage some of the emerging market, and over time this might create a vibrant ecosystem of indie studios collaborating." That might make a similar amount of jobs in a similar time span, but there's no way to validate that; there's no way to make that seem less risky. Yet it's all taking bets; it's a numbers game. What I think correlates most highly with success is quantity, when betting quantity equals quality. So what you want to do is make as many bets as possible. So how do you set up a system which will allow you to place as many bets as possible? Well, putting all your money behind a big company in the end might be a good move, there's not a lot of risk but it's only one bet. How do I create a system where I am happy to place a hundred bets, knowing that by default nine out of ten bets are going to fail, but can accept those fails so I can find the ones that succeed? Especially knowing that ahead of time I could have no idea which 10 of the hundred are going to succeed. No one in government is ever going to give you $200 million for an incubator where 90 percent of what you create is going to bomb. I mean, I'm just guessing because of the way numbers work that 10 percent or so is going to be a success, but there could be a real margin there with the successes. Maybe not the next Facebook, but the next "something" that's going to be explosive. You can only get that if you place all those bets. Do you think the "big bets" like Ubisoft or EA might ever be at risk of leaving Canada? You could definitely see that happen; we're seeing it happen in other countries. When you have these big shops like EA in Vancouver and Ubisoft in Montreal, you don't know if it's going to be so compelling for them to ship the labor elsewhere. But this is really why you want to have that vibrant ecosystem, because if Ubisoft or EA start to shrink rather than grow, then you have enough different kind of companies in different markets doing different types of games that people have the ability to shift within the ecosystem. But if you only have one big company, and it goes down… then what happens? Well, you're from Montreal, and I can only think of one small indie there, and that's Polytron. There's A2M, but they're four-hundred strong or so. Well, there's Trap Door, they're working on games for iPhone, and are about 20 guys or so. But it's not like Phil Fish (Polytron) is going to hire 500 ex-Ubisoft guys if they were immediately let go. It's about how we foster more of the indie shops that can grow to a few dozen and offer more ability to shift between those studios. It's a perspective thing, and people just don't want to be bothered with it, because it looks like just peanuts. It's like venture capitalists. VCs only want to do big deals because it costs them the same in overhead to do a small deal as a big deal, so might as well wait for the big deal. But those little deals add up, and you don't know which "little deal" is going to blow up into the next Google or whatever. Are the emerging markets more open to these ideas? Yes and no. In the real emerging markets, they have no incumbent industry, and as they're literally starting from a clean plate you try to get them to understand chasing big companies is not going to service their market. So to some extent you do have an easier time trying to get them to jump ahead and look at Facebook, look at the App Store, on-line casual as a starting point, as they really have no other choice. But it's still tough for them, they would still love a triple-A shop in their neck of the woods. Isn't also hard for them to create content that could cross cultural barriers? Some of the work I've done with the emerging markets is to teach them they first have to learn how to be successful in their own borders. For example, in South America some of the countries are like "Well, we've got no market within our borders." But there are these cultural sensibilities that make it difficult for them to export, plus the fact they're trying to compete on a global scale. And they have their own country of millions of people they could serve. And the thing is you don't serve that market with Halo, you service it with something more culturally relevant to them. And then they ask "how do we deal with piracy?" and I think you look at the Korean model. Ten years ago it was 100 percent black market, but they innovated on the business side. Once you succeed in your own market, well, you've built up your experience, built up your talent, resources, funding. You might be fine with that. But if you feel you've capped the market you can also start to look at exporting. I don't have hard numbers to back this up, it's just a gut feeling I have; if you want to be successful, succeed in your own backyard before you start looking globally.