Before starting let me tell you a bit about myself and why I'm writing such an article. I first got a bachelor degree in economics, later I made a business master but I thought it was a terrible idea and then I returned to economics for a PhD in game theory. Unfortunately, I dropped out as I saw an opportunity and I founded Nowhere Studios in 2011 where I'm the founder/producer to this date. One part of my brain is still busy thinking about world economics. Eventually, as I belong to it, I think about game industry economics as well.
In this article, as a flavour, I will use lots of quotes from the book "Why Nations Fail" for two reasons: First, I recently read the book and I was fascinated by it. Second, right after reading the book, I realized that we are from the same high school with Daron Acemoglu. He is 12 years older than me and he suddenly became one of my role models and inspirational people in my life.
"Economic growth and technological change are accompanied by what the great economist Joseph Schumpeter called creative destruction. They replace the old with the new. New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete." - Why Nations Fail
Reasons to Support the Game Industry
Let's start with why governemnts should favor one industry over the others. There are lots of different theories about how and when governments should intervene in free market mechanisms. While the advocates of laissez-faire and free market theories often find all kinds of government interventions unnecessary and detrimental for the ultimate wellfare, even the most capitalist countries in the world have some kind of intervention or "dirigiste policies". The main reasons for government interventionism are:
-Some sectors might affect the profits of other sectors positively or negatively as an externality (e.g. technological advances or pollution)
-Some sectors can boost the general wellbeing of the society (i.e. by creating jobs, by increasing exports or simply making the people happier/healthier)
-Although the sector is not profitable yet, it is expected to make a big growth in the future
-There are some market inequalities affecting the natural growth of the sector (e.g. lack of resources, destructive competiton, entry barriers etc)
-Some sectors are viewed as strategical as they will be needed mostly in case of a natural disaster or warfare.
Government intervention also occur when an industy negatively impacts the economy or the wellfare of the public. Carbon tax, alcohol tax or even toll fees to enter the city center with a private car is necessary in some cases. Managing the econonomy is all about allocating the recources properly.
Governments make use of regulations, tax policies or subsidies as tools to incentivize or penalize different sectors but as we will see later in the article there are many more ways to help the game industry.
Therefore as we have seen that government interventions happen and they are probably necessary in most situations, we will move on to why or when governments should pick the game industry as a strategical sector to boost? What makes the game industry special or favourable over the other industries?
“A remarkable thing about new technologies in the Roman period is that their creation and spread seem to have been driven by the state. This is good news, until the government decides that it is not interested in technological development—and all-too-common occurrence due to the fear of creative destruction.” - Why Nations Fail
Today, the game development isn't just for the local market contrary to most other entertainment products. Games have no border and they are widely accepted in all countries online markets. Whereas it is pretty difficult for movies, books to reach overseas except Hollywood movies or some best-seller books, even the most modest games have a chance to be sold in the other corner of the world. The global market is not protected and most games content belong to a global culture that need very little or no localization effort.
Animation studios, which look very similar to game development studios in production have a very narrow global market which consists of a few giant buyers that are very selective. IT services on the other hand have many buyers but local suppliers are highly prefered.
In Australia for example the total export of the industry is expected to be %90 of total industry revenues. Australia is a very big market for games but it is still exporting %90 of locally developed games to other countries. (*Australian Electronic Game Industry Profile, 2005). In France, game industry exports is higher than %70 of the total revenues for locally developed games(*SNJV, 2012). Game industry has arguably the highest export/domestic sales ratio between all industries of this size or bigger.
Boosting the game industry is a perfect way to increase the exports of a country and the most effective way to deal with the trade deficit.
Game development is a heavily labor-intensive act. Salaries make up to 90% of all development expenses for most game types. Game studios employ artists, game designers, programmers, producers, animators and many more, including a very large array of different profiles. If a country has a large educated unemployment, a healthy game development industry might help reducing the unemployment rate efficiently.
Even in a country relying heavily on technology and energy imports, game development is still much better than other industries for closing the trade deficit. Take manufacturing to compare, where there is still a high labor factor, if you are importing oil, microchips and robotics there is close to 0 value added in your value chain. It has sometimes even a negative impact for the trade deficit. This is mostly why energy-dependant countries can't deal with their trade deficit even when they do a devaluation of their currency. The answer is game development. Full value added, more than 80% export in most countries. Most other labor-intensive industries like manufacturing or agriculture (even if they do have a big value added) face very heavy market protections while trying to export goods.
Keynesian economics suggests, especially in case of a stagnation with high unemployment, increasing the government expenditure will increase the aggregate demand and stimulate the economy. Therefore even paying people to dig holes then make them cover it up, will help because the money will return to the local economy as tax revenues. Giving grants to game industry has much better effects as most of the expenses are going to salaries which is quite the same as paying directly to people and plus you have the exports as a bonus.
“The great inequality of the modern world that emerged in the nineteenth century was caused by the uneven dissemination of industrial technologies and manufacturing production. It was not caused by divergence in agricultural performance.” -Why Nations Fail
Game industry is relatively young and it allows new joiners to catch up the big players of the industry. Every year a game from a studio that didn't exist a few years ago becomes a huge hit. The industry is very dynamic and constantly changing form with new technologies and trends.
2000's was the decade that online gaming boomed for example. With a careful planning of Korean government, Korean online game exports raised from $183 million in 2003 to $2.1 billion in 2011(KOCCA Report 2012). More than 10 times growth in 8 years. Online games had gained importance over other game categories during that time as well but the overall category growth isn't even close to explaining the growth of Korean online games.
Game industry allows small companies to grow naturally to huge ones in just a few years without the need of big initial investments. Most startups just need a seed money, talented developers and a strong vision.
Global game market is expanding and all forecasts expect that it will continue to do so. New platforms and techonologies are driving the growth and there is always a good unique idea for a new company to follow.
Millions of gamers know about Poland due to Witcher series or Finland for Angry Birds. Creative media industries play a big role for the global image of a country which is proven to increase the consumer evalution of its products and its tourism.
Out of all creative media industries games are the one that cross the borders most easily as already been told.
Policymakers often neglect game industry as it's a relatively small and formed by smaller companies that lack lobbyists. Policymakers tend to spend their energy on sectors where they expect to gain politic support. Even if it's not the case and they are full of good intentions, they can't see the diminishing returns of regulations and they tend to spend their energy on bigger industries.
A new regulation would increase the output of construction industry 0,1% probably as all the necessary regulations have already been done in years. But in game industry that changes with enourmous speed, a regulation might mean a doubling of all the output.
Today many new technologies are discovered due to games or become public through games.Interactive military, medical or drive/flight simulations, real-time rendering algorithms, programming languages have all experienced breakthroughs through the techniques used in games. Gmaes have enabled many other technologies indirectly such as the development of CPU/GPU chipsets and other hardwares. Gamification has become a marketing tool derived from game design principles of engagement, retention and reward mechanisms.
Having a developed game industry is resourceful for a wide range of other industries and there are career swapping opportunities for veterans of those industries.
There is some discussion going on around if the game industry is recession proof or not but the common opinion between tech VC funds is that investing in games is a good way to hedge against their investment risks.
The same hedging principle applies for governments as well. It seems that when the aggregate demand falls, somehow, video games sales remain the same. I believe this is due to the price inelasticity of total video game purchases. People tend to cut eating out, enjoying a movie or other entertainment expenses before video games as it's relatively a less expensive way of having fun. It's an inferior good, like bread or public transportation. Also it is believed that unemployed people tend to play more games than other types of entertainment which explains the resistant demand even in times of recession.
The issue is discussed in this article on Gamasutra.
Known Practices for Game Industry Incentives
I wrote an article in May for different ways of funding a game company it included various government grants from different countries. The list needs to be improved and updated.
By some strange twist of fate (!), more developed countries have better and more reliable incentives for the game industry. Nordic countries, Canada, Korea and UK are doing great. US and other European countries have mixed scores and the rest of the world seems like ignoring the whole opportunity. I will try to discuss why some countries are doing better than others in the conclusion part of the article.
Now let us try to analyze and categorize the different incentive tools used by governments. We will start with financial incentives first. Let us compare different methods used and try to make a conclusion.
Project funding vs company funding:
Game development is the locomotive of the game industry. Project funding programmes are excellent and sometimes don't even require an incorporated entity. This is the backbone of any support programme towards game industry.
But development isn't the only job in a mature industry. There are various business models that development is only a tiny part of the whole product. Marketing, publishing, ongoing operations, legal issues all cost money and can be incentivized. Therefore governments use a mix of different programmes that supports projects and companies functioning in the industry.
Development vs marketing funds:
As already said, development costs are made up by salaries mostly. Funding development increases the number and salaries of developers while also increasing the number of games developed each year. But development is not always the phase where developers needs a little push. Marketing became the most important expense for mobile development unfortunately. Even in AAA category, biggest games of the year spend much more on marketing than development.
Funding the marketing expenses in foreign territory for games is a well thought support both for helping the industry and fighthing the deficit gap.
Advance payment vs refund:
Advance payment means the studio receives the funding before the development starts. The eligibility often requires a concept work, a prototype and a marketing plan. This option is very good for the studio whereas it is not very optimal for the government as it is way open for misuse and there is no real mechanism for the developer to stop developing the game and start doing other projects.
Refund means the studio receives the funding when they release the game or after the requirments of the fund has been met. Although this method is much safer to avoid misuse, it leaves the developer with a big finance problem. For big development studios this is not an important issue as they have higher credit limit in banks but for indies and startups delayed payment doesn't work without an extra incentive that would help them access some form of finance.
Partial vs Full Payment:
It is quite rare for a government to give full support to a project. Whereas it is a dream for studios, it often ends with a lot of wasted money. Best practice is to leave some risk to the developer for the total wellbeing of the ecosystem.
Full payment might be necessary when the government needs an extra push to promote a cultural heritage or a national technology worldwide through games. Games are effective in such promotional activities but this should be the topic of another article.
Some incentives limits the use of the fund freely even in the project. Some possible restrictions are:
-Only national expenses are accepted:
This restriction aims to stop studios develop the game elsewhere and receive the fund. It makes sense for developed countries where the salaries are much higher and if the priority is to increase aggregate demand in the country rather than boosting the game industry. Although I believe a better practice would be to limit foreign expenses to a percentage rather than banning it totally. For developing countries this restriction is meaningless because if they get a service from another country it usually means they can't produce it domestically and they lack the know-how. Receiving a service is the first step of getting know-how.
-Only certain types of developers are accepted:
This is a restriction I saw in tech funds. Computer scientists, programmers and engineers should form a certain percentage of the team in a R&D fund. Same principal may apply to game specific funds as certain percentage of the team should be programmers, artists and game designers. If the policymakers know what they are doing and if they see a lack of specialty in the ecosystem, this restriction makes sense to start converting, let's say programmers, from other industries to games. Although I believe the restriction is mostly applied for avoiding misuse and it's a bad measure against it.
-Only certain types of platforms are accepted:
This is a very sharp policy that tries to shape the nature of the ecosystem. For example, supporting mobile games for 5 years will generate a much higher number of mobile developers and mobile specific know-how without any doubt. But tweaking the nature of natural flow of the industry demand is risky business. Doing this will convert many other developers to mobile market and if not foreseen wisely it can be a waste of energy when the industry moves another way.
-Only certain genre/category of games are accepted:
Sometimes institutions want to support storydriven or music-based games to build bridges between different industries and games industry. A visionnaire support programme might be helpful for the future of both industries and creating new cross-genres.
It is widely known that adult or violent content in games doesn't get any funds. But pushing it further and supporting only kid games or sports games should be avoided for the same reasons with the previous restriction. If done with an economic motive, genre/category restriction needs a very clear forecast about the industry and doing so will assume that companies are much worse in prediction of the future than the governent which is rarely the case.
Limiting the funding amount or the number of projects:
-Project Funding Limit: Each project may receive up to a certain amount of fund.
This kind of limit creates an incentive for small projects and favoring companies focusing mostly on mobile and casual games if the limit is not very high. Unless there is a company funding limit or a company project limit accompanying the project funding limit this results in companies publishing a high number of games each year instead of making a big game. In that case the incentive becomes a policy tool that tries to shape the nature of the ecosystem which is risky.
If the aim of the project funding limit is to diffuse the fund to the ecosystem and the resource is low then the best practice is to apply a company funding limit and a company project limit along with the project funding limit.
-Company Funding Limit: Each company may receive up to a certain amount of fund each year.
This limit aims to difuse the fund to the ecosystem as the other limits and favors small companies over bigger ones. This might result in employees of bigger companies to form their own companies. The limit will create a pressure on salaries and eventually hurt big companies in the end.
-Company Project Limit: Each company may apply to the fund with a certain number of project each year.
While the aim is usually the same with the other ones. This limit creates an opposite effect to project funding limit. If there is a company project limit the companies will tend to create bigger projects instead of publishing multiple projects each year.
Indirect financial and non-financial supports:
Incentivized loans are great when the industry has many startups. This is how many industries in the pas has boomed. Low or no interest loans with long pay-back periods and with the guarantee of the government (partial guarantee or full) can send the industry to the sky from scratch.
Incentivizing investors is a very effective method as investors are better at selecting promising projects than governments and it is one of the best ways to support the industry with minimal intervention to the free-market.
Non financial supports are usually aiming the whole industry rather than a single project or company. Even raising the education level helps, but to list some of the more specific supports:
-Including game design and development courses to universities related programmes
-Organizing or supporting the organizion of trade events, fairs and festivals
-Opening incubations centers or supporting the already existing ones
-Working together with associations
-Creating a industry specific agency that would organize all future support programmes
-Doing regular research for the industry needs
How to Choose the Best Policy:
Policymakers can't make good decisions without a good knowledge about the industry and data. Governments applying the best practices have some kind of agency where the industry data is collected, analysed and turned into an annual strategy. Feedback from the industry is necessary as well to conduct a good programme.
Any support programme is better than nothing at all. If your government can't afford an agency or even a single research it's best to imitate what succesful countries are doing. As told earlier, Canada, UK, South Korea and Nordic countries have very good incentives. It's not easy to copy/paste them but still better than nothing.
For the research part, the first thing to do is to collect the basic data to understand the structure of the industry:
-How many developers (programmers, artists, designers, producers)
-How many companies (development studios, publishers, service companies)
-Average salaries of developers
-Expenses by categories (salaries, marketing, licenses, services, other)
-Domestic value added in gross exports
The second stage of the research should be a comparative analysis of the industry with other industries in the country and also a comperative analysis with other game industries from other countries. The comparative analysis will give the output of many more studies like SWOT analysis, Porter's Five Forces analysis, market predictions etc.. all of these studies should be made. But two things will be clear right after the first analysis:
-The necessity to support game industry
-What are the weaknesses of the local game industry and how to adjust
As it's a new industry and there are lots of different business models both in B2B and B2C part of the industry, it's very hard for the government to keep up with its regular pace. Regulations should be able to change very fast and support programmes need to renewed yearly at most.
Each support programme should have a clear set of goals that would benefit the economy of the whole country (even if it's in the longterm), profitability of game developers and improve the structure of the industry.
Supporting the game industry is necessary and some countries are doing much better than others at it. Instutitons like Kocca, Canadian Media Fund, Nordic Games, UKIE are helping their governments to better understand the needs of the industry through regular researchs and industry feedbacks.
Daren Acemoglu, as quoted many times in this article, puts a very a heavy imphasis on the difference between inclusive and extractive institutions. Extractive institutions exist to extract the value from one part of the society/industry and transfer it to another part of the society/industry. Whereas inclusive institutions exist for the sole reason to support an industry or an activity.
“We call such institutions, which have opposite properties to those we call inclusive, extractive economic institutions—extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.” -Why Nations Fail
Without an agency or a very strong association either there isn't enough support or the support programme is so badly planned that no one can actually benefit from it. In some cases the support programme is misused and government has to cancel the programme right after.
My solution is to get together and lower the workload that needs to be done by policymakers. A government agency is not a must at least in the beginning. Associations should focus on the benefits of game industry for the economy. Game developers of the world. Unite!