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Interview: Della Rocca On Breaking Tax Breaks' Hold
Interview: Della Rocca On Breaking Tax Breaks' Hold Exclusive
July 8, 2010 | By Mathew Kumar

July 8, 2010 | By Mathew Kumar
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    19 comments
More: Console/PC, Exclusive



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.


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Comments


Tim Carter
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Wow, I really agree with this. As a kind of incubator, in Toronto, it strikes a chord.



I have to point out that you can get money up front from a tax credit. It's possible to "bank" these credits (for a small percentage), and a lot of film production in Toronto was done on Ontario Government production tax credits. However, you need to be well set up as a corporation, and you need to have some sophisticated accounting inside your set-up to be able to do that; things rarely available to the little-guy indie shop.



Back to agreement: there is also a kind of Darwinism-by-bureaucracy that happens when you require too much bureaucratic savvy in these small guys. It's a kind of political entrepreneurship (as opposed to good ol' market entrepreneurshp - focussing on making the product the market will buy). In this environment, the ones that succeed aren't the ones necessarily with the most creative talent, but the ones who understand the complexity of the tax credits, the regulations, the spreadsheets and the application forms. It becomes very top-heavy that way. The "whales" have the corporate, legal and accounting resources to navigate this maze where the little indie guys rarely do.



We're trying out something vaguely like the art patronage model.

Ryan Creighton
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(Tim's bang-on with his Darwinism-by-bureaucracy point)



Jason mentions "the next Facebook" and "the next Google" in the interview, but it's important to note that nearly all of the Canadian funds are explicitly geared towards content. In many cases (except perhaps the R&D refunds), you're expressly forbidden from building a platform like Twitter, Facebook etc. This is a real handicap to many small start-up companies. It ties into the whole risk/reward dilemma - the most spectacular successes (and phenomenal flops) in technology have been in platforms, not content. Only the very biggest multi-million dollar monster games get heat in the press around their release times, but the media reports on *platforms* like Twitter, Foursquare, Gowalla, Google Maps, Facebook and LinkedIn on a daily basis.



i think we could really benefit from the government shifting their focus from IP ownership and content creation to platform and tool development. They keep banging the drum about innovation, innovation, innovation! Superb ... now my character has a blue hat instead of a red one. Have i innovated? He rides a triceratops instead of a horse. Did i pull it off? It's much more feasible to innovate wildly with a technology, tool or platform than it is with a story, where everything's been done to death six ways from Sunday.



- Ryan

nathan vella
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Ryan - CMF (experimental) was rebuilt so that it INCLUDES twitter/facebook/etc-like applications/platforms. Little known fact, but telefilm was an original investor in Flickr. Its a lot more open that CNMF was.



Tim - you can't bank tax credits as a startup or an in-the-red indie, so the fact that it's possible is kind of moot. I also strongly disagree with your point about the only ones succeeding are the ones that know the system. Most Toronto indies barely understand the system, but are smart enough to connect with people/companies/associations that do. These people/companies/associations are easily accessible and affordable. It is not top-heavy, as proven by the # of tiny Toronto and GTA shops that access these things. Moreover, there's a network of developers who've accessed it that can help new shops learn the ropes. All in all, I think you're mistaken about the inaccessibility of the programs.



Anywho, great interview and the point about tax credits jason makes is one that should be listened to by those that claim tax credits in Canada are the be-all and end-all of the industry.

Bart Stewart
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I also thought the positions expressed made good sense. In fact, I see the two main items discussed -- targeted tax breaks and focusing on landing "whales" -- as related.



In both those cases you increase the risk of failure by putting your money on a few numbers instead of spreading your bets. That analogy is pretty obvious with respect to making special concessions to attract big game publishers. But it also applies when treating the game industry as a whale by giving it special tax breaks, as opposed to using public funds to create and maintain a business-friendly environment through (among other things) general tax reduction. From the public servant's point of view, it should feel too risky to play favorites with any industry, including game developers/publishers.



As Jason says: you don't know how the overall business/financial environment might change tomorrow. Rather than setting up long-term, constituency-protected policies that preemptively reward a few particular players based on how the environment appears today, it's wiser to hedge your bets by general investment in a properly regulated but low-cost business/financial environment. That maximizes participation and allows consumers themselves to select the winners, keeping the marketplace efficient at rewarding (and thereby attracting) quality. And that benefits the game industry as well as anyone else.



Another way to think of this is that the greatest "platform" of them all is an open and fair marketplace.

Mathieu MarquisBolduc
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I dont get him. I dont have a link, but I remember our local business papers quoting that the Quebec video games tax incencitives introduced by Bernard Landry all those years ago have a *10 times* return on investment. 10 times! And the author tries to pass that as a mistake, speculating -with little to support it- that giving grants to indies and startups would have produced better results? Those big studios attracted by the tax breaks generate a critical mass of talent and experience and some people use that experience to start new studios. *Thats* an incubator for you. Startups full of people with no industry experience a very likely to fail, even if they get a bunch of money from the government.

nathan vella
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Mathieu - by your logic Montreal should be an hotbed of small studios and indie talent. There are 2 indie studios in Montreal (that i know of), one of whom has 3 people. Toronto has more in one building. Montreal is the furthest thing from an incubator you could possibly imagine. It's like a de-incubator.



Further, it wasn't JUST tax breaks that drew Ubi/EA/Eidos to Montreal...



I think you're missing a lot of key info.

Mathieu MarquisBolduc
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Nathan -

I think one of the reason we dont have that many small studios is because they are succesfull and they grow! Think of A2M - started small, grew, still independant. Beenox, small startup, grew, now part of Activision, Jamdat, small mobile house, grew, became EA Mobile, etc.



I dont get why having a lot of small, struggling studios would be better than having a lot of large, successful studios, and Im sure the government of Quebec agrees with that sentiment.

Tim Carter
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Well Nathan, the proof that you see is the ones that get the funding - the ones that navigate the maze. But what you don't see are the ones that don't get the funding because they simply didn't apply. So what you really have is evidence that is inconclusive - not proof.



Until you did a study that contrasted these two groups you can't say that anything is proven. What you can say is some funding has been given out to perhaps some good projects. But as Chris Crawford says, how do you know what you're missing if you haven't seen it?



Also, I don't really understand your disagreement with my tax credit comment since we both said the same thing: it's possible to get money for these credits, but most indies rarely have the ability or expertise to do so. (Though, I would add, that once you learn how, it's not too far a stretch to go ahead and do it.)



Ryan, thanks for agreeing. I agree a lot with your comment on content. A lot of the funders don't understand the nature of inventive gameplay.

nathan vella
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Mathieu - all the companies you listed were founded in 2000 or earlier. Those are 10+ year old studios. The indie/small studio scene in Montreal is almost non-existant, but Polytron & Trapdoor are doing their best to change it.



Tim - i am missing your point. Yes you have to apply to get funding. Yes the government doesnt see projects that dont apply. Re: tax credits - my bad, read your response wrong.

Russell Watson
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I have to agree with the author completely. Only a month or so ago I was trying to convince a university professor who is working with his country's goverment at developing a games industry, that going after the big companies is not the way to go. Once I had done that he wasnt particularly interested in what I had to say.



They were only interested in the 'big score' rather than planting seeds and growing their own industry.

Robert Anderson
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I feel Mr Rocca is on to something here.

I guess a big question to ask is should Governments fund companies for creating jobs or should Governments fund companies to create inovation within a specific field? Not necessarily the same thing but both very valid reasons. The former tends to have a more immediate result and works well within a 4 year political cycle. The latter is much higher risk in the short term with a higher potential return in the long.

Each Province has quite a few grants/loans for startups that are not specific to any type of business. They are small and take quite a bit of paperwork to get but are great for a start. Things like Workforce expansion, where you may be able to get up to 50% of an employees salary paid for. Up to 30 weeks or so.

The NRC also has some major money for software innovation that can be accessed, with some of it's own issues mind you.

Governments by their very nature tend to be myopic and can only see as far as the next election. Not a bad thing as it gives us in the industry chances to help make changes every so often.

When it comes down to seeing a pile of "guaranteed" jobs in the next few years versus high risk investments in a bunch a ventures, Governments will tend to go the "easy" road.

It takes some real political strength to see further.

I would rather see 100 small studios keeping busy than 3 or 4 holding most of the jobs. Best case would be both.

Kim Pallister
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>But isn't a straight up promise of 800 jobs in ten years a much easier sell within government?



To me this seems like the key point. Gov't (at least elected ones) are going to approve things with high short term return. The tax breaks are entirely about "get company A to settle HERE rather than THERE".



One point not touched on (maybe peripherally) is that getting the whales to settle brings the startups and incubation with it. Si Valley is filled with companies started by Ex-SGI, Ex-Sun, Ex-Intel folk. Seattle has a lot of Ex-MS-startups. I know a handful of ex-Ubi and ex-A2M folk doing startups in Montreal. Incubators may have helped these people, but the fact that they were there to begin with is because of the whales that were landed.

Ian Bogost
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Excellent points all around. Now if only we could get these government shills to heed advice...

Raymond Chua
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Offering tax credit to producers/developers gives them incentive to spend money in a particular region. Money spent making films/games creates a ripple effect that should benefits the local economy. If you look at macroeconomic theory then interest and tax rates have far reaching effect on investment behavior. Therefore tax credits are merely tools for government economist to shape the marketplace and win some political backers.



When the government identifies film or game production as a key engine for economic growth, it's easier for them to identify the big players by the size of their workforce and capitalization. Innovation plays an important long-term role, but it's harder to identify and quantify innovative companies. Venture capitalists are better at handling innovation, but don’t necessarily give a damn about local economies or winning elections.



The question is which is easier to do? Apply for government funding, get VC money, or build a successful indie game studio? The main reason for doing any or all of the above is to get a leg up on the competition – and eventually become the big fish. Alternatively you remain true to your art and not sell out to the man.

Raymond Chua
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Oh, I should preface that a successful indie game studio is a studio that's eventually bought by a publisher or billionaire. Being indie means eating cat food, right? Yuck!

nathan vella
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i just finished some fancy feast while typing this

Jonathan Gauvin
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There are actually a lot of small studios in MTL.

Over the 6 years I've worked at Ubisoft, I've seen a lot of people moving from studio to studio, sometimes coming from small studios, sometimes comming from EA. A2M or Eidos.

Sometimes leaving for emerging small studios or going to the big ones.

The MTL video game industry is not only Big studios as ppl might think but a complete ecosystem.



I unfortunately don't have the names of all the small studios as I've only stayed in Ubisoft the whole time, but I assure you there are many, they are just all in the shadow of the many big ones.



Also, the "bet" concept described in the acticle is flawed.

A 800 employee studio is not 1 bet, as the 800 employees won't be working on the same project.



It's rather many bets with much more chance of producing result since the Ubisoft Toronto company is founded by experienced managers that have shipped games and know the process. Plus, they can rely on support from the other Ubisoft studios for technology and manpower.



Also, 1 big studio increases the chance of communication between the employees, the sharing of technology and good practices, focussing the advancement on new tech instead of re-inventing the wheel.



And this does not mean that you won't be making all sorts of games. Ubisoft MTL is a studio that attacks all sorts of game markets with casual, AAA games, online games, iPhone games, PC games, Wii games, XBLA games etc.

Jason Della Rocca
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Great mix of feedback, thanks!



As a point of clarification, tax breaks are an awesomely powerful and useful tool for economic development. (Some tweets were collapsing the article into a "Jason opposes tax breaks" sound bite, which is not the case.)



I'm opposed to using tax breaks as the SINGLE tool for regional/cluster development. Game development in Canada is succeeding for dozens of factors - sure tax breaks are a big part of the overall strategy, but it is not tax breaks alone.



I've run into this "silver bullet" thinking all the time in my consulting efforts: "well dang, we just need to legislate a tax break and we'll be successful like Canada!" Without any consideration of the overall ecosystem within which game development can prosper (ie, talent pipeline, access to funding, cost of living, related industries, etc, etc).

Stephen Triche
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Baton Rouge has been doing both, building up incubation as well as offering tax breaks. I agree though, it doesn't help a new company all that much. Most of the startups around here only get going because they are branching off an existing software development company.


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