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Are tax breaks dooming Canada to second-class status?

By on July 7, 2010
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The issue of tax breaks for the games industry is a live one.

Attractive tax breaks offered by Canada, France and many US states are drawing global publishers to build studios and recruit talent based on tax incentives, rather than broader commercial logic.

Britain, which does not offer tax breaks, is falling down the global rankings of games-producing companies from third to either fifth or sixth, depending on who you believe. TIGA, the games development trade body, has been a vociferous supporter of tax breaks for the games industry to “level the playing field”.

But is Canada actually benefiting so much? In the latest Develop 100 2010 survey of the world’s most successful game studios, one statistic leaped out at me:

“Within Canadian-made games, 82 per cent of product sold is by a publisher-owned studio, no surprise given the many studio investments in the region.”

Hold on. Are the tax breaks really doing what Canada wants? Are they creating a strong, domestic business with global exports and long-term potential? Or are they just creating a legion of indentured wage slaves who are only attractive to foreign investors because of the generous tax breaks?

What’s the long-term future of Canadian development?

I’m guessing that the purpose of the Canadian tax breaks are to build long-term value in the economy (not just keep people in jobs, which to my mind is the role of the market, not of government).

The question, then, is whether Canada’s economy will benefit from the repatriation of profits generated by its local development talent to the coffers of US, French and Japanese companies.

After all, a knowledge economy rests on Intellectual Property. And that IP is not being created for the benefit of Canadian companies but for their overseas paymasters.

Does this matter?

I think it does.

Ask any businessman whether he would be happy to compete on price alone, and he would look at you as if you were mad. Price is a poor differentiator, and a beggar-thy-neighbour one. As soon as high-quality development talent comes on stream in other countries that have lower costs-of-living or better tax breaks, Canada is in trouble. Unless it offers even bigger incentives.

For the long term, Canada needs to foster a spirit of entrepreneurialism and IP-generation that will stay in Canada. It needs to encourage its best and brightest to start new businesses, not to take attractive (and subsidised) jobs with global behemoths.

A quick test for you: can you name two global Canadian success stories in games in the last ten year? For these purposes, they need to be well-known to gamers, still independent, and have created intellectual property with a long-term future.

I’m struggling.  Maybe I don’t know enough about Canada.

Or maybe tax breaks have a hidden, and dangerous, cost.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com
  • MEE

    You're welcome and thanks.

  • Just a point on the French tax break – you can't realistically include them at the same level as the Canadian ones.

    Have you heard of any big publisher announcing they were opening or expanding in the country thanks to it?
    The only ones benefiting from it, due to its very limited nature, are small independent studios…

    As for Canada, you also have to put things in context for them. Despite its geography, it is a small country and they managed to get themselves on the map. The tax incentives have created a very strong ecosystem and you can see now and then entrepreneurs emerging from it and starting games businesses. Give them time.

    As for success stories, being bought is part of it, so you really can't ignore Bioware's achievements. I would like to say Club Penguin as well, but they were never part of the game industry ecosystem to start with.

  • Thanks for letting me know about Michigan tax incentives. In my book How to Publish a Game I mention tax breaks from Georgia, Connecticut and Texas, but don't think I had seen the Michigan ones.

    Good luck with your new IP

  • MEE

    Ah, let's not forget Capy: http://www.capybaragames.com

    Being a Michigan indie developing original IP myself, I'm definitely looking to take advantage of the world's best incentives at 40%–I'll let you know how it goes.

    http://www.michiganfilmoffice.org/For-Producers

  • Oh, I agree with that, I am seeing that in Vienna every day. Of course the same thing happens when the subsidy provider is a publisher. And, before you say it, self-publishing is the way out of there 🙂

    Still, it's probably easier to encourage entrepreneurism if you already have a huge base of developers. Or not – I have never studied this in detail.

  • Thanks for those names, Neil. I'll check them out. The key question is what other innovations is the government stifling by these incentives. I'll address that in my next tax-related post.

  • Neil beat me to the punch. All of those companies are owned, and have been for some time.
    I accept it may take time, but in that time, the industry changes and tax breaks, which are hard to change, may start to hold back innovation, not help it.
    But that is a subject for my next post.

  • Neil Postlethwaite

    Unfortunately Rob, Relic are THQ owned and Radical are owned by Activision. But I think it's important to remember that all these studios were successful independents before they were acquired. Arguably, studios like Bioware and Relic showed the Canadian Government the potential for game development in the area.

    As far as current successful independent studios off the top of my head how about Next Level Games, Hothead Games and United Front Games?

    If all the tax breaks do right now is create centres of game development and employment for all the game dev graduates, then I think the Canadian Government will be happy. From there, they can always refocus incentives to favour independent growth (although the pub-owned large devs will always expect their cut)

  • Oops – Bioware aren't still independent, of course. Relic and Radical, then. Both of whom actually pre-date the subsidies, as did Bioware, but both of whom have benefited hugely from them and have been able to grow and invest in original IP as a result of them.

  • Bioware and Relic. Actually, I suspect Radical are more successful than Relic these days, but they're not as well-known since Prototype is their only truly successful original IP.

    In terms of interesting up-and-coming studios – I'd say we're actually a bit too early in the Canadian story for that to be happening on a large scale. You want a climate where people have worked long-term in a publisher studio, are fairly financially comfortable and willing to give founding an indie a go – that probably takes over a decade to come about.

    I understand the “subsidised jobs” fear (although I suspect that the success of the Canadian incentives quite possibly makes the scheme revenue-neutral at worst, at this stage – I don't think the Government have given an official line on that as yet, though). However, I think that fear is something that arises from the British experience of subsidising industry sectors, where it's primarily been used to prop up failing industries – be it coal, or shipbuilding, or steel. There's no hope of recovery – the subsidy is basically pissing good money after bad.

    As we all understand, that's not the case in games; subsidies to attract a strongly growing industry to choose your country over your rivals are a totally different thing from subsidies designed to hold back the tide in a dying industrial sector.

  • That's a totally fair point.

    But I refer you to my question: who has been a successful independent Canadian studio?To broaden it out, just point me in the direction of interesting, up-and-coming studios.

    I'm quite prepared to be proved wrong. I just want to point out the inherent risks that tax breaks don't create long-term wealth, just subsidised jobs.

  • I think you're missing the longer-term picture. Having a market full of large studios operated by international publishers has fairly direct benefits in terms of providing quality employment, of course, but in the medium to long term the effect is to create a large population of highly qualified and experienced game development professionals in Canada.

    The cycle of the industry has always seen key staff from internal studios striking out on their own in search of creative and commercial freedom, and I'm sure that the Canadian government knows this. Their hope will be that in the coming decade, the presence of firms like EA and Ubisoft will result in a boom for home-grown Canadian studios, founded by experienced creatives from the larger publishers, nurtured by the same tax breaks which attracted the publishers to the country in the first place, and fed by a steady stream of professional staff who have cut their teeth at internal studios and are keen to try something else.

    Tax breaks have always been a combination of long- and short-term plays, in my view – short term economic benefits backed up by the prospect, over a decade or more, of a long-term boom in the homegrown creative sector and the creation of strong, independently-owned IPs within a region.

  • To an extent, I see your point. Knowledge workers are valuable for their future potential to create IP, rather than for the ongoing exploitation of that IP. And China has seen a lot of startups in Shanghai where the founders were trained at the “University of Ubisoft”.

    But the key for me is whether Canada is successfully creating a self-sustaining eco-system which engenders startups (the real engine of growth in an economy) or if they are just buying in jobs for as long as the tax payer will support it.

    Any sector which relies on state subsidies starts to become distorted and eventually is structured to meet the needs of the subsidy provider (the government), not the revenue provider (i.e. customers). This seems a very dangerous thing for a government to encourage.

  • I Am Not An Economist, but these tax breaks allow Canada to build up an ecosystem of development talent that can in theory become (more) self-sustaining, no? And does a knowledge economy rest on IP? I am not sure I fully understand or agree with that. One can buy IP after all, but doesn't a knowledge economy rest on having the capability to generate IP?