Fund Games: Europe Part 2

Last week, I began a tour of financial conditions in the world's leading game development regions with a look at North America - where powerful subsidies and tax breaks from Canadian federal and provincial governments are driving a boom, while the weak dollar, industrial inertia and a concentrated base of publisher power keeps the US industry healthy.

This week, Europe is in the spotlight. Here, arguably more than anywhere else in the world, legislative and macro-economic factors have caused huge uncertainty over the future of the game development industry. While there seems to be wide agreement that Europe will continue to be a key location for development in the coming years, few people are entirely certain what shape that future will take.

In videogames terms, Europe is dominated by the United Kingdom - both as a retail market, and as a development location. A long history of game development in Britain has created strong industrial inertia and an enviable pool of talent, while the nation's well-deserved reputation as a cultural powerhouse helps to fuel some of the most creative developers in the world - responsible for creating massive global franchises like Grand Theft Auto. Moreover, an English-speaking population hasn't hurt Britain's developers as the publishing industry has grown increasingly US-centric.

However, continental Europe has always boasted its own share of successful developers - and a variety of factors, both economic and social, have precipitated an upturn in the fortunes of continental studios. Meanwhile, the strength of both British Sterling and the Euro on the currency markets, combined with a high cost of living, poses problems for the whole region as it struggles to compete with North America and Asia-Pacific. Governments who have been slow to recognise the cultural and economic value of videogames have done little to help.

The Old World

Perhaps the biggest contrast between Europe and the other major development regions of North America and Asia-Pacific is the number of countries - and very distinct cultures - it encompasses. The United Kingdom alone includes four very distinct nations, each with its own language and cultural background. The European Union contains 27 member states, with half a billion citizens and 23 official languages. The continent encompasses predominantly Christian, Muslim and secular states, sun-kissed beaches on the Mediterranean and Arctic tundra in Scandinavia, proud former Imperial powers in the West and states from whom the veil of the Iron Curtain was only recently lifted in the East.

This diversity breeds creativity, with European studios often seen as more risk-taking and innovative than their overseas rivals - even by publishers and critics based in the US. However, in the past it has also led to the creation of many games whose appeal was highly localised. In the large region centred on Germany and its neighbours, for instance, locally developed strategy and RPG titles have traditionally sold incredibly strongly, but developers there have faced difficulty in building products that appeal to a wider market. The UK's close cultural ties with the United States, by contrast, have helped developers there to create games with broader international appeal.

This situation has changed dramatically in recent years, thanks in no small part to the European Union - which has facilitated and encouraged the movement of talented staff between European nations. Although language remains a barrier, English language abilities in most continental nations are excellent, which gives development studios located all around the region a common language in which to work.

A visit to any European studio is an eye-opener - the mix of nationalities, races, languages and cultures represented is more diverse than ever before. This blending of European cultures is delivering huge success in terms of creating games with international appeal, as it provides the development process with a wide range of different perspectives.

This, then, has been a benefit to European developers - but freedom of movement for workers is not the only benefit which the European Union offers. Last year also saw the initiation of the very first Europe-wide funding mechanism for the videogames market, as part of the Media Plus initiative.

At present, this scheme is in its infancy. Only EUR 1.5 million (USD 2.15 million) is available in funding each year across the entire union, divided up into prototyping grants of between EUR 10,000 and 60,000. Console and handheld developers can apply for a larger grant, of up to EUR 100,000, providing that they make up half of the funding from their own accounts. As such, the whole scheme is really aimed at existing firms rather than start-ups; in fact, it's explicitly designed to provide prototyping funds to studios which have had at least one successfully published product since 2005.

However, it's an important step forward for European developers - not financially, perhaps, but in terms of recognition. While territories like Canada and Singapore have been offering huge tax breaks and subsidies to development studios, Europe has, until recently, failed to acknowledge any value in the videogames industry. The Media Plus scheme is a first step towards acceptance at an EU level - but at a national level, European states have vastly different approaches to the games sector.

Northern Lights

Perhaps the most progressive of all the European regions regarding videogame development is Scandinavia, the states of Norway, Sweden, Denmark and Finland. Although Norway remains outside the European Union, it has signed up to many EU projects and the European Economic Area free-trade agreement - and it participates with its Scandinavian neighbours in Nordic Game, a major initiative to promote development in the region.

Launched in 2006, Nordic Game is initially a six-year commitment from governments in the Nordic region. In 2007, it allocated DKK 5 million (EUR 671,000) in two rounds of funding to a large variety of developers, mostly in the form of small grants - and its success in inspiring grass-roots creativity is clear from the vast number of applications it received. The programme was hugely over-subscribed, with funding applications totalling over EUR 3 million.

The focus on videogame development in Scandinavia is, to a large extent, a continuation of the region's focus on the high-tech and communications industries - much like Canada's tax breaks for development are the offshoot of the nation's former efforts to attract film and TV production firms.

Scandinavian nations have been world leaders in the roll-out of consumer IT and high-speed broadband, and tiny Finland is the unlikely home of one of the world's largest high-tech firms, Nokia. It's probably no coincidence that Finland also invests about EUR 6 million each year in game development, through its Tekes technical industry funding agency - a large percentage of the EUR 21 million invested by every EU government combined.

As a result, Scandinavia is a big market for games; it's the sixth or seventh largest market worldwide in terms of actual expenditure, but per capita spending on games rivals the UK and US, having overtaken Japan. Combined with good support for local tech firms, this has led to the creation of several successful homegrown studios - DICE (Battlefield), IO Interactive (Hitman), Remedy (Max Payne) and Funcom (Age of Conan) being four of the largest. Through Nordic Game's funding initiatives and its annual development conference, the governments hope to promote more of the same.

Scandinavia isn't the only region where government is taking an active role in promoting game development, though. France, too, is making efforts to create an attractive financial environment for game creation - and early last year, applied to the European Commission for permission to treat games equally with films, thus extending film industry tax rebate schemes to game development.

After a number of delays to the decision, the Commission finally announced in early December that France's application had been approved. As a result, France is now preparing to offer a cash rebate of up to 20 per cent of total development costs to its studios, subject to games meeting certain criteria for cultural significance.

Fortress Britain

This decision will make waves far beyond the borders of France - and nowhere more so than in the UK, where developers have faced serious difficulty in getting any kind of support from government. Although a system of R&D tax credits does exist in the UK, which some developers have been able to benefit from, the government generally takes a hard line on state aid to any industry - an approach which has worked in general for the nation's economy, but which leaves the UK at a vast disadvantage compared to heavily state assisted development industries in Canada and Singapore.

Despite recognising this situation, the UK government has often fallen back on the argument that it cannot offer any aid to the videogames development industry due to EU rules. The French victory on this front with the European Commission now scotches those arguments; the path is open for Britain to offer incentives to development companies, if it wishes. The real question now is whether the will exists, politically, to do so.

At present, that seems somewhat unlikely. The French government's persistence on the issue was fuelled by a number of key factors - not least of which is the presence of strong, vocal and high-profile publishing companies in France, who have far more capacity for political lobbying than individual development studios or their representative bodies. Ubisoft, one of the world's top publishers, is headquartered in France, as is the (admittedly struggling) parent company of Atari, Infogrames. More recently, the world's most profitable publisher, Activision Blizzard, started life in French ownership through the merger of Activision with Vivendi Games.

The UK, by contrast, has only one major publisher - Eidos - and it is widely predicted not to remain in British hands for long. The net effect is that while France has a strong publishing industry and retains a large amount of valuable IP in French ownership, Britain mostly creates valuable intellectual property and passes it directly into the hands of US, Japanese or even French multinational companies.

France, too, had witnessed a far more damaging effect from the rise of Canada than Britain did. Some estimates suggest that as much as half of the French development industry high-tailed it across the Atlantic in the space of two years - and while British development teams have faced tough competition from their rivals across the pond, overall employment in the development sector in the UK has continued to grow regardless.

It's not only Canadian government subsidies which threaten development in Britain, and elsewhere in Europe, however. The strength of the Euro and British Sterling against the dollar has vastly increased the expense of development in this region for publishers whose accounts are generally managed in US dollars - while a combination of strong employee protection laws, relatively high taxes and high cost of living make it very tough for studios to cut their prices in order to compete.

So far, that doesn't seem to have had a massively adverse effect on developers across Europe - with the costs, perhaps, being offset by the perception that studios in Europe are more likely to produce valuable new IP, as well as the reputation for quality many established European studios have garnered. In the longer term, however, currency exchange rates could present a major problem to European studios competing for business in a global market. Offsetting them with tax rebates and subsidies may be vital to the health of the sector.

Looking East

One area which - in theory - shouldn't be quite so heavily influenced by the currency problems is Eastern Europe, the former Soviet Bloc nations which only a few years ago looked poised to become a major region for development outsourcing. Depressed economies, low wages and high levels of skill looked like the perfect recipe for cheap outsourcing of large chunks of development - or even entire projects.

In practice, it hasn't quite worked out like that. A significant amount of development outsourcing does indeed go to Eastern Europe, but what's even more significant is that development companies there are creating their own AAA games - and are discovering that, as the EU's influence stretches east and economies rapidly bounce back, their costs aren't actually that far below those of their western compatriots.

Indeed, some Eastern European developers now have outsourcing concerns of their own - talking about India and China as being the most likely destinations for firms looking for outsourced code or art. Developers working on hit PC title STALKER in the Ukraine (a perfect example of Europe's diversity feeding into game creation, if ever there was one) described development budgets in the region as being similar to Western European or American budgets - a far cry from the cheap labour most people expected five years ago.

The overall picture across Europe, then, is a strange mixture of optimism and pessimism. Despite some positive moves on a political level, the future looks bleak for government or EU support of the games market on the scale we've seen in Canada or Singapore - but local moves by governments in Scandinavia and France definitely suggest that the industry could start to see sufficient support to prevent further exporting of development, if not to attract business back from overseas.

However, this is offset by the vast cultural strength of the region - and anyone who doubts that European developers are held in high regard would do well to consider the sheer level of development work which continues to flood into the territory, despite the financial problems outlined above.

Europe lags behind the rest of the world in its treatment of the games industry, and currency differences threaten to pose mounting problems for developers in the region - but yet it continually punches above its weight on the global stage. Governments here would do well, however, not to take that for granted; the games industry may be easy to ignore at present, but if the market does hit a serious downturn, it could be too late to start caring.