Fund Games: North America

Once upon a time - in the good old, bad old days - there were three very simple models for financing the development of a game. Games were either developed internally by a publisher, developed externally by an independent studio funded through regular milestone payments from a publisher, or created entirely using the indie developer's own funds, with a publishing deal only being struck near the end of the process.

All of those models continue to exist, of course. Although the publisher internal studios are certainly on the rise at present, while the number of independent developers with the muscle to finance a next-gen development project on their own is very small, those models remain at the heart of the games industry's product creation cycle.

However, the picture is no longer quite so simple as it once was. Success has bred complexity - first, from the involvement of private finance firms who brought with them ideas such as completion bonding (a model taken from the film industry where a finance firm pays for development, and is paid back by the publisher when the game is released), and latterly, from the interest regional and national governments have taken in the fast-growing industry.

Long gone are the days when a game developer could run on great code and art alone. Finance and economics are now vastly important considerations, and the strength of the industry around the world is now dependent on legislative and macro-economic conditions, rather than on local talent. This, in turn, is forcing game developers to become an increasingly mobile workforce.

Over the course of the next few weeks, I'm going to be looking at the economics of game development in three of the world's most important regions - starting, this week, with what has traditionally been one of the vital hotbeds of game creation, North America.

The New World

Think North America, and, with apologies to Canadian and Mexican readers, the chances are that you think of the United States. Politically and economically, the continent is dominated by the USA - and it's no surprise that it's home to a hefty share of game development, too. The Texan cities of Austin and Dallas have been centres of independent game development for many years, while in Southern California, game studios and publishers nestle up to the far older movie businesses - and further north in rainy Washington State, the presence of a vast high-tech industry has helped to nurture many studios.

However, to find the real business buzz around game development in North America, you need to look further north. The first words to be chalked up in the notes for this article were "The Canada Effect", and it's no exaggeration to describe that as the single most important factor in the North American game development business right now. The cities in which you'll find new studios springing up and game developer job listings filling the recruitment pages aren't Dallas, Los Angeles or Seattle. For that, you need to look to the new Canadian powerhouses of Vancouver and Montreal.

Not so long ago, Canada was the hold-out of a number of independent development stalwarts such as Bioware. Now, with Bioware being swallowed first by investment group Elevation Partners, and subsequently by Electronic Arts, only former Nintendo second-party Silicon Knights, Unreal co-developer Digital Extremes and a few smaller studios remain as a reminder of the region's indie history. Multinational publishers rule the roost here - and the list of giant firms with development campuses in the country reads like a who's who of the industry.

Electronic Arts is here - twice, in fact, employing over 1000 people at a vast location near Vancouver as well as a smaller number at a new studio in Montreal. Ubisoft has one of the world's largest studios, employing 1600 people, in Montreal. Rockstar Games has studios in Vancouver and Toronto; Eidos just opened up in Montreal; THQ Canada is the new name for Vancouver's Relic Entertainment. Japanese publisher Koei just opened its first studio outside its native country in Toronto. New publishing giant Activision Blizzard owns Vancouver-based Radical Games and Quebec City based Beenox.

What's more, few of these are small operations. Ubisoft Montreal and EA Vancouver are the giants of the bunch, but nobody else is aiming particularly small. It's rare to find a multinational studio with less than 50 employees (although some do start out small - Koei Canada, perhaps reflecting its status as a toe in the water for the Japan-centric firm, started with a 30-person development team), and most have staff levels well north of 200 - and hiring programmes that are even more ambitious than that. Even Activision's low-profile conversion house Beenox, which employed 32 people when it was acquired in May 2005, plans to expand to almost 300 staff by 2009.

Red Maple Rising

Those are the symptoms of the Canada Effect - but what is the cause? There's one primary reason for the flourishing development industry north of the US border - namely, that Canadian regional governments are among the few in the world that have identified the interactive entertainment market as one they want to attract. Several Canadian provinces have the games industry firmly in their sights - and Quebec in particular, with its initiatives handled largely by its enormously proactive development agency Invest Quebec, has done a stunning job of making itself into one of the most attractive places on earth to set up shop.

The financial incentives are vast for studios setting up in Canada. A system of tax credits for creative industries has its foundation over 30 years ago, when Canada first tried to attract the movie and TV businesses across the border (as a result, even today many series and films ostensibly set in the United States are actually filmed in Canada). Under this system, firms can claim back tax equal to a percentage of their costs in creating (and in some cases, marketing and distributing) their products.

In Ontario, schemes game developers can take advantage of include a 30 per cent refund on salary costs and marketing budgets, called the Ontario Interactive Digital Media Tax Credit. Other specific credits cover computer animation and sound recording specifically.

Montreal-based firms get a deal that's even better, in some respects. A basic tax credit accounts for 37.5 per cent of a company's salary bill - and some developers claim that a combination of various subsidies and credits in the Quebecois city can cover up to 60 per cent of the bill. In both places, regional government bends over backwards to accommodate firms who want to establish themselves in the city, assisting them with everything from locating property to finding staff.

It's no surprise, then, that publishers are rushing into Canada - or that they're maximising the size of their studios there, to wring as much benefit as possible from the tax credits on offer. However, the tax credit system is not without its detractors - primarily those who claim that they can't last forever, and wonder what will happen to the industry in Canada when they disappear.

The government's hope, of course, is that it won't have to worry about that for a long time. Even if, as threatened, the British government demands a WTO investigation into the legality of the credits, any action would probably take a decade to happen. By that time, even without tax credits, Canada's game development market should have enough industrial inertia behind it to sustain it for a very long time.

After all, it's not just tax credits that have attracted firms to Montreal and Vancouver - in fact, Vancouver's provincial government (British Columbia) offers no such credits in the first place, a fact which has provoked some low level inter-provincial squabbling in recent years. Canada's macro-economic conditions have also been attractive to game publishers, with salaries north of the border generally being somewhat lower than in the United States, while the nation's health care programmes helped to cut the cost of healthcare to employers.

Blame Canada?

In the past year, the tumbling value of the US dollar has made Canada a bit more expensive - the currencies now trade almost at parity, which was almost unthinkable a couple of years ago. However, the cost of living in Canadian cities remains lower than many US cities - and far, far lower than cities in Western Europe - which allows salaries to remain competitive. It helps that the country is also a popular destination for the kind of skilled, educated workforce the games industry requires. The nation is widely seen as having a good standard of living, and recent political events in the United States have helped to cement Canada as a popular choice for European and Asian workers wishing to continue their careers in North America.

So, should studios in the United States be worried? Probably not - not yet, at least. Despite the huge concentration of development in Montreal and around Canada, there's no convincing evidence of a "brain drain" across the border - and it seems that the huge growth the industry as a whole is experiencing is driving Canada's expansion as a development centre, without needing to bleed any existing regions in order to do so. The country is also determined to develop its own home-grown talent, and funding has been secured for many game development focused university courses - which should, in time, ease any fears of too much talent heading north.

The United States also remains a hugely attractive place for the games development business. Aside from the history and the local talent pools in the nation's game development hotbeds, it also has a cost of living that's hugely competitive when compared to Europe and the richer nations in Asia - and although salaries remain relatively high, the tumbling value of the US Dollar has helped to make US developers among the most competitive in the world. For now at least, it's extremely difficult for developers working in Euro or Sterling to compete with those charging for their services in US Dollars.

The other reason why the United States shouldn't be breaking into a cold sweat over the success of its northern neighbour, however, is far more worrying from Canada's perspective. Put simply, Canada has managed to nurture a development industry that is creating some of the world's most successful and best-loved intellectual properties - and then promptly handing the IP, and the profits, to overseas firms.

This is the real concern about the long-term legacy of Canada's development industry. Although firms like EA and Ubisoft have put down very deep roots in the country, ultimately Electronic Arts is a US firm, and Ubisoft a French one. In fact, not a single major publisher in the games market is based in Canada - and all of the valuable intellectual property being developed at the studios across the country belongs to foreign, mostly US-based, companies. The dangers of having a large industry owned entirely by foreign firms are obvious - and it's this that is the Achilles' Heel of the so-called Canada Effect.

Nevertheless, Canada provides a clear indicator of how a nation can go about attracting media companies in general - and videogames companies specifically - to its shores. Its success has remade the map of the development industry in North America, and has served as a wake-up call to developers, publishers and governments around the world. The Canada Effect may be the single most important factor shaping the business of game development today - but as we'll see next week, not everyone is quite ready to up sticks and move to Montreal...