Creative Industries - Gaming

20 January 2014

From Grand Theft Auto to Moshi Monsters, the UK video games industry has enjoyed a string of recent successes. And it’s set to reap big benefits from the shift to digital business models – provided it can master challenges in its path. 

The UK video game sector contributes £947m to the British economy

When video game Grand Theft Auto V was released in September 2013, it achieved global retail sales of more than $1bn in just three days – making it the fastest-selling entertainment product ever.

But while the crime adventure series is played by gamers worldwide, far fewer people know that it was originally developed in Dundee and is today produced in Edinburgh by studio Rockstar North, part of international gaming company Take-Two Interactive Software.

It’s just one of a string of recent hits for British game developers, from Mind Candy’s online game Moshi Monsters to Jagex’s multiplayer role-playing title RuneScape. 

Indeed, the UK has a history of producing high-quality video games since the 1980s, as programming talent has emerged from the country’s cultural and creative strengths in fields from film and TV, fashion and music, to art and design.

Research published by games industry trade association TIGA reveals that the sector contributed £947m to UK GDP in 2012, employing more than 9,000 people in games development and indirectly supporting almost 17,000 further jobs.

Today it’s the fifth largest developer of video games in the world, according to TIGA chief executive Richard Wilson. But he warns that the industry has declined in both employment and GDP terms since 2008.

Canada, for example, has leapfrogged ahead, backed by government tax incentives. “We’ve lost projects to overseas competitors and jobs, investment and studios as a consequence,” he says.

Although calls for a UK games tax relief were answered in the chancellor’s 2012 Budget, it has since been held up by a European Commission investigation into whether it breaches state aid rules.

Nevertheless, Wilson is confident it will happen. “If they give the green light, I think the industry will be set for significant growth. There’s lots to look forward to in 2014.”

Structural shifts

Momentum has already been gathering thanks to the pre-Christmas launches of Microsoft’s Xbox One and Sony’s PlayStation 4 consoles. “It’s very exciting; there’s pent-up demand,” says Jason Kingsley, chief executive of Oxford-based studio Rebellion, the creator of Sniper Elite.

It’s been more than seven years since a similar launch, compared with a gap of five years previously. “I think take-up will be greater than ever,” he adds. 

But this extended wait for new consoles has been accompanied by shifts in the market and the rapid development and adoption of mobile devices has changed the way people play games over the past few years. 

It’s seen the games industry undergo a major structural transition. At one end, companies such as Rockstar are continuing to invest hundreds of millions of dollars in premium console and PC franchises such as Grand Theft Auto with cinematic production values.

At the other, studios are increasingly focusing on digital “free-to-play” or “freemium” games delivered via smartphones and tablet apps. 

This transition has seen console-based studios Blitz and Eurocom go out of business and retailers have suffered. But it also offers significant opportunities and is opening up game-playing to mass-market audiences. 

“Super-high speed broadband and app stores enable small, agile content creators to reach global audiences directly and push the traditional gatekeepers of the supply chain to one side,” says Ian Livingstone, vice-chairman of interactive entertainment trade association UKIE and former chairman of Eidos. 

The new platforms enable small studios to publish their own titles, made with smaller budgets and teams and with the potential to earn higher margins and retain their IP, rather than being dependent on commissions from the major publishers. “Most publishers are changing to this new model; it’s a hell of a leveller,” says David Braben, chief executive of Cambridge-based Frontier Developments. 

“We’re side by side with them on digital stores. There’s a new digital high street taking form.” He adds that Frontier is responding to consumers’ desire to use their content on different devices: it produced one game for Android, iOS and the Xbox 360, for example.

The trend also places new creative demands on the games’ creators. “Because games are a service they can use analytics and metrics to find out what customers do and don’t like, and change them,” says Livingstone. “This allows fantastic innovation and creativity.”

Kingsley agrees: “Rather than being an auteur, you have to change your game if people think it sucks. 

Otherwise they’re not going to pay you.” Rebellion is adopting a portfolio approach, launching free-to-play games such as Harmony Isle as well as £30-£40 console titles.

But the digital market isn’t a nirvana. “There are lots of studios doing well out of it but it’s getting more and more competitive – particularly on iOS,” says Patrick O’Luanaigh, chief executive of Farnborough-based nDreams.

“It’s not making a good game that’s hard so much as getting noticed.” His company is currently 100 per cent self-publishing but is for now focusing on the more condensed console and PC audience as well as those on the Steam online game download platform. 

"It’s also moving into virtual reality games. “I’m a massive believer that that’s going to be a big new segment of technology, starting in gaming,” he adds.
The quest for finance
The move to self-publishing brings a range of challenges for games companies, from the need for enhanced leadership, management and commercial skills to financing this new business model. 

Studios need the cash to market and launch games as well as develop them – money that was traditionally provided by the big publishers. 

It’s not always easy to find: the banks have traditionally been reluctant to lend to the industry given its IP-based nature and lack of tangible assets. Crowdfunding has opened up a new financing channel – Rebellion has just funded a role-playing game through Kickstarter, for example.

The Enterprise Investment Scheme and Seed Enterprise Investment Scheme can also be useful. But these can only take a company so far. 

O’Luanaigh believes there’s a gap in the funding market for studios that are too big to raise money from business angels or friends and family but don’t have the £3m-plus turnover to raise £3m-£4m from investors or venture capitalists.

A lot of smaller studios are finding that at the moment. We’re trying to raise £0.5m-£1m to help us accelerate and it’s a really difficult amount to look for

Wilson believes that the introduction of games tax relief will increase inward investment into the sector and help indigenous developers to access finance. A greater understanding between financiers and the creative industries more broadly – something that’s a priority for the CBI – would also be helpful. 

Nevertheless, Frontier’s listing on AIM in summer 2013 is an encouraging development, ending a run of British companies, including Candy Crush’s King, favouring the Nasdaq. Braben believes that problems with some games-company IPOs early in the industry’s life soured the City’s view of the industry. But he hopes that Frontier’s decision will help to change the tide – and it is a sign that there is investor appetite in the UK for successful games companies. The company raised £4m.

A battle for skills

But it’s not just management and commercial skills that are needed. While the skills of UK programmers and coders, games designers and artists are globally recognised, there aren’t enough of them.

Because games are a service they can use analytics and metrics to find out what customers do and don't like, and change them

Kingsley is concerned that this could hold the industry back. “Rebellion is 95 per cent export-driven. If we can’t get the skilled people and they’re going to other places because of tax competition, we won’t do as many titles and that will reduce our exports,” he says.

The industry has suffered from a talent drain to the City, although that has eased over the past few years. 

But a bigger problem has been with the ICT curriculum in schools: while coding was taught in the 1980s, the emphasis of the curriculum later shifted. “ICT as it was taught became largely about learning Office skills – Word, PowerPoint and Excel – but gave children no idea about how they could make their own technology,” says Livingstone. “They could play Angry Birds but they couldn’t make it.”

This is now changing. Livingstone was the co-author of the 2011 Next Gen report, which has been instrumental in convincing education secretary Michael Gove to introduce a new computing curriculum from September 2014. 

This will encourage children to be “digital makers” as well as users. “That could be transformational for every industry that has digital components,” he says. 

He’s also keen to see improvements in teacher training in computing and for art and creativity to be recognised as part of the STEM (science, technology, engineering and maths) agenda.

But such measures are long-term in nature. In the meantime, Braben believes that a more sympathetic approach to migration policy is needed. “UK people are migrating abroad, but it’s much harder to bring Singaporean, US and Canadian nationals here because of issues with visas,” he says. “That’s problematic.”

Despite these challenges, those in the industry are optimistic about the future. The number of start-ups in the past few years is an indication of the UK games sector’s dynamism and adaptability.

ICT gave children no idea about how they could make their own technology. They could play Angry Birds but they couldn't make it

The exponential growth of mobile and tablet gaming is opening up new markets and improving perceptions of the industry; no longer are games the sole preserve of teenage boys.

“There’s an ever-growing market of young people around the world who are going to get into computer games,” says Kingsley. “You’ve got emerging markets such as Brazil, Russia, China and the Middle East. Games can transcend cultural and communication barriers. Our audience is only going to get bigger.”

A creative growth strategy

The UK’s successful creative industries – of which the games sector is an important part – play a vital role in attracting foreign direct investment.

But how can the creative industries be equipped with the tools they need to continue to thrive in the future as they face up to shifting business models, increased digitisation and intense international competition?

The CBI has published a new report – The Creative Nation: a Growth Strategy for the Creative Industries – that attempts to answer these questions.

It has worked closely with the Treasury, the Department for Business, Innovation and Skills and the Department for Culture, Media and Sport to identify ways that the UK can retain and enhance its status as a leading creative hub.

The report recommends a series of policy measures that the government could take to support the creative industries in areas such as skills, access to finance and digital infrastructure.

It also examines how the UK can expand its creative footprint overseas and the levers the government can use to promote greater IP protection for content producers in export markets.