The Games Up campaign has filed its data with the Government pushing forward the case for a UK games industry tax break - and we've got the full report available to read here online. Part four looks at the wider impact games have on the economyâ?¦

Games Impact – Part 4

Catalytic impacts

Key Points
• The contribution of the UK Games Development industry is wider than direct and multiplier effects discussed so far. There are a number of ways in which it facilitates the performance of other sectors of economy.

• The Games Development industry is an R&D intensive industry – estimated to invest 14% of its turnover on R&D. The technological advances that come about as a result of this R&D investment can be transferred to firms in other sectors in the form of ‘spillover’ effects. Academic research (although focussed on the manufacturing sector) suggests that such spillover effects are very large, with R&D investment generating a social return of around 70% – i.e. every £100 million invested in R&D leads to an increase in GDP of £70 million in the long run.

• Cluster effects are efficiency gains arising from companies being located close to each other. There is clear evidence that clustering effects are present in the Games Development industry, with most companies located around 8 main hubs. This implies that if the industry would decline, and some companies would leave the cluster, there would be negative productivity effects on the remaining companies.

• The magnitude of these clusters effects are difficult to quantify, but research for the broad IT services sector suggest that for every additional 1% in employment in the cluster, productivity increases by 0.25%.

• Video games have a broad demographic reach – there are at least 26.5 million people in the UK playing games (48% of them are female) – and its penetration rate is increasing fast for the older age groups. Given its wide audience reach and the length of exposition (hours / week) in the younger age groups, there is a clear cultural dimension to games as a medium of entertainment that cannot be ignored.

• Video games also reflect the cultural values from the country where they have been made, reinforcing the country branding, and defining its cultural image, its technological reputation, or promoting tourism.

The previous chapters discussed the direct and multiplier contribution that the UK Games Development industry makes to the UK economy, in terms of GDP, employment and tax. However, the overall contribution that the industry makes to the UK economy is far wider than this, as a consequence of the Games Development industry having spillover effects on other sectors of the economy. This chapter explores some of these spillovers which include: R&D, clustering, and other cultural benefits arising from the Games Development industry.

The wider benefits of R&D investment
R&D investment enhances the productivity performance of the firm or sector that invests in it. But not all of the returns to R&D spending are ‘private’ – ie captured by the firm or sector that makes the investment. Some of the technological advances and innovations that come from R&D spill over into other firms, both in its own and other sectors, boosting their productivity as well..

[img :389]Academic studies and previous research by Oxford Economics (although focussed on manufacturing R&D) suggest that the ‘spillover benefits’ of R&D can be very large, with R&D investment generating a social return of around 50%-100% – ie every £100 million invested in R&D leads to an increase in GDP of £50-100 million in the long run (see diagram).

Estimations by Oxford Economics suggest that the R&D expenditure in Games Development industry is around 14% of turnover, that is, around £90 million in 2008. Assuming a social return of 70% (and private return of 25%), this would imply that expenditure undertaken by the video games industry would have a positive impact in the long run of £45 million elsewhere in the economy every year, that is not directly accounted for. Therefore, the stock of R&D built up by the Games Development industry over the last decade could be adding as much as £290 million to GDP.

The benefits of R&D investment by one sector spill over to the wider economy in a number of ways. For example, it may be through knowledge sharing or imitation; it may occur as new techniques and products are passed onto the next stage of the production process; or it may happen as workers move from one company to another. Figure 5-3 summarises the channels by which R&D spillovers may occur.

The development of video games rely to an important extent upon technology, and as video games become more technologically complex, it becomes more R&D intensive. R&D spillovers take place:

• Into the ICT sector: R&D undertaken in the games industry drives the demand and acts as a catalyst for technological innovation in the ICT sector, such as middleware (games engines), graphic design, or hardware.

• Into other sectors: technology originally devised for games, especially in computer imaging, graphics resolution, high-speed interactivity, and touch feedback, have found application into other sectors, such as medical imaging, architecture, design, defence, and engineering. Some examples of these applications are discussed further in Figure 5.2.

Case Study – Example of R&D spillovers into other sectors:

Immune Attack ( is a new generation video game that engages students and teaches complex biology and immunology topics in a manner different from the traditional classroom approach. The goal is to immerse the student in immunology concepts to make learning fun and exciting.

Medical imaging requires the same high-speed processing that entertainment software uses to create 3D images in real time. Using traditional processors, reconstructing an image takes two seconds per slice, or over five minutes for a full image. The CELL processor can process the same image in seconds, not minutes. The massive amounts of data resulting from these scans can result in delays, discomfort for patients, and a strain on hospital data processing.In 2004, the U.S. Army established its own video game studio to develop software to use in training. For example, Full Spectrum Warrior, a realistic game developed for the U.S. Army to simulate combat has a modified version available to the general public.

The Center for Advanced Research in Technology for Education (CARTE) trains military recruits on how to respond to a crisis in a virtual Bosnia.The game relies on sophisticated artificial intelligence to mimic peace keeping operations, and the trainee uses normal speech to interact with the game

[img :390]This diagram shows channels of diffusion for R&D spillover effects

Cluster effects

The “knowledge spillovers” referred to in the previous section, are more likely to propagate if the industries are located close to each other, since there are greater possibilities to interact and watch and learn new ideas or technologies. Therefore, the lower the distance, the lower the transaction costs.

Clusters form because of the efficiencies arising from the physical proximity. There are two types of clusters:

• Intra-industry clustering; and,

• Inter-industry clustering (or Marshallian clustering).

Although no conclusive evidence of intra-industry clustering has been found between the Games Development industry and other creative sectors, there is clear evidence of intra-industry clustering of Games Development companies locating next to each other.

[img :391]A geographical analysis using Location Quotients for the video games industry by Local Authority District (LAD), are presented in this diagram and show clear evidence of intra-industry clusters. An index above 1 (red), indicates a concentration of video games industry above the national average, and show clusters to exist in Guildford, Brighton, East Midlands, Yorkshire, Edinburgh, and Dundee. Clustering implies that if the industry would decline, and some companies would move out of the cluster, there would be a loss of efficiency for the companies that would stay, and at the margin, would reduce overall national productivity. Therefore, clustering has positive productivity effects within the industry, and ultimately, in the whole economy.

Although the magnitude of these effects for the games development cannot be estimated due to the lack of data, recent work has been conducted on the benefits of intra-industry clustering at the two digit SIC code. The results indicated that the IT services (ISIC 72), that includes video games development, have a “localisation” elasticity of 0.253. This means that a 1 per cent increase in IT clustering (measured by employment), will result in a 0.253 increase in productivity.

Cultural benefits
[img :392]Contrary to the perception of some people, the most popular games are quiz and board games, rather than shooters or racing games (as this diagram shows).

A number of studies suggest that games may develop particular visual and motor skills, strategic thinking and relationship building, social integration, and some job-specific skills, as depicted in the examples in Figure 5-6.

Video games have a broad demographic reach, and their penetration rate is increasing fast, especially older age groups, given that penetration for the younger age groups is already reaching saturation11:

• There are at least 26.5 million people in the UK playing games (48% of them are female).

• The average age of the player is 28. Video games are very popular with young people (with 91% of the 6-24 year olds playing games), but not only: 51% of the 36-50 year olds and 18% of the 51-65 year olds also play games.

• Between 44-54% of gamers aged 6-24 consider gaming as a social activity.

Given their wide audience reach and the length of exposition (hours / week) in the younger age groups, there is a clear cultural dimension to games as a medium of entertainment that cannot be ignored.

Case Study – Example of games with a cultural dimension:

Floodsim is a free online game produced to raise awareness around the issues surrounding flooding by allowing players to take control of all government spending on flooding and see the results of policy choices. The game was created by UK games developer Playgen funded by Norwich Union and has been played to date by nearly 29,000 players worldwide.

Eduteams was created by Team Play Learning Dynamics and funded by Dundee City Council to encourage young people to work in teams to overcome challenges. The game was distributed in 9 schools in Dundee, is designed to use multiplayer collaborative play to develop emotional intelligence skills amongst young people. The game utilised core curriculum content and was specifically designed for use by teachers in the classroom.

Buzz!, the Schools Quiz, was created by Relentless Studios and published by Sony Computer Entertainment Europe. The successful quiz game was adapted to create a series of curricular games in conjunction with the Department for Education and Skills, and was designed as a tool to assist learning and homework.

[img :393]There is another aspect to video games that is exclusively restricted to the country where the video games is developed, which has to do with the cultural values embedded into the game. There are some distinctive British traits, such as the humour and the narrative, that are distinctive to British games. An evidence of this distinctive “Britishness” of the UK-made games is the fact the UK consumers perceive them differently than consumers in other markets (see diagram).

There are some cultural values associated to the video games that are characteristic to the country where they originate, and that reflect its cultural values. For example, if the industry in the UK was to decline, there would be a loss to society as these distinctive ‘British’ traits would not be found in the games made somewhere else.

Further, the UK “country-branding” projected by the video games could serve to reinforce the image of the country as tourist destination (i.e. through images of landscape, landmark buildings), technological reputation, or cultural values. Moreover, this effect may be even stronger than other mediums such as film, given the longer exposure involved in video games, as a single title is consumed for a greater duration than a film or a TV.

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