"Four year lesson learnt: We won't get tax breaks"

Rick Gibson on why, after tireless campaigning, the tax relief ship has sailed
Author:
Publish date:

As tax credits float away from the UK studio sector, leaving a flotsam of good intentions, hard work, broken promises, and an oily slick of cynicism, what next for British games?

As the source of most of the hard data on the current and future states of the UK games development sector, GIC has long been in the tricky position of balancing the strong potential for a bright future for UK studios with the downward indicators that result from the uneven global playing field. So where does the industry go from here?

Here are three scenarios with possible responses, based on the Coalition Government spending a fair amount, a small amount and nothing at all.

Scenario 1 is the least likely: Government finds a modest pot of money for the games industry to use, say between £5m and £20m. The latter’s roughly the amount unused in Film’s tax credit allocation last year, and, before he got elected, the new Minister thought he might be able to raid it.

This seems unlikely, but what could the industry do with that kind of money? Big measures like tax credits that benefit many studios are out because that level of budget is too small. That scale suits grant schemes, but they have patchy track records.

The French specialise in hand-outs providing temporary relief for wobbly companies and many supported companies collapse when funding stops. Slightly better are educational grants designed to link industry with universities, but few have yet delivered much of commercial value.

More viable are specialist bodies disbursing matched grants (Government matches private funding), or low interest or convertible loans. These can be successful when the right product/studio is backed following vigorous tyre-kicking. Here, matched grants could deliver the most bang:buck ratio, and assist a modest number of studios with sub-£0.5m early-stage or prototype financing.

Scenario 2 is barely more likely: Some money, say £1m-£2m, is scraped together by combining various pots in different departments. This will take a fair degree of political will and capital, whose existence is currently unclear.

The problem with this level of funding is that it’s quickly spent, administrative costs can burn a significant proportion, and the remainder could disappear into low impact schemes such as trade show grants, generic organisational assistance or ‘innovation grants’.

This level would see few if any specific projects assisted and it is arguable whether any value would be created at all. Perhaps controversially, I’d suggest that the trade bodies would be better recipients for this level of funding than Government departments. Perhaps TIGA runs a prototype fund like Nordic Game or an indie game competition, or ELSPA teaches the new marketing or commercial skills desperately needed by new digital businesses. Whatever the programme, these organisations are better placed to deliver high-impact assistance than Government.

Scenario 3 is most likely: Nothing happens at all. Politicians continue to glad hand the industry, dodge the blows but, since the cupboard is bare, no assistance is forthcoming for the foreseeable future.

In this scenario renewed calls for tax credits could fall repeatedly on unfertile ground. As someone who has worked on tax credits for over four years, I believe that boat has well and truly sailed.

This scenario means organic growth or decline, depending on which games sub-sector you’re in.

Many console studios’ headcount has gradually declined over several years, as publishers increase the size, but reduce the number of bets placed, usually on bankable IP. These studios will continue to win work for hire, but fewer contracts in 2009 could persist as publishers weather the falling console market until the next generation arrives.

Gloomy statements from senior publisher execs on the unlikelihood of increasing their investment in Britain hint that further pain is to come for traditional studios. Sadly, we see no indicators strong enough to challenge the trend of slow decline for the 80 per cent of the UK’s developers working in studios mostly or entirely financed by publishers.

What about the remaining 20 per cent working self or privately funded studios? Almost all are in the online space and no regular reader will be surprised to hear us say that the online sub-sector’s a healthier place to be.

Most UK companies in this space are growing, some at a brisk pace, and our forecast for online is continued strong and sustainable growth.

That’s a key word – sustainability – surely the most important criteria when Government asks where it should invest or how it should help. The bottom line is that many online studios we assess for investors have considerably higher profit margins from more predictable revenues than offline studios. Leaner online studios that service their own audiences and book consumer revenues are intrinsically more stable, able to raise finance and are ultimately more sustainable.

Investors instinctively turn towards service businesses with predictable revenue flow in a growing market, as opposed to those hoping for a big hit in a flat or declining market. Any initiative requiring matched funding from VCs would naturally skew towards online businesses. The low levels of funding in the first of our two scenarios are largely inappropriate for traditional console titles anyway.

So, I’d propose that helping British studios speed up their slow transition towards a more sustainable online future is arguably the best way to make count whatever meagre assistance can be cobbled together by this hair-shirted Government.

Related

London_Thames_Sunset_panorama_-_Feb_2008.jpg

Games Tax Relief delivers

Rick Gibson discusses the promising results of a new study into the UK development scene and reveals the effect Brexit could have on finding funding