Friday, January 24, 2014

We’re Still Newbs When It Comes to Electronic Entertainment Incentives

By Evan Robertson, Project Associate

Over the course of my life, I’ve spent an inordinate amount of time reaching that next level, trying to defeat that final boss, or, more recently, trying to build a rocket to get to a fictional moon. I’ve reached the point at which I’d just simply rather not know how many hours (more realistically months) of my life have ticked off playing video games. The landscape of the video game industry has undergone significant alterations as it ticked away.

We’ve gone from pixelated Mario titles, to major triple-A games with the latest graphic that blur the line between reality and game, to electronic media that reaches the highest level of artistic expression (one need only look as far as Shadows of Colossus and Ico before it). It’s interesting then, to see that we economic development professionals target video game companies much like we do any other firm – the New York Times reports that 20 states offer some form of incentives for video game production. Yet, innovations within the industry itself and its shifting distribution model demand alternative forms of economic development assistance. Simply put, if the goal is to build an electronic entertainment culture – we’re all going about it wrong.

First, a case study. CCP Games is a video game developer and publisher located out of Reykjavik, Iceland. In the gaming community, they are best known for Eve Online – one of a handful of Massively Multiplayer Online Role-Playing Games (MMORPG) to enjoy any form of longevity. This past year it celebrated its’ tenth anniversary which – I can’t stress this enough – is a colossal feat.

CCP planned to expand its’ North American facilities, receiving state tax credits from Georgia to do so. These credits occurred at a time when the company was working on a few titles which it hoped would expand the company’s user base, thereby increasing revenue. Unfortunately, their expansion plans were undermined by uproar over changes to Eve Online which sparked fury among its subscriber base – damaging its primary revenue stream.

The company was forced to shift focus from its new MMORPG title – World of Darkness – which was being developed at its Georgia location to focus on Eve Online as well as DUST 514 – a first-person shooter spinoff title. As a result, the company laid off half of its Georgia workforce. Despite the downsizing, CCP still collects Georgia film tax credits through its North American subsidiary – receiving about $3.1 million in 2012 alone.

Georgia offers a flat tax credit of 20 percent based on a minimum investment of $500,000 on qualified productions in Georgia with an additional 10 percent Georgia Entertainment Promotion uplift by using the Georgia logo on approved projects.

This isn’t to denigrate the use of public dollars to support video game development. It’s about the shifting landscape of the video game industry and its emergent distribution model. Simply put, the use of production tax credits may not be the best way to build a sustainable, electronic entertainment culture within a community. The industry is transitioning from larger, more expensive production outfits to smaller, more nimble companies and entrepreneurs who no longer rely on large publishers to reach a massive audience. Consumer taste – or rather my taste – is transforming along with it.

If you paid attention to the Consumer Electronics Show this year, you’ve probably come across news stories about Valve’s Steam Machine. Steam is essentially the iTunes of the PC gaming, you log in, purchase the title you want to play, download it, and start playing. No physical media, just a digital copy. The service is extraordinary – it reaches 65 million active users last October. Steam Machine seeks to grow that number by creating hardware more suited for the living room.

More importantly, embedded into Steam’s distribution service is Steam Greenlight – a system that lets users’ rate new games to be released through the platform. Greenlight has been a boon to indie developers, allowing them to reach a massive audience in a short amount of time. As I write, seven of Steam’s top ten selling games are indie titles – indie titles such as Rust and DayZ can reach 30,000 or so concurrent players at any given time. And this isn’t the only avenue for indie developers to reach large gaming audiences. Sony, Microsoft, and Nintendo alike have similar online stores to sell indie games through their respective console platforms. Video game developers and entrepreneurs can now easily reach their target audience, no longer requiring large video game publishers to handle retail relationships and logistics. Technology, in this industry, has been a great equalizer.

Indie developer’s struggles have much in common with entrepreneurs outside of the gaming industry – they deal with succession issues, reaching their target market, handling investor relations, hiring the right staff, and ensuring that their product is of the highest quality. Indie Game: The Movie offers an inside look at the struggles and successes of indie game development. Success is life altering, failure devastating. These developers are at the forefront of video game design (trust me when I say the large developers play it safe, often) and distribution – they are innovators, they are entrepreneurs.

Tax credits for production may not be the best avenue for creating a vibrant video game culture. Instead, economic developers must use those tools from the toolbox that are best suited for creating startup culture – networking a community, providing incubator space, connecting entrepreneurial video game developers with established leaders, linking startup capital to indie developers, and offering support services required for basic business management.

Going back to Georgia, the state’s proactive steps to become a leader in crowdfunding could be more impactful in crafting an electronic entertainment culture than its tax credits ever will.