Enough Subsidies

One of the biggest successes in B.C.’s technology industry is the emergence of the video game sector, a 6,000-employee-strong, billion-dollar-a-year fun factory. Ever since the game Evolution and its creator, Distinctive Software, emerged in the ’80s, this vibrant sector has grown to become the envy of many cities that seek a “creative class,” as author Richard Florida would call it. So envious, in fact, that Toronto and Montreal have waged an all-out subsidy war on Vancouver to attract and build the same type of industry. For those of you keeping score at home, it’s working: Montreal has 4,400 video game employees and Toronto has 1,300 (but just landed a major studio, Ubisoft Inc., with its egregious handouts). Vancouver video game CEOs are now wondering where their handout is.


Before I get bellicose about subsidies, let’s look deeper at the subsidy-free video game sector in Vancouver. In terms of talent, the sector employs computer programmers, digital artists and admin personnel in roughly equal amounts. These tend to be younger, highly educated workers willing to put in obscene hours when required, making the sector highly productive. Everything the sector makes is digital, meaning its only consumable is electricity. Even the discs that games ship on today will soon disappear as everything goes online. The wages are high and the perks are exceptional (you’ll see incredibly comfortable and fun work environments at any game studio). Sounds like this is an industry we want to keep, correct?


As in most technology sectors, video game companies typically become successful (or fail) and get consumed by a larger company. Two to three years later, when all earn-outs have been pocketed, the staff filters out and starts a new company. To wit, Distinctive was bought by Electronic Arts Inc., which begat Radical Entertainment Inc., which was eventually bought by Vivendi Games, which begat Black Box Games, which was bought by Electronic Arts, which begat Next Level Games Inc. and United Front Games Ltd., which are two of the biggest studios in town today. Through every iteration, the companies become more sophisticated, more experienced and better managed. Fourth- and fifth-generation startups are far more likely to thrive, especially when there is a ton of talent available in the local market.


If there is an Achilles heel to Vancouver’s video game sector, it is the fact that most of the studios are working for hire as opposed to producing original content. Studios make games for the big publishers and are paid royalties “up front,” meaning that unless the game sells very well, the studio will only have the project financed, with no other potential upside. In order to break out of this mould, the sector requires one thing: capital. Investment capital will allow the expensive original games to be built without being financed by the big publishers, giving the lion’s share of the wholesale game price to the studio. The value of the studio itself goes up immensely when it owns the intellectual property behind the game. A lone example of this today in Vancouver is Smoking Gun Interactive Inc., a company made from the Relic Entertainment team behind one of its successful games. There should be many more like Smoking Gun.


What would subsidies do to the Vancouver video game sector? Just look at the local film and television industry or digital animation industry to see what happens when you subsidize. The industry becomes subservient to the major international sources of capital (the movie studios, for example) and wholly reliant on the subsidy to survive. In essence, you create a permanent service sector. Instead of subsidies, our mature local video game sector needs investment capital that sees returns driven by normal market forces as the motivation to invest. To the CEOs of the hundred or so local studios: resist the easy government handouts of our eastern brethren and make the sector stronger. n


Brent Holliday heads the technology practice for Capital West Partners, a Vancouver-based investment bank.