INDU Committee Report

CHAPTER 2: CHALLENGES AND OPPORTUNITIES AND THE ROLE OF THE PRIVATE SECTOR, EDUCATIONAL INSTITUTIONS AND THE FEDERAL GOVERNMENT

A. Shortage of Skilled and Experienced Workers

Deirdre Ayre (member, Other Ocean Group Canada, Canadian Interactive Alliance), Pierre Moisan (Vice-President, Strategic and Business Affairs, Frima Studio), Mr.Lutz, Ms. Poulin, Ms. Verge, Mr.Henderson, Mr.Hilchie and Mr.Carrier raised the issue of the shortage of skilled and experienced workers in the Canadian video game industry. As per their assessment, this shortage can be attributed to three main factors:

The relative youth of this industry in Canada compared to the United States and Japan, which reduces the pool of experienced Canadian employees who can fill the vacant senior positions.

The difficulties associated with training intermediate and senior employees from other industries to come into the video game industry as senior employees because of the uniqueness of this industry that combines math, science and art.

The fact that video game developers are competing with other industries for increasingly rare skilled and experienced professionals such as computer programmers and software engineers.

i)The Role of Government Programs

While indicating they would always prefer to hire a Canadian worker as opposed to a foreign worker with the same skill set and experience, Mr.Lutz, Mr.Moisan, Mr.Hilchie, Ms. Poulin and Ms. Ayre reported that in Canada, it is sometimes impossible to find suitable personnel without stealing them from competitors. In order to alleviate this shortage, the witnesses advocated for better and easier access to foreign workers through the Temporary Foreign Worker Program (TFWP), and in particular, through its Canadian Intra Company Transfer component. Ms. Ayre noted that mid- and senior-level staff hired from abroad often act as mentors to less experienced Canadian workers. She also estimated that for every senior-level worker hired abroad there are about three or four junior Canadian persons employed in the Canadian video game industry.

Mr.Hilchie stated that delays in processing Labour Market Opinions (LMO) and issuing work permits had increased considerably due to changes made to the TFWP to prevent the abuses of this program that had occurred in other industries. For her part, Ms. Poulin expressed some concerns about the delays and the red tape associated with the Canadian Intra-Company Transfer Program:

We face some obstacles in the international recruitment process, including long delays in obtaining labour market opinions — especially since the expedited process was suspended—proposed constraints to the Intra-Company Transfer Program, a four-year limit for work permits, delays and unequal treatment in embassies, and so on. All that greatly complicates the process used to find those resources, which are really essential for us.

When questioned about potential changes to the intra-company transfer component, Mr.Lutz warned that increasing the minimum years of work experience from one to three years, requiring companies to pay higher salaries of 30% or more for foreign workers, and eliminating access to the program for companies that use too many foreign workers could seriously impact EA’s productivity.

Alexis Conrad, Director General, Temporary Foreign Worker Directorate, Department of Employment and Social Development, explained that the department had the opportunity to meet with many representatives of the entertainment software industry and that the government is aware of the industry’s needs to have access to foreign workers without undue delay. David Manicom (Director General, Immigration Branch, Department of Citizenship and Immigration) remarked that the TFWP serves to attract highly skilled foreign nationals who may eventually settle in Canada permanently and become citizens. Mr.Conrad stressed that what the government is trying to accomplish through recent and pending reforms to the TFWP is to ensure that employers with a good track record that have demonstrated the non-availability of Canadians to do highly paid work have timely access to temporary foreign workers. According to Mr.Conrad, the purpose of the reforms is to ensure that temporary foreign workers are not used as a substitute for Canadian workers or in lieu of a proper human resource strategy to hire and train Canadians. This last element explains why the government is putting in place a requirement that companies applying for temporary foreign workers provide a plan outlining the steps they will take to transition to Canadian workers.

Mr.Manicom noted that employers must first apply to Employment and Social Development Canada for a LMO to hire a temporary foreign worker. Once this authority is granted, the future employee can apply to Citizenship and Immigration Canada (CIC) for work authorization. The intra-company transfer stream of the TFWP is exempted from the LMO process. Mr.Manicom indicated that the intra-company transfer stream is subject to an ongoing review by the federal government and that consultation with employers and stakeholders is taking place.

Mr.Manicom also observed that other programs, such as the Canadian Experience Class and the Federal Skilled Worker Program, aim at attracting highly skilled professionals to Canada. CIC is rolling out a new electronic system for these programs in January 2015 to manage economic immigration applications. This new system would allow the federal, provincial and territorial governments as well as employers to actively target highly skilled immigrants and to match them with jobs available in Canada.

ii) The Role of Academic Programs

Further on the issue of labour shortages, Jocelyn Benoit, professor, École des arts numériques, de l'animation et du design, who appeared as an Individual, made the following four suggestions to increase the availability of skilled and experienced Canadian workers for this specific industry:

• Companies should be encouraged to free some of their employees to teach in Canadian colleges and universities.
• Colleges and universities should create training programs that allow the transfer of highly qualified workers from other industries in which demand for their skills is declining.
• The development of employees’ skills should be supported as an ongoing process.
• The Canadian video game industry should offer more internships for students.

On this last point, Mr.Benoit mentioned the example of Ubisoft, which has started an inter-university competition for video game prototypes. Once the winning project is chosen, a team of 40 to 50 people is formed on the chosen university campus to produce the game. Mentorship comes first from university professors and then from Ubisoft employees.

Some witnesses suggested that improving academic programs that lead to a career in the video game industry could also help alleviate the shortage of skilled and experienced workers over the long term. In this regard, Mr.Della Rocca stressed the importance for colleges and universities to train students for entrepreneurship and nimbleness instead of training them only for employment in specific jobs. Additionally, Richard Smith, Director and Professor, Master of Digital Media Program, Centre for Digital Media, said that the Master of Digital Media Program teaches entrepreneurial skills and supports entrepreneurial ventures. He also noted that many of his students created their own companies either during their studies or after graduation. The Committee learned that annual fees for this program are about $30,000 for a Canadian student and $52,000 for a foreign student because the school operates on a break-even basis with no government subsidies to lower tuition fees.

In term of artistic training, Mr.Peacock argued that colleges and universities should start offering theatre programs and mid-career training that would provide students with the artistic skills that video game developers are looking for (voice-overs, motion-capture acting, etc.).

B. Fiscal Competitiveness

As shown in Table 1, in 2013, there were six provinces that had a tax credit for their provincial video game industry. While the rates and amounts of these credits varied from one province to another, all these tax credits are tax expenditures that subsidize the cost of labour.

Table 1 – Provincial Tax Credits for the Video Game Industry, 2013

Source: PricewaterhouseCoopers LLP, Digital media and animation incentives in Canada 2013.

There is currently no federal tax credit specifically designed for the Canadian video game industry. That said, video game developers may be eligible to apply for the federal Scientific Research and Experimental Development (SR&ED) tax incentive program, as well as various other federal initiatives created to encourage research and development (R&D) and innovation.

Mr.Della Rocca explained how Quebec’s Production of Multimedia Titles tax credit works:

The tax break that we talk about in the gaming industry is on labour. In Quebec it's 37.5% on labour. If I spend $1 million on programmers, artists, designers, etc., at the end of the year, when I file all my paperwork, I will receive $375,000 back from the provincial government.

Mr.Henderson told the Committee that governments around the world are trying to attract investments from video game companies since these investments create highly paid jobs and generate significant tax revenues. On that point, Mr.Hilchie stressed how common tax credits have become by indicating that in the United States, there are about 25 states that offer digital media or video game production tax credits.

Ms. Verge explained that it is important for Canada to maintain its fiscal competitiveness in terms of provincial tax credits as well as the SR&ED program because these incentives favour Canadian studios when Ubisoft, which has operations in 28 countries, decides where it should produce its next video game. Indeed, competition for investment occurs among video game developers as well as among the various studios within a company. Ms. Verge also indicated that provincial tax credits enabled video game developers to take more risks and to be more creative and innovative. Mr.Henderson reported that provincial tax credits and the federal SR&ED program were used by Ontario-based companies to grow their businesses, create original intellectual property and develop their own brands. Further to this point, Michael Schmalz, President, Digital Extremes, stated that over the past ten years, his company had developed its own proprietary game development technology with the help of the SR&ED program.

Mr.Lutz informed the Committee that EA applies for the SR&ED program in all the Canadian provinces in which it operates. This program is a key incentive for EA to conduct R&D in Canada. Mr.Lutz and Ms. Poulin argued that multinational companies should be treated equally under the SR&ED program because multinational companies such as EA and Ubisoft conduct important and innovative R&D in Canada. Sara Morton, Director, Interactive Ontario, Marit Stiles, Director, Public Policy and Communications, ACTRA – National, and Mr.Henderson advocated for the creation of a federal interactive digital media tax credit that would work in concert with existing provincial tax credits.

C. Access to Early Funding

Difficulty in accessing early funding was mentioned by many witnesses as a hindrance in establishing Canadian entertainment software companies. Mr.Della Rocca explained the various stages of venture funding:

There are different stages where you have investments. At the very earliest stage it's what you would often call “love money” because someone has to love you to be crazy enough to give you money. So it's angels and it's rich uncles and that kind of stuff. Then you have seed stage, or early-stage investment. In Montréal an example there would be Real Ventures, which was quite active in developing the start-up ecosystem. It's not until you are sort of profitable and you're generating revenue and now you need growth capital, that's where you see Fondaction and FTQ coming in at that stage. It's far too risky for them to be playing in the love money and early stage because the level of failures is quite high and the bets are much smaller. So generally they're doing bigger checks at a later stage.

According to Mr.Carrier, access to funding is very important for smaller companies in the video game industry. Funding can be accessed through the Canada Media Fund, for example, or through venture capital. Hibernum, which was supported by the Quebec Department of Culture and Communications’ investment fund and co-financed by the Fonds de solidarité FTQ, was cited as an example. Mr.Della Rocca meanwhile stressed the importance of start-up funds for small firms, citing Real Ventures (also funded by the Solidarity Fund) as an example of success..

Khaled Shariff, Chief Executive Officer, Project Whitecard Inc., noted that if venture capital funding were easily accessible in Canada, there would not be a need for tax credits in the entertainment software industry. Mr.Shariff also argued in favour of tying government assistance to the market, meaning that government assistance would be contingent on obtaining venture capital from the private sector. Mr.Della Rocca offered a different perspective by explaining that tax incentives are close to irrelevant from a start-up point of view since, in order to eventually benefit from a tax credit, a start-up first needs to have money and spend it. Mr.Della Rocca also indicated that governments should not necessarily optimize tax incentives but should instead attempt to diversify the type of government assistance programs that are provided by offering early-stage investment funding, for example. He praised the Canada Media Fund, which provides financial support at an early stage, as a way of actually producing content and noted that positive effects, namely on-the-job training for young workers, would ensue from supporting start-ups.

Mr.Della Rocca also stated that there is a whole movement towards favoring start-ups and entrepreneurship and also highlighted the federal government’s role in providing venture capital funds. He nonetheless noted that the entertainment software industry does not necessarily benefit from these trends. Further to this point, he indicated that the shift toward mobile and online gaming is changing the investment dynamic in the entertainment software industry by increasing the strategic importance of venture capital. Mr.Della Rocca also explained that facilitating access to early-stage capital would have a dramatic effect on the volume or velocity of start-ups as well as on the creation of new intellectual property in Canada. Mr.Della Rocca also stressed that this approach could protect the industry from the so-called “innovator’s dilemma”:

The summary of the “innovator's dilemma" is that the very things you do to succeed today are the things that prevent you from succeeding tomorrow. It's your own success that blinds you to those shifts and disruptions that are occurring. The best way to counteract the innovator's dilemma is to have and support start-ups that are not encumbered by the rules of success of yesterday; that can explore and experiment and fail; that can become the new big thing. To the extent that all of the resources and all of the attention goes [sic] into supporting the current paradigm, we will be completely lost when the paradigm shifts.

Ms. Morton highlighted that the best way for governments to help increase the supply of venture capital is to provide matching funds to private financiers rather than try to pick winners. She further noted that tax measures in support of early-stage funding may be worth considering. On this aspect, Serge Landry, President and Chief Executive Officer, Canadian Interactive Alliance, commented that not all types of venture capital are currently lacking in Canada; the problem of accessibility is most acute with early-stage funding, that is, seed funding in the range of $100,000 to $2 million. Mr.Landry also suggested that the Government of Canada should contemplate implementing a crowd-funding policy similar to that of the United Kingdom.

D. Creating Domestic Brands and Original Intellectual Property

Several witnesses, including Mr.Moisan, Mr.Della Rocca, Mr.Landry and Mr.Benoit, spoke of the importance of creating domestic brands and original intellectual property if Canada is to reap the full range of benefits from having a domestic video game industry. Mr.Della Rocca further argued in favour of establishing new metrics to define success such as: 1) What is the volume of new intellectual property being created?; 2) How many new start-ups are being created?; and 3) How much investment and venture capital dollars are being generated?

Mr.Moisan, Mr.Shariff and Ms. Ayre stressed the importance of the Canadian Media Fund in supporting the creation of original intellectual property in Canada. Mr.Moisan called the role of this program “essential,” while Mr.Shariff and Ms. Ayre argued in favour of increasing its funding envelope, or at least not decreasing it. That said, Mr.Shariff recommended streamlining the application process for this program. He stated that over the course of several years, he had to fill out “maybe over 1,000 pages of applications”. He further noted that even responses of 100 pages are too large and he gave as an example a project sponsored by the National Aeronautics and Space Administration (NASA) in the United States where the response was 15 pages long plus a presentation.

Mr.Moisan also noted that the need for subsidies will be diminished the day Canada has its own brands by illustrating that “Garfield doesn't need subsidies. Mickey Mouse doesn't need subsidies.” Mr.Henderson cautioned, with respect to government subsidies, that the objective should be to develop an industry rather than to try to subsidize cultural products. He further expressed that support for interactive digital media must allow the government to recoup its investments through employment and taxes, for example.

For his part, Mr.Benoit noted that significant funding is available for applied research in engineering and programming but that financial resources are scarce in the artistic areas, such as video game and level design. Mr.Benoit thus argued in favour of making research funding in the visual and narrative aspects of video game production more accessible.

With regard to intellectual property, according to Mr.Lutz, the countries with the strongest intellectual property protection laws are the ones who will thrive in the digital economy, and he praised The Copyright Modernization Act of 2012 as a strong first step in this direction in Canada.

E. New Growth Opportunities: Example from Abroad

Sales of games through the internet have made it increasingly easy for video game companies to reach a global audience; thanks to online distribution, selling video games on the Asian market is now as straightforward as selling them on the local market.

The advent of online sales has meant a drastic reduction in distribution costs and a corresponding increase in growth opportunities for Canadian start-ups. Indeed, the success of a single game title could put a start-up on a fast track to becoming a multi-billion dollar company. Mr.Della Rocca and Mr.Landry gave the example of the Supercell success story in Finland to illustrate this point. Box 1 provides an extract of Mr.Della Rocca’s testimony on Supercell’s success story.

F. The Mobile Revolution and the Marketing of Canadian Video Games

Mr.Moisan, Mr.Henderson and Mr.Hilchie all expressed the view that the ever-increasing interest of consumers and developers in applications for mobile devices such as smart phones and tablets is one of the most important trends affecting the video game industry. The mobile revolution is drastically changing the way video games are produced and consumed as well as the way they are monetized. Reflecting on the impact of this trend, Mr.Moisan observed that today’s video games have to be able to communicate among different platforms such as PCs, consoles and mobile devices in order to allow a consumer to start playing a video game on one platform and then continue this same game on another.

According to Mr.Henderson, in conjunction with the emergence of mobile devices, a new way of monetizing video games called the “free-to-play” model has emerged:

As was mentioned, there's this new model of game development, whereby you give away the core product and then you try to monetize later on. You get them excited about your game and then get them to the point where they want to buy more. It's a fairly new phenomenon. We've seen it in the games industry over the last several years, but it has dramatically changed the way the industry works, especially for digital products like tablets and mobile.

Mr.Moisan indicated that the free-to-play model represents an added difficulty as customers are getting used to playing for free: “People no longer pay for the games at the outset; they will pay if they like them”. Thanks to mobile applications stores such as the App Store and Google Play, it has become increasingly easy for companies to distribute and sell games to a vast audience and for consumers to access them. According to Mr.Della Rocca, the benefit of “app” stores has been the elimination of the middlemen between the game and the consumer. These developments have resulted in a reduction in the barriers to entry in the industry and have meant an increase in the level of competition. In this context, as described by Mr.Moisan, marketing is taking on a growing importance:

(…) there was a period where there were garage companies that could make games. Then there was that trend for triple-A titles and only big companies could make blockbusters, which were quite risky, but now it's back to garage companies for many mobile applications. That's what our marketing efforts have to fight, because we are stuck with the fact that there are hundreds of thousands of apps.

Mr.Schmalz, from Digital Extremes, shared with the Committee the example of his company’s choice to distribute its latest video game title, Warframe, on the Internet for free. This game has been monetizing well because myriad players across 125countries have paid to get the additional features.

Further on the point of international market access, Mr.Moisan and Mr.Landry both underscored the importance of government assistance in exporting video games. In particular, they mentioned that consular offices and embassies could help Canadian companies establish contacts in large emerging economies. Mr.Landry noted that there has been a culture of game development in Canada, but not a culture of game publishing; this has to change so that Canadian games are published by Canadian publishers. According to Mr.Landry, a Canadian publishing agency should be created with the assistance of the federal government. Mr.Landry also proposed that the Business Development Bank and Export Development Canada become more involved in the entertainment software industry and be willing to take on more risk. He also suggested that the federal government provide support to local events such as the Montreal International Game Summit and the GameON: Finance conference in Toronto.

Finally, Ms. Verge voiced support for the establishment of a comprehensive long-term policy toward the industry by the federal government. According to Ms. Verge, such a policy would complement similar provincial measures and ensure sustainability for the industry.