Download Senate Inquiry into future of Australia`s video game industry

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Our ref
Contact
David Gelb (03) 9288 6160
Georgia King-Siem (02) 9335 8567
25 September 2015
Dear Sir/Madam
Submission to the inquiry into The Future of Australia’s Video Game Development
Industry
KPMG welcomes the opportunity to provide a submission to the Australian Senate’s
Environment and Communications References Committee Inquiry into The Future of
Australia’s Video Game Development Industry (“the Inquiry”).
Our comments are based on our industry knowledge and experience working with a diverse
range of companies, including those in the video games development industry.
In this submission we provide insight into the games development industry and address each of
the three questions posed by the Inquiry. Our submission provides a range of comments,
covering:
• Industry observations;
• International comparisons; and
• Recommendations.
We would be happy to discuss the information contained in this submission, should you have
any questions.
Yours sincerely
David Gelb
Partner - R&D Incentives
KPMG submission
Future of Australia's video game
development industry
September 2015
25 September 2015
Contact: David Gelb
Executive Summary
Knowledge Economies
Internationally, countries are supporting and promoting innovation in an effort to both develop
new markets and establish their own knowledge economies. Demand for information,
technology and communications (ICT) continues to grow and video game development is now
big business. Globally, video game development is worth more than the film industry, but is
often overlooked. In Australia, spending on games is disproportionally increasing compared
with the Australian gaming industry. This can be remedied, but only if Government is willing to
provide strategic support.
Outlined in this submission are ideas designed to develop, attract and export video game
developers and their products, many of which are geared towards encouraging non-government
investment and streamlining regulatory frameworks.
The Innovation Imperative
One of the recommendations in KPMG’s recent tax reform paper in relation to what Australia
can do to assist the growth of the nation’s innovation sector was the establishment of
Innovation Companies – involving the creation of specific concession to attract investors into
backing a particular company and then accessing trapped tax benefits (like losses) earlier. Video
game developers could be included within this framework.
We recommend strategic support in the following areas:
•
•
1
Regulatory and Tax Frameworks
−
Internationally aligned treatment of crowd funding.
−
Easier and more attractive access to venture capital.
−
Internationally aligned pricing for developer tools.
−
Restoration of grants and in kind support for the video game industry.
−
Incentives for cross-media collaboration.
Attracting International Companies and Hiring Locals
−
Learning from international markets.
−
Extension of film industry support.
−
•
Greater collaboration with educational institutions.
Maximising Export Opportunities
−
Support to access to Asian markets.
−
Redefining the EMDG in consideration of digital technologies
While all of the above may not be feasible immediately, we believe that significant and
immediate steps must be taken to support Australia’s gaming industry.
2
Detailed comments
1.0
Background
1.1
Technological development is an important contributor to long-term growth.
Innovative ideas and improved processes, products and services generally increase the
welfare of society over time. A 2014 European Commission Report found that
without market intervention, countries are likely to generate less innovation than
socially desirable. 1
1.2
Transition from a resource-based economy to a knowledge-based economy takes time
and considerable investment. Government is well equipped to strategically support
and foster innovation given the knowledge, connections and incentives at its disposal.
1.3
Advisory and trend analysts within the CSIRO’s ‘Futures’ advisory services group
have recently identified an emerging new “megatrend” which they call the
“innovation imperative”. Megatrends are trajectories that will have a significant effect
on government, business and society over the coming years, paradoxically providing
economies with both challenges and opportunities.
1.4
As our natural resources deplete, we must find other sources of income through new
industries to drive economic growth. Australia is “faced with an imperative to
innovate like never before”. 2 The innovation megatrend suggests that Australia and
other advanced economies face a challenge, and in order to overcome it they need to
take risks, devise new ideas and invest in blue-sky scientific research.
1.5
The video game development industry (the ‘gaming industry’ or ‘industry’) is a
knowledge based industry that Australia would do well to invest in, if it intends on
generating a new source of income for the future.
1.6
1
The Gaming Mega-Trend
Taxation Paper No 52, 2014, European Commission, A Study on R&D Tax Incentives: Final report,
written by a consortium led by CPB with CAPP, CASE, CEPII, ETLA, IFO, IFS and HIS (the EU
Commission Report).
2
Hajikowicz, S. 2015, ‘The seventh megatrend: Why Australia must brace innovation’, The Conversation, 6
May 2015. Available from: http://theconversation.com/the-seventh-megatrend-why-australia-must-embraceinnovation-41232
3
To the average non-gamer, it may be a surprise to learn global video game revenue
exceeds the global film industry – US$88.4 billion 3 to US$88.3 billion 4 in 2015. 2014
was a huge year for the Australian video gaming industry, with annual sales
increasing by 20% (AU$2.462 billion or US$2.290 billion). 5 With such a large global
market and Australia’s past performance in the arena, it is unusual to find a distinct
lack of government support for this industry. In stark contrast, the Australian film
industry benefits from three strong pillars of tailored, government support – location,
post production and producer offsets. In fact, partly due to the success of these
incentives, the industry has consistently called for this support to be extended to the
development of video games, voice acting and possibly even ‘app’ development.
1.7
It’s not all about fun
Game development is serious business; the video game development industry plays a
central role in a broader technology marketplace and the new digital economy.
First, video games are not restricted to consumer entertainment; educational games,
recruitment tools (KPMG itself has started to “game-ify” its graduate recruitment
process) and therapeutic tools (such as the work done for people with Alzheimer’s
disease) are all valuable contributions to both our economy and society. In 2013
Gartner, Inc. predicted ‘gamification’ would be used in 25 percent of redesigned
business processes by 2015, and they predicted this would grow to more than a $2.8
billion business by 2016. 6
1.8
Second, the skills required to develop video games can be applied to a host of
interconnected industries, including film, animation, TV production, app development
and software. Thus investing in video game development isn’t an isolated
contribution to the economy because its support diffuses over time into skills,
productivity growth and competitiveness in associated industries. The knowledge and
learnings from the gaming industry also extend well beyond associated industries.
3
McDonald, E. 2014, ‘Global Games Market Will Reach $102.9 Billion in 2017’, New Zoo: Games Market
Research, 15 May 2014. Available from: http://www.newzoo.com/insights/global-games-market-will-reach102-9-billion-2017-2/
4
The Statistics Portal. 2015, ‘Filmed entertainment revenue worldwide from 2015 to 2019 (in billion U.S.
dollars)’, The Statistics Portal, 2015. Available from: http://www.statista.com/statistics/259985/globalfilmed-entertainment-revenue/
5
Serrels M. 2015, ‘2014 was a huge year for the Australian games industry’, Business Insider, 4 March
2015. Available from: http://www.businessinsider.com.au/2014-was-a-huge-year-for-the-australian-gamesindustry-2015-3
6
Meister, J. 2013, ‘How Deloitte made learning a game’, Harvard Business Review, 2 January 2013.
Available from: https://hbr.org/2013/01/how-deloitte-made-learning-a-g/
4
Technology pioneered by games has been used in the varied fields of defence,
neuroplasticity and molecular biology. 7 A specific example of how researchers in the
US leveraged a simple puzzle game to research Alzheimer’s disease can be
found here. 8
1.9
Third, video games and associated digital media is an untapped tourism resource.
Many foreign jurisdictions have realised the benefit of presenting unique cultural
influences and history in their domestic game development and film industries. The
UK, for example, provides interesting criteria for its UK gaming developers by way
of a cultural test that looks at the cultural content of the game. Cultural content can
promote Australian culture, people, lifestyle, natural wonders and tourist attractions to
the global tourism market in a far more immersive way than most other advertising
channels. Essentially, ads have superficial impact, whereas interactive stories or
games make you feel like you are living the Australian experience – a far more potent
promotion tool. Strong examples of past success in this cultural stream include Dead
Island, which had Australian main characters and a uniquely Pacific Island
environment, Patient Zero by IRL Shooter which allows players to use laser guns to
shoot ‘zombies’ in real life or Mad Max.
7
The Economist Special Report on Video Games, December 2011. Available from:
http://www.economist.com/sites/default/files/special-reports-pdfs/20111210_video_games.pdf
8
Ibid, p.9.
5
2.0
How Australia can best set regulatory and taxation frameworks that will
allow the local video game development industry to grow and fully meet
its potential as a substantial employer
2.1
The Australian gaming industry has the potential to employ thousands of Australian
ICT, Creative Industry and other skilled professionals in one of the world’s fastest
growing markets. In order to maximise the industry’s employment potential, video
game developers require the funds, global industry connections and regulatory
flexibility to seek out private investment. Similarly, to establish and nurture this
potential in the face of strong international competition, the sector needs strategic
assistance, not broad-based incentives. The typical industry support will not suffice
when dealing with the digital economy and the complex interaction of computer
science and art that underpins video game development.
2.2
Existing support for the industry has dwindled over the last few years from millions
in targeted grant support to a single, innovation-dependant R&D Tax Incentive. While
some fledgling companies under $20 million aggregate turnover benefit from this
incentive months after the expenditure has been raised and spent, the vast majority
need upfront capital, not post-tax refunds. By extension, more established companies
or subsidiaries with global parent companies, over $20 million aggregated turnover
only receive tax breaks, not cash refunds, under the Incentive. This means that if you
are a game developer in losses (a common scenario in the current Australian climate)
the only assistance program available to you simply adds to your losses, with no
immediate benefit whatsoever. More importantly, support for this industry should not
be limited to innovation that meets the requirements of the Incentive; innovation in
gaming is more subjective, and can come in the form of new features or styles rather
than completely new technologies.
2.3
At least initially, the only market players with the capital and flexibility to develop
new engines or functionalities (the kind of development generally eligible under the
R&D Tax Incentive) are the major global players who are based overseas with
billions in revenue. Even when the R&D Tax Incentive is cashed out using tax losses,
the cash is received at least a year and often two years after the initial outlay for a
high-risk project. 9 Therefore, more proactive, upfront and targeted assistance is
9
R&D activities can only be registered after the end of the financial year and expenditure is claimed as part
of the Income Tax Return, generally filed 3-12 months after the end of the financial year. Even then, the
Australian Tax Office will take 1-3 months to assess and pay the refund. Expenditure incurred at the start of
a financial year will not result in a refund for another 12-24 months later. For fledgling game developers, 1224 months is a very long time.
6
required to maximise game developers employment potential. Specific
recommendations, based on KPMG’s research and industry consultation include the
following:
2.4
Regulatory clarification of crowd-funding for the industry in line with international
standards.
The regulatory framework for crowd-funding is unclear. Issuance of easy-to-digest
guidance for small business, particularly those in the digital economy, would be
helpful.
2.5
A prime example of a large game developed using crowd-funding is Star Citizen. A
large interactive online environment, Star Citizen raised over $88 million in crowd
funding to develop the initiative shape the outcome and features of the game,
attracting a Guinness World Record for the largest single amount ever raised via
crowdsourcing. Similarly, Pillars of Eternity raised funds from over 77,000 individual
contributors to develop the game.
2.6
While there are some impressive examples of large amounts raised by crowd funding,
these are the exception and not the norm. Most amounts raised are far smaller and
other sources of funding much needed.
Direct government assistance or policy directed toward freeing up venture capital and
crowd-funded capital for budding video game developers is much needed. Early
access to even small amounts of funding can make or break game development. On a
regulatory and tax framework front, the GST, R&D Tax and other implications of
such equity raising should be clarified with sector consultation.
2.7
Venture Capital Regulation Changes.
Government support through programmes such as the Incentive is vital for early-stage
R&D, often bridging the so called “valley of death” between innovative idea and a
viable commercial product. This requires a balance between government and private
sector support. From the private sector, venture capital (VC) has an important role to
play. In 2014, VC funding accounted for 0.01% of GDP but was responsible for 10%
of business expenditure on R&D (BERD). Global market volatility is severely
depressing VC investment world-wide, but complexities surrounding the use of
7
Venture Capital Limited Partnerships (VCLPs), including inconsistent investor tax
treatment are believed to be exacerbating the problem in Australia.10
2.8
AVCAL (Australian Private Equity & Venture Capital Association Limited) in its
Re:Think Submission called for VCLP reform indicating that compliance costs were
eroding ~15% of the gain returned to investors. Australia is ranked as the 8th most
attractive country for VC investment behind the US, UK, Canada, Singapore, Japan,
Hong Kong and Germany. During FY14, $516m in VC investments were made in a
variety of industry sectors with 75% of all VC investments in communication
technology (AVCAL 2014 Yearbook). With an obvious preference for
communications technologies, arguably less government support or guidance will be
needed to make the gaming industry an attractive VC target industry, but a minimal
level of guidance or support is critical to promote this market for video game
developers. 11
2.9
Reducing or offsetting inflated costs of certain software licenses
With the gaming industry now predominantly comprising small companies and startups, another factor to consider is the prohibitive cost of software development tool
licences and high operating costs for developers.
In 2012, the House of Representatives Standing Committee on Infrastructure and
Communications undertook an inquiry into IT pricing entitled ‘At what cost? IT
pricing and the Australia tax’. The report was tabled in July 2013. The Committee
heard evidence that suggested price discrimination is rampant amongst digitally
delivered content, this included software. 12 The products delivered are essentially
identical when downloaded in Australia or elsewhere. Digital delivery doesn’t require
packaging or shipping, therefore consumers questioned the justification for
significantly large differences in price between Australian and overseas markets. 13
The CHOICE submission explicitly stated that “international price discrimination is
the most likely cause of Australia’s high IT prices.” 14
2.10 The submission made note of the fact that international price discrimination impacts
the costs and productivity of Australian businesses operating in the digital economy.
10
KPMG, 2015, Submission to the Vision for Science Nation Consultation Paper, p.9
Ibid
12
House of Representatives Standing Committee on Infrastructure and Communications, 2013, ‘At what
cost? IT pricing and the Australia tax’, pp. 23-28.
13
Ibid
14
Choice Submission, p.4.
11
8
Multiple submissions from the public into the inquiry specifically highlighted wellknown global software brands as some of the multinational corporations guilty of said
price discrimination. Some of these brands have a virtual monopoly on the niche
software used by developers to design and build various products in the industries of
the digital economy (including video gaming), therefore it is not surprising they were
referenced in the Committee report.
2.11 With high operating costs cited as the reason for many game development companies
ceasing operation in Australia, the sector could benefit from assistance being
provided that aims to lower these costs as much as possible. Tackling this issue for
one sector could benefit many others.
2.12 It is worth noting the regulatory and productivity synergies in investigating and
rectifying this issue. The recent G20 BEPS Action Plan, consumer groups and
industry association have all expressed the need to adapt to the digital economy
including eliminating artificial geographic price differentials when software is no
more costly to run in Australia than elsewhere. Some price differentials are over
100% - with the Australian small business or consumer bearing the cost.
This could be addressed through regulatory frameworks to support geo-neutral
pricing for businesses, price ceilings for digital products, software licence subsidies,
or claim back schemes to allow development companies to offset the cost of the
licences they need.
2.13 Restoring Grant Funding
The Australian Interactive Games Fund was a grant program designed to encourage
Australian innovation, creativity and sector growth in the gaming industry.
Announced in late 2012, the $20 million fund was created after a relatively long
period of consultation with the industry, but was unexpectedly cancelled in 2014
without consultation to the detriment and shock of many developers.
2.14 There is a strong case to be made for the re-instatement of a grants program
specifically for the game development industry given its market size, the
opportunities it presents for the Australian economy and the relative success of the
previous grant program. However any new grant program should be preceded by
industry consultation to determine how the previous fund could be improved upon.
9
For instance, funding for a single title is useful, but enterprise level funding is also
critically important in helping companies to develop multiple games at a time. 15 This
is because it allows developers to come up with a number of prototypes that can be
market tested or demonstrated with publishers to select those with the most potential,
i.e. pivots are commonly required and locking funding to a single title or game
concept is overly restrictive and doesn’t work well with market realities.
2.15 Tax breaks for cross-media collaborative projects
It has become increasingly apparent that video games and film (predominantly from
Hollywood) are converging more rapidly, especially with video game spin-offs from
blockbuster films such as Lord of the Rings, The Godfather, Spider-Man and Iron
Man. There have also been popular video games that have made their way to the big
screen, such as the very famous Tomb Raider, and more recently, video games such
as Hitman, Assassin’s Creed, Borderlands, and even Angry Birds.
Although the Australian film industry is only a fraction of the size of Hollywood,
Australia does provide tax incentives for local film productions. There is potential
here for Australia’s tax system to extend this assistance by providing tax breaks for
cross-media collaborative projects, thereby encouraging local gaming developers to
collaborate with their film counterparts. The collaboration of the two industries could
allow for a greater chance of producing a successful product, however a video game
and film combination would be considered not only a high risk endeavour, but an
expensive one also. For Australia to break into this space, Government support would
be required to foster local development and growth.
15
Screen Australia. 2012, ‘Interactive Games Fund Consultation: Notes From Melbourne Forum’, Screen
Australia, 11 December 2012. Available from: http://www.screenaustralia.gov.au/getmedia/32441929-cb40403f-be60-0a80af354e4c/Melbourne_Games_Forum_notes.pdf
10
3.0
How Australia can attract video game companies to set up development
operations in Australia and employ local staff
3.1
International markets and the alignment of games development with the film industry
In Australia and perhaps due to its relative age, the gaming industry has been treated
as an unrelated sector to the film and television (media) industry. This is not a
suitable approach given the high degree of interdependence between areas related to
both such as voice acting and CGI. A greater effort is required in order to foster
stronger industry collaboration between all these inter-connected sectors. There is a
key role to be played here by the Government in order to achieve the level of
collaboration required to foster strong growth in these industries.
3.2
Many other jurisdictions, such as Canada, Finland, New Zealand and the USA, have
already aligned and extended film industry assistance to the gaming industry.
Australia’s film and gaming industries are prime candidates for similar
rationalisations, with location, post production and producer offsets for films made in
Australia supporting thousands of local jobs a year. These incentives 16 offer tax
offsets (16.5%, 40% and 30%) provided an eligible film or TV production has
obtained pre-certification by the relevant Arts Ministers under s376-10(1)(c) or s37635(1)(b), or Screen Australia under s376-55(1)(b) ITAA1997. For simplicity, these
existing schemes could be broadened to include video game development. This would
minimise the regulatory burden while utilising existing knowledge of the scheme to
maximise industry uptake.
3.3
Finland’s gaming industry provides a good case study on how targeted funding
programs have helped established a world-class gaming hotspot and billion dollar
industry. These programs have helped established a strong ecosystem that has
attracted video game companies to set-up operations and establish a foothold locally.
Finland’s ‘Tekes Skene’ program offers approximately 70 million Euros to the
gaming industry with a holistic offering including funding, business development
mentoring and networking services for meeting foreign gaming companies, publishers
and investors.
3.4
Australia could consider a similar program with government funding provided
through a specialised grant program whereby the most promising, commercially
viable companies are given access to funds. In conjunction with direct funding,
16
As contained in Division 376 of the Income Tax Assessment Act 1997
11
government funded incubator programs would also support start-ups and help to
facilitate industry collaboration and connections with VCs and other private investors.
3.5
Critically, Finland also focusses on creating specialised ‘hubs’ or technology parks
for its gaming industry. The Finland program has been highly successful with popular
titles Angry Birds (Rovio) and Clash of Clans (SuperCell) coming from Finland’s
investment into their game development industry. Key to their success has been the
Government’s funding as well as the Government’s role in connecting international
VCs with these game developers. Reportedly, SuperCell now earns $5 million USD
per day from Clash of Clans, while Rovio reported an increase in revenue from €6.5
million in 2010 to €152 million in 2012.
3.6
New Zealand provides another example of a country which has supported and
nurtured a booming gaming industry through their R&D grant funding program and
government supported incubators and accelerator programmes. According to a recent
media release by the NZ Game Developers Association, jobs in the industry have
risen by 30%. 17 The sector now employs 568 fulltime employees and earned
$78.7million in FY15, with 82% of the revenue coming from digital exports. 18 It has
been widely reported in the NZ media that the boom in gaming development, skills
and exports is expected to be identified as an emerging new sector when the financial
reports charting the contribution of the creative industries to the NZ economy are
released in September 2015. 19
3.7
The UK offers yet another example. 20 The UK government recognises the value of
the video game industry and supports it through a generous tax relief scheme, the
“Video Games Tax Relief” (“VGTR”). Its benefits have been widely praised.21
3.8
Montreal in Canada provides a final example. Montreal promoted itself to
international companies as a games development hub by subsidising wages, as well as
a multimedia tax credit for French-language content – covering up to 37.5% of
17
Interactive Games & Entertainment Association, ‘Jobs in NZ Industry Grow 30%’, 21 August 2015.
Available from: http://www.igea.net/2015/08/jobs-in-nz-industry-grow-30/
18
Ibid
19
Atherton, J. 2015. ‘Kiwi gaming industry boom earns half a billion dollars’, Sunday Star Times. Available
from: http://www.stuff.co.nz/technology/games/70144957/kiwi-gaming-industry-boom-earns-half-a-billiondollars
20
UKIE. 2014, ‘The games industry in numbers’, The UK Interactive Entertainment Association, 2014.
Available from: http://ukie.org.uk/research
21
Sliwinski, A. 2012, ‘UK finally implementing game tax relief’, Engadget, 21 March 2014. Available
from: http://www.engadget.com/2012/03/21/uk-finally-implementing-game-tax-relief/
12
companies’ salaries. As a result, Ubisoft opened an office there, employing some
2,000 staff across a range of fields. 22
3.9
Local industry feedback in Australia has been supportive of the idea of maximising
the impact of targeted government assistance by co-locating numerous game
developers together, alongside related industries like film, ICT, app development and
the creative industries.
3.10 These types of initiatives have proven to act as a catalyst for project
commercialisation and have enabled gaming studios to diversify their game portfolios
and embark on new and more innovative projects that would have otherwise been
deemed too risky to undertake. They have also helped improve industry competencies
and robustness through cross-skilling, collaboration, and supplying the means to
recruit better talent. Holistic support for the gaming ecosystem can be underpinned by
industry specific government programs and will lead to Australia becoming a more
attractive destination for gaming companies wishing to establish themselves and gain
access to the increased expertise and creativity of the country’s gaming industry.
3.11 University Collaboration
In line with the Government’s drive for growth in Science, Technology, Engineering
and Mathematics (STEM) learning, we believe that the video game development
industry can provide a job market and skills base to employ STEM graduates from
educational institutions for the future. Strong alignment programs (in the form of
specific degrees, skills or major alignment within associated degrees like ICT,
internships and industry-institution networking and coordination) between the
industry and universities could provide a critical link to support STEM learning and
the video game industry more broadly. This will help game developers identify and
target talented university students, while helping university students identify game
development companies in Australia who are doing innovative things – rather than
just look abroad. Creating specific niche degrees around the needs of the gaming
industry will both attract international students and attract investment from
multination corporate companies, as has happened in New Zealand when Frenchbased company – Gameloft – opened a subsidiary in Auckland five years ago, partly
to capitalise on the some of the best 3D animators in the world. After starting out with
22
Van Praet, N. 2012, ‘Video game tax break makes Quebec an industry hub’, Financial Post, 15 October
2012. Available from: http://business.financialpost.com/entrepreneur/video-game-tax-break-makes-quebecan-industry-hub?__lsa=e5f0-a331
13
just 12 employees, it now has a team of 177 of developers, designers and artists. 23
Ultimately universities and other educational institutions should be seeking to
collaborate with industry so that those studying STEM, languages, graphic arts or
performing arts are exposed to the gaming industry and vice versa. This may help
reduce the cost of development (where students assist developers as part of their
course), but also bring in new ideas and promote innovation.
23
Atherton, J. 2015, ‘Kiwi gaming industry boom earns half a billion dollars’, Stuff.Co.Nz, 12 July 2015.
Available from: http://www.stuff.co.nz/technology/games/70144957/kiwi-gaming-industry-boom-earnshalf-a-billion-dollars
14
4.0
How export opportunities from Australia's local video game industry can be
maximised
4.1
The development of export opportunities for local video game developers must
recognise the global nature of the target market, the close interaction with the digital
economy, the highly mobile nature of the industry and the Asian Century. With these
principles in mind, we make two policy observations.
4.2
A partner to assist games developers to export to Asia
First, government liaison and translational services should more keenly consider the
digital economy when assisting the export of Australian goods and services. Making
connections in Asia for many game developers in order to leverage local marketing,
labour resources or technical expertise is extremely difficult as the customs, culture
and language is vastly different to western countries. Breaking into the Asian market
can take years and be very costly. If the Government can support the Australian
gaming industry to break into Asia, substantial growth and export opportunities
abound. For example, the Government could create an export assistance program or
take trade missions of Australian games developers overseas to connect them with
Asia.
4.3
The need for something more targeted than EMDG
Second, the current Export Market Development Grant (EMDG) system for
promoting exports has limited application for software companies and game
developers for two key reasons; cash-flow and the reality of exporting digital
products.
4.4
Small game developers require upfront cash to develop an exportable product, but the
EMDG reimburses funds already spent and up to 24 months after they were incurred
(grants close 1 December in the financial year two for expenses incurred in year one,
but don’t finalise the application process until May of year two).
4.5
The EMDG also fails to account for the expenses incurred in exporting digital
products such as video games and film. Expenses like travel and IP costs aren’t
typically necessary when negotiating or advertising video games for export, but
substantial prototype costs can be incurred to develop a minimal viable product
(MVP). Unfortunately, the current EMDG framework under Schedule 5 of the
scheme (Export Expenses - Trade Fairs and Promotional Events) precludes the
claiming of in-house labour costs for the production of display equipment (such as
15
MVPs), which are the vast majority of export product development costs for video
games. In addition, the guidance for Schedule 5 is heavily focused on physical
prototypes. However with some updating, the EMDG could provide a useful support
for digital industries.
16
5.0
Conclusion
Australians are innovative and hard-working, but often struggle to translate
innovation into successful commercial outcomes (referred to as ‘innovation
efficiency’). Strategic government assistance is needed to change this. For the gaming
industry, there is growing demand for video games, but there are also many barriers
as most game producers in Australia are micro businesses. We have provided the
Inquiry with some recommendations on how we believe government can better
support this industry which is closely aligned with other recommendations for how
Australia can promote innovation and move toward a knowledge economy. If there is
any further information we can provide, we would be pleased to do so and we again
thank the Committee for the opportunity to provide our comments.
17