The C-word

Develop has asked a panel of experts with practical experience of global development to discuss the threats of Canada and other low-cost development territories.

Adrian Hawkins is CTO at Kuju and Andy Norman is Head of Racing at Monumental, both major developers which have studios overseas in addition to those in the UK. Neal Gandhi is CEO of QuickStart Global, which establishes overseas teams for companies including Lightning Fish and Monumental. Kevin Hassall runs Beriah, which works with UK developers to build development projects using external partners.

Rick Gibson is a leading industry analyst, whose company, Games Investor Consulting, has generated several years of detailed data on this subject.

There seems to have been a lot of anger amongst UK developers at the way that Canada has been so aggressively touted as a place to set up studios. Do you think that that reaction’s justified?
Kevin Hassall: The anger’s understandable, but it’s misplaced. There’s no reason why any country or group, be it Canada, Thailand, Scotland, whoever, shouldn’t compete for projects or investment or for talent.

But people are frustrated, and they’re scared. A few years ago UK development was a huge success story – there were a load of sexy AAA success stories, studios were expanding, and people felt like we were on top of the world.

Now there are job cuts and studio closures, where the industry is growing it isn’t in areas that seem sexy or fun, and most people don’t seem to understand why this is happening. So they get emotional when they see some young upstart – Canada – seeming to be stealing a march on us.

Andy Norman: I personally know over a dozen people – friends – who have re-located there in the last few years. And many, many more acquaintances. What’s more, some of them are now ‘second generation’ in that they are creating their own companies… in Canada.

Rick Gibson: This kind of promotion – both the spam on GameHorizon’s seats and cold-calling of our studios – has been going on for half a decade. Getting angry at Nova Scotia or Prince Edward Island dropping unsubtle marketing material is as futile as railing against ad breaks in commercial television. Get used to it.

More important is what our policy response should be – how do we make a better environment for British studios to compete in, or how do we make our studios more sustainable?

Neal Gandhi: There seems to be a rather strange idea that having a studio in a location like Canada, India or China is at the expense of a studio in the UK. This has never made sense to us. We see even the smallest independents having their own global network of studios working together to complete projects.

For example with creative direction in the UK, games coders in Canada and artists and testers in a lower cost location like India. It’s about building a sustainable business, based out of the UK, winning major deals with publishers and adding to the UK economy.

Adrian Hawkins: I actually admire the marketing effort that the Canadians put into all this, and perhaps there is something we should learn from them in the way they support the industry.

It’s also nothing new, there’s been bursts of brain drain to Canada going back over a decade now, I just think that this time around the timing has unfortunately come shortly after the Coalition’s announcement on UK tax breaks (which in my view was unsurprising if disappointing for the UK industry).

Is it really much cheaper to run a studio in Canada? Do developers really have much to gain from moving across the ocean?
Rick Gibson: Canada wins hands down on the cost front – it is significantly cheaper. Montreal’s salary rebate on developer salaries which are already roughly 5-10% less than the UK’s (at current exchange rates) results in net savings of over 40% versus the UK, and that’s before overheads like property leases, business rates etc.

Neal Gandhi: I can tell you for sure taking wages subsidies into account that costs in Canada are approximately 2/3rds of the cost in the UK (we’re talking Midlands here, not London). As far as Canada is concerned, it’s never been about having immigrants come in from Britain and take the new jobs that are being created, it’s always been about creating employment opportunities for Canadians.

Adrian Hawkins: The numbers can be quite compelling. And the industry there is now well established, with a good talent pool and a number of big players.

Rick Gibson: But it’s not just about cost: quality of the talent pool is as, if not more, important. Canada’s overall talent pool is more debatable, although not at the high end, and there are grants for bringing in talent too. Big players like Ubisoft, EA and Square hoover up or import the best people by paying top dollar and winning giant government grants, which leaves scraps for smaller companies who find it hard to recruit experienced people. Outside of these big studios, Canada, unlike the UK, has struggled to create ground-breaking original new IPs. If you want to rinse and repeat at lower cost, Canada’s great, but not if you want to break the mould.

Kevin Hassall: We’ve worked on around 60 projects in the last 18 months, and those very rarely get placed into Canada: other teams – including guys in the UK, but also those in the far east or Eastern Europe – routinely have better offerings. Maybe that isn’t representative of the whole industry, maybe we are only looking at particular types of projects, but it’s clear that in many situations a subsidized Canadian studio is still less cost-effective than an unsubsidized studio elsewhere.

What about the countries which are reputed to be really cheap: places like China and India? Is the games industry going to follow industries like heavy manufacturing and clothing, and just relocate to the third world?
Neal Gandhi: The games industry is nothing like manufacturing or the rag trade. We’re talking about digital products that can be worked on collaboratively across multiple continents. The bigger picture is an industry that has a worldwide shortage of suitable talent.

Kevin Hassall: Bangladesh may now lead the world in garment manufacturing, but the world still looks to Paris and Milan for fashion. There’s a lot of heavy industry in China, but German manufacturing has flourished by focusing on high-tech work. There are lessons there for the UK games industry.

Adrian Hawkins: The games industry is continually evolving, with lots of scope for innovation, new creative thoughts and new technologies to get to grips with. The UK should be well placed to adapt to those changes, even if Eastern countries do a growing proportion of the production work.

Andy Norman: Platform holders are reticent about allowing development kits into the ‘third world’ (AKA the developing world). So at the moment, China, India, other parts of Asia – these are used as resource centres to bring down the cost of games development all over the ‘first world’. But already the platform holders are easing the ‘development kit’ barrier, so there will be new players, new competitors soon.

Neal Gandhi: I have a problem with the term “third world”. It suggests sub-standard. A visit to the studios that we established on behalf of Monumental Games, Lightning Fish Games and before that Sumo Digital would demonstrate clearly that the people there can produce work of a quality that is truly world class. By the way, the average gross salary of a highly experienced 3D environmental artist in India including the equivalent of employers national insurance is around £9,200 a year.

Rick Gibson: Firstly, outsourcing is not as cheap as it says on the tin, and it can often cost more to outsource to a cheap territory than go local if the brief, processes and project management by the outsourcing studio are not airtight and delivery by the outsourcer is not first class. Secondly, the most experienced staff in outsourcing studios in China and India are charging monthly rates equivalent to western studios. Quality always costs, so caveat emptor for those seeking a deal.

Kevin Hassall: Salaries and other business costs are incredibly varied in a lot of emerging development territories, and follow rules which seem baffling if you are only used to the UK. We know teams who see government taxes and related charges as a bigger cost than salaries. We know guys who are paying salaries under $10,000 per person per year, but who struggle to make money if they can’t charge out at $5,000 per man-month. All this makes sense when you get into, but it seems alien at first and does make conversations about costs quite difficult.

Rick Gibson: Nevertheless, outsourcing is standard operating procedure for almost all studios, and it has mostly involved lower end work, or highly specialised work (mo-cap, music, sound, perhaps scriptwriting) where full-time capacity cannot be justified.

Most studios hesitate to outsource IP creation – programming, design or even animation. This hesitation is prudent in an industry where the value lies in creating new IP that must be culturally sensitive to its target audiences.

The UK has benefited from its cultural affinity with the giant games markets of the US and Europe, an affinity which is unlikely to end soon. In less mature games markets, almost all studios struggle to create globally successful games – AAA console hits (that are not ports) from India and China are rare – there aren’t enough experienced teams to hire and it’s taken global companies ten years to incubate full development studios ready to create AAA titles.

Everything else is partial game development. Games companies in the rapidly developing world are inexorably raising their game, in China’s case accelerating their development by servicing its huge domestic market. China will soon overtake Canada and Korea as the world 3rd largest games development market by sales value.

There is a lot of concern about loss of jobs in the UK industry. What percentage of jobs do you expect UK studios to off-shore in the future? How many jobs will be lost?
Adrian Hawkins: It’s difficult to pick apart the figures against a backdrop of economic recession. Equally a company could be in a growth phase, and perhaps outsource 50%, but that wouldn’t necessarily equate to losses in the UK

Rick Gibson: So far we estimate that offshoring has resulted in very few net job losses in UK studios, because the handful of UK studios that have set up subsidiaries overseas have grown overseas while remaining largely static but not cutting jobs in the UK. While data on the % of jobs UK studios will off-shore is not available, it is likely to be small. Neither offshoring nor outsourcing will ultimately be responsible for UK studio job losses.

Neal Gandhi: You have to decipher how many jobs have been lost because companies either failed to reach critical mass, or have run out of cash. This is an industry that is predicted to grow at 10% per year for the next few years according to PwC.

With that kind of growth, I find it hard to believe that there are examples of studios being deliberately closed down in the UK and re-opened in a place like Canada. Instead I see studios expanding their footprint, retaining UK jobs but also taking on more staff in other countries as well, just like well run businesses like Monumental and Lightning Fish have.

Kevin Hassall: For the UK, a globalised games development industry means fewer jobs in some disciplines and more in others. I’d expect to see fewer jobs in repetitive or asset-creation areas, like audio assets, modelling, and level design, and more jobs in creative art, production management, and concept design.

Whether the new jobs will outweigh the old depends on how well UK games businesses adapt. But what is clear is that we don’t get to choose whether or not this happens – development is globalising, and the challenge is to work out how best to make that work for the UK.

Neal Gandhi: We don’t see jobs being lost in the UK provided British games entrepreneurs continue to run their businesses well and embrace a globally competitive cost base. On the other hand, if studios stick their heads in the sand and don’t embrace this reality then I can see many more going out of business and jobs being lost.

Rick Gibson: Job losses seem likely to continue (roughly 7% fall in last 2 years). These losses are due to other global factors – the foremost of which is the fall in work-for-hire contracting to UK studios who lose out to high quality studios in subsidised territories, more of whom are cropping up all the time.

Kevin Hassall: The UK games industry’s future is in the hands of its entrepreneurs, not its wannabe “stars”. If we’re serious about our industry’s survival, we should start celebrating entrepreneurial talent – people like Michael Acton Smith at Mind Candy and Darren Jobling at Eutechnyx: these are the guys whose efforts will keep the UK industry alive and vibrant.

So conversely, can you imagine people from overseas off-shoring to British companies?
Adrian Hawkins: As independent developers, most of our customers are US or Japanese based, and will choose to use companies like ours over their local ones for a variety of reasons, not least of which being the breadth of established talent in the UK.

I can also envisage very specialised studios, production/post-production houses, technology providers and creative agencies performing well here.

Andy Norman: The point is that it is considerably more cost effective for them to do that going forwards in Canada.

Rick Gibson: A few publishers will simply decide that the benefits of UK’s superb talent pool come at too high a price. Others will not, and our recent survey of publishers found most to be bullish about using British studios in future.

Kevin Hassall: The potentials of placing work into the UK go beyond the traditional publisher-developer model. For subcontracting and co-development work Britain often provides highly cost-effective teams, and there is in theory no reason why overseas developers couldn’t make use of that.

We’ve spoken to Chinese, Russian and Indian companies who are interested in placing work in the UK. But I doubt that many UK companies are actively looking for that kind of work, nor that many overseas developers realize the potential – they’ll have seen the Canadian charm offensive, but won’t be aware of what Britain can offer.

Rick Gibson: Large-scale development projects are already multi-site and multinational and US, Japanese and French publishers outsource partial and full development projects to British studios all the time. Offshoring (say an Indian studio opening a UK office) is rare today but not unknown (India’s Gameshastra just did that in London).

Much further ahead, offshoring to the UK may become more common. Acquisitions by Chinese, Korean or Indian companies (such as Reliance’s acquisition of a 50% stake in Codemasters) are as likely as offshoring to the UK.

The UK’s share of the pot will depend on keeping our staff creating great new games and up to date with the latest platforms, production methodology and commercial models.

Neal Gandhi: I see the UK as the centre of creativity with British businesses orchestrating resources in multiple countries to create the best possible products and services that are then sold across the world bringing jobs and tax revenues back to the UK.

Perhaps what people fear is that studio owners will close their UK offices, and move their whole operation overseas – maybe to Canada, maybe China or India. What would you say to someone who proposed that as a plan?
Neal Gandhi: Don’t be stupid! The UK is the best place to run a successful international company from. Take it from me, we’ve grown out of the UK to employ more than 700 people across 10 countries around the world.

Rick Gibson: To my knowledge only global companies with flexible resource and substantial IP ownership have survived moving an entire operation overseas. I’d be extremely sceptical that smaller developers would survive such a transition. Should companies go to the wall rather than survive overseas? That would be barmy, but such a binary scenario is unlikely to happen in real life any time soon. Instead, we’re likely to see a few more UK studios slowing or freezing growth in the UK while growing capacity overseas.

Adrian Hawkins:  Our outlook is that we see overseas territories as giving us scope to grow in a way that’s difficult in the UK, but not as a replacement for what we do here. Although I could easily understand someone who was motivated to make a wholesale move, I also think they would miss out on the diverse talent that exists here, and would suggest to them that having a broad portfolio of studios and locations has compelling upsides.

Kevin Hassall: From the numbers that we’ve seen on our clients’ projects, there’s on average a 30% benefit to UK developers in involving external companies in projects, sometimes much more. That may be using partners in the UK or overseas, either as outsourcers or more creatively. That’s a benefit which can be taken in speed or cost. All UK games businesses should be looking at ways to make themselves stronger, to safeguard their futures and their employees’ jobs.

Rick Gibson: Offshoring and outsourcing are tools in all good studios’ toolbox for handling demand. There are tough times ahead for console studios and, when a company’s survival is at stake, all options should be on the table.