Prepared By: DigiBC and BC Interactive Task Force

Briefing Note: Digital Media Industry – Video Games Sector A Strong Industry Cluster is Born

Prepared For: Expert Panel on Business Taxation in British Columbia May 3, 2012

Fast Facts – BC Video Game Sector 

Early 1990’s Distinctive software sold to EA. EA Canada becomes largest interactive studio in the world.

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In 1990’s to early 2000’s, EA Canada spawns a powerful, leading global video games sector in BC producing annual growth rates of >20%, higher than the overall market. Many new studios are formed.

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In 2008, global economic meltdown results in several studio closures and job layoffs. Growth is stalled for first time. Competitive jurisdictions institute tax incentives to lure prestigious projects and high paying jobs including 5 Canadian provinces and 21 US States.

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In 2010 BC adopts new Interactive Digital Media Tax Credit. Studios start hiring again including EA, United Front, Slant Six and many others. New studios set up in Vancouver including A Thinking Ape, GameHouse, Silicon Sisters and many others.

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Today, the 30-year old industry includes marquee global media companies EA, Microsoft, Disney, Ubisoft, THQ, Activision and Capcom, major local studios Radical, Relic, Next Level, Slant Six, Blue Castle, Hothead, Piranha, United Front and Eastside Games and hundreds of smaller studios.

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BC continues to be a leading global video games hub in Canada with over 85 studios employing about 5,000 full time highly-paid employees (2X provincial average) and thousands more under contract in BC. Many top selling games are produced in Vancouver including FIFA and Need For Speed.

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New high growth platforms are starting to attract new investment, studios and jobs. Smart phones, tablets, online, digital distribution, cloud computing, motion controllers and social media are transforming the industry.

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Foreign media companies in the US and Asia are again looking at BC for investment and high caliber talent. There are many opportunities for growth but in a highly competitive market with many jurisdictions competing for jobs, investment and prestigious entertainment projects. Result, BC is underperforming today compared to overall market and in jeopardy of losing its leadership position.

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Briefing on Video Games Industry Introduction DigiBC, the digital media and wireless association of BC, and the BC Interactive Task Force (BCI) were formed by industry leaders in the digital media industry to address the increasing competitive threats to this important innovative sector of the BC economy. BCI has conducted extensive research and produced several reports over the last two years evaluating BC competitiveness in the video games sector. The video game businesses that make up DigiBC and BCI are united in their desire to build a competitive, sustainable leading world class digital media hub in British Columbia. The global video games industry and current trends in digital media provide a significant opportunity to attract new investments and create 5,000 new long-term sustainable jobs in BC by capitalizing on our natural competitive advantages in a rapidly -growing global industry. Ours is clearly an industry of the future. However, the global industry has also become increasingly competitive and many other jurisdictions throughout the world have instituted tax incentives to lure new jobs to their territory. The playing field is no longer level and as a result, BC is losing thousands of jobs and large new investments to other jurisdictions. Our industry leaders are passionate about protecting our competitive position and keeping our existing talent in BC as well as capitalizing on new opportunities to create thousands of new family-supporting jobs over the next five years. BC Industry Today British Columbia has established itself as one of the top video game hubs in the world over the past 30 years. Simply put, BC has become a digital powerhouse. The video game industry in BC has grown dramatically over the past three decades increasing at an average 20% growth rate and now contributing to other industry sectors such as mobile, education and health care. The industry now consists of over 85 interactive studios employing an estimated 5,000 full time high-tech workers who earn double the average annual provincial salary. The industry also creates thousands of additional indirect jobs and supports countless contractors.

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The industry is estimated to generate GDP of $855 Million. BC is ranked second in Canada behind Quebec and top 10 in the world. BC boasts several marquee video game publishers including Electronic Arts, Nintendo, Microsoft, Activision, THQ, Ubisoft and Disney. The Electronic Arts studio is one of the largest in the world, Club Penguin is the leading online studio for Disney, and Pixar has located its only studio outside its primary California complex in Vancouver. In addition, BC is home to a thriving and growing entrepreneurial community of small video game studios looking to capitalize on these new trends in smart mobile devices, social media, digital distribution and increasing broadband penetration. In 2011, BC hosted the world’s largest computer graphics conference, SIGGRAPH, the first time held outside the US and is coming back to Vancouver 2014. For the past three years, Vancouver has hosted the Canadian Video Game Awards. Canada is the third largest country for production of video games behind US and Japan. Global Industry Outlook The digital media industry is in the midst of a digital revolution and represents a huge opportunity for the BC’s economy. The rapid evolution of smart phones, tablets, social media, broadband, motion controllers, digital distribution and cloud computing is driving exceptional growth. Facebook, which only started in 2004, has over 900 million users. The 100+ million users of iPhones and Android-based phones have spawned an industry that has already produced over 600,000 software apps. Compare this to the evolution of radio which took 37 years to reach a mass audience. Digital media is projected to grow at 11% per year with higher growth rates in emerging markets over the next five years, far outpacing traditional media’s 3% growth. The $59 billion global video games sector is forecast to grow at 8% per year with online and mobile increasing at significantly higher growth rates. Software apps are projected to grow from a $7 billion industry today to $35 billion sector within 5 years. The new BC Interactive Digital Media Tax Credit, which went into effect on September 1, 2010, has already started leveraging BC’s natural competitive advantages. This policy is one of the best structured tax incentives in North America, due in large part to government’s collaborative work with the digital media industry. As a result of this new tax policy, hundreds of high-paying digital jobs have been protected at companies including United Front Games and Slant Six Games. More importantly, the tax policy directly led to the creation of new jobs at companies including A Thinking Ape, Exploding Barrel Games, Microsoft, GameHouse and was critical to

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the inception of a number of new start-up studios. Unfortunately, these gains were partially offset by job losses at other companies. Competitive Challenges Since the recession of 2008, the BC video games industry has been hit hard with studio closures, studio downsizings and lost out on almost all new large video game opportunities. Studio downsizings and closures in BC have contributed to over 1,190 lost jobs. Opportunities to attract new video game investments to BC have been lost to other jurisdictions. This resulted in losing 3,850 potential new jobs in BC. The total combined economic impact is a loss of 5,040 jobs or $.9 Billion in GDP. Our workforce is mobile and many BC trained and educated employees and families have moved out of the province to other regions. If this trend continues, BC will have lost its competitive advantage in the global market and it will be difficult to recapture. Consider these facts:  BC has lost its number one ranking in Canada to Quebec by a wide margin and Ontario is pushing hard to beat BC.  BC has the lowest digital media credit in Canada. There is a $4 million cost benefit per console title by moving a console title to Quebec, all due to the tax incentive difference.  The BC digital media tax credit net of provincial SR&ED, which must be forfeited, is only 5% on average. This is not enough to attract new investment or encourage expansion.  EA, our anchor company and major contributor to our cluster, has been downsizing in BC over the past several years while increasing in other regions  Many of BC’s video game companies have been weakened by closures and layoffs while Quebec and other regions are thriving  BC video games industry is growing at a much slower pace than the rest of the world

Many jurisdictions have responded in the last several years with digital media tax incentives to attract high paying jobs and investments. Six Canadian provinces, 21 US states, Australia, France, Singapore, UK and Korea have all launched tax incentive programs aimed at luring video game and digital media companies. This has contributed to the creation of an uneven playing field in a tough economic environment in which cost has become one of the deciding factors. This was not so true before 2008.

What Industry Could Have Looked Like Today Our original tax incentive proposal in 2009 had requested 40% tax incentive, which was over double the rate approved and announced at the 2010 Winter Olympics. If our request had been 5

approved, our industry would have been twice the size today at over 10,000 employees, number one in Canada and a top five centre in the world with an estimated $1.7 Billion in GDP. This proposal made sense since we would have been treated similar to animation companies which participate under the film credits. Our industries are converging and we hire from the same creative labour pool. In addition, our proposal created a net positive economic benefit to BC in each of the five years being forecasted. However, the current digital media tax credit is only 17.5% while the animation companies receive an average of 51%. The animation industry is doubling in size and projected to be the largest in the world next year. The BC video games industry is now under performing and losing its competitive position compared to the rest of the world.

Potential for Tomorrow with a more Level Playing Field The potential for tomorrow with a more level playing field is to double the size of the industry in five years to over 10,000 full time employees generating an estimated $1.7 billion in GDP. This will reinvigorate the industry and create jobs for students graduating from university in software engineering, game design, art, production, audio, special effects and other creative fields. Global companies will respond by investing in BC. BC will benefit with a strong global leadership position and robust economic environment for our future employees and families who want to continue to live in BC.

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Recommendations We are not in favor of tax incentives in general. We wish they did not exist. However, digital media jobs are considered highly desirable in the global market and many jurisdictions have responded by targeting these jobs with tax incentives and promotional campaigns. These competing jurisdictions have been effective in luring away talent from BC. Our companies want to stay in BC and compete based on their talent strengths, creative capabilities and BC’s natural advantages. This is an industry worth saving and tax neutral based on a five year economic impact study conducted in 2009. We need to leverage these advantages to protect current jobs, create new jobs and attract new investment from opportunities in global markets. We recommend only slight changes to existing policy. No new legislation is required. 1. Increase the Interactive Digital Media Tax Credit from 17.5% (ave 5% net of BC SR&ED) to 30% (17.5% net impact) to provide a stronger incentive to attract larger investments, bigger projects and more jobs. 2. Include BC contract labour in the digital media tax credit policy to encourage the conversion of contract positions into full- time employees. This policy change would be more similar to Ontario and Quebec 3. Harmonize the Small Business Venture Capital Program with the Digital Media Tax Credit to allow all entrepreneurial companies to participate in the program. Today, many small studios are not permitted to participate in the program 4. Utilize AdvantageBC (formerly IFC) to provide a tax holiday for five years for senior digital media executives who immigrate to BC with plans to establish a permanent business and hire staff

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Selected BC Video Game New Job Opportunities – 2012 to 2014 Company – Page 1 of 3

Current Staff in 2011

Potential New Jobs Estimate

All

1,200

150 - 500

All

175

300 - 600

Vancouver

Console; online

140

25 - 75

Vancouver

Mobile

40

20 - 60

Victoria

Social; Mobile

30

15 - 50

Japan; CA

Social; mobile

0

25 - 50

Japan

Social; mobile

0

25 - 50

California

Web/ mobile

25

25 - 100

California Victoria

Online; mobile

0

25 - 75

Location

Burnaby

Vancouver

Game Platforms

Victoria

Mozilla App

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Selected BC Video Game New Job Opportunities – 2012 to 2014 Company – Page 2 of 3

Game Platforms

Location

Current Staff in 2011

Potential New Jobs Estimate

California

Web/mobile

0

0 - 100

California

Online/Social

0

0 - 200

California

Mobile

0

0 - 250

China/ California

Mobile/Social

0

0 – 150

China

Web games

0

0 - 100

Vancouver

Mobile Games

10

35 - 90

Victoria

Comics Web/ mobile

2

2 - 50

Vancouver

Mobile

25

10 - 25

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Selected BC Video Game New Job Opportunities – 2012 to 2014 Company – Page 3 of 3

other start-ups All other game companies

Game Platforms

Location

Current Staff in 2011

Potential New Jobs Estimate

CA; Vancouver

All

140

20 - 100

Kelowna

Online

400

25 - 100

Vancouver

Mobile

200

25 - 100

Burnaby

Console

100

25 - 100

Vancouver

Social/Mobile

5

20 - 40

Vancouver

Interactive books

8

10 - 25

Vancouver

Social/Mobile Healthcare/ education

25

10 - 25

BC

All

500

50 - 100

BC

All

1,975

100 - 300

5,000

942 – 3,415

Total Employment

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New Opportunity

Downsize Closure

Company

Location

Comments

EA

Vancouver

Closures/downsizing Moved NFS console and NBA Live

EA

Montreal

New Studio Mobile/other

750

Ubisoft

Toronto

New Studio

800

Ubisoft

Vancouver

Closure

THQ

Montreal

New Studio

Disney

Vancouver

Closed Propaganda Games

Eidos

Montreal

Two new studios

450

Funcom

Montreal

New Studio

150

Warner Interactive

Montreal

New Studio

100

Radical entertainment

Vancouver

Downsized

65

Nexon

Vancouver

Closed Studio

100

Slant Six Games

Vancouver

Downsized

50

Relic Entertainment

Vancouver

Downsized

50

Next Level

Vancouver

Downsized

25

VMC

Montreal

New Quality Assurance/Localization

Total ( 5,040 Jobs Lost)

600

100 400 200

1,200

3,850

1,190

This schedule summarizes total jobs lost in BC since Fall 2008 from studio closures, studio downsizing and new opportunities lost to other jurisdictions when British Columbia was being actively considered. Total new jobs lost are 3,850 from new market opportunities and 1,190 from studio closures and downsizings for a total of 5,040 jobs.

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BC Video Games Industry Snapshot Overview Benefits    

 Leading Global Industry Cluster o o o

EA anchor tenant almost 30 yrs and largest EA studio 2nd in Canada Top 10 in World

 Over 85 Game Companies o o o o

   

5,000 employees All platforms; full capability Art, engineering, production, audio Active entrepreneurial community

 High profile marquee companies BC Video Games o Leading global games

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o Large staffs o Excellent training o Large investment in infrastructure  Expanding to other industries o Use of game technology

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GDP Est $855 Mil High paying jobs (2X Ave) Employee 85% Canadians High growth rate for new hires o Annual average – over 20% Hire local University graduates Long term sustainable companies Environmentally friendly Highly skilled foreign talent prefers to stay in BC for quality of life Strong connections to California, Washington and Asia Game technology being applied to healthcare, education, film, books, marketing and software applications

Video Games Developed in BC

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Global Market Outlook for Video Games and Digital Media

Golden Market Opportunity 32% CAGR

1.2 1 0.8

2010

0.6

2015

0.4 0.2

Global Outlook for Mobile and Online Games is 2X media industry average Key Global Market Drivers

40 30 20

2010

10

2015

0

0

Software Apps $ in Bil

Smartphone/Tablet Devices in Bil

Advertising

Smartphones

Digital distribution

14.9% CAGR

30

New Games

New app stores

25

Broadband Demographics

20 15

2010

10

2015

3 2.5 2 1.5 1 0.5 0

5 0 Online Rev in Bil

$

38% CAGR 5X

15 10 5 0

2010 2015

Ad Rev $ in Bil

2010 2015

10.0% CAGR

11.0% CAGR

Mobile Rev $ in Bil

Average CAGR 5.7% all media and entertainment

The Opportunity is Digital Media

Media & Entertainment

Global Sales & CAGR% Next 5 yr

413

13%

10

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SWOT Analysis – BC Video Games Sector BC Strengths

BC Weaknesses

 Leading global centre

 Lower growth than global industry

 Marquee companies

 Loss of big projects to other markets

 Large labour pool  Highly skilled/educated

 High % small studios

 Gov’t policies

 Lowest tax incentives in Canada

 Proximity to US/CA  Gateway to Asia  Quality of life 

Market Threats

 Quality of living/lifestyle

Market Opportunities

 Large global industry

 Global economic instability

 Above ave growth

 Shift to new platforms

 High growth in emerging markets

 Growing competition  New technologies require retraining

 Many new high growth platforms

 Many competitive tax incentives

 Expansion to other industries/education 14

Worldwide Digital MediaTax Credit Landscape

ALASKA

UK

Canada

BAFFIN ISLAND YUKON NUNAVUT

NORTHWEST TERRITORY

6 Provinces

France NEWFOUNDLAND

NEWFOUNDLAND BRITISH COLUMBIA QUEBEC

ALBERTA

Korea

VANCOUVER ISLAND

MANITOBA Prince Edward Island NEW NOVA BRUNSWICK SCOTIA

ONTARIO SASKATCHEWAN

MAINE

WASHINGTON NORTH DAKOTA

Singapore

NEW VERMONT HAMPSHIRE

MINNESOTA

MONTANA OREGON

NEW Y0RK

WISCONSIN

MASSACHUSETTS RHODE ISLAND CONNECTICUT

SOUTH DAKOTA IDAHO

MICHIGAN WYOMING

PENNSYLVANIA IOWA

NEVADA

NEBRASKA ILLINOIS

INDIANA OHIO WEST VIRGINIA VIRGINIA

Pacific Ocean UTAH COLORADO

CALIFORNIA

KANSAS

KENTUCKY MISSOURI TENNESSEE

Australia

OKLAHOMA

ARIZONA NEW MEXICO

NEW JERSEY

DELAWARE MARYLAND

NORTH CAROLINA SOUTH CAROLINA

ARKANSAS

United States

MISSISSIPPI GEORGIA

HAWAII

Atlantic Ocean

ALABAMA TEXAS

21 States

LOUISIANA FLORDIA

Yellow – Digital Media Tax Incentive Green – Recent increase to Tax Incentive

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Digital Media companies have become more cost conscious as a result of the severe recession in 2008 Jurisdictions around the world have increased digital media tax credits to attract jobs and video game projects in a more competitive world Texas, Florida, Louisiana and Australia have increased their tax credits in the last 12 months Tax credits are an important factor in deciding where video games are produced especially larger video game projects. Tax credits are not the only factor.

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BC New Digital Media Direct Labour Contract Labour Refundable Fed SR&ED* -Corp -CCPC only -Refundable CCPC/corp Other Programs

Quebec

17.5%

Ontario

Manitoba

Nova Scotia

35%-40% 100% incl Yes

40%

50%

Yes

37.5% 50% incl Yes

Yes

Yes

35% of 150% Yes

20% exp 35%/20%

20% 35%/20%

20% 35%/20%

20% 35%/20%

20% 35%/20%

20% 35%/20%

Yes/No

Yes/N0

Yes/No

Yes/No

Yes/No

Yes/No

Invest Tx Cr IFC Inclusion

Invest cr Tx Holiday Training Recruiting

Jobs Credit Marketing