Chapter 5
Committee view and recommendations
5.1
Video games are big business, both in Australia and throughout the world.
The evidence available about consumer demand for video games and the value and
growth of the global market for them suggests that the industry will continue
to expand significantly. Not only are games for entertainment in high demand,
but so‑called 'serious games' for health, education, workplace training
and various other purposes are also expected to become more common. Expected
and unknown future technological advances will likely also support the
industry's bright future; for example, virtual reality could significantly
change how consumers and businesses interact with technology in a wide range of
areas. Game development is among the industries that are at the forefront of
such developments.
5.2
To maintain economic growth, prosperity and international
competitiveness, advanced economies such as Australia need to embrace
innovation and transition to a knowledge economy that relies on technology and
highly skilled jobs. The game development industry fits this description. Many
other countries appear to have already reached this conclusion with respect to
their domestic video game development industries. The committee has heard how
governments in Canada, various European countries (such as the United Kingdom
and Finland) and, closer to home, New Zealand, offer grants, tax
incentives and other forms of support to promote growth in their video game
industry.
5.3
Conveniently, Australia has a proud record of successful video game
development. Opportunities exist, however, for Australia to build on its existing
industry and to ensure that this creative and technology-focused industry can
play a key role in helping Australia transition to a leading digital economy.
A recent history of challenges and setbacks
5.4
While other countries have expanded their video game industries,
Australia's has contracted in size. It is evident that the Australian industry
has faced significant challenges in recent years. The downturn in the world's
economy following the global financial crisis of 2007–2008 and the sustained
appreciation of the Australian dollar relative to the United States dollar has
changed the structure of the industry. International game development companies
that had studios based in Australia reconsidered their Australian operations.
Other Australian-owned companies also closed or downsized.
5.5
The video game industry was not unique in encountering challenges caused
by Australia's resources boom and the two-speed economy. However, it has
undergone significant structural change and lost many experienced
professionals. For example, it appears that many Australian video game
professionals have chosen to further their career elsewhere. In an emerging
industry, losing experienced developers whom others can learn from is
problematic. The reduction in the number of large, established studios,
including international studios that bring expertise from elsewhere, is also a
problem: these studios can perform many useful roles that provide positive
flow-on effects for the overall industry.
5.6
The video game development industry also suffered a setback as a result
of the Australian Government's decision in the 2014–15 Budget to abolish the
Australian Interactive Games Fund (AIGF). The AIGF was announced by the former
Labor Government to help support the development of the video game
industry in Australia. The committee considers that this was a sensible investment
in an emerging industry. It was also relatively modest in its upfront cost to
the Government: $20 million over three years from 2012–13.
5.7
As the evidence taken during this inquiry has demonstrated clearly, the
AIGF supported several successful projects. These included both specific titles
and projects that helped the industry to grow, such as a shared office space
that facilitates collaboration and reduces overhead costs. However, the AIGF
was ended before the return on investment could be demonstrated.
5.8
Despite the renewed focus and discussion on innovation following the
release of the Australian Government's National Innovation and Science Agenda
in December 2015, it is not apparent that the Government has given explicit
attention to interactive game development and the potential for Australia's
future that this industry could provide.
The Australian Government could assist the industry to reach its potential
5.9
The committee is not advocating that the Australian Government
'pick winners' or growth sectors. As noted in Chapter 3, Senate committees
and the Australian Government often hear cases for particular industries to
receive government support or tax incentives. Regardless of how compelling
these arguments may be, it would be neither possible nor desirable for the
Government to fund every measure that is proposed.
5.10
The Australian Government does have a role, however, in ensuring policy
settings assist entrepreneurs and innovative businesses to flourish. The
Government should also consider whether programs or incentives that are
provided to one industry are being denied to other similar industries without a
clear reason for doing so.
5.11
The committee has also given consideration to the different roles that
the Australian Government and state governments can, and should, undertake in
relation to support for the video game development industry. Various state
government programs, particularly those operated by Film Victoria, appear to be
successful. The evidence provided to the committee indicates that state
government support has been a significant factor in the different growth rates of
the video game development industries in individual states.
5.12
Nevertheless, the Australian Government has previously administered a
successful funding program that made a positive net contribution to Australia's
economy. The reasoning that originally accompanied the introduction of the AIGF
is fundamentally sound and continues to be relevant. The self-sustaining design
of the AIGF was also a key feature—the reinvestment of funds recouped from
successful projects would have maintained the AIGF beyond the initial funding
committed by the previous government.
Recommendations
A successor to the Australian
Interactive Games Fund and extension of the producer tax offset
5.13
The primary recommendation made by the committee is that the Australian
Government introduces a scheme similar to the previous AIGF. The AIGF is the
most effective means to address the access to finance issues that small studios
face and to help those studios grow into mature, stable businesses. The
economic return from funds provided as grants and loans during the AIGF's short
life presents a compelling argument for the Australian Government to return
funding to Screen Australia for such a program.
Recommendation 1
5.14
The committee recommends that the Australian Government introduce a
funding scheme based on the former Australian Interactive Games Fund.
5.15
Grants and loans from the AIGF, however, are unlikely to be enough to
secure a sustainable video game development industry in Australia. Small
businesses would typically be targeted for grant funding or government-backed
finance; however, businesses operating in Australia that grow beyond that size
still face significant challenges. When considering this, the committee was
mindful of the apparent inconsistency in the treatment of video game developers
and other creative industries that stride between arts and commerce, such as
the film industry.
5.16
The film industry has access to taxation offsets that are designed to
support and develop the Australian screen media industry by providing
concessional tax treatment for Australian expenditure. In particular, a
refundable tax offset for Australian expenditure in making an Australian film
is provided in subdivision 376-B of the Income Tax Assessment Act 1997
(known as the producer offset).
5.17
The committee considers that government support should be provided as equitably
as possible across related industries. A tax offset would also be an effective
way to support the continued growth of mature game development studios that
have progressed beyond initial projects that may, or may not, have been
supported by grant funding. The existence of a tax offset would help firms with
access to finance, as the ability to borrow against the estimated amount of the
tax offset could help alleviate some of the risk financiers associate with
creative industries.
5.18
The offset should be modelled on the producer offset, although whether a
20 per cent offset or 40 per cent offset should be applied will require further
consideration as part of the policy development process. Adjustments to the
general eligibility and expenditure criteria may also be necessary to ensure
that the offset is appropriate for the video game development industry. The
eligibility criteria should exclude certain types of games, such as games that
involve gambling. It may also be appropriate to exclude from the tax
offset projects funded under the replacement to the AIGF referred to in
recommendation 1.
5.19
Given the small size of the Australian video game development industry,
the committee does not envisage that the cost to the Commonwealth associated
with this measure would be high. However, the offset should be reviewed at an
appropriate time after its introduction, such as two years, to ensure it is
operating effectively.
It may also be appropriate for a sunset clause, of perhaps ten years, to apply
to the offset so a case has to be made in the future for its continued
operation.
Recommendation 2
5.20
The committee recommends the introduction of a refundable tax offset for
Australian expenditure in the development of game titles. A review of the
operation of the offset should be undertaken at least two years after the
offset commences.
Shared, collaborative workspaces
for video game studios
5.21
Many submissions and witnesses at the committee's public hearings highlighted
the benefits of innovation hubs and shared workspaces for video game
developers. The site visit to The Arcade in Melbourne organised by the GDAA
allowed the committee to see firsthand how a shared space can operate.
The committee encourages relevant Australian Government ministers to visit
The Arcade.
5.22
Shared workspaces that can house several studios and developers present
many advantages. Direct financial benefits for small studios include reduced
overhead costs, as expenditure on office space is likely to reduce. A shared workspace
can also be fitted with access to high-speed internet that is essential for
game developers, but which they may struggle to obtain elsewhere.
5.23
There are other benefits of shared workspaces that are more difficult to
quantify. A challenge that the Australian industry faces is project
expertise—as the industry consists of many small studios, there is a risk that
multiple businesses devote a great amount of time and effort to solving problems
that someone else has solved previously. Spaces like The Arcade encourage
knowledge sharing and collaboration within a community, allowing developers
more time to focus on seeing their projects through to successful completion.
5.24
The committee considers that the Australian Government should contribute
funding for the development of additional shared working spaces based on
The Arcade. As the committee considers that state government support for their
local video game industry is essential for such a project to succeed, the
specific location of the next Arcade-type space should take into account
whether the relevant state government has demonstrated support for the growth
of the industry.
5.25
The committee also considers that the Australian Government should
consider the contribution that the game development industry can make to
economic activity in regional areas. Games have been developed successfully in
regional areas, and the National Broadband Network (NBN) provides a further
opportunity for game development to occur outside of metropolitan areas. It may
be feasible to support the establishment of an innovation hub in a regional
centre that could support video game development and other high-skilled,
technology focused businesses.
Recommendation 3
5.26
The committee recommends that the Australian Government encourage, and contribute
financial assistance for, the creation of shared working spaces modelled on The
Arcade in other locations. This support should be contingent on co-funding
provided by a state government and further evidence that the state government
supports the growth of a video game development industry in its state.
5.27
The committee further recommends that the Australian Government consider
the viability of establishing an innovation hub for video game development and
other technology startups in a regional centre.
How the Government can promote the
potential of 'serious games'
5.28
The committee received compelling evidence about the potential for
'serious games' in health care, education, training, defence and many other
applications. The committee considers that demand for these products will
naturally increase without government intervention; however, the immediate need
for these products may not be readily apparent in some sectors. The Australian
Government could help promote the development of serious games in Australia by assisting
the game development industry to connect with the sectors that may have a need
for serious games. The Government could also consider how such games could be
useful for the various services it provides.
Recommendation 4
5.29
To encourage the further uptake of 'serious games' in health care,
education and other sectors, and production of these games by the Australian
video game development industry, the committee recommends that the Australian
Government facilitate dialogue between video game industry associations and
groups that use, or could potentially use, serious games.
Crowd-sourced funding
5.30
The committee received a limited amount of evidence on taxation matters
that affect small video game development businesses. As noted in Chapter 4, the
committee was provided with an example where money raised by crowd-sourced
funding was treated as assessable income for taxation purposes. The crowd-sourced
funds were used for a business project, however, they were subject to taxation
before the expenses related to the project were incurred.
5.31
This may be an isolated example caused by particular timing issues, such
as the rollover of one taxation year to the next. Also, the tax implications of
crowd‑sourced funding affect a wide range of businesses in different
sectors. However, the committee considers the issue is worthy of further
investigation.
5.32
The committee does not have sufficient evidence to make a recommendation
for a specific amendment to taxation law or administrative practice. Instead, it
draws this issue to the Australian Government's attention for further
consideration.
There may be possible changes that could specifically target startups that use
crowd‑sourced funding. One option that could be considered is allowing
small businesses to rollover assessable income from crowd-sourced funding to
the subsequent taxation year.
Recommendation 5
5.33
The committee recommends that the Australian Government consider the tax
implication of crowd-sourced funding for startups, including whether temporary
tax relief should be available for income that new businesses gain from
crowd-sourced funding.
Marketing and travel assistance
5.34
The Australian video game industry is essentially an export industry.
The committee is concerned by the evidence it received about the limited
utility of the Australian Government's Export Market Development Grant (EMDG)
scheme for the video game development industry, despite a need for assistance
in developing export markets.
5.35
The committee notes that the scheme was reviewed in 2015. Nevertheless,
this is an issue that the Government should consider further, particularly
given the growing importance of securing successful businesses that operate in
the digital economy. It may be beneficial to consider the relevance of the EMDG
scheme to all businesses in the digital economy as, although this inquiry has
focused on video game development, there may be other types of businesses in
the digital economy that encounter similar issues.
5.36
A related matter is expenses for game developers to travel to domestic
and international game conventions and exhibitions. When considering whether
changes to the EMDG scheme could make the program more relevant for video game
developers, the Government should give attention to this issue as well.
5.37
Overall, however, the committee is of the view that the Australian
Government should focus on matters that state governments may not be
well-placed to address, such as ensuring to the extent possible that businesses
which have grown beyond the initial seed funding stage operate in an
environment that supports their continued growth. The committee does not
consider it appropriate that the Australian Government supplant state
government support for local game development industries. Continued state
government engagement with the video game industry is important for the
industry's sustainability.
5.38
Game conventions and travel expenses appear to be an area that the state
governments can focus on and support. It is clear that state governments are
able to provide assistance for travel costs—the Victorian Government's efforts
in this regard are a key example. Not only does it appear unnecessary for the
Australian Government to duplicate or replace such state-based schemes, the
committee considers that it is beneficial for the game development community to
engage with state governments about the importance of domestic and
international game conventions, particularly as state governments can support
such events in their jurisdictions.
Recommendation 6
5.39
The committee recommends that the Australian Government develop a
discussion paper and consult on the utility of the Export Market Development
Grants scheme for businesses that operate in the digital economy.
Employment matters
5.40
The committee cannot conclude this report without commenting on the
state of diversity in the developer workforce and workplace practices in the
industry.
5.41
As noted in Chapter 2, the latest estimate of gender breakdown in
the industry suggests that only 12.7 per cent of the workforce is female. This
is disappointing. The low rate of female participation in the industry
weakens not only the industry's case for government support, but also its
economic prospects. The committee is of the view that the industry's long-term success
and sustainability depend on a more diverse workforce. The committee
acknowledges, however, that the industry is working to address this issue.
5.42
The committee also notes the evidence received about past cases of poor
working conditions, overworked employees and businesses that collapsed leaving
unpaid wages.
5.43
In developing measures to promote growth in the industry, and when later
reviewing the success of these measures, the committee calls on the Government
to be cognisant of these employment issues. The committee wishes to see
meaningful progress towards a more diverse workforce. Separately, the committee
also considers it is important to ensure that working conditions do not
deteriorate. Government programs should not assist businesses that perform
poorly against either of these measures.
Recommendation 7
5.44
When considering and reviewing measures to support the industry, the
committee recommends that the Australian Government take into account whether
the industry is improving the diversity of its workforce and is providing fair
employment conditions.
Broadband infrastructure
5.45
The committee notes that Australian video game businesses are often at a
competitive disadvantage when it comes to high-speed, reliable broadband.
Evidence received by the committee emphasised the importance of high-speed
internet, in terms of both download and upload speeds, for businesses that
develop products such as video games. It is clear that inadequate broadband
access presents productivity and market access issues for video game
developers. The rollout of fast, affordable and reliable broadband is one of
the most effective ways to support sustainable growth in industries such as
video game development. High-speed, reliable broadband can also help unlock
regional Australia's economic potential by supporting the creation of high
skilled jobs outside of the capital cities. Game development can and does occur
outside metropolitan areas, and the type of work undertaken in the sector
accommodates flexible working practices, such as remote work, which can be of
particular importance for developers in regional areas.
5.46
The consensus among submitters is that Australia's internet
infrastructure is simply not good enough. For Australia to be home to
innovative, technology-focused businesses that can successfully compete in the
digital economy, 21st century broadband infrastructure needs to be available.
Many countries are overtaking Australia in terms of the broadband speeds
customers can access. In recent global broadband rankings released by US
company Akamai Technologies, Australia has slumped to 60th in terms of average
peak connection speed, down from 30th in the third quarter of 2013.[1]
This has occurred in part as a result of the current Government's NBN policy to
halt the rollout of fibre-to-the-premises (FTTP) and replace it with a 'mix' of
technologies, including fibre-to-the-node (FTTN), which relies on the ageing
copper network to deliver broadband.
5.47
Continued reliance on ageing infrastructure is likely to exacerbate the
competitive disadvantage suffered by Australian firms, particularly as overseas
markets increasingly gravitate towards gigabit-capable internet infrastructure.
Recommendation 8
5.48
The committee recommends that the Australian Government commit to
rolling out 21st century broadband infrastructure.
Final comment
5.49
The committee has devised and outlined in this chapter specific
recommendations that should receive immediate consideration from the Government.
However, the committee emphasises that the body of this report has relayed and
discussed many other ideas that could potentially help Australia's video game
industry to flourish into a sustainable and valuable sector that can keep
Australia's talent here, rather than overseas.
5.50
The committee calls on the Government to take the opportunity to do
everything possible to secure a larger share of this growing, high-skilled
industry for Australia. The committee hopes that the industry has a bright
future in this country and that this inquiry helps to secure a positive
operating environment for local businesses.
5.51
The committee commends this report to the Senate and the Government.
Senator Anne
Urquhart
Chair
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