By Tim Shea, General Manager of Product Development, and Angelos Angelou, CEO, Angelou Economics, 512-658-8400, Angelos@AngelouEconomics.com
This past July brought the closest thing to the “Zombie Apocalypse” any of us will (hopefully) see in our lifetimes. In an almost inexplicable display, thousands of men, women, and children spent the summer’s hottest month wandering streets and parks across the globe, eyes glazed over with a single minded purpose. Fortunately, that purpose was relatively benign: to find and catch Pokémon.
The craze was brought about by the release of Pokémon Go, a unique, if not entirely, novel app that blended the real world with Nintendo’s popular gaming franchise in the greatest manifestation of augmented reality to date. The app’s launch was a wild success—it attracted millions of users and doubled the company’s stock practically overnight—but it hasn’t come entirely without controversy.
Isolated incidents of the app being used to facilitate robberies and a handful distracted users’ accidental deaths have drawn a critical eye to the game, and there are indications that interest in the game has already peaked and is starting its long decline. With all of that said, however, Pokémon Go serves as a textbook case study revealing two undying truths of the video game industry. First, digital escapist entertainment will always draw dirty looks and dire warnings. Second, and more important, it can bring in a lot of revenue.
In a sense, it’s appropriate that it was a Japanese company, Nintendo, that created the gaming craze of Summer 2016. After all, some of the most iconic brands in the industry come from the Land of the Rising Sun: Nintendo, Sony, Sega. But these companies no longer have the stranglehold on console gaming that they did in the ‘80s and ‘90s. Ever since the debut of Microsoft’s Xbox in 2001, the American tech giant has broken into the industry in a big way.
How big, exactly, is kind of hard to tell. Microsoft is a bit cagey with their sales figures, but the best estimates have the company selling more than 19 million of their latest Xbox One console, each fetching anywhere between $250 and $500. Revenue figures are likewise massive. Q2 2016 saw Microsoft’s gaming divisions generating more than $1.5 billion in revenue, and that was a bad quarter for them. And these don’t just translate into fat profits for the wealthy corporate elite; they also mean tens of thousands of well-paying jobs. For example, Microsoft Studios (the relatively small Redmond, Washington based subsidiary charged with developing games) employs nearly 200 people with salaries that regularly break six figures.
Even more encouraging is that success in this industry is not strictly the purview of domineering multi-national corporations. The software development side of things has always been home to innovators and upstarts, particularly in the realm of computer-based gaming. MicroProse out of Las Vegas, id Software of Mesquite, Texas fame; they’re among the numerous companies that went from humble beginnings to industry changers in a matter of years. Now based in Richardson, Texas, id Software is still an industry icon with more than 200 employees injecting millions into the local economy.
As computing technology continues its relentless forward progress and gaming branches into non-traditional fields, the opportunities available have become even more varied and democratic. Mobile gaming is an area of especially astounding growth. Practically non-existent a decade ago, it’s now a $2.6 billion industry in America alone. Simple, downloadable phone apps have made the founders of companies like Palo Alto-based Machine Zone, Inc. millionaires, and the open nature of the Apple and Google app stores allow anyone with programming chops to try their hand at instant success.
The meteoric rise of software development is not restricted only to gaming, either. Increased connectivity and reliance on tablets, smart phones, and other mobile devices have created an employment boom within the industry and its related fields. Between 2005 and 2015, total employment grew nearly 60 percent to 1.9 million; 1.9 million quality jobs with an average annual pay of $106,000.
All of this begs a simple question: how are American communities leveraging this high-powered economic engine? The traditional industry clusters—San Francisco, Austin, Seattle—will continue to benefit no matter what efforts they choose or choose not to undertake. Aspiring programmers will still flock to them regardless, eager to mingle with like-minded individuals or score a spot in a big name accelerator like the Y-Combinator.
But state and local governments are also taking an active role in the promotion of clustering. Not content to rely on its reputation for a friendly business climate or the software development talent produced by its numerous universities, in 2014 the Texas Film Commission expanded its generous incentives program to cover video gaming as well. In the state that already employed 5,000 in the game development industry, companies who spent more than $3.5 million were able to recoup up to 20 percent of expenditures under the new rule. Atlanta’s burgeoning gaming industry likewise benefited from a similar State of Georgia program. It’s estimated that the city was home to only six gaming development companies in the mid-2000s. Now they have more than 70.
That’s not to say video game incentives are the subject of ubiquitous laud. To the contrary, the industry has been subject to numerous accusations of being excessively subsidized. Probably the most notable example was the headline grabbing case of Electronic Arts, a software company that paid out $98 million in taxes on $1.2 billion in profits over the course of five years. Similar trends extend throughout the entire industry, which exploits its unique position at the crossroads of tech R&D and entertainment to double dip into incentives pools. This hasn’t been lost on government players, and recent years have seen several states scaling back or eliminating their incentives programs altogether. That hasn’t changed that it’s a buyers’ market for developers. With numerous locales offering them lucrative at home and abroad incentives packages, communities would be wise to well understand both the competition and their own software development landscape before spending time and money courting these profitable, but fickle companies.
Luckily, cities don’t need to lure the next id Software to benefit from the gaming boom. Gaming conventions and the curiously dubbed “E-Sports” are other potential avenues, attracting a new and flexible kind of tourism. Of course, not everyone can host as prestigious an event as Los Angeles’ annual Electronic Entertainment Expo. A quick Google search, however, reveals dozens of smaller gaming conventions in cities as diverse as Killington, Vermont and Pasco, Washington. In a similar fashion, E-Sports tournaments attracted tens of thousands of visitors and hundreds of millions in investments in 2015. With a little bit of marketing and an adequate event space, it would be fairly easy to leverage the obvious interest in gaming as a local-level tourism and entertainment attraction.
An equally buzzed-about-economic engine, and one with a much richer American heritage, is the film industry. It’s impossible to think of movies without thinking Hollywood, or speak of television without invoking New York City’s 30 Rockefeller Plaza. Indeed, those remain the two dominant clusters of the video production industry, with New York and California jointly accounting for over half of the total national industry employment. It’s not growing quite as fast as its gaming counterpart and the wages aren’t quite as enticing, but with an average annual pay of more than $60,000, it remains an economic sector that provides a middle class income to hundreds of thousands of Americans.
That probably explains why so many state and local governments are eager to attract movie sets to their jurisdictions with generous tax benefits. Currently, only 15 states don’t have film and television incentive packages in place. Like with the closely-related video game development incentives, the scope and nature of benefits varies between different localities. There are some standouts, though. Georgia and Kentucky are by far the most generous, offering tax credits up to 30-35 percent on qualifying expenses. This can translate into millions of dollars for major projects and industry executives are paying attention. Organizations such as Film Production Capital, for instance, provide a detailed state-by-state list of relevant tax rebates and other incentives.
Another similarity between video game and film incentives is that attitudes towards the benefits of such programs are mixed. Georgia Governor Nathan Deal recently spoke in favor of his state’s tax credits, citing the tens of thousands of jobs, billions in wages, and 120 firms he believes they helped attract. Likewise, Utah recently touted their incentive program as helping to create six movie projects within the Beehive State.
And these aren’t just no-name projects being brought away from Hollywood. Since the expansion of Georgia’s program in 2008, for example, the state has been home to projects such as The Walking Dead, a Captain America sequel, and The Hunger Games franchise. As to whether these projects actually deliver enough bang for their buck, well, let’s say there’s still a fair amount of consternation. A 2012 paper by the Tax Foundation highlighted most independent studies finding that film tax credits generated less than 30 cents for every dollar spent. They then went on to state that, “at best, film tax incentives largely shift production from one sector to another without producing a net increase in economic activity or employment.”
The ambiguous returns of film and gaming tax credits make them excellent fodder for budgetary debates, particularly as deficits and fiscal solvency are increasingly-contentious issues at all levels of government. This in turn translates into a fair amount of economic uncertainty for players both big and small within their respective industries. Such an environment has huge implications for both economic development and site location. In regards to economic development, state and local politicians need to understand the extremely competitive nature of these fields and how an expansion or retraction of their offerings will impact their standing. For companies looking to expand or relocate, an understanding of the political atmosphere is essential. After all, relocating solely to benefit from a tax break that might not exist next year could be a costly proposition, if not outright disastrous.
Bio: Tim Shea is the General Manager of Product Development at Angelou Economics. He focuses on delivering innovative new research to broaden the horizons of economic development. He has a B.A. in Economics from the Franciscan University of Steubenville and an M.A. in Economics from the University of Texas at Austin.
