By Gavin O’Loughlin, VP Pacific Northwest for IDA Ireland
While its size is massive, the worldwide electronic gaming industry isn’t for the timid, particularly for players hoping to succeed in wealthy markets like Europe with its population of 550 million consumers. First off, new games can take long periods to produce and demand participation from a host of highly skilled workers. Another wrinkle is that companies have to wait years during this income-free development period, but when a game finally goes to market, it still might fail for various reasons. However, these dissuasions don’t prevent a variety of companies from chasing a market that will reach $545.98 billion in 2028 with a CAGR of 13.2% from 2021-2028 according to Fortune Business Insights.
Gavin O’Loughlin, IDA Ireland
Given the potential payoff, it’s no wonder companies from the largest (Nintendo, Microsoft, Take-Two Interactive, Electronic Arts, Activision Blizzard and others) to medium-sized producers along with small upstarts are eagerly participating in this sector and prominently targeting the EU. However, sage advice is important for would-be gaming producers looking for cost-cutting ways to catch a headwind in this potentially very profitable industry. Particularly the less-sizeable firms without air cover from their market heft or income from other product lines can benefit from some helpful strategies to help overcome the many challenges in the electronic gaming world. An emerging scheme that can be of benefit to U.S.-based companies is looking beyond their own borders for locales that can give them an edge. Here are some tips:
1) Seek out tax advantages
Developing electronic games is a resource-intensive business so some nations hoping to beef up their participation in such a potentially appealing sector have attracted companies to their shores through tax breaks. For example, Montreal has developed the nickname of the “Hollywood of video games” after spending years offering tax credits and subsidies to offset salaries, which is appealing to companies worried about the likely lean years spent in developing a new game.
This approach is found in a number of countries within Europe and worldwide, with some more established than others. France, the UK, Germany and Australia have various tax credit schemes aimed at the sector. The newest example is Ireland’s digital gaming tax credit for the video gaming industry launched last November from a country with a strong ecosystem in tech, animation and filmmaking. The new scheme enables eligible companies to apply for a refundable tax credit equal to 32% of expenditure incurred for the design, production and testing of a new digital game, up to a limit of €25 million per project, meaning that the tax credit could be worth up to €8 million (32% of €25 million) to recipients. This is in addition to a corporate tax deduction at the relevant trading tax rate (12.5% or 15% from 1 January 2024 for multinationals with global turnover in excess of €750 million).
Applying only to new games, it can be leveraged by any gaming company doing development in Ireland but may be of particular interest to smaller sized gaming firms. Says Mark O’Sullivan, partner at international law firm Matheson, which works with companies in the gaming industry among others: “A mid-sized video game developer who wants to take on the larger players in the market might find it quite attractive because it may help to bridge the funding gap, due to the refundable nature of the credit.” However, the tax credit should also still be appealing to many of bigger gaming companies already in Ireland. These include Microsoft, Riot Games, Electronic Arts, Activision Blizzard, and others, supporting them as they expand projects or take on new ones.
2) Go where less-pricey talent is located
Not surprisingly, the cost of talent for the electronic game industry is highest in the United States, reflecting salaries in related high-skill areas, with intense competition for such workers. A wide range of expertise goes into the final game product, starting with the all-important software developers but also including artists, voice actors, writers, QA testers, animators, producers, marketers and many more. Creating and marketing a new game can be similar to that needed on a small film staff, so finding all the requisite pros in one place is key.
Says O’Sullivan: “You’ve also got people who are working on support and community management because, of course, a video game is not like it used to be — a package that you just roll out on a CD-ROM. It’s now a multi-media online service that is provided. There’s a whole online infrastructure and ecosystem around that with data that’s going back and forth.”
Given its long history of filmmaking, Europe is a prime locale to find the talent needed to staff such a large, sophisticated organization and salaries are often lower than in America. Europe is also likely to have more of the technical workers that power today’s gaming industry. Among the check-off items companies should use when picking a European location is broad English-speaking abilities, a young, well-educated workforce, a well-developed post-graduate training environment that pumps out skilled new workers at a good clip and, potentially, a research sector with a history of teaming with industry to create new products and technologies.
3) IP protection is key
Intellectual property is a bedrock of the digital and gaming industries. According to Sonya Manzor, head of tax from Irish law firm William Fry LLP, protecting IP and developing it in a country that has a very clear and robust legal framework that is understandable and effective is important. A key driver for international companies making decisions about where to locate operations/investments in the European Union is the legal framework of the country. In research carried out by William Fry with over 300 C-suite executives from leading companies around the world, it was found that companies headquartered in the US are significantly more likely than European firms to attach high importance to the legal framework in making such decisions.
The EU doesn’t offer patentability of software like there is in the U.S. but otherwise, the legal framework is similar between America and nations with common-law systems such as Canada, the UK and Ireland. However, continental Europe has a somewhat different legal system that might not be as familiar to American companies.
Both protection and enforcement of IP are critical for gaming companies, notes Manzor, thus a nation should be able to accommodate fast action by companies if an IP breach has taken place. “In Ireland, for example, there’s no monetary threshold for being permitted to take your case in the commercial court when it’s an IP matter, and it’s a quick and effective system .”
The value of any brand in the gaming world starts with the games themselves including the code, the art, the design and related elements. However, protecting the licensing of merchandise and sponsorships also matter in monetizing all the work that goes into a successful game. Thus American gaming companies taking advantage of a European location with its tax breaks and staffing advantages should also examine the legal environment to ensure it meets their legal and commercial needs.
4) Be aware of upcoming legislation
Having an EU location can be beneficial for U.S. gaming companies but doing business overseas also involves complying with local laws. Over the next 18 months, new legislation will be implemented in the European Union called the Digital Services Act that will require platforms and content hosts – including many video game companies — to comply with certain requirements.
According to Matheson partner Carlo Salizzo of the firm’s technology and innovation group;
“This legislation was designed to regulate platforms and content that’s being put on the Internet. It’s a framework piece of legislation but it’s not going to affect everybody. If a company allows users to upload content onto their platform and a lot of people view it, then this comes into the scope of the Digital Services Act. Not all companies will be affected by it, such as smaller companies and startups but when you get to a certain level of revenue, video game providers may well be within the scope of the legislation.”
The upshot for those gaming companies affected is that they will need to have a representative in the EU to deal with complaints, interact with officials and otherwise be accountable for compliance. This new legislation delivers another reason why U.S. gaming companies should consider setting up a European office, particularly one with proven English-speaking ability in the locale, a workforce skilled in the various elements of creating and selling games and tax advantages that will help the company thrive in this challenging but potentially lucrative market.
About the Expert
Gavin O’Loughlin, IDA Ireland
Gavin O’Loughlin is VP Technology, Pacific Northwest for IDA Ireland. In this role, he assists businesses looking at Ireland as the next step in their international growth strategy, and also works with companies that already have successful operations in Ireland. O’Loughlin started his career in the pharmaceutical industry and has since worked in various sectors within IDA, both in Ireland and the US. Today, he is based in Seattle working with Startups, consumer facing companies and large enterprise technology companies. O’Loughlin’s formal qualifications are in pharmacology and business. Contact him on gavin.OLoughlin@ida.ie
