23.09.11THROWN UNDER A BUS: MY RESPONSE TO MACLEANS


Recently, Macleans magazine decided to throw video games under the bus with a piece by tech writer Jesse Brown (@jessebrown) called Grand Theft Tax Break. His initial article boils down to a simple argument: Canadian game developers shouldn’t receive tax incentives. What follows is my response and refutation of Mr. Brown’s claims and the insulting tone he needlessly employed to make them. As a professional in the industry Mr. Brown prodded, and as a huge proponent of the Canadian game development community, I felt compelled to comment.

I’d like to start by getting this out of the way: After reading Brown’s article, I became irate enough to invite him to eat my feces. I know. It was a quite hotheaded of me (not to mention gross). I’d like to apologize for that. Evidently the baiting and name-calling in Mr. Brown’s article had the desired effect on me and I took to Twitter guns blazin’. Bloops!

With that out of the way, I’d like to get into why exactly Brown’s sentiments about the Canadian game industry prompted my initially hotheaded and scatological response; in the process delving into some inaccuracies in his reporting, his misunderstanding of government tax incentives as a whole, as well as the overall insulting tone of his articles.

I love making games in Toronto, and I believe that tax incentives are, when used correctly, an effective tool for governments to help bolster industries that provide economic, social and cultural benefits to a city/province/country. This has been true of the relationship between government and industry many times in the past, so why is the games industry any different?
 

THE VALUE OF TAX INCENTIVES TO A SMALL STUDIO

Why do I care about tax incentives? It’s quite simple – Capy, the company I helped start and currently run, has leveraged small amounts of government support into creating its own original, Ontario owned & controlled IP.

Capy (and numerous other independent studios like Queasy, Metanet, Drinkbox, and many more) have leveraged government tax incentives to build, from the ground up, an industry of cultural, social, and economic value in the city of Toronto. Is it a coincidence that Toronto has one of the most thriving and successful independent development communities in the world? Not even close. I believe the combination of talent, drive, and support are the root of Toronto’s success.

In the early genesis of Capy, every facet of our business was dependent on larger American and European publishers who provided us with contract work almost exclusively for brands like Pirates of the Caribbean and American Idol. We didn’t control the IP, the development, or the business around the games. We were strictly a work-for-hire company, and although we did our best to make great games, the whole process was out of our control and owned by someone else. To make things worse, once a game was done, so was our cash flow until we found another project with yet another publisher who dictated the development. After three years, with our heads and spirits sagging, many of our original founders leaving, and some pretty bleak financials, we took our SR&ED tax incentive for the year and pushed it all into a charming and ambitious little puzzle game called Critter Crunch. We owned Critter Crunch – the IP, the development, the business, and promotion. The game launched on PSN, has sold around 100k copies to date, and helped put us on the map. Fast-forward to 2011, where once again our tax incentives helped fund Superbrothers: Sword & Sworcery EP, one of Capy’s most successful projects with well over a quarter of a million sales in under six months. Tax incentives helped us take Capy from another faltering licensed game maker and turn it into something that I believe has real value in both the game industry, and in the provinces’ economy.

Capy employs over 20 people, meaning tax incentives help cover our size while simultaneously helping us to create a much more fulfilling work environment. We aren’t making rushed games as a marketing piece for a company that couldn’t care less about us – we’re working together to make (hopefully) cool, creative, interesting titles. We received tax incentives, and we’ve built something meaningful with them.
 

THE ECONOMICS OF AN ECONOMIC PROGRAM

Now, perhaps the thing that confuses me most about Mr. Brown’s comments are that, despite getting a rather concise lesson from Peter Nowak on how incentives in Canada are a pretty effective economic tool, Brown still doesn’t like them.

I think this is quite important to note: Brown essentially accepts Nowak’s defence of the economics of tax incentives. He offers no argument, whatsoever, against the economic value of a program that is economically driven. If the point of tax incentives is to foster economic growth in an industry, and you can prove there is a concrete, substantial and growing economic benefit… What’s the argument?

In an effort to ensure I understood the ‘theoretical’ side of tax incentives, I went ahead and had a chat with a close friend, who also happens to have a doctorate in economics and teaches at a university. I asked Dr. Smith, from an economic point of view, why do governments even have tax incentives? If they truly result in the kind of middling returns that Brown decries, why would governments even consider them? Here’s how Dr. Smith explained them to me, in wonderfully understandable bullet points:

• Governments provide a tax credit, and reduces the overall tax burden on a firm
       o This lowers the costs of the firm
• Firm expands production because of this. In an industry like gaming, this would translate into the firm hiring more skilled people, since it’s a relatively labour-intensive industry.
       o Alternately, it could mean the firm creates its own content rather than relying on US/Euro companies.
• This generates more output from the firm. The government would recoup some of its tax benefit directly at this stage because it:
       o Collects tax on the extra output.
       o Collects tax from the new employees (or existing employees working harder)
• There is also an indirect increase in output in other sectors, and this is where a “multiplier” comes from
       o The new employees spend money at a local business, which generates new output and income
       o They in turn spend some of their new money on goods and services
       o This cycle loops, and keeps going & going…
• For example you get some tax incentives. You hire a new worker at your company. This person takes part of her/his salary and buys an expensive meal. The restaurant gets this extra revenue, and pays part of it out as wages to its servers. Those servers all go out and spend their money at a bar. The bar owner pays out some of that revenue as wages to the bartender, and etc.
• The total effect of the tax incentives is the direct effect (the increased output by the firm claiming the benefit) and the indirect effect (from all the other companies down the line that benefit by the extra spending). Sometimes these multipliers are greater than one, which means that when the government forgoes that one dollar in tax revenue, it generates more than one dollar in extra output combined.

As Nowak points out in his piece, the $1.7b in revenue games will generate in Canada this year makes it seem like the multiplier for game development is clearly greater than one. In an interesting twist, Dr. Smith also notes that incentivizing game development has a clear social benefit through increased cultural activity – something Toronto proves via the Hand Eye Society, Gamercamp (and Gamercamp Jr), The Difference Engine, The Artsy Game Incubator, TIFF Nexus, Nuit Blanche, TOJAM and so much more.
 

TAX INCENTIVES AND THE QUALITY OF LABOUR

After dismissing the beneficial economic elements of tax incentives to the gaming industry, Brown goes on to explain that he believes the real issue is how tax incentives result in us selling “ourselves short as cheap labour to foreign companies.” I believe this statement is a little confused, and not surprisingly false.

First, there is a blatantly obvious distinction between “cheap labour” (see: migrant workers, overseas manufacturing, kids making running shoes, etc) where workers are paid next to nothing, and the labour employed by game development in Canada. Brown’s statement inaccurately implies that large studios like EA and Ubisoft abuse Canadian talent, paying them peanuts to be their “grunts”. This is miles from the truth. The jobs game development has created in Canada involve almost exclusively highly skilled labour – everything from senior to junior, tech to creative, business to HR. They are jobs that pay well and almost always include solid benefits. These are not “outsourced” jobs, in the way Brown implies, nor are Canadian devs simply the drones Brown paints them to be. The employees at Canadian studios are creating and developing, from the ground up, some of the industries biggest titles – far from the work-for-hire model 3rd party studios rely on, and miles from the implications conjured up when using the term “cheap labour.” Brown purposely, and I think somewhat irresponsibly, uses charged words to paint a bleak portrait of the relationship between development, tax incentives, and foreign investment in our industry.

Another argument Brown uses to devalue the impact tax incentives have on Canadian game development is to posit that once India gets “up to speed,” Ubisoft, EA, THQ, Square-Enix, and WB will all pack up their operations and leave Canada for India. However, India has been putting out top-tier programming talent for years (more skilled than U.S devs, in some cases), and most of the major publishers have outfits there: EA Hyderabad, Ubisoft Pune, and many more. However, the majority of these studios are doing complimentary work – porting, quality assurance, perhaps some technical work on certain components. With the exception of mobile development studios like Gameloft, very few Indian studios are focused on game creation. India is already “up to speed” in programming – the talent is unquestionably there – but game creation isn’t packing up and moving.
 

A LITTLE CLARITY, PLEASE

After reading Brown’s articles and seeing him shrug off arguments made by Peter Nowak & Jaime Woo, I’m not even sure he understands how the tax incentive programs work. If he indeed does, then I believe it’s a little disingenuous to exclude even a small explanation from the article, considering how quick he is to damn them. Tax incentives are not upfront monies. They are not cash dolled out directly into company accounts to reduce labour costs on the fly. To receive money via OIDMTC (Ontario’s tax credit) you have to go through a long process which cannot start until you complete development of a title. Before the long process of receiving tax incentives can start, you have to pay salaries, rent, and even taxes. To be clear: you must spend your entire development budget before you can even apply. Further, after you apply, you wait in excess of a year before you receive your credit. The implication of Jesse’s article is that this is just money flowing right into game developers’ pockets free and clear. This is simply not the case.

The second much-needed clarification is that whenever the tax issue arises, everyone is quick to point to Ubisoft Toronto as some sort of tax vacuum lighting rod. “They got $250m,” everyone shouts. However, almost all of the people shouting have a strong tendency to ignore critical components of the deal. They tend to ignore the part where Ubisoft, in turn, is committed to investing $500m+ in the same time period. They blank on the impact 800+ new highly skilled jobs will have economically, socially, and culturally. They manage to gloss over the fact that the games being developed at Ubi TO involve one of Ubi’s biggest franchises. They miss the influence that landing a giant like Ubisoft has in luring other companies, as Montreal has shown us time and time again. Perhaps most importantly, they also seem to forget (or not know) that Ubisoft’s $250m has nothing to do with tax incentives whatsoever. The $250m was an investment directly from the province of Ontario – something that’s been done for almost every substantial industry in Canada (and the US) at one time or another. I will happily admit I am not in love with Ubi getting $250m, but although the distinction may not be huge, I still view government investment and tax incentives as separate issues altogether. So should an article written explicitly about tax incentives.
 

RAAAAAGE

Now that I’ve covered my thoughts on tax incentives, I’d like to talk about the ugly component of the original article (as well as Brown’s day-later follow up) that offended me the most, and caused the outburst I began this piece apologizing for. In the process of dismissing the benefits of tax incentives within game development, Mr. Brown also chose to belittle the individuals who make up my industry, and when called out for doing as such, tried to pass them off as mere “jokes” and accuse his detractors of not being able to see the humour in them.

I would like to call bullshit. And not just regular bullshit. I would like to invoke the type of bullshit that only gets called when someone is caught red-handed doing something asinine and unacceptable, but tries to wiggle out of it by claiming it was “all in good fun” or shouting “can’t you take a joke” rather than accepting their own poor judgment. When you insult someone, and they explain why they feel insulted, the adult thing to do is simple: you either own it, or apologize. There is no in-between. If you really think programmers are grunts, don’t claim its a joke. If you don’t think programmers are really grunts (hint: they are not), apologize. Don’t take the adolescent backdoor to safety and blame the victims for not laughing.

Brown writes: “I suspect that once the magical silicone dust settles, both governments will learn that coders are the grunts of gaming.” He back-peddles rather ungracefully in his second article with “The coder grunts, though treated shabbily within the business, are themselves highly trained technologists.”

Game programmers don’t deserve that kind of slight. Programmers are my co-workers, my friends, my mentors, and my idols. They are the women and men that make magic happen with 1s and 0s day in and day out. They are the furthest things from “grunts,” and to call them that on a website for a magazine like Macleans is unacceptable. No one would ever be rude and inconsiderate enough to call a cinematographer on a feature film a “grunt,” nor would you ever even think of calling a biochemical engineer at a pharmaceutical company one.

I was also slightly surprised that Brown, who has a lot of experience writing for nerd culture, would choose to regurgitate the most overused stereotype for gamers, that of the awkward, bearded coder programming in his basement. It’s an easy joke and very understandable to people with no knowledge of games, so I can somewhat understand why Brown used it, but that still doesn’t mean it isn’t a tad lowly.

And really, choosing to use Bonetown as the only actual game in the article? Ok, that is actually kind of funny.

Mr. Brown, of course, has every right to purposefully and shrewdly generate little firestorms within my industry by publishing provocative opinions short on facts and laced with insults. Heck, he even managed to get me to type “feces” into my iPhone. That being said, Brown doesn’t get to shirk the very debate he created by passing off his lack of knowledge and his oddly misplaced disdain for programmers, as all just a bit of fun.

Written by Nathan Vella, with immeasurable amounts help from Dan Vader. Big thanks to Ron Carmel & Andrew Webster for their input as well.

Brown’s article was based off this NYT article, which my good friend @ADAMATOMIC tore to pieces here

This piece is intended as opinion. If you find any errors in research or interpretation of Brown’s article please let me know.