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Will Austin's Tax Incentives Make It The Video Game Capital Of The World?

Jan 29 2014, 12:41am CST | by

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Will Austin's Tax Incentives Make It The Video Game Capital Of The World?

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Will Austin's Tax Incentives Make It The Video Game Capital Of The World?

Did you ever wonder how Hollywood (the industry) came to be located in Hollywood (the city)? It wasn’t just the weather. Though the temperate climate did help early movie makers shoot outside year-round, the real reason for the westward migration of the film industry in the early 1900s was to escape a tax of sorts.

At the time, Thomas Edison, who owned the patent to the first-ever motion picture camera, formed the Motion Picture Patents Company , which charged hefty royalties on producers, exhibitors and movie theater owners that used its patented technologies. The early Hollywood was formed by a group of rogue movie producers who didn’t want to pay Edison’s fees and thought that the west coast was far enough away from Edison’s New Jersey home base to evade enforcement. The first film was shot in Hollywood in 1910.

One hundred years later, the modern-day whizzes of the moving image — video game makers — are following a similar westward trajectory to Austin, TX. This time around, it’s tax incentives, not patent infringement, driving the migration.

According to The New York Times, Texas now ranks second in the nation, behind California, in video game employment, with roughly 5,000 residents working in the industry. This is driven by one of the largest tax incentive programs in the nation, which offers cash grants to video game productions for wages paid to Texas residents. Texas legislators have allocated $85 million to the program for next year.

Texas isn’t alone. There are at least 27 other gaming tax credits in effect across the U.S. and Canada, according to an analysis by GamesIndustry International , the Entertainment Software Association and PwC. Their full list of incentives, with links to the websites of the agencies, can be accessed here .

The logic behind these incentives is hard to argue. According to Reuters , the global video game industry – including mobile games on smartphones and tablets – was on track to log $66 billion in revenues in 2013. It is projected to grow to $78 billion by 2017. The top three software publishers – Activision Blizzard, Electronic Arts and Take Two Interactive – have a combined $10 billion in annual revenues. And, the average salary for video game industry employees is about $90,000 per year.

In addition, the industry is growing at a blistering pace as other, more established industries have been in decline. In September 2013, for example, Grand Theft Auto V, produced by Rockstar Games, became the first piece of entertainment of any kind (including movies and albums) to gross $800 million in worldwide sales in its first 24 hours on the market. It crossed the $1 billion mark in just three days. By comparison, Avatar, the top grossing Hollywood blockbuster of all time, took 17 days to reach the $1 billion mark before topping out at $2.8 billion.

That’s an irresistible combination of stats for any cash-strapped state, so it stands to reason that so many of them are scrambling to attract the industry. But, there’s only one Hollywood. Sure, lots of movies are shot in Toronto and other cities that have implemented tax credit programs to attract the film industry, but Hollywood has remained the Mecca of filmmaking for many reasons. It was an incentive that drove the industry west at the turn of the century, but it was the outgrowth of a support system of late night talk shows, high-end real estate and power lunches that kept it there. Not to mention the weather.

Today’s video game industry is not unlike the early days of film where a gold rush mentality is unfolding. Which states will win the gaming industry’s home base mantle – and how? Tax incentives will certainly play a role. But so will things like quality of life for Gen Y programmers and graphic artists, proximity to major publishers like Activision, EA and Take Two and the growth of a support system of investors, app developers and console manufacturers.

These last two points are critical. Much like the Hollywood studios, the big game developers are able to wield enormous influence in the industry, particularly after financial successes like Grand Theft Auto. Console manufacturers from Microsoft to Sonyto Nintendo also have a great deal of skin in the game. In its Q4 earnings report, Microsoft indicated that its Xbox console sales totaled $1.2 billion for the quarter, an increase of 54%, and one of the company’s top revenue drivers.  As the industry grows, these centers of gravity around the biggest players are likely to come along for the ride, helped, no doubt, by tax incentives.

After California and Texas, the states with the highest number of video game industry workers are Washington , New York and Massachusetts. Will it stay that way? Will Illinois (#6 on the list) make a run for it based on the runaway success of a new gaming franchise? The industry is still small enough that a single blockbuster game has the potential to shift the league tables dramatically. As the digital economy continues to evolve, states have a unique opportunity to attract talent with the kinds of incentives that will spur development and, potentially, redraw the map of entertainment industry hot spots.

Source: Forbes


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