Canadian Heritage Committee on Nov. 1st, 2012

[Prof. Avrim Katzman]

Yes.

[Scott Simms, Liberal, Bonavista—Gander—Grand Falls—Windsor, NL]

Okay. I wanted to get this down for the sake of our analyst.

For the second part of my questioning, I want to go to Mr. Johnston and also to the west coast, to Mr. Davis and Mr. Chenard in Vancouver. Vancouver, you mentioned that the SR and ED program is being rolled back and that it needs to be more proactive.

Quite frankly, over the past two days we've heard a lot about the tax breaks and less about direct investment by governments. It seems to me that's where you want to go or you want to stay, or maybe not, but you've never really been exposed to a lot of government direct investment in this industry. It has all been about the tax credits.

Mr. Johnston on the east coast, you mentioned the provincial silo effect. You have two levels of government involved and you think there should be more of a national strategy—I don't know what the word is—to make this work for tax credits so that it's not siloed in any particular province.

Mr. Johnston, I'll start with you for a comment.

[Michael Johnston]

Nova Scotia is one of the provinces with a more lucrative digital media tax credit. I probably shouldn't complain too loudly, but we do leverage both tax credits.

As I mentioned, we're a fairly software development-intensive company. You're right. It's a model that we understand in terms of the SR and ED program. It's something that has worked. We've learned how to leverage that to grow our innovative software base and to then sell that more broadly on international markets.

You're right that we don't really yet quite understand the nature of the direct government investment in this field. We're certainly interested in where that may go, but we know what works and we know this is potentially being rolled back, so it certainly gives us pause.

On the provincial digital media side, I think a number of other guests talked about parachuting in specialized labour from other regions. At different times we'll need acting talent or vocal talent or engineers or graphic designers or something that we simply can't find in the Maritimes. This isn't a huge labour pool.

We're not able to leverage any of those resources in terms of tax credit filings on the digital media side. Therefore, if we can't leverage them—if we can't get a reasonable break, I suppose, on the cost of that labour—we're incented to look anywhere in the world for that labour, not primarily in Canada, which would be awfully nice. It would be nice to be able to look to Vancouver to find skill for the game that we're building, versus going to another country and having that money leave our borders.

[Scott Simms, Liberal, Bonavista—Gander—Grand Falls—Windsor, NL]

Thank you for that.

Could I go to the Centre for Digital Media to react to that as well?

[Dennis Chenard]

From our perspective, the students coming into the program at the Centre for Digital Media are also looking at opportunities around....

I think Lance is in a better position to speak to it from a studio perspective. I'll pass it to Lance.

[Lance Davis]

First of all, let me say that if our Vancouver resource could be made available to our friend in Halifax, we'd be happy to fill that need. The affordability of this workforce is integral to its success.

It's interesting that some people portray the tax credit programs as a race to the bottom and a giveaway of taxpayers' money, but irrefutable, substantive evidence shows that the evolution of the industry in Quebec over these few short years to become the number one hub in Canada is directly attributable to the tax credit.

In B.C. our animation hub has grown over only two to three years to become almost number one in the world, thanks in large part to the tax credits that are available to our contemporaries in the film and animation industry. It's interesting to note there's a huge distinction between the credits applied to them and to us. I'm not sure why that differentiation occurs, so if you're thinking in that realm going forward, please give effect to that. It's a very large digital environment.

[The Vice-Chair, NDP, Pierre Nantel]

Thank you very much, Mr. Davis.

We will now move on to Mr. Scott Armstrong.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

Thank you, Mr. Chair.

My first questions are going to go to Mr. Johnston in Halifax.

You talked about your experience working in the States, and now you've come to Canada. What advantages does Canada provide over the United States for your company? Why couldn't you have set up in the United States and run your company there? What advantages do we have in Canada currently?

We have lower corporate tax rates and other advantages—

[Michael Johnston]

That's a fair question. The corporate and personal tax rates probably aren't competitive. If you stack us up against Atlanta, which has been at every digital media conference I've ever attended to talk about their outstanding programs, it is difficult to be directly competitive with some of those incentives.

We have a few intangibles here. Certainly in Atlantic Canada we have the highest number of universities per capita in North America, or so I've heard. We have an outstanding labour pool. We have, for our part, a lucrative—or, at least, it has been lucrative—R and D tax program that has certainly helped us be innovative in the innovative software work we do for global media brands.

We have, as I said, excellent educational institutions and a lifestyle that keeps people here. Everywhere I sell, there is a perception that Canada is a place of integrity with which to do business. I think that goes a long way. I think people understand our regulatory system, our legal system, and our tax system. They know that they can do good business with Canadian companies and get good value.

For my part, personally it's been better to be back home in Canada. I don't have to deal with visa issues and U.S. immigration. I came home shortly before 9/11. It was nice to be able to avoid the visa situation during those dark days of history.

I've been impressed by the quality of the labour here and by the support programs at all levels of government here in Nova Scotia. On the trade side, there is support from some of the ACOA trade programs and certainly from some of the provincial trade programs as well, and there is the federal R and D program.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

Thanks.

Mr. Johnston, we heard at the last meeting that everything is moving to digital download for distributing product. Would you agree that the future of your industry is going to be all digital downloads of products?

[Michael Johnston]

That's 99% of what we do.

As I mentioned in my remarks, we really don't build a lot of stamped-on DVDs or large blockbuster console games.

Everything I do, everything I export, is bits and bytes. Every game we build is either available online in a web browser, has been optimized for a mobile web browser, or is a mobile application built to be installed on your iPhone or Android device. At this point I probably can't speak to anything we've done in a dozen years that hasn't been accessed almost exclusively online or downloaded to mobile.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

That allows you to set up and operate your business in a more rural area. You could operate your business maybe not just in Halifax. You could go outside into a more rural area or a more rural part of the country, because the way you distribute your product, you wouldn't lose an advantage, because you don't have to pay for gasoline and other transportation costs. Is that accurate?

[Michael Johnston]

That's absolutely true. I grew up an hour north of here, close to your neck of the woods. We've been exploring setting up satellite teams in more rural parts of the province, partly because some of the tax credit regimes we have here in Nova Scotia have rural incentives to encourage companies to look outside the urban cores, which I think is a great idea. As long as we have a good connection and stable infrastructure, it doesn't matter where we sit.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

We've heard a couple of people say that when they're trying to bring in foreign workers, they are mid-level or project managers. I think you mentioned the same thing.

Is this going to be a situation that exists forever, or is this group of young workers we're now training in the industry going to be able to fill those roles in five, 10, or 15 years so we won't have this pressure to bring immigrants in to fill these mid-level and project manager roles?

[Michael Johnston]

Your comment is a fair one. We certainly see that the entry-level folks grow into mid- and senior-level resources, but that's always been the case. I've been doing this for 12 years, and this has always been a problem. It seems that we have a voracious need for more talent in this industry. As soon as we invest in growing a mid-level resource, we've tended to grow our business and need more of them.

There is a dramatic shortage of people with experience in this part of Canada, and honestly, there are a lot of great growing companies that need those people, so we're seeing a lot of cross-hiring, which really just drives up salaries. It's great for the resources but it is challenging for companies.

We need a deeper pool. It would be nice to be able to post a job ad and get more than one or two applicants to pick from.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

Does anybody else have any comments on the training aspect or building internal capacity within your operations?

No? Okay.

Thank you, Mr. Chair.

[The Vice-Chair, NDP, Pierre Nantel]

Thank you, Mr. Armstrong.

Before giving Mr. Dubé the floor, I want to mention the following.

We'll now have five-minute rounds. They're a little shorter, so everybody gets to speak.

[Matthew Dubé, NDP, Chambly—Borduas, QC]

I hope the other witnesses will forgive me because I have another question for Mr. Talbot. I am interested to hear what our witness from Quebec has to say, because there are people from the South Shore of Montreal, from my riding and neighbouring ridings, who work in this industry.

You mentioned actors, engineers, architects and all of those who are involved in creating video games. I don't think people realize that to create a product that costs 99¢, such as Angry Birds for example, there are people who have to create the characters, decide what colours to use, and so on.

I put this question to representatives of Canada's Alliance numérique based in Quebec. How much of an advantage is it to be in a region such as Montreal, where there is a lot of artistic talent in all these fields? I talked about this at the last meeting. L'actualité magazine, for example, mentioned people with history degrees who contribute to the game Assassin's Creed, which is the Canadian game that probably makes the most money.

What I would like to know is how much of an advantage it is in the video game industry to be in an environment where there are many artists and content creators.

[Denis Talbot]

It's an incredible advantage. Artists work alongside very pragmatic people who deal with zeroes and numbers. The artists are in their own world and draft images. It's fantastic to be able to combine that with a voice for a character and bring it to life.

In Canada, in Vancouver, in Toronto and in Quebec, we are very lucky. We can have a lot of exchanges. It is important to know that the young people who are currently doing this kind of work are very talented. To answer Mr. Armstrong's question, it can take 5, 10 or 15 years before these young people have the maturity to manage teams of younger people and pass on the torch, for example.

Being able to work in a stimulating environment is great. I have been at recording sessions where the actors completely become their character as they say their lines. It's very similar to what is done in film. There are more and more international actors coming to Montreal to do voice-overs, to develop the voices, and so on. In Splinter Cell, I actually saw Quebec talent at work. For example, the young princess is voiced by a Quebec woman. Of course, it's important. These actors portray the characters with a lot of emotion and that is integrated into the video game characters by people who know what they are doing.

One day a young man came to see me with a character he had created. It was a knight and it was fantastic. This young man was finishing school. The knight he had created was excellent and included a lot of details. I believe we were at Eidos, which was holding an open house. The young man showed us his creation and said he wanted a job. One of the experienced employees told him that the picture was very nice but that, to integrate it into a game, so many polygrams would be required that there would be no more room to make the game work.

You have to be able to play tricks with technology and exchange ideas with people who were there before you, people from other provinces and even other countries, to be able to find ways to make the animation very realistic and close to what you get in film. You want the people playing the game to be completely immersed in it. You want them to feel as though they are, in a sense, participating in a movie as the hero.

[Matthew Dubé, NDP, Chambly—Borduas, QC]

Is there a way to reconcile these two realities? For example, on Tuesday we heard from representatives of the Writers Guild of Canada. They explained that the script for a video game was three times longer than for a film because there are peripheral characters. There are also those small voices you hear in the background when you are walking around a digital world.

Should training be adapted to this new situation? For example, there are an increasing number of people who did not study in a field traditionally associated with video games who will go on to work in that sector, correct?

[Denis Talbot]

People studying acting can easily find work in the video game industry because there is an increasing use of voice-overs and character portrayal. Engineers can also work in this sector.

When you are reconstructing part of 17th or 18th century Italy, you obviously can't use pictures. You have to look through books and work with historians. A few years ago, it would have been surprising to see a historian working on a video game. Let's look at the example of the game Assassin's Creed. It is set in Italy. You can see the bridges, the structures, and you can recognize the buildings. People will go out and do reconnaissance work and will very skilfully take this artistic vision and make it realistic in the digital world, in a video game. These are people who would usually draw real bridges and structures. It is beautiful to see all this come together.

[The Vice-Chair, NDP, Pierre Nantel]

Thank you, Mr. Talbot. Thank you, Mr. Dubé.

Mr. Parm Gill, you have the floor.

[Parm Gill, Conservative, Brampton—Springdale, ON]

Thank you, Mr. Chair.

My question is for Mr. Johnston, but others are free to also weigh in and give their thoughts.

Some people have suggested that a high-dollar lack of talent pool and few R and D incentives have impeded the industry, yet we see the industry continues to grow at a high rate.

Can you please tell the committee if you anticipate continual job creation and overall growth within the industry as a whole?

[Michael Johnston]

Yes, but I would offer that our growth has certainly slowed in the last 12 to 18 months, largely related to the dollar. Two to three years ago, when the dollar was stronger, we had tools available to help us win new work and to be competitive. We have some major contracts with Nickelodeon and MTV that renew every year. We've been traditionally very, very competitive with offshore teams in Belarus, India, and China in competing for those same projects.

Two years ago we were able to do creative things with currency forwards, to lock in money at favourable rates and offer rate reductions to clients to help sign long-term contracts and to grow those contracts. All of those tools are gone from our tool kit at this point.

As I mentioned, we've been the fastest growing business in Atlantic Canada for several of our 12 years. This past year we've grown a tiny bit. This has been the year of slowest growth that we've seen in the life of the company. We have a lot of opportunities, we have a lot of proposals, but we lack some of the tools we used to have to clinch the work on the finance side.

So yes, I see as much opportunity, if not more, in the global market, but, as I say, there are fewer tools to help us lock those in and bring them home.

[Parm Gill, Conservative, Brampton—Springdale, ON]

Is there anyone else who would like to add to that?