Industry Committee on March 5th, 2014

[The Chair, Conservative, David Sweet]

Good afternoon, ladies and gentlemen.

Bonjour à tous.

Welcome to the 14th meeting of the Standing Committee on Industry, Science and Technology where we're continuing our study of the entertainment software industry in Canada. Before us is the Entertainment Software Association of Canada. We have Jayson Hilchie, president and chief executive officer, along with Julien Lavoie, who is the vice-president of public affairs.

Mr. Hilchie is going to be beginning his opening remarks and both will be available for questions.

Colleagues, we have to keep it pretty tight. We are going to have bells at 5:15 so we have moved some timing around a little bit and I have to do some math.

We'll let Mr. Hilchie go ahead with his opening remarks and then I'll advise you about how much time you'll have for questions.

Please begin, Mr. Hilchie.

[Jayson Hilchie, President and Chief Executive Officer, Entertainment Software Association of Canada]

Thank you.

Good afternoon and thank you very much for having me here today.

My name is Jayson Hilchie and I am the president of the Entertainment Software Association of Canada or ESAC. ESAC represents a number of leading video game companies in the Canadian industry from multinational publishers and console makers to local distributors and independent studios. I'm joined today by Julien Lavoie, our vice-president of public affairs.

With my opening remarks I'd like to provide you with an overview of the industry in Canada, but we'd be happy to get into specific issues with you and answer your questions after my remarks.

First off, I'd like to thank the committee for devoting time to studying and better understanding the Canadian video game industry. It's an exciting and dynamic sector that is at the vanguard of Canada's growing digital economy. The video game industry alone already directly generates $2.3 billion of Canadian GDP. The video game industry is the fastest growing entertainment industry globally. The global market is currently estimated to be worth $77 billion U.S. in 2014. That's bigger than box office revenues for movies worldwide. By 2018 it is predicted that the global industry will be worth as much $100 billion as a result of an expanded market and new technologies such as Xbox One, PlayStation 4, and Nintendo Wii. You've heard some earlier witnesses cite some of our stats from the latest research, which reveals that collectively the industry in Canada employs approximately 16,500 people at nearly 350 companies nationwide.

Canada has currently the world's third largest video game industry in terms of number of employees or is in first place on a per capita basis depending on how you look at it. Canada has had tremendous success in the past with big budget video game blockbusters and we're known the world over for franchises like NHL and FIFA, Mass Effect, Assassin's Creed, Splinter Cell, and Batman: Arkham Origins, to name just a few. We're also well known for successful indie titles and critically acclaimed games that are enjoyed the world over. We've seen tremendous growth in this sector over the past few years. From 2011 to 2013 we saw a 5% growth rate in terms of jobs, which is more than double the average Canadian labour growth rate during the same period. The types of jobs that are offered in the video game industry are truly the jobs of the future: high-paying, knowledge-intensive, innovation-driven, and at the cutting edge of creativity and artistry. These jobs include computer programmers and software engineers, 3-D artists and designers, game play analytics professionals, and monetization experts just to name a few.

Our industry comprises a unique mix of artistic and technological professions, and the collaboration of these two areas is what produces truly innovative products. But it also fosters the creation and development of many different multi-functional skill sets such as art and design, animation, visual effects, game design, sound design, motion or performance capture, computer programming, narrative development, and business and marketing. These characteristics contribute to and constitute the types of transferable skills that can be used to grow various subsectors of the Canadian knowledge economy.

In fact, talent, skills, and experience with emerging technologies are at the heart of our industry. Without the hard-working men and women who pour their hearts and souls into these playable stories and innovative, interactive entertainment, there wouldn't be an industry in Canada. It's our reputable know-how and proven track record that is fueling the development of games across this country. The workforce is also young and dynamic. In fact, the average age of a video game industry employee is 31 years old, which represents a key demographic necessary for the growth of the Canadian economy. With an average salary of just over $72,000 a year, Canada's video game professionals are earning well above the national average and helping move this country forward economically.

The video game industry is constantly changing. The traditional console market has seen some consolidation due to the rising costs of production but also the shift of users to mobile devices. This consolidation was also caused by the fact the previous generation of consoles had been on the market for close to eight years. However, with the launch of powerful next generation boxes such as the Xbox One and PlayStation 4, which in some ways are redefining the living room experience, we expect to see a steady resurgence in the importance of console gaming.

The rise in the number of companies developing games for hand-held devices has largely grown out of an exciting new opportunity on the mobile front and the challenges associated with risky, big budget titles that take hundreds of thousands of dollars more to produce and many years compared to lower costs of production time for mobile or more casual types of games. Our latest economic study shows that the average mobile game costs roughly $300,000 to develop, consisting of a team of seven professionals and taking five months to complete. Compare this to the average console game, which costs roughly $9 million to develop, requires a team of 65 professionals, and takes over a year and a half to complete. Some of the biggest titles available on the market can dwarf this average when development costs and marketing budgets are taken into account.

Innovation is a key component of our industry. We make significant investments in research and development to continually advance the technological underpinnings of our games. Our consumers are demanding better, faster, bigger game-play experiences, and our industry is responding by investing in technology in a concerted way. Games are also increasingly evolving in real time, with new content being added after launch, and are being updated to respond to consumer demand. Our 2013 video game industry study found that companies on average are investing 21% of their production costs in research and development, and that companies spent 48% of their company expenditure on development and creation of new intellectual property.

Our industry takes advantage of federal government incentives, such as SR and ED tax credits; however, this program does not treat all companies on a level playing field. R and D conducted by global firms in Canada—even those with significant production facilities here—contributes to this country's innovation and is conducted by Canadians residing in Canada. Levelling the playing field on SR and ED would help drive innovation and increase R and D in our industry.

To maintain a strong video game industry, Canada must seize the opportunity to establish itself as the world leader in this innovative and cutting-edge sector. But to do this, we need access to the best talent from Canada and from around the world. As our industry continues to grow and the required skills continue to evolve, we increasingly find that in order to fill intermediate and senior-level positions—those jobs requiring 5 to 15 years of experience—we must look outside of Canada. There is significant pressure on our labour pool at that level of experience, given our position as the largest industry on a per capita basis.

Locating and hiring junior-level employees is not the issue; with roughly 65 educational programs in Canada graduating students with video-game-specific skills, we have access to this level of talent. But due to the size of our industry and its relatively young age in Canada, we suffer from a shortage of labour at the more experienced levels. Changes to the temporary foreign worker program have resulted in significant delays in accessing the talent we need, which puts our competitive position at risk. Being able to access global talent in an efficient manner is paramount for the continued growth of our industry.

We have a comprehensive list of recommendations to make to the committee on specific actions that could be taken to continue to create the right conditions for success in the video game industry in Canada. We will be submitting these recommendations to the committee at a later date.

Those are my remarks. We would be happy to take your questions.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Hilchie.

I think we'll be able to get seven rounds apiece. Remember, colleagues, that we're just going to go straight through, with seven minutes for each person. I'll have to keep it pretty tight.

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair, and thank you to the witnesses today.

This will be easy, with just one organization, and that the organization that represents all the companies.

You mentioned that Canada is third in the world—in terms of the number of employees, I believe you were saying—but first per capita. We've heard time and time again in this committee, even before this study and during it, about the strength of the Canadian industry.

Give us the reasons. Why is the industry so strong in Canada?

[Jayson Hilchie]

We've really narrowed that down to two major points. We've recently quantified this in our research, but we knew it before qualitatively anyway.

Canada has a great talent pool. I know that I talk a lot about access to talent and the senior and intermediate talent that we need. But when this industry began in Canada—it's really been here for less than 20 years, in terms of the overall growth that we've seen get us to the point we are at now. The quality of talent that's available in Canada and government support and policies that have helped to essentially create winning conditions here are the two main forces that have helped our industry get to the point it is at now.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Okay.

In regard to the other largest players globally—you said there are two countries ahead of us in terms of number of employees—what other countries are strong?

[Jayson Hilchie]

The United States and Japan are the two biggest. The United Kingdom, in fact, used to be the third largest video game industry in the world and is now fourth, possibly fifth; I don't know. A lot of expats from that industry have helped contribute to the Canadian industry, because that particular industry was a lot stronger at a much earlier point in time than ours was.

But there are a number of other countries. Korea is also a large and growing industry. We assume that China's industry is growing as well; however, there's no substantive data for that.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Among the countries you listed, you said the U.K. was higher and has moved down a little bit. Are there countries that are significant threats to the Canadian industry?

[Jayson Hilchie]

Countries such as Korea and China—those types of emerging economies—certainly are growing at a rate that I believe could in the future threaten us.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

You talked about the strengths within the industry, the reasons we're so strong here in Canada. What would be the threats on the horizon as we consider the future of the industry? What ought we to be concerned about as a country?

[Jayson Hilchie]

The biggest threat to us, and this is one of the reasons for many of the meetings I have here in Ottawa and for many of the comments you hear from our organization, is focused on continued access to the high-quality talent that we need to be able to continue to grow.

Look at the growth of our industry and the number of people we employ now. We're the third largest industry in a country with a population of 35 million. The U.S., with 320 million to 330 million people, has roughly 30,000 employees in their industry. So we're considerably punching above our weight, but because of our low population, it is a very difficult prospect for us to continue to fuel our industry's growth. Being able to access the best talent in the world that we can, both domestically and globally, is a huge factor in the continuing competitiveness of our industry in Canada.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

What was the number of employees in Canada, again? You said it in your opening comments.

[Jayson Hilchie]

It's 16,500.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

As you consider that threat on the labour side—and we get lots of people coming to us suggesting what the government should do—what is the industry itself doing to address that issue?

[Jayson Hilchie]

Our members do a number of things. They're doing everything, from grassroots-level consulting with universities and colleges to make sure that the curriculum is up to date and that they're graduating students with the skills our industry needs today.

We're a fast-paced, innovative industry that is constantly changing. I know you've heard this from other witnesses before me, but in order to ensure that the graduates continue to come out with the skills that our companies need, our companies spend significant amounts of time working with those universities, taking on interns—students who are still in school—and giving them opportunities to work on blockbuster games that are going to be released worldwide.

Some of our members do everything from running internal university programs for their employees to making sure that they're constantly being upgraded with skills that are needed for the new platforms they're working on or the new games. There is a wide range of initiatives that our members undertake, everything from grassroots to institutional initiatives that provide competitive advantages for those individual companies.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

If you had the opportunity to speak to a young person coming out of high school and interested in a career in the gaming industry, what would your advice be, in terms of the path they should take?

[Jayson Hilchie]

That's a good question. For me, it would be to go to a school that has a reputable curriculum, that is known for producing graduates who are going to the companies that are making the games.

First of all, they need to figure out what it is they want to do. Do they want to make games? Do they want to be an artist? Do they want to be a producer? Do they want to be a computer programmer? The answer to that question would cause considerable divergence in the paths such people would travel. We have school programs in Canada that graduate artists that are considerably different from the university programs that graduate computer engineers and software developers. You would need to really understand what it is you wanted to do in the video game industry. One of our strengths is that we are at a convergence point of so many different skill sets that there are many different things you can do.

So figure out what it is you want to do and then find the best school that graduates students in that area.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I have less than a minute, so I'm going to wrap up now. I'll come back to this in the next round.

[The Chair, Conservative, David Sweet]

Next we have Mr. Harris for seven minutes.

[Dan Harris, NDP, Scarborough Southwest, ON]

Great. Thank you for coming in. It's nice to see you both again.

I'm going to jump right back into the temporary foreign workers and other programs that exist. We heard from other witnesses on Monday that when you bring that upper-level person in from elsewhere, they then are also able to train the Canadians so that they can eventually take on those jobs, which will help to continue to grow the industry.

There are some changes to interchanges between employees who work at the same company. Ubisoft and EA are examples of companies that make use of these. There are changes, we heard, coming down the pipe, changing the requirements from having worked there for one year to having worked there for three years.

Is that change going to negatively impact the industry's ability to bring in talent?

[Jayson Hilchie]

Yes, absolutely; if those changes go through, they would significantly impact some of our global companies that have locations in other countries. It is an issue on which we have been quite proactive and for which we have been advocating. We met with the Minister of Immigration just last month to talk about this specific issue.

At the time, it seemed to me that the conversation was quite positive; that potentially these changes would not be as nuclear as you're suggesting. We're obviously continuing to monitor this situation, but maintaining the existing regulations would obviously be in our best interest.

[Dan Harris, NDP, Scarborough Southwest, ON]

Great.

I've mentioned it before on this study and it's worth mentioning again because of issues that exist in other sectors with the temporary foreign worker program and the ability to either drive down wages for Canadians or take advantage of people from elsewhere. In the gaming industry this has absolutely nothing to do with that and should not get wrapped up in that conversation.

Every company we've heard from has said that they'd love to hire Canadians because it's cheaper to hire somebody here than it is to actually displace somebody from elsewhere. Of course with average salaries being in the $72,500 range, these are good family-supporting jobs that we need more of in Canada.

Mike started talking about who is coming up behind us. Whenever you're ahead in the race, that means there are more people behind you trying to catch up. He asked about a couple of things.

Which country do you think would be next in line to try to overtake us, and what competitive advantages have they put in place?

[Julien Lavoie, Vice-President, Public Affairs, Entertainment Software Association of Canada]

The U.S. is actually a threat in the sense that many jurisdictions—states within the U.S.—are looking at some of the incentive programs that some of the Canadian provinces have and are looking to either replicate or copy some of the successes we've had here, because they are also looking for employment strategies that include some of these very desirable jobs. That is something we're keeping an eye on in terms of what's happening in the North American context. The industry is more or less concentrated in Texas and in California, and somewhat on the east coast of the U.S. as well, but a lot of other states in the U.S. that you wouldn't think would be players are trying very aggressively to attract companies as well. So that is something we're watching.

[Dan Harris, NDP, Scarborough Southwest, ON]

Another stat mentioned a few minutes ago is that companies are spending up to 21% on research and development. That's just huge because when you look at Canadian companies on the whole, they're spending between 1% and 2%. It's a testament to the evolving nature of the industry and the huge technological leaps that keep happening. A job that didn't exist yesterday will be there tomorrow.

There are the SR and ED tax credits that have been reduced over the last couple of budgets. We've heard that is hurting the industry.

But for small players, new players, the entrepreneurs, the person who worked at one of the big companies and goes to start off the next big thing, the SR and ED tax credits don't really help them out. What kinds of measures would you like to see in place to help us incubate those small new companies?

[Julien Lavoie]

I believe that some of the smaller companies do access the SR and ED credits.