Fund Games: Asia-Pacific

In previous instalments of this short series on game development funding and the economic conditions influencing the industry, Iâve looked at the situation in North America, where Canadian subsidies are helping to create super-studios around Montreal, and the European situation, where governments are only slowly beginning to offer support - or even recognition - to an industry threatened by high costs and unfavourable exchange rates.

This week, we round out the series by looking to the Asia-Pacific region - an area as diverse and confusing in games industry terms as it is in cultural and political terms. It encompasses the rich economies of Japan, South Korea and Australia and the glittering towers of technologically advanced city-states like Singapore, Taiwan and Hong Kong, nestled close by developing nations such as Vietnam, Malaysia and Thailand. At the heart of the region, and arguably dominating its mindset, is the world's fastest-growing economy, China - while another emerging giant, India, rises on its frontiers.

Risen Sun

For the games business, Japan has long been regarded as one of the cradles of the industry. With a history dating back to the dawn of the commercial videogames market, Japanese publishers own some of the most valuable IP in the industry - easily rivalling, and almost certainly exceeding, the value of IP owned by their American rivals.

In addition to an incredibly healthy publishing market, Japan is also home to two of the industry's major platform holders - Sony and Nintendo - and has a huge domestic market of its own. Although local spend on gaming has reduced in recent years (only to be buoyed again by the DS and the Wii), it remains one of the biggest markets in the world for games overall. A keen awareness of the restrictions of the local market have focused Japanese publishers on the export market, and the funding of overseas development.

Game development in Japan is near saturation point. The work available outmatches the nation's talent pool, which has led to a strong market for experienced overseas development staff, especially those with Japanese language abilities. Many Japanese publishers are also increasingly looking overseas for development opportunities, and either founding studios in the West or pursuing deals with independent developers here.

Moreover, even the country's high cost of living (which, although renowned, is still lower than many European nations') and the threat of a strengthening Yen is unlikely to impact the strength of development in Japan. Many franchises are closely bound to Japan with cultural ties that outvote any financial considerations, and many Japanese publishers simply prefer working with local developers.

Moreover, the relationships between publishers and developers in Japan are often closer than those found in the West. As well as in-house studios, Japanese publishers also cultivate "second party" relationships with preferred developers, a kind of voluntary co-dependence that has its origins in the "keiretsu" structure of interlocking businesses that is unique to Japan.

Changes are certainly afoot in Japan, but the status of the nation as a videogame superpower is unlikely to be eroded any time soon - and its climate for developers remains, for the most part, static. In fact, despite its vast importance to the worldwide industry, Japan is essentially outside the scope of this article. Its importance is as an investor in overseas economies, not as a target for inward investment or new studios.

Although it's far from being quite so developed as a market as its neighbour across the Sea of Japan, South Korea plays a similar role within the region. A combination of factors, not least of which is the country's rapid and early adoption of broadband internet, have led to Korea becoming a major force in the PC massively multiplayer market.

It now exports its products around the world, through successful publishers like NCsoft - but its biggest export markets remain its Asian neighbours, with Korean titles attracting huge audiences across countries like China and Taiwan, and throughout South-East Asia. As a result, South Korea, too, is an exporter of games - and of investment.

Australia is another nation whose story, although interesting, is squeezed to the sidelines of the Asia-Pacific region. Its industry is presently very small, and is very threatened by China and even India - because despite a strong local market in film and TV, the Australian games industry mostly handles outsourcing, rather than original product development.

The industry there is seeking government support, in the form of the same access to funding schemes enjoyed by film and TV productions - but at present, there's little to suggest that Australia's small but plucky games industry will fare well in the face of increased competition for outsourcing tasks.

The real focus in the Asia-Pacific games market at the moment is, in essence, a tale of two cities - the high-tech city-state of Singapore, and the world's fastest-rising metropolis, the futuristic Chinese port city of Shanghai.

South Seas

Lying at the southern tip of the vast peninsula which holds much of the land mass of Malaysia, Singapore is one of the busiest and most important trading ports in the world. It's also a logical place for the global media industries to look for a foothold in Asia. The influence of the city's colonial background as a British port is still clear in Singapore, and it's often seen as a meeting point between east and west - a melting pot of many local cultures, with strong trading links to almost every other nation in Asia.

For modern high-tech and media businesses, the fact that the predominant language of the city-state is English is a vast boon for Singapore - and the nation's claim to having the strongest IP protection laws in Asia is crucial in a region where piracy is rampant, and the authorities are often accused of turning a blind eye.

Moreover, Singapore has a high-tech edge over its rivals. Recognising that its past prosperity was down to strong sea trading links with Asian nations, the country has sought to secure its future with strong digital links to the same nations - and now claims to be the most connected country in the area, with super-fast fibre optic links spreading from Singapore across the Asia-Pacific zone. Education in the city, meanwhile, is superb, turning out highly skilled graduates who are ideal to fill positions in high-tech industries.

All of these factors have helped to turn the attention of the games industry towards Singapore in recent years - but the real appeal of the nation lies in the efforts of the government to turn the state into a media powerhouse. Subsidies and initiatives for game publishers and developers in Singapore are vast, with the sector seen as being key to a national objective to raise revenue from media to 3 per cent of its GDP within the next five years.

Behind these initiatives lie a number of government agencies, such as the Singapore Economic and Development Board - which has earmarked a billion Singapore Dollars (almost 500m Euro) for the game development sector. Estimates of exactly how much money Singapore is pumping into the sector vary; on top of that dizzying figure from the EDB, some point to a S$5 billion fund which the National Research Foundation has allocated to the development of two key areas, one of which is interactive and digital media.

Whatever the total figure is, it's definitely vast - and it shows on the ground, too. Every few months a new round of funding is announced for prototyping, development or expansion. Towards the end of 2007, a S$350,000 fund was made available for casual gaming firms; S$250,000 was pumped into mobile games only a short while previously. On an ongoing basis, large funding grants are available for almost every aspect of the development process - some for the local firms Singapore is keen to encourage, but many also applying to multinationals.

Faced with such subsidies, and with the many tax breaks Singapore offers to corporations who are involved in media or high-tech activities, it's no surprise that many firms have already set up shop in the district. Electronic Arts is arguably the most high profile company in Singapore, running localisation and networking development from its Asian base in the city, but its neighbours include LucasFilm Asia (animation production and handheld games), Koei Singapore (massively multiplayer games), Genki Singapore (handheld games) and European developer 10tacle.

Although it has a higher cost of living than many of its neighbours - and its educated workforce certainly comes at a greater cost than those in nearby rivals such as China and Vietnam - Singapore is a perfect example of government intervention at work in this market. Unlike European governments, who have shied away from direct financial support of industry, Singapore's government isn't afraid to get its hands dirty - even to the extent of offering private equity funding through state and semi-state bodies.

It may be anathema to capitalism, but for this city-state, it certainly seems to work. The question for Singapore, however, must be whether it can continue to work in the face of its new rival - the second Asian city of note to this feature, Shanghai.

The Sci-Fi City

The overall impact of the rising star that is China's economy is a topic far, far beyond the scope of this article - but for the games business, there are a few key effects to note. As China's population becomes increasingly affluent, it is demonstrating a taste for videogames to rival that of its neighbours in Japan and Korea - especially in the field of online gaming, which is a massive growth market in the country.

Education in the country is creating a vast pool of talent for games companies to take advantage of, much of it focused on Shanghai, and the widespread availability of labour is keeping salaries relatively low - although there are definitely signs of inflation. With the local market undergoing explosive growth, and a wealth of talent to draw upon - not to mention Shanghai's excellent and growing infrastructure - the city looks like it should be a top global destination for game development.

In some respects, it already is. There are hundreds of companies in Shanghai which handle outsourcing of development tasks for western developers and publishers, ranging from small specialised firms to massive, full-service outsourcing giants. Local estimates suggest that a couple of hundred of these firms have sprung up in the last couple of years alone; not all of them have been successful, of course, but it certainly speaks of an incredibly fertile business sector.

These firms handle everything from design and full game creation, through porting and localisation, to more simple tasks like art or sound effects. Largely run by local entrepreneurs, their success has attracted western publishers to China - and specifically, to Shanghai - in an attempt to capitalise both on the outsourcing business and on the availability of local workers. Activision Blizzard, Take Two, Electronic Arts, Epic Games and Konami all have studios out there, largely focused on outsourced tasks from their parent companies elsewhere in the world.

The big cheese of Shanghai development, however, is French firm Ubisoft. Its Shanghai studio started out doing similar outsourcing tasks to the other publisher studios here, but rapidly moved on to handling ports and even entire sequels. Now, the company is doing end to end development of original games in-house. It's thought to be the only Western studio to be doing so in Shanghai.

The reasons for the reticence of other publishers to heavily commit themselves in Shanghai are simple. Firstly, there is a question mark over how long China will remain a cheap country in which to do high-tech business. Already, Ubisoft reckons that Shanghai development is no cheaper than development in its Canadian studio in Montreal. Competition has driven salaries up in Shanghai to the point where although still lower than those in Canada, they are on a similar level once the generous subsidies in Montreal are taken into account.

Secondly, and more importantly, China remains hugely protective of its local videogame publishing market. The country, which still censors media heavily, is concerned about the influx of games from Japan and Korea, and to a lesser extent from the West, into the nation - and is seeking to combat their influence in two key ways. The first, a large fund to promote home-grown game development (almost $250m has been earmarked thus far), is a positive step. The second, a set of restrictions on the sale of foreign games, is less helpful.

These restrictions mean that overseas firms need special business licenses to publish games in China - and those licenses are generally granted only to Chinese-owned businesses, which means that publishers must reluctantly enter into tightly controlled business deals with local partners to distribute their games. For a company with a large development base in Shanghai, like Ubisoft, the situation is faintly ridiculous - even games developed in China, using almost entirely Chinese staff, cannot be sold in China without jumping through a frustrating set of administrative hoops.

Ubisoft, however, is looking to the future - hoping that its presence in the country will give it a vital foothold in the rapidly-growing economy, and leave it well positioned to deliver content tailored for Chinese tastes in years to come. Other publishers, no doubt, have similar strategies. Even if doing business in China right now is discouraging on many counts, it's not a market that anyone thinks they can afford to stay out of.