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Why the market is finally warming up to Britain's videogames industry

Around five years ago Rockstar North, a video games developer based in Edinburgh, finished work on what would become one of the most financially successful media products in history.
Grand Theft Auto V, a crime game in which players battle fellow hoodlums, police and the US government on the streets of a fictionalised version of Los Angeles, pulled in $800m (?600m) of revenue within one day of being released. It has since generated more than $6bn of sales and picked up an enviable stack of industry gongs along the way.
But though the game was made mostly in Britain and is rightly held up as a success story for the UK, most of that financial benefit will have flowed up to Rockstar North’s ultimate parent company, New York’s Take-Two Interactive. 
That says a lot about the UK industry, which despite its stellar reputation and wealth of professional developers is yet to produce an independent giant to rival Take-Two and other giants in the US and Japan which dominate much of the industry. But as new business models catch the eye of investors and a rash of developers join the stock market there are signs of change on the horizon.
Why the market is finally warming up to Britain's videogames industry

Grand Theft Auto V, by Edinburgh's Rockstar North, is one of the most financially successful media products of all time
The UK is home to around 2,000 developers and publishers, according to data crunched by industry body UKIE, but the sector is extremely fragmented. Two thirds of those employ four people or fewer and many of the remainder are owned by foreign giants such as America’s Electronic Arts, known for football game Fifa, and Ubisoft, the French publisher behind the Assassin’s Creed series.
One of Britain’s largest independent gaming companies is Frontier with revenues of ?37m last year.
It was set up in 1994 by David Braben. “I’ve known a lot of people in the industry who started companies back in the Eighties and Nineties that got bought out – mostly by US parent companies,” he says.
While some of those buyers – such as Take-Two – have maintained their presence in the UK, others gradually shut up shop. “There’s a great long list of famous UK developers where that creative spirit and intellectual property they created moved abroad,” he adds.
Until recently there were virtually no games companies on the London stock market at all. Investors had been put off by the case of Tomb Raider maker Eidos Interactive, which after a series of disappointing results was forced to merge with rival SCI before being snapped up for ?84m, a fraction of its peak value, by Japan’s Square Enix in 2009.
We’re now able to self-publish titles all around the worldDebbie Bestwick, Team 17
But in 2014 Frontier took the plunge and joined London’s junior AIM market. Previously a “developer-for-hire” that would produce games for other companies to publish, it raised cash to self-publish its own titles including space fighter Elite Dangerous and theme park simulator Planet Coaster.
Braben says investors were initially sceptical that Frontier could self-publish a so-called “AAA” game – the equivalent of what the film industry would call a “blockbuster”.
But after the games took off its revenues ballooned. Investors were given further confidence last year after Chinese tech giant Tencent bought a 9pc stake for ?17m and Frontier revealed it was working on Jurassic World Evolution, a game based on the hit film series. Its market value has more than tripled in the past 18 months to ?688m.
Its stint as the UK’s sole listed games developer came to an end in December when Sumo Digital, which worked on the PS3 hit LittleBigPlanet, floated with a value of ?145m. Two more, Worms developer Team 17, and racing game specialist Codemasters, followed hot on its heels last month. 
Neil Patel of City broker Liberum, which handled Codemasters’ and Frontier’s floats, says investors have an increasing appetite for the companies thanks to a change in the way games are distributed. While in the past they were almost always sold as physical products in shops, the industry has been moving away from that model towards digital downloads.  That includes mobile phone app stores, but also the online PC game marketplace Steam and services such as Xbox Live and PlayStation Network, which allow gamers to download the latest ?50 title to their console.
Why the market is finally warming up to Britain's videogames industry

Codemasters, which makes the official Formula 1 videogames, floated last week
Debbie Bestwick, chief executive of Team 17, says digital distribution has grown “phenomenally” and now accounts for around 88pc of the company’s revenues.
“We’re now able to self-publish titles all around the world,” she adds. 
Selling online means bigger margins as publishers can avoid the cost of making physical discs and giving as large a cut to retailers and also less risk as they don’t have to hold as much stock.  Even more significantly it provides an opportunity to keep milking customers for cash well after they have bought a game itself by offering paid-for “downloadable content” such as new weapons, maps and levels.
That accounts for a big part of the success of Grand Theft Auto V, whose online mode has continued to rake in cash four years after the game was first published.
“The fact that revenue is now more predictable is very reassuring for investors,” says Codemasters chief executive Frank Sagnier. “It used to be quite hit and miss years ago.” The industry has also benefited from a tax relief scheme introduced in 2014 ago that allows producers of “culturally British” games to pay less tax on successful titles and get a rebate from the Treasury if they invest cash in a game that flops.
The fact that revenue is now more predictable is very reassuring for investorsFrank Sagnier, Codemasters
Jason Kingsley, who owns and runs Rebellion, an Oxfordshire developer whose turnover topped ?40m in the year to last June, says the tax break has helped UK firms reverse a “brain drain” of skilled workers to countries such as Canada that have long provided generous financial incentives to games companies.
Attracting the right talent is one of the biggest challenges for the sector as it competes with tech firms such as Google and Facebook for developers. Dr Richard Wilson, who runs industry group Tiga, says video games courses launched by universities have helped.
But Sagnier warns Brexit could pose a threat if it makes it significantly more difficult for companies to hire people within the European Union.
Why the market is finally warming up to Britain's videogames industry

Team 17, maker of the long-running Worms series, joined the stock market last month
“We’ve had a lot more difficulty attracting the right talent from abroad than we used to – and that is a problem,” he says. “We don’t have enough talent in the country [now].”  The industry has certainly come a long way since Kingsley started out, when making games “was a sort of young man’s indoor hobby” and the “classic computer game nerd would have been the classic consumer”.
The UK consumer market is now worth more than ?5bn, according to Ukie figures and, thanks in part to the rise of smartphone games, almost half of gamers are women. As for Britain’s new crop of listed games firms, they’ve all enjoyed a good start to stock market life, maintaining gains on their IPO price. But there’s a long way to go before they can rival the industry leader, Activision Blizzard. The market cap of the US giant behind the Call of Duty series currently sits at around $55bn. 
Activision
 
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