Having that history is a strong way to succeed. Silicon Valley goes back to the 1940s, with Atari and homebrew computer clubs. Games have a history in Silicon Valley going back to the 1970s. Japan is strong with companies like Sony, Nintendo, and Sega. One of the more interesting ones here is the Demo Scene in Helsinki, which started in the 1990s. You might think that Nokia was the source of the mobile game expertise and mobile technology expertise of the Finns, but it goes back farther than that, to a club that they formed among hackers who really just wanted to learn how to do things. They started making games back then when nobody cared about mobile devices. Eventually that gave birth to companies like Rovio and Supercell and games like Angry Birds and Clash of Clans.
These games don’t just happen. The world is flat, in some sense. Mobile games can be made everywhere. But it’s not a surprise to see those particular games being made in areas where the expertise goes back for decades. Id Software made Dallas into the capital of first-person shooters, a sort of dubious title to have, I suppose. 3D animation software companies like SoftImage in the 1980s set Montreal on the right track. You need these different ingredients to get a region off on the right track.
Here’s a bunch of those ingredients. It’s easy to underestimate the value of being a region where people play a lot of games, but this cultural engagement is very important. Leadership is also very important — people who have foresight like David Packard and Bill Hewlett back in the 1940s. They worked for Stanford University to groom it as a first-class technology university so they could get enough employees to start Hewlett-Packard. Specialization is something I’ll talk about more later. Financial support in the form of venture capitalists. And international talent. Does your country or your region attract people from other countries because they want to work at the companies you’ve created?
Another good example of a zero-sum game here is Silicon Valley versus Boston. This is something AnnaLee Saxenian, a professor at UC Berkeley, studied in a book called Regional Advantage: Culture and Competition in Silicon Valley and Route 128. She found that Silicon Valley beat Boston, in a way, because it was more open. It embraced a more open approach to companies and industry. In Boston you had vertically integrated companies like Data General and Digital Equipment Corporation. They tried to do everything themselves, everything from designing chips to making the software that ran on their minicomputers. When the PC era came along, they weren’t flexible enough to move fast. Intel and Microsoft specialized in doing one thing well — making chips or making operating systems.
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We all know that history, how Silicon Valley won. Everything was there — venture capitalists, startups, the ability to fund dozens of chip companies or hardware companies to move into the space with enough speed. But we can find another interesting lesson there about the origins of the platform owners and where they happened to grow up. Seattle is strong because of Bill Gates. Intel is strong because of Gordon Moore and Andy Grove, where they lived. That heritage continues. The bay area as a region is strong because of companies like Oculus, Facebook, Google, Apple, and Intel. Like Microsoft and Intel in the PC platform era, these companies are platform owners who have handled the platform changes and business model changes well.
Shervin Pishevar created SGN in Maryland. In the early days of Facebook and the Facebook Canvas platform, he moved his company from Maryland to Palo Alto so he could be close to where Facebook was. That turned out to be an advantage.
The U.S. game industry is not measured that well. But once in a while they measure how big the U.S. game industry is. This data is from a few years ago, collected by the Entertainment Software Association, but it points out that it’s a pretty big industry. With more than 500 games companies in California alone, that’s many times bigger than some countries have. 150,000 jobs high-value jobs are helping the U.S. economy grow faster.
Some of the facts about the largest public game companies in 2014 are also interesting. China’s Tencent was number one. But again, we have platform owners in the form of Sony, Microsoft, Apple, Google, and Nintendo on that list. The biggest game companies are the ones that also own the platforms. If your region has a platform, your region can control its destiny in games.
This industry would be very boring to write about if nothing changed. What I find very fun about it, just about every day, is that I always see something new. Games are growing across the $100 billion mark. Supercell, with just 200 employees, is valued at $10 billion. Ubisoft, with 10,000 employees, is only $3.7 billion. Does that make sense? It’s possibly because of the amount of cash that Supercell generates, and its games are played by more than 100 million people every day.
Things changed a little bit in 2015. You have NetEase, another Chinese company, joining the list, as well as Bandai Namco and Mixi. It’s a nice representation across the whole globe there. Japan of course has a very rich heritage games, not only with platform owners but also third-party companies.
The arcade industry is still very interesting here. The stars of the entertainment industry here in Japan are more like the makers of games. It’s exporting things like manga and anime and games to the rest of the world. It has a strong influence, an outsized influence that many other companies just don’t have.
Canada has a lot of government help. One of the best things any country can do is set up a program to give grants to game companies. Then you’re able to start measuring just who is in your country and what companies are at work. Canada knows exactly how many game company it has. They measure that on a year-by-year basis.
With 472 game studios, that’s about a third as many as the U.S. has, but the population of Canada is just one-tenth of the U.S.’s. Again, it’s over-represented in the game industry relative to how you think it might be. It has some very strong studios for companies like EA, Capcom, Ubisoft, and Activision Blizzard. It also has a lot of good homegrown talent, like BioWare, Behaviour, and Relic Entertainment. Costs are pretty cheap compared to the U.S. as well, and they have tax breaks. The Canadians definitely have a smarter government when it comes to encouraging the game industry to do business in their country.
If you think back to the transitions that have happened — from minicomputers to PCs, from PCs to mobile — every time new platforms came along, the epicenter of power in the industry also changed. Redmond, Washington became very important in the game industry when Microsoft came along. These new platforms may be on the fringe right now, just one percent of total game industry revenues, but it’s important for companies to keep up with them and focus on them because they may become the bulk of the industry at some point when a shift happens.
Here’s a success story about Behaviour Interactive, a Canadian game studio that started in 1992. 24 years later, they came up with a hit called Dead By Daylight, a multiplayer horror game. It’s doing very well for them. This is an example of how you can start as something very small, an amoeba, and you evolve over time. You can grow up doing things like outsourcing until you hit the next level of the food chain. This food chain example is something you can apply to any industry in any country. The object of this game is to evolve and grow your industry higher up the chain because you don’t want to be eaten by somebody else.
China has very much recognized that. Its government leaders are urging worldwide expansion in the game industry. Everybody in the world should be aware that’s their intention, to expand the presence of Chinese game companies throughout the world. China Joy is an interesting show, because the government mandates that every Chinese game company go there. It’s a very successful show, drawing more than 300,000 people. China didn’t have much history in console games, but it’s very strong in PC and mobile. It’s pushing very hard into VR, converting internet cafes into VR entertainment centers.
Financial power and geographic arbitrage separate the powerful from the weak
Geographic arbitrage creates enormous financial power. Different countries have had this over the years. Basically, the stock market in China overvalues the companies there. Companies can, relatively speaking, be far more valuable in China than they are in the rest of the world, and they can use that valuation to acquire other companies around the world. This happened in France a while ago. French companies started acquiring a lot of others. Infogrames acquired Atari at one point, because of this geographic arbitrage that existed at the time. This is another thing to think about. The value placed on game companies throughout the world is not flat. It’s tilted in many directions.
China also has a lot of problems. They have censorship. They have trade restrictions. Overseas companies can’t operate their own games in China. They have to have a Chinese partner. That has a limiting effect on their industry. Censorship also has a limiting effect on creativity. If your creative people aren’t in an open and trusted and safe environment, they’re not necessarily going to be as creative as they could be.
This is what I meant when I was talking about specialization. A whole region can specialize in something. The Israelis have what they call a startup nation. They’ve specialized for decades in online gambling. That gave birth to social casino games in the age of Facebook. It’s helped them create companies like Playtika. They also specialize in marketing tech companies and mobile games as well now. They’re growing their game industry. Per capita they have more game companies than they should, because of that history of specialization. The same goes for Finland and mobile games. Canada is more stable as an economy by comparison, because it’s more broad-based across a bunch of different cities and a bunch of different categories of games. That’s good for them.
Regions will often rise or fall because a company gets acquired. A Chinese coalition acquired Playtika in Israel recently. The decisions that get made for that company are now made in China instead of in Israel. It’ll be interesting to see whether that’s good for Playtika or not. Companies like Looking Glass — Looking Glass was a pioneer in games in the Boston area, but when it shut down, Boston lost a lot of its advantage in games. Small changes like this can really affect the strength of the game industry.
Geopolitics matters as well. A lot of companies in either Israel or Ukraine have had different divisions in both places. When Russia invaded Ukraine and the Ukrainian civil war began, many studios there were simply lost. A lot of them moved to Israel, only to find themselves in the middle of Gaza’s unrest in time.
Silicon Valley has become way too expensive. People in the indie game space in Silicon Valley now can’t afford the rent in San Francisco. They’re all having many people live in the same place in order to survive, or they’re moving elsewhere. One company called Mino Games in San Francisco decided to leave and relocate to Montreal. The CEO, Josh Buckley, told me that their company is far better off now. The costs that they face are a third of what they were. In an ultracompetitive mobile game industry, they had to do that in order to survive.