The DeanBeat: New Zealand levels up game industry amid a world of giants

New Zealand is a small country in a remote part of the world, but that doesn’t mean it can’t make its mark on the gaming industry. After all, Finland has a similar population of 5.6 million people, and its game developers have entertained billions of people with titles like Clash of Clans and Angry Birds.

Using Finland as inspiration, countries like New Zealand want to build their own gaming ecosystems with high-paying jobs that can be done anywhere, particularly in an age of remote work. And New Zealand, which is hosting a 600-person game conference this week in Wellington, already has a lock on most things based on The Lord of the Rings — an industry unto itself.

So it seems logical New Zealand has a shot at engineering an economic miracle around games as many countries have around the world. I explored this topic of regional game development growth around the world back in 2017, and this story reminds me of two brothers who, as they told me years ago, learned to program games because it was too cold to go outside and play.

Alexey and Afanasiy Ushnisky were two twin brothers who grew up games in Siberia. Their tinkering led to game development, and they built a 800-person mobile game company that showed you could make games anywhere in the world. They moved to warmer climes in Singapore and eventually relocated their headquarters to New Zealand, where they have found the place to be quite hospitable for making games. They have 30 people in the Kiwi land and plan to build a local studio.

“We liked New Zealand and that it has a good climate and a high standard of living conditions,” Alexey Ushnisky said in an email to GamesBeat. “The fact that New Zealand is ranked as the best country for ease of doing business also influenced our decision to open an office here. In addition, it was important for us to find a location in a suitable time zone – compared to the U.S. and Asia – where our main markets and business partners are located. We also like that Kiwis are very peaceful and calm. They know how to find a balance between work and personal life.”

Now, some people theorize it’s easier to grow game development talent in cold climates because, as the Ushniskys found, it’s easier to stay inside and play or even make games than it is to go play outside. But the weather can still be a bit chilly in New Zealand. And they do make games in warmer climates like Los Angeles — or Turkey, another hot spot for game talent. I’ve never been there, but I’m watching from afar.

And while New Zealand is a small country amid a sea of giants — including the nasty Australians who have 30% tax rebate for game development companies — no place has a lock on creativity. New Zealand has a chance to create the next Supercell, the star of Finland’s game industry, as much as anybody, said Chelsea Rapp, chair of the New Zealand Game Developer Association (which is hosting the annual event this week) and program manager for the Digital Screen Campus at University of Canterbury.

“One of the cool things about the New Zealand industry is that it makes primarily New Zealand [intellectual property],” Rapp said in an interview with GamesBeat. “There aren’t any big American or European subsidiaries here, and the industry grows about 35% annually.”

Rapp noted the New Zealand game industry grew by 222 jobs in 2021 during the lockdown, reaching a total of 969 people. New Zealand interactive media and video games studios earned $276 million in 2021, up from the previous year’s revenue of $271 million.

But Rapp noted that Australia’s tax incentives run the risk of luring companies and game talent if the New Zealand government doesn’t provide similar incentives in New Zealand. The country provides tax breaks for the film industry, but not for games, despite the fact that game production isn’t as vulnerable to shutdowns because of virus lockdowns.

New Zealand studios estimated last year the would have 331 more job vacancies in the coming year, but they worried that they wouldn’t be able to fill them due to Covid-19 border restrictions.

Despite these challenges, New Zealand is starting to get the attention of venture capitalists, said Chris Jagger, managing partner at Alt Ventures, a New Zealand-based game venture capital investor, in an interview with GamesBeat. Chinese companies such as Tencent and NetEase have made investments.

While the country has a lot of companies, the top 12 earned about 91% of last year’s revenue, Rapp said, and they employ about 77% of the total workforce. The largest firm is PikPok, which has about 200 employees.

“The New Zealand games industry has a history of punching above its weight with super successful games like Bloons, Path of Exile, Polybridge, and Mini Metro to name just a few,” said CEO Mario Wynands, in a statement to GamesBeat. “With the industry here soon to expand past the 1,000 person mark, we’ll see bigger and more regular hits alongside significant revenue growth as we build on that success and experience. New Zealand is a country to watch, join, or invest in for sure.”

He added, “As a region, we would do well to capitalize on the huge interest and reputation New Zealand has globally. Overseas talent, capital, and connections will help us reach that next level faster and more decisively.”

Some recent indie game successes from New Zealand include:

• Icarus which released in December 2021
• Wanderer, released earlier this year on PlaystationVR
• Dread Hunger (by Digital Confectioners) which came out of early access earlier this year and exploded

While it may be a matter of time before the big hits come, it’s also important for the companies to control their own destiny. Once they reach a certain size, they may have to look elsewhere for talent, capital, or acquirers. Game engine maker Unity recently bought the special effects tools team of Weta Digital for $1.6 billion. That kind of success from a cousin industry can be inspiring.

Still, holding on to talent won’t be easy. Australia has state tax incentives on top of a national incentive, and it recently made it so New Zealanders don’t have to have a visa to work in Australia.

“It makes it easy for Australia to poach talent, which is a really big worry for a lot of game studios in New Zealand,” Rapp said.

Sadly, similar tax breaks for film proved to be unpopular with the wider New Zealand population, as they enabled foreign companies to come in, get tax breaks, but still take most of the profits out of the country. So selling the government on game tax breaks could be tough, and the government hasn’t responded despite a decade of lobbying by the game industry.

“They’ve set up a small incubator for grant funding already. We hope to see some more support coming,” Jagger said.

Rapp looks at Finland, which subsidizes its startups, and how a government loan for Supercell years ago is now reaping hundreds of millions of dollars a year in tax revenues. And Finland’s game industry revenue is around $3 billion. Perhaps, as a way of counter-cyclical thinking, it might be worth betting on New Zealand while other investments in the rest of the world are affected by macro events.

“We’re starting to see for the first time a steady generation of those early stage startups that are maturing and starting to scale, which has been a real challenge for the New Zealand industry, in particular, because there aren’t any government incentive programs,” Rapp said. “Without a tax offset, it has been really challenging for those really early stage startups to get off the ground. Especially because we’re so isolated from the rest of the world geographically.”

Magic Leap had a studio in New Zealand but shut it when it folded its consumer mixed reality business in 2020. That team morphed into NZXR and was recently picked up by Niantic, maker of Pokemon Go.

Tim Ponting is the establishment director of CODE, a regional game incubator which was set up and funded by the New Zealand government (in partnership with Dunedin City) as a grant funder for startups and early-stage studios.

“New Zealand has seen a lot of these ups and downs,” Ponting said. “But it has been less of a rollercoaster ride here than in other countries.”

Indeed, the lack of foreign companies has meant that they don’t have studios to shut down during tough times, as happens in Australia.

“New Zealand has been stable when crises hit other parts of the world,” Ponting said.

Game development relies on talent in almost all creative disciplines, from screen and visual arts, to music and sound, and writing and design. Alexey Ushnisky said in an email that his company thinks highly enough of the talent in the area to start assembling a studio with local talent.

The Ushnisky brothers have a lot of company. In 2021, the average game business was eight years old, though 12 startups were founded in the previous year. The country has about 65 studios altogether.

About 30% of companies have not shipped a game yet, while 60% of studios are independent game developers focussing on creating their own projects and intellectual property. About 25% are contractors producing games for clients. Just 7% make virtual reality or augmented reality games and apps, and 5% focus on serious and educational games.

To get inspiration, this week’s game developer conference in Wellington will feature the theme of “convergence” for industries that are centering around gaming and increasingly relying on it, such as film. The event includes a keynote talk by Connie Kennedy, head of Epic Games LA Lab, and a fireside chat with filmmaker Jon Landau.

While gaming has spread around the world and VCs are making regular visits to places like Turkey, New Zealand seems like a new and yet ripe frontier.

“We’ve had these sort of success stories in the studio space here in New Zealand, but we’ve not had any private investment previously go into the space, despite the fact that we’ve had the success and there is great studio ecosystem,” said Jagger. “A lot of it was built on the back of what Peter Jackson and Richard Taylor did with Weta, as they built the VFX industry in New Zealand, they built a movie production industry in New Zealand, over the past 20 years.”

The tech ecosystem has grown fast, and gaming is starting to emerge in the form of a studio incubator and Alt Ventures, which, as a private VC, has under $10 million in capital and focuses on pre-seed rounds. While other tech funds are in New Zealand, Alt Ventures is the one that focuses on games.

“We set out to basically provide the next level of capital for the studios that are emerging with games and we’re the private funder in the market here,” Jagger said. “We have a success story here from the studios that have blazed the trail. We now think of New Zealand as a game development hub.”

Jagger can also try to round up investors from other territories and bring them to investments in New Zealand. So he will travel to various events outside the country.

“We’re a small country and we are reliant on people migrating here,” said Jagger.

Jagger’s investments go into companies that may have experience shipping products for other companies and then want to do their own game. They may have a playable demo to show for it and a plan to target a certain customer. Their teams are perhaps five to 15 people.

Alt Ventures invested in Phat Loot Studios, maker of Untamed Isles, in 2020. That game goes into presales in August and then early access in October.

Perhaps the game industry could better exploit New Zealand’s connection to The Lord of The Rings, as Peter Jackson made the Oscar-winning movies in the country. Weta Workshop, headed by Peter Jackson’s Weta cofounder Richard Taylor, announced this week it is making a new Tolkien game for Take-Two Interactive’s Private Division label.

“It’s definitely become part of New Zealand’s cultural identity,” Rapp said.

But New Zealand doesn’t have a particular focus in games, like Dallas, Texas, has for first-person shooters, for instance.

Jagger said a lot of the talent originated with the success of Weta, the maker of The Lord of the Rings and The Hobbit films, as people spun out into games in Wellington in particular.

And it has drawn migrants like Ponting, who worked as a game journalist way back in the 1980s and switched over to communications at game companies. He moved to New Zealand a decade ago and has been investing in game studios and he is also on the board of the New Zealand Game Developers Association. A decade ago, the industry in New Zealand was far smaller, he said, but it has been growing 30% a year.

“The larger companies have accounted for the majority of the growth here, like Grinding Gear Games — which made Path of Exile. Then there is PikPok and Ninja Kiwi and Dinosaur Polo Club and RocketWerkz,” Ponting said. “I think an area ripe for growth is the new generation of small studios coming on and joining the larger fish.”

Ponting’s CODE group, which has had $10 million in government funding over the years, has invested for multiple years in Dunedin in the south of New Zealand. It has funded and accelerated over 25 projects, including 16 new studios, in a relatively small region.

“Over the years, you can see how things are completely different, not just in government support but in access to capital,” Ponting said. “It’s never been easier to raise money across the industry, and that’s been a good thing. By the same token, there is no one size fits all globally. Every country has to have their own ecosystem of investors, government support schemes, education, and they all need to collaborate in a jigsaw capital.”

I noted that the United States government is uniquely inattentive when it comes to the game industry.

“Over here, you go to the airport and you recognize somebody,” Ponting said.
Of course, no one, not even New Zealand, will enjoy it if the world goes into an economic slump.

“There are many conflicting forces at the moment, and many changes on the cards, and New Zealand ultimately, will be affected by it,” Ponting said. “But in New Zealand, I think we will be slightly shielded from it only in the sense that our investment opportunities were kind of slightly behind the times. So in other words, there is a lot more interesting investable product and a lot more interesting investable teams that have not so far been snapped up.”

In a smaller territory, the competition is more collaborative because everyone is trying to reach the global market, Ponting said.

“There is a really collaborative vibe in this country, which is great to see,” Ponting said.

Originally appeared on: TheSpuzz