How Brexit impacts U.K.’s $3.83 billion gaming industry

The United Kingdom is the sixth-largest market for game spending in the world. It’s ahead of countries like France and Canada as well as all of Southeast Asia put together. But now, following Britain’s stunning decision to exit the European Union (a move most people refer to as “Brexit”), the United Kingdom’s position as a gaming leader is under threat.

The British pound’s value compared to the United States dollar has crashed to $1.36. That matches its lowest value during the darkest days of the 2008 global financial collapse brought on by U.S. banks selling toxic mortgage-backed securities to investors around the world. Overnight, the pound dropped to $1.33, which is its lowest point in more than 30 years. But a depreciating pound is only one concern. Prior to the British referendum, companies like Rolls Royce and JPMorgan warned the country that leaving the EU could lead to job losses as companies avoid investing in a region embroiled in uncertainty.

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And no one knows what is going to happen next — but, in economics, that is an answer in itself. When doubts about the future replace consumer confidence, that can lead to a downturn or even a full recession. That’s one the U.K. may have to face, and GamesBeat has brought together experts from multiple sectors in the gaming industry to tell us whether or not they’re worried.

U.K. and games

The U.K. spends $3.83 billion annually on games, according to research firm Newzoo, and publishers and developers around the world have come to rely on that revenue. The country is especially important in the mobile market, where it is regularly one of the top regions for billion-dollar hits like Candy Crush Saga and Clash Royale. After Brexit, GamesBeat talked to experts around the industry think will happen next — even if most people are unsure.

“The falling pound could mean that games increase in price and British consumers can afford to buy fewer games,” R.W. Baird analyst Colin Sebastian told GamesBeat. “In addition, it’s possible that companies could decide over the long term to locate operations outside of the U.K.”

The first effect of a weak pound is that it just won’t have the purchasing power that it did earlier this year. Even if consumer confidence in the U.K. remains high, foreign publishers won’t see as big of a return from game sales. At the same time, Sebastian points out that this turmoil is likely going to frighten investment out of Great Britain.

Newzoo cofounder and CEO Peter Warman echoed that concern.

“One of the things that will happen now is that global games and media companies will no longer set up their global or European HQ in London,” Warman told GamesBeat. “And I expect that the ones that have their HQ in the UK are thinking of moving out — like Sega and King.”

GamesBeat reached out to major publishers like Nintendo, Sony, Microsoft, Activision, Ubisoft, and EA as well as Sega and King to ask about this. Those companies all have major investments in the U.K. including development studios like Ubisoft Reflections in London that is working on Tom Clancy’s Ghost Recon: Wildlands. But so far, EA, Activision, and King have all declined to comment until they know more. The rest have yet to respond to our request.

A risky investment

For the companies that do choose to remain in the U.K., they may face some new adversities.

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“The decision to leave the EU means an increase in taxes for the U.K. games industry, and will weaken its competitive position,” SuperData Research CEO and analyst Joost van Dreunen told GamesBeat. “What makes this particularly bitter is that it may effectively undo the work done by organizations like Ukie that only recently won much-needed tax relief. The U.K. has a long history of small development shops coming up with popular and innovative content, and Britain’s exit and the inevitable tax increases will likely hit indies and small studios the hardest.”

Ukie, which van Dreunen refers to, is the trade body that represents gaming companies in the U.K. In January, Ukie led an effort to get a $1.64 million investment to turn London into “the world’s games capital.” Despite the exit from the EU, Ukie claims it will continue to try to do more of that in the future.

Ukie CEO Dr. Jo Twist, Order of the British Empire released the following statement following the Brexit:

“Ukie is committed to ensuring the U.K. is the best place in the world to make and sell games, and although this decision and the political uncertainty it brings will have an impact on our businesses, it is important to remember that we are already a globally successful sector and a leading exporter in the digital economy. Ukie will continue to work hard with colleagues in government and other sectors to ensure we continue to have the best possible business environment for our sector, and we will be following developments closely and advising members as they unfold.”

But Ukie, like every other organization, will have to wait to see how everything plays out before it can serve any workable advice to studios in the U.K. Meanwhile, studios like Talisman (discounted now as part of Steam’s summer sale) developer Nomad games, which is in a town outside of Manchester, U.K., thinks this could cause problems as it goes to raise money from foreign investors.

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“Around 80 percent of our funding so far originated in Europe,” Nomad CEO Donald Whiteford said. “It won’t suddenly disappear, but new EU pots will likely dry up for Britain.”

Nothing to worry about

And while Ukie is keeping that stiff upper lip, it is not alone in thinking that Brexit anxieties, too, shall pass. Wedbush Securities analyst Michael Pacther told GamesBeat that while he agrees the Brexit will affect trade and jobs, he thinks the overall gaming market is going to come out relatively unscathed.

“My best guess is that there will be little or no impact on the games industry,” said Pachter. “Games will still be sold, and those games produced by EU domiciled companies like Ubisoft will probably still make their way to the U.K. market — although they may be subject to a different tariff than the zero tariff currently imposed.”

Newzoo’s Warman said something similar.

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“Overall, I think the impact will be not as big on the games business as it will be on other industries,” said Warman. “But the upcoming break-up of Great Britain is huge.”

And at least one indie developer thinks he’ll still do alright making games in the United Kingdom. Positech Games founder Cliff Harris, who is responsible for strategy sims like Democracy 3, said he’s not worried.

“Firstly, a low pound against the dollar means I actually need to sell fewer games to survive than before, as all games are effectively priced in dollars, which is obviously, financially a great thing,” Harris told GamesBeat. “The only problem would be any issue that prevented me working easily with contractors in Europe. But frankly, I only use remote workers and they are from all over the world, so I can’t see it vaguely being a problem.”

Harris says that if you employ a ton of visa workers, this could end up causing you some trouble. But that’s not how his business works.

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“If someone is in the same position as me, where all their staff are U.K. citizens, and who make a profit, then Brexit means you are possibly better off,” he said. “I think overall, it’s really not that bad for U.K. devs at all. I sell games to every country on Earth as it is. Language barriers are far more real than trade barriers to people selling products online. As usual, nobody will agree with me, but there you go.”

Nomad’s Whiteford, who voted to remain in the EU, reckons that leaving could even have benefits for him. He points to a memo from game-industry lobbying group TIGA that claims Brexit could actually mean more tax breaks for developers.

“Free of EU law, tax breaks could perhaps be improved to further stimulate business,” said Whiteford. “We are currently looking at another round of investment and both U.S. and Asian investors are on the cards. The talent is here — at least for now — and with a weaker pound, value is high. We sell digitally around the globe. Again a weaker pound works for us in this scenario. On the world stage, nothing changes. We’ll have to see if changing regulations give us more work to do in the future concerning Europe, but it’s too early to say.”

No, seriously, what does Brexit mean?

Finally, we asked VB Insight director (and U.K. resident) Stewart Rogers to just tell us what all of this means. Like everyone else, he sees uncertainty as a problem. He points out that U.K. will now have to pay the EU to trade with it, and he’s worried about what trade with the U.S. will look like after this. But, overall, he thinks not much is going to change.

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“Yes, revenues will be hit if the pound weakens further, but the Bank of England has been planning for this moment for months and states that it has contingency plans to assist with supporting the market and establishing stability.”

Rogers says that the biggest immediate issue is potential restrictions on movement that is key to the EU. Right now, the EU rules still apply, and people from U.K. can work in any country in the Union. If they feel like they can get out now and establish a job, they may flee the U.K. while they still can.

“There are 21,000 jobs across the EU working on mobile games, for example, and the UK has the largest share, with 5,000 full-time employees,” said Rogers. “Looking at the research polls that indicate the age and education levels of those that voted to remain in the EU, and how those exact people — who are 18-to-24 with a high education level — fit the games industry mold, it wouldn’t surprise me if we see a ‘brain drain’ while the U.K. negotiates with the EU, taking advantage of the ability to work in the EU under the current rules and laws before any changes are imposed.”

And losing talent is something that could scare away investment … which could encourage even more U.K. developers to leave the country now. It’s a downward spiral waiting to happen.

“Whichever way you cut it, it costs a lot of money to hire and bring up-to-speed new employees, and younger employees are more likely to want to see the world before they age,” said Rogers. “The fear of a restriction on the ability to work across the EU in future — if that happens — may cause a migration of talent now and, therefore, an immediate burden on the industry.”