The video games industry: is more support needed for this UK success story?

The UK’s gaming industry is bigger than people think. The country is the fourth largest exporter of computer games in the world, and the sector is worth more than the domestic music and film industries combined.

Gaming is incredibly popular too, with around one in six adults in the UK regularly playing video games. And if under-18s are also considered, then there are currently 40 million gamers across the country today – equivalent to the entire population of Canada frequently picking up a controller, joystick or smartphone to play.

This is a powerful consumer base. In 2023, UK household spending on games reached £7.8 billion – a 4% increase from 2022. Research suggests that the sector could continue to grow, with one report projecting a domestic market volume (the total value of video games-related shares traded per year) of over £8 billion by 2027. This would take it to roughly four times the current size of the UK film industry (which had a market volume of £2 billion in 2023).

Partly because of this, UK studios are good at developing games. According to the trade body UK Interactive Entertainment (Ukie), there are over 2,500 video games businesses in the UK. The sector supports about 75,000 jobs, with roles ranging from coding, artwork and music composition to the commercial and legal work within games companies.

The sector also creates wider economic benefits. These come primarily in the form of ‘technology spillovers’ – when ideas or tools first used by games developers are deployed in other settings. Research by Ukie finds that spillovers from the global gaming industry were worth an extra £1.3 billion of UK output in 2021. It pays to let others play.

But challenges loom. Sector-wide job losses, the rise of artificial intelligence (AI) and an insufficient tax support system mean that many UK video games studios are facing a period of uncertainty.

Brexit has also affected the industry, with some international developers deciding to snub the UK in place of other territories with access to the European Union’s (EU) single market and its free movement of labour.

How policy-makers respond to these issues will have substantial implications for the future of the UK gaming industry.

The rise of gaming in the UK

The UK punches above its weight when it comes to video games development. The country’s computer games sector is the largest in Europe and boasts well-known titles including Grand Theft Auto (GTA) and Tomb Raider. These are global brands with global reach, developed here in the UK.

The GTA series in particular is a cultural powerhouse, having sold 400 million copies of various titles since first launching in Dundee in 1997. Around 180 million copies of GTA V (the most recent title) have been sold since 2013, and the long-awaited sequel, GTA 6, is predicted to make $1 billion (£780 million) within 24 hours of its release date next year.

Similarly, the Tomb Raider franchise – which was originally developed by a company called Core Design in Derby – has generated 19 games and three feature films as well as an animated Netflix series. The Tomb Raider brand is worth an estimated $3.1 billion (£2.4 billion).

Cultivating these high-profile titles pays off. Between 2016 and 2021, the UK was the fourth largest exporter of video games in the world (Fazio et al, 2024). It currently exports more games than China, Hong Kong, Singapore and South Korea (see Figure 1). And if the Cayman Islands (where some firms are registered principally for tax reasons) are ignored, then the UK climbs up to third in the global rankings.

Figure 1: Video game exports ($ billion) by country, 2016-21

Source: Fazio et al, 2024

Unlike the experience of many other creative industries, UK gaming may actually have been helped by Covid-19. Growth in the export of video games from the UK accelerated during the pandemic, rising from $3.4 billion (£2.6 billion) in 2016 to $8.8 billion (£6.8 billion) in 2021 – an increase of over 250% (Fazio et al, 2024).

Games developers were one of the few groups to benefit from the worldwide lockdown restrictions that forced millions of people to spend more of their free time (and money) online.

The UK is home not just to video game developers, but also to consumers. According to a market report by Appinio, 89% of Brits play some form of video game at least occasionally. In terms of age groups, among Generation Z (those born between the late 1990s and early 2010s) and Millennials (the generation born between 1981 and 1996), 96% say they play video games.

What’s more, this is not just an occasional treat. In fact, 45% of the country identify as ‘frequent gamers’, with over half of 35-44-year-olds playing every single day. A report by Ofcom (the UK regulator for communications services) shows that 39% of households have at least one console (such as a PlayStation or Xbox). The top title played by console gamers is Fortnite (2.88 million UK users), followed by FIFA 23 (2.86 million), GTA V (2.22 million) and Minecraft (1.68 million).

These staggering numbers speak to the remarkable history of the industry – both in the UK and globally. With the first rudimentary computer game developed in a physics lab at the Massachusetts Institute of Technology (MIT) back in the late 1950s, it wasn’t long before gaming burst into the cultural mainstream.

By the 1970s, arcade machines could be found across Europe, Japan and the United States, with titles like Pac-Man and Donkey Kong growing particularly fast. By 1982, arcades were already generating more revenue than either pop music or cinema: a new entertainment age had begun.

Consoles followed soon after. Nintendo launched the first handheld Game Boy in Japan in 1989; Sony released the PlayStation in 1994; and before long Microsoft followed suit, developing the Xbox in 2001. To date, Nintendo has sold an estimated 754 million units, Sony 535 million and Microsoft 149 million (see Table 1).

Table 1: Consoles sold per manufacturer, 1970-2020

Source: Wallach, 2020

But the story doesn’t end here. Next came Apple and the launch of the iPhone in 2007. This set the stage for the rapid rise of online and mobile gaming, a transition that saw the industry grow ‘from tens of billions to hundreds of billions in revenue’.

The company announced its App Store in 2008, allowing third-party app developers to create mobile games that catered to a mass market (like Doodle Jump, Candy Crush and Angry Birds). Suddenly, the world of gaming leapt from people’s living rooms to their pockets.

Mobile games have ballooned in popularity ever since, with advertising revenue and in-game purchasing options supercharging this part of the market. To illustrate the economic power of gaming on smartphones, consider this: Pokémon Go took just 19 days to reach 50 million users. It has since made £6.2 billion in revenue, despite being free to download and play.

How does the UK gaming sector affect the wider economy?

The popularity of gaming doesn’t just benefit video games studios and technology companies. In 2023, the UK games industry brought substantial gains to the wider economy, triggering £1.3 billion in additional output, £760 million in GDP and £380 million in labour income, according to Ukie. This, the organisation calculates, has generated £250 million in additional tax receipts for HM Treasury.

Ideas and tools first developed for computer games can also have a positive effect on other industries (what economists call ‘spillover effects’). Gaming technology is being adopted at ‘a rapid rate’ for film and television, automotive design, education and even healthcare.

For example, some firms are using systems called ‘game engines’ to design 3D worlds for testing products. Audi (the German car manufacturer) uses game engines to simulate new vehicles before making physical prototypes.

Similarly, virtual reality (VR) headsets are used by doctors to develop their real-world surgical skills by training on virtual patients. And video/image-rendering technology is deployed by property developers to produce interactive digital designs for construction projects (Ukie, 2023). Almost everywhere you look, gaming technology is being re-imagined and re-applied.

Technology from video games is also increasingly driving innovation elsewhere in the creative arts. For example, the recent Disney+ series, The Mandalorian, used a tool called StageCraft to generate digital sets using ‘real-time image rendering’ (a technology initially built for the gaming world).

Using StageCraft, rather than a traditional green screen, the crew were able to create a virtual environment that every actor on set could simultaneously see and react to in real time. The days of performers struggling to engage with an endless sea of green or blue could be gone – and all thanks to video games.

But the spillover benefits extend past VR technology and image rendering. Other sectors beyond medical sciences and film/TV can gain from the computer games industry. The information technology (IT), energy, retail and even metallurgy sectors have each benefited from technology spillovers from videos games in terms of economic output (see Figure 2). In each case, systems that began life in the gaming world are found to be useful in other industries.

For example, in the marine/defence sector, video games controllers have been used in place of traditional systems for operating certain tools and machines. In 2018, the USS Colorado (a nuclear submarine) was equipped with Xbox controllers for crew members to operate sensors called ‘photonic masts’. The gaming hardware was cheaper than the bespoke periscope controllers – and easier to use too.

Figure 2: Top UK sectors by spillover impact on output ($ million)

Source: Ukie, 2023

There are also measurable effects within the labour market. According to Ukie, in 2021, spillovers from the global gaming sector supported 9,900 jobs in the UK – this on top of the 75,000 jobs within the sector itself. Again, IT, energy extraction and healthcare services all benefited. Overall, an estimated 3,000 additional IT positions were created in 2021 because of spillovers from gaming.

Beyond improved output and the creation of new jobs, video games can also indirectly support employees’ happiness. Research from the University of Oxford shows that people who play games report greater wellbeing. And a happier and more relaxed workforce tends to be a more productive one. Every player wins.

What are the challenges facing games studios in the UK?

Despite all this economic promise, challenges remain for the UK’s gaming sector. On the demand side, the pandemic-driven gaming bubble has now burst, and consumer activity has largely returned to pre-crisis levels. This has led some studios to cancel projects and reduce staff sizes (Rodgers, 2024).

For suppliers, sectoral job losses, threats from AI and an imperfect tax support system present various stumbling blocks for studios up and down the country. And as with many export-driven sectors, Brexit is adding further pressures.

Earlier this year, Sony cut 900 jobs from its PlayStation division, announcing that it was closing its London studio entirely. Similarly, Microsoft laid off around 650 gaming staff in September, having already let go of 1,900 workers in January and closing four studios in May. This is part of a wider global trend: over the past 18 months, thousands of video games workers around the world have lost their jobs as the post-pandemic boom starts to slow (BBC, 2024).

For Microsoft, the announcement came shortly after a high-profile acquisition. In late 2023, the tech giant finalised a $69 billion (£53 billion) deal to acquire Activision Blizzard, the publisher of popular games Call of Duty, Diablo and World of Warcraft.

This move came under scrutiny from regulators on both sides of the Atlantic. It was only following a successful legal case against the US Federal Trade Commission, and after making various concessions on the deal structure to appease the UK Competitions and Markets Authority (CMA), that the acquisition went through. Microsoft’s subsequent spate of redundancies in the gaming space has raised eyebrows further.

The rapid spread of AI also poses a threat to some workers in the industry. Although AI has historically been used within video games for their core functionality (for auto generating backdrops, for example), generative systems such as OpenAI’s ChatGPT tool are increasingly being used for traditionally ‘creative’ tasks.

For example, French developer Ubisoft announced recently that it has used generative AI to create dialogue within video game stories. The reason? It’s much cheaper than hiring scriptwriters. This is a major concern for people working in the games sector, and one that echoes recent disputes between film writers, actors and production studios in the United States.

Brexit is also playing a part in slowing down UK gaming. The country’s departure from the EU has meant that some global studios are now looking at Germany instead of the UK as a place to develop new titles. This is because the German government currently offers more generous tax relief to creative firms looking to set up shop. What’s more, expanding into Germany allows a firm to benefit from cheaper labour, thanks in part to freedom of movement within the EU’s single market.

The UK does have its own tax support scheme for games developers. In 2014, the government introduced the video games tax relief (VGTR), leading to ‘an explosion in UK game development’. According to HM Revenue and Customs (HMRC), companies have made claims for nearly 2,000 games, with a total of £830 million having been paid out in relief since the policy was introduced ten years ago.

But there are weaknesses in the system. Although originally launched to support independent developers, so far, the main beneficiary of the VGTR scheme is Dundee-based but American-owned Rockstar Games. The company has claimed £360 million in tax relief but has ‘paid no corporation tax since being accredited for the scheme in 2015’ (Rodgers, 2024).

Rather than helping younger studios blossom and grow, the VGTR framework has instead been exploited by ‘large developers of high-budget, high-profile titles’. This neither supports competition nor is a good use of public money. Levelling the digital playing field should be a policy priority.

What next for UK gaming?

There are various ways that UK policy-makers can help to shore up the country’s gaming sector. Reforms to the current tax system, public-private funding schemes and further investment into skills would all help smaller firms to navigate current challenges.

Not only would this support individual businesses, but it could also help to facilitate further positive technology spillover effects for the wider UK economy. With the right policies in place, gaming can continue to be an ‘economic win-win’ for the country.

A recent report by The Independent Game Developers' Association (TIGA) – a lobbying group representing the UK video games industry – presents a policy plan for ‘unlocking the next level and growing’ the industry.

First, it proposes that the UK government should expand its ‘video games expenditure credit’ scheme (a relief scheme that offers a 34% credit received net of tax deductions at the main rate of corporation tax), increasing its generosity.

TIGA recommends that the proportion of qualifying expenditure should be increased from 80% to 100%. This would mean that eligible games developers could claim relief on a greater share of capital spending, encouraging them to invest more in new systems and ideas.

Second, TIGA suggests establishing a video games investment fund (VGIF) to support games developers. Awards between £75,000 and £100,000 would be delivered as grants, while sums above £100,000 would be structured as loans that would be matched pound for pound by private stakeholders.

TIGA estimate that such a scheme would cost £27 million over five years but would yield a net tax contribution of £57 million – a 213% return on investment for HM Treasury by 2027.

A similar model has already had some success in Finland. Between 2012 and 2017, the Finnish equivalent of the VGIF provided €100 million worth of matched loans and grants to domestic games companies. For every euro invested in Finland’s video games sector, between €9-26 was generated for the taxpayer.

Finally, the TIGA report calls for greater investment in sector-specific skills. Policies such as an industrial secondment programme, a skills investment fund and the expansion of BTEC qualifications in video game design could all help to bolster the industry.

Improvements in human capital (the knowledge and skills in the workforce) could help to mitigate some of the threats posed by AI and Brexit, ensuring that British workers are better equipped to deal with the sector’s ever-changing skills landscape and with competition from overseas.

A growing gaming sector offers positive technology spillovers for the wider UK economy. But beyond the potential gains in productivity, jobs and tax receipts, protecting the country’s gaming sector is also an opportunity to safeguard one of the country’s most precious economic and cultural assets.

The next record-breaking title – like GTA or Tomb Raider – could be just around the corner, and ensuring that it is developed here in UK would bring benefits that extend far beyond video game enthusiasts and tech firm shareholders. Policy-makers must do what they can to create the conditions for gaming to continue to flourish in the UK. It’s time to start the next level.

Where can I find out more?

• Policy and public affairs: A summary of campaigning objectives from TIGA.org.
• The economic impacts of video game technology spillover: A report by Ukie and FTI consulting.
• Ukie annual review 2024: Report summarising the impact, insight and influence that Ukie has had over the last year.

Who are experts on this question?

• Hasan Bakhshi
• Juan Mateos-Garcia
• Mark Lenel
• Richard Wilson
• Ruth Towse

Author: Charlie Meyrick

Image: NanoStockk on iStock