Playing for keeps

Tax breaks may be answer for video game firms

Avery Sargent, 14, of Somerville played Dance Central on an Xbox 360 game console at Micro Center in Cambridge last week. Avery Sargent, 14, of Somerville played Dance Central on an Xbox 360 game console at Micro Center in Cambridge last week. (Aram Boghosian for The Boston Globe)
By Hiawatha Bray
Globe Staff / February 3, 2011

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Less than two years ago, when Paul McCartney and Ringo Starr strolled together onto a stage at the video game industry’s biggest trade show, Harmonix Music Systems of Cambridge was at the top of its world. Harmonix, the developer that launched a global craze for music-based video games, had reunited the surviving Beatles to celebrate the latest release in its hugely popular series Rock Band.

Six months later, Beatles: Rock Band had sold 1.7 million copies worldwide — far less than Harmonix’s parent company, Viacom Inc., had hoped for from a game tied to the world’s most famous music group. In December 2009, Harmonix laid off 13 percent of its workforce. A year later, the company was dumped by Viacom as Rock Band sales took a nose dive. The private-investment firm Columbus Nova paid $50 cash for Harmonix in December, and assumed $100 million of the company’s liabilities.

The crisis at Harmonix, still one of most prominent Massachusetts video game companies, demonstrates how tough it is to succeed in this highly competitive industry. Yet state lawmakers are poised to offer millions of dollars in tax credits to video game companies willing to locate or expand here.

“We want to take the entire video game industry and its supporting cast and have them locate here,’’ said State Representative Vincent Pedone, a Worcester Democrat, who has introduced a bill to offer a variety of tax credits to attract video game developers. “We want to make Massachusetts the hub of the universe for video game design.’’

Pedone’s timing could be better. Eric Nakajima, senior innovation policy adviser at the Massachusetts Executive Office of Housing and Economic Development, said such a tax credit program might bust the state’s strained budget. “The Commonwealth may not be in a position to offer those incentives right now,’’ Nakajima said last week during a gaming industry conference in Cambridge.

The recently announced shutdown of Evergreen Solar Inc.’s solar panel plant in Devens also clouds the prospect for such tax breaks. In 2007, the state offered Evergreen $58 million in aid to help it build a massive solar panel factory in Devens. The company, which has received about $38 million of the package so far, revealed last month that it will shut down the plant and eliminate 800 jobs. Massachusetts’ secretary of housing and economic development, Gregory Bialecki, has said Evergreen will likely have to pay back $3 million in taxpayer money, plus forfeit more than $20 million in incentives that it hasn’t received so far.

“On the heels of the Evergreen Solar announcement, members of the Legislature are a little skittish on tax credits,’’ Pedone acknowledged.

Indeed, Massachusetts House minority leader Bradley Jones, a North Reading Republican, warned that “Evergreen was a cautionary tale’’ which highlighted the perils of government aid to businesses — although he said he’s open to Pedone’s proposed tax credits.

“I think it’s the kind of thing we ought to be discussing,’’ Jones said. “At least what’s being talked about here is not company-specific, but more industry-specific.’’

Neither legislator believes the state should follow the example set by Rhode Island. With aggressive support from then-governor Donald Carcieri, the Rhode Island Legislature backed $75 million in loan guarantees to woo game developer 38 Studios LLC, which agreed to relocate from Maynard to Providence. 38 Studios, founded by former Red Sox pitcher Curt Schilling, is scheduled to publish its first game, Kingdoms of Amalur: Reckoning, this autumn, and is developing Copernicus, a multiplayer online game that will compete against the popular World of Warcraft.

Even within Rhode Island, the loan guarantee met strong resistance. Opponents noted that 38 Studios has never produced a game and faces tough competition. Besides, they warned, taxpayers would be left holding the bag if the company flops.

Carcieri’s successor as governor, Lincoln Chafee, was a leading critic of the 38 Studios deal. “He is opposed to any such arrangement that would create unnecessary risks to the Rhode Island taxpayer,’’ said Chafee spokesman Michael Trainor. Chafee has said he’ll do what he can to ensure the state’s investment pays off.

Where Rhode Island went wrong, Pedone said, was to bankroll a single video game company. “I think it’s a much better public policy to set up a system which will encourage the entire industry to come in,’’ he said.

The history of Harmonix shows how quickly a video game company’s luck can change. The company originated the music game craze in 2005 with Guitar Hero, in which players use simulated plastic guitars to “perform’’ popular rock songs. Game publisher Activision Blizzard Inc. bought the rights to Guitar Hero in 2006, while Viacom acquired Harmonix. In the following year, Harmonix introduced Rock Band, which allowed multiple players to form a simulated music group. Both Guitar Hero and Rock Band were quite successful; by 2009, the two games had achieved combined worldwide sales of $3 billion, with $1.66 billion in 2008 alone.

It’s been downhill ever since, as bored consumers and a weak economy caused a sales collapse. Total music game sales in 2009 declined by almost half, to $850 million. And the Beatles version of Rock Band failed to reverse the trend.

Meanwhile, Harmonix’s new dancing game, Dance Central, is also generating less-than-spectacular sales. Harmonix declined to comment for this article and refused to provide sales data; but NPD Group, a consumer products research firm that tracks video game sales, said Dance Central was the 13th most popular video game in the United States during the crucial holiday sales month of December, selling 640,000 units that month. Another research organization, VGChartz Ltd., estimates that Dance Central has sold 1.5 million copies since its debut in early November of 2010. By contrast, the rival dancing game Just Dance 2’ has sold 5 million copies since it launched in October, and NPD ranked it as December’s second-best selling game.

Pedone acknowledged that video game development is a risky, unpredictable business. “Of course there are going to be successes and failures,’’ he said.

But, he argued, support for the overall industry could pay big dividends. Despite the recession, Americans bought more than $10 billion in game software last year. “This is not just Madden football on your Droid,’’ Pedone said. “We’re talking about an industry that’s projected to be in all facets of our daily lives.’’

Hiawatha Bray can be reached at