How & Why Nintendo Prioritises R&D

8th Oct 2021
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While companies within industries such as hospitality and travel have struggled with the uncertainty that a global pandemic, Brexit and a sluggish economy have brought us, the UK’s games development sector has boomed. Over the last year, it’s generated more than £4.22 billion for the economy, has employed a record number of games developers and has invested in more games titles than it has in 14 years.

The reason behind the gaming industry’s success is its constant and increasing investment in innovation and R&D.

You only have to look at the likes of Nintendo to see why R&D is vital for the success of companies within the industry. Which, coincidentally, is exactly what we’ll do in this article.

We’ll explore why R&D is needed in the gaming industry, we’ll take a sneaky peek at what Nintendo’s R&D strategy is and we’ll establish how game developers can invest in R&D without breaking the bank. 

Why R&D is needed in the gaming industry

As we’ve seen, the overall picture looks rosy for the UK games industry. However, the outlook for some of the smaller, independent game developers is not quite as idyllic: Around 40% of independent game development studios have been forced to close due to financial problems.

The problem is that the gaming sector is growing exponentially: New, innovative games, consoles, hardware products and software services are being released every single day.

Not only do developers have to compete with other studios in the UK, but thanks to virtual games stores like Steam and long-term stalwarts like Nintendo, they’re also competing with developers from all over the world.

So, to keep up with the crowd and survive the fast-paced, competitive games market, developers must invest in and prioritise R&D.

Why game developers need to prioritise R&D

The success of the video games industry has always been driven by continuous and sustained innovation in hardware, software, user experiences, distribution platforms and business models.

"Focusing on research and development as well as products has always been fundamental to our development." - Perfect World CEO, Xiao Hong

A strong R&D strategy enables game developers to respond to market needs quickly. It allows them to outperform their competitors and it rewards them with huge financial gains, which they then re-invest into further R&D. And so, the cycle continues. 

R&D work also enables developers to ensure that the new products and services they’re developing are a) wanted by the market and b) not already being developed by others. Continuous R&D enhances brand reputation and encourages the company to focus on the important stuff, like their target audience, new emerging markets, their competition and developing an unbeatable USP.

The video game industry is much more than a platform for entertainment, every company invests in research and development activities to propose innovative products for their audience.” – Leyton

Having announced a new record for its spending on R&D this year, there is no one better to demonstrate the value of R&D than Nintendo.

Nintendo’s R&D strategy

With flops like ‘Labo’ and ‘Mario Kart Live: Home Circuit’, it’s clear that not all Nintendo innovations take off. But what this also shows us is that Nintendo is always trying out new ideas. They’re constantly innovating and investing in R&D. In fact, in 2020, they spent approximately $880 million on R&D (more than ever before) which represented 5.3% of their total revenue.

Nintendo doesn’t have a specific time frame in mind for hardware development, rather it is “constantly researching technology” in a bid to create new experiences.” – Video Games Chronicle

What does Nintendo’s R&D spend go on?

A large part of this increased R&D spend went on developing new titles, software and hardware features for the Nintendo Switch, an innovative hybrid video game console that they launched back in 2017. The console is a tablet that can either be docked and used as a home console or taken away and used as a portable device. With features such as wireless Joy-Con controllers and directional analogue sticks for motion sensing and tactile feedback, Switch has been a massive hit with the Nintendo target audience, with over 85 million units sold to date. This clearly explains why they decided to allocate such a large part of their R&D budget to enhancing this game-changing product.

As the Nintendo Switch is in the middle of its product lifecycle and only has approximately four years left in the market, Nintendo also felt it necessary to invest part of its R&D budget into developing its next-generation hardware-software platforms too, which will continue to follow the company’s existing integrated hardware and software strategy.

And, to make sure they’re developing enhanced features, titles and software that will keep their customers loyal and beat their fierce competitors, Nintendo is pooling R&D time, money and resources into marketplace surveys to determine what their target audience wants and needs.

The most important thing for us is to continue to provide new and interesting gamesThe basis of Nintendo’s game creation is to make it as intuitive as possible for anyone to play. We want to lower the barriers to play and create many games that can be played by as many people as possible.” – Nintendo Company President, Shuntaro Furukawa

This continual investment in R&D is clearly paying off: The company reported an annual revenue of $16.59 billion last year, which was up by 34.4% year-on-year and was the highest annual revenue they’ve made in over a decade.

I believe [that…] if we don’t make fresh and surprising proposals to new customers, we will always be forgotten.” - Nintendo Company President, Shuntaro Furukawa

But it’s slightly easier for big guns like Nintendo to allocate time, money and resources into developing new, innovative ground-breaking products and services. They often have R&D teams who are solely dedicated to researching and developing the next ‘big thing’. But what about the small, independent game developers? How do they stand a chance against innovative products like the Nintendo Switch, for example? 

How developers can invest in R&D without breaking the bank

Video games cost in the region of between £35,000 to £500,000 to design, build, test and launch. And, thanks to the increase of video games popularity, skilled developers are in high demand, so hiring and retaining the right staff members is costing more too.

You can, therefore, see why putting precious time, money and resources into R&D and taking the risks that come with developing new products is a hopeless prospect for some, small-time game developers: They simply can’t afford to take the risk.

However, there is a way.

Keen to satisfy a growing demand and put the UK firmly in the global video games market, the government launched the Video Games Tax Relief (VGTR) scheme back in 2014. The incentive was designed to help both struggling and successful game developers design, build and launch innovative video game products and services. 

The VGTR scheme explained

As we’ve established, innovation is the cornerstone of the games development sector. This is why the government created the VGTR incentive. And, since it launched, the VGTR scheme has paid out over £400 million in tax relief and cash credits to hundreds of game developers from all over the country.

VGTR will cover up to 20% of the costs associated with the design, build and testing of an innovative video game product or service. And, in the last tax year alone, the scheme paid out, on average, £345,000 per claim to video game developers.

The benefits of claiming VGTR

As well as receiving a much-needed cash injection or tax break, VGTR also offers game developers the following:

A faster pay-out
Despite what many think, providing a VGTR claim is filed outside of the spring slog (December – March is the peak season for tax claims) and has no errors or missing information, the claimant could receive their pay-out within four to ten weeks.

Increased competitiveness
Because the scheme is designed to reduce the cost of game development, it means game developers can charge less for titles, premium features, and add-ons whilst still making a profit. Or they could use the cost savings to invest more money into increasing the quality and variety of their products and step-up their marketing activity so they can reach a wider audience.

Equity protection
It’s common for new or small-time game developers to try and secure funding from VCs or angel investors to help them with their increasing development costs. But this means that they must surrender a portion of their shares, profits and control. VGTR offers developers a non-dilutive funding opportunity which lets them keep their voting rights and a higher share of profits.

How game developers can claim VGTR 

As an accountant, you probably know that making a VGTR claim can sometimes be a long, drawn-out process, especially if there are discrepancies and HMRC launch an enquiry into the claim. So, to avoid costly setbacks and to make sure your game developer clients secure the maximum amount of VGTR possible, why not speak to an R&D tax specialist like Myriad Associates. Myriad Associates have been filing R&D tax credit claims for over a decade, they have a 100% success record, and they have a strong relationship with HMRC thanks to their careful, right-first-time approach. They like to work alongside accountants, like you, to help you secure your clients the most tax relief, at an affordable cost, and as quickly and as efficiently as possible.

To find out how they can help, give them a call on 0207 118 6045 or drop them a message.