Business, Innovation and Skills Committee
Oral evidence: The Digital Economy, HC 571
Tuesday 8 March 2016
Ordered by the House of Commons to be published on 8 March 2016.
Members present: Iain Wright (Chair); Paul Blomfield; Richard Fuller, Peter Kyle, Amanda Milling; Jonathan Reynolds, Amanda Solloway; Kelly Tolhurst; Craig Tracey; and Chris White
Questions 404- 479
Witnesses: Jo Twist, CEO, Ukie, Chris van der Kuyl, Chairman, 4J Studios, and Philip Oliver, CEO, Radiant Worlds, gave evidence.
Q404 Chair: Good morning. Thank you for coming to give evidence on the digital economy for our committee. We are very grateful. For the purposes of the record, who are you and which organisations, if any, do you represent?
Jo Twist: My name is Dr Jo Twist. I am a CEO of UK Interactive Entertainment, which is the trade network for games businesses in the UK.
Chris van der Kuyl: I am Chris van der Kuyl. I am the Chairman of 4J Studios, a games developer based up in Scotland. I am also the Chairman of Entrepreneurial Scotland, which is an organisation that represents Scotland’s entrepreneurial community, and the Director of the Digital Catapult as well, so I come here with a few hats on.
Philip Oliver: I am Philip Oliver. I am CEO of Radiant Worlds, a game developer based in Leamington Spa. I have been in games industry for a very long time. I am also responsible for the initiative Made in Creative UK.
Q405 Chair: Thank you. This is a growing area in terms of the world economy. How good are we at the video games industry in Britain, Jo?
Jo Twist: We are a leading light in terms of the global market place. We are the sixth largest consumer market in the world. The games industry globally is estimated to be worth over £80 billion by next year.
However, we have some distinct issues. We need to maintain our competitive global position. We still face competition in the digital economy, as all businesses do—games businesses in particular—from North America, from the Nordics, and particularly from Asian countries like China and South Korea. This global competition is growing all the time. In order for us to maintain our competitive standing and to climb up the sectoral ranks, we believe there are some distinct and targeted interventions that we could put in place. We have made five recommendations around those targeted interventions.
Q406 Chair: It is an excellent report that Ukie produced in terms of the blueprint for growth, and we will explore that later on. Chris, how good are we?
Chris van der Kuyl: The answer is, in context, that we are excellent. We are genuinely world class. Jo has just alluded to the scale, but the computer games industry is the world’s largest entertainment industry by revenue. We are larger than the movie box office. One game made in the UK—Grand Theft Auto—is now effectively bigger than all the retail sales in the music industry put together. People sometimes rock on their heels a little bit when they hear that statistic: it is that big. As we have said, Grand Theft Auto—created and still to this day developed in the United Kingdom—is possibly one of the biggest franchises. Our own company, 4J, is fortunate enough to work with Microsoft and a Swedish company called Mojang on Minecraft for all games consoles. Genuinely some of the biggest entertainment products in the world are created in this industry.
To Jo’s point, our technical and creative leadership has got us here, but there are a number of issues and challenges facing us, both from global competition and the internal market for talent. We really need to focus on those if we are going not only to retain but to extend our position of leadership in the sector.
Philip Oliver: I complete agree with both what Chris and Jo said. It is important to note that we had a great start in the UK back in the 1980s with the BBC initiative, linking up with Acorn to create the BBC Micro, and Sinclair, obviously. That put us at the front for a good decade, almost. Then the finance that came in from Japan and America and the support they gave their companies meant they grew much faster and were better invested. When it got to the time of big teams being created, all the finance was coming from other countries. They took over the industry, and unfortunately we are still fighting and we are still behind, because they are the powerhouses with the finance. They do own a lot of the IP. Minecraft and stuff is now owned by an American corporation; our game is owned by a South Korean corporation. Often it is the case that we have the talent and the creativity, but sadly the ownership and the IP has gone to America and other countries that have better financial systems in place and a better investment culture.
Q407 Chair: Jo, you mentioned already there are five recommendations in the blueprint for growth you produced quite recently. I think that report says that we could virtually double turnover by 2020 if we obsessed with competitiveness. In terms of being able to fulfil that potential, in a nutshell what are those five recommendations and what should Government be doing to help?
Jo Twist: It is really about the ecosystem and fuelling the engine of growth. We believe that the success of the industry has very much been down to our freedom to innovate with technology but also the freedom to innovate in our business models. We have always been a born-digital sector; we are only about 40 something years old. We think there are some particularly live regulatory issues facing us at a European level around some digital single market proposals that might stifle that innovation, not just for the games sector acting digitally but for all sectors who need to act in a global digital economy.
Chair: Like what, specifically?
Jo Twist: For example some of the proposed digital content rules in the proposed directive potentially are going to reopen a whole set of issues that we, as the UK, dealt with in terms of some of the consumer protection laws that we revisited last year. They may impose some unintended and unnecessary regulatory barriers.
One of the key drivers and one of the key issues for us—which has already been alluded to—is also around skills and talent development. There is a playground-to-pension job to do, if you like. There are some specific interventions required at primary-school level. We already had great support from the Government and great success in getting computer science back on the curriculum, which will put us back to where we were when this growth of the industry started in the 1980s.
However, we need to make sure that we are really making some targeted intervention and support in schools with teachers to teach creative computing. We have several good projects that are examples of how to do that. One of our crunch points for skills shortage and feeding our talent pipeline—not just for the games industry but for all creative and digital economy sectors—is talent that is more experienced, so maybe has four to six years’ experience. We need to be able to make sure that there is a frictionless immigration system so that, while we fix the talent pipeline at a younger age, we are able to bring in diverse talent to fuel our creativity and innovation.
We need the best infrastructural environment for companies to act globally in a digital economy. That means excellent broadband infrastructure. If you track the rate of development for key games companies and key games competitive nations across the world—not just in terms of countries like South Korea but also regions in the Nordics and cities like Berlin—you can see the obvious correlation with very high speed upload and download broadband.
Q408 Chair: How do we compare in infrastructure with our competitors?
Jo Twist: We have good coverage but it is really the speeds. If you look at South Korea, they had very high speed broadband in the 2000s, which fuelled the growth of and live streaming of e-sports, which is a very interesting, high-value opportunity for the UK.
It is also related to the best tax environment. We are very grateful for the support the Government have offered with the tax relief scheme. We have got 237 games that have already received interim or final certification. That has created jobs and economic growth, so we need to make sure that remains in place when re-notification comes up next year.
Q409 Chair: What are the barriers that we need to remove, Chris, in order to achieve our potential?
Chris van der Kuyl: You will hear common strands from all of us, which have already come out 10 minutes into evidence today. Most certainly the single biggest barrier is talent. I probably alter my position vis-à-vis Jo’s on immigration policy, for example. Frictionless immigration, which I would wholly support, is a temporary fix while we sort the pipeline. This industry has such potential for growth that we will always be hungry for fantastically talented individuals.
Specifically, post-study work visa, which was abolished around 2012, is an area that has had a material impact on our ability to take some phenomenal talent. Our higher education institutions are not there as profit centres based on undergraduate throughput; they are there to create fantastic talent with which we can create enormous permanent value. Yet, we have made it very difficult for individuals who have come to study from outside the EU to remain with companies like us. We have them as interns while they are at university; we train them alongside their university and college courses, and then they are plucked away from us and sent back whence they came, which is insane. The talent side is huge for us.
On the early stage interventions, Philip mentioned that those of us of a certain age started off on the Spectrum and the BBC Model Bs at school.
Chair: I was a Commodore 64 man, myself—
Philip Oliver: An American import.
Chris van der Kuyl: We cannot all be perfect, Chairman.
We have only just started to get back to the importance of coding as opposed to teaching people how to use word processors, which is a completely different skill. Those things coming together are essential for us to create the base. In terms of the fiscal regime, the Government ought to be commended not only for the tax breaks that were long fought for by the industry over a number of different Governments but for creating, very recently, things like the UK Games Fund, which is run by Paul Durrant and his team up in Dundee. That is centrally funded, early, early stage financing, because it is a hits industry and the commercial sector cannot always pick the winners from day one. Having that there has been phenomenal.
Britain is phenomenal in innovation and creativity, and we need to allow that more entrepreneurial spirit to thrive for things like less regulation around the IP sector and how we can share copyright more effectively. I know the Digital Catapult and UK Games Fund are now collaborating to work out how they can use the same techniques that are out there in the world of Bitcoin to try to track IP and have people own IP all the way through. Those kinds of initiatives can make the UK distinct and highly competitive.
Q410 Chair: Philip, Chris mentioned a games fund that was established, presumably to address market failure. I was very interested in the written submission that you gave us, where you said, “Finance is a problem; venture capital is not as well developed here”. What needs to be done in terms of making sure that finance is available for games developers?
Philip Oliver: It is almost a cultural issue. The problem is that if any of us or any entrepreneur set up in Silicon Valley with the kind of talent that is in the UK, they would automatically have people assume that it is going to work and it is a good bet. Over in the UK, the VCs automatically assume this is too high risk, which is such a shame, because the UK probably has better talent and better loyalty. One of the good things that we have in the UK is a culture of loyalty from the businesses to the staff and the staff to the businesses—something that does not exist that much over in Silicon Valley.
We have an advantage but we do not have the VCs who see the opportunity. It is risk. Any digital creativity is a risk. But we stand a better chance of success than many places across the world.
Q411 Chair: What is the solution to that? How can we address that cultural change that we need?
Philip Oliver: You have got to change the hearts and minds of the investors. Trumpeting the success of companies in the UK is the most important thing. They are very quick to have huge news stories in America and other places celebrating people who have made an absolute fortune. How often do we see that in the UK? When you celebrate those people, the VCs say, “I wish that could have been me. I must put my money in next time, early”. I have been in business now for over 30 years. I have not been able to raise any money ever.
Q412 Chair: What size of investment is required?
Philip Oliver: It depends on the size of the company. Starting right back at the entrepreneurs, the two or three guys who are very talented and creative, beside needing lots of advice, help and support from trade organisations and everything, would need £150,000 to £200,000 to start with. As the company grows, they need the first round, second round and upwards. We need to be into the millions quite quickly, and we need to grab the opportunity quite quickly. This is such a fast growing industry. The rest of the world recognises this; in the rest of the world the investors are jumping in very fast and accepting the risk. Here, everybody is a little bit, “Well, I have got to wait and see”.
Jo Twist: A lot of it is an education job. We work hard as a sector: we are putting on a London Games Festival again, with funding from the Mayor of London, which is to shine a spotlight on the culture as well as the economic powerhouse of games across the UK, but based in London. We like to act locally and think globally.
We need to shine the international spotlight on the clusters of companies that are all over the UK in the games industry. We are not a London-based sector like many other creative sectors. More than half our industry is outside of London. They are strong sectors and strong clusters, which are related to strong talent pipelines. People want to stay in those places; we want to create jobs in those areas. That means there needs to be more of a co-ordinated approach when it comes to attracting investors and educating investors about the opportunities there, not just in games clusters but in digital clusters across the country. Once you shine a spotlight on and make a big deal out of a cluster, and the talent, innovation and creativity there, that is when people potentially get interested in investing. If we want to see the success of the Games Fund—which is £4 million over four years—actually make real headway, this is at prototype stage and it is very important in order to get investment.
However, there is another side to this: we now benefit from the cultural tax credit. As has been noted, we argued long and hard to prove that we are cultural products as well as software. We need to look at the way that other public cultural institutions help and support other screen sectors, such as television, film, animation and VFX. As we have been doing applications for the new B2B finance market that is happening in London in April, we have noticed a clear gap with games that are very much cultural games. They are not going to attract VC investment at this stage. I had experience of commissioning at BBC and Channel 4; we faced the same thing. These games need to be created and there needs to be that access to cultural institutional support, not just in commissioning but also in skills development.
Q413 Chris White: Thanks to Jo for raising the issue of digital and games clusters. We are very pleased that Leamington is one of those. You talk about us being the sixth largest in the world, but then you were not terribly enthusiastic about what we were necessarily doing in this country. One of the problems we have is the profile of this sector. Why does everybody not know how successful your sector is in comparison with our film industry? If we are sixth, how are we going to maintain and improve that position? What can the Government do to help that?
Jo Twist: A very important part is the way we are represented in official data and how we are counted. We simply do not have that fixed, and we are working very hard, again with the support of DCMS, to try to make sure we are measured accurately. We had an example in Scotland where a couple of years ago reports said that the industry created no jobs and no economic value, which is utter nonsense. That has been recognised and fixed. As soon as we have data and real-time data about who we are and where we are, and our own SIC code that represents us as a digital business, we can shout loud and proud about that message. We need a better way of working with UKTI and better visibility about the kinds of investments they are making per sector to help companies access market places.
Chris van der Kuyl: I certainly did not try to give an impression that things are not particularly good in the UK; I think the opposite. They are very good at the moment. The quality of product we are producing is exceptional. If one looks at the top ten console games in the world, we are not sixth; we are third, I think, if you look at actual sales.
To Phil’s point, though, many of those intellectual properties are not owned within the UK, so the bulk of the revenue does not stay in the UK, which is a slightly different challenge that we face. In terms of your question about why people do not understand, there is a simple answer, Jo notwithstanding: games developers are not generally the most photogenic individuals in the world.
Philip Oliver: Present company excluded.
Chris van der Kuyl: I was waiting for you to add that.
If we go against the publicity machine of the film industry, the television industry, the music industry—that is not what games are about. It is a different thing. I suppose we are the equivalent of Pixar in the movie industry. We are the guys and girls in dark rooms who create the product. Very recently, though, with the advent of online video streaming and the democratisation of that platform, the people who talk about games and who play games professionally have become huge household names. In the Minecraft community there is a young man who goes by the moniker of Stampy. He recently came to deliver the Royal Society of Edinburgh Christmas lecture and had 4,000 people in the room to listen to him lecture about how he builds worlds in Minecraft and how he has turned that into part of a huge industry.
The short answer as well is we are evolving as an art form and as an entertainment industry. One of the things I live by is the fact that we are living in a time, especially in our industry, of the fastest change any of us have ever been part of and it is the slowest pace of change we will ever experience again. Try to take a crystal ball and look five or 10 years into the future. Mobile phone gaming did not exist 10 years ago; now it is possibly, by revenue, the biggest sector. In another 10 years, augmented reality and virtual reality will be there. The real potential has only just begun to be understood, and that would be my treatise to you: we have done phenomenally; we have accomplished a huge amount as an industry, but now is the right time to really get behind us, because we can absolutely see ourselves as one of the leading countries in the world in one of the—if not the—leading entertainment industries in the world. I am delighted with your question because often we are seen as frippery: “It is games, is it not? It does not really matter”. No, it matters. We are, by hours spent, the most interactive form of entertainment as well.
Philip Oliver: And one of the fastest growing sectors.
Chris van der Kuyl: The fastest growing sector, yes.
Jo Twist: This is why, again, it goes down to that talent base as well. We are played by one in three people, there are 1.6 billion players across the world, it is the biggest selling entertainment product of all time, and it is 50:50 male/female. Yet, when we look at our talent pipeline, we are not getting that diversity into the industry. We need to be able to attract international diversity as well, because diversity is a 2D thing.
Q414 Chris White: You say, absolutely rightly, this is evolving as an art form, but is one of the challenges you have, Philip, that this is also evolving as a business?
Philip Oliver: Absolutely. Business models are having to evolve. We used to go into shops and buy boxes on shelves, and the distribution chain and everything has obviously gone digital. Then beyond digital, everything is starting to go free-to-play, so the game itself is given away for free and inside the game you make your digital purchases. The psychology, the analytics and everything in the business models that are happening behind the scenes are changing the whole world in which we live, and the way we collect our revenue from the players is completely different. In fact, there have been stories about the YouTubers being able to make more money than the games themselves eventually, which is just an incredible situation but an opportunity too.
I would like to address your question about how we raise the profile. The report that Ed Vaizey commissioned about four years ago highlighted the fact that, when you went around the world and asked people where Grand Theft Auto was made, where the Lego games were made and where Tomb Raider was made, most people assumed it was America or Japan. That needs to be addressed, and the GREAT campaign is fantastic, but one of the things I was asking for is that, within the products themselves, we can put a logo on the games so the players themselves, all around the world, can see, “This was made in Great Britain”. That is why I set up the Made in Creative UK, a logo that people can just put on their games, so that anybody in the world playing it can see, “Oh, the UK is great at making games”. That will percolate through to the investors and to everybody else.
Q415 Michelle Thomson: First of all, thank you for coming. Chris, as an early 1990s postgraduate from Abertay in Dundee, what is it specifically about Dundee historically that has led to where you are today and, in particular, what do you see in the operating environment that ensures it continues as a centre for excellence, whether it is innovation, entrepreneurism or ambition?
Chris van der Kuyl: I just have to, for the record, factually correct one thing: I graduated from the University of Dundee, not Abertay.
Michelle Thomson: I was Abertay.
Chris van der Kuyl: Oh, sorry. I thought you were saying I was. I hold a visiting Chair at Abertay, so I am a supporter of both venerable institutions.
Peter Kyle: Who is the politician now?
Chris van der Kuyl: The Dundee story, which is on record, is quite remarkable. It grew out of the 1980s and the fact that we were right at the heart of the manufacture of these microcomputers. There was a real ubiquity of access there, which very quickly begat an ecosystem that started off out-of-hours school computer clubs. This was a feature of the UK at the time because teachers, as well as the students, were really quite keen on this new technology, which then turned into some of those individuals outside Dundee—one of them sitting to my left right now—becoming professional game developers at an incredibly young age and staying with that industry.
In Dundee, David Jones, who was the founder of DMA Design, Russell Kay, a founder of another company called Visual Sciences, and I approached Abertay at that point and said, “Look, we need a talent ecosystem. If you do not help us now, we will not be able to sustain growth in the city”. Again, as is well known, Abertay created one of the world’s first full undergraduate and graduate programmes for computer games engineering and unashamedly branded it as “Computer Games Engineering”. It was a very new university at that point. Its access qualifications or levels to enter went past Cambridge computer science at one point because the demand was so huge. Today, in a city of fewer than 150,000 people, we have over 40 games development companies and several thousand people working in the industry. We feel we have only scratched the surface. It really goes to show that with a laser focus on an industry that has the growth potential like this, one can create something extraordinary.
How do we sustain that? The wonderful news is we believe—not to use too much marketing speak—that a 360-degree approach means this is not just about the companies and the universities but the culture of the area and the environment in the city that we live in. The big news for Dundee that many people know is we are currently building the V&A’s first custom outpost from London: this phenomenal sort of Sydney Opera House on the River Tay, which will be open in about a year and a half to two years. Dundee is the only city in the UK to have been awarded City of Design status by UNESCO—a very remarkable thing to happen. Most of that is down to the fact that we have got such a position in the games industry.
We have put these building blocks there. Now we need to build around those and we need to build stronger institutions and stronger companies. The one thing we can do more than anything is overfund the higher education sector, and that, right now, is said in a time of effective austerity, when all of the higher education budgets are being cut. That is a disaster. That is a disaster today but it is a disaster for the future, and one that could stop this digital revolution in its tracks as far as the UK is concerned.
Philip Oliver: May I just address the talent pipeline as well? It is really important that we inspire at a young age. It is absolutely fantastic that computing got put on the national curriculum—fantastic. Unfortunately, I found the actual execution or the sales of it very dull. Jo mentioned creative computing—that is what it should have been titled. That would have made so many females sign up to it. As it is, it is still seen as quite a dull, male-oriented subject, and we have just lost half of the potential talent pool. It is not too late to turn that around. We can call it “Creative Computing”; we can readdress it and make the curriculum a little bit more inspiring.
The skills on it are fine; I do not have a big issue with that, although, in making it more attractive, use “games”. Kids love games. Use that word. It does not currently, which is ridiculous. If people think they can make games in the future and these are the skills they need, they will learn those skills. Those skills are transferrable to any digital economy and any digital job. We need to inspire them, and we need inspire the teachers and bring the teachers along as well, because we do not want to keep changing the curriculum on the teachers; they do not appreciate it. Let us make it inspiring for them. On the talented teachers, sadly industry can pay more and therefore there has to be some investment for those talented teachers to stay in teaching and to recruit into teaching, and for them to inspire the next generation.
Jo Twist: As we see further devolution at local level, again this is the opportunity to have a really joined up, co-ordinated strategy at local enterprise partnership level in order to get the skills talent right from the start. If we have more control at local cluster level, these elements and local ecosystems can grow.
Q416 Paul Blomfield: In Sheffield, which I represent, there is a buoyant creative and digital sector, but it did not come through any planning; through serendipity it came into being. It was dominated by a few individuals, but it does not have the kind of history Chris talks about Dundee having. How did that happen? What were the conditions that made it right for some places and not others, and what can we do to nurture it more?
Jo Twist: Having been to Dots fest and having been involved with the Children’s Media Conference, events like that are crystallising and focusing attention, bringing together experts from across the country. You are meeting the companies and having the opportunity to see the fantastic education institutions there. That is one thing. You are absolutely right. Tech City did not happen because Government overlaid a PR plan on top of it. Tech City happened because of low rents and bohemian polymath culture where you would have programmers rubbing up against artists. That is the crux of it. We have identified 12 digital clusters across the UK. These clusters can have these interventions just to support the foundations in the ecosystems. It grows from the ground up; it is not a top-down planning solution. It is about community and it is about making sure the interventions are targeted, particularly at a young level, and that links are made between those companies and a spotlight is shone on them.
Philip Oliver: And creating a great environment in that area.
Chris van der Kuyl: The only thing I would to add to that is, as someone who worked and operated the business in Shoreditch for seven years right in the middle of Tech City UK—and loved it—I am a big fan, but I would not use it as an exemplar because it has the London effect. Jo said exactly what it was: it was artists first into low-rent accommodation; the artists were followed by the multimedia digital folk, and then suddenly the corporates have all turned up. That is just evolution.
Jo Twist: And made it too expensive.
Chris van der Kuyl: They have made it too expensive.
The interesting thing when you talk about the games industry and digital media as a sector—more specifically than pure technology—is the blend it needs. It does not just need phenomenal geeky, amazing programmers, which it does; it also needs fantastic creative artists and animators; it needs game designers; it needs musicians. It needs the creative brains combined with the technical talent. That is the thing that creates the unique blend and is one of the elements that the United Kingdom is quite famous for. I keep harking back to the institutions that surround it: Dundee’s blend, in a very small city, is two universities and a world class art and design college. Without the art and design college I doubt we would be having the conversation today, because it really has to have that blend.
We look at Edinburgh. Edinburgh right now has one of the most vibrant technology clusters: the two unicorns we all hear about in FanDuel and Skyscanner, which have become every bit as successful as anything out of Silicon Valley. It all comes down to the Informatics Forum at the University of Edinburgh—the computer science department—being top three in the world by anyone’s ranking. As Philip just said, it was that critical point of inflection that comes from where the spring water of talent is, and that is, generally, higher education institutions. For games it is not just technical; it needs creative arts as well.
Then it is how you fan the flames and the sparks, and that goes to, in Dundee’s case, things like the V&A, the Dundee contemporary arts centre, of which people thought, “Why do we bother?” We have got unemployment challenges in the outlying parts of the city. It is a city not without—for those that know it—its challenges of deprivation, but right now we believe that by fanning the flames internally we will create something exponentially more valuable. If one wanted to look at an exemplar of it, go and look at Seattle, where the whole ecosystem has grown up over a 20- to 30-year period. It was the worst time in their history: Boeing and logging industry dying on their feet because of the oil crisis in the 1970s. Cut to 40 years later and you have got one of the most vibrant economies in the world. There is no reason we cannot do that here.
Q417 Paul Blomfield: Can I look at the issue of talent, which you keep coming back to, and ask what we need to do? Chris, you talked about the course that Abertay developed, but what do we need to do to grow our talent? What do we need to do to attract more women? It is interesting: Jo made the point that it is 50:50 players, so why do we still have this image of the people developing the games being nerdy boys?
Jo Twist: To me it does go back, again, to eight is too late. As we have already alluded to, the average age of someone who plays games is 33, but 100% of children and young people play games. They combine this mix. Whatever you are passionate about and you are into, even if you are not skilled at art, you can find a place in making a game. It goes down to really supporting the teachers who are trying to implement the coding curriculum, trying to give them the resources, and funding the good models that exist that are mapping resources to the curriculum and are approaching computational and algorithmic thinking using play-based techniques. This is how people learn. We have always learnt through play, but we have stopped learning. This encourages diversity, not just girls but people from all backgrounds and from all different experiences, into the subject area. A Digital Schoolhouse pilot, funded by the Mayor, ran for a year in London across eight schools, trained 600 teachers, reached 6,000 kids, and that attracted far more girls and piqued their interest into computer science than any other programme we have seen. We would love to see that scaled out; unfortunately there does not seem to be a very joined-up approach to how that is scaled out.
Chris van der Kuyl: Sitting here today on International Women’s Day, it is highly appropriate to look directly at this. If one looks at where the games industry comes from, it is very much seen as a young boy’s domain to play and fiddle with computers and play games on it. As big business got involved, very unfortunately that grew into, “Right, that is the audience, so we are going to make more combat games and games that appeal to that audience”. That disenfranchised female players more and more and more. What has happened over the past 10 years is, especially with the indie game development scene, it is now very cheap. The tools are so accessible. Anyone, if they have got a great idea, can go and make at least a prototype or a fully-fledged game, Minecraft being an excellent example of something that had zero outside investment and went on to dominate the industry. Guess what? More and more of those are addressing games that a broader audience or a female audience would love and they are being commercially rewarded and successful. You can see the industry finally start to move.
Within the production side of the industry, we have always been an industry who have wanted diversity in their workforce, because we know diversity means more creativity; it brings different perspectives, and without it we will be down one channel making Space Invaders for the rest of our lives. From our perspective, it is not only welcomed; it is demanded now. We need to have more creative diversity in our companies.
Q418 Paul Blomfield: That is really useful. How do we keep up? I remember talking to an online retailer a couple of years ago who was talking about exactly this issue in terms of their recruitment of talent. They said, “Part of the problem is we talk to the universities about what are needs are and they develop a new course. By the time they have got the graduates, our needs have moved on”. It is such a fast-changing industry.
Philip Oliver: It is a very fast moving industry. The most important thing is we inspire at all levels. We inspire when they are kids because they are already interested in games. We can take that as read. Let us use that. Let us let them have a subject at school that takes that to the next level—not just learn how to play games but learn how they were made and how you could take part in making it. Take that all the way through: support the teachers with pay and golden handshakes and things like that, but also with resources. We can make some amazing resources that are really fun: the teachers do not have such weight on them in needing to learn it, because the resources support them. Take that theory all the way through.
One of the problems with the universities—and I have gone into lots of universities and done talks—is the grades of the people coming in at the moment are not good enough, because they did not have the choice of computer science at GCSE and then at A level and then degree. The first time they need programming is at degree level, which is just crazy. We are starting to address it, but we need to do that better and faster.
Jo Twist: It is also a shared responsibility in terms of educating and helping to support teachers and lecturers with role models and with different kinds of mentors. Industry-led schemes do that work in schools and careers services, going in and doing guest lectures and so on. That is a long road to change. It is a long job, but again critically it is about this early approach to how we are educating and teaching. It is around taking STEAM very seriously: taking art just as seriously as we take programming, maths and physics. Then there is that knowledge about the career pathways jobs, which we keep making up as we go along; “data scientist” did not exist two or three years ago. These are critical jobs and skill sets not just for the games industry but for the entire digital economy. Once we get cultural recognition from the likes of BFI, the Arts Council and other cultural institutions that support young talent and innovative ideas in other screen sectors, that attracts and is a great advert to all these other students who did not realise that games can be not just their hobby but a career.
Q419 Paul Blomfield: Chris, you mentioned the importance of making the most of international talent and the closure of the post-study work route. This is something I very much agree with you on; I chaired a cross-party inquiry in the last parliament talking about reopening that. Those who disagree with us would say, “Well, there is a route for catching talent through the Tier 2 (skilled worker) route”. Why is that not good enough?
Chris van der Kuyl: It is not dynamic enough. It comes right back to your last question, which was: this is moving so fast, so how on earth do we educate people now? The fact is you are absolutely correct: it moving far too fast to fix the curriculum and say, “If you learn that, you can walk in”. These great institutions are creating a type of fearless learner: fearless of new technology and fearless around design and innovation ideas. Almost by the time they are Tier 2 qualifying—by the way, we love those kinds of talented individuals as well—we have missed the benefit of the fact that we have worked with these institutions to create these fearless, talented learners who can come out and dynamically change our businesses the first day they walk in. There is something to be said about the way the great institutions teach. They do not teach fact as a primary purpose; they teach methodologies for learning. Especially inside technology and creative industries, it is about ways of thinking as opposed to hard and fast fact.
One thing—and I do not know the answer to this—that I would encourage you to look at is the Teach First programme. Unfortunately for reasons of governance in Scotland it has never been rolled out in Scotland, but it is something that has been phenomenally successful in England and Wales. I would love to see Teach First applied more to computer science graduates and to creative arts and design graduates. At the moment it seems the companies that sponsor Teach First are the bankers and the big accountancy and big professional firms, so it is like, “Park your law qualification for a couple of years and teach”. I would love to see our industry say, “We would love you to come and work in games but go out to schools, go and inspire and make things happen in a practical sense with young people”, because it is about peer understanding.
I was in a primary school the other day in Dundee talking to primary 1 up to primary 7, so the five-to-12 age group. Some of them kind of knew Dundee was somehow involved in Minecraft, but none of them knew that Grand Theft Auto was created in Dundee—although I am glad to say none of them had played it—nor, indeed, Lemmings, which was the game that started it all for us. By walking in there, I was able to say to them, “The guy that invented that, he lived 200 yards from here”. You saw these aspirational young children, none of whom would go into the games industry, suddenly say, “What, really? Somebody who lived round the corner from us made some of the most important games in the world?” When the penny drops that someone they can see or touch or hear about can deliver something like that, they suddenly start to believe themselves, and that goes through every tier of education. The more communication we can do, the more championing we can do and the more touchpoints we can make between our industry and education, the better.
Jo Twist: That is why we are slightly concerned about the apprenticeship levy. At the moment I know there is a separate work stream on this, and we have been very involved in that. The apprenticeship levy and apprenticeships are, in practice, a very good thing and we very much welcome that. However, at the moment there is a big question mark over apprenticeships and how they work in the games industry—let alone the rest of the creative industry. We are highly skilled jobs and we need people who can hit the ground running. We want to be able to train people up. We very much valued the Skills Investment Fund and we have been able to bring new entrants into the industry, but we do not have the standards in place for these apprenticeships. They are not developed; there is no funding to develop them. As an industry, we have estimated we are going to be paying £2 million into that levy pot. However, the companies at the moment in the games industry will not be able to use their digital vouchers. I know there is a separate work stream on that, but it a critical point for us, particularly as we are bringing in people who are retraining from other jobs.
Paul Blomfield: That is an important point we should explore further but I guess we are running out of time.
Q420 Peter Kyle: This has been an absolutely fascinating session. Thank you so much. I have got so many questions I am going to have to try to narrow it down. I would like to go a bit deeper into the cluster idea. Chris, you gave a great example of building links with educational establishments, but it sounded like in the example you gave you were in the driving seat of it—you almost created it. We need clusters that will create industry, rather than industry going out there and creating clusters. Why was a cluster able to be created in your area, and is that applicable to the other areas in the country where there are not clusters?
Chris van der Kuyl: It is a very dangerous policy. There is obviously a lot written on cluster theory and things such that one might believe a cluster can be created out of nothing. Yes, central Government intervention: if there are enormous amounts of money spent on research in a certain area and located somewhere, it is likely a cluster will emerge. That has happened many times before, but there needs to be some spark there to look at. Within our sector one looks for technical excellence of a talent pool combined with creative excellence. It is why the UK punches above its weight. It is why many countries that have tried to be successful in the gaming industry have not, because you cannot fake creative talent.
Q421 Peter Kyle: It is interesting that the example you gave links to two universities. I represent Brighton and Hove, which has a great, very vibrant creative arts industry and two universities. Is that a possible trend, if you are looking for places?
Chris van der Kuyl: Brighton is a fantastic cluster. I have got many friends down there. There are great games companies in the environs. There are also broader digital media businesses that have grown. It is one of the first areas of the UK to have big commercial success.
Q422 Peter Kyle: Why do you think that was?
Chris van der Kuyl: Exactly the reason we have just said: talent.
Jo Twist: The talent mix.
Chris van der Kuyl: The mix. In many ways, if I remember correctly, the universities around Brighton were not necessarily the most technically leading universities and developed that, because the demand came from the arts side. All these people started going to the internet and web, saying, “We have got great graphic design companies. Can you help us find more programmers?” The other can be true as well. You can nurture a cluster—there is no question—and Dundee is a phenomenal example of one. It is not that we have all sat back and waited for local government or national government to do it. We have all rolled our sleeves up. One brilliant example of that is we were not in the driving seat. To Philip’s point, Abertay came to us with a brand new course called computing and virtual environments—CAVE, if I remember, because they like their acronyms in higher education. They came up with this CAVE degree and said, “Would you support us in an application to get funding?” We unilaterally said, “No, we will not. If you turn it into a computer games degree we can take every person you provide. If it is computing and virtual environments—whatever that means—we could not care less”. They were quite brave at the time—to Philip’s point—in saying, unashamedly, “This is games”. It was the best decision they ever made.
Q423 Peter Kyle: In Brighton, also, there are two universities that are quite complementary. They have different focuses as universities, which presumably means for a small city you are going to get a lot of diverse talent. You talk about talent as if talent is one thing, but presumably you want programming skills, creativity skills, entrepreneurial skills, and business skills but also the entrepreneurial flair that goes with it. Business and entrepreneurship are different attributes.
Philip Oliver: On the entrepreneurs, many people now, seeing the story of Notch, who created Minecraft, and Mark Zuckerberg with Facebook, go, “I could do that”. That is the spark and that is great, but they do not know what they do not know. They need support, advice and help. The passion and, probably, quite a lot of talent they already have is fantastic, but you only need to fail on a few touchpoints, like getting your finances a little bit wrong or hiring the wrong person or committing to a huge rent that you cannot afford, and you run out of money. We need to support those very talented entrepreneurs before they go into business and, to a certain extent, some of them are told, “It is probably not right for you. Go into industry for a few years, learn what you do not know and then try”. For the others who do proceed, help them with some financing, reduce some of their rent and give them lots of advice. I have suggested they be signed up to trade organisations.
Q424 Peter Kyle: I have got two questions. The Chair will bite my head off if I do not be quick. You have just come back to your first point, which was about getting to the point where IP disappears off abroad. Am I right in thinking that that is two points, because the talent is developed locally and then it is snapped up internationally?
Philip Oliver: It is all down to the finances. It is basically who can afford to back this team—and that needs money. There is not enough money in this country for that.
Q425 Peter Kyle: It is having the investment to support people who are creating the product?
Philip Oliver: Correct.
Q426 Peter Kyle: Then having the next step: when it becomes huge, people are selling the brand or the product.
Philip Oliver: It is before it is scaled. It is when it has potential—you go out to raise the rest of the money because you need to increase the team size and the meet the opportunity—but before the revenue has started to come in. To be honest, I have been a salesman going out to these publishers for the last 25 years, and you do not go to the UK. There is not anybody to go to in the UK to find the money.
Chris van der Kuyl: I would have to divert from Phil’s point here because I do not agree with it at all. He has just raised it: with Notch and Minecraft, he created that in his bedroom. He designed a product that he was capable of effectively delivering first versions of by himself. With a small amount of talent, he started to generate revenue, which there are ways to do nowadays, because of crowdfunding and the internet. They never took a penny in external investment. They sold to Microsoft, very publicly, for $2.5 billion. That money is now going to start to flow through the Swedish economy in future generations of the product, and there is money in the UK.
Q427 Peter Kyle: That is why it is about two issues: getting companies off the ground and then where you go from there.
Jo Twist: It is about supporting companies to scale and to grow, because we are all operating in a digital global economy. For every single one of our members and every single one of the companies in the games sector, as soon as you publish a game on iOS or yourself, you are selling and you are exporting to the rest of the world. That is when the support needs to come for people to be able to scale up and to have business resilience in order to deal with that business, or in order to go out to those markets personally and to reach those marketplaces.
Peter Kyle: You make the point very well.
Jo Twist: Which is why the regulatory landscape around the digital single market issues are of critical importance for us to solve.
Q428 Peter Kyle: All of you have made the point about teaching in secondary schools all the way through higher education and further education.
Jo Twist: Primary schools.
Chris van der Kuyl: Primary schools.
Peter Kyle: Do any of your companies go, proactively, into schools?
Jo Twist: Yes.
Peter Kyle: You have made a point about the existing trades and the big four accountancy firms. All of those take it very seriously in a structured way.
Jo Twist: We run the Video Games Ambassadors scheme, which is a network of over 200 individuals—a very diverse network of individuals. We deploy them into—deploy them?
Chair: Deploy is not a bad word to use.
Jo Twist: We take them into careers fairs all over the country. They go into schools; they only need to do at least one thing. They are code clubs; however they are not play-based, games-based code clubs that are combining computer science with arts. Yes, the industry steps up and does that, and the industry is very good at sharing. That just needs to be scaled.
Q429 Peter Kyle: In the school of which I am chair of governors, we set up a digital academy in the school, but we had to proactively go out and find the companies.
Jo Twist: Yes. We have proactively gone out and created the Digital Schoolhouse model with computing at school.
Q430 Peter Kyle: Why is there a problem then?
Jo Twist: Because it is difficult to scale and to get the funding to do that.
Q431 Amanda Milling: I have got one question that is quite short, and I might be opening up a big debate with the other one. First of all, picking up on Chris’ point, it is International Women’s Day today. Do other countries face the same challenges we do in terms of engaging girls and women in the sector? The other question goes back to Jo’s point about apprenticeships. I know we are doing another inquiry on this, but I would like you to elaborate further in terms of the issues you face regarding apprenticeships and the sector.
Jo Twist: Because the games sector is so young and because of the historical reasons we have seen, and because computer science has not necessarily been taught creatively across the world in schools—in fact, the UK is leading on this in many ways, apart from Israel and the Nordics—there have been these issues around attracting diverse people into computer science and those disciplines. We see lots of projects happening in the States; sometimes they do not exactly go the right way.
It, again, is a long-term job. It is a long-term goal of ours. Diversity and diverse teams, not just in terms of inherent diversity but acquired diversity, is absolutely the engine of creativity and innovation. We know that. We have seen that. That is ongoing and there are a number of different solutions to that but, again, we go back to early stage interventions and role models and teaching. Our techniques of teaching and play-based learning can be very unplugged. You are leaning about algorithmic thinking or systems thinking using magic tricks, dance moves, playdough and so on. There are techniques, but the teachers need that support, confidence and resources.
To the apprenticeship point, we do not have a culture of apprenticeships in the games industry. We have training on the job and we are very supportive of that. We are very highly skilled as a sector and we are working on products constantly. We are not just working on one product that is out and that is it. We are iterating and reiterating games or a service. We do not have higher level apprenticeship standards in place, apart from two. The organisation that was creating these has lost its funding: NextGen Skills Academy. We are concerned, as a creative industry, that despite the fact this levy will come into effect next year, people will not be able to use their digital vouchers effectively to buy in the skills they really need.
Yes, there are existing apprenticeships that have been created by other sectors that we could be using—particularly around business skills and so on—but we need that programming and artistic talent. We need the time and flexibility to be able to create those standards at higher level 3 and above. At the moment we have nowhere to go to create these standards. We also are working with BIS very closely to ensure that we might be able to extend the life back of these digital vouchers. We think it is a very critical issue because we need to make this system work; it is a compulsory levy and we do not want people having to not spend in other ways. We do not want this to affect our global competitiveness as a sector either in terms of FDI.
Chris van der Kuyl: If you had asked me five years ago about the applicability of an apprentice and modern apprenticeships, I would have said, “We have viewed that and had some in support roles”. In core production of our games and development, it does not really apply because of the skills barrier. This year—2015 into now—we took our first school leaver. We put them up against a bunch of student interns and this person performed more strongly at certain design tasks that we needed. We took a risk and we brought this person in. They will go on to college to study an access qualification to go on and do a higher level degree. They want to be in this industry; we believe they will be in this industry. If there was a way for us to work through an apprenticeship programme with those kinds of individuals as they went through the right kind of external journey to get to the highest levels of qualifications of our industry, we would bite someone’s arm off to allow us to do that. However, the system that is being proposed at the moment is not close to flexible enough to do that. It does not really apply.
Q432 Chair: I am afraid we have run out of time, but I think this could have gone on for quite a considerable amount of time. Thank you very much for your evidence. We are really grateful for all the facts and insights that you have provided us. Thank you very much.
Jo Twist: We would love more conversation. Please join the APPG on Video Games.
Chair: And who is the Chair of the APPG?
Jo Twist: The learned gentleman to the left.
Chair: Thank you again.
Examination of Witnesses
Helen Dickinson, Chief Executive, British Retail Consortium, and Paul Misener, Vice-President, Global Public Policy, Amazon, gave evidence.
Q433 Chair: Thank you for coming. We are really grateful. We are looking at the digital economy and very interested in how the digital economy is changing retail, so we are very interested in what you have to say with regards to that. For the purposes of the record, who are you and which organisation do you represent?
Helen Dickinson: My name is Helen Dickinson. I am the Chief Executive of the British Retail Consortium. We are the only trade association that covers the entirety of the retail industry, from large retailers to small ones, selling all sorts of products: anything that you might buy in your shops, either digitally or physically, day-to-day across all channels, whether that is online, in stores, out of town, high streets or—more likely these days—a combination of all of the above.
Paul Misener: My name is Paul Misener, Mr Chairman. Thank you for inviting me to testify and offer evidence this morning. I really appreciate it. I am the Vice-President of Global Public Policy for Amazon.com, where I have held this role for 16 years now.
Helen Dickinson: Has Amazon been going for 16 years?
Paul Misener: Yes, I know. I really am delighted to be here. Thank you very much and thank you for the inquiry. The digital economy is extremely important to our millions of customers here in the UK, so I look forward to your questions.
Q434 Chair: Thank you very much. Retail has changed enormously in the past decade or so. The digital revolution is pushing further change—transformation if not revolution. How do you anticipate that digital is changing retail and how will it look in the future?
Helen Dickinson: The first thing is we need to recognise the UK is at the forefront of e-commerce on the global stage. Online retail sales, as a proportion of the total in the UK, are about 15%, and the pounds per head that equals is higher than pretty much any other market. The UK is leading the way from a digital, e-commerce business-to-consumer point of view. That has caused a reinvention, which is proving successful, with some challenges, in some of the high streets across the country, so I am sure we will talk about that in a bit more detail as we go through. It is also meaning that there are now fewer people working in the industry than there were about 10 years ago: there are about 190,000 fewer people working in retail today. We have an industry that is investing hugely in digital technology as well as price deflation, so we have had nearly three years of continuous falls in prices. Taking those together and then looking forward as to what the impact might be, we see there will be fewer people working in retail in the future. We see that pace of change accelerating over the next couple of years. The aspiration is obviously to move from a broader base of people working in the industry to fewer but better jobs in the future.
Q435 Chair: That is essentially what your report published a week or two ago says. You say 900,000 fewer jobs in retail. That seems an enormous amount.
Helen Dickinson: It does seem an enormous amount. We made some assumptions, and we can all challenge as to whether they are exactly right or whether it will be over 10 years, which is what we were saying. It might be shorter; it might be longer. The key point we were raising in the report is that there is some good news associated with that: the industry will become more efficient. Also there are some risks and challenges associated with it, particularly with respect to more deprived areas across the country, more vulnerable people in the workforce and for smaller versus larger businesses.
Q436 Chair: Does the customer get a better deal as a result of the digital revolution?
Helen Dickinson: If you look across the last 30 or 40 years of UK retailing, we have seen a shift in where the power lies: from suppliers who had the products that everybody wanted, to retailers who needed to find space to be able to sell. Now that power has shifted firmly into the hands of consumers, because they have got much more visibility through the internet around price, around availability, around competition, and that has firmly put the power into the hands of the consumers. One of the high-profile CEOs I think said, “The customer was always in charge and now they are the superpower”, which is a nice little quote.
Q437 Chair: We might come on to that a little bit later on. Paul, how is retail changing? You, obviously, as a firm have changed it quite considerably, as well.
Paul Misener: It is changing in a good way towards consumers, as Ms Dickinson has indicated. She was right to point out the Office for National Statistics figure of about 13% to 15% of retail here in the UK being online. It is important to clarify that that includes the online sales of multi-channel sellers. Many of her members sell not only on the high street but also online. That 13% figure is important but it includes sales by the multi-channel sellers online. I have seen figures as high as 15% for the UK.
This number is particularly interesting. First of all it indicates that something in the order of 85% or 87% of retail sales in the UK are offline—a very significant proportion. This very much contrasts with some of the predictions that I have seen over the years. When I joined Amazon in late 1999/early 2000, there were predictions at the time that within five years online commerce was going to be something of the order of 30%, even as high as 50%, of retail. Here we are; it is not five years later and we are not saying it is a third or a fifth, but 15 years later it is a seventh. That in itself is remarkable.
Another thing Ms Dickinson said is really important here, and that is the UK’s leading role in this. I am not sure it is clear, but that 13% is the highest in the world. The United States is aspiring to double digits; in the US we are somewhere of the order of 9% or 10%; Germany is around 8% I believe, and the EU average is lower than that. The UK is to be congratulated for policies that do encourage e-commerce. You are doing very well. On the question about growth, as well, I have seen statistics also I guess from the Office for National Statistics that suggest that growth is of the order of 10% a year. To be clear, that growth is not going from 13% to 23%. It means it went last year from somewhere north of 11% to 13%, and that kind of growth is about right. Again, that is something to be proud of here in the UK. The statistics are supportive of the growth here.
Q438 Chair: Could you help me understand Amazon’s business model? Are you a technology company, are you a retailer, are you both or are those terms obsolete?
Paul Misener: We are a customer company. I know it sounds a bit like marketing, but the reality is we focus on our customers. What do they want? We try to anticipate what innovations would be important to them and what services would be good to them. It is part of our DNA. We have been doing this for 20 years. We will have meetings internally where we have a table and an empty chair and say, “What would the customer think as we are talking about the kinds of services that we want to provide her?” It is that important to us.
That said, obviously we are heavily technology based. We began as a retail firm. Maybe this would be instructive, Mr Chairman. When we began we were a pure retailer. We would buy stuff wholesale, put it in a warehouse and sell it off at retail. The only novelty is all the sales occurred online as opposed to a shopfront. From that point, however, we have morphed into becoming a business that now provides support to other start-ups. I have to say that one of the most exciting things about my relatively long career at Amazon is that I have seen it go from being a start to helping start-ups. Much of what we do is take the technologies that we have developed for our retail business and now make them available to other users. Probably the principle example of this is allowing third-party sellers to sell through our website. When we first posited this notion a decade or a decade and a half ago, it was viewed as crazy. Why would you allow a third-party competitor to your retail business to come on to your website and sell right alongside you?
Q439 Chair: This is Amazon Marketplace?
Paul Misener: Yes, it is now. If I may, Mr Chairman, it went through this bad stage where we called it zShops. The concept in zShops was where third parties were allowed a segregated corner of our website essentially where they could offer their wares. It was an innovation. It was thought to be crazy at the time because it introduced competition right on our website, but customers hated it. Nobody used it. It was a bad innovation. Then we thought, “Well, let us take that”, and we just meld them together now such that everyone is selling right alongside each other. It is like a high street store that has a bunch of shelves with wares on it and allowing other sellers to come in and put the same wares on the same shelves right next to them—they could be for a lower price. This is great for sellers; it is great consumers.
Q440 Chair: It is great for Amazon. This is a great business idea. You do not have to hold any stock; you do not pay for things like packaging and posting. Yet you still take a cut. What is not to like about that?
Paul Misener: That is a fairly small part of our business. 47% of the units sold through Amazon are not sold by Amazon the retailer. Many of those units are sold through our website by third parties that put them in our warehouses so we can provide the fulfilment services for them: the picking and the packing and the shipping and all of that musty stuff. It is another part of our business that we developed for our retail business that we now make available to third parties.
Q441 Chair: Do you see yourselves as a low-margin business?
Paul Misener: Demonstrably we are. We are in the retail for the first part, so the core of our business is retail.
Q442 Chair: Scale is very important with regard to that. You want to pile them high and sell them cheap, probably more on a scale that has been unrivalled in human history, but that is where you will make your money.
Paul Misener: We price to maximise customer trust. We want our customers, when they come to our website, to know they are going to get a low price. The way they get it is either through our retailer business or through the sellers who are selling alongside us, who often undersell us. That is why 47% of the units sold through Amazon the website are not sold by Amazon the retailer.
Q443 Chair: Do you worry about competition in that you might be stifling competition?
Paul Misener: Not at all.
Q444 Chair: The reason I ask is I read a couple of years ago this fantastic book, The Everything Store by Brad Stone, and there is a review of it in the London Review of Books. Allow me just to make this quote from the review, and this is about Amazon’s business model: “With lower prices you’ll get more customers; with more customers you can push suppliers to lower their prices, which will let you lower your prices even further, thereby attracting more customers; repeat until your competitors are dust”. Is that a fair summary?
Paul Misener: No. No. It is an interesting viewpoint of things, but it is simply not the way we operate. First of all, as I mentioned, retail is a low-margin business by definition. It historically has been: it is high turnover, low margin. Also, we are reinvesting heavily. In the UK in the past five years, we have invested £4.5 billion in new facilities and innovation and R and D—and I can tell you all about that. The new facilities are something to keep up with customer demand. We have to keep up. The innovation—we can talk about that—is also very important to us as a company to provide new services to our customers.
Q445 Chair: My final question before I open it up to colleagues is about the use of data and essentially whether Amazon is changing into a data collection company. This is a serious question; it is not meant to be flippant in any way. Are you trying to take over from Google?
Paul Misener: No. I do not even think they are our competitors.
Q446 Chair: The reason I ask is that for people like Amazon Prime subscribers you will be the go-to choice for shopping options without having to resort to Google. The collection of data that you will have is enormously valuable. What do you want to do with that?
Paul Misener: We have used consumer information from the very beginning to personalise the shopping experience at Amazon. We want each customer to come to the website and be able view it as their personal store. Protecting that customer data, keeping it close and using it responsibly is paramount to the company, because if we do not do that we have lost customer trust, and that is the most valuable asset we have.
Q447 Michelle Thomson: Good morning, Paul. Thank you for coming to the session. Following on first of all in terms of retail versus digital, I understand you have recently opened your first bookstore in Seattle, and Re/code in the US claim that you have planned another 300 to 400. I suppose my question is, in essence, what appeal do bricks and mortar stores have to an online digital company such as Amazon? Is that part of your future plans for world domination?
Paul Misener: No, it is not part of those plans. The opening of a physical bookstore took some people by surprise. It is just a natural growth of wanting to serve our customers. We just felt that was a way to do it better. The hope is if that works, we could serve our customers that way in other areas as well. We did not view that as such a big deal. I appreciate why, from the outside, it is viewed as a momentous change, but it is just an outgrowth of our willingness to try to serve our customers.
Q448 Michelle Thomson: Do you anticipate doing that in the UK as well, then, presumably?
Paul Misener: I have got nothing to announce. I cannot say; I cannot speculate on that, but let us see what happens. Let us see if our customers like it. Hopefully they will like the experience in our physical store there in Seattle. After all, innovation is about something you hope your customers will like. I told you about zShops; that was an example of an innovation our customers hated. It failed; it was a flop. We try to figure out innovations they will like. If they like them, we will continue with them; if not, we will disband it like we did zShops.
Q449 Michelle Thomson: Following on from that, I guess that goes back to the point the Chair made about whether you are retail or digital. It is almost like retailisation, with your recent link up with Morrisons. Do you see further plans for moving into expensive retail outlets as a mechanism of getting greater reach?
Paul Misener: We have many partners, as you can appreciate, globally. The arrangement with Morrisons is to begin carrying some of their brands—their branded products—on our website. We are very happy to add to the selection of products we have on our website by working with Morrisons to bring their branded products online.
Q450 Michelle Thomson: One more thing on that, going back to the digitisation: are drones something you would like to trial for delivery in the UK? I do not know what your plans are as compared with the US for drones.
Paul Misener: This is an example of investment and innovation right here in the UK. We have, in the Cambridge area, a development centre specifically around these aerial drones. For those of you who may not be aware of this, these are automated vehicles that are lightweight and could make lightweight deliveries to customers in local areas. Much of that innovation is taking place right in Cambridge. We also have in the area some testing going on. It is one of a couple of development centres in the world working on aerial drones, and we hope to bring that Prime Air service to customers sometime in the near future.
Q451 Michelle Thomson: Just following on from that, do you see any dichotomy then in governments such as the Scottish Government—I come from Scotland—giving Amazon grants to create jobs while, at the same time, you are funnelling the savings into making jobs obsolete?
Paul Misener: There are certain circumstances where localities will want to make available some incentives to bring in jobs and investment. The incentives we received in Scotland were ones available to any company that would come in and make jobs and investment available in the country, especially in that region. That is only a tiny fraction of the investment we are making in the UK. As I mentioned, over the past five years there has been something like £4.6 billion of investment here.
Helen Dickinson: Picking up the question asked there, it is not a case of bricks versus clicks. When we think of retail now, it is absolutely that the channels are completely blurred, certainly from a customer point of view. If you think about how any of us as shoppers shop these days, we are as likely to go into a store and buy something as we are to do some research online and then go into a store, or to buy something online and either have it delivered or click and collect. Over the last couple of the years, retailers—particularly more traditional retailers—have been dealing with the idea that it is one versus the other in really thinking about where they put their investment and how they structure their business such that they are facing into the customer across those different channels in one way. That is the whole investment equation, and the mix of physical and digital is really important as we look forward. There absolutely will continue to be physical stores and high streets that include stores on them, but they will be different from what we have seen in the past. We raised business rates in our report in that those that operate in physical property talk a lot about it being a disincentive to making more of that investment at local level.
Q452 Richard Fuller: One of the themes that we have looked at in this inquiry is the challenge for existing legislation and regulation in different sectors where there has been some digital transformation, for example in digital music issues of copyright protection. We talked to taxis and Uber, and that is about protecting or not protecting the rights of certain types of producers, or Airbnb and the hotel industry with consumer rights when they go into certain buildings that have regulations and those that do not. I guess, just picking up on what Ms Dickinson has just said, one of the issues where there may be a disparity between the two parts of your industry is business rates. If I can, I am going to ask you a few questions, and as you have been in the industry for 16 years, Paul, I am not going to try to catch you out on anything. I looked at your website—Amazon’s corporate website—and you list your locations in Europe. In the UK you have fulfilment centres, customer service centres and corporate offices. Where are your shops?
Paul Misener: Our shops? As you undoubtedly are aware, we do not have storefronts typically, with the exception of the one we have launched in Seattle. We pay business rates for our office space, wherever it is, say in London, Cambridge or Edinburgh. We also pay business rates on the huge facilities that we have distributed around the country. Look, there are a variety of business models, as you can appreciate; Ms Dickinson has talked about how there is this mix there. We will always pay what is owed.
Q453 Richard Fuller: And you do, but let me just go through a specific couple of examples, because we are lucky enough to have a distribution centre for Amazon quite near my constituency, Marston Gate Distribution Centre, which is 67,000 square metres and pays £52.50 per square metre in business rates. In Bedford we are also fortunate to have a Waterstones book shop, which is at 11 to 13 Silver Street, Bedford. I hope anyone in Bedford today will go look and purchase a book there. Their adjusted business rates are £850 per square metre. That is 16 times what you pay per square metre at Marston Gate. Is that disparity sustainable?
Paul Misener: This is a challenge and choice for policymakers to make.
Q454 Richard Fuller: What would be your advice? You have been in the industry for 16 years. There is nobody—nobody—in this room who understands the tensions between existing retail and online retail better than you. Please, what is your advice?
Paul Misener: My advice would be to take a long hard look at it. You have a very hard job. The policy choices that face you are very difficult. We will pay whatever you come up with in these business rates. The challenge that you face is not binary; it is not one kind of business model versus another. There is a real challenge: what about the companies that are bricks and clicks. What about those that have some facilities in downtown Seattle and other distribution centres elsewhere? It is a real challenge; I acknowledge that. I confess I do not have the answer. We will pay whatever you end up requiring.
Q455 Richard Fuller: I appreciate that, but it is often said one of the reasons large global technology companies get a bad rap from people is that you do not pay what you are due; you do pay exactly what you are due. You and other companies do. Maybe you could help advise, but that is 16 times disparity between high street and distribution centres. My instinct is that disparity is too strong even in a mixed environment. There is the long-awaited rates review—and heaven knows how ambitious the Chancellor will be in a couple of weeks’ time—but perhaps some narrowing of that might be in order. Do you have any particular resistance to that?
Paul Misener: It might be. I will acknowledge that it might be in order. There are a lot of advantages, obviously, to being on the high street as opposed to in a remote area. Whether they are appropriately balanced right now, I do not know. I really do not. I acknowledge that is worthy of a review.
Helen Dickinson: My perspective on this is it is less about how the cards are shuffled within the retail industry and much more to do with the fact that property taxes have become too big a proportion of the total of business taxation. If I look across the retail industry as a whole and do not differentiate between channels, we can see that the industry is about 5% of the economy, so 5% of GVA. It pays about 10% of business taxation, across all the main taxes including business rates. It pays about 25% of business rates. Our recommendation to Mr Osborne, as he looks forward as part of his budget, is that the solution to business rates lies in looking at what he is going to do around the business tax roadmap and how all taxes fit together, not looking, particularly within retail, at how you shuffle the cards within the industry, because most business now operate across different channels. We need to reduce the burden—to your Waterstones example, which sits on prime retail space—so that burden is spread across a bigger proportion of business taxation.
Q456 Richard Fuller: That is very interesting, and I was not anticipating that response, because I thought you would talk about differences and the unfairness between different sectors of retail. Just to be clear, your point of view is that, when it comes to rates, we are past those concerns—the fact I am bricks and mortar and Amazon get an unfair deal because they are just online. That is the argument of days gone by, and now you are together in the view that it is about the burden of property taxes on retail that is important.
Helen Dickinson: Indeed, and the other part of it: property tax as a proportion of business taxation, and the other aspect is international tax, so the work of the OECD and how international businesses in the 21st century should be taxed when they can operate across different borders. There are still some within the industry who might talk about this bricks-versus-clicks unfairness, but those two issues are the root of where that comes from. That is why our position is about reducing the burden on property tax such that it removes the disincentive from operating in physical space.
Q457 Chair: Before I bring Chris in, can I just follow up on that? We took evidence with regard to the steel industry in terms of making sure there is a level playing field regarding the rateable value of new plant and machinery on business rates. If you were in Mr Osborne’s shoes, with the budget about to be published in 10 days’ time, and you want to reduce business property taxes, where would you then increase taxes in order to make sure that it could be revenue neutral, as he wants it to be?
Helen Dickinson: I would look across the totality of his forecasts that sit within all the income that comes into the Treasury. I completely recognise that there is a need to balance books, but what I am really clear about is that the answer does not sit within property tax and how we spread it among us. I do not have an answer to your question. I just think that we need to look across different industries and how all of it fits together—whether it is corporation tax, national insurance or other property taxes.
Q458 Chair: One final question from me before I bring Chris in. There are other aspects of taxation, air passenger duty for example, where representatives sometimes say, “If you lowered the rates, you would increase the tax take because it would incentivise increased activity”. Have you any evidence as the BRC in respect of if you reduced business property taxation, particularly in retail, the tax take would increase?
Helen Dickinson: We have considered it, but the challenge with business rates is that, even if a property is empty, they are still subject to some small release and still have to pay business rates. From a Treasury point of view, that is great news. We have not been able to work out what exactly the secondary effects are, because we were given a very strong steer by the Treasury that when they do their modelling they are not taking those into account when they are assessing the OBR forecasts. It is a bit of a no-brainer if you have got an empty property versus one that is employing people and generating local economic benefit—I am sure you have all seen it in your local constituencies.
Q459 Chris White: Following on from Michelle’s question about your new building in Seattle, you said, “Let us see if our customers like it”. I am going to make a prediction here that they will like it, because we have had bookshops and the general public have liked them. We have fewer book shops now because of some of your business model, which is incredibly effective. There is a sort of personal question I would like to ask you: how do you feel about local bookshops closing down as an effect of your business model? There is also a more general question with respect to how you developed a relationship with Morrisons and the effect that will also have on our high streets. How do you envision our high streets looking in five or 10 years’ time? Very different? The same? Better?
Paul Misener: Thank you for the questions. As far as the bookshops go, many of us old-time original Amazonians, the first generation of us who came in, are very bookish people. I happen to be an electrical engineer/computer scientist turned lawyer; I love my books. I have got a collection of at least 2,500.
Chris White: That sounds like a distribution centre.
Chair: It is a fulfilment centre.
Paul Misener: I am not selling. We are bookish people: we love our books; we love book shops. We have done what we can to help them sell through us to reach markets well beyond where they could reach currently. Much of the demise of the small bookshop occurred before Amazon was a factor; it occurred largely because of big box retailing. Since then we have endeavoured to help bookshops in a way the big boxes have not. They cannot; they are not set up to—we are. Many of the tens of thousands of third party sellers who sell through our website that are based in the UK are bookshops. We are giving them a reach that they did not have before and a reach that others have not given them.
You asked me about Morrisons as well. Again, that deal was to carry some of Morrison’s branded products on our website, and we view that as a good thing: it increases the selection available to our customers, which is always good, and they are a very well respected brand. We wanted to bring that to them. Where do I see the high street? It has always been a mix. Again, if you think about it, when I started—when I made the leap to go to this little start-up called Amazon—the predictions were that within five years it would be something of the order of 30% or 50% of retail; it has not happened. We are still at 13% and that is the highest in the world. I anticipate—I hope—it grows over time, but for the foreseeable future it is going to be a mix of things. It is going to be a mix within certain companies that do both things, and then there will be some that are purely online and some that are purely offline.
Helen Dickinson: On the high street end of the question, if you look across the country we will see fewer physical shops, which takes you back to the business rates equation, because unless something is done to remove those disincentives, that will partially determine how many fewer. We will also see a difference in terms of experience, in terms of what those physical shops will be doing, because of the fact that their channels are much more blurred. We will see more retailers offering what people in the industry call “theatre”: having a reason to draw people in that is much less about a functional exchange of a transaction and more about the leisure and pleasure of shopping as an activity, so less retail, more leisure.
We are talking a lot within the Future High Streets Forum, which is a joint Government-industry initiative with Marcus Jones in DCLG, about how you facilitate the restructuring that needs to happen at local level, whether it is conversion to housing, bringing more people in, or whether it is a stronger night-time economy. I see high streets absolutely playing a critical part in the future, but they will, as they have done over the last 50 years, look different from today, so we are in a process of reinvention. It has some challenges associated with it, particularly in some of the more deprived areas of the country, because that is where we will see the impact hit hardest and the most significantly, and from a policymaking point of view we need to address that.
Q460 Chair: I am very interested in your point about reinvention and innovation and making sure that the high streets will look different. In your experience, which areas—towns, cities—are doing this well? Can you cite any areas of good practice?
Helen Dickinson: Certainly there was a competition at the end of the last, a Great British High Street competition. That is the second year it has been held. There were over 200 entries into that competition, and the biggest learning is that the critical success factor at a local level around those that do it well and those that are struggling is about the quality and the involvement of partnerships. That could be formally through a bid or an informal group of people who are doing something locally—ideally with the involvement of the local authority—and have an idea about how they can draw people in and create some of that theatre, a destination, and reasons for people to shop locally. It is about the quality of local partnerships.
Q461 Chair: Is there a correlation between the ability of partners and high streets to respond and the relative economic deprivation in that area as well? There may not be enough money to invest in the theatre that you were suggesting.
Helen Dickinson: Yes, there is, to a degree. There is still plenty of untapped potential in high streets where those sorts of partnerships, groups of people, do not necessarily exist or do not have the right involvement.
Q462 Chair: Do you think, in general, online retailers are innovating better and more successfully than people who are just in the high street? I know it is not an either/or these days, but what is your sense about that difference between online and high streets in respect of innovation?
Helen Dickinson: There is an issue to do with perhaps smaller businesses that operate at high-street level. Again, that comes back to some of the work that the forum is undertaking. There are going to be some pilots for something called the Digital Hub, whereby the idea is to have a physical presence of some expertise in local areas that businesses in that area can tap into to raise their capability on what digital means at a local level.
Q463 Chair: Paul, you mentioned innovation. Amazon is very much an innovative company. Could you tell us a little bit about what you have been doing and what you plan to do in the future?
Paul Misener: I would be happy to. We would like to think of ourselves as an innovative company. We want to innovate very much on behalf of our customers: to offer new services and products to them. One of the areas in which we have also taken a learning that we developed in the context of our core retail business is in cloud computing. I am not sure you are all familiar with this term or this service. It allows businesses to use computing only as they need it, sort of like a utility. For start-ups this is radically important, because to be a start in the digital economy almost by definition you need computing power: you need software; you need to be offering information kinds of services in the digital economy. 10 or 15 years ago the only way to have done that for a start-up would have been to use your early capital, go out and buy computing hardware, buy software, run on it and probably pay a couple of programmers to run it for you. That is all capital investment before you have done anything to help out your own business—your novel idea.
Cloud computing services now make available that kind of computing capacity—storage, analysis, analytics, computation—as a service, so you only pay for what you need and you do not pay for what you do not need. Today, our cloud computing business, which is one of many, is called Amazon Web Services. It provides computing services to fairly large companies such as Shell Oil and Netflix. You may be familiar with the cab calling service Hailo. Hailo runs its entire infrastructure on Amazon Web Services’ cloud business. That way, especially when they were in the very start-up phase, they did not need to spend capital on computing, because they could just rent it from us, and they could have from others. That kind of innovation, again, is really exciting for somebody who saw Amazon as a start-up and now is in a position to help out start-ups like Hailo.
Q464 Chair: In terms of innovation, thinking a couple of years ago about Kindle, is the accusation that that restricts choice a valid one? I have to have a Kindle in order to have an e-book or whatever, and that means I will not be able to transfer and have that portability. In many respects you are almost restricting choice and competition there. Is that fair?
Paul Misener: No, it is not, because we offer our customers interoperability—I think that is typically the phrase used—where it matters most. We recognise that our customers have a variety of devices. I have an iPhone, I have many iPads, I have several Kindles, as I mentioned. We wanted to make sure that, if you purchase a Kindle book, it is available on every single one of those devices. One of the features of the format that we use—the Amazon Kindle format—is that it allows you to move from one device to another seamlessly without having to go back and try to figure out where you are in a book. You can start reading at night at the bedside put the book down, and the next morning on the tube you can read it on your iPhone. It picks up exactly where you left off.
Chair: I just use a train ticket as a bookmark.
Paul Misener: Not that book. That kind of innovation in the format is super important. We would not want to see that kind of feature lost. Providing it across the devices really recognises the reality of today: that not everybody has a Kindle or that is not their only device; they multiple devices on which they want to read.
Q465 Chair: The digital economy is changing commerce very rapidly, and both of you have already mentioned how Britain is the leading e-commerce nation on Earth. What are the barriers to making sure we can realise even further potential? What should we be addressing in Committee in terms of the things that are holding us back?
Helen Dickinson: We have talked about business rates, because I see e-commerce and physical as being part of the customer-facing solution. Skills are another big topic that we could potentially go into. I did not take the name of the lady that was talking about the apprenticeship levy. We want to ensure that the apprenticeship levy becomes part of the solution around what the skills that will be needed within retail in the future look like. That—which is the same point the lady was making—is fundamentally about the flexibility over where the money can be spent, because retailers do a lot of innovation and need to ensure that the training they undertake is most valuable to them. We know, from a third party point of view, that is not necessarily available at the moment. Business rates and skills would be the two biggest barriers.
Q466 Chair: Is that true for Amazon as well, Paul? Do you find it difficult to recruit talent?
Paul Misener: It depends where, but we have found, however, that the training aspect of our role at Amazon is extremely important. We train our employees to be able to do their jobs, and so certainly if they come in with technical skills it is very helpful, even at the entry level. We also have introduced a programme called Career Choice, whereby we will pay up to 95% of the tuition for our hourly paid workers in our fulfilment centres to go off and get a certificate or an associate’s degree in any high demand occupation, even if it is irrelevant to Amazon. It gives the workforce a chance to say, “Look, if I want a different career, I can train for it, just so long as it is in a high-demand occupation”. Although we are not funding training in philosophy, for example, we are in nursing, even though nursing is not a part of what Amazon employs. I do believe the very first person who went through—I am not certain of this—our Career Choice programme, getting that tuition paid by Amazon, now is a nurse working somewhere else. It is a view to ensuring that the necessary skills are available in society more broadly.
Q467 Chair: Are you happy with the working conditions in your fulfilment centres?
Paul Misener: Yes, absolutely.
Q468 Chair: I may be out of date here, but the book The Everything Store talks about a points system, where if you are late for work you have half a point. If you call in sick, there will be a point. After six points, you are automatically fired. That does not happen in the UK, does it?
Paul Misener: We have a system of evaluating our performance like any other company does. Ms Milling has the Rugeley facility in her constituency and she has visited it a couple of times. I would invite the entire Committee or members of the Committee to come see. Come talk to the workforce; come see what it looks like. If anything, it is really cool. Even for somebody who has been there for so long, the nerd in me just loves the place because of the cool automation, how it all works and just the scale of it all. If you were to come and visit either with or without me, just to go in and see and talk to the people and see what they think of the conditions there, you will get a much more clear perspective. It is an open invitation.
Chair: Thank you. That is very kind.
Q469 Richard Fuller: That might be fun. You definitely have to come, though. If we go to your facilities in the UK, what proportion of Amazon employees are employed and what proportion are agency workers?
Paul Misener: It matters seasonally. Our workforce has to vary. Retail generally has to do this for seasonality, including around Mother’s Day—it is true.
Richard Fuller: I do not think you should have said that.
Chair: Please do not mention Mother’s Day, Paul, certainly not to Chris.
Paul Misener: I don’t want to know. Currently we have 12,000 permanent employees in the UK. That will rise to, we think, at least 14,500 by the end of this year. Within the past week or so we announced a new facility that is going in in Leicestershire. I hope I am not spilling the beans on this, but within the next few days we will be announcing another facility in the North West. Those two facilities together will account for something like 1,500 new jobs. Those are permanent jobs. At present we have of the order of several thousand temp workers.
Richard Fuller: Several thousand could be?
Paul Misener: Around 4,000 or 5,000. I can get the precise number for you, but it is of the order of 4,000 or 5,000 temp workers. We are still coming off of Q4, which is when we hire the most temps. That is where we get many of our permanent workers; the temp workers who want to stay on are what we call “converted”, and then come on as permanent workers thereafter. That is partly how we grow the workforce.
Q470 Chair: On the living wage, this is another Government policy that has been announced and will be pursued over the next five years. One of the three sectors where it is expected to have the biggest impact on employment is the retail sector. Could you just share with the Committee your thoughts about the living wage and any positives or concerns that you have about it?
Helen Dickinson: The industry is supportive of the living wage in principle. There is no doubt from a retail point of view more needs to be done around low pay. I do not know if you have seen our report, but that highlights that the incidence—so the proportion—of people on low pay within retail has been rising over the last decade or so. There is absolute support in the first instance. The question is how the economics of it will pan out over the next few years. We have done some work to assess what the cost of that might look like, and you have got to make various assumptions: we are looking at between £1 billion and £3 billion a year. If you combine that with the increases that we expect to see if business rates do not change, plus the cost of the apprenticeship levy, which is another add on, that adds up to about £14 billion over the next five years, which is equivalent to about 20% of retail industry profitability.
The question is around how unevenly that will land across different parts of the economy. That is what we were highlighting in the report: more vulnerable people, more deprived areas and smaller business. It comes back to business rates again. It comes back to the independence of the Low Pay Commission around making sure they are independent to look at the trajectory over the next five years to 2020 and how that will impact on a regional level. The third thing is about the apprenticeship levy.
Q471 Richard Fuller: Mr Misener, for Amazon, with your agency workers, do you have protocols in place to ensure that your agency workers obviously are paying their employees consistent with the national minimum wage and would do that for the living wage?
Paul Misener: Yes, of course, and in fact for our permanent employees we—
Richard Fuller: No, for your agency workers.
Paul Misener: I understand. I said “and” for our permanent employees we raised the entry-level wage to £7.20 a good six months in advance. It is really important to recognise, however, that the vast majority of the employees at Amazon are not at an entry level wage. It is at £7.20 now, but they very quickly move up; within a couple of years it is another 10% on top of that and so on. The percentage of employees that we have at entry-level wage is pretty small.
Q472 Richard Fuller: It might be interesting to see for Amazon what proportion of your employee base is paid now what the living wage will be in 2020, more than £9 an hour, if you have that information. We have seen in other sections a number of companies have moved ahead already—Lidl and others—about saying, “We are going to pay the living wage”. They are moving to it now. If Amazon were to be able to demonstrate it is doing the same thing, that would send a very powerful message.
Paul Misener: I would hope that we are not also just focused on the wage, because we provide our employees comprehensive benefits, including private health insurance, a pension plan and even stock. Our permanent employees get stock, and over the past five years or so that stock is valued at something like £1,000, so the additional benefits we give our employees are not insignificant.
Q473 Paul Blomfield: You present a very benign impression of your operations: encouraging competition, happy to see people undercutting you. You will know that is not a view shared by booksellers and book publishers. The Booksellers Association surveyed publishers, and 42% said in the last two years you had attempted to prevent them from offering a better deal to anyone other than Amazon. How does that fit in with the impression you have tried to give us of your business?
Paul Misener: I am not sure exactly about the statistics that you cite. We work with publishers.
Q474 Paul Blomfield: It is not true, then? You do not try to tie publishers into deals where they will not undercut through any other seller.
Paul Misener: We have MFN clauses with respect to e-books and e-books alone. Those MFN clauses cover pricing and other characteristics—release dates and those sorts of things. It is largely because of the opportunities for, frankly, collective action on their part. You may have seen yesterday the US Supreme Court refused to hear the Apple appeal. This is an appeal of a settlement that was reached a couple of years ago with the American Department of Justice in which Apple agreed to pay $450 million because of the accusation that they had colluded with major publishers to keep e-book prices high. E-books are different from physical books.
Q475 Paul Blomfield: Can we just concentrate on physical books, then? Are you saying that you do not try to force publishers to not offer a better deal to anybody other than Amazon for some physical books?
Paul Misener: I will have to get back to you on those specific accusations being made there. I am sorry I do not know about that.
Paul Blomfield: You cannot say that you do not do it.
Paul Misener: I am saying I do not know the answer to your question specifically. I am saying, though—I will say—that we have endeavoured to keep prices low for our customers all along. There are often negotiations. One of the very prominent deals or negotiations that you may have seen was with respect to Hachette. There was a ton of controversy about the business arrangements between our company and theirs. It was eventually resolved. We find ourselves working with publishers all the time, and we find that we agree on more things than on which we disagree, but of course there is sometimes going to be business term negotiations.
In the context we recognise, like our customers do, an electronic book simply ought to cost less than a physical book. There is not the paper, ink, storage or shipping—all those things that go into a physical book. It ought just to cost less. We really have had some fairly high-profile negotiations with some publishers over the last few years with respect to e-books.
Q476 Paul Blomfield: Yes. We will get back to some physical books. I wonder if you could explain to me what you thought your CEO, Jeff Bezos, meant when he said, “Amazon should approach these small publishers the way a cheetah would pursue a sickly gazelle”.
Paul Misener: Wow.
Paul Blomfield: What does that say about your business? What did he mean by that?
Paul Misener: I am not even sure that quote is real. I do not know it, I am sorry.
Q477 Paul Blomfield: It is certainly real; I can provide you with the origin of it. You know this company inside out; you have worked in it all this time. What do you think he was thinking?
Paul Misener: Again, I am not about to acknowledge that that is something he said, but let me tell you how we think about working with our publishers. The publishers are going to be around for a long time. They provide a great service. We work with them, and for the foreseeable future they will be partners in business with us. We also have started self-publishing options for authors to be able to avert the gatekeeping function that publishers of necessity have. Publishers, of course, have to make choices about upfront investments. When a publisher takes on an author, the publisher has to say, “We believe that this author’s works will sell, because we are going to put up an upfront investment into editing, typesetting, printing and then distributing lots of books”. All those things are expensive upfront costs. As a result, of necessity they have to act as a gatekeeper. We have started self-publishing options for authors just to avoid that very necessary gatekeeping function. We see these as symbiotic relationships where we are continuing to work with the publishers but also allowing authors to have self-publishing options available.
Q478 Paul Blomfield: Do you encourage showrooming, which is obviously a concern of booksellers?
Paul Misener: Yes. No, we do not.
Q479 Paul Blomfield: Why did you develop the Firefly app, which enables customers to pick up a barcode and then link directly to your online sales function?
Paul Misener: We were not the only ones who had that functionality available, but I understand that concern. I have used the Firefly app to rebuy things that I already have. I have things in my house; I can just scan the barcode and, boom, I can repurchase it. That is one application of it. We recognise that high street sellers have an advantage over us because of the immediacy of the purchase. That has always been the case, but people have been price comparing for a long time and the web has made it much easier. I have mentioned before that we allow third party sellers to come on our very website and undersell us. There is the result that 47% of units sold through our site are not sold by our retail business.
We actively encourage people to price compare. There are also price comparison sites off of Amazon; they are called shop-comp sites. They are shopping comparison sites, which crawl the web for the best prices. This is the kind of thing that simply did not exist pre-web. Pre-web, if you were fortunate enough to have a few buying choices in your town, you had to go to each one. If you had five shops, you had to go to at least five of them to find the lowest price, maybe six, because you had to go back to the one with the lowest price. That kind of price comparison online is far easier and it disciplines all sellers online, including our retail business.
Chair: May I, on behalf of the Committee, thank you both? That has been very informative and I can certainly say I have enjoyed it. That is going to help us produce recommendations for our digital economy inquiry, so thank you very much again for your time. We really appreciate it. Thank you.
Oral evidence: The Digital Economy, HC 571