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Michigan Tax: Animators, video game makers drawn to Michigan

Video game developer Nathaniel McClure had never been to Michigan before he began scouting the Great Lakes state last year as a possible choice for relocating his company.

After seven visits over six months, McClure was sold. The 34-year-old uprooted his life in Los Angeles and moved to Michigan to open a digital studio.

The attraction was simple: He could do the same work while taking advantage of the state's steep film industry tax breaks.

"Forty-two percent is a lot of money," said McClure, CEO of Scientifically Proven Studios, which opened this year in Farmington Hills.

Big Hollywood productions like "Gran Torino" and "Red Dawn" may get top billing when it comes to the beneficiaries of Michigan's film industry perks. But animators, video game developers and digital media firms also are capitalizing on the 42 percent tax break, helping this small, emerging, high-tech industry grow in the state.

Attracting such high-paying, permanent work to Michigan has the potential to make a big economic impact and could further bolster the state's reputation as a studio production hotspot.

"For one thing, it's definitely the future," said Ken Droz, spokesman for the Michigan Film Office. "When you talk productions, they're not all shooting on film anymore."

Looking beyond movie production could also help Michigan land longer-term projects -- most video games take multiple years to complete -- and help attract highly educated professionals, state officials and industry officials say.

"If you do capture a major motion picture in Michigan, the money is going to be quite significant," said Steve Siwek, a Washington, D.C.-based economist who has studied both industries. But digital production will tend to deliver permanent, higher-paying, computer-literate jobs.

While the digital production industry is smaller than the $80.7 billion motion picture industry, it has shown steady growth. Computer and video game sales totaled $11.7 billion in 2008. For a period before the recession hit, the industry had been posting annual sales growth in the double digits, according to the Entertainment Software Association, a Washington, D.C.-based trade group for computer and video game publishers.

The sector's expansion in Michigan far lags that of the film and television industry, even though digital work was included in the original tax incentive bill that went into effect in April 2008.

Among the 100 production projects granted tax breaks from the state, a half-dozen have fallen under the category of digital media, Droz said.

That's largely because the technology-intensive work takes longer to ramp up and often requires creating a permanent local work force, he said.

Already, several large and small digital production houses have set up shop in Michigan.

Pixofactor Entertainment in Royal Oak last year moved to Michigan from Florida to take advantage of the tax credit. The 3-year-old company works closely with video game powerhouse Electronic Arts Inc. in Redwood City, Calif., and develops games and downloadable applications for devices like the iPhone.

While Pixofactor doesn't receive the state's tax credit directly because it's a game developer, the incentive gives the company an advantage when bidding for work, said Sean Hurwitz, the company's president. A $1 million project would cost a client only $600,000 with the tax break, he said.

"It makes us a heck of a lot more competitive," Hurwitz said.

The company has plans to grow its work force by 200 during the next year or two, mostly by hiring local artists and programmers, he said.

In Plymouth, PC gaming company Stardock plans to spend $18 million during the next decade to hire employees and expand its facilities to include a new $900,000 studio. The 60-employee firm was founded in Michigan more than 20 years ago.

CEO Brad Wardell said the credit helps give Michigan technology firms a boost in overcoming other economic challenges, such as an otherwise relatively high state tax burden and a weak high-tech business community. It also helps attract talent and retain Michigan graduates who may have otherwise left for jobs elsewhere.

Some video game producers say the state could do more to attract work here by extending the credit to Michigan companies that contract with large game publishers. Right now, only publishers can earn the tax credit because they own the intellectual property rights, and many are based out of state.

The industry's expansion in Michigan has had growing pains.

Last year, Wonderstruck Studios LLC, a Los Angeles film studio, was working with another California studio to launch Detroit Center Studios, envisioned as an $86 million digital animation and visual effects studio at the former MGM Grand Casino site.

But plans for the MGM site broke down in negotiations.

Wonderstruck has since set up shop at Ford Field in downtown Detroit. It has projects in the works and is hiring, said Thad Johnson, an emerging markets director with Wonderstruck, who declined to offer specifics, citing confidentiality agreements.

"The industry at large views Michigan as the next frontier for animation production," he said.

Dan Hewitt, a spokesman for the Entertainment Software Association, said it's no surprise Michigan's tax credit is generating a favorable buzz. "We go where there is a talent pool," Hewitt said "That's why you see pockets in Florida, Massachusetts and Louisiana" where there are tax credits from production work, he said.

The recession could even work to Michigan's advantage, said Scientifically Proven's McClure. Many large digital studios have cut staff, so more programmers and designers are on the move. As technology advances, fewer people are needed to do the same amount of work, paving the way for smaller start-up firms.

"It's kind of like the Wild West," McClure said of Michigan. "There is tremendous opportunity. It's just not focused or directed yet."
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