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Western Canadian Capabilities in Wireless Communications, Gaming and Software Services: World-class Capability with Investments by Leading Global ICT Companies
Western Canada’s ICT sector is the second-largest ICT cluster in Canada (after Ontario), with considerable breadth and energy. Strong research infrastructure has attracted and retained world-class specialists in many areas such as wireless communications, gaming and software services, and, as a result, an increasing number of foreign investors have already established their R&D centres in Western Canada.
“ICT” is a broad term that covers all technical means of producing, communicating and organizing information. According to Statistics Canada, it includes older technologies such as radio, copper line and television broadcasting, and newer technologies such as Web development and mobile devices19. Therefore, data on Western Canada’s ICT sector may vary across different sources, depending on the definition of the ICT sector used. However, we think that the most significant growth segments in the ICT sector clearly are software development, wireless communications and digital media. In this report, “ICT” refers to these three sectors.
Employment Levels, Contribution to GDP, Key Foreign Investors
British Columbia’s ICT sector has more than 6,000 companies, and generated approximately $9 billion in revenues in 200820. BC Stats reports that employment in key job categories in British Columbia’s ICT sector in 2008 was as follows: 32,400 in computer system design services; 24,100 in broadcasting and telecommunications; and 7,300 in Information Services and Data Processing Services21. We expect that these numbers will be growing rapidly over the next decade, as more students graduate from the province’s educational institutions and more highly-skilled immigrants come into the province from around the world. British Columbia’s Digital Media and Gaming sector is also large, with leading companies such as Electronic Arts and Radical Entertainment expanding their operations. Within this province, the sector had annual revenues of $2 billion in 200822.
Employment in British Columbia’s ICT sector is concentrated in Greater Vancouver, where global firms such as Microsoft Corporation, Intel, IBM, Broadcom, 3M, Eastman Kodak Company, Harmon International Industries, Sophos, Oracle, Business Objects, Nokia, Honeywell, Raytheon, Electronic Arts and Seiko Epson have their operations23. In addition, local firms such as TELUS, ACL Services Ltd., D-Wave Systems Inc., MPR Teltech, MDA, Sierra Systems, PMC-Sierra and Sierra Wireless are also growing rapidly in British Columbia. The Information and Communications Technology Council (ICTC) estimates that, in 2006, internationally educated ICT professionals represented 18.7% of total ICT workers in British Columbia, compared to the national average of 10.3%24. Immigrants and international researchers therefore play an important role in B.C.’s ICT sector.
In Alberta’s ICT sector, there are nearly 4,300 firms that, taken together, employ about 54,500 people and generate over $10.2 billion in annual revenues25. Among the 54,500 employees, it is estimated that about 16,600 people work in the software industry, and 16,000 in the Wireless sector26. Leading ICT firms include Shaw Communications Inc., GE Power Systems Canada Inc., Hemisphere GPS, Nexen Inc., Allstream, Flextronics, Colt Engineering Corp., IBM and Schlumberger Canada27. There are also a number of leading wireless firms, such as Meta4hand, Blackline GPS, Novatel, Wedge Networks, Hemisphere GPS, Redwood Technologies and Baseband Technologies28.
In Manitoba, 15,000 workers are employed at ICT firms. There are about 2,500 computer programmers and 1,500 computer and network operators, and web technicians in the province29. Fifteen hundred leading ICT firms in the province include EDS, IBM Canada, IDERS, ImagiNET Resources Corp., Momentum Healthware, Online Business Systems, Protegra Technology Group and Emerging Information Systems Inc. ICT firms in Manitoba are concentrated in Winnipeg.
In Saskatchewan, there are about 300 information technology firms in the province, and its ICT industry had revenues of $1 billion in 200830. Saskatchewan’s software industry employs approximately 14,000 workers31. IT firms in Saskatchewan are concentrated in Saskatoon and Regina32. Growing ICT firms in Saskatchewan include Cronus Technologies Inc., Itracks, MarkeTel Multi-Line Dialing Systems Ltd. and Technology Management Corporation33.
Research and Development Facilities
R&D, combined with commercialization, is key to the growth of the ICT sector. Some of the world’s best ICT research facilities are located in Western Canada. These include:
TRLabs, a Calgary-based R&D consortium focusing on ICT and the largest consortium of its kind in Canada. TRLabs functions as an R&D vehicle by connecting industry partners with researchers, university professors and students, and helping them create innovative technologies. It has five labs (Calgary, Edmonton, Regina, Saskatoon and Winnipeg), and has created 369 commercialized technologies and 83 active patents34. The Network for Emerging Wireless Technologies (NEWT) is a division of TRLabs. NEWT is a wireless testing and development centre that provides hardware and software design, implementation and test support to developers of wireless products and services.
WestGrid (Western Canada Research Grid) is a consortium of western Canadian universities that provides high-performance computing (HPC) resources for Canadian research projects. These include systems and applications programs, data storage, networks and programming35.
MiNa, the Microsystems and Nanotechnology Research Group at the University of British Columbia, is also contributing significantly to advancing ICT in Western Canada. Areas of research covered by the Group include nanodevices and computing.
The National Institute for Nanotechnology (NINT), Canada's flagship nanotechnology institute, was established in 2001 and is operated as a partnership between the National Research Council and the University of Alberta. NINT aims to establish Alberta as a leading centre of innovation in nanotechnology, and is funded by the Government of Canada, the Government of Alberta and the University of Alberta36. The facility houses more than $40 million of the latest generation of scientific equipment, including electron and scanning probe microscopes, and chemical and material analysis instruments37.
In Saskatchewan, the Saskatchewan Research Council operates a 3D Virtual Reality CentreTM. This centre employs the latest-generation high-resolution stereo projection equipment, which can project computer-generated active stereoscopic 3D images on three screen modules of 8 feet by 10 feet. The technology allows the user to navigate in all directions and choose various camera positions, including viewpoints not available in real environments.
Manitoba also has leading-edge research facilities in ICT – most notably, the Engineering and Information Technology Complex at the University of Manitoba. This facility has advanced computer-based product development tools, including a 40-seat computer laboratory as well as a mini-simulated manufacturing laboratory with a rapid prototyping machine, mini-numerical controlled machine tools and a virtual reality system.
In British Columbia, the University of British Columbia (UBC) has the Advanced Materials and Processing Engineering Laboratory, where scientists and engineers specializing in various fields, including electrical and computer engineering, gather to invent innovative technologies. Also, the Institute for Computing, Information and Cognitive Systems at UBC, and the Centre of Scientific Computing at Simon Fraser University provide a visible focus for computational research on the campus and in the wider Pacific Rim research community. Other programs offered in British Columbia include a unique Masters of Digital Media Program offered jointly by the University of British Columbia, Simon Fraser University, Emily Carr University and BCIT.
Existing Government Programs
Both the federal government and provincial governments offer many types of supports for the ICT industry in Western Canada, and we think that this will continue to be a significant factor in global companies’ decisions to invest in the region.
The Government of Canada has the Scientific Research and Experimental Development (SR&ED) program that encourages businesses, including small and start-up companies, to develop R&D-based new products or processes. SR&ED provides companies with either refundable or non-refundable tax credits for eligible expenditures incurred in Canada for R&D activities38, and is considered one of the most generous R&D tax incentive programs in the developed world.
At the provincial level, British Columbia has some of the lowest tax rates in North America and also provides various tax credits and incentives for R&D work. British Columbia’s R&D Tax Credits provide qualified R&D firms with a 10% tax credit against provincial income tax, in addition to receiving the federal SR&ED tax credits39. The B.C. government also has programs to attract investors, such as the International Financial Activity Act (IFAA) and the Small Business Venture Capital Act (SBVCA). These programs help start-up ICT companies in the province commercialize their ideas.
The other three provinces have tax credits to encourage R&D as well. Alberta’s Scientific Research and Experimental Development Tax Credit is worth 10% of eligible expenses40. The Government of Saskatchewan also has the Saskatchewan Research and Development Tax Credit of 15% of qualifying R&D expenditures41, and the Government of Manitoba’s Manitoba Research and Development Tax Credit provides a 20% non-refundable tax credit applied against Manitoba corporate income taxes payable42.
Both federal and provincial governments also offer support for promoting western Canadian technology to the rest of the world. The Government of British Columbia sponsors exhibition space for Canada Pavilions at various trade shows such as CommunicAsia, the largest Information and Communications Technology trade show in the Asia-Pacific region. It also had an active Olympics pavilion campaign and stepped up marketing efforts for B.C.-based companies in both the 2008 Beijing Olympics and the 2010 Winter Olympics in Vancouver/Whistler. We think that it is extremely important for Western Canada’s ICT companies to connect with firms and organizations in the Asia-Pacific region, considering Western Canada’s potential to grow as a North American gateway to the Asia-Pacific market.
We also see some innovative incentives for R&D provided by the Government of Alberta. The Alberta Innovation Voucher Pilot Program, launched in November 2008, provides small technology-driven businesses with Innovation Vouchers that can be used as payment for services offered by approved service providers. Preference is given to businesses in emerging growth sectors, including ICT, and the list of approved service providers includes NINT, TRLabs, NanoFab at the University of Alberta, the Alberta Centre for Advanced Microsystems and Nanotechnology Products and the Alberta Research Council.
The Government of Alberta also supports various groups that help energize the ICT industry. For example, it supports Alberta Deal Generator (ADG), which facilitates investment in high-growth Alberta technology companies by connecting companies with its large network of accredited investors. The Government of Alberta also has various endowment funds, such as Access to the Future Fund, a $3-billion endowment that supports innovative post-secondary initiatives, and the Alberta Ingenuity Fund, a $1-billion science and technology endowment fund that encourages innovation. In addition, the Government of Alberta has established a Research and Development Associates Program that gives ICT companies two years of support for recent Master’s and doctoral graduates hired to conduct research within the company (a $55,000 annual stipend and a research allowance of up to $7,000).
Business Case Analysis: World-class Capability
Our analysis of IBM-PLI data shows that Western Canada’s ICT sector is globally competitive across the three sub-sectors considered in this report. In the Wireless Communications sector, Vancouver and Calgary ranked 18th and 20th respectively, in terms of their quality scores. This was likely driven by the fact that the Wireless Communications sector in both cities has a niche focus on applications, Global Positioning System (GPS) and Location Based Services (LBS) development, and some focus on carrier-class network development products. Moreover, from a profitability perspective, both western Canadian cities ranked 3rd and have comparable cost structures to those of centres such as Toronto, Montreal, and Waterloo, and better cost structures than those of other U.S. and international wireless communications clusters.
In gaming and software services, IBM-PLI data show that western Canadian cities have a superior quality-profitability advantage. In the Gaming sector, Winnipeg’s cost structures help to rank it 3rd in the world, in the same league as Seoul (which has a tremendous gaming industry), while Victoria (4th) and Edmonton (4th) are not far behind. Vancouver, of course, has a large gaming industry anchored by Electronic Arts and others, and from a cost perspective is still an attractive location compared to similar global centres such as San Diego, Toronto or Tokyo.
IBM-PLI’s indicators show that labour costs are lower in Western Canada than in comparable cities in the U.S. For example, estimated annual labour costs for a large-scale enterprise software design centre would be $9.4 million in Winnipeg, $9.5 million in Saskatoon and $9.7 million in Edmonton, compared to $13.1 million in San Francisco. Also, when we calculated labour costs of a typical video game company, we found that it would cost C$2.5 million in San Diego, but $2.2 million in Vancouver, $2.1 million in Victoria, $2.0 million in Edmonton and $2.0 million in Winnipeg. In our view, lower labour costs in Canadian cities partly reflect the lower costs of providing employee benefits such as health insurance in Canada. Keep in mind, however, that these costs are only wage costs and do not take into account job and training tax credits offered in most U.S. states.
Professionals in the Gaming sector who possess skills in software as well as in digital media production are difficult to find. Therefore, digital media and gaming companies locate in places where such skilled workers are available. Vancouver is one of the leading centres in the world when it comes to the availability of such talent, and in IBM-PLI’s index of presence of experienced games-related employees, Vancouver received the fourth-highest score among all of the cities covered in the study, next only to Montreal, Toronto and Los Angeles. In addition to experienced workers, Vancouver also has a large student population and a large pool of people employed in the film industry. This nexus of digital and traditional media production is increasingly gaining in importance, as the line between digital and traditional media is becoming increasingly blurred.
In other areas such as infrastructure, business taxes, general business environment and quality of life (all of which are key decision criteria for foreign investors), western Canadian centres come out strongly.
Industry Structure and Competitive Dynamics: Strong Presence in Application and Software Development; Lacking in Carrier-class Solutions, Components and Devices Expertise
It is clear from the above analysis that Western Canada’s ICT industry is robust, with deep clusters across the region. Foreign investors have recognized this western Canadian advantage and have invested heavily in the region. As a result, Western Canada has some strong capabilities in engineering services, infrastructure services and enabling software and services, along with strong expertise in the development of enterprise-class and consumer-class solutions, and of course in digital content development.
At the same time, a look at the leading ICT companies in Western Canada suggests that there are only a handful of firms undertaking carrier-class solutions and component and device design and manufacturing in Western Canada. This is in part the result of history, but it is an important factor that needs to be kept in mind when thinking about attracting FDI in this sector in Western Canada.
In the wireless space, developing (and selling) carrier-class products and services is absolutely crucial since carriers are at the top of the telecom value chain. The missing link in Western Canada (and indeed in Canada, more generally) is that the wireless carrier industry is protected by foreign investment regulations that essentially prevent global carriers from entering the Canadian market. The entry of a global carrier (of the stature of Vodafone, Orange, T-Mobile, China Mobile, etc.) leads to the development of clusters of technology suppliers around it, as well as to a stronger network of connections between the carrier’s headquarters and technology vendors that seek to develop and sell their solutions globally. Barring this, Canadian technology vendors use trade shows and private visits with global carriers to pitch their products and services. In other words, the likelihood of a carrier buying a product or service for its global operations increases if its suppliers are in the same city, rather than halfway across the world.
Across the wireless, gaming and software industries in Western Canada, we can think of only a handful of firms that are directly engaged in the design and manufacture of devices or components that go into telecom or gaming infrastructure and devices. Being directly involved in the components and devices ecosystem is also crucial since, just like carriers, OEMs are at the top of the devices value chain and their presence results in strong positive network externalities. This is why San Diego, Waterloo, Chicago, Stockholm, Helsinki and Seoul have such vibrant technology clusters. They are anchored by global devices and infrastructure vendors such as Apple, RIM, Motorola, LM Ericsson, Nokia and Nokia Siemens Network, Samsung, and LG Electronics.
Our sense of the ICT industry in Western Canada is that there is more than enough room for it to grow in the short-to-medium term. According to Gartner, the fastest-growing segments within the software application development market during the next five years will be security testing, distributed testing and Microsoft.NET platform application development tools43. Within this application development market, which is an important market for western Canadian software services firms, the key factor facing application development vendors will be their inability to deliver, in a timely fashion, product quality, effective marketing and well-trained distribution channels43. All of these, together with continued economic uncertainty and skills shortages in U.S. centres, will result in a greater emphasis among software vendors on consolidating closer to home, with western Canadian suppliers benefiting from these trends.
In the Wireless Communications sector, the applications market has exploded in the past two years with the introduction of the iPhone. Western Canadian companies, which focus on wireless application development, have benefited from this applications boom and will continue to grow their solutions across various platforms, as we think that there is great depth and scope of platform expertise in Western Canada.
In the Gaming sector, western Canadian expertise is fairly well-established and with some of the leading global companies already operating out of Western Canada, we do not see any short- to medium-term threats to this industry in Western Canada.
Foreign Direct Investment Implications: Tier 1 Players, Global Carriers and Venture Capital Needed in Wireless Communications Sector
In terms of strategies for foreign direct investment attraction, we feel that the greatest thrust needs to be in the attraction of Tier 1 players, global carriers and venture capital funds in the Wireless Communications sector. Indeed, the greatest growth in both the software and gaming markets will come from the way in which applications are moved into the mobile space, for example in areas such as enterprise mobility and mobile gaming. A scan of capabilities in Western Canada shows that in the wireless space, outside of a limited number of Tier 1 foreign investors such as Nokia (and, to a certain extent, Microsoft’s recent investment in B.C.), there are a limited number of global handset vendors or wireless telecom infrastructure vendors with significant ongoing operations in Western Canada. As in the Aerospace sector, the presence of these firms acts as a magnet that attracts their suppliers and customers to also establish operations in Western Canada and helps in the development of clusters that centre on these firms.
Another area of attention is the permanent presence of global wireless carriers in Western Canada. To a certain extent, Canadian foreign investment laws limit the extent to which global carriers can invest in network operations in Canada directly (witness the recent controversy over investments by Orascom Telecom in Globalive). This definitely has an impact on the strength of the relationship between Canadian suppliers and their global-carrier customers. At the same time, global carriers are not just looking to establish operations in a particular country or region: They are also looking for the best technologies and applications available to them and have active venture funds to invest in these technologies and applications. In our view, most interactions between potential western Canadian suppliers and their global carriers is intermittent, with trade shows, industry associations and one-off private meetings that result from these interactions acting as important conduits for investments by these global carriers in technologies developed by western Canadian firms. These interactions need to be institutionalized, with options such as the establishment of a permanent global telecommunications trade show in Western Canada or incentives to global carriers to establish a marketing office in Western Canada that acts as a permanent link between western Canadian software and application development firms and their global-carrier customers.
An example of this interaction is the Service Provider Investment Forum (SPIF), organized annually by Wireless Innovation British Columbia (WINBC) together with the Telecom Council, at the margins of its annual Pacific Northwest Wireless Summit held in Vancouver. SPIF, a monthly meeting of representatives from both wireless and wireline carriers, venture capital and R&D divisions of service firms from around the world, is held monthly in San Francisco. SPIF investors are focused on strategic investment and partnerships in areas such as components, devices and enabling technologies for enterprise solutions and content44. Since 2006, SPIF has attracted the venture capital arms of France Telecom, NTT DoCoMo, British Telecom and Nokia, among other global carriers and infrastructure vendors. Institutionalizing focused events such as these or inviting the business development offices of these global venture capital funds into Western Canada would be an effective mechanism to help increase investments by these global players in the region.