Square Enix hasn't had the best time recently. The company just released its annual report for 2013, showing a net loss of $145 million for the fiscal year that ended on March 31, 2013. Square Enix hasn't really hit high in the net income category over the past five years, but $145 million is an extraordinary amount of money for the company to lose. They outdid themselves in the wrong direction.
Former Square Enix president Yoichi Wada, who's been in the position since 2000, resigned back in March 2013 when these numbers were first reported. He was replaced by Square Enix director of Accounting and Finance Yosuke Matsuda. With today's annual report, Matsuda gets his first real chance to assure shareholders that he's not like the guy he replaced. Changes make shareholders happy.
Matsuda outlines four games from different segments that failed to meet the company's expectations: the arcade game Chosoku Henkei Gyrozetter, Sleeping Dogs, Hitman: Absolution, and Tomb Raider. He focuses on the latter three games, which were the only major console releases from the company during the fiscal year.
"These three titles, which were developed for consumer game consoles, were critically-acclaimed through media coverage, and therefore, I believe, were successful from a game development perspective," writes Matsuda. "However, we were exposed to increasingly severe competition with a number of blockbuster titles from major publishers, and experienced great difficulties in price control of these titles from a marketing perspective."
Matsuda also says that Square Enix had to bend over backwards with "price protection, back-end rebates, and promotional cooperation costs" to reach the shipment numbers it did on those games, meaning there was less than normal profit. Despite these issues, Square Enix is already hard at work on another Tomb Raider and another Hitman, with Sleeping Dogs finally reaching profitability. The company still loves HD games, but it realizes that the market is pretty hard to succeed in, while its social games are "continuously" making good money and "a key growth area" for the company.
"We do not recognize this situation as a temporary phenomenon that can be dealt with merely by restrengthening the distribution system, but as a structural problem in the HD business. That is to say, the financial results posted in the fiscal year under review reflect an intrinsic problem within the HD game business model that has come to the surface," writes Matsuda.
So, changes are coming and the first target will be the traditional disc-based model of delivering console gamers. Matsuda believes that the company will never turn its back on big budget AAA titles, but something has to give. Everything is on the table and Square Enix is looking at digital-only, free-to-play, and crowdfunding programs like Steam Early Access.
"Under the model of selling packaged games, the timing by which we may offer a game to customers is limited to the release of the product. Profit opportunities are almost non-existent during the game development phase," he explains. "Titles of large-scale development are our flagship titles, showcasing our technologies. We will never lower the flag of such titles. In fact, they are strong brands and therefore have the potential of diverse content exploitation. It is possible to establish a business model that delivers content in various formats to customers even before the launch of a game."
"The F2P model is flexible in that earnings are adjustable according to players' demand without any restriction on distribution of game products," he continues. "The time has come for us game makers to take more flexible approaches in offering games and to devise various earnings models conforming to customers' game-playing environments, moving away from the limited outlet of disc-based distribution of games. In this current of change, it is extremely important for the HD games category to enable transition from a disc-based earnings model to a more flexible one. This will define the future way we pursue HD games development."
Matsuda also raves about tablets, smartphones, and microconsoles, like the recently-announced PlayStation Vita TV.
"The spread of smart devices has now enabled multidevice, multi-environment experiences of HD games," says Matsuda. "Once distributed exclusively on discs, HD games are now available through other media. We must shift away from the traditional divided structure in favor of a unified system that aligns earnings models with game development."
This is worrisome, because at least in North America, Square Enix's mobile and social offerings are equivalents to digital highway robbery. The free-to-download iOS version of Theatrhythm Final Fantasy, the full version of which goes for $30 on Nintendo 3DS, costs nearly $90 if you purchase the content piecemeal. Final Fantasy: All The Bravest for iOS costs $4, but they also charge $1 for party revival, $1 each for classic Final Fantasy charactes, and $4 for extra adventures. Final Fantasy Dimensions is free in theory, but the entire game actually costs $20.
Simply put, Square Enix's mobile offerings are trading off nostalgia with exorbitant prices. Not every game is this bad: Deus Ex: The Fall offered a reasonably complete experience for $7, but the Japanese side of the company is still operating under a different mindset that I'd not like to see brought to my console and PC games. I understand Square Enix and its new president are on a quest toward profitability, I just worry that they may forget about what they're treading on to get there. Free-to-play can work if it's done right and I don't know what Square Enix will do in the future, but the evidence in front of me isn't great.