The State of Square Enix: 2013 Edition

We are currently in the thick of one of the most telling times of the year for the video game industry: Earnings season. I have been highlighting some of the bigger publishers over the past week, and after an upbeat report from Electronic Arts and an uncertain outlook from Activision Blizzard, we are going to make a quick trip to Asia and talk about the embattled Square Enix.

Bad times….

In short, Square Enix is struggling mightily. For the “fiscal” year 2013 (which, strangely enough, ends March 31st, 2013) the Japanese developer posted an operating loss of 6.081 billion yen, which translates to nearly $60 Million USD.

Additionally, the company reported that their Digital Entertainment division (which also covers its game business) saw a huge 99.7% decrease in operating income. It made $313k on sales of $739million, meaning that it barely broke even. In comparison, 2012 brought an operating income of $99million on sales of  $597milliion. As you can see, in 2013, Square got absolutely killed on the margins (profit vs expenses). This is one of the worst possible things you can see on an earning report.

Square execs mentioned that the significant losses during fiscal 2013 were the result of “underperformance of major titles for consumer game consoles in North America and Europe.”

This is a huge loss for Square, and proves that their reliance on Western-themed AAA titles like Tomb Raider, Hitman and Sleeping Dogs have been a nearly universal failure.

While the games received strong critical marks, their sales came in well-below expectations. For games with massive development budgets, three losses in a row can be devastating, and Square Enix is officially feeling the strains of their under-performance.

While it can be expected that the call focused overwhelmingly on the financials, with the fact that they are now in a precarious money situation, there were some other interesting tidbits of information about why they are struggling, along with hints at their future prospects. Initiate bullet-form:

  • Poor performance and extraordinary losses were blamed on “an increasingly competitive and oligopolostic” video game market in Europe and North America

Thoughts: From both an investor and gamer standpoint, this is quite brutal to hear. As one of the biggest publishers in the world, complaining about an oligarchic market is a sign of weakness. If you think about it, Square Enix is one of the first oligopolies of the industry, merging together to create a mega-corporation that was supposed to dominate the market. They have the resources, influence, name recognition and reputation to continue operating successfully, and any rationalization that says they are losing money because of other big publishers taking all the sales shows that Square is either inept or fearful. This is easily the most distressing aspect of the entire conference call.

  • They are in the final development stages for Lightning Returns: Final Fantasy XIII, which will release at the end of the year.

Too much is riding on Lightning

Thoughts: From what I have seen, this game does not look good at all, and seems like just another continuation of the convoluted, complicated, unemotional and linear XIII saga. And we still have yet to hear anything about the only game in this series that anyone wants to play, Final Fantasy XIII-Versus.

  • They are finishing up the HD versions of Final Fantasy X and Final Fantasy X-2.

Thoughts: This is something that I have no problem with. HD remakes are interesting to me from both a visual and nostalgic perspective. People miss the old Square so much (partly because of their inability to create similar experiences at the present) that bringing these games back by putting a new coat of paint on them is a perfectly valid option for the company. Although I could think of about 3 FF games that I would rather see get the HD treatment (along with the fact that I thought X-2 was easily the weakest in the series), this is still a viable strategy for Square.

  • Eidos Montreal is developing a next-gen reboot of the classic Thief series for 2014.

Thief might be hanging on for dear life…

Thoughts: there has been a great deal of talk about how this game is currently in development hell. Combine that with a teaser trailer that looks markedly similar to other recent games (particularly Dishonored) and you could get a generic non-starter. But Eidos has been one of the only Square developers creating quality experiences, so hopefully they can finish strong and release a great product (lets just hope they can keep the budget under control)

  • “The business environment surrounding the [Square Enix] Group is in the midst of major changes, where smart devices such as smartphones and tablet PCs are spreading rapidly,Because of this environment, Square is putting a larger focus more on phone, tablet and browser-based games.

Thoughts: When a company starts losing money, it will surely cling to what has been working. And for Square at the moment, it is their foray into mobile games. While core gamers will blow this off, casual titles have been performing strongly for the company, particularly Final Fantasy Airborne Brigade and Kaku-San-Sei Million Arthur. This could be a good thing for Square going forward as the quality of mobile games become better, but at this point, their move into this sector will be met with indifference (or worse) from gamers like us. While they should keep a focus on such a potentially lucrative area, Square had better continue devoting enough time to their core games, or they will become irrelevant.

  • Square is looking to create titles more specifically suited for the regions they are being sold in.

Identity crisis

Thoughts: This was a somewhat confusing statement. Becuase the “western” games they have worked on for release in the West have failed. How are they going to change this result by going region specific? In other words, how can they “outwestern” themselves? Also, does this mean we, as European and American gamers, should just forget about JRPG’s and Asian focused series? A HUGE portion of Square fans in the West want them to go back to what they do best: JRPG’s. But when you focus too much on regional proclivities, you may alienate your core fans.

  • They mentioned they are in need of better staffing, stating “In order to achieve the Group’s medium- to long-term strategy, it is imperative to expand its global business and meet customers’ diverse content needs. To do so, it is critically important that the Group acquires and develops ideally suited human resources.”

Thoughts: They are basically saying “we need stronger employees.” While I have no idea what goes on behind closed doors, this was not a very surprising revelation. We should expect to see more layoffs considering their performance, the only issue is that they need to fire and hire the right people. While lower level employees who make the games should be held accountable for their weak efforts over the past year, it seems to be a leadership issue more than anything. Without a strong vision for the corporation (which is necessary for such a large company) any business plan will likely fail. The executives and board of directors need to take a serious look at themselves, because I think that most of Square’s issues lie at the top of the hierarchy.

Square Enix believes the changes they are making will be the platform for profit in the coming fiscal year, projecting net income of between ¥3.5 billion and ¥6 billion, or $34.4 million to $59 million. These are uncertain numbers though, and all of their changes must provide a benefit for Square to be profitable in 2014.

All in all, Square is at its weakest point in 30 years and needs to make big changes to keep up with an industry that is quickly surpassing a company that was once gaming royalty. For all of us who love the old Square, lets hope that the company finally understands what they need to do to become an industry giant again. If you want to go into more detail about why Square is in the precarious situation it is currently in, check out our feature, The Fall of Sqare Enix: A Retrospective on What Went Wrong and What Needs to Change.

What do you think Square Enix needs to change in order to right the ship and turn back into a great company?

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3 comments

  1. Thixy · · Reply

    Best way they can Make Easy money is Remake Final Fantasy VII-IX Ever single Square Enix Fanboy wants it. Why throw away Billions of easy money to be made ? Its just stupid and Final Fantasy XII-XIII/1-2 Have been Fail and fail. And to continue down that path SE will never recover.

    1. Agreed. Since they do not seem to have any vision for the future, might as well look to the past for the time being. Remakes would be hugely lucrative for Square. And who knows, revisiting the past might help them find that golden touch again for future titles…

  2. Atrayo · · Reply

    If Square-Enix is getting nailed making games for the North American and European markets due to economic conditions beyond their control. That may be a recipe for insanity of doing the same thing over again and expecting different results.

    The Western world doesn’t have a monopoly on gamers. Perhaps its best for Square-Enix to focus on the Eastern audience. Meaning Japan, South Korea, China, Singapore, Tawain, and India. The developing world of China especially is what made “World of Warcraft” soar in subscriber numbers. Best make games for the Far East which is where the gamers with increasing buying power are situated. When North America and Euro nations return to the fold than it can be what it was prior in outlook.

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