Square Enix focuses on core games and sticks to blockchain investments

Square Enix President Yosuke Matsuda said in his annual letter that Square Enix is ​​committed to expanding its high-defininiton game business globally. It also holds true with its blockchain investment strategy.

Expanding existing franchises such as Final Fantasy and Kingdom Hearts into global blockbusters and introducing new intellectual properties that could become the next big franchises is a priority.

Square Enix has two of the most anticipated games in 2023 with Fantasy XVI coming on June 22, 2023 and Forspoken launching on January 24, 2023.

During the year, Square Enix overhauled its development and publishing organization to promote growth and support it in the future. It streamlined the game business under the One Square Enix model and more closely coordinated the working relationship between Japan and the West. It also sold its Western game studios Eidos Montreal, Crystal Dynamics and Square Enix Montreal to Embracer Group for $300 million.

As part of the One Square Enix model, they have appointed two Product Managers who will work together to expand their publishing capabilities worldwide. It promotes industry executive John Heinecke (who oversaw Hearthstone and Overwatch at Blizzard) from CMO to CPO.

Looking ahead, Square Enix will keep an eye on and explore new business opportunities including blockchain entertainment, and there are also several new projects based on new IP in development.

Economic headwinds

Matsuda opened the letter and talked about the economy. He pointed to rising inflation, the US central bank’s move to raise interest rates and Russia’s invasion of Ukraine. It increased geopolitical risk, drove up prices and caused supply chain disruptions. Share prices plummeted, especially in technology, and ground to a halt.

“This chain of events continues to cast a large shadow over global capital markets,” Matsuda said. “The impact on our lives in Japan is also increasing with each passing day as the dramatic weakening of the yen has pushed up the prices of imported commodities, triggering further inflation.”

He added, “Just as we saw promising signs that the world is moving beyond the three years of the COVID-19 pandemic, these huge changes in the macroeconomic environment also pose a number of risks to the digital entertainment industry.”

In particular, the semiconductor shortage limited hardware supply, which has had more than a minor impact on the operation of Square Enix’s businesses. He said he expects those conditions to improve in early spring. It can help the company achieve its medium-term business plan, which you can find here.

Structural reforms

These financial changes led the company to lay the foundations for its medium-term business plan. They also led to the company carrying out structural reforms that looked even further. This meant major changes such as the sale of the western studios and the focus on the core digital business.

The goal of the sale of Western studios was to further concentrate resources as the increasing sophistication and complexity of game development has made game development more expensive to pursue.

“We will also begin to reconfigure the group’s portfolio of titles for the medium to long term. To that end, we will accelerate our efforts to strengthen our in-house development capabilities by further expanding our in-house talent pool, while more rapidly concentrating our resources on developing titles that are globally competitive, Matsuda said. “The remarkable growth in the scale of modern game development has made it more important than ever to elevate the skill sets and focus the efforts of our development teams.”

Disposing of studios and strengthening in-house development capabilities may on the surface appear to be moves at odds with each other, he acknowledged.

“However, we must flexibly and constantly revise our medium/long-term title portfolio and the development studios that create it in light of the environment we find ourselves in,” he said. “As such, both of these moves are essential if our group is to continue to provide entertainment that meets the needs of a developing world.”

The company said it will review its development organization and use M&A and other methods to optimize its studio portfolio through both organic and inorganic means, ensuring it continues to strengthen its internal development capabilities.

Publication Changes

On the publishing side, Square Enix is ​​moving away from the previous geography- and function-based model where Japanese and Western publishing organizations operated independently of each other.

“Instead, we are creating an end-to-end global publishing organization based on the ‘One Square Enix’ concept,” he said. “We made particularly thorough changes to the organizational structure of our Western operations, adopting a sales and marketing structure optimized for to match the new studio portfolio created by the sale of our three overseas studios.”

The company is expanding functions to capture as much of the upside as possible from the digital shift that has accelerated since the outbreak of the pandemic.

“By simultaneously strengthening our development and publishing organisations, we will further strengthen our group’s presence as a global publisher and achieve new growth for our existing core digital entertainment business,” he said.

Blockchain Investments

In terms of new business domains, the company said it would invest in three areas.

Among them, the most focused is on blockchain entertainment, “to which we have devoted aggressive investment and business development,” he said.

This focus caused a stir on the internet last year, when gamers feared that Square Enix would abandon hardcore games in favor of roguelike blockchain games. But Square Enix had to re-emphasize that it will continue to make its hardcore titles.

He added: “Looking externally, I think it’s fair to say that blockchain gained significant recognition as a field in 2022, as evidenced by ‘Web 3.0’ becoming a well-established buzzword among business people. However, the year also saw volatility in the cryptocurrency and NFT (non-fungible token) markets that followed the dramatic changes in the macro economy described above.

Alongside the crypto winter, he pointed to the gloomy and scandalous bankruptcy filing of FTX in November.

“In the wake of this development, we hear rumblings from some countries about early steps to regulate such businesses more strictly. In Japan, meanwhile, the drive to encourage such businesses has gained momentum, led by the government, he said.

In June 2022, the Japanese Cabinet signed a plan called “Priority Policy Program for Realizing a Digital Society”, which includes formulations regarding the creation of an environment to promote the Web3 concepts, including the use of NFTs based on blockchain technology. Japan’s Digital Agency also launched a Web3 study group.

– New technologies and frameworks lead to innovation, but they also create considerable confusion. After riding out such societal tides, some such technologies and frameworks gradually become part of people’s lives, eventually giving rise to new businesses and growth, Matsuda said.

After the excitement that surrounded NFTs and the metaverse in 2021, 2022 was a year of great volatility in the blockchain-related space, he said.

“However, if this turns out to have been a step in a process leading to the creation of rules and a more transparent business environment, it will definitely have benefited the growth of blockchain entertainment,” he said.

Keeping a steady eye on these environmental changes while considering from a higher perspective what Web3 and blockchain entertainment is actually about provides a different view than focusing on them solely in technological or speculative investment terms, he said.

“As I said in last year’s New Year letter, if we consider traditional gaming to have become centralized, then blockchain gaming must operate based on a self-sustaining decentralized model. It’s that concept, that philosophy that I see is the key,” Matsuda said. “That is, what kind of new experiences and new excitement our Digital Entertainment business can deliver to our customers through its game development efforts and other endeavors under the self-sustaining, decentralized concept is extremely important.”

Several blockchain gaming events held overseas have recently produced more active discussion than ever before about what makes the games exciting and what their user community looks like, he said. The market was driven more by speculative investors than by players through 2021.

“In other words, the content that was at the forefront was created based on the premise that blockchain and NFTs would result in monetization,” Matsuda said. “But in the wake of the aforementioned turbulence in the cryptocurrency industry, there is now a trend to see blockchain technology as just a means to an end and to discuss what needs to happen to achieve the end of delivering new experiences and excitement to customers. I see this as a very favorable development for the industry’s future growth.”

He said the company has several blockchain games based on original IPs in development, some of which it announced last year, and the company is preparing to unveil more titles this year.

“We are also engaged in global sourcing from an investment perspective and will continue to take stakes in promising businesses whether we find them in Japan or abroad,” he said. “Blockchain has been an object of excitement and a source of unease, but with that in the rearview mirror, we hope that blockchain gaming will move into a new stage of growth in 2023.”

20th anniversary

Finally, Matsuda noted that 2023 is a milestone year in that it marks the 20th anniversary of the merger of Enix and Square.

“Our group intends to achieve further growth by continuing our self-sustaining development and transformation while we are alert to the changes that will occur in the next decade and beyond,” he said. “We will drive our businesses forward with the goal of making 2023 a year of great development and transformation.”