Square Enix refocuses on core games and sticks to blockchain investments

Square Enix President Yosuke Matsuda said in his annual letter that Square Enix is committed to growing its high-defininiton games business globally. It’s also stick with its blockchain investment strategy.

Growing existing franchises like Final Fantasy and Kingdom Hearts into global blockbusters and introducing new intellectual properties that can become the next big franchises is a priority.

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

During the year, Square Enix overhauled its development and publishing organization to advance growth and support it in the future. It streamlined the game business under the One Square Enix model more closely aligning working relationships between Japan and the West. It also sold off 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’ve appointed two chief product officers who will work together to grow its publishing capabilities across the globe. It promote industry exec John Heinecke (who oversaw Hearthstone and Overwatch at Blizzard) from CMO to CPO.

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

Economic headwinds

Matsuda opened his letter talking about the economy. He pointed to soaring inflation, the U.S. Federal Reserve’s move to raise interest rates, and Russia’s invasion of Ukraine. That heightened geopolitical risk, drove up prices, and caused supply chain disruptions. Stock prices plunged, especially in tech, and stalled.

“This chain of events continues to cast a major shadow over global capital markets,” Matsuda said. “The impact on our lives in Japan also mounts with each passing day as the dramatic depreciation of the yen has ballooned prices on imported raw materials, triggering further inflation.”

He added, “Coming just as we were seeing promising signs of the world moving beyond the three years of the COVID-19 pandemic, these tremendous changes in the macroeconomic environment also pose a variety of risks to the digital entertainment industry.”

In particular, the semiconductor shortage constricted hardware supplies, which has had more than a minor impact on the operation of Square Enix’s businesses. He said he expects these conditions to ameliorate in the early spring. That could help the company hit its medium-term business plan, which can be found here.

Structural reforms

These economic changes led the company to lay the groundwork for its medium-term business plan. They also led to the company to implement structural reforms that looked even farther out. That meant big changes like the sale of the Western studios and the focus on the core digital entertainment business.

The objective of the Western studio divestment was to further concentrate resources as the increasing sophistication and complexity of game development have made game development more costly to pursue.

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

Divesting studios and strengthening internal development capabilities may on the surface appear to be moves that are at odds with one another, he acknowledged.

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

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

Publishing changes

On the publishing side, Square Enix is moving away from the previous geography- and function-based model under which Japanese and Western publishing organizations operated independently of one another.

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

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

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

Blockchain investments

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

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

This focus caused a stir on the internet last year, as gamers feared Square Enix would give up on hardcore games in favor of scammy 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 is fair to say that blockchain gained significant recognition as a field in 2022, as evidenced by ‘Web 3.0’ becoming a firmly established buzzword among businesspeople. However, the year also saw volatility in the cryptocurrency and NFT (non-fungible token) markets that tracked the dramatic shifts in the macroeconomy described above.”

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

“In the wake of these developments, we hear rumblings from some countries of early moves 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 off on a plan called the “Priority Policy Program for Realizing a Digital Society,” which includes wording regarding the creation of an environment for promoting 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. Having ridden 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.

Following the exhilaration 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 proves to have been a step in a process that leads to the creation of rules and a more transparent business environment, it will definitely have been for the good of the growth of blockchain entertainment,” he said.

Keeping a steady eye on these environmental changes while considering from a higher-level perspective what Web3 and blockchain entertainment are actually all about presents a different vista than if focusing on them solely in technological or speculative investment terms, he said.

“As I said in last year’s New Year’s letter, if we consider traditional gaming to have been centralized, then blockchain gaming must operate based on a self-sustaining decentralized model. It is that concept, that philosophy that I see to be key,” Matsuda said. “That is to say that what sort 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.”

Multiple blockchain gaming events held overseas 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 gamers though 2021.

“In other words, the content that was at the forefront was created based on the premise that blockchain and NFTs should result in monetization,” Matsuda said. “However, in the wake of the aforementioned turbulence in the cryptocurrency industry, there is now a trend to view blockchain technology as a mere 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 beneficial development for the future growth of the industry.”

He said the company has multiple blockchain games based on original IPs under 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 exhilaration and a source of turmoil, but with that in the rearview mirror, we hope that blockchain games will transition to a new stage of growth in 2023.”

20th anniversary

Lastly, 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 evolution and transformation as we remain watchful for 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 major evolution and transformation.”