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Troubled Square Enix needs a fresh start

Troubled Square Enix needs a fresh start

Thu 28 Mar 2013 4:42pm GMT / 12:42pm EDT / 9:42am PDT
Publishing

Yoichi Wada's departure must signal a turnaround if the iconic Japanese publisher is to survive the next generation

Another week, another CEO gone. It's tempting to draw comparisons between John Riccitiello's resignation from EA and Yoichi Wada's subsequent departure from Square Enix. It's even reasonable to state that the underlying causes are the same: both CEOs are being ousted because of the failure of their respective companies to adapt quickly enough to changing conditions in the games business; they are both casualties of the massive transition that is pulling the rug out from underneath slow-moving, behemoth publishers.

More than parallels, however, there are contrasts aplenty. Yoichi Wada is not John Riccitiello, and Square Enix is not EA. These men and the companies they helmed have charted very different courses through these troubled waters, and have slipped up in very different ways. It's not helpful to lump them in together; it makes for a good press narrative, but tells us little about the factors that are pushing and pulling our industry into new shapes, making and breaking companies and careers along the way.

1

Where Riccitiello was a marketing and brand management guy who served two lengthy stints at EA (and spent the time in the middle immersed in games through his VC vehicle, Elevation Partners), Wada's entire background is in the corporate banking sector. His installation at the head of Square Enix was a bizarre affair - he became CFO two months after joining the firm, COO three months later and finally president and CEO another three months down the line. Less than a year after holding his first games industry position (he claims to have been a game consumer, but admits that he didn't even know that Square was the maker of Final Fantasy), he was leading one of Japan's iconic publishers.

I'm all for the games industry reaching out to external talent from other sectors - both creatively and in a business sense - but this strategy of parachuting someone with almost no knowledge of games (or even of consumer products of any description) into a senior role at a games company is one that almost inevitably ends in disaster. Last week, I said that the shocking thing about John Riccitiello's departure was that he'd managed to hold on for so long in the face of board and investor discomfort with the pace of the company's progress. Equally, the shocking thing about Wada's departure is that he's been allowed to stay at Square Enix for 13 years - years in which the firm's franchises have been slowly devalued, its development budgets and schedules have been a tragic mess, and its efforts in new markets have been overtaken by more nimble, adaptive rivals.

Square Enix has attempted to do four things in the past decade or so. It has tried to expand further into the Western marketplace. It has tried to build a subscription MMO business. It has tried to develop a mobile and social games business, often in parallel with a cross-media approach to franchise creation. Finally, it has tried - as every publisher in the industry has - to adapt its development processes to the demands of powerful new game hardware.

With only a single exception, Square Enix has done badly at these things. Its western expansion has been driven by a single acquisition - the company picked up British publisher Eidos, on its last legs following years of horrendous mismanagement, and has to its great credit turned this into a major foothold in the west, a task greatly helped by turning around the quality of franchises like Tomb Raider and Deus Ex.

"Square Enix' development studios in Japan have simply failed to match themselves to the challenge of developing on this generation of hardware"

In MMOs, however, Square Enix was first dwarfed by Blizzard (which is fine, admittedly - one can run a great, profitable business without having to be the market leader, a fact industry commentators all too often forget) and then proceeded to seriously threaten what market share it enjoyed with the shoddy, unfinished release of Final Fantasy XIV. In mobile and social, too, the company has enjoyed minor success, but even with franchises like Dragon Quest and Final Fantasy in its catalogue, it has been completely overtaken by firms like DeNA and GREE, as well as smaller, more nimble developers. Most shockingly of all, Square Enix's development studios in Japan have simply failed to match themselves to the challenge of developing on this generation of hardware. Final Fantasy XIII limped out the door in a state that made it perfectly obvious to even the most naive of consumers that it had been hugely down-scaled and chopped up in order to get something - anything - on the market. Its supposed stablemate, Final Fantasy Versus XIII, has been in development for seven and a half years and still doesn't have a release date.

Of course, Square Enix is more than just Final Fantasy, but the troubled fate of the company's headline franchise is a clear sign of difficulties that run through the firm Yoichi Wada has led. The buck stops at the desk of a good CEO, but Square Enix's most high-profile studios and franchises in Japan have seemingly foundered upon being confronted with next-gen technology, and Wada has been powerless to fix the rot. He had to go - and his successor now faces a Herculean task.

On the plus side, Square Enix is still a company packed with extraordinary talent, both in Japan and abroad. The firm's efforts on platforms like the Wii and DS stand out as among the generation's finest, with games like The World Ends With You and Dragon Quest X displaying a remarkable depth of talent that's capable both of building new, intriguing experiences and tapping deftly into a wellspring of nostalgia for the firm's older games. Few publishers enjoy such loyalty for their franchises, and few console publishers monetise "true fans" quite as well as Square Enix does; the firm's merchandising department is small by comparison with its publishing department, but has a very comfortable profit margin. Meanwhile, in the West, an unfortunate appetite for daft adolescent controversy-raking in the marketing department is compensated for by superb development talent.

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Yet all of that is meaningless without a business strategy and leadership that can harness those talents and build a profitable, sustainable business. Square Enix needs to move more rapidly and nimbly, adapting to new markets and business models that have so far been slipping from its grasp. It desperately needs to bring its spending under control. Games like Tomb Raider and Sleeping Dogs missed targets despite selling millions of units; Tomb Raider sold 3.4 million physical units so far this month, and still hurt the company's bottom line. That's not a sustainable position, and speaks to completely unrealistic budgeting and out of control costs at the company. It also begs a deeply uncomfortable question: after eight years at least in the development studio, how many copies is Final Fantasy Versus XIII going to have to sell in order to break even?

Of course, there's a wider problem here for the entire industry: our games cost too much to make, they're already too expensive at retail (which drives a disproportionately large second hand market), and the market for core games is probably reaching a plateau stage. Something has to give, and it's likely to be a combination of development costs being reined in and new revenue models being introduced (to the chagrin of many gamers, which will probably be justified in many cases). If that's a general challenge for the industry, though, it's a specific challenge to Square Enix - a company that exhibits extremes of all of those problems. Yoichi Wada did nothing to fix those problems while he was at the helm of the firm. He had to go - and if Square Enix is to have a future as a major publisher, his successor will have to do an extraordinary job of turning this ship around.

10 Comments

Just interested that there was no mention of Taito which Square-ENIX owns? Was it not true their sales (amusement) and Operation (arcades) went up over the same period?

Posted:A year ago

#1

Nicholas Pantazis
Senior Editor

1,017 1,463 1.4
I think this is an odd article to write about a company that has been consistently profitable all generation compared to, well, everyone else. Aside from Ubisoft and Activision, publishers consistently lost money on HD consoles (yes, even EA, recent successes aside). Take Two is possibly on its last generation, THQ and Midway DID have their last generation, and Ubisoft largely made their money on Wii and DS cash-ins, not on their HD releases (Assassin's Creed being the exception). The Japanese companies who continue to make handheld games are arguably much more stable.

Posted:A year ago

#2

Andreia Quinta
Creative & People Photographer

214 534 2.5
Popular Comment
His installation at the head of Square Enix was a bizarre affair - he became CFO two months after joining the firm, COO three months later and finally president and CEO another three months down the line. Less than a year after holding his first games industry position (he claims to have been a game consumer, but admits that he didn't even know that Square was the maker of Final Fantasy), he was leading one of Japan's iconic publishers.
Like having a renowned car sales-man suddenly trying to sell high-end SLR cameras. I don't understand why high businessmen are put in front of things they don't know or really care about. Kotick is an aberration, an exception.

Posted:A year ago

#3

Julien ROBY

6 6 1.0
@Nicholas:
Take 2 on its last generation? Really? I'll have to strongly disagree with this analysis :)

Long gone is the time when 2K would not have great revenues if no GTA was on the year line up.

Between this backcatalogue of IP and GTA5 around the corner I dont think Take 2 is going to disappear anytime soon.
Like Ubisoft, 2K is one of the few publishers that has managed to deliver a constant flow of quality and high selling titles.
I bet they will be in the top 3 western publishers at the end of next gen.

Edited 1 times. Last edit by Julien ROBY on 29th March 2013 12:26am

Posted:A year ago

#4

Rick Lopez
Illustrator, Graphic Designer

1,269 941 0.7
Sleeping dogs wasnt a bad game and Tomb raider was pretty great. I think the problem is that square enix budgets its projects way to high and expect rediculouse sales. To earn anything back from the development of tomb raider they require at least 10 million units sold... WTF!? In the little time its been released, it has sold way over 1million units. I think 3.2million units... not sure... For many other games this would have been a success.

I still think a game like tomb raider could have been developed with less money. I mean Final Fantasy Versus 13 hasnt even come out... how long has that been in development? I think they have lost focus from a creative and business point of view. They set out to make a perfect game, instead of making a great game. I think the creative thinking is at fault. For when designing a game, they should be mindful at the fact that they should consider not to drain the economical resources of the company to the ground. If the whole "final fantasy 13 fabula nOva cristalis saga thing".... was not really working out, why keep developing games around it... why a final fantasy 13-3.... why not start fresh and if FFversus13 cant get off the ground at a reasonable time, why not just pull the plug before it starts burdening the company economically. If its an idea that is not working why continue to poor money into it.

Then they have all these goofy cliche character designs with crazy hair and dorky personalities. This isnt the 16 bit era... before you could have gotten away with that but now we have more realistic graphics, and alot of the final fantasy characters are rediculouse and laughable to say the least. Dont even get me started with the wardrobe... or wardrobe that gives characters abilities. Final Fantasy lends itself to be epic. But dorky personalities get in the way of that.

Tomb Raider can make its money back after multiple games, as a franchise, but if a sequel is gonna cost 200million and a third game is gonna cost 300million, then I cant see what good that will do the company. I think they should think smaller but better. How to gain the same results but with less resources. Xenoblade is a fine example of a great RPG on a lower spec system, which Im assuming cost less to make. This is a fine example of what Im saying.

However Agni's Filosophy If turned into a game looks promising. Character designs and theme seem pretty down to earth. The color palette seems to work.

New game development technology is supposed to streamline development... I wonder why costs and team size keeps increasing. We have game engines that are supposed to have much of the physics and graphics attributes integrateted. But no matter how much technology comes along to make things easier, team sizes increase, and budgets are higher.

I hope luminouse engine was developed to address all these problems and streamline game development. Cause selling 10 million units to make money back is just a crazy expectation.

Posted:A year ago

#5

Eric Pallavicini
Game Master

276 177 0.6
Cause selling 10 million units to make money back is just a crazy expectation.
It probably would not be that crazy, if the market had not become so diversified. Maybe what was underestimated is the focus of the gamers who have more opportunities to play on multiple platforms and multiple ways (mobile, F2P, kickstarters) in addition to somewhat being more patient for many of them (i.e. wait for an offer on Steam instead of getting it fullprice, even if it is worth fullprice). "Behemoth publishers" may have been overconfident about what they thought "gamers want", while they surely want games of that quality (i.e. latest Tomb Raider) they may not wait for them (except diehard fanboys) as by the time only massive studios and publishers could produce high quality games (gameplay being out of the equation).

Posted:A year ago

#6

Haven Tso
Web-based Game Reviewer

255 8 0.0
I think the most important thing for Square-Enix to do is to decide what does it want to be? A Japanese developer and publisher with a western presence or an international publisher? At the moment it seems Square-Enix is diversifying for the sake of diversifying and ended up tangled itself with the web it spinned. For example if Final Fantasy wants to be a JRPG, stay that way and keep fans happy but if they want Final Fantasy to be a western RPG just go ahead. Any half bred products that want to be everything would end up becoming nothing both for gamers and the market. I am quite astound that Square-Enix still hasn't learnt this. If they want to develop western RPG, they should start a new franchise instead of messing around with what they have. Dragon Quest stays as a JRPG and that's how its followers like it to be and thus still sell well. A similar approach should be applied to the Final Fantasy series. I would love to see Square-Enix developing a new western RPG franchise that plays like a western RPG but not any dumbed down or hybrid version of Final Fantasy.

Posted:A year ago

#7

Rick Lopez
Illustrator, Graphic Designer

1,269 941 0.7
@ Haven Tso - Really liked what you said.

Posted:A year ago

#8

Tom Keresztes
Programmer

633 239 0.4
Kotick is an aberration, an exception.
Is he? Did he get involved in designing/making games, or just sells products and kills the studios that not profitable enough ?

Posted:A year ago

#9

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