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Square Enix: "It is necessary to review the definition of 'AAA Title'"

Square Enix: "It is necessary to review the definition of 'AAA Title'"

Tue 28 May 2013 10:03am GMT / 6:03am EDT / 3:03am PDT
PublishingDevelopment

Tomb Raider, Hitman broke even, but were harmed by "rigidity" of packaged goods model

Square Enix director Yosuke Matsuda has outlined the structural deficiencies within the packaged goods industry that weakened apparently successful titles like Tomb Raider and Hitman: Absolution.

In a briefing held on May 13, 2013, Matsuda pin-pointed Sleeping Dogs, Tomb Raider and Hitman: Absolution as examples of products being failed by the prevailing packaged goods model. Despite hitting the right level of quality on all titles, Matsuda said, Square Enix suffered in the "critical metric" of net sales to customers - a much more relevant figure than the oft-cited number of units sold into retailers and the distribution network.

"We have seen significant degradation in results," Matsuda said. "In the packaged sales business, very strong competition in the marketplace has resulted in pricing methods such as price protection (costs incurred to maintain pricing) and back-end rebates (sales incentives) growing in increased importance, and creating a critical increase in pricing method costs."

"I believe that this situation is not a one-time event for the fiscal year ended March 2013, but it is a structural issue within the packaged sales product model"

Last year, the company's "Provision for Allowance for Sales Returns" more than doubled to almost 4 billion ($39m/26m), while advertising costs shot up by 5 billion to hit 12.3 billion ($120m/80m) as it struggled to maintain consumer interest.

"Even though development expenses were covered, these titles did not sufficiently contribute to profits," Matsuda added.

"I believe that this situation is not a one-time event for the fiscal year ended March 2013, but it is a structural issue within the packaged sales product model. As a result, I believe it is difficult to guarantee an appropriate return on our investments within the revenue model of purely packaged software"

So, in the long-term, Square Enix will be moving away from the "rigidity" of the packaged goods business model, and the slow asset turnover of the "long-term, large-scale development" required by games like Tomb Raider and Hitman. The company will continue to invest in games of this kind, but its approach will need to change with consumers' spending habits.

"There is a huge difference from the perspective of business risk between a model where no revenue opportunities take place for several years until the product is completed (upon which investments are recovered at one time), and a model where revenue opportunities exist in some form prior to product completion, even if the amount of money invested is the same.

"I believe this is a crucial point. The problem is not simply a financial issue."

Matsuda pointed to Kickstarter and Steam Greenlight as examples of unifying development and marketing, while opening up possibilities for consumer feedback and pre-release revenue.

"What should we present to our customers before a game is finished, how can our customers enjoy this, and how do we connect this to profitability, is something we are thinking about implementing, and which can improve our asset turnover in the process."

"I think it is necessary to review the definition of 'AAA Title', and we need to pursue a new type of blockbuster title"

Square Enix will also increase its focus on smartphones and tablets, with the intention of releasing the sort of products that it would once only have sold on consoles - story-driven, single-player games. It will also place more emphasis on regional markets, moving away from the assumption that a single product can have a global reach by targeting specific groups of consumers through both its products and their marketing campaigns.

"We will continue to invest in flagship titles that showcase our technological prowess, pursuing high-end game quality, and which can earn profits on a global basis," Matsuda said, indicating that the company will reveal more on its strategy at E3.

"That said, we cannot reasonably finance this direction for every single title, and we have to think about our entire product portfolio.

"Our strategy of selling AAA titles of 10 IPs around the globe has implicitly assumed Hollywood-style cinematic major games centred on single-player experiences. Going forward, I think it is necessary to review the definition of 'AAA Title', and we need to pursue a new type of blockbuster title, in addition to the conventional type of blockbusters."

Matsuda has set Square Enix a target of reaching 25 billion operating profit as soon as possible. Last year, the company made an operating loss of more than 6 billion.

14 Comments

Perhaps taking a leaf of EAs pro digital appraoch can offset the challenges of the packaged goods dilemma, because the AAA production quality is not the issue. IN addition, maybe just keep the packaged goods to a special collectors edition and charge a premium accordingly, This will help cater towards the fan base, including throwing in associated IP merchandise/digital goods store.

Posted:A year ago

#1

Morville O'Driscoll Blogger & Critic

1,613 1,473 0.9
Popular Comment
"There is a huge difference from the perspective of business risk between a model where no revenue opportunities take place for several years...
This is a very real problem, I think, and not just for SquEnix, though it's to their credit that they've formally acknowledged this issue.

Deus Ex: HR is an amazing game, but it took 4 years from initial announcement to release. Thief 4 is plagued by rumours of false-starts, poor optimisation, and no clear lead, was announced in 2009 and is tentatively penciled in for a 2014 release. 4 years and 5 years of development time respectively, where all the company is doing is bleeding money in the form of wages, staff benefits and pre-release marketing.

One alternative to this business and development system is to speed-up the development time, like EA did with the Mass Effect and Dragon Age games; but then quality can suffer. The better alternative is to shift towards episodic gaming. Whilst the initial development and sales period problems are still present, they're minimised, since all you need to do is create a good first episode, and sell that to the public. As long as the quality is good - and the development time not too long - the Episode 1 sales should cover the initial development costs, with word-of-mouth and the long-tail helping to create profit on future installments. Both Deus Ex and, I think, Thief 4, could be easily transferred into the episodic model system, since they're both story-based games.

In short, perhaps the gaming industry needs to look more at TV than the movies as a model to base development and sales on.

Edited 2 times. Last edit by Morville O'Driscoll on 28th May 2013 1:23pm

Posted:A year ago

#2
I like your thinking Morville, another appraoch could be the way they film and produce the Lotr trilogy whereby a game trilogy can be budgeted and developed simultaneously such that, with the main bulk of work produced, the last 8-12 months coudl be spent refining Game 1, and once that is released, the team can refocus on Game 2 and so forth thus having shorter development times perhaps

Posted:A year ago

#3

James Prendergast Research Chemist

735 432 0.6
"As a result, I believe it is difficult to guarantee an appropriate return on our investments within the revenue model of purely packaged software"
I think this is the most important sentence in the whole article and I'm not sure, exactly, what it means or is meant to mean. Tomb Raider, Hitman and Sleeping Dogs were not purely packaged software - they were also sold digitally. However, if the definition of "packaged software" is not physical - which would negate the some of the point about "sales returns" - then those titles also included DLC as part of their design which covers the possible definition of one discrete sale per customer.

So, Square Enix are already not selling products as purely packaged... nor are they selling them as discrete units.

It's clear from the other article that they see Kickstarter and it's bretheren as a way to generate income during development but I don't see how that offsets the costs of development any more than the current physical/digital model they're using - there's still going to be a similar number of customers who want the product. The main problem is that they are miscalculating total sales and, from their sales returns figures above, physical sales.

If they made more limited runs of DVDs/Blu Ray releases for their games alongside their digital releases then that would make more sense to me from a business perspective. If a title proves popular then do another production run: just like Ico and SoTC did - not to mention the next gen re-release.

Kickstarter isn't the way to solve this - mainly for two reasons:

1) If you look at titles ordered on Kickstarter most people pay below final/release RRP on those titles. You're actually going to be losing revenue on those customers that would otherwise have made day one sales at $60 or whatever. Now they're only in at $30 or something and they probably want more for their increased risk.

2) Title and feature lock-in: You are immediately reducing your ability to significantly alter a project if it's proving unsustainable or to shutter it mid-way through development. You are beholden to those people investing in your game. If you fail to deliver a game or most features of a game this is the end of your ability to use Kickstarter and its bretheren because a big entity like Square Enix, rightly or wrongly, is viewed as one "development house" by the general public. The name of Square Enix would be tarnished rather than a particular developer/development team within the Legion as is currently the case with Indies utilising these types of funding services.

[edit]
With regards to episodic content - once again - you have to guarantee the series. I'm still stuck with Sin Episode 1 (which I thought was decent and I wanted to see where the story was going) but I had nothing more after that, nor will I. Something like Telltale's model works well for adventure games but I'm not sure it lends itself to AAA quality titles - especially first or third person, cinematic- and set-piece-heavy games.

Edited 1 times. Last edit by James Prendergast on 28th May 2013 1:42pm

Posted:A year ago

#4

Brian Smith Artist

197 89 0.5
Personally I'd like to see a model akin to shareware mixed with episodic. A sizable portion of the game is released, 20% or so, not for free as with shareware but for minimal cost. This acts like a demo of sorts and is long enough that folk can get their teeth into it and form a solid reason to buy or not. If the taster sells well and gets good feedback to the publisher then a fullly commited large scale development can go ahead in the knowledge that the public have experienced proof of concept and are primed to buy the full product. The initial release also works as pre-release marketing effectively.

It would go a long way to removing titles from production that have no release interest and also on the opposite side, possibly allow more risky ideas to be dipped into the market to check the response. The pre-full scale release could also offer discounts to customers that pre-order in-game etc. It would be tricky to make happen I admit but with development costs primed to multiply maybe a bold model like this is whats needed to keep this industry ticking along.

Posted:A year ago

#5
I like your idea Brian.

Its as you say, there can be so many incubator titles in pre production and its hard to say which proof of concept gets the greenlight for production. In addition, demos are so pricey to produce using the pre existing AAA model, there has to be some middle ground whereby the developer is still the ultimate vision keeper with suggestive input from the fanbase so that the final product is a more refined titles, which can also surprise

Posted:A year ago

#6

Stefan Pettersson Specialist Consultant, Fat Tuna

77 19 0.2
Square Enix (SE) doesn't seem to listen to their customers. Take Tomb Raider for an example. Buyers wanted a single player story driven game, and that's what they got. Then SE added multi player onto that and put their faith in DLC for new multi player maps. SE even said publicy there would be no single player DLC at all.

So basically what happend was the single player people traded their games after finishing the campaign, instead of keeping the game and spend money on single player DLC. No wonder the river of cash drained quickly. I would personally have loved to spend (a lot!) more money on new areas for single player Tomb Raider, but Tomb Raider multi player was dead in the water from the very beginning.

You don't need market research to see this was bad judgement, you just need a tiny bit of market know how.

Edited 1 times. Last edit by Stefan Pettersson on 28th May 2013 3:33pm

Posted:A year ago

#7

Jakub Mikyska CEO, Grip Digital

207 1,122 5.4
I see the spiraling costs as the biggest problem. As it has been already pointed out, you simply can't work on a game for 4 to 5 years (unless you're working on GTA). There are developers like Naughty Dog that are able to spit out a fantastic game every other year. There has been a great article about the development of the new Metro game.
It is possible to make an AAA game with a reasonable budget and 2 years time.

Posted:A year ago

#8
I think we're about to find out if the mobile market can support episodic story based AAA games.

My guess is that the first movers will do really well and possibly establish the next big gaming franchises. If I was them I would try do something like LA Noire and go for a more mass market audience that currently watch HBO dramas rather than a 3rd person action adventure in the style of Tomb Raider.

Edited 1 times. Last edit by John Owens on 28th May 2013 4:30pm

Posted:A year ago

#9

Daniel Soltyka Software Engineer, Turbine, Inc. | WB Games

1 3 3.0
In regards to episodic content being a possible alternative to the current multiple year dev cycle, keep in mind that that only solves one potential development time sink: content (which is, admittedly, likely the largest time sink).

Still, the tech being a game needs to be considered. Take Tomb Raider as an example. A lot of the gameplay elements, tech wise, are in from the outset. Certain gameplay mechanics are added as the game progresses, as is the case with most adventure type games, but core systems can't be made episodic. Eg: rendering, input, optimization, AI. Essentially, the systems that take the most time to develop need to be in place in the beginning.

This makes episodic development somewhat difficult, as your engineering team essentially needs to "have the game done" by episode 1, which then lets you spent lots of time on content. Consider Half-Life 2 in regards to episodic content. The game was "done" with Half-Life 2, tech wise. There where marginal tech accomplishments in Ep1 and Ep2, they where basically all content.

I'm not saying episodic development wouldn't work, we just haven't seen a functional model of it out in the wild where a large scale AAA title was produced. It would likely take some serious planning.

Edited 1 times. Last edit by Daniel Soltyka on 28th May 2013 4:46pm

Posted:A year ago

#10

Murray Lorden Game Designer & Developer, MUZBOZ

202 72 0.4
I'm glad they're thinking about this stuff. And hope to see some good single player story driven stuff come to mobile from them, too.

Episodic delivery could work, although with these epic size/depth games (like Thief), you need to get a lot of systems all working together before a single level can be released. But you could foreseeably release a first episode that focusses on specific gameplay elements, and continue to add additional gameplay elements, as well as further story and levels in following episodes.

Posted:A year ago

#11

Morville O'Driscoll Blogger & Critic

1,613 1,473 0.9
Good points about gameplay mechanics; something I only vaguely thought of. Middleware would kind of help the situation regarding the technical aspects, but it would require very precise design to integrate gameplay-specific content into the early chapters. Though perhaps this could be the next step in Tutorial-Level evolution?

Another potential down-side is pricing-tiers. Telltale's Walking Dead sold digitally for just over 20 for the entire season, but something like Thief 4 would need to be priced differently, otherwise the financial pay-off isn't worth it for the company. But, then, with talk of $80 games, it might be easier to push cheaper episodic titles, even if they're more expensive than past efforts.

@ James

I see your point regarding Sin, and there's always (the lack of) HL3/Ep3. Perhaps Brian's idea of shareware/episodic is a better idea, though I think there's still the risk of some games just not being completed due to messy company financials.

Posted:A year ago

#12

Ian Brown IT Developer / IT Infrastructure

107 26 0.2
Square Enix (SE) doesn't seem to listen to their customers. Take Tomb Raider for an example. Buyers wanted a single player story driven game, and that's what they got. Then SE added multi player onto that and put their faith in DLC for new multi player maps. SE even said publicy there would be no single player DLC at all.

So basically what happend was the single player people traded their games after finishing the campaign, instead of keeping the game and spend money on single player DLC. No wonder the river of cash drained quickly. I would personally have loved to spend (a lot!) more money on new areas for single player Tomb Raider, but Tomb Raider multi player was dead in the water from the very beginning.

You don't need market research to see this was bad judgement, you just need a tiny bit of market know how.
Couldn't agree more. I loved the single player in this game and eagerly awaited the extra single player content of tombs and crypts to solve. What happened was they spent time making multiplayer maps for a multiplayer mode i spent 5/10 minutes on. It's not bad its just not good when probably 90% of the game on my bookcase have the same modes (TD/CTF etc.).

I really wish companies would stop tacking on a multiplayer mode on any game just because others have it. Some games work with multiplayer, Tomb Raider wasn't one of them and was a better solo game than others in recent time.

Support what your game is good at, not simply copy the others and spawn undesired multiplayer DLC which is a waste of time & money.

Posted:A year ago

#13

Benjamin Kratsch Deputy Editor-in-Chief, Games Network

22 4 0.2
Okay, wow.

When we are talking about 6 Mio sold copies, this is like 300 Mio. dollar in money value right? Have they really spent 100 Mio. on the development of Tomb Raider plus 100 Mio. on marketing? I mean it's a cool game and I got that they needed a star for every country for Lara, but I don't see any Next-Gen-Engine or something other that costs more than 50 Mio. to develop? With that kind of budget we are in an area with Crysis 3.

I mean sure, 100 Mio. plus is not enough for a big company. Because you gotta draw off retail, Xbox/PS3 licencse and tax.

Posted:A year ago

#14

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