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How do you lose $134.8 million when net sales go up 15.7%?

Square Enix lost ¥13.7 billion ($134.8 million) in 2012, despite a net sales increase of 15.7% over the previous financial year. The fiscal year ending March 2013 - which saw the launch of Tomb Raider, a title that enjoyed exceptionally good sales despite not meeting all of Square's expectations - was dismal for Square Enix, and it blames underperformance of major console titles in North America and Europe, at least in part, for the loss. This despite that fact that, according to Square, net sales in the Digital Entertainment division went up 24.5%, contributing significantly to the overall net sales increase.

Significant decreases in operating income, primarily in the Digital Entertainment section - Square's biggest business segment by far - are cited by Square as contributing directly to the exceptional loss. The Digital Entertainment division saw a drop in operating income - that is, profit less expenses, like cost of goods sold - of over 99%, when compared to the previous financial year, a drop that suggests massive Digital Entertainment expenses and overheads managed to dig the division a hole it could not sell its way out of, and perhaps had no hope of escaping. The only Digital Entertainment titles to do well, in terms of costs and sales, were Square's mobile and tablet titles. As a result, one of Square's new initiatives to increase profits is to target smartphones and tablets as a game platform. The console market, highly competitive and controlled by a small number of firms, just isn't working out for Square so perhaps, it thinks, mobile is the better bet. Improving turnover is also key to Square's new vision of the future. Finally, constructing a product portfolio "tailored to consumer tastes in respective served regions" is, according to Square's briefing session, its third strategy by which it intends to return its HD Entertainment division to profitable status.

Square Enix anticipates an increase in operating income for the financial year ending March 2014; its target is ¥25 billion ($245.5 million), which it intends to achieve ASAP. "Bold implementation of the business transformation" is Square's means of reaching that operating income target.

So much like Capcom, Square Enix has joined the club of came publishers that seem brain dead in figuring out how they're losing money and resort to extremes that will not solve their financial woes. Frankly, it forms something of a bewildering picture. Like many publishers, Square seems to have horribly ludicrous sales goals. Tomb Raider was expected to sale 6,000,000 copies within 1 month which was never going to happen. It managed 3.6 which really is an excellent sales success, but Square had horribly unrealistic expectations and budgeted around the larger number (wonder how much money they'd have saved not making that pointless multiplayer mode). Likewise Hitman Absolution was expected to sale 5,000,000 when it only sold 2.5 million and similar figured occurred for Sleeping Dogs.

Much like THQ before them, Square has fallen into the pit of thinking things will sale better than they realistically can and so they over budget the title to the point that it can never make the money back.

EDIT: As a side note, among the methods used to project sales figures for the purposes of budgeting is metacritic.

Once again proving how gakky metacritic is.

That said, I don't think this can be compared to THQ. THQ's downfall rest's mostly on the giant money pit the Udraw was.

Its similar in that Saints Row was a game budgeted with horribly unrealistic sales expectations. THQ barely made any money off Saints Row 2 because they put so much money into the game.

 LordofHats wrote:

Much like THQ before them, Square has fallen into the pit of thinking things will sale better than they realistically can and so they over budget the title to the point that it can never make the money back.

EDIT: As a side note, among the methods used to project sales figures for the purposes of budgeting is metacritic.

I meet with directors that do this all the time, their bonuses are based on performance expectations so it's more "how much money do I want to make" than "what might happen" Basically you get to write your own check, it's moronic.

This is actually more than likely a product of steam, any larger company without a digital distribution method of their own has to cough up like 40% of their sale to valve/ea/whoever, so if no one saw that coming, it could easily account for higher sales and lower profits.

/all/ game producers are leaning towards tiny, cheap casual tablet/phone games rather than riskier AAA titles, which is having the odd effect of a lot of indie games becoming better and awesome.

Might this be a push for Square-Enix to change their current long-term plan of 'make horrible games'? Probably not.

Was it here that we were talking about how Capcom was also complaining about low sells, but instead of realizing maybe it is sequel fatigue or mediocre games they blamed western gamers for having bad taste and also not enough DLC? I can't recall exactly atm, but it was something as ridiculous as that. I'll look for it later.

I posted a comment about it in another thread and I think I posted a thread about it awhile back too.

 Grundz wrote:

/all/ game producers are leaning towards tiny, cheap casual tablet/phone games rather than riskier AAA titles, which is having the odd effect of a lot of indie games becoming better and awesome.

They don't need to be tablet/phone games. You just don't need that much to make a good game (which seems to all go into cinematics and Hollywood writers anyway these days).

Nintendo knew about it 7 years ago, which is why they could release two consoles in a row that can do very badly and still be better off financially than their peers.

Right. I'd rather see a professionally produced 2d sidescroller than another battlefield: call of honor.

 LordofHats wrote:
Much like THQ before them, Square has fallen into the pit of thinking things will sale better than they realistically can and so they over budget the title to the point that it can never make the money back.

I wonder how much the dog is wagging the tail, and vice versa?

That is, in the current arms race in which production budgets are growing much faster than sales, I wonder how much companies are pressured to overstate sales figures just because the alternative is basically admitting that it costs them too much to make games at the accepted level of production. Better to be wildly optimistic in your sales figures than to say 'well we're going to lose money for a while until something seriously changes in the market conditions'

So basically the argument is fear instead of stupidity?

I can buy that.

 Melissia wrote:
Right. I'd rather see a professionally produced 2d sidescroller than another battlefield: call of honor.

I'm certainly bored of seeing more and more over-produced, increasingly samey mega-budget games. We seem to be long overdue for disruption innovation.

It's the observation that established market players produce more and more technically impressive products, but often limit themselves to a smaller and smaller niche of the market. Meanwhile new technologies come in with a newer, crude product, that due to price and a more direct business model quickly assume a mass position in the market. The more refined, technical products are alright with this as they find better profits in chasing the niche models. In time though, the new products refine themselves, and claim more and more business from the refined products, who in turn chase more and more niche markets until they're taken over entirely.

In gaming this happened before, when the consoles originally took up a cheap, mass market position underneath PC market. Nintendo and Sega gaming consoles couldn't compete with the PC for gaming power, but they were much, much cheaper. From there, PC gaming has moved into more and more powerful hardware with more and more elaborate game engines, while the consoles have followed them, each console one-upping the one before it. Price has crept up all that time, and left space below for new disruptive technologies.

Then the cheaper, simpler handheld games did the same thing all over again - cheap machines with simpler games came in and formed a new market left behind by the increasingly sophisticated consoles.

Now maybe smartphones will do the same thing - smartphones are pricy but they're bought for a lot more than gaming, and when the games are priced around $1 and you get them almost instantly after buying, well it's clear to see the advantages. Crazy Birds and Words with Friends are likely to be the start of something else.


Automatically Appended Next Post:

 Melissia wrote:
So basically the argument is fear instead of stupidity?

I can buy that.

That's a pretty good way of summing it up.

I dunno, at the moment, the PC gaming scene appears to mostly be backing off of absurdly high requirements. Although that might just be because of my focus on the indy game market... but even big name PC developers haven't really raised the requirements that much in half a decade.

Me and my friends have been discussing this and we think a parallel can be drawn to the film industry. In films there are three kinds of movie; the low budget film, the high budget blockbuster, and the mid-budget b-flick. Low budget films make money by trying to be as good as they can on as little as they can (essentially they are indie games). High budget films try to pour in their cash for a huge return (the AAA game titles). However there is no real equivalent in the games industry for the mid-budget movie. A lot of production companies get buy through the year by releasing a bunch of mid-budget movies that they can use to fund their other larger budget titles. Video game developers don't do this. They always try to maximize profit by pouring in the cash, or by making some terrible title that no effort was put into at all.

 Melissia wrote:
I dunno, at the moment, the PC gaming scene appears to mostly be backing off of absurdly high requirements. Although that might just be because of my focus on the indy game market... but even big name PC developers haven't really raised the requirements that much in half a decade.

Thats because of the console. It's not a coincidence that the PC minimum standard for the last 6 years has been the Nvidia 9800. That's because the Xbox 360 has processing power comparable to the 9800. Since most blockbusters try to maximize profits by being multiplatform, the consoles have kept minimum system requirements down on PC. The kinds of games that are often PC exclusives tend not to be graphically intense (RTS, MMO, simulators etc). Most shooters, which are really the drivers of graphics development in many ways, are designed console first PC second. That's kept the system requirements down for the past couple years.

 Melissia wrote:
I dunno, at the moment, the PC gaming scene appears to mostly be backing off of absurdly high requirements. Although that might just be because of my focus on the indy game market... but even big name PC developers haven't really raised the requirements that much in half a decade.

It isn't just the requirements, though that's part of it (and its great that the increases in hardware requirements finally settled down). It's also the price of games, and the pile of money and years of development invested in to each product. The point being that the industry is now trapped in a cycle of producing a more highly engineered, improved version of the last effort, over and over again, each time spending more and more money to exceed the last version.

A new Call of Battlefield thing needs to be bigger and faster than the last one, and then the next one bigger and better than that, and so on.


Now, I'm not saying we should all play smartphone games right now, because there's hardly any good ones. Words with Friends doesn't replace WoW, even when Words with Friends is free. But disruption doesn't work by replacing the old technology straight away.

The classic example is the old vertically integrated steel mills, which once utterly dominated steel production. But then minimills developed, which were cheaper and used less power, but were only really good for producing low end stuff like rebar. But they had a foot in the market, and plenty of scope to refine their processes, and so in a relatively short time they jumped up the market, producing more refined and therefore more profitable products, while the steel mills retreated into more and more high end, specialised products.


Smart phone aps right now are taking the junk end of the market, casual single dollar purchases from people who are bored on their lunch break. But there's a whole world of improvements and refinements available to them, while in the console market the AAA budget game producers can do what? Start making crappier, cheaper games?


Automatically Appended Next Post:

 LordofHats wrote:
Me and my friends have been discussing this and we think a parallel can be drawn to the film industry. In films there are three kinds of movie; the low budget film, the high budget blockbuster, and the mid-budget b-flick. Low budget films make money by trying to be as good as they can on as little as they can (essentially they are indie games). High budget films try to pour in their cash for a huge return (the AAA game titles). However there is no real equivalent in the games industry for the mid-budget movie. A lot of production companies get buy through the year by releasing a bunch of mid-budget movies that they can use to fund their other larger budget titles. Video game developers don't do this. They always try to maximize profit by pouring in the cash, or by making some terrible title that no effort was put into at all.

Good point. One of big reasons that those low and mid range movies get made is because their smaller budgets allow a lot more freedom to creators. They can experiment with new techniques and new styles of film making, and the bits that work can be slowly rolled up in to bigger titles. Resevoir Dogs becomes Pulp Fiction becomes Kill Bill. The smaller titles might not make more money on average, but they introduce you to talent and techniques that make your AAA projects more likely to make a good return.


To drag that back to the disruption innovation I was talking about, there's an idea in that theory that despite what most management techniques tell you about maximising return on assets, it's good to maintain small subsidiaries working in less refined parts of the market. So if the old vertically integrated steel mills had kept working in rebar, they probably would have used mini-mill technology to produce that rebar, and then continued to expand that technology and they'd likely still be in business today.

In the same way, gaming should do exactly what you said, make cheapo games and mid-range games. Make bucket loads of them and let them explore the boundaries of game design, and keep in contact with the best new talent in the industry.

The prevalence of metacritic "requirements" is kinda frightening. I remember when there was that big court case between the guys who made Call of Duty and the company that wanted to keep all their money (Activision) that the details of Bungie's soul-selling contract came to light, and it included a requirement for a minimum metacritic score. That's just absurd. Sales targets I can understand, but "You must get a good rating on this website or be in breach of contract"? That's nuts!

And Square's sales targets were extreme. They had very good sales, yet somehow weren't happy with them.