The president of Square Enix called the company's fiscal 2013 "a very difficult year." Sluggish performance of the publisher's high-definition games and slow sales of new arcade games contributed to a $145 million net loss for the Final Fantasy and Tomb Raider publisher.
Square Enix's poor performance, which included an operating loss of more than $64 million — the company's first since the merger of Square and Enix — is not a one-time event, according to president Yosuke Matsuda, and reflect "an intrinsic problem within the HD game business."
Matsuda points to three Square Enix-published games (Sleeping Dogs, Hitman: Absolution and Tomb Raider) that failed to meet their respective targets in Europe and North America resulting in "financially unsatisfactory consequences."
In a letter to shareholders in the company's annual report (PDF), Matsuda wrote that the HD games category "faces the structural issues of an inflexible earnings model." The earnings model of making big investment, blockbuster games and shipping them on discs offers limited opportunities to make money while those games are in development, he said, and carries substantial financial risks. Free-to-play games, on the other hand, offer greater flexibility and opportunities to engage with customers as software is being developed.
"it is extremely important for the HD games category to enable transition from a disc-based earnings model to a more flexible one"
"Consequently, the time has come for us game makers to take more flexible approaches in offering games and to devise various earnings models conforming to customers' game-playing environments, moving away from the limited outlet of disc-based distribution of games," he said. "In this current of change, it is extremely important for the HD games category to enable transition from a disc-based earnings model to a more flexible one. This will define the future way we pursue HD games development."
In other words, Square Enix is looking at the profit-making opportunities of free-to-play games and applying them to titles that heretofore followed more traditionally developed, disc-based models.
Matsuda also points to the growth of smartphone and tablets, which now support high-definition games, like Square Enix's Deus Ex: The Fall. That helps expand the audience for HD games, but will require Square Enix to adapt its development practices.
"[T]he spread of smart devices has now enabled multi-device, multi-environment experiences of HD games," he said. "Once distributed exclusively on discs, HD games are now available through other media. We must shift away from the traditional divided structure in favor of a unified system that aligns earnings models with game development."
Matsuda said adapting Square Enix's business to meet the changing environment is a priority for the company in 2014.