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Square Enix blames “huge slump” in US sales for western title failures

Tuesday, 9th April 2013 06:11 GMT By Brenna Hillier

The European market is soft but its poor sales in North America that really surprised Square Enix this past year, resulting in an expected extraordinary loss out of its next financial report.

Square Enix has released an English transcript of the meeting in which it advised investors of an extraordinary loss last quarter, prompted CEO Yoichi Wada’s resignation, and admitted that its last three big western titles hadn’t met projections.

The publisher noted that its current financial year results are not hugely varied from previous years, and that net sales are close to forecast. The one area of major discrepancy is in the Digital Entertainment segment, where Square Enix forecast net sales of ¥94.5 billion and is expected to come in at ¥87 billion, a variance of ¥7.5 billion ($75.5 million). Of this ¥87 billion, sales are divided as follows: ¥53 billion in HD Games, ¥23 billion in Social Gaming and Others, and ¥11 billion in MMO.

Western HD Games fail to perform
“Of the negative variance of ¥12.8 billion against the operating income forecast, a large portion (more than ¥8 billion) originates from HD Games,” Wada explained.

The executive said Eidos’s portfolio was a huge part of the publisher’s console profits in the year following its acquisition, so Square Enix has pushed to release one or two western-developed and focused titles every year. Encouraged, Square Enix gambled a bit on FY2103, releasing western-developed titles only, and no Japanese-made blockbuster.

“We put considerable amount of effort in polishing and perfecting the game content for these titles, receiving extremely high Metacritic scores. However, we were very disappointed to see that the high scores did not translate to actual sales performance, which is where we see the substantial variance in operation profit/ loss against the forecast,” Wada said.

Square Enix did not disclose exact sales figures or projections, but said it expected to sell 2-2.5 million units of Sleeping Dogs in Europe and North America; 4.5-5 million units of Hitman: Absolution worldwide; and 5-6 million units of Tomb Raider worldwide.

Square Enix’s financial forecast was actually based on a figure between 80-90% of its actual estimate, to allow for discrepancies, but sales fell well below the mark anyway.

“The European market was generally soft, however what affected us the most was the huge slump in North American sales. Not only were sales sluggish, but we were also hit by additional costs in dealing with distribution channels, such as price protection and rebates, which placed huge pressure on our profit and loss,” Wada explained.

“A large portion of the variance against forecast comes from the three titles I just mentioned.”

A practical example of the market variation is found in the March PSN charts; in Europe, Tomb Raider was the top PS3 game, while in the US it came in at fifth.

Wada acknowledged “certain degrees of success” from its western development teams, but said Square Enix’s revenue model is “outdated” and its selling capacity is “far weaker than [iy] ever imagined”.

“In the end, we simply failed to sell the required number of units,” he said.

Wada also said that development costs for the Wii U version of Dragon Quest 10 are having a negative effect on Square Enix’s margins; it released too close to the end of the year to have any significant impact sales-wise – although it should be noted that it’s not performing well. Later in the meeting, Wada said the MMO division is not living up to expectations, either.

Social, browser and mobile going strong
Square Enix expects its Social Gaming and Others division to return good sales figures, noting “continuous growth in net sales” and improving profit margins.

Wada said Square Enix is happy with its “competent” IPs, and that the social gaming division has improved since relocating and reorganising so teams can share expertise across projects.

“Although we have yet to come up with a powerful title that can turn around the entire gaming industry, we are pleased to see extremely strong and steady growth in this area,” he added.

Sengoku IXA and Million Arthur were cited as examples of successful titles produced in this division.

Cutting costs
Square Enix is now making an “extraordinary loss in an effort to sort out items not achieving expected revenue levels, through scrapping those items and terminating production”, Wada said – making a loss on disposing of unprofitable projects, in other words.

Of a ¥4 billion loss, more than ¥2 billion is related to studios in Japan, where production has been halted on some work-in-progress games.

More than ¥1 billion is related to the closure of a US division to develop casual games for smartphones, which “did not go well,”.

It looks like some projects have been closed in European studios, too, to the tune of “a few hundred million yen”.

In addition, Square Enix expects a ¥2 billion loss related to restructuring.

Executive shuffle
Wada took personal responsibility for Square Enix’s downfall in FY2013, voluntarily withdrawing from the board of director’s voting process and naming his successor.

“I recognize that the revisions to consolidated results forecasts for the current FY ending March 2013 are shocking, and I sincerely apologize to our shareholders and investors for the poor performance and not meeting your expectations,” Wada said.

“We have done everything we can do to adapt and respond to the drastically changing environment; however we have not been able to accomplish satisfactory results since FY2011. I intended to do what had to be done but these results came despite my best efforts. The seeds that we have planted have by chance, or by necessity, all worked in synch negatively resulting in a huge loss for FY2013. Consequently, we are currently planning some fundamental management reforms.”

Newly incumbent Square Enix president Yosuke Matsuda has promised a thorough review of the company’s business, and lay-offs have already begun, striking the Los Angeles office.

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12 Comments

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  1. Francis O

    Yes, I also pointed to this. Square Enix is making good Western games, but the cost to make these games are high. hey need to go back to what made them famous in the first place, amazing RPGs

    #1 1 year ago
  2. Bashtee

    Bad management, period. 5-6 mio. units for Tomb Raider? MMO division not living up to his expectations?!

    Anybody who saw the FF14 Beta 2 years ago, could see one of the worst MMOs ever. It didn’t even had a hardware cursor. Nonetheless, they went on and released it.

    After all the fails with previous Tomb Raider titles, it was more about gaining the customers trust back. SE screwed up.

    And $20 mio. for games, which will not be released…

    #2 1 year ago
  3. Ali

    WTF is this ? They have had awesome sales last year/beginning of this year. They are putting too much blame on their western staff even though by any other company’s standard those sales are more than enough.

    Their Jap studios have been doing nothing, their FFs haven’t really been great nor selling great in ages and I bet ya they cost much more than Sleeping Dogs and Hitman.
    I loved SE for picking up the dying Eidos, but if they are screwing them then I really wish that they just sell em to those who can appreciate them.

    #3 1 year ago
  4. salarta

    So now we actually know that the numbers given previously for units sold actually did reflect sales to that point, and not what they expected to make.

    I doubt it will be the case, but I’m hoping that the sales figures Squeenix planned for either results in the new branch of Tomb Raider not continuing, or at the very minimum that the proper Lara Croft gets to make a big return and have her origin story told. I MIGHT be able to accept the “new” Lara if she’s treated like a secondary spinoff concept of Lara to the no-substitutes original, as opposed to trying to completely do away with the original Lara in favor of this new one.

    Other than that, yeah, Squeenix makes these mistakes all the time. It’s just that this time, they gambled too much on blind fanboys and fangirls cushioning them. They always essentially try to whore out whatever they think will make them the most money. It was FF7, then the FF franchise as a whole, and they originally would have done the same to Parasite Eve if 3rd Birthday had succeeded in sales. In the process, they made cheap ports, half-assed spinoffs and sequels, they even tried to pull some nickel-and-diming microtransaction BS with such projects as My Life as a King and FF4:TA (both games that claim you get the full game for $10-15, but in truth you need to spend $40+ for the full game). Now, they tried it with Western games and it backfired in a big way.

    #4 1 year ago
  5. The_Red

    So back to ruining FF even more while ending the awesome western focus that brought us Deus Ex HR, Tomb Raider and Sleeping Dogs? Well done SE.

    #5 1 year ago
  6. salarta

    @5: Pretty much on the first half. Though I wouldn’t be surprised if sequels to the games mentioned in the second half amplify everything bad in them, because that’s how Squeenix operates: upon failure, double down on the worst qualities and purge the best. When Squaresoft took a huge financial hit due to FF:TSW and got bought by Enix, Squeenix took the core problems of “slapping the FF name on things that don’t deserve it” and “straying too far from the series’ roots” that FF:TSW had, and made that the driving force of almost everything FF-related they did for the following decade.

    #6 1 year ago
  7. dtyk

    Full of shit. This is just bad management in Japan, and then they blame it on their Western efforts. It doesn’t take a genius to figure out how much money they waste on 10 year development cycles.

    #7 1 year ago
  8. dotfaust

    I wanna slap these people… Where are they pulling these sales projections from? 4.5-5 million for hitman in the U.S. alone? 5-6 million for Tomb Raider?! This is ridiculous! These games don’t even resemble their respective predecessors! They’re just random blockbusters with a familiar name slapped on the cover. If square is hoping to get gta/halo/cod sales, they’ve got to build a name and grow it into that huge money maker, the same way they grew final fantasy (before they completely squandered the name). You can’t just churn out “triple A” releases one after another and just expect these unrealistic numbers. Make games with manageable budgets, realistic expectations, and for god sakes respect what made those titles so great in the first place, then if one of them starts catching fire you can start pouring the big bucks into it! Gaaaaaaaaaaaahhhggggggghh *takes a dump onto my own face and passes out

    #8 1 year ago
  9. SplatteredHouse

    So, to meet expectation, Tomb Raider had to DOUBLE a series best opening month. Wtf were Square Enix smoking. Their Japanese releases have fallen off, and like even Wada said, they went all in on western projects, two of which were wearing the skin and names of popular franchises, while bearing questionable relation to the material. I did not want to play another Uncharted, so I didn’t buy Tomb Raider.

    I didn’t appreciate the narrative/gameplay being irreconcilably separate – and I’d already noticed that BS from Far Cry, which I also didn’t get – so, again I didn’t get TR. Finally, I did not appreciate the pre-release coverage being so forced and abrupt. They just showed the same thing time and again (Lara finds bow, pangs after yet still brings down deer…oh, woe is she!) Even Crystal Dynamics doesn’t get a free pass. So much marketing noise around that game’s launch, yet so little information.

    I actually found out what the game was like, from watching Youtube impressions; and what I saw was by no means bad but also not great, although they’d thoroughly soured me from their antics beforehand, had the publisher, to the point that I opted for something else, and still don’t intend to play Tomb Raider.

    #9 1 year ago
  10. salarta

    @8, 9: Again, keep in mind how long development took, how much marketing was done (I’m betting this was among the most expensive marketing campaigns, if not THE most expensive, to date for a video game), hiring Rhianna Pratchett (her pay was probably higher than your usual writer would get on account of her credentials and name), and probably more aspects that don’t come to mind. After all, Capcom got $5-6 million for Resident Evil 6 when they expected several million higher, and RE6′s marketing campaign wasn’t anywhere near as aggressive as Squeenix pulled for Tomb Raider.

    That’s also not counting that the Resident Evil franchise straying from its past was giving it a lot of negativity, whereas it seems most people hated the Tomb Raider franchise and its history prior to the new game. As I’ve noted before, most people praising the new Tomb Raider also seem to think Lara Croft was nothing but a pair of big boobs with guns until the new game. Such massive hatred for the past implies that consumers would be happy with just about any kind of revision of the Tomb Raider series that strays from the original Lara Croft and Tomb Raider franchise like it’s a cancer. And that’s what makes the lower numbers appear unusually low: for all that marketing, for all the time and money poured into development, and for all the hatred toward the past that pretty much says “you have free license to do just about anything you want and get away with it short of making a porno,” it still didn’t manage to reach the lower end projections of more popular franchises like Resident Evil.

    #10 1 year ago
  11. DSB

    @9 You said it, man.

    The PR really didn’t manage to sell it as the quality game it apparently is. But then that’s more of a footnote compared to Square Enix expecting a completely unrealistic performance.

    I recently bought it, but I haven’t had the chance to play it yet. Looking forward to it though.

    #11 1 year ago
  12. Espers

    S-E, western people are busy playing with tablets and phones like retarded zombies, they don’t give a shit for a great gaming experience on the home console !! stick to Japanese theme games !! leave the point and shoot games to western publishers.

    #12 1 year ago