Another week, another major video game acquisition. But this time, it’s different. Square Enix, the Japanese publisher known best for Final Fantasy, said it has agreed to sell off its Western studios and intellectual property to the acquisition-hungry Swedish holding company Embracer Group, including the Tomb Raider franchise, for just $300 million.
The sale speaks to the state of the game industry in many different ways at once: about single-player gaming as a business, Square Enix’s management style and how classic properties as well-known and beloved as Tomb Raider can be worth peanuts compared to mobile, free-to-play games.
Square Enix wanted, but never got, a big hit. The history of Square Enix’s Western game business can be summed up in two words: “missed expectations.” The company repeatedly threw its own games under the bus for underperforming, and it was never exactly clear what sales milestone Square Enix was hoping to achieve with its reboots of Tomb Raider, Deus Ex and Hitman.
- Many of Square Enix’s Western entries over the last decade came from Crystal Dynamics and Eidos-Montréal, the former of which developed classics like Gex and Legacy of Kain before taking over Tomb Raider from Core Design in 2006. Eidos was put in charge of reviving cyberpunk cult classic Deus Ex.
- After years of releasing games to underwhelming sales and after Hitman maker IO Interactive did a managed buyout to release itself from Square Enix ownership, the publisher nabbed a potentially lucrative Marvel license in 2017. However, both the Avengers game in 2020 and last year’s Guardians of the Galaxy also underperformed. The state of the multiyear Marvel deal is currently unknown.
- Square Enix says the sale will help it invest in forward-looking tech, and getting rid of the properties “enables the launch of new businesses by moving forward with investments in fields including blockchain, AI, and the cloud.” The blockchain bit is certainly turning heads.
Did Embracer Group get a bargain? Much of the conversation around Monday's sale is concerned with just how cheap it seems: Tomb Raider, Deus Ex, three studios and a back catalog of 50-plus games for less than a third of what Embracer paid for Borderlands studio Gearbox last year. It sure seems undervalued at first glance, but the numbers may tell a different story.
- Data released from Square Enix Monday indicates that the Deus Ex reboot sold only a combined 12 million copies, whereas the three Tomb Raider reboot games sold a combined 38 million copies. Not bad numbers by any means, but not stellar, either, when you factor in heavy post-release discounting. (The entire trilogy released as a bundle last year went on sale for $20.)
- The future of AAA gaming has been fraught for years, and it’s only getting worse. The market for single-player games is especially cutthroat, with stiff competition from live service and free-to-play games that can generate more in a month than most single-player games make in a lifetime.
- Square Enix’s reported profit margins for its Western studios were also razor thin. According to the share transfer agreement, Square's North American studios generated about $200 million in revenue last year, but earned less than $8 million in operating income.
- “Price is fair, both sides may be making bets with some risky assumptions,” wrote NPD analyst Mat Piscatella. Metaverse expert Matthew Ball was more blunt in a now-deleted tweet: “Assets sold at low price from company trying to sell them for *years* during [a] record M&A period, were not sold at low price, were not doing well, were not haphazardly sold.”
Embracer Group has a plan. So what can a fast-growing gaming conglomerate do that one of the oldest and largest Japanese publishers can’t? It’s not totally clear right now. Square Enix’s Western business always felt messy and mismanaged, and its games poorly marketed.
- “Embracer believes there will be an increasingly strong demand for high-quality content, including AAA single-player games, over the decade,” the company wrote in a press release.
- It’s a risky bet. Single-player games take years and millions to make, and fewer and fewer gamers seem to be making time for them in between Fortnite, Roblox, Call of Duty and whatever else is competing for our attention. Elden Ring and first-party Sony and Nintendo games may increasingly be the exception in the future.
- Still, Embracer seems to have a pretty ironclad acquisition strategy it’s following through on, and its massive financial growth over the past year is proof its making the right bets so far. This deal, when closed, will give Embracer 124 internal studios, more than 14,000 employees and a pipeline of more than 230 games, of which 30 are labeled AAA.
This should not be read as Square Enix giving up on single-player games. The company is still heavily invested in Final Fantasy, with a new main entry in development, and has Dragon Quest, Kingdom Hearts and other related role-playing series squarely in its bread-and-butter zone. Square is also keeping control of the Just Cause and Life is Strange series and planning to publish the action game Forspoken later this year.
But Square’s winding and underwhelming attempt to break into the Western game market over the last decade by trying to revive old classics has ended with what many industry watchers are calling a fire sale. It’s not a triumphant end to this chapter of Lara Croft, but it's an exciting and hopefully more financially sound beginning of an all-new one.