Why Square Enix is selling Tomb Raider and exiting the Western game market
Hello, and welcome to Protocol Entertainment, your guide to the business of the gaming and media industries. This Tuesday, we’re discussing Square Enix’s sale of Tomb Raider and its Western games unit, the controversial pro-blockchain comments of ex-Nintendo president Reggie Fils-Aimé and the new puzzle sensation Knotwords.
Square Enix’s single-player struggle
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 combined operating income.
- “Price is fair, both sides may be making bets with some risky assumptions,” wrote NPD analyst Mat Piscatella.
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 it’s 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 is 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.
— Nick Statt
“I’m also a believer in the concept of ‘play-to-own’ within video games. And I say this as a player where I may have invested 50 hours in a game, 100 hours in a game … There’s some games I’ve invested 300 hours in a game. And when I’m ready to move on to something else, wouldn’t it be great to monetize what I’ve built?” — Former Nintendo of America President Reggie Fils-Aimé is a fan of blockchain gaming and NFTs, according to comments he made during a SXSW talk back in March that was only just posted to YouTube last week.
A MESSAGE FROM WORKPLACE FROM META
100% of C-suite staff surveyed by Workplace by Meta said that frontline workers were a strategic priority for their business in 2022, but nearly two in three of them said that keeping their frontline staff, who bear the brunt of the stresses of the workplace most acutely, had only become a priority since the pandemic hit.
In other news
Meta plans to release four new headsets by 2024. The company will be releasing two new Quest models and two high-end standalone VR headsets over the next two to three years, according to The Information.
Activision Blizzard hit with more labor charges. The Communications Workers of America has filed another NLRB complaint against the game publisher, accusing it of threatening employees against speaking out about California’s ongoing discrimination lawsuit.
Why Netflix’s Tudum was doomed. A lack of direction and the departure of CMO Bozoma Saint John may have as much to do with Tudum’s downfall as the company’s decision to cut costs.
Epic Games accused of hiring discrimination. Ex-Apple and Blizzard employee Cher Scarlett, a well known labor activist, is accusing the Fortnite developer of refusing to hire her on account of her history of organizing and speaking out in support of unions, The Washington Post reported.
Lionsgate strikes a deal with Peacock to bring movies to the NBCUniversal-owned streaming service. This follows a similar deal with Roku — apparently, everyone wants “John Wick”?
Berkshire believes in the Activision deal. Berkshire Hathaway now owns nearly 10% of shares in the game publisher in a bet that the deal to be acquired by Microsoft will pass all the required regulatory hurdles over the next year. If the deal closes, the firm gets paid $95 a share.
PlayStation adds fresh mobile talent. Sony has hired Kris Davis from mobile gaming firm Kabam and Meta’s Olivier Courtemanche, who was formerly product director at Zynga, to help lead its smartphone gaming efforts.Microsoft continues carrying the E3 torch. There’s no Electronic Entertainment Expo this year after both the physical and digital events were canceled, but Microsoft said last week it will host its standard summer showcase for Xbox Game Studios and Bethesda titles on June 12.
The word puzzle renaissance
One of the oldest and most reliable game genres is the word puzzle. While crosswords were introduced in the early 20th century, word and magic squares date back to ancient times. And yet, the fundamental concepts of human language and logic are so flexible that we’re still getting novel takes on the genre in 2022.
Last fall, the world slowly discovered Wordle. And now we have Knotwords. The mobile game, developed by indie puzzle mastermind Zach Gage and released last week, is a blend of logic puzzles and crosswords, forcing you to fill in squares of letters to form words without being given any clues. It’s an ingenious game that's easy to grasp while featuring a staggering amount of depth.
I’ve been obsessed since I downloaded it last week, and doing the Knotwords daily puzzle has slotted in neatly alongside Wordle and the other smartphone impulses that keep me from getting out of bed when I’d like to. It’s available for free, with a generous pricing scheme for access to more puzzles. If you’ve grown tired of Wordle or find traditional crosswords to be too time-consuming, Knotwords features a perfect blend of novelty, difficulty and accessibility. Just beware: It’ll burrow itself into your brain quickly and efficiently, and I don’t see it leaving mine anytime soon.
— Nick Statt
A MESSAGE FROM WORKPLACE FROM META
Businesses are starting to turn to workplace communication tools. Such tools enable frontline workers to feel more connected to the rest of their business, to raise concerns and to provide feedback on potential pain points or points of improvement. By bridging that divide, companies can unlock new savings and efficiencies, and build a business that can last for the long run.
Thoughts, questions, tips? Send them to firstname.lastname@example.org. Enjoy your day, see you Thursday.