Square Enix President Talks Future
05.25.05 - 9:52 PM

Following yesterday's presentation of his company's financials, Square Enix president Youichi Wada gave same insights into his perception of where the game industry was heading. Wada stated "one could not be optimistic about the future". With the industry's consolidation continuing at a high pace, he highlighted the need to adopt a system compatible with the challenges posed by the next generation of hardware and platform diversification.

While Wada has repeatedly emphasized the growing role of online gaming in the past, he acknowledged the new online features offered by the three next generation console were in fact troubling him. As an example he cited Nintendo's plan to offer a game download service upon launching its new platform Revolution next year. According to Wada, the question of how much profit would be distributed to third party publishers was still entirely opaque. In regard to the other hardware platforms, he explained it was still an open question who would have to shoulder the costs for the proposed online portals. He also could not see how the money would be shared or who would share it once a game had been sold.

Following the launch of the next generation consoles, releasing software for the current generation of hardware would also face a major challenge: Restrained buying by customers saving their money for the new hardware will force retailers to lower their prices. Hence, retailers would make less money and distributors would also refrain from buying current generation games. As a result, the market for used games will get a boost leading to sales of new games declining even further. In case of a major title like Square Enix's PlayStation 2 RPG Final Fantasy XII, constrained buying would bring down the profitability from 36% to 30%.

For the Square Enix president, the aforementioned platform diversification means offering a diversified set of content to users of game consoles as well as cellphones. Under this strategy, game consoles and cellphones will be "windows" to view the same content. To implement such a strategy it was mandatory to go beyond just games, and build various business models based on movies, novels and DVDs. By offering customers the chance to access various media formats without having to choose one specific platform, content makers (third party publishers) could reduce the importance of specific platforms.

Wada described the next two years as one big battle. This key period would determine which role the various companies will play and who will be the main players on an altered game industry map. Therefore, Square Enix was looking into intensifying its cooperation with other companies. This could be achieved through merger and acquisition (M&A) activities. A key approach in this respect was the international specialization of development actvities. As an example, Wada cited one part of the job could be done in China, another one in Ireland. However, if a company was unable to focus on the respective division's strong points, it would not survive.

Chris Winkler