The latest Square Enix results have seen the Japanese video game giant book an extraordinary loss as it focuses its priorities on AAA games.
The loss of 3,733 million yen ($33m) is for its recently acquired subsidiary Luminous Productions Co. Ltd, which the company has repositioned to focuses entirely on top-tier video games, known as AAA games.
In an announcement of the extraordinary loss, the company explained its decision:
“Having conducted an in-depth review of the business strategy for Luminous Productions Co., Ltd., a wholly-owned subsidiary (the “Subsidiary”), the Company had decided to focus the Subsidiary’s development efforts on large-scale, high-quality AAA game titles, which best leverages the Subsidiary’s strengths.
“This decision has resulted in the booking of an extraordinary loss amounting to 3,733 million yen, including the disposition of the portion of the content production account related to the game titles under development at the Subsidiary and impairment losses on intangible assets.”
Luminous Productions’ AAA focus reflects changing video game market
Luminous Productions was opened in March of this year, with Hajime Tabata, director of the company’s flagship title Final Fantasy 15, at the helm.
At the time, Square Enix said that Luminous had been founded “with the sole purpose of bringing brand new types of entertainment content to a global audience”.
However, this focus appears to have shifted, with today’s announcement indicating that top-tier flagship titles to rival games such as the recently released Red Dead Redemption 2 are now the priority.
This move may sound like a conservative choice, but it reflects a wider move by the industry away from new platforms such as mobile and virtual reality, which only a few years ago were the main focus areas being discussed.
Mobile in particular appears to be being dropped as a key focus by Enix, following weak sales earlier this year.
While novelty has long been key to an industry expected to innovate each year, we are now appearing to be witnessing the emergence of a step change in AAA titles, as advances in AI and graphical capabilities make it possible to produce games that are dramatically more complex than previous generations.
A notable example in this space is the upcoming Cyberpunk 2077, which features complex interaction with thousands of non-playable characters and a storyline that alters with player choices.
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When successful, these generation-defining games are hugely profitable, but as they require development teams in the thousands, and often tens of thousands to complete, they have vast upfront costs.
Stock see modest rise despite disappointing Square Enix results
The wider Square Enix results, which covered the six months up to 30 September, were not great news for investors.
Net sales and operating income in the company’s console division decreased compared to the same period of the previous year, as did the massively multiplayer online role playing games division. The smart devices and PC browser division also saw performance below expectations.
These combined to produce a net sales drop of -15%, and an operating income of -61%.
However, Square Enix stock has seen a modest rise throughout the day following the results announcement, despite declining in days before.
Opening on the Tokyo Stock Exchange at 3,905 JPY, it has now risen to 4,045 JPY at the time of writing, briefly rising to 4,905 JPY before lunch.
This indicates that while investors were anticipating poor results, the decision to shift focus onto AAA games has largely been welcomed.