After losing $200 million on Marvel games, Square Enix now fears risk

After losing an estimated $200 million from Avengers and Guardians of Galaxy, Japanese games publisher Square Enix is afraid of risk and is taking big measures to combat it...including possibly selling off stakes of its developers.

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In a recent Q&A with investors, Square Enix made some very interesting comments about the future of its game studios. Executives in the Japanese games publisher, which is known for major franchises like Final Fantasy, said that management is open to the idea of "forming joint ventures and taking minority stake" in order to reduce the significant volatility involved with making games.

This volatility and risk was exposed with two major flops for Square Enix; the company's duo of Marvel games, Avengers and Guardians of the Galaxy, not only missed internal expectations but led to an estimated loss of $200 million. This heavy loss led Square Enix to sell its entire Western game studios branches, which include Crystal Dynamics and Eidos Montreal, to Embracer Group for just $300 million. Also included in the deal were franchises that continually missed Square Enix's lofty expectations including Tomb Raider and Deus Ex.

While Square Enix is still profitable and still doing well (despite losing 37% in Q1 revenues due to foreign exchange rates and lower game sales), the company is gearing up for major new games.

Square Enix's spending on new games has swelled to a record-breaking $792 million in FY22. Square Enix is spending more money on game development than it ever has before and it is doubling-down on major fan-favorite franchises like Final Fantasy 7, which is getting multiple new game releases.

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Square Enix wants to do it all...which requires lots of risk.

The publisher's communications do seem odd considering Square Enix is trying to invest in practically every major technological breakthrough in the gaming space. Square Enix CEO Yosuke Matsuda has promised to invest in more fledgling tech like cloud gaming, VR/AR/XR, and more recently, the volatile and ultra-speculative market of NFTs and blockchain gaming.

Matsuda has expressed interesting in creating a play-to-earn blockchain platform for future Square Enix games.

"The cost of developing a single title is on the rise. As such, owning studious outright means that while you can expect major returns, your downside risk is also substantial. The result of this is greater-than-expected earnings volatility.

"Therefore, rather than insisting on full ownership, we want to additionally adopt other approaches such as forming joint ventures and taking minority stakes so that we will be able to hedge our investment risk, thereby controlling our volatility and achieving both growth and the optimal balance sheet profile."

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