Square Enix's new live service game bets aren't paying off very well...and the publisher really needs new hits right now.
Square Enix is a well-diversified business. It makes most of its revenues from browser and mobile games, but Final Fantasy XIV consistently delivers quality revenues and mainline AAA games typically prop up yearly earnings with a fusillade of sales. Things get murky when Square Enix (and other publishers) try to capitalize on multiple segments at once with a single product. As we've seen with failed games like Babylon's Fall, which may be Square Enix's biggest flop to date, this combination is a risky bet that can backfire.
While Square Enix is still doing pretty well for itself and is in no real danger earnings-wise, we have to mention that its new live service bets haven't taken off as much as the company would have liked. Babylon's Fall was disastrous and not only failed to meet expectations, but it ultimately failed in every aspect as both a live game and a commercialized, full-priced product. This may not have been a big deal for Square Enix, though, considering it's a smaller-scale type of game developed by PlatinumGames. Bablyon's Fall was, however, the latest example in Square Enix's multi-faceted business model which attempts to capture multiple games industry segments into one package (in this case a monetized live game and a premium product).
That being said, PlatinumGames did develop one of Square Enix's most successful games in recent memory with NieR Automata.
Babylon's Fall was recently removed from the market and will be entirely terminated in 2023.
Not only was Babylon's Fall a big miss, but Square Enix also closed down Final Fantasy VII: The Last Soldier, its strange battle royale mobile mashup set in the FF7 universe. Games like The Last Soldier are typically lower risk because they're all-digital and have no delivery or distribution costs associated with them.
That's two failed live games for Square Enix. These misses also come at a time when the company needs more guaranteed hits.
Square Enix recently sold its entire Western games division to Embracer Group for $300 million, including Deus Ex developer Eidos Montreal and Avengers developer Crystal Dynamics. They even sold off a treasure trove of franchises including Tomb Raider, which has sold over 80 million copies in its lifetime, and Deus Ex as well.
Square Enix sold these properties off because they lost an estimated $200 million from Guardians of the Galaxy and Avengers games that were developed by these two studios.
The goal of this sale was to make Square Enix into a more lean and controllable force with a targeted focus. However, if history has taught us anything, Square Enix is anything but laser-focused. There's things they want to do, including new mainline hits and continued FFXIV expansions, but the publisher is quick to latch on to emerging, risky trends, including live games and microtransactions (often where they don't necessarily make sense, as in Mankind Divided), and NFTs, a wildly speculative market.
The publisher has said it is also thinking about licensing its IP rights to external developers to help mitigate risks associated with sales failures.
Square Enix also spent a record $792 million on games development in FY22, and new experimental games in these nascent markets could be a part of that spending.
There's even talk of Square Enix creating a play-to-earn blockchain gaming platform for future titles.
Right now Square Enix isn't in bad shape. That could possibly change if the publisher suffers more failed games.