Square Enix II: The JRPG masters
In the second part of this series, we explore Square Enix's videogame triumphs (in JRPGs) and failures (everywhere else!)
In the first part of this analysis, we went through Square Enix's smaller segments (arcades, merchandising and manga).
But Square Enix's best-known IP is, without any doubt, Final Fantasy. But while it occupies a privileged spot in many gamer's minds, it is not a single IP, and far from the only valuable one in Square Enix's portfolio.
In this part, we will review first the financial situation of the videogame division and its profitability, the evolution in the last few years and their upcoming games, and not only that, but the core IPs in their library. But first, let's start with understanding the three different business models that hide under this segment.
The business models: HD, SD, MMO
While the IPs are shared between all modes, we have three very distinct ways to make money here:
HD games, or, as we old people like to call them, games. You buy a copy and then play or replay as much as you want, but other than some very particular scenarios, online play is relatively limited. This is the most problematic segment and has had losses at least for the last 2 years, likely longer (but Square Enix didn't disclose subsegments back then). Despite the titles making 500-600 $ million per year in aggregate, they still can't recover costs. At the same time, it is the source of the IP the other branches use, so you could be tempted to consider it an investment. This segment includes all consoles and PC, including portable consoles like the Switch.
MMO: PC/Console online multiplayer games. In the case of Square Enix, shared universes with seasonal events and large updates from time to time. They make about half the revenue of the segment above1, but their margin is 40-60%, depending on the year and what has been released. They make money through content packs, in-game purchases, subscriptions to servers, and cosmetics. They have 2 main games, Final Fantasy XIV and Dragon Quest X, although FFXI is technically still open, but without new big updates being released. FFXIV gets big updates on a biannual basis, more or less, while DQX gets more frequent but smaller updates. Both have going on for very long (since 20132 for FFXIV, and 2012 for DQX), but so far aged gracefully. So far, no attempts to add to the roster have been really successful3. The good part about MMOs is the much higher LTV of a user, and if they have critical mass they are incredibly profitable because the churn among heavy users is very low (as it becomes a very important part of the user's life). Hence the good margins.
SD (Smart Device) games, or mobile. There is a host of games here based on Dragon Quest, Final Fantasy, and other properties (Octopath, SaGa). The segment as a whole is the biggest in terms of revenue and has around 14% margins. The biggest contributors to revenue are Dragon Quest Walk (2019) and Dragon Quest TACT (2020) (both only in Japan) and FFVII Ever Crisis (2023), but there are many more relatively relevant ones. Despite Ever Crisis’ contribution, the trend is downwards in the last few years. In SD, we are dealing with service games of a sort, but in general with lower loyalty and higher costs (especially the cost of getting more users to replace the ones that leave). In Square Enix's case, we have to add the royalties the actual developers (and in some cases operators) of the games get. Because Square Enix doesn't develop their mobile games on their own.
The financials and current situation
Now that we have looked into what the business model is, let's look at the financials. First, we have the PNL, and what it looks like is, like many game makers, there was a COVID boost and then a bit of a hangover.
Except in this case, the hangover seems impressive, with profit levels below 2019 despite revenue being up 20%. Not only that but the corporate structure also scaled a lot, and I think it was due to the bigger games structure, given the timing, so you have to add a further 7B in expenses to that tally.
We do have the data per line to have a more detailed analysis (although weirdly enough, the subsegment breakdown was not done for operating profit for 2021 and 2022)
As you can see, HD revenue has always been wildly noisy, and SD and MMO revenues are still above pre-pandemic levels, and the same is true for their operating profit. In H1 FY25, SD looks weak despite Ever Crisis doing decently as the portfolio ages. However, Dawntrail revitalized MMO, which is doing even better than in 2022. HD is, of course, still losing money, although very little (and I think it won't lose money this full FY).
HD is, however, a painful story. While the 2020 losses due to lack of releases are understandable, FY23 and FY24 were supposed to be much, much stronger than they were.
The lineup for FY23 was a bit weaker (Octopath Traveler II, and FFVII Crisis Core were in the lineup along with new properties like Valkyrie Elysium and Forspoken), but FY24 was supposed to be mindblowing, with both FFXVI and FFVII: Rebirth, along with Foamstars. Of the 7 titles mentioned, I think 4 are almost unequivocal flops (Valkyrie Elysium, Forspoken, Foamstars, and Rebirth4).
Not only that, but as we saw in the previous article, Square Enix has really good cash conversion in their other businesses. In videogames, though, it is a bit different. Though everything flows through the PNL eventually, games require significant investment that in Square Enix's case is booked in the content production account, so the results have to be adjusted based on that variation as well
What we can see here is that in 2020, 2021 and 2022 cash conversion was a bit worse than the results imply, while in 2023 and 2024 it was a lot better, all else equal5. The trend of reducing ongoing investment has changed in H1'25 with a 3.6B increase. But still, something much more moderate than the increases in 2020-2022.
Square Enix's game development issues
While one of Square Enix's issues is the decrease of profits in the SD area, that was always a bit of a sideshow for them, as you can check by who is developing their games. All their successful mobile games have other studios involved. DQ Walk? - Colopl6. DQ Tact? Aiming7. FFVII Ever Crisis? CyberAgent. That's part of the reason why the margins are so low in this segment. Maybe they should acquire core competencies in the area, but they don't really have them as of now. I will discuss their strategy (or lack thereof) later, but you can't always count on something with DQ Walk's level of success.
HD is a different area. It should be a core competency of Square Enix, and they do develop major titles. But how are they unable to generate profit when they are getting $500-600 million in revenue per year? Reverting that and getting it to be profitable is key for Square Enix. Let's review what has been happening.
Repeated failures outside their core expertise
Foamstars, Babylon's Fall, Forspoken, Outriders… all of those failures share similar characteristics. First, almost all (except Forspoken) were developed externally. Second, all of them are outside Square Enix core area (JRPG + Japan-aesthetics action RPG8). Third, they all had pretty large budgets, and failed to be profitable.
If you want to expand to a new area, I think you need to do it either with an internal team or with a limited budget. Preferably both, because you need to build internal muscle in a new genre, especially if your entire machine is specialised in a relatively niche genre. And the jump to a AAA game in a new genre might still very well fail!
Cannibalization
Maybe you think I am going to talk about getting FFXVI and FFVII: Rebirth in the same fiscal year and sure, I am sure there was some cannibalization there, or at least some exhaustion when Rebirth's marketing hit. But at least FF main games appeal outside the core JRPG fanbase. The same could be said about Dragon Quest games in Japan, they have their own fanbase and don't compete in the same realm.
But the same is not true for most of their games. If you release Valkyrie elysium, The Diofield chronicle, Triangle strategy, Star ocean 6, Tactics ogre reborn, Stranger of paradise, Voice of cards, Various daylife, Chrono Cross: The radical dreamers edition and Harvestella in a single calendar year, they are going to affect each other a lot. This happened in FY22, FY23 and, to a lesser extent, FY24.
A big part of that was caused by COVID which not only created a new content arms race in gaming but also delayed a lot of projects… that then got released in bulk in calendar years '21, '22 , and '23. Square Enix was, I think, a clear victim of that, with about 4 relevant titles in calendar year 2020, 15 in 2021, 18 in 2022, and 11 in 2023. 2024 is back to a more normal schedule, with 89.
PlayStation focus
In this day and age, running their mainline Final Fantasy games as PlayStation temporary exclusives is counterproductive. I am sure when they first made the decision it was a great deal, but PlayStation is no longer the only platform high-end JRPG enthusiasts use (although it is still the one where they are over-represented). But I think a big part of the reason for Atlus's progress in the last few years is moving to true multiplatform with simultaneous release, and there you have Metaphor: Refantazio, competing with FFVII: Rebirth despite being a completely new IP10.
Lack of promotion
One of the complaints you hear the most from Square Enix fans of late is that FFVII: Rebirth has barely been publicized. That tracks with my subjective impression. At the same time, it was released only 8 months after FFXVI, and while those are different properties really, in terms of promotion it is harder to make yet another FF resonate… so it seems they didn't try too hard.
I suspect the same applies to other games in the lineup discussed before, as there was just too much in the lineup competing for attention.
A light at the end of the tunnel
A lot of these problems are being solved already (lack of promotion and cannibalization are a result of the COVID glut), and I think the company is taking steps to address the rest, as we will see in part 3. This FY the release lineup has been a lot less ambitious (a SaGa game, a Life is Strange one, Visions of Mana, and everything else are remakes - Dragon Quest III, Fantasian, Romancing SaGa 2, Kingdom Hearts HD11), but is working decently, especially Dragon Quest III.
The only confirmed game for 2025 is another Dragon Quest remake, but we also know they are working on Dragon Quest XII and Kingdom Hearts IV, although they don't have release dates. I am especially interested in the path that the Dragon Quest IP seems to be following, as we will discuss in that section. But the main point is that we know they are
Mostly working on multiplatform titles
In their core area and evolving their core properties
They terminated some external publishing contracts, like the one with PCF
The pipeline is not so clogged anymore
Maybe I'm stupid, but I think it might work.
MMOs: Square Enix's bright spot
We have been talking about Square Enix's woes, and we need to talk as well about their brightest spot. MMOs have slumped a bit in the last couple of years, but they are recovering in H1 thanks to the release of FFXIV: Dawntrail. And despite the lack of expansion packs for FFXIV since FY22, FY23 and 24 were above any pre-COVID years still. FY25 is shaping up to be close to the FY22 record, although I don't think it will surpass it.
With only 2 games based on the core properties of the company (FF and DQ), there is not much else to say about this segment, other than the upcoming FFXIV mobile version. We could talk about their initial attempt with FFXI, and also the first failed attempt with FFXIV, until A Realm Reborn came out. But I will just say this: through trial and error, they have become experts in operating MMOs. Dragon Quest sadly only has traction in Japan, as happens with the rest of the franchise.
About the mobile version, it is being developed by a Tencent subsidiary, and I'm not sure I am convinced about its potential impact, given that reportedly it won't be interoperable with the main one and it only contains A realm reborn content, not the one from the expansions afterward.
Personally, my impression is that the MMO segment will continue being a good profit engine, but it is hard to see it growing a lot as of now (although my impression is that FFXIV has increased pin opularity in the West in the last few years). So I expect the same pattern of a bump every three years with large expansion packs and then back to the baseline. But I don't expect incredible growth from that baseline.
Mobile
Not a core strength and an area where Square Enix is more than happy to iterate with different external developers and stick to what works. The extent to which that happens is illustrated in this Reddit compilation
In most cases, the monetization is not great and they are just killed after one or two years. But the success of Dragon Quest Walk (mainly), Dragon Quest Tact, and FFVII: Ever Crisis in Japan12 has been enough to finance all this and then more. Mobile games are usually a lot cheaper, and it is worth it to just release and see what sticks, as long as they don't keep spending in something that has no traction. It seems like so far they have been doing well.
Nevertheless, revenue is going down since COVID, and it is going to be hard to replicate Dragon Quest Walk's success (regularly in the top50 for grossing in Japan after 5 years of operation). I am not extremely hopeful about them finding a new global success while throwing spaghetti at the wall, but probably a better decision than buying Rovio or some equivalent! For now, I expect the downward trend to continue.
The videogame IPs
The most valuable aspect of Square Enix is not their current state of operations, but their IP, as a proxy for their fanbase. That is what could enable them to make more money or not go under too much in bad times.
Final Fantasy
Final Fantasy has been around for some time, as the evolution in Cloud's image shows. And that was the 7th entry in the series! At the same time, Final Fantasy is, in a way that is very typical in long-running JRPG series, not a single property. It follows the same schema as the Tales series of Bandai Namco, or the Shin Megami Tensei series of SEGA/Atlus. Roughly each of the games in the series takes place in a different universe, but they share concepts and gameplay. Contrary to other franchises, Square Enix didn't make the effort to separate the brands of the different spawned IPs (as Atlus did with Persona).
In the case of Final Fantasy, I think we can talk about 4 distinct properties, really
Main series
The series itself has a lot of brand recognition, and every new installment sells several million copies at a minimum. The next installment would be FFXVII. While they used to be common, nowadays the gap between mainline entries spans several years. Between XV and XVI it was 7 years, so every release is a relevant event… but not so much in terms of sales, recently.
The gap between releases is easily explained by all the other derivatives ongoing FF properties have, and because they have become just… massive endeavors. They have levels of effort and budget only comparable to the biggest AAAs. Sadly, the level of sales was not quite there for the last entry, FFXVI. It did sell relatively well for a game without a PS4 version (only Spider-Man 2 sold more that year), but with a relatively low installed base and failing to be the absolute reference, the revenue was not enough to offset other failures in the year.
While the popularity of the franchise is still high, it is no longer the only JRPG reference (Atlus is competing well) and the RPG scene has a lot more competition than it used to, so it is probably hard to maintain profitability at this level of expense, at least without going multiplatform.
Final Fantasy VII
Final Fantasy VII was the most successful game in the series, none has ever equaled it again in terms of impact or sales (excluding MMOs). In the last few years, Square Enix set out to capitalize on it and has tried to develop extensively that setting, with mixed success
A new trilogy of main games
Remake (2020), did amazingly, with more than 5 million copies sold in PlayStation, more than 1.5 on PC, and well played in PS+, bringing total sales estimations to more than $800 million13.
Rebirth (2024) which did… meh. Part of it is because it has come out only in PS5, only 8 months after XVI and with a lackluster marketing push. The PC version seems to be doing decent presales and is coming out in January. Sales estimates at this point are below $200 million.
A third part of the series is expected to be released in 2027 (as it matches FFVII 30th anniversary), but without a confirmed date.
Crisis Core: Reunion (2022), a remake of a FFVII prequel released in 2007. It sold a bit more than a million copies (which is expected, given the success of the original)
FFVII Ever Crisis, the only mobile game that seems to have been working for Square Enix in the last few years.
In short, this world is getting quite a lot of content and while Remake did incredibly, Rebirth didn't. That said, Rebirth was critically acclaimed, is doing decently in PC presales, and shows early signs of becoming a fan favorite, so there is still hope. I think the marketing was what failed here mostly.
FFVII is also the source of a good chunk of merchandising and licensing revenue. It is not disclosed how much, but more than 40% of their current figures catalog (and 23% of the overall merchandise one) is FFVII-related.
Final Fantasy XIV
The MMO is set in a different universe, and while the mainline or FFVII games can be a gateway drug that leads you here, the conversion is not necessarily high. But at this point, it has its own very dedicated fanbase, and the once-every-three-years expansion seems sustainable. It is not experiencing a massive decay in players yet, but Dawntrail has been a bit divisive among the fanbase, partly because of the story, partly because of a more realistic orientation of the graphics, rather than the more anime-like (and lower fi) look the game had previously.
Revenue-wise it did more than alright in H1, but the next quarters need monitoring to see if it was only a few people complaining very loudly or if it has large fallout. Early indications (Steam CCU - not the main platform, Activeplayer…) seem to indicate the June-July spike didn't hold this time and the expansion won't revitalize the game, so it could continue its decline.
In terms of merchandise, they are also really strong, the only ones with more items in the catalog than VII (though not in the figures department!)
Final Fantasy X
The tenth installment of the series was very successful, almost at VII levels, and spawned a sequel (imaginatively named X-2). While there have been some compilations and a remaster (released to several platforms from 2013 to 2019), this branch of the IP has been mostly dormant in the last few years, but could be recovered at some point as VII was.
Other extension candidates (FFXIII/XV)
FFXIII and XV share some lore, but not universes, along with FFXIII-2 and Type 0. And they also shared success, being, I think, the most successful games between X and VII Remake.
A revival of either the lore (Fabula Nova Cristalys) or one of the universes is also an option.
And the future?
It is difficult to settle what is the value of the FF IP as a whole, but the MMO alone brings about $200 million14 of high margin revenue every year (will be more this time thanks to Dawntrail). And several of the games (XIII, XV, a couple in the VII universe…) have generated close to a billion in sales each. While they have high budgets (probably $100 million or more), when one of these games works, it returns huge profits. In my opinion 2-3B is a conservative estimate, but also a useless one if they company is not able to use the IP well.
The short term future of Final Fantasy seems to be keeping the back catalog going (though HD editions, bundles like the I-VI…) and keep operating the MMO, while the new VII game drops. The next mainline is too far away, and there are no hints of other revivals yet. Contrary to other people, I don't think the budget of the mainline FFs is a problem, and I think they all have been profitable, except maybe Rebirth, and I think it will be so in time, there is a lot of waste in Square Enix, but it was mostly in the other games mentioned earlier.
But they need proper support and spacing of the releases. Making a game like Rebirth for 4 or 5 years to drop it 8 months after another mainline game in a relatively small installed base without much marketing is just a waste of resources. Let's hope the IP gets better treatment in terms of marketing and release windows in the future. Quality-wise, they haven't dropped the ball.
Dragon Quest
Toriyama aesthetics JRPGs running for 35 years, what is not to love? And the Japanese sure love them! For example, the recently released Dragon Quest III 2D HD remake has sold more than 800k physical copies only for Switch in Japan, without taking into account any other countries, platforms, or digital sales.
In the same way as Final Fantasy, it does have shared themes, mechanics, and aesthetics, but there is no direct continuity between installments (except for the first three). They do share aesthetics and usually a fairly straightforward chosen-one storytelling, versus the more social/moral conflicts-based storytelling in Final Fantasy.
It has never gained a similar level of international popularity, but it is such a household name in Japan that it does not matter. They even have a Pokemon Go - like game that is making the bulk of revenue for the SD division (although in decline now!), and Dragon Quest X, the MMO, has also been very popular, but was never localized outside of Japan, so it is only there.
The latest full installment, Dragon Quest XI, was fairly successful, with about 7 million units shipped worldwide (including all editions). More than 5.3 of them in Japan15.
So what would I wish for this franchise? Well, obviously, to get to some popularity outside of Japan through well localised HD editions, then a good modern release also well localised and marketed, and then maybe even localise and open the MMO. With Toriyama's style popularity all over the world, it could even work!
Cue the HD-2D remakes for Dragon Quest III, released this year, and Dragon Quest I-II, released the next. That said, it seems like instead of a way of popularising the series in the west, someone at Square Enix thought that a 2D remake could command premium pricing (60$, so not quite AAA estandard nowadays16, but close) in 2024 outside of Japan as well, where it is essentially a collectors item for a well beloved IP17. Hope they start discounting outside Japan early and often and maybe they can get some nostalgics on board… that then can get more people. And hope they think better about pricing for I-II (again, outside of Japan).
In any case, the franchise is well. I estimate the MMO brings in north of $100 million of high margin revenue18 every year, and mainline games tend to do $400-500 million in revenue. A far cry from FF, where the good ones did close to $1 billion, but far more impressive considering the geographic lack of distribution.
Kingdom Hearts
Probably the last of the big IPs, but one we should not forget. The action RPG series has sold less than the other two, but only because it is by far the youngest. Contrary to the other series, in this case there is a continuity between games. It is also a shared IP from which Disney gets royalties (and their characters feature prominently). It is also important to consider that it is a global IP, maybe even West-oriented, instead of Japan only like Dragon Quest.
The last one in the franchise (out of the mainline ones, there are spin-offs and mobile games) was Kingdom Hearts III, in 2019, and it had sold 6.7 units in 2022, so probably it passed 7 by now. Kingdom Hearts IV is in preparation, but there is no release date, although the rumour is 202619. There is also Missing Link, a mobile game expected to come out in 2025.
Honorable mentions
NieR maybe hasn't sold as many games as FF, but I bet in terms of merch it has been a close run, and then there is the anime series, and the games still sell well, with NieR Automata selling over 8 million units -and still selling decently every year. Just Cause also sold well… except Just Cause 4, the latest entry in 2018, that seems to have sent the series into oblivion. Mana and SaGa are alive and well, and are also not very high-cost productions usually, and you still have things like Chrono, Star Ocean or the recent Octopath Traveller, all still above 4 million units sold per franchise.
Square Enix has a cost problem, but not an IP one.
Conclusions
The biggest strenght of Square Enix's videogame segment is the already well established IPs it has, with at least 3 evergreen IPs, and 2 or 3 more that would be considered as such in almost any other publisher.
The MMO segment is in soft decline due to age, but supported by those properties and thanks to update cycles the decline is not too steep (and might even revert at some point, with updates that are more popular), and the SD segment is in a steeper decline (but of less relevance, given the difference in margin and that a big part of both development and management costs are external).
HD… well, it has been a disaster for years, but I think it is on the mend. They seem to be releasing less overlapping games already, and hopefully they will also be more careful with costs. The management of the IPs, in terms of caring for them and not releasing crappy stuff that can undermine it, is there. But there are a lot of unknowns.
There is also one problem that has me a bit worried. In FY22-23, blockchain was a great focus and they put Symbiogenesis NFTs out, now they are supposed to have a huge focus on using AI for development… not to mention the Splatoon-inspired flop of the year20 I don't know, guys. Just make games, don't make too many, don't try to follow too many random trends at once. Your shareholders will surely appreciate that more than random mentions to blockchain.
Overall, I think seeing it returning to FY22 profitability levels is… just not happening soon. MMOs and SD were supercharged by the pandemic (and HD as well). But the profitability levels of FY23 don't seem that far-fetched. And FY23 profitability levels with the current strenght of the non-gaming segments would make for an interesting PNL.
But we will talk more about the PNL in the last installment. We will go over corporate governance, capital allocation and valuation scenarios, now that we know the IPs, a bit of their history and the outline of how each of the main ones is being treated.
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At least in 2023 and 2024, in FY25 it looks like that won't be the case thanks both to the segment making more due to content releases and the HD segment not doing really well.
If you look for the release date, it will say 2010. Except that release failed miserably and what we have now was released in 2013 as FFXIV: A realm reborn.
Well, technically they classified Foamstars as an HD game, but it was a kind-of-F2P (depending on the month) with in games stores, mostly online gameplay… the works. It was an attempt to do a service game, not a standard one.
In terms of sales. Rebirth has fantastic reviews and I think in the long run it will sell decently. I would argue the sales in preorders on Steam so far point to a slightly stronger release than FFXVI, while on PlayStation FFXVI did far, far better.
All else was not equal. Square Enix has paid more tax than the PNL reflects in 2023, and that alters the picture somewhat
And they get compensated for it. It is the majority of their almost 30B yen entertainment business segment, diminishing as the title ages.
Again, a major title for the company, which is suffering from the lower performance as the title ages.
NieR is not a traditional JRPG by any means, but I've always thought the reason it (and Bayonetta!) did so well was aesthetics.
I took the numbers from Wikipedia. There might be some missing (Outriders was not there, for example, as well as NieR replicant, but added them both to the numbers), but it is directionally correct.
With a pretty pretentious name to boot. I like Atlus, I have a big position in Sega. But Metaphor: ReFantazio is a bit too on the nose.
Kingdom Hearts HD 1.5 + 2.5 ReMIX, to be precise.
This last one has some revenue coming globally, but a lot less than Japan really.
Sales, not revenue. Square Enix gets about 60% of that after the platforms cut and VAT.
Back of the envelope estimation based on how revenue moves when there is a new content pack vs. DQ, that has more frequent updates (although the major ones run every three years as well, and the last one was on the tail end of FY24). Not sure how accurate it is, but I wouldn't believe any number below $175 million for FY24
Mario Kart 8 Deluxe, Nintendo's best selling game ever, sold 6 million units in Japan. That's the league Dragon Quest plays in - in Japan.
Most AAA are priced at 70 or more these days, and then with all kinds of add-ons, collector editions, etc.
The game is still selling remarkably well, and seems to be close to 1 million units outside of Japan which for a HD-2D remake is insanely decent, and well on track to beat other 2D success stories like Octopath Traveler I. It is still a missed opportunity, I think.
Same estimation as above with FFXIV. Here, I wouldn't believe any number above 125, really.
Coming from Midori, a relatively well-known leaker usually focused on Sega that posed as a Japanese woman, broken english included, that turned out to be an american guy. That was fun.
Foamstars.
Can't wait for the conclusion :-)
Thanks for the write-up! How should I interpret the game-related intangibles variation graph I'm not sure why it goes to negative when cash conversion is better for those years?