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Square Enix Looking to Sell Stakes in Its Studios to "Improve Capital Efficiency" [Update: Luminous Productions Merging With Square]

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Ishaan

Ishaan

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Update: Explanation from Square's president Yosuke Matsuda in their annual report (Oct 29, 2022)

By "a more diversified capital structure of our studios," I refer to not fixating on full ownership and instead making various patterns of the studios' capital structure that enables sharing development risk with partners. Such a strategy would allow us to grow our studio portfolio as a whole while exposing ourselves to ess risk. Specifically, we would diversify the capital structure of our studios by not only owning some studios outright, but also by welcoming third parties to take stakes in some of our studios or by our taking stakes in studios outside the Group. In this way, we would create a studio portfolio that spans a continuum from studios that we own outright to those that are equity-method affiliates or less. Under such a strategy, we would also engage in M&A activities, for example, and work to achieve a balance between growth and financial stability.
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Original opening post:




Read the full thread for context, but here's a summary:
  • Square's capitalized game dev costs are currently $840 million

  • Square Enix is planning two phases of measures to improve its capital efficiency
  • Phase 1 was the sale of Eidos and Crystal Dynamics
  • Post its sale of Eidos and CD, the company will have $1.4 billion in cash and zero debt

  • Phase 2 will be "diversification of studio capital structure" (essentially how different studios obtain their funding)
  • As part of this, Square is reviewing its portfolio of studios and looking to sell stakes in certain studios to external entities
  • Certain studios will remain 100% owned by Square Enix, while others will be partially owned (joint ventures or equity method)
  • This is happening at a time when companies like Sony, Tencent, Nexon etc. are looking to buy

Still a work-in-progress, but here's a list of every creative department within Square Enix.
 
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Lelouch0612 said:
They are apparently looking at selling stakes in their Western studios while increasing their workforce in Japan.

Basically, they are focusing on the more profitable portion of their console games business.
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Are we certain it's referring exclusively to western studios? Because David says "biggest impact is on US/EU studios" and that they intend to concentrate resources around Japanese titles, but I don't think they're explicitly discounting selling stakes on both sides of the pond.
 
I don't think SE has that many distinct studios now, unless they plan to spin off production groups as well?

Luminous Studio getting an investment from SIE would make sense.
Tokyo RPG Factory????
Taito getting investment from another Arcade focused company?
 
Lelouch0612 said:
They are apparently looking at selling stakes in their Western studios while increasing their workforce in Japan.

Basically, they are focusing on the more profitable portion of their console games business.
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Do we have any stats at all backing up the idea that the profitable / unprofitable split was basically Japan vs West?

From where I'm sitting with just the zoomed out view, the entire HD games division is potentially the kind of thing you'd want to overhaul. If they are planning to become a more hit-driven company (better margins, not a lot of teams just doing "ok") then I'm expecting the smaller Japanese teams to get folded into the larger teams or spun off.

I'm also looking forward to getting the full transcript here eventually so we can tease out whether or not the tweet thread sourced here was fully accurate or if it partially misinterpreted / mistranslated.
 
Feels like Tencent time to swoop in once more there.
 
Stygr said:
Where is this money going? $840m is a lot for a company of SE size
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They have a good amount of big budget games in development for the next few years.

Forspoken, Final Fantasy XVI, Final Fantasy VII Rebirth, Dragon Quest XII, Kingdom Hearts IV, likely a new Nier, etc.

There's also the continued support for their MMOs, and other smaller projects.
 
TonyBaduy said:
Imagine Nintendo of all companies bought more stakes in certain Japanese studios, it probably wouldn't change much but I'd love to see the meltdowns and overreactions from it.
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They already own stakes of:
Bandai Namco
Konami
Koei Tecmo
Square Enix
DeNa
CyGames
Kadowaka

Owning stakes of partners is in fact the most Nintendo thing they could do; even wholly owned subsidiaries like Retro Studios and NDCube started as co-owned studios in which Nintendo had some stake in.

pd: With the exception of DeNa their stakes on these companies are not enough to influence their actions in any meaningful way, neither Nintendo cares about doing so.
 
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Oregano said:
I don't think SE has that many distinct studios now, unless they plan to spin off production groups as well?

Luminous Studio getting an investment from SIE would make sense.
Tokyo RPG Factory????
Taito getting investment from another Arcade focused company?
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Dunno what madlad publisher out there would buy stake in Tokyo RPG Factory. May as well invest in Balan Company too.

I can see SIE investing in Luminous for sure though.

Can't comment on whether or not Creative Business Units are on the table here. I'll look under the couch cushions for some cash if CBU2 is looking for investment though.
 
Blue Monty said:
They already own stakes of:
Bandai Namco
Konami
Koei Tecmo
Square Enix
DeNa
CyGames
Kadowaka

Owning stakes of partners is in fact the most Nintendo thing they could do; even wholly owned subsidiaries like Retro Studios and NDCube started as co-owned studios in which Nintendo had some stake in.

pd: With the exception of DeNa their stakes on these companies are not enough to influence their actions in any meaningful way, neither Nintendo cares about doing so.
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Do you know will much they have stakes in:
Bandai Namco
Konami
Koei Tecmo
Square Enix

Thanks
 
Brandonleemoss said:
Do you know will much they have stakes in:
Bandai Namco
Konami
Koei Tecmo
Square Enix

Thanks
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You would need to do some math to figure out how much their shares represent, but the amount they own is public from their annual report. If you search for the company in the 2022 report you can see the number of shares and the dollar value.

Bandai and Dena are by far the largest amount. The rest are pretty small, but notable as they say they do maintain them to keep the business relationship.

www.nintendo.co.jp

IR Information : Annual Report

www.nintendo.co.jp
 
Nintendo owning stock in these other companies is really just gesture showing good faith in the relationship and are willing to have the fate of their fortune tied to their business partner. The practice is called 株式持ち合い.
 
KtSlime said:
Nintendo owning stock in these other companies is really just gesture showing good faith in the relationship and are willing to have the fate of their fortune tied to their business partner. The practice is called 株式持ち合い.
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Yeah, it's a very highly-literal "we are invested in your success" sort of gesture.
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I'm having trouble understanding exactly what Square Enix is proposing here, however. How do you sell stakes in a developer that remains 100% in their ownership? The joint venture stuff at least makes sense, someone invests in something and gets something back.

But it really is a puzzler why they're doing this, they don't seem strapped for cash.
 
Blue Monty said:
They already own stakes of:
Bandai Namco
Konami
Koei Tecmo
Square Enix
DeNa
CyGames
Kadowaka

Owning stakes of partners is in fact the most Nintendo thing they could do; even wholly owned subsidiaries like Retro Studios and NDCube started as co-owned studios in which Nintendo had some stake in.

pd: With the exception of DeNa their stakes on these companies are not enough to influence their actions in any meaningful way, neither Nintendo cares about doing so.
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I need them to add some Sega to their portfolio.
 
I don't think it's all that surprising that Square Enix is opting to do this. Their major games tend to be expensive, high-risk projects, and they've been burned by them enough times at this point. The blame has often been directed at the Eidos side of the company, but Square Enix Co. Ltd. has had its fair share of projects that haven't panned out, as well.

Most tellingly, back in 2013, Square's president, Yosuke Matsuda, said that he wanted the company to be able to lower the risk of its more expensive projects by adopting a model where the company could begin making money even during the development phase. Matsuda cited Early Access and Kickstarter as inspirations, and just a few years later we saw Square explore the episodic model with Life is Strange and Final Fantasy VII Remake, both of which essentially allowed them to do just that—make money while the "full" experience was still in the works.

Co-owned studios are just another way to do the same thing. Sharing the risk of development with an external entity makes a lot of sense for an especially high-risk, high-reward company like Square Enix. I'd imagine their collaborations with Sony and Nintendo played a role in demonstrating the benefit of working with an external partner as well, if they aren't confident that their products will consistently be profitable enough. This setup also allows them to have more games in development at once, so it makes sense all around.
 
jacsoncr said:
does this make sense to anyone?
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Terrell said:
I'm having trouble understanding exactly what Square Enix is proposing here, however. How do you sell stakes in a developer that remains 100% in their ownership? The joint venture stuff at least makes sense, someone invests in something and gets something back.

But it really is a puzzler why they're doing this, they don't seem strapped for cash.
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477a3791-1ccb-4898-b5bd-06e8dae65a46_text.gif

This is why official English translations should be an industry standard. Still waiting on the full details from Square Enix & Embracer Group as to what IP & assets ends up where. Might be referring to the dreaded Production Committee system that blights Japanese animation & cinema. Whatever the case, surprised considering all the games coming out this financial year. Furthermore, seeing as many of them are by external Japanese studios, Square Enix can already increase or reduce the overall number of projects in development without impacting any in-house work.

One thing is certain, external international studios like People Can Fly (Project Gemini) & Avalanche Studios (Just Cause 5?) shouldn't get involved. Both companies have other partners (Take2 & Microsoft respectively) & self publishing divisions. They can go elsewhere if Square Enix isn't fully committed to funding major projects. Io Interactive is doing fine without them.
 
Yeah, I'm wondering if Square Enix might be trying to do more committee systems for their projects. They already participate in these for their multi-media projects (Fullmetal Alchemist, Soul Eater, and more of course), so seeing them approach them more-so in the video game field would be... I'm not sure if it's good or bad, but feel likely the latter. Like, Dragon Quest is set up as a committee system (one of the earlier ones I can think of too), which is one of many reasons why getting a sale of Square Enix itself was not likely to occur.

However, that said, if Square Enix perhaps wants to take "less risk aversion" for titles, they may be intending to do a committee system for new IPs and other projects going forward. That's the reason the Production Committee system existed in the first place. Joint ownership, joint spending, less risk, though as we know, it often means more issues for the people working on the projects and less pay towards them for that matter...

If that's indeed the read, man...
 
jacsoncr said:
does this make sense to anyone?
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Sounds like a company that, outside of its plus with FFXIV, has only made a loss in the last quarter and is now being forced by its investors to react to this.
If even games that are received positively by customers are not profitable, then you have two options. Either you reduce the costs or give away a few IPs and studios to redistribute the money.

I wish them the best of luck with this, I'm curious to see what the outcome of this process will be.
 
Ishaan said:



Read the full thread for context, but here's a summary:
  • Square's capitalized game dev costs are currently $840 million

  • Square Enix is planning two phases of measures to improve its capital efficiency
  • Phase 1 was the sale of Eidos and Crystal Dynamics
  • Post its sale of Eidos and CD, the company will have $1.4 billion in cash and zero debt

  • Phase 2 will be "diversification of studio capital structure" (essentially how different studios obtain their funding)
  • As part of this, Square is reviewing its portfolio of studios and looking to sell stakes in certain studios to external entities
  • Certain studios will remain 100% owned by Square Enix, while others will be partially owned (joint ventures or equity method)
  • This is happening at a time when companies like Sony, Tencent, Nexon etc. are looking to buy

Still a work-in-progress, but here's a list of every creative department within Square Enix.
Click to expand...

Do we not have confirmation that Division 1 of CBU1 is working on FF7 Rebirth? Sounds like a no-brainer but who knows. Same with Crisis Core Reunion.
 
So are we talking SIE invests in Luminous and that particular studio is then co-owner by Square and Sony? Nintendo invests in Asano’s team and Square and Nintendo co-own the developer?

If that’s what they are talking then we may be looking at things remaining similar and not a lot of changes, but this is to vague for me to know what to expect.
 
DeuceGamer said:
So are we talking SIE invests in Luminous and that particular studio is then co-owner by Square and Sony? Nintendo invests in Asano’s team and Square and Nintendo co-own the developer?

If that’s what they are talking then we may be looking at things remaining similar and not a lot of changes, but this is to vague for me to know what to expect.
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It also might be myopic to think of "gaming" companies. NdCube was originally co-owned by Nintendo and Dentsu, as it had been set up for the F-Zero cross media push. For a similar reason Dentsu was part owner of Level Abby.
 
DeuceGamer said:
So are we talking SIE invests in Luminous and that particular studio is then co-owner by Square and Sony? Nintendo invests in Asano’s team and Square and Nintendo co-own the developer?

If that’s what they are talking then we may be looking at things remaining similar and not a lot of changes, but this is to vague for me to know what to expect.
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Thinking on it through this lens, it could also mean that, for example, when Team Asano is looking for outside developers for a project, instead of hiring Acquire or whomever, Nintendo could step in and offer an EPD team or Retro/NLG to assist instead, if they so chose for a project they were already financially invested in.
 
Terrell said:
Thinking on it through this lens, it could also mean that, for example, when Team Asano is looking for outside developers for a project, instead of hiring Acquire or whomever, Nintendo could step in and offer an EPD team or Retro/NLG to assist instead, if they so chose for a project they were already financially invested in.
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It will be interesting to see how this plays out. I wish we had more insight into how they envision this working.
 
the asano team is not like sora ltd or mistwalker, if so, is there no point in investing in them? what nintendo could do is take tri ace
 
Goodbye Luminous Studios, once Forspoken releases and bombs.

Tokyo RPG Factory is also probably on the chopping block too.

Terrell said:
Thinking on it through this lens, it could also mean that, for example, when Team Asano is looking for outside developers for a project, instead of hiring Acquire or whomever, Nintendo could step in and offer an EPD team or Retro/NLG to assist instead, if they so chose for a project they were already financially invested in.
Click to expand...

Team Asano is currently S-E's most successful studio from a critical and commercial standpoint, outside of the FF14 and DQ10 teams. They reliably produce a consistent series of hits on a modest budget. I doubt that S-E would be willing to sell them...

... if S-E ever did get bought out though, I guarantee you that Nintendo would headhunt Asano and his team almost immediately though; and would likely continue to operate them in much the same way as how they currently run, which is coincidentally similar to how SPD/EPD 7 (Yoshio Sakamoto's team) is run, with them getting outside studios to do the heavy lifting of development.
 
jacsoncr said:
the asano team is not like sora ltd or mistwalker, if so, is there no point in investing in them? what nintendo could do is take tri ace
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tri-Ace belongs to Nepro Japan, not Square Enix.

DCSales said:
Team Asano is currently S-E's most successful studio from a critical and commercial standpoint, outside of the FF14 and DQ10 teams. They reliably produce a consistent series of hits on a modest budget. I doubt that S-E would be willing to sell them...

... if S-E ever did get bought out though, I guarantee you that Nintendo would headhunt Asano and his team almost immediately though; and would likely continue to operate them in much the same way as how they currently run, which is coincidentally similar to how SPD/EPD 7 (Yoshio Sakamoto's team) is run, with them getting outside studios to do the heavy lifting of development.
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It's amusing that a company like Nintendo is approaching such HD-2D games as if their lives were at stake, while they have abandoned all 2D game development (most recently AlphaDream).

The question that arises here is under what conditions such investments should take place. If Square Enix is just looking for someone to give them money while they continue to be the decision-maker of the project, then this experiment can be scrapped.
 
For those wondering Square Enix's Japanese (HD games) R&D Groups consist of:
  • Creative Business Unit 1 (FF, KH, SaGa)
  • Creative Business Unit 2 (DQ, Nier, Asano)
  • Creative Business Unit 3 (FFXIV, Ogre)
  • Creative Business Unit 4 (mobile, Mana)
  • Luminous Productions
  • Tokyo RPG Factory
  • Extreme Edges (localization)
  • Taito (amusement, selfpublishing)
This doesn't include stuff like CGI, AI or mobile only/focused R&D.
 
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This just strikes me as bracing for a real fall. Forspoken, FFXVI, FF7R2 are all PS5 exclusive. DQXII is probably off for another 2-3 years.
 
Sorry to bother you guys, just wanted to know if this mean good or bad news for Square? How common is this? Should people be worried about Square or it is just "business"?
 
Smelly said:
This just strikes me as bracing for a real fall. Forspoken, FFXVI, FF7R2 are all PS5 exclusive. DQXII is probably off for another 2-3 years.
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If FF7R and FF16 sell like their predecessors then SE would be falling upwards.
 
Jorge said:
Sorry to bother you guys, just wanted to know if this mean good or bad news for Square? How common is this? Should people be worried about Square or it is just "business"?
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I think most of us aren’t sure exactly what their plan is here as the comments seem sort of vague. It’s unclear if they are looking for someone to invest in the traditional sense, which would mean owning a portion of the Developer or if they are just looking for help finding projects, which is common practice for some exclusives in the game industry.

At this point I think we have to wait until we see more about the strategy and how they expect this to play out.
 
Brandonleemoss said:
Do you know will much they have stakes in:
Bandai Namco
Konami
Koei Tecmo
Square Enix

Thanks
Click to expand...
In US Dollars:

Bandai Namco - 295 millions dollars (very small for the size of Bandai Namco)
Konami - 4 millions dollars (very very small for Konami)
Koei Tecmo - 875k dollars (Koei Tecmo is a very small company but this has to be a joke from Nintendo)
Square Enix - 4 millions dollars ( very very small for Square Enix)


brutaka3 said:
I need them to add some Sega to their portfolio.
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They should add Capcom as they are doing well


Jorge said:
Sorry to bother you guys, just wanted to know if this mean good or bad news for Square? How common is this? Should people be worried about Square or it is just "business"?
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Was it bad news when Nintendo sold off Rare? You decide.

My opinions below:

Good news for Square Enix! Very smart! for the short term that is.

The one we should be worried about is Nintendo as they should sell off Retro Studios right now immediately.
 
Diaochan said:
The one we should be worried about is Nintendo as they should sell off Retro Studios right now immediately.
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Nintendo doesn’t sell or close studios, if Retro Studios isn’t profitable anymore they will repurpose it like they did with NST/NDCube.
 
Why should Nintendo sell off Retro Studios? The Donkey Kong games were fairly successful, right? And they're working on Metroid Prime 4. It's not their fault that the game has been in development for so long. Metroid Prime 4 will be the best selling Metroid game ever. According to google it could accomplish that will 3m in sales. Easy.
 
Diaochan said:
The one we should be worried about is Nintendo as they should sell off Retro Studios right now immediately.
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Why? That makes no sense. They're literally developing Metroid Prime 4 right now.
 
jacsoncr said:
ndcube is the third-party nintendo studio that generates the most money
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It is 1st party and it only became as successful as it is nowadays after being repurposed once Hudson was shut down, in origins it was created as part of F-Zero multimedia push of the early 00s in collaboration with Dentsu. The push failed and a lot of employees left, Nintendo instead of shutting them down bought all Dentsu shares and repurposed it first as a R&D studio and later as the home of the Mario Party team once Hudson did shut down.

NDCube is the example of what Nintendo does with their studios once things don’t work out.
 
TonyBaduy said:
Imagine Nintendo of all companies bought more stakes in certain Japanese studios, it probably wouldn't change much but I'd love to see the meltdowns and overreactions from it.
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Hell, I'm a bit shocked Nintendo never pushed to wholly-buy Game Designer's Studio which they co-founded with SE using Yamauchi's Q-Fund. Somehow SE got it instead and merged it with Taito of all things.

Honestly Taito would be a fantastic fit for Nintendo speaking of if Nintendo wanted to try an ambitious acquisition. They have a cherished legacy, from NSO/classic game catalog resources, to maybe tickling Nintendo's fancy of ever trying actual arcade games which they've dipped their toes in some parts over the last 20 years (Triforce, Cruis'n Blast, Mario Kart Arcade GP, Pokken, etc.).

Very unlikely, but if SE were keen on selling them after all and maybe if they're not too expensive, who knows, maybe Nintendo could make a bid. Only other folks I'd expect to be interested are what, Sega and BN?
Blue Monty said:
It is 1st party and it only became as successful as it is nowadays after being repurposed once Hudson was shut down, in origins it was created as part of F-Zero multimedia push of the early 00s in collaboration with Dentsu. The push failed and a lot of employees left, Nintendo instead of shutting them down bought all Dentsu shares and repurposed it first as a R&D studio and later as the home of the Mario Party team once Hudson did shut down.

NDCube is the example of what Nintendo does with their studios once things don’t work out.
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Ironically, I think OG NDCube had several Square folks who worked on FF8 and 9.

But yeah, Nintendo's "Hudsonification" of NDCube was a stroke of genius.
 
Blue Monty said:
It is 1st party and it only became as successful as it is nowadays after being repurposed once Hudson was shut down, in origins it was created as part of F-Zero multimedia push of the early 00s in collaboration with Dentsu. The push failed and a lot of employees left, Nintendo instead of shutting them down bought all Dentsu shares and repurposed it first as a R&D studio and later as the home of the Mario Party team once Hudson did shut down.

NDCube is the example of what Nintendo does with their studios once things don’t work out.
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thanks for the information, I know it's the first part but I didn't know how the studio had been formed
 
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