Thread by @JNavok

A thread on the recent Square Enix news regarding FF sales numbers and expectations. ign.com/articles/final…

As a reminder I reported to two CEOs of Square Enix for the better part of a decade and ran a subsidiary. I also correctly predicted last year that Square Enix was going to break exclusivity. I'll note I have no confidential information that I'm basing my arguments on.

To start, we need to look at decisions made on the titles under development within the lens of 2015-2022, not the lens of 2023. For example, FF16 would have started pre-production prior to the release of FF15, which was released in 2016.

This is a pre-Fortnite era. Budgets for FF7 Remake and into Rebirth would have been around this period too. This is important to note and we will get back to it.
axios.com/2023/09/25/squ…

There's a misunderstanding that has been repeated for nearly a decade and a half that Square Enix sets arbitrarily high sales requirements then gets upset when its arbitrarily high sales requirements fail to be met.

This was not true when I was there and is unlikely to be true today.

Sales expectations generally come from a need to cover the cost of development plus return on investment.

resetera.com/threads/does-s…

If a game costs $100m to make, and takes 5 years, then you have to beat, as an example, what the business could have returned investing $100m into the stock market over that period.

For the 5 years prior to Feb 2024, the stock market averaged a rate of return of 14.5%. Investing that $100m in the stock market would net you a return of $201m, so this is our ROI baseline.

Can the game net a return higher than this after marketing, platform fees, and discounts are factored in?

This is actually a very hard equation though it seems simple; the $70 that the consumer pays only returns $49 after 30% platform fees, and the platforms will generally get a recoup on any funds spent on exclusivity meaning until they are paid back, they will keep that cash. Plus, discounts start almost immediately.

Assume marketing expenses at $50m, and assume that you're not going to get $49 but rather an average closer to $40 given discounts, returns and other aspects. Now let's say in that first month you sold 3m copies with $40 net received (we will ignore the recoup). You need to surpass $254m to make expectations. (That's $100m + $101m in ROI baseline + $50m in marketing).

At 3m copies with $40 per copy received, you've only made $120m. You're far off. ign.com/articles/final…

From the statements made, it will take FF16 eighteen months to hit expected sales. (I used the stock market as an example but actual ROI should be higher than stock market averages).

https://x.com/6d6f636869/status/1790227310567960626

The sales figures required aren't wild expectations; the number of copies sold were too low. And my numbers are actually much lower than realities (game dev costs are probably 2x as high, and marketing is also likely 2x as high, and this makes ROI requirements higher too).

But that's not even the core of the problem, this is just me proving that expectations aren't set immodestly.

The core of the problem is that the budgets were set in a period where the expectation was that audiences would grow.

Total audience growth was a reasonable expectation in the 2015-2022 era and still is today. Not only had the industry grown significantly each year, but each day that new generations were coming of age, they were coming of age as gamers. Meaning that your total addressable population should be increasing and you should be increasing your revenue.

What's happened? Not just to Square Enix, but to the industry as a whole? Audience behavioral patterns are radically different than expected in 2015. Remember, I said 2015 was pre-Fortnite.

The way it used to work was that you'd pick your release date similar to a Hollywood movie, stick to it, and consider the competition to be the titles releasing the weeks before and after.

We would look at a Hitman or a Deus Ex release and consider whether there was a Call of Duty or Assassin's Creed coming out around that time, assuming that gamers had X amount of money to spend and Y amount of time, and that if we wanted to get the full sticker price (remember, discounts eat into cash received and also at that time, used disc sales were $0 cash received) we needed to get as many sales in the first two weeks as possible.

At that time, as a gamer, once you finished the most recent game you were on, you moved onto the next. You were looking for your next title once you finished the prior one. We wanted one of our titles to be the next title you bought to fill your gamer needs.

This world radically changed in the last 6 years.

Earlier this month Kotaku had an article called "9 Great Games We Can't Stop Thinking About." There's a surprise 10th slide, and that is Fortnite.

@ZwiezenZ writes in the article: "And once again, another weekend arrives and I realize that I'll be spending most of it playing Fortnite. I'm very close to maxing out both my battle pass and Festival pass, so that's the plan.

I hate how deep Fortnite has its hooks in me–to the point where I'm choosing to play it over brand-new, cool-looking video games–but I can't help it. I must finish these damn passes, get all the rewards, and earn the right to play other stuff. Well, until the next season starts up and I once again return to Fortnite to drop in and level up all over again. It's sick. I hate myself. I can't wait to play more this weekend."

kotaku.com/weekend-guide-…

This is indeed the point. Square Enix are not competing against just the latest new installments, they are competing against every F2P online game that is constantly adding content and getting more robust over time.

The assumption was that people would jump between products when they finished one. But, as you know, F2P games like Fortnite or Warzone are evergreen, they never get old. They are always updating with new content and experiences. They can continue for decades. Candy Crush has had its best years ever the last few years. And companies like Epic can continue to invest back into the products to make them better, creating even higher barriers to entry for competitors. reuters.com/technology/can…

The game industry is still growing in revenue but that revenue is increasingly captured by fewer live services games that are generating a level of stickiness seen in social media companies. There are reasons there are very few competitors to Facebook. Once the network effect starts, it can keep going for a long time. Since Instagram (also FB), the only real competitor in an entire decade that showed up and could quickly reach 1bn+ people was TikTok. And this is in a trillion dollar valued industry. kotaku.com/old-games-2023…

I expect Fortnite, Roblox, Warzone, and similar products to continue to grow revenue. Meanwhile, put yourself in an older gamer's shoes: if you're a gamer with disposable income but less free time, and you have the choice of paying $70 to play 100 hours in FF16 or to just continue playing Fortnite with your friends for free, you'll wait to see the FF16 reviews before you decide whether to switch off FN.

In other words, your switching costs (how good a game is, how exciting it needs to be) are now substantially higher than when you'd finish the latest Assassin's Creed and look for the next title to fill your time, because you’re awash with content options. Fortnite doesn't end.

This is the reason we see trends where games are either spectacular 10/10 successes, or disasters, with little in between; there is no "next hit" being searched for in many cases. And this polarization makes risks higher, and costs higher too (we will get to this in a moment.)

Now if you're a younger gamer in your teens, you may not even be thinking about FF. If you are 13 years old now, you were 5 years old when the last mainline FF, FF15, came out.

Your family may not own a PS5 and you may not care. You're satisfied with Fortnite or Roblox or Minecraft with your friends on your phone or laptop. I'm not say that this is the case for everyone. But it is certainly a trend.

The old AAA franchises do not seem to be converting the younger generations that the industry was counting on for growth, and instead F2P social games on mobile are where they spend their time.

This is the reason every publisher chased live service titles; audiences clearly gravitated toward them, and profits followed in success. (It is surprising that Square Enix, which had successful F2P live service mobile titles in Japan, left the AAA live-service attempts to Eidos rather than try to build those products in Japan, but dissecting this problem would likely require an entirely different thread.)

Regardless, the Fortnite-ization of the industry was not entirely predictable in 2015 when budgets were being planned. Even after FN came out and well into the Covid period it felt like industry growth was pulling all ships forward, not just a handful. But that isn't what happened.

Now we have to get to the cost of development. Asset generation, motion capture, textures, animation, engineering, infrastructure are incredibly expensive. Making games costs a lot of money. The recent layoff wave is generally a consolidation toward a new expected sales average in the number of titles being produced, not the cost of an individual title, which is going to continue to increase. (Spider-Man 2 cost $380m! )

Development costs have gone up, and switching costs of the consumer has gone up, and as a result companies have to invest even more because it has to be a 10/10 or gamers will stick to Fortnite. (I don't literally mean FN, but similar types of products.)

Meanwhile, FF7 Rebirth, which has a 92% Metacritic rating, can't get the sales it needs (though that's also complicated due to it being a sequel.) These factors mean the status quo must change.kotaku.com/what-hacked-fi…

There are three levers you can pull to make the equation work for return on investment at a game company. You can decrease costs, increase price, or increase audience size. As noted, any non-service game is having trouble increasing audience size. Meanwhile, on the cost side, inflation is up, salaries are up, and consumers require sophisticated, beautiful products to get them to fork over cash rather than keep playing F2P titles.

It is true that there are many smaller games or less beautiful games that generate audiences and are profitable. But something like Balatro is not a good example to point to. It's made by one person. AAA games can take hundreds, thousands of people to make. A single person making $2-3m in sales is life changing, a hundred people trying to split that is not enough money. And products like Balatro are lightning in a bottle, you can't generally capture that twice, and there are hundreds of thousands of competing products on Steam or App Stores that fail for every Balatro.

This leaves only price left as a lever to pull. Since the price of games hasn't substantially increased, relative to inflation, package disc games have gotten cheaper over the last two decades. The assumption was that this was okay because the audience size would grow instead of price. But the audience went to the platform titles.

Prices for packaged disc games will go up. Game companies have no choice, it is the only lever left. Just look at Kotaku's article about GTA6’s price point from this week: kotaku.com/gta-6-gtavi-gr…

You're also seeing this trend with Ubisoft's Star Wars game

It's not because game companies are penny pinchers looking to fleece their users. It's because this is the only path left to make non-F2P service titles workable in the AAA space given cost and competition.

Something has to give; if SQEX can’t get its cost of dev down (it will go further up) and is getting good reviews but isn’t increasing audience, they and the rest of the publishers are going to have to increase price point. Otherwise live service titles will be all we have left.reddit.com/r/pcgaming/com…

There's another path that I can think of, which is increasing the take rate. If publishers can capture more of the platform side revenue, they can moderate price point increases while capturing a better return on investment because they'll be capturing say $50 or $55 out of $70.

@TimSweeneyEpic knows this which is why he's fighting the good fight on platform fees, both at EGS and with the app stores, to open up PC and mobile ecosystems.

This is also why you'll see MS and others take advantage of his fight and start their own app stores. (You would think MS would chip in for Epic's legal fees given they're capturing the benefits with no risk!)

But this path will take time, and is very hard on consoles, where the AAA publishers make a lot of their money, so expect price increases to still be the norm.

readwrite.com/microsoft-to-l…

I've responded to several questions received in this follow up post:

https://x.com/JNavok/status/1794895235522122040