Revamping our studio portfolio
On May 2, 2022, we announced that we would be selling some of our overseas studios and IP to Sweden-based Embracer Group AB. The sale covered the three studios of Crystal Dynamics, Eidos-Montréal, and Square Enix Montréal, as well as related business assets and IP. The objective of the sale was to build stronger business foundations by revamping our portfolio of titles and studios, thereby enabling us to be selective and focused in leveraging our resources, as game development efforts become more sizable and sophisticated.
Achieving major growth in the game industry is difficult now for companies that compete primarily in the Japanese market, given its graying demographics. As such, it is critical for our business that we produce hit titles that speak to the global market, which offers greater scale in terms of both customers and sales volumes. Furthermore, game development efforts are becoming more sizable and sophisticated as the result of technological advancements in the devices on which they are played, such as consoles or smart devices. The investment required to develop game titles is therefore an order of magnitude greater than in the past. In other words, the Japanese market is no longer sufficient for achieving a level of earnings that enables us to recoup our development investment and generate a profit, and we therefore need to approach our development efforts based on the assumption that we have to succeed in the global market.Another change is how easily accessible information on games has become for our customers. We find ourselves in a world where social media spreads information instantaneously, enabling customers the world over to simultaneously obtain the same information on games through a variety of different devices and outlets.For our Group to better focus on developing titles for the global market in this changing environment, we need to concentrate our limited resources on the development of strong and robust titles. We need to enhance our presence in the global market by quickly establishing an organizational structure that enables us to consistently roll out high-quality content produced through selective and focused resource allocation, which requires the revamping of our title and studio portfolio.
Since our acquisition of Eidos in 2009, the three studios included in the recent sale made major tangible and intangible contributions to our Group as our core overseas studios. However, their portfolios were focused on the development of major titles, which presented the risk of a serious cannibalization of our Group’s financial resources over the medium to long term. We therefore decided to divest the studios in order to achieve further growth through the optimal allocation of our resources and the creation of a more robust product pipeline. We look forward to seeing Crystal Dynamics, Eidos-Montréal, and Square Enix Montréal further develop through their new partnership with Embracer Group AB.The initiative described above represents the first stage of our studio portfolio strategy. For the second stage, we are exploring the question of how to diversify the capital structure of our studios, as detailed below.
Our studio portfolio strategy has basically been for the Group to own its studios outright. Our 2005 acquisition of TAITO and 2009 acquisition of Eidos were in keeping with this view. Full ownership meant that since we bore all the development costs, we would stand to receive the entirety of the financial returns. At the same time, however, it also meant that we were exposed to the entirety of the downside risk. In the days before game development efforts reached their present massive scale, this strategy proved very effective because our Group was amply capable of absorbing any volatility on its own, as well as of generating returns that outstripped any risk.However, as the investment required for development efforts has grown, this strategy has begun to produce side effects of a scale that we cannot ignore. It is now more important than ever that we manage financial volatility and the impact that it has on our accounting because, while development investments fuel our Group’s future growth, we must also recognize those investments in the form of our content production account. How to exercise appropriate control over volatility and strike a balance between risk and return when making growth investments are the key questions that we must ask ourselves as we manage our games business going forward, and I believe that the answer lies in a more diversified capital structure of our studios.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 less 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.
I will next discuss the blockchain entertainment domain, which is to play a key part in our strategy for future growth.