Square Enix President 2023 New Year Letter Emphasizes Major Blockchain Focus; “Aggressive Investment”

I want to start by wishing everyone a happy new year.

Countries around the world experienced skyrocketing inflation in 2022. The US Federal Reserve accelerated the pace of tapering at the start of the year, and Russia’s subsequent invasion of Ukraine resulted in heightened geopolitical risk that drove up resource prices and caused supply chain disruptions. The Fed and other central banks then embarked on a round of rapid policy rate hikes that spurred a significant rise in long-term interest rates. Share prices plummeted, particularly in the technology sector, and IPOs ground to a halt. This chain of events continues to cast a large shadow over global capital markets. The impact on our lives in Japan is also increasing with each passing day as the dramatic weakening of the yen has pushed up the prices of imported commodities, sparking further inflation.

As we saw promising signs that the world is moving beyond the three years of the COVID-19 pandemic, these huge changes in the macroeconomic environment also pose a number of risks to the digital entertainment industry. In particular, the semiconductor shortage has limited hardware supply, which has had more than a slight impact on the operation of the group’s businesses. Managing our businesses amid this uncertainty remains challenging. However, we expect that these conditions will improve in early spring, which we hope will provide a tailwind to the achievement of the group’s medium-term business plan, which you can find here.

Based on this understanding of our environment, we attributed two purposes to the year 2022. The first was to lay the groundwork for the financial year running from April 2023 to March 2024, which is the final year of our current medium-term business plan. The second was to carry out structural reforms that looked even further. For these reasons, we undertook a comprehensive overhaul of both our development and publishing organizations, focusing on our existing core digital entertainment business.

On the development side, we sold three studios – Crystal Dynamics, Eidos-Montréal and Square Enix Montréal – as well as the associated IP to the Embracer Group last August. The goal of this sale was to further concentrate our resources as the increasing sophistication and complexity of game development has made such endeavors more expensive to undertake. This sale represents part of the aforementioned structural reforms and was designed to effect fundamental changes in our portfolio of studios.

We will also begin to reconfigure the group’s portfolio of titles for the medium to long term. To that end, we will accelerate our efforts to strengthen our in-house development capabilities by further expanding our in-house talent pool, while more rapidly concentrating our resources on developing globally competitive titles. The remarkable growth in the scale of modern game development has made it more important than ever to elevate the skill sets and focus the efforts of our development teams.

Selling studios and strengthening our in-house development capabilities may on the surface appear to be moves at odds with each other. However, we must flexibly and constantly revise our medium/long-term title portfolio and the development studios that create it in light of the environment we find ourselves in. As such, both of these moves are essential if our group is to continue to provide entertainment that meets the needs of an evolving world . We will continue to assess our development organization and use M&A and other methods to optimize our studio portfolio through both organic and inorganic means, thereby ensuring that we continue to strengthen our internal development capabilities.

On the publishing side, we are moving away from the previous geography and function-based model where our Japanese and Western publishing organizations operated independently of each other. Instead, we are creating an end-to-end global publishing organization based on the “One Square Enix” concept. We launched this new structure late last year with close collaboration between our two Chief Publishing Officers (CPOs), a newly created role. We made particularly thorough changes to the organizational structure of our Western operations, adopting a sales and marketing structure optimized to match the new studio portfolio created by the sale of our three overseas studios. We are expanding our capabilities so that we can capture as much of the upside as possible from the digital shift that has accelerated since the outbreak of the pandemic.

By simultaneously strengthening our development and publishing organizations, we will further strengthen the group’s presence as a global publisher and achieve new growth for our existing core digital entertainment business.

In terms of new business domains, we have named three focus investment fields under our medium-term business plan. Among these, we are most focused on blockchain entertainment, to which we have devoted aggressive investment and business development efforts. Looking externally, I think it’s fair to say that blockchain gained significant recognition as a field in 2022, as evidenced by “Web 3.0” becoming a well-established buzzword among business people. However, the year also saw volatility in the cryptocurrency and NFT (non-fungible token) markets following the dramatic changes in the macro economy described above. In particular, the last half of the year produced a gloomy series of blockchain-related news, including the scandalous bankruptcy filing of FTX in November.

In the wake of this development, we hear rumblings from some countries about early steps to regulate such businesses more strictly. In Japan, meanwhile, the drive to encourage such businesses has gained momentum, led by the government. In June 2022, the Japanese Cabinet signed a plan called “Priority Policy Program for Realizing a Digital Society”, which includes formulations regarding the creation of an environment to promote the Web 3.0 concept, including the use of NFTs based on blockchain technology. Japan’s Digital Agency also launched a Web 3.0 Study Group.

New technologies and frameworks lead to innovation, but they also create considerable confusion. After riding out such societal tides, some such technologies and frameworks gradually become part of people’s lives, eventually giving rise to new businesses and growth. After the excitement and excitement that surrounded NFTs and the metaverse in 2021, 2022 was a year of great volatility in the blockchain-related space. However, if this turns out to have been a step in a process that leads to the creation of rules and a more transparent business environment, it will definitely have been for the best for the growth of blockchain entertainment.

Keeping a steady eye on these environmental changes while considering from a higher perspective what Web 3.0 and blockchain entertainment is actually about offers a different view than if we focus on them solely in technological or speculative investment terms. As I said in last year’s New Year letter, if we consider traditional gaming to have become centralized, then blockchain gaming must operate based on a self-sustaining decentralized model. It’s that concept, that philosophy that I see is the key.

That is, what kind of new experiences and new excitement our Digital Entertainment business can deliver to our customers through its game development efforts and other endeavors under the self-sustaining, decentralized concept is extremely important.

Several blockchain gaming events held overseas have recently created more active discussion than ever before about what makes the games exciting and what their user community looks like. The market was driven more by speculative investors than by players through 2021. In other words, the content that was at the forefront was created based on the premise that blockchain and NFTs would result in monetization. However, in the wake of the aforementioned turbulence in the cryptocurrency industry, there is now a trend to see blockchain technology as just a means to an end and to discuss what needs to happen to achieve the end of delivering new experiences and excitement to customers. I see this as a very favorable development for the industry’s future growth.

Our group has several blockchain games based on original IPs in development, some of which we announced last year, and we are making preparations that will enable us to unveil even more titles this year. We are also engaged in global sourcing from an investment perspective and will continue to take stakes in promising businesses whether we find them in Japan or abroad. Blockchain has been a subject of excitement and a source of unease, but with that in the rearview mirror, we hope that blockchain gaming will move into a new stage of growth in 2023.

Finally, I would like to note that 2023 is a milestone year for us in that it marks the 20th anniversary of the merger of Enix and Square. Against a backdrop of dizzying changes in our business environment, we have achieved significant growth fueled by the myriad opportunities that have arisen over the past two decades. Our group intends to achieve further growth by continuing our self-sustaining development and transformation while we are alert to the changes that will occur in the next decade and beyond. We will drive our businesses forward with the goal of making 2023 a year of great development and transformation.

I wish you all the best for the new year.

Yosuke Matsuda

President and Representative,

SQUARE ENIX HOLDINGS CO., LTD.