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Square Enix Technology Business Report

A Business Class

KaminaGirl

April 20, 2021

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Research Question

Has Square Enix implemented information technology and systems that are aligned with their business strategy successfully to keep a competitive advantage during the rise of online PC gaming stores and mobile gaming?

Executive Summary

Square Enix Holdings Co Ltd is an interesting company in an industry that is constantly evolving with technology. It has been through some tough times in the early 2010s and those tough times are reflected with a negative earnings per share in 2011 and 2013. From the perspective of an accounting student, it is hard to fathom a big company having negative earnings per share. A computer science student might be more shocked that the company hasn’t had a huge cyber security issue in this kind of technology driven world. 

In this report, the current state of the video game software industry will be described using Porter’s Five Forces Model and the changes technology brings to these five forces. Following that will be a company analysis of Square Enix. It will give a brief description of the company, their Competitive Strategy in Porter’s three generic business strategies, their Revenue Model, details on their cybersecurity and privacy policy, and an analysis on their financial data. With both analyses, the answer to the aforementioned research question will become clear and precise.

Current State of the Industry:

The current state of the Video Game Software industry has changed with the rise of information technology and systems. To simplify the changes, this analysis will incorporate Porter’s five forces model.

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The threat of substitute products or services has been lessened from the rise of technology. Technology has increased so rapidly that a game nowadays can be a cinema-like experience to rival substitute products like TV shows and movies. The big budget games are no longer asking the consumer to imagine a computer generated block as a person since video game models can look like actual people now. With the rise of mobile devices, most of the population also unintentionally has a video game platform in their pocket. In 2018, there were 966 million players and $34.8 billion revenue worldwide from mobile games. (Civelek) Most of the games on those mobile devices have a free-to-play system instead of a monthly subscription like Netflix and Hulu. The profits from those games are by advertisements or microtransactions. 

Final Fantasy VII (1997) Square Enix         Final Fantasy VII Remake (2020) Square Enix

Supplier power has lowered for some companies but remained the same for others in the rise of technology. The rise of technology has allowed some companies to directly sell their product with no middle man. Computer gaming has completely gone digital and the new mobile market has always been digital, so there is no need for the production of disks or cartridges to deliver a product on those platforms. On the other hand, there is still a market and huge demand for a physical release of a game on the other platforms like Playstation, Microsoft's Xbox, and Nintendo. For a physical release to happen, the company must deal with cartridges and disk suppliers. Even forgoing a physical release on those aforementioned platforms, the company will have to pay fees for their game to be on the platforms’ digital stores.

Buyer power in the industry has increased from the rise of technology. Since social media and user reviews allow consumers to share their thoughts with others, consumers can affect the potential copies sold for a video game. The most prominent tactic in buyer power of the video game industry is “review bombing”: posting a lot of negative reviews on a certain game or games to draw public attention. Those tactics can force competitors to change a game’s price or worse, remove a game from stores. For example, a Taiwanesse game named Devotion was taken 

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off online stores a week after it launched because it was review bombed for unintentionally featuring a Chinese political meme. (Conditt)

The threat of new entrants in the industry has been lowered due to technology but is still high depending on the type of game. The rise of online computer markets like Steam and Epic Games Store, mobile markets, and inexpensive development software like Ren’Py and RPG Maker has lowered the barrier of entry to produce and sell video games. At the same time, video games have become more complex with the new technology and buyer expectations. This in turn requires lots of resources and time in the development of video games. Small group indie video game developers can achieve funding for their development through crowdfunding websites such as Kickstarter and Patreon but the funding depends on luck and promotion.

Lastly, the rivalry among existing competitors both internally and externally has increased due to technology. Since video game development has become very complex, the higher end video games require very skilled labor in programming and graphic design. (Cook) The pool of that kind of skilled work is very limited. There is also a large amount of video games on the market to buy ranging from both old and new. 

Company Analysis:

Introduction

Square Enix Holdings Co Ltd was founded in April 2003 by the merge of two companies: Square Co., LTD and Enix Corporation. The company’s headquarters is located in Japan, Tokyo and has multiple subsidiaries in many countries. Yosuke Matsuda is the current president of Square Enix and has been its president since 2013. (EBSCOhost 7) While Square Enix has involved many industries such as book publication and merchandising, the company’s main revenue is from the video games industry. Digital Entertainment, which was primarily video games, represented 72.4% percent of their net sales last financial year. (Square Enix) The company is known for the development and/or publishing of iconic video game franchises such as Final Fantasy, Kingdom Hearts, Dragon Quest, and Tomb Raider. 

Square Enix is a Triple-A third-party video game company. In simpler terms, it is a major publisher that neither is nor works for a particular video game platform. At the time of writing this report, Square Enix is preparing the launch of NieR Replicant ver.1.22474487139… and will be releasing Neo: The World Ends with You and Final Fantasy VII Remake Intergrade later this 

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year. The company also has worldwide continuously operating mobile games such as Final Fantasy Brave Exvius, Romancing SaGa Re;univerSe, and, in the near future, NieR Re[in]carnation.

Competitive Strategy and Revenue Model

Using Porter’s Generic Competitive Strategies, Square Enix’s business strategy can be classified as Differentiation. As stated previously, Square Enix is a third party. Its games are on all platforms and thus has the competitive scope of a broad market. This differs from companies that appeal to a narrow market like Valve and Nintendo. Almost all of Value and Nintendo products are on a single platform like the computer or the Nintendo Switch. Most of Square Enix’s products are big title expensive video games so their cost strategy is high cost. An example of a Cost Leadership, low cost broad market, company video game would be Electronic Arts. Most Electronic Arts products are free-to-play games with microtransactions. 

Square Enix has many types of revenue models such as Traditional Sales, Subscriptions, and Licensing. The longest revenue model for Square Enix is traditional sales of their developed and/or published video games. The Subscription-based model for their games such as Final Fantasy XIV and Dragon Quest X has become a much more profitable revenue model due to new expanded content bringing in subscribers. (Square Enix) Licensing their more famous IPs has brought revenue to the company but for what and how much is up to speculation. For example, it is speculated that making Final Fantasy VII Remake a timed exclusive on the Playstation 4 platform was based on a licensing agreement with Sony. (Fingas) 

E-Commerce for Square Enix is both Business-To-Customer, B2C, and Business-To-Business, B2B. For B2B, Square Enix sells licensing agreements of its video game 

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IP to other businesses for collaborations. For example, Square Enix has a licensing agreement with Nintendo to allow Nintendo to use Final Fantasy and Dragon Quest property in the Super Smash Bros Series. Square Enix also sells its video game products to retail stores and online stores who in turn, sell the product to the consumers. The only Business-To-Customer Square Enix does is through their online store, so it’s a pure-play structure.

With the increase of information technology and systems, Square Enix has changed its revenue models and structure but Square Enix’s competitive strategy has stayed the same. One of their new revenue models is microtransactions in their mobile games. It has been noted in their financial report that the sales of those mobile games have been increasing year by year (Square Enix). The mobile game activity also increases Square Enix’s B2C activity as well. While not fully in the field of video game industry, Square Enix has also made B2C with music streaming of their video game soundtracks. (Kaser)

Cybersecurity and Privacy

Square Enix’s privacy policy is located on their “Group Corporate Information and Investor Relations” section of their website in both English and Japanese. At the time of this report, their English privacy policy was last updated on May 25, 2018. Their Japanese privacy policy was last updated on November 1, 2011.

Square’s Enix’s privacy policy complies with the FTC’s Fair Information Practice Principles. On their website, Square Enix does have a pop-up informing the consumer that cookies are being used and asks for consent of the usage of those cookies. Their policy also states that it will inform consumers and employees about acquiring personal information unless it is within certain stated categories mentioned on the privacy policy website. (Square Enix) This follows the first two principles: notice/awareness and choice/consent. (Landesberg et al. 7-9) As for manipulation of the personal data of an individual, the policy states “only the individual in question may request the disclosure, correction, addition, deletion, termination of use, and erasure of their Personal Information.”(Square Enix) and lists out security checks needed for an individual to manipulate the data Square Enix possesses. This follows the two of the five principles: Access/Participation and Integrity/Security. (Landesberg et al. 9-10) Lastly, for the principle of Enforcement/Redress, Square Enix has the privacy policy itself and also states that there will be a trained administrator within each department to handle personal information. (Square Enix) 

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There aren't that many United States regulations on handling personal data specifically for the video game industry. The only huge regulation is COPPA which “requires all online services collecting and sharing information about children online to obtain the child’s parental consent, and to follow a number of other data-handling requirements”. (Newman and Joseph 573) Square Enix does not have to worry too much about COPPA since it applies to games targeted specifically for children and almost all of their games don’t fit that category. (573)

As for incidents of cybersecurity issues, there haven't been any huge incidents for Square Enix in the past ten years and what could be considered incidents aren’t major in the video game industry. (EBSCOhost 7-9) Like most video games companies, Square Enix has encountered leaks: video game project information being released to the public before the intended date. In those incidents, the reason for the leaks were simply speculation unintentionally being right or a failure on the third party involved. There was no evidence of any of the leaks being caused by hacking directly into Square Enix’s corporation. Compared to other video game corporations just in the past year, this is an accomplishment. For example, CD Projekt Red, a Polish video game company, was hacked by a hacktivist in February 2021 and the hacktivist threatened to post their important data to the public. (Mondal)

Financial Data Analysis

The following data presented in this section comes from the “Square Enix Holdings Co Ltd SQNXF” page on Morningstar. The currency data is in Japanese Yen which currently equates to 0.0093 United States dollars. (Morningstar)

Gross Profit has increased steadily in the last ten years and has even doubled their 2011 sales in 2020. The only noteworthy marks are 2013 and 2019.  It is recommended to investigate 

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those years since the gross profit decreased rather than increase in those years. Overall, Square Enix has improved over the years and should keep doing the business practices set in place in this decade.

Revenue’s growth has aligned most of the time with gross profit growth. The only points that don’t match with gross profit are 2013, 2017, and 2019. There was a higher revenue in those years but the gross profit did not increase reasonably with revenue to those particular years. That means the cost of goods sold was proportionally in those years. It is recommended to investigate those years. If there were sales on certain games that came out the year prior, Square Enix should try to find incentives to get the consumers to buy those games at full launch price.  

Basic Earnings per Share has improved overall in the past 7 years. Since 2011 and 2013 are negative numbers, the net income of those years was less than the dividends promised for the 

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preferred stock. It is recommended to not have the amount of preferred stock from 2011 and 2013 in the future. The amount of preferred stock compared to the net income in recent years is reasonable and is a good benchmark for future years. 

Current ratio hasn’t gone below 1 in the past 10 years which is good. Companies should at least have a current ratio above 1 since it means the company can pay off their current debt in case of an emergency. The ratio fell significantly in 2014 and then went back up a bit. It has remained around the same in the past 6 years. Considering 2013 didn’t seem like a good year for Square Enix, the much lower current ratio must mean that the company invested their money more than usual in 2014 to bring more profit. The Current ratio for the past 6 years is a good benchmark for future years. A reasonably low current ratio is good too since it is better for a company to invest rather than keep cash lying around. It is recommended to stay near this new benchmark, 3.5, in the current ratio.

Conclusion and Research Question Reflection

While financially struggling in the beginning of the 2010s, Square Enix has evolved to match the pace of the ever-changing information technology and systems world. Yosuke Matsuda has done well handling the role of Square Enix’s president. The investments the company made in 2014 have helped the company’s financial health to remain consistent and the company’s profits to grow. Expanding their revenue models and e-commerce to fit the current industry has helped the company as well. Square Enix understood that more people are considering the video game industry as at least on par to the movie industry in entertainment. It 

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took advantage of that by doing other revenue models that other entertainment industries are doing. 

As for the research question, it would be wise to modify the question. While the rise of PC online store gaming and mobile games has changed the information technology and systems in the video game industry, there are other factors that must be addressed as well. These factors are what Square Enix has excelled at as well. The new research question is “Has Square Enix implemented information technology and systems that are aligned with their business strategy successfully to keep a competitive advantage during the video game industry’s transformation of becoming a major entertainment industry?” The answer to the new research question is “yes, after a rough start.”

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Works Cited

Civelek, Ismail, et al. “Design of Free-to-Play Mobile Games for the Competitive Marketplace.” International Journal of Electronic Commerce, vol. 22, no. 2, Apr. 2018, pp. 258–288. EBSCOhost, doi:10.1080/10864415.2018.1441755.

Cook, Dan. “Video Games in the US.” IBIS World, IBIS World, Dec. 2020, my-ibisworld-com.proxy108.nclive.org/us/en/industry/nn003/industry-outlook.

Conditt, Jessica. "Chinese Video-Game Censorship Doesn't End with 'Devotion'."ProQuest, Aug 02, 2019, https://search.proquest.com/blogs-podcasts-websites/chinese-video-game-censorship-doesnt-end-with/docview/2267935127/se-2?accountid=*****.

Fingas, Jon. "'Final Fantasy 7 Remake' Will be a PlayStation Exclusive Until 2021."ProQuest, Dec 10, 2019, https://search.proquest.com/blogs-podcasts-websites/final-fantasy-7-remake-will-be-playstation/docview/2324219918/se-2?accountid=*****.

History｜About Square Enix Group｜SQUARE ENIX HOLDINGS CO., LTD., www.hd.square-enix.com/eng/company/history.html.

Kaser, Rachel. Square Enix just Dropped almost Every Final Fantasy Soundtrack on Spotify & Apple Music. Newstex, Amsterdam, 2019. ProQuest, https://search.proquest.com/blogs-podcasts-websites/square-enix-just-dropped-almost-every-final/docview/2253221151/se-2?accountid=*****.

Landesberg, Martha K., et al. “PRIVACY ONLINE: A REPORT TO CONGRESS.” FEDERAL TRADE COMMISSION, June 1998, www.ftc.gov/sites/default/files/documents/reports/privacy-online-report-congress/priv-23a.pdf. 

Mondal, Poonam. Here are 6 of the most Notorious Cyber Attacks in the Gaming History. Athena Information Solutions Pvt. Ltd, Mumbai, 2021. ProQuest, https://search.proquest.com/other-sources/here-are-6-most-notorious-cyber-attacks-gaming/docview/2490591769/se-2?accountid=12390.

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Newman, Joe, and Joseph Jerome. ""Press Start to Track"? Privacy and the New Questions Posed by Modern Video Game Technology." AIPLA Quarterly Journal, vol. 42, no. 4, 2014, pp. 573.

Privacy Policy｜SQUARE ENIX HOLDINGS CO., LTD., Square Enix, 25 May 2018, 

www.hd.square-enix.com/eng/privacy.html.  

Square Enix. 2020 Annual Report, 2020. Web. 21 February 2020

Square Enix Holdings Co Ltd. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=dmhco&AN=9142DAF0-9DC1-4B79-8A2E-007C5E6042EA&site=bsi-live. Accessed 21 Apr. 2021.