Square Enix did not know how to squeeze profits out of its western studios

Square Enix did not know how to squeeze profits out of its western studios ...

Square Enix is distributing Eidos and Crystal Dynamics to Embracer Group, the largest western studios, but it is first to focus on the reason. Why did Square Enix abandon the Tomb Raider and Deux Ex studios at an apparent low price?

Square Enix has invested a lot of money on these studios, but hasn''t decided how to make the income from that investment. In 2021, Eidos Interactive generated its highest revenue in three years. However, these revenues did not offset its costs, and Crystal Dynamics had a profit margin of 0.6 percent.

Last year, Square Enix as a whole had a operating income margin of 14.2%, according to an Niko Partners analyst.

Square Enix clearly ran out of ideas

Companies are wary of having to experience a loss on their profitability, but that doesn''t mean they immediately sell off underperforming businesses. Square Enix had the option of deciding what to do next with Crystal Dynamics and Eidos. This arrangement suggests that Square Enix was a lack of interest.

The publisher now goes from having Crystal Dynamics and Eidos on their own IP to developing a Disney-owned brand. That''s almost certainly to the extent that Square Enix is reporting that if Marvel could not make these studios profitable, nothing will.

Eidoss Guardians of the Galaxy sold less than 1.5 million copies in its first few months, even after several discounts at retail.

Square Enix offers other non-favorable options if we look at competing publishers.

Any project that does not have at least a 15% profit margin has been shut repeatedly by EA. This has left the studio with fewer and less projects each year.

Activision has adopted a similar approach to EA, but instead of closing studios, it has simply placed all of its employees in the content farms called Call of Duty or Blizzard. Square Enix has already experimented with this. It made a deal to allow Crystal Dynamics to collaborate with Microsoft''s The Initiative on Perfect Dark.

Why so low?

Crystal Dynamics and Eidos'' low earnings pushes down their value. Embracer would get a better return on its money by simply putting $300 million in an index fund. At least if the studios continue on a similar trajectory to 2021.

If they work on their own IP, they know that the studios will likely generate better net income. Eidos had a profit margin of 7.2 percent in 2019, for example. And the IPs themselves have a lot of value.

Embracer is getting a lot for a relatively low price even when it comes to operating a studio. That suggests that Square Enix either has a completely new business strategy or other motivations.

Square Enix has already claimed that it will invest more in blockchain, AI, and cloud gaming. It would probably do that. Crystal Dynamics and Eidos have probably no interest or abilities in these areas. So the publisher is pursuing a future that had no use of those teams.

It''s also worth taking into account the context in which this agreement is happening. Massive corporations like Microsoft are purchasing giant publishers. Tencent has indicated that it intends to continue to make moves. Every other publisher is trying to position themselves to acquire, merge, or acquire something else themselves.

Square Enix increases its ability to remain more efficient in terms of potential acquisition. Perhaps that is the next feature of this story.

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