As Square Enix Pivots, Embracer Acquires New IP

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Hi Everyone. Welcome back to another issue of Naavik Digest. Last week’s most popular stories included: Soliton’s piece on A Game Engine to Play Them All, Gigabite’s essay on The Problem with P2E & The Gaming industry, and Input’s coverage of Netflix’s future gaming plans. With that, let's jump into today’s issue...

Roundtable: Square Enix’s Western Studios ‘Only’ Cost $300M?

In this Metacast episode, David Amor, Matej Lancaric and Miikka Ahonen, join your host Maria Gillies to discuss:

Bored Ape’s Virtual Land Sale
Web2 vs Web3 UA
Warcraft Arclight Rumble Announcement
Embracer Acquires Square Enix’s Western Studios

You can find us on Spotify, Apple Podcasts, Google Podcasts, YouTube, our website, or anywhere else you listen to podcasts.

Listen To The Episode

#1: Embracer buys Square Enix's North American Studios for $300M

On Monday, Swedish holding company Embracer announced that it is acquiring Square Enix's North American development studios and related IPs for $300M in cash. The studios that are part of the deal include Crystal Dynamics, Eidos-Montreal, and Square Enix Montreal. The IP portfolio includes Tomb Raider, Deus Ex, Thief, Legacy of Kain and a back catalog of over 50 titles.

The $300M price tag is meager compared to recent acquisitions, such as Sony acquiring Bungie for $3.6B in January. However, as Square Enix's western studios are only taking their first, expensive steps with live service games now, Bungie has already honed live ops for the Destiny franchise for 7 years. Thus, as the world around them has shifted to continuously operated live games, Square Enix's divested studios consist mostly of true old school AAA development.

In short, Embracer is taking over:

Circa 500 developers of Eidos-Montreal, makers of the 2018 title Shadow of the Tomb Raider as well as last year's Marvel's Guardians of the Galaxy
Circa 300 developers of Crystal Dynamics, a California-based studio responsible for the 2015 Rise of the Tomb Raider and 2020 Marvel's Avengers.
Circa 150 developers of Square Enix Montreal, a mobile studio that has shipped Tomb Raider and Hitman titles for mobile but struggled with the free-to-play model.

Square Enix started its Western operation by acquiring the UK-based Eidos in 2009. It has been a rocky road ever since. While the studios have successfully shipped games such as the three Tomb Raider reboot titles, financial wins have been scarce. In particular, the two Marvel titles from the past years have proved troublesome to Square Enix.

Embracer Square Enix — *Source: Square Enix via* *TweakTown*

Meanwhile, Square Enix's domestic business in Japan has flourished. Just to name a few successes: Final Fantasy, Dragon Quest, and Romancing Saga mobile titles are generating hundreds of millions in yearly revenue; and the cross-platform online game FFXIV has taken over World of Warcraft as the go-to massively multiplayer online game. Considering this, plus the fact that the company has been looking for an out from the high-stakes AAA business for years, the divestiture makes a lot of sense. Finally, Square Enix President Yōsuke Matsuda outlined already in January the company’s newfound focus in Web3, an approach reiterated in a recent statement on the sale.

Thus, the sale itself is not a surprise, but the price is. Even with outstanding profitability issues and the yearly costs of the acquired studios, Embracer should be happy about the outcome. It is set to gain a thousand seasoned game developers and a bunch of evergreen IPs, the crown jewel of which is obviously Tomb Raider. $300M for all this in today's heated M&A market does seem like a steal. Business models may come and go, but great gaming experiences are timeless. Embracer just got itself a thousand talented creators in a market where professional game developers are in higher demand than ever.

Embracer has been vocal about its focus on the AAA experience. The problem with the AAA model has never been a lack of consumer demand, but the sheer investment needed to make these games. As the amount of companies delivering these experiences decreases, it might just become a viable strategy again. AAA development is slow, expensive, and risky, but if Embracer has the patience to bet on it in the long term, it might just succeed. (Written by Miikka Ahonen, Co-founder of Lightheart Entertainment)

#2: What Matters for Sports NFT Games

Embracer NFT — *Source:* *Zephyrnet.com*

We’re seeing a Cambrian explosion of blockchain-based sports NFT games come to market. A few standout projects like NBA Top Shot and Sorare have demonstrated the potential to build in this space, and there is appetite for another breakout title. Over the past year, these games have received $1B+ in funding (including Sorare’s $680M Series B and Dapper Labs’ $505M Series C & D), ranging from simulation to collectables to live gameplay. The big question — why now?

*The two largest sports NFT projects by secondary sales volume. NBA Top Shot is the clear leader, with Sorare showing signs of potential. They rank 6 and 16 in all-time volume, respectively. | Source:* *Cryptoslam*

My favorite articulation of a ‘why now’ comes from GOALS, a FIFA Ultimate Team (FUT) alternative: We take the opposite approach and instead acknowledge our users' right and demand for a secondary market. With the rise of web3, we believe the timing is right and technology mature enough to create a game where we promote P2P trading of in-game assets. Through the use of blockchain and non-fungible tokens (NFT), every asset will be fully owned by the player, and not by us.

In short, NFTs for sports games are a natural segue because the consumer behavior for them already exists. Sports in particular have a near-religious fandom to them, with Americans alone spending ~$60B on them each year. Fans now want new ways to express their fandom. On the flipside, leagues also want new ways to drive revenue, and to better engage new and existing fans. What blockchain tech enables is a more seamless P2P transaction experience (which by extension also means owning the assets) and for the consumer to share in the upside of the project.

This is a complex, deep space to dive into. While there are already a variety of successful models that have been built, sports NFT projects like NBA Top Shot and Sorare (which has 230+ league partnerships and counting) only scratch the surface — the space is still clearly nascent with a myriad of areas that are fertile for innovation or reimagining of existing designs.

🎮 In Other News…

💸 Funding & Acquisitions:

Embracer reached an agreement with Square Enix to purchase Crystal Dynamics, Eidos-Montréal, and Square Enix Montréal (in addition to rights of IP like Tomb Raider & Legacy of Kain) for $300M. Link
AccelByte, a backend services platform for game developers, raised $60M led by SoftBank. Link
LootRush raised $12M to remove barriers to entry to web3 games. Link
SnackClub raised $9M to help blockchain games thrive in emerging countries. Link
InfiniGods raised $9M in a round led by Pantera. Link
AppLovin bought an earlier version of Wordle. Link

📊 Business:

Newzoo forecasts the video games industry will hit $200B in revenue in 2022. Link
Meta is building a web version for Horizon Worlds. Link
Turtle Beach is exploring a potential buyout. Link
Razer plans to delist and go private. Link