Game news “Old video game franchises no longer speak to young people”. This former Square Enix employee draws up an alarming observation about the AAA industry

The man who whispered in Yōichi Wada’s ear

His name may not mean anything to you, but he has rubbed shoulders with the big names in the video game industry. Jacob Navok was the Director of Business Development at Square Enix for 5 years, from 2010 to 2015. At that time, Yōichi Wada was leading the group, and Jacob Navok was responsible for finding strategic partnerships and developing new business models. He then headed a subsidiary of the Japanese group – Shinra – before becoming CEO of Genvid Technologies, a specialist in streaming solutions.

His various roles and positions of responsibility have allowed him to develop an in-depth understanding of the video game business.. On X, he occasionally offers some commentary on the industry. For example, he announced that Square Enix would be forced to abandon the exclusivity model to survive. This is ultimately what the Japanese giant did. Suffice to say that since then, the gentleman has been particularly listened to by the sphere of media analysts.

An old outdated model

In a long thread accessible on X, the former deputy director of Square Enix delivered an enlightening analysis of the issues linked to investment in the world of AAA video games at a time when service games are all the rage. By way of introduction, he specifies that the budgets for Final Fantasy XVI and FF7 Remake were surely decided around 2016, at a time that he describes as “pre-Fortnite era”. At that time, budgets were set when the industry believed that audiences would continue to grow and grow. “Before, we chose a release date like for a Hollywood film, we stuck to it and we considered that the competition was made up of the titles that came out the previous and following weeks” he wrote, before adding: “we were looking at a Hitman or Deus Ex coming out and wondering if a Call of Duty or Assassin’s Creed was coming around the same time, assuming players had X dollars to spend and Y dollars of time”.

The company then had to make the right sales estimates in order to allocate the right budget to a project. Jacob Navok explains that multiplying the number of sales by the price of the game is not a good indication of what the publisher really makes on a video game. In a world where large companies are on the stock exchanges, we must never forget to think big. “If making a game costs $100 million and takes 5 years, it has to do better than the return the company could have gotten by investing $100 million in the stock market over that period” he declares. “Over the five years to February 2024, the stock market recorded an average rate of return of 14.5%. By investing that $100 million in the stock market, you get a return of $201 million, which is our baseline for ROI” he continues. This is where the problem arises: “Can the game generate a return above this figure after taking into account marketing costs, platform fees and price cuts?”.

The impossible equation

The former head of business development at Square Enix then recalls that of the 70 dollars paid by the consumer, only 49 dollars returns to the pockets of the publisher after the deduction of 30% of platform fees. And that the equation is increasingly difficult to solve by adding the costs linked to marketing, discounts and returns which bring the net amount down to around 40 dollars. “With 3 million copies and $40 per copy sold, you only made $120 million. You are far from the mark” he observes. To make matters worse, Navok recognizes that his figures are significantly lower than reality. “The costs of developing a game are probably twice as high, and the marketing is also probably twice as high, making the ROI requirements higher” he said.

Especially since development costs have increased. Creating AAA quality games today costs more because of the precision that the assets must achieve (textures, animations, etc.), but that’s not all. “On the cost side, inflation is rising, wages are rising, and consumers need sophisticated and beautiful products to entice them to shell out money” notes the former Square Enix employee. In a world where producing a AAA can reach $380 million, such as Spider-Man 2, we understand that the slightest mistake can be catastrophic for a studio. Especially since new competitors have given gray hair to this model established for years.

The winning service, but not for everyone

We have often repeated it here, The explosion of gaming services, and especially the coronation of Fortnite, has changed the way the industry giants think about the video game business. And the way customers consume it. “Back in the day, as a gamer, once you finished the last game you were on, you moved on to the next one. (…) This world has changed radically over the last six years” writes Navok. Today, publishers offer games “premium” which directly compete with free-to-play titles that never age because of content that strengthens them over time. Not only is the hypothesis that the player buys a game after having finished one no longer true, since some games no longer finish, but in addition, the player has lost the habit of spending 80 euros to switch from a software to another, he who is full of free-to-play. “Candy Crush has had its best years in recent years. And companies like Epic can continue to invest in their products to improve them, creating even higher barriers to entry for competitors” notes Jacob Navok.

In addition, the success of a game service fuels its success, like any social network. “There are reasons why there are very few competitors to Facebook. Once the network effect begins, it can last for a long time. Since Instagram, also Facebook, the only real competitor to have appeared for a whole decade and to have been able to quickly reach more than a billion people has been TikTok. And this, in a sector valued at trillions of dollars” he adds. “Development costs have increased, and consumer switching costs have increased, and as a result companies have to invest even more because it has to be a 10/10. Otherwise, players will return to Fortnite. (…) Meanwhile, FF7 Rebirth, which has a Metacritic rating of 92%, isn’t getting the sales it needs. These factors mean the status quo must change” announces the former deputy director of Square Enix.

See Final Fantasy VII Rebirth on Amazon

New generation

There “Fornitization” of video games has redistributed the cards and has managed to interest a target that the dinosaurs of the industry are seeing leave, little by little: young players. “If you’re a young gamer in your teens, you might not even think about Final Fantasy. If you’re 13 today, you were 5 when the last FF came out” laughs Navok. He adds that younger gamers don’t have consoles and don’t care, as long as they have a PC or phone that gives them access to Fortnite, Roblox or Minecraft. “Old AAA franchises don’t seem to be converting the younger generations the industry was counting on for growth” he confirms. This is why the historic giants have launched numerous Live Service projects. Last year, we learned that Sony, although known for its single-player narrative games, was going to invest heavily to move into service games..

Newzoo (leading group in video game and player data) recently indicated that 25% of the time spent by gamers playing was only focused on 5 games in 2023: Fortnite, Roblox, Minecraft, GTA 5 and League of Legends . Additionally, 15% of gaming time was spent on annual titles (Call of Duty, Sports FC, etc.). “Barely 8% was dedicated to new games not belonging to annual franchises. This is what everyone is fighting about. Only 8% of playing time“ reports Christopher Dring from GamesIndustry.

So what to do? Raise prices

Listening to Jacob Navok, our big historical names in video games risk dying out since they are trapped in the production of very expensive and therefore very risky AAA titles, and the development of service games which immediately expose themselves to too much competition. fierce. So what to do? According to him, three levers exist to improve the return on investment in this troubled period: reducing costs, increasing prices or increasing the audience.. As has been shown and as Phil Spencer has repeated in recent months, the number of video game consumers is not growing.

As for cost reduction, it is particularly complicated in times of inflation, at a time when the 90+ Metacritic for an AAA requires spending a lot of money in order to deliver the most accomplished work possible. This is why, according to Jacob Navok, we will surely see prices increase further. “This is not because gaming companies are money grabbers looking to fleece their users. That’s because it’s the only path left to making games viable in the AAA space, considering costs and competition”, he explains. “Expect price increases to still be the norm” he says, by way of conclusion.