These days, video game company acquisitions have become a routine part of the newscycle, and we tend to talk about them in billions. Look at a mega-deal like Xbox’s $68.7 billion Activision-Blizzard acquisition, PlayStation’s $3.6 billion acquisition, or the handful of other billions-of-dollars deals that seem to be the norm in 2022.
So the latest acquisition headline is surprising, at least at first glance, because the number involved is so much lower than we’ve come to expect – Embracer Group acquiring three Square Enix studios and their major franchises like Tomb Raider, Deus Ex, and more for only $300 million. For longrunning, critically acclaimed studios and their decades-long running series… that number, especially compared to other acquisitions, seems like a steal, right? Well, it certainly seems like it from a player perspective, but Square Enix has previously labeled many of these studios’ releases, despite critical success, as commercially disappointing in past earnings reports, and it has stated a goal to invest in more technologies like blockchain, AI, and the cloud. With this in mind, studios developing traditionally single-player, narrative adventures may not neatly fit into that company vision. And that means the sale might actually be a good thing for these studios in the long run.
A Shocking Sale?
That $300 million number might seem to us armchair analysts like highway robbery for heavyweights like Lara Croft, the Guardians of the Galaxy (though any future Marvel games still require approval from the rightsholder), and Deus Ex’s Adam Jensen, but that number most likely comes from a number of very reasonable factors, according to Ampere Analysis’ Piers Harding-Rolls.
“The price is what it is and is based on Embracer’s evaluation of the business and Square Enix’s willingness to sell,” Harding-Rolls told IGN. “There are certain things we don’t know which will influence the exact price – running costs and the pipeline of games for example – so it’s hard to evaluate the price really accurately based on the information we have.”
One very clear reason might simply be money. As Niko Partners’ Daniel Ahmad noted on Twitter, Eidos and Crystal had far smaller profit margins than the whole of Square Enix did in 2021. That’s not to compare the individual holdings to the company, but to rather demonstrate how little they contribute to Square Enix’s overall profit margin. Both analysts have pointed to how Square has sought to sell off this aspect of its business for some time now.
“[Square Enix] has struggled to get consistent commercial success out of those studios, and it wants to build a leaner organisation with a more compelling growth and profit story for its shareholders,” Harding-Rolls explained. “This move allows the company to become leaner and to run a more profitable games business today. Commercially, the deal puts it in a stronger position, which gives it a stable footing for future growth.”
This all makes plenty of sense when you consider most major projects from these studios are likely years out – even Embracer’s acquisition notice explains the company doesn’t expect to gain major revenue from the deal over the next two financial years outside of back-catalogue games. Crystal only recently announced a new Tomb Raider using Unreal Engine 5 that is likely years away, and is otherwise still working with Microsoft on a new Perfect Dark, while Eidos just released Guardians last year, and SE Montreal’s offerings after the GO series stopped have been infrequent.
Looking at the relatively light pipeline over the next few years and underperforming recent games like Marvel’s Avengers and the (critically acclaimed) Marvel’s Guardians of the Galaxy, and the seemingly low price point starts to make more sense. A huge influx of money to focus on Square's stated interests, combined with no longer having to worry about operating the studios and more centrally focusing on Square Enix’s other existing holdings could, as Holding-Rolls pointed out, allow the company to create a more profitable picture of itself for its investors.
With this in mind, what value is there to Embracer? Embracer has been scooping up companies like Gearbox, Asmodee, and many more, and though there are potential upsides to the deal, like successes based on high-profile franchises, Harding-Rolls noted it’s not without risk.
“Embracer faces substantial investment in these studios over a number of years before seeing any significant ROI, but it has also added a strong collection of IP and franchises with potential future value that could easily eclipse the $300m asking price if successful,” he said.
Embracer’s announcement even included word that the studio has acquired additional bank funding to finance its acquisitions like this, but as Embracer CEO Lars Wiingefors told the Financial Times (via VGC) recently, the company’s wide array of purchases helps to mitigate risk from any single buy.
“If you can make one game, you have a big business risk but if you make 200 games, like we do, the business risk is less,” Wingefors said at the time.
With what equates more leeway in what may define a “success” under Embracer, this move may have also created a potentially positive upswing for those teams, too.
Success Outside of Square Enix
The trio of studios being sold off by Square Enix offers a host of familiar franchises, many of which have included critically praised starts, sequels, reboots, and more. But that $300 million price tag starts to make even more sense when you consider that, under Square, there’s been a history of those games being critically successful, but commercially unsuccessful, at least according to Square's expectations. Infamously back in 2013, the critically acclaimed Tomb Raider reboot failed to meet sales expectations despite shipping 3.4 million copies. Two other western developed and well-received games, Hitman: Absolution and Sleeping Dogs, also did not meet sales expectations back then. Square Enix president Yosuke Matsuda would say, years later, that those expectations for Tomb Raider at least were “extremely high,” but there has been continued sales disappointment in these studios as the years have gone by.
In the ensuing years, the Deus Ex franchise has also essentially gone dark, with reports from 2017 that the franchise was on hiatus even after the well-received Deus Ex: Mankind Divided, Square Enix Montreal stopped producing its praised “GO” mobile series, Marvel's Avengers was labeled a "disappointing outcome" by Square and most recently, Marvel’s Guardians of the Galaxy from Eidos initially underperformed sales targets, too.
Fair standards or not over the years given many of these games were still praised by critics and players, as Ahmad noted on Twitter, its western studios have repeatedly underperformed while Square has continued to see gains from its Japanese studios, such as with the incredible sales success of Final Fantasy XIV and its recent expansions like Endwalker, as well as the successful launch of Final Fantasy VII Remake in 2020. With a company like Square Enix beholden to its shareholders, maximizing profits, and focus – at least right now – on blockchain technologies, maybe, the studios just weren’t the right fit for Square Enix? Perhaps being held to a different standard at Embracer will allow these critical successes to also become commercial ones, as there’s clearly love for them when they’re treated right. Though Deus Ex has, in its lifetime, only sold about 12 million units according to new info from this acquisition, Tomb Raider has sold over 88 million units across its existence, 38 million of those from the reboot trilogy. There is obviously a built-in audience for these franchises, and Embracer is hoping to bolster its AAA, recognizable series, and its potential player base, with this deal.
We’ve already got a prime example of a studio whose work was labeled a commercial failure, separated from Square, and went on to find success – IO Interactive. The Hitman devs weren’t even sold off by Square Enix – instead, the company simply withdrew from IOI back in 2017. Hitman 2 would later go on to acclaim under publisher Warner Bros. Interactive Entertainment, and Hitman 3 grew to even greater heights, self-published by IOI. The company called Hitman 3 the most successful Hitman game of all time and led to the company’s highest revenue and profit numbers in its history.
IOI’s bright future includes a James Bond project among other unannounced games, and though it’s impossible to say how the company would be faring if it remained as part of Square Enix, it’s a far cry from the commercial woes it saw nearly a decade ago at the company. The Embracer group acquisition may offer another similar fresh start for Crystal Dynamics, Eidos Montreal, and Square Enix Montreal. After all, it seems Embracer doesn’t acquire companies with an intent to exert too much control. Embracer CEO Lars Wingefors, again to Financial Times, said “From a commercial standpoint, we don’t have central, commercial decision-making. Looking at other companies, they’ve struggled when they put too many layers of directors and management and start controlling creators, that’s when they start falling apart.” That approach may require some adjustments for these teams, but could perhaps lead to other Hitman-like success stories and, as Harding-Rolls, notes, ultimately be for the best.
“That decentralised approach to running the business will be a culture shock for the studios involved considering the way that Japanese publishers are often run in a heavily centralised way. Arguably it could be commercially liberating,” he noted. And that’s certainly a sentiment echoed by Embracer itself, as the company’s presentation regarding the acquisition said “We firmly believe that the studios will excel under Embracer’s operating model.”
And, similarly to the Sony-Bungie deal, there may be another element at play that makes this a positive for the studios involved – multimedia. Square Enix America and Europe CEO said “Embracer allows us to forge new partnerships across all media to maximize our franchises’ potential and live our dreams of making extraordinary entertainment.” And as notable franchises that players and viewers can attach to increasingly become the bedrock of the content wars, it’s no surprise that the teams may want to see their beloved series take on new life, and instill more love for them, by translating them into different media.
While the decision’s price may be giving the general audience sticker shock, perhaps it’s not so surprising given Square Enix’s focus, financial views of these studios and their output, and Embracer’s increasing interest in amassing recognizable studios and IP. There’s a potentially bright future ahead for the studios, as analysts have noted, though it’s not a deal without its risks. At the very least, IO’s independence from Square certainly offers a cautiously optimistic tale of what could happen, though we won’t fully understand how these teams truly succeed or fail for at least another couple of years. But maybe that will give us all enough time to recover from the shock of that $300 million price point.
Jonathon Dornbush is IGN's Senior Features Editor, PlayStation Lead, and host of Podcast Beyond! He's the proud dog father of a BOY named Loki. Talk to him on Twitter @jmdornbush.