Sales of Sleeping Dogs, Hitman Absolution and Tomb Raider fell short of Square Enix's expectations, sparking the publisher to launch a costly restructuring. The problem, Squeenix has said in its annual report, but "an intrinsic problem within the HD game business model." It's just not sensible to work on a game for years, losing money, then release it and hope you'll make enough back, it says.
Square Enix says that games were "critically-acclaimed" (which is debatable) and it considers them successful from a development perspective, but the money part was the problem.
The console market is still primarily driven by boxed copies of games on store shelves, it says (noting that digital distribution is "becoming the mainstream" for PC and DLC), but oodles of games are flooding in and retailers are becoming picky about stocking them.
To get attention into the crowded market it offered "considerable incentive programs" to retailers, "such as price protection, back-end rebates, and promotional cooperation costs." While this helped ship boatloads of copies to stores, it lowered the profits on each.
As making a big fancy game takes years, its current model is to spend money all through that then hope it makes it back at the end. Which is a bit of a gamble. "Profit opportunities are almost non-existent during the game development phase," it notes. Other than irritating pre-order campaigns, of course.
One might point to the alpha-funding craze on PC which is letting people play games early and fund development, but it's jolly unlikely any major publisher would venture into that in any serious way.
One might also sneer that Square Enix needn't spend millions and millions of dollars on making games so very fancy, but don't expect that to change. "Titles of large-scale development are our flagship titles, showcasing our technologies, it said. "We will never lower the flag of such titles."
However, having such big and beloved fancy brands realized so lavishly gives it "the potential of diverse content exploitation," it says. Square Enix dreams of using these in "a business model that delivers content in various formats to customers even before the launch of a game."
Unfortunately, it neglects to paint a picture of what this model could include. Small spin-offs and mobile and games, like Ubisoft favors, is one possibility I imagine. However, far more interesting would be ideas like Hitman: Sniper Challenge.
The Hitman: Absolution spin-off used bits of the main murder simulator to create a standalone game focused purely on sniping from a rooftop. Bafflingly, it was offered as a pre-order bonus rather than a paid release. If Square Enix were to start spinning off cheap-to-make snippets of games as standalones, it could both make a little money back and get people excited about the main release.
(Sniper Challenge, by the way, was released free-to-play almost a year later on an obscure online portal--relatively useless for both monetization and marketing.)