A scorching critique of Square Enix (and what Square did next)

Let’s put things in order. PLUS: A major lawsuit against Bungie and Sony is dismissed, though could return.

3D Investment Partners slide 15 (of 112), making the case that Square Enix’s revenue growth (vertical axis) and operating profit margin (horizontal axis) are worse than six big gaming competitors.

Back in November, Square Enix, the powerhouse Japanese gaming company behind Final Fantasy, Dragon Quest and Mario Hoops 3-on-3 (look it up!) announced an update to its current three-year company plan.

This got some press, because…

• Square vowed to improve its game development efficiency by aiming to make AI handle some 70% of the quality assurance work needed to craft a game.

• The company said it would continue to consolidate its game development resources and cut some of its overseas workforce, to focus on Japanese development for a global audience. (Square Enix conducted a mass layoff in North America and Europe the same day it issued the update)

Then, this week brought more news: Activist investment group 3D Investment Partners published a brutal 112-page slideshow excoriating Square Enix for the company’s performance, calling out revenue declines, slamming its relatively poor profitability, questioning why arcade maker Taito is still even part of SquareEnix and shredding Square Enix management over the three-year plan

Just one key twist.

The 3D IP report was presented to Square Enix way back in September. It’s not new, definitely not to Square Enix management.

That report from Square Enix about AI-driven QA and overseas cuts? That was issued in November, by which time 3D IP had used its slide deck to request specific actions and information, such as more specifics about Square Enix’s goals and targets.

The November Square Enix report does not seem to have appeased 3D IP at all. On Monday, the firm publicized its September report and an equally searing press release. In the release, 3D IP complains that they asked Square Enix president Takashi Kiryu to “establish a framework and present a concrete process to fundamentally re-examine management plans with a view to maximizing corporate value” and got in response: “a brief email stating…a new review framework was not necessary.”

So 3D IP went public and is now asking other Square Enix shareholders to “to read the Presentation and share with us your frank views” in preparation of more pressure on Square Enix’s board of directors.

3D IP has some pull already, and is looking to strengthen that. In July, the investor raised its stake of Square Enix to 14%. That would make them the Square Enix’s second-largest shareholder, though not with enough voting power to oust members of Square’s board and install people who would trigger its desired changes. That’s the point of the shareholder outreach through the publication of the September slide deck.

(For a measure of 3D IP’s efficacy in pushing companies to change, see Japanese beer maker Sapporo. 3D IP has been pressing Sapporo to sell off its real estate holdings. The company is reportedly close to doing so.)

The whole slide deck is a remarkable document. A few things popped out at me, beyond the withering chart-based groaning about Square Enix’s financial performance: