Square Enix and Capcom march towards contrasting futures

On the face of it, Capcom and Square Enix are a pair of companies pursuing very similar goals. The financial updates released by both firms this week talk in broad strokes about their successes and failures with AAA console titles, their hopes for expanding their success in western markets and plans to do more in the mobile space. Read into the details, though, and you see that in many regards these two companies - stalwarts of the Japanese publishing industry - are at opposite poles and betting on quite different futures.

Capcom, in many regards, is the game publisher most vocal consumers say they want. It's doing interesting new things with established IP (Resident Evil 7, for example) while continuing to update and improve beloved older titles, complementing its AAA releases with a steady feed of HD remakes and re-releases of classic hits. It talks regularly about having ambitions in the mobile space, but remains almost entirely focused on console and has made no inroads worth speaking of on smartphones. Instead, it aims to grow by building the appeal of its franchises in new markets - its main undertaking at the moment being teaching Europe and the USA to love Monster Hunter like Japan does. As a consequence of this, and of its heavy focus on internal development, its ability to grow is limited to very gradual expansion, and for all that it's practically a household name, it remains by far the smallest of Japan's top tier publishers.

"In a sense, we can view what Square Enix is doing on mobile as a dry run for how Nintendo's mobile plans could play out"

Perhaps it's Capcom's smaller size that's prevented it from bashing up against the market realities that have forced Square Enix onto a rather different path. Unlike Konami, whose management were only too happy to transition to being primarily a mobile game company, Square Enix seems to feel deeply culturally attached to being a console game creator. Its console development budgets have risen steadily, and the stock the company places in franchises like Final Fantasy, Dragon Quest, Deus Ex and Tomb Raider is simply enormous. Square Enix firmly believes in the console market and though it's a second-tier publisher right now (simply due to the absolutely huge size of first-tier publishers like Activision and Nintendo), it sees itself as being a contender for becoming a global leader in console publishing.

The fly in the ointment is this; unlike Capcom, Square Enix has done a pretty solid job of creating mobile titles around its franchises, and well, they're booming. Last year, its mobile revenues overtook its revenue from console games. This year so far, it's made more money from mobile games than from console games and MMOs (its third largest business segment) combined. The reality is that without any slackening of the pace or loss of focus on Square Enix' core console business, its revenues have been handily outstripped by the company's mobile titles - which include a number of original Dragon Quest and Final Fantasy titles, as well as original IP like the relatively recently launched Grimm Notes.

I mentioned Konami above as a contrast, because this is exactly the same reality that faced Konami. The parallels, in fact, are striking; Konami's mobile games were booming, it was struggling to retain its position in console publishing and feeling its margins squeezed, and it had a huge, expensive console title sucking cash and development resources. If Square Enix' management thought along the same lines as Konami's, they'd take the opportunity of Final Fantasy XV's launch to wind down much of their console development and refocus the company on mobile.

That seems unlikely to happen - not only because Square Enix has a very different company culture and quite different ambitions, but also because the firm's mobile games have by and large drawn upon the richness of its console IPs. In a sense, we can view what Square Enix is doing on mobile as a dry run for how Nintendo's mobile plans could play out. A franchise like Final Fantasy succeeds on mobile thanks to the recognition and goodwill it brings with it from console; in theory, that should then feed back into stronger sales of console titles (thanks to the audience being more deeply involved through regularly playing the mobile games), which in turn should drive even higher adoption rates for mobile games. That's the virtuous circle Nintendo hopes to achieve through its games; Square Enix has been working on it for some time, and the only part we're still unsure of is just how effective the feedback loop that sees mobile titles shoring up their console counterparts is.

"Machine Zone's games tend to fall firmly on the abusive side of the F2P business model, which could severely tarnish the valuable Final Fantasy IP, but one would imagine that Square Enix...will keep its hand on the tiller in that regard"

The nature of Square Enix' ambitions also means that the company is very open to partnerships with others, even where its most valued IPs are involved - another contrast with Capcom, whose focus on internal development above all else is either admirable or a bit mad, depending on which angle you're viewing it from. Tucked away along with Square Enix' results this week was perhaps one of the most important announcements the company has made in years; that it's working on a Final Fantasy XV MMO with Game of War creators Machine Zone.

While Machine Zone's bombastic approach to marketing has caused lots of rolled eyes across the industry (though honestly, there's a tinge of jealousy in there; who wouldn't want Arnold Schwarznegger fronting the ad campaign for your military strategy title?), it's got two of the top-grossing mobile games in the world, and what it'll be capable of pulling off with the Final Fantasy brand in its hands will be intriguing to watch. It's a risk, of course; Machine Zone's games tend to fall firmly on the abusive side of the F2P business model, which could severely tarnish the valuable Final Fantasy IP, but one would imagine that Square Enix, a veteran of effectively monetising mobile games without aggravating its core fanbase, will keep its hand on the tiller in that regard.

Ultimately, Capcom is a company that's betting much of its future on, well, the future of the industry looking rather like the past did. Capcom says that part of the reason it's slow to ramp up development is because it's hiring graduates rather than experienced staff, which clearly telegraphs how stubbornly traditional the firm's management practices are. Hiring batches of new graduates (often with zero actual development experience) is a traditional Japanese corporate approach that's rooted in the era of jobs for life, focusing less on the skills and abilities of the graduates and more on the ability to inculcate them with a deep sense of long-term loyalty to the company. Unsurprisingly, Japan's high-tech companies have largely given up on it, especially for development roles.

The fact that Capcom sticks doggedly to this, despite playing merry havoc with the company's ability to boost its software output, speaks to just how traditional the company's worldview is. (It doesn't really speak well of the company's management in general, to be honest; working conditions at Capcom have caused multiple waves of skilled staff to leave the firm, and you'd think that eventually they'd realise that they're painstakingly training new graduate hires only to have the best of them take all those skills to somewhere with better pay and conditions a few years down the line.)

"Long-term, Capcom's health as a company largely relies on the segment of the industry it's always existed in staying still and not evolving too far away from the company's comfort zone"

Capcom's traditional hiring practices and management approaches are mirrored in the traditional nature of how it sees the games market. It's happy to keep trundling along making new Monster Hunter, Resident Evil and Street Fighter games, and re-releasing old ones to cash in on new hardware, but it really struggles with new IP and does such a poor job of growing its business that you might wonder if there's even any real enthusiasm for doing so in the company's management. Its commitment to consoles is laudable in many regards, but its failure to do anything worthwhile on mobile, its reluctance to engage in development partnerships and the glacial pace of its internal development expansion are not readily counterbalanced by a strategy to somehow make American people like Monster Hunter a bit more. Long-term, Capcom's health as a company largely relies on the segment of the industry it's always existed in staying still and not evolving too far away from the company's comfort zone.

Square Enix, by contrast, is filled with ambition and has a clear view of an evolving market and how to take advantage of it. It wants to be a top mobile publisher, and it's arguably closer to that goal than any other traditional publisher (barring Activision, which just bought its way to the top of the market with an enormous chequebook). It wants to break into the top tier of console publishing, and here, too, the company is willing to innovate along the way - from the multi-media, multi-platform onslaught that is Final Fantasy XV to the exploration of new business models with Hitman. It's willing to reinvent itself and its games along the way, and to partner with whoever can help it make the journey to the top.

The ambition is great, but don't misunderstand; it's an approach borne of necessity, because the squeeze on the middle tier of the console market is far from over, and Square Enix can see that very clearly in its figures. Rising development costs haven't been matched by rising console revenues (a problem Capcom, too, needs to contend with eventually). It succeeds in climbing this ladder, or gets off entirely and joins Konami in the "mobile first, console sometimes" camp of publishers.

Both companies are stacked with valuable IP with devoted fanbases, which gives them every advantage they need to succeed - but their approaches to success could not be more different. Square Enix keeps moving and expanding; Capcom stays still and sticks to what it knows. Both approaches have innate risks; both publishers, despite strong positions today, face uncertain futures. The coming years will see them wage a fascinating and indirect showdown between tradition and evolution in the games business.