Square Enix's New Year's Convolution | This Week in Business

This Week in Business is our weekly recap column, a collection of stats and quotes from recent stories presented with a dash of opinion (sometimes more than a dash) and intended to shed light on various trends. Check back every Friday for a new entry.

As anyone who read our 2021 recap column might remember, last year the games industry had the decency to wait a few days before going completely off the rails. We had no such respite in 2022, as Square Enix president Yosuke Matsuda released A New Year's Letter from the President on January 1 Japan time, when many of us were still stuck in the waning moments of 2021.

He starts the letter off wishing everyone a happy new year, then does seemingly everything in his power to ensure that doesn't happen. He says the metaverse "is not a mere buzzword but here to stay." He predicts that NFTS will "become as familiar as dealings in physical goods." He promises to invest more in cloud gaming, even though Square Enix has already been down that road (under Matsuda's stewardship, no less), and abandoned it after a year and a half when it couldn't convince anyone else to invest in it.

Those bits of the letter are varying degrees of absurd, but they were just preamble for Matusda's grand vision of blockchain gaming.

QUOTE | "I realize that some people who 'play to have fun' and who currently form the majority of players have voiced their reservations toward these new trends, and understandably so. However, I believe that there will be a certain number of people whose motivation is to 'play to contribute,' by which I mean to help make the game more exciting. Traditional gaming has offered no explicit incentive to this latter group of people, who were motivated strictly by such inconsistent personal feelings as goodwill and volunteer spirit."

It's remarkable to see publishers who have run MMOs and spent years dealing with gold farmers going out of their way to invite pure profit-seekers into their games

First off, it takes an irrational amount of rhetorical confidence to take the unfiltered greed we see in the NFT and blockchain space and try to make it sound altruistic, like they're only doing to enable all these people who want to make everyone else's game experiences better.

Second, it's remarkable to see publishers who have run MMOs and spent years dealing with gold farmers going out of their way to invite pure profit-seekers into their games.

QUOTE | "We do whatever we can to try to minimize the financial rewards from behaving in this way and exploiting the game like this... This is our game. We have to be able to protect our players." - Then-Blizzard president Michael Morhaime, in an Austin Game Developers Conference keynote in 2007, explains how gold farming operations set up sweatshops in undeveloped nations and run on stolen accounts and credit card fraud.

Finally, there's no need to incentive people who play to contribute in traditional gaming because plenty of them do it already. From Mario Maker level creators to fan translators to modders to healers in MMOs, there are plenty of players in gaming who devote an unreasonable amount of time and effort to make other people's experience in games better.

But if Matsuda still thinks people need incentive to make those contributions more consistently, of course he needs to pay these people for it. But hiring people is expensive, and he would prefer to get all the extra work without bulking up the payroll.

Matsuda's answer is user-generated content, which he says hasn't produced as much game-changing content as he expected because it has to this point lacked in financial incentives.

QUOTE | "However, with advances in token economies, users will be provided with explicit incentives, thereby resulting not only in greater consistency in their motivation, but also creating a tangible upside to their creative efforts... By designing viable token economies into our games, we will enable self-sustaining game growth. It is precisely this sort of ecosystem that lies at the heart of what I refer to as 'decentralized gaming,' and I hope that this becomes a major trend in gaming going forward."

Matsuda's revolutionary vision of "decentralized gaming" sounds like bog-standard platform capitalism to me, and if achieved as he lays it out, would give Square Enix all the profits (or more) of a successful live service game with far less of the responsibility.

The content creators necessary for Matsuda's vision would not be full-time employees of Square Enix, or even contractors. They would not have the salaries, the benefits, or the protection of labor laws that full-time employees enjoy. Square Enix would not need to hire them, to vet them, to have them sit through sexual harassment or racial sensitivity training or other such programs. Square Enix would not even have to pay most of them anything of significance for their time and effort. Instead it would sell the work of content creators and give them a cut of the proceeds, doing little more than providing them with tools and a framework to enable them to "be their own boss."

Presumably the publisher would want to encourage high quality content, so all user/creator work would be done on a speculative basis. More popular content would earn user/creators more money. That might work fine for a handful of the most popular creators, but rest assured the masses would walk away with little to nothing.

The "greater consistency" in motivation that Matsuda seeks comes with greater inconsistency in the content creators' compensation

It's the same basic model used by YouTube, Twitch, and Roblox (all of whom I will point out have brought in loads of money without tying their business models to blockchain). Sure, there are a handful of success stories on each that serve as aspirational tales to draw in tons of people with visions of fame and fortune, but most will never get what they want out of the deal. The "greater consistency" in motivation that Matsuda seeks comes with greater inconsistency in the content creators' compensation (when compared to employees) and similarly inconsistent concern for the welfare of the people driving the business.

Just look at how platforms like YouTube and Twitch have neglected to provide their users and creators with safe environments. Look at how their moderation policies have failed time and again, how much they will tolerate atrocious behavior and how many second chances they will give before finally booting bad actors for good.

Look at how they have been able to financially support and benefit from content that would never have been remotely defensible if it came from an actual employee.

In February of 2017, YouTube kicked Felix "PewDiePie" Kjellberg out of its Preferred advertising program and cancelled a season of the Scare PewDiePie show it had planned on after a Wall Street Journal report highlighted a number of offensive and antisemitic videos he had run on the site.

It was a perfect distillation of all of these platforms' failings, because Kjellberg had been pushing the envelope with antisemitic jokes for months but it took mainstream media coverage to spur it into action. YouTube even knew that Kjellberg was crossing the line as it stopped running ads against one of his videos in which he paid two men to hold up a sign reading, "Death to all Jews." That video was demonetized several days after posting but left up on the site, but it wasn't until the Wall Street Journal started asking questions a month later that it was finally pulled.

And even though YouTube went so far as to cancel its partnership with Kjellberg for the Scare PewDiePie show because it wasn't comfortable with his content, it left his YouTube channel -- which had 53 million subscribers at the time -- up and running. (YouTube would go on to sign an exclusivity deal with Kjellberg in 2020, when he had 104 million subscribers and 25 billion views, which the platform eagerly celebrated as "far and away the most of any individually operated YouTube channel in history.")

Look at how many years of backlash it takes for these platforms to stiffen rules around harmful behavior and content, and then look at how pitifully they enforce the rules they actually have on the books.

QUOTE | "As an open platform, it's crucial for us to allow everyone -- from creators to journalists to late-night TV hosts -- to express their opinions [within] the scope of our policies. Opinions can be deeply offensive, but if they don't violate, they'll remain on the site. Even if a video remains on our site, it doesn't mean we endorse/support that viewpoint." - YouTube explains (in 2019!) why videos with targeted racist and homophobic harassment didn't violate its policies.

The Roblox model benefits the platform holder above all, primarily at the expense of the content creators who make the business possible

We know how this dynamic works on YouTube and Twitch, of course, with platforms not willing to intervene until the dumpster fire is so large and kicking off so many toxic fumes that advertisers start to think twice about that deal for naming rights on the dumpster. But we can also see how this platform dynamic works in game development proper with Roblox, which offers incredibly low revenue shares paid out in fun bucks that can sometimes be converted to actual money for an additional fee, no oversight or protections for the developers making their careers on the platform, and an unfortunately robust pipeline of mass shooting recreations. This model benefits the platform holder above all, primarily at the expense of the content creators who make the business possible.

Even if a content creator is fortunate enough to make a business out of their work on these platforms, it's a precarious one. The platform holder can change the terms of the deal at a moment's notice, imposing unfavorable terms with a take-it-or-leave-it ultimatum. Like Tumblr in 2018 or GameJolt this week, it can decide that it no longer wants to host that type of content. (Or maybe that type of content is fine, unless it's gay.) Maybe it just shuts down because the platform's parent company lost interest. Admittedly, game development already lacks stability in the best of cases, but I see no improvements in precarity with the Roblox model of user-generated content platform.

Generally speaking, this is a bad model for developers, who already have numerous alternatives for breaking into the business and building a career in more financially stable models that streamers or influencers may lack. And while I'm reluctant to view success in the industry as a zero sum game, there remains a possibility that the more entrenched and popular games like this become, the more those alternative entry points into game development dry up (much like free-to-play mobile games obliterated the premium mobile market).

And while there are concerns of exploitation inherent to user-generated content-driven games like Mario Maker or Little Big Planet, there's also an inherent value to them. They began with the idea of, "Wouldn't it be cool if we could make and share our own levels in these games?" By contrast, Matsuda's stated vision of blockchain gaming seemingly begins and ends with, "Wouldn't it be cool if we didn't have to pay developers to make content for us?"

So yes, of course people who "play to have fun" are going to have reservations about you building your development process around an exploitative business model that incorporates unintuitive new technology that doesn't actually offer any improvements over the status quo. The challenge for Matsuda and his fellow NFT visionaries is to show how the heretofore undefined benefits of blockchain outweigh the considerable downsides players will see from inserting unregulated financial speculation into the middle of their video games.

The Rest of the Week in Gaming

QUOTE | "You will be entitled to have your desired nickname listed as the first purchaser of the NFT on our website" - Konami's website explains what the "winners" of its Castlevania NFT auctions will actually receive.

That's already pretty underwhelming, but it gets even sadder when you look at the restrictions around this. Konami is only planning to have the nickname on the website from February until the end of this year, and even then warns that period could change. If someone wants a nickname Konami determines to be "socially unacceptable," they lose the right to have their nickname on the site. If you sell the NFT to someone else before Konami confirms it's OK with your nickname, the nickname rights associated with the NFT "may be invalidated." If the nickname could be used to identify a specific individual, Konami won't allow it. The NFT comes with no intellectual property rights, so you can't use it for commercial purposes. And of course, you can't return the thing or get a refund.

So what do you really get with this?

QUOTE | "Konami is not able to preclude the purchaser from spreading on social media the fact that the purchaser purchased the NFT nor from transferring the NFT to a third party." - The Terms of Use on the Konami site.

That's right, you can tell people you bought the NFT on social media and Konami can't stop you! Although come to think of it, you don't even need to win the auction for that. Also, you can re-sell the NFT (but apparently not the right to have a nickname on a website for a year) to someone else, which as we all know is the real appeal here, because NFTs are worse than a solution in search of a problem; they're a bet in search of a thing to bet on.

QUOTE | "Power To The Creators. Request to be a creator on the GameStop NFT Marketplace. We will open up minting access on a rolling basis." - GameStop on its new NFT website, because when it comes to obscene valuations completely detached from any semblance of actual real-world worth, nobody has more experience than GameStop.

I will say that at least Konami has the decency to create the images and animations attached to its own NFTs; GameStop is apparently relying on other people to make those as well.

QUOTE | "Due to the ongoing health risks surrounding COVID-19 and its potential impact on the safety of exhibitors and attendees, E3 will not be held in person in 2022." The ESA pulls the plug on E3 2022, at least when it comes to the in-person event.

QUOTE | "The bill would make it an unlawful employment practice for an employer or former employer to include in any agreement related to an employee's separation from employment any provision that prohibits the disclosure of information about unlawful acts in the workplace. The bill would provide that any provision in violation of that prohibition would be against public policy and unenforceable." - An excerpt from the digest summary of California's SB 331 -- the Silenced No More Act -- which went into effect January 1 and was drafted to prevent companies from covering up harassment and discrimination through non-disclosure agreements and settlements.

STAT | $100 million - The amount Riot Games will pay to settle a 2018 class-action lawsuit with former and current employees alleging gender discrimination at the studio. The developer originally reached a tentative settlement in the case for $10 million in 2019, but the California Department of Fair Employment and Housing intervened saying the women in the case could be entitled to up to $400 million instead.

QUOTE | "Among those poised to avoid millions of dollars in capital gains taxes are Mr. Baszucki's wife, his four children, his mother-in-law and even his first cousin-in-law, according to securities filings and people with knowledge of the matter." - The New York Times, reporting on Roblox CEO David Baszucki's use of a Qualified Small Business Tax Break that he has exploited to multiply the tax break -- which lets investors in early start-ups avoid taxes on at least $10 million in profits -- a dozen times over.

STAT | 4 - The number of games released in 2021 that wound up in Steam's top 12 revenue-generating games of 2021. This number is actually up from the number of new releases in the 2020 list (three) and the 2019 list (two).

STAT | 14,000 - The number of game development studios in China that shut down since the company halted video game approvals nine months ago, according to an estimate from state-run news outlet Securities Daily.

QUOTE | "I am hearing now that studios everywhere are getting a lot more cautious when it comes to communicating release dates for the big titles and are getting better at gauging the effects of the pandemic on their production. As such, I think we will see more robust pipelines and fewer delays from the bigger studios in 2022." - In our annual analyst predictions round-up, Dr. Serkan Toto says 2022 will see fewer game delays than the past two years.

QUOTE | "I expect release date announcements to become even more rare and shifting dates post-announce more common. Making games has always been hard. Given the complexity and increased stakes involved in today's market things have become even more difficult. Flexibility remains key." - In the same article, The NPD Group's Mat Piscatella expects another year chock-full of missed release dates. (Piscatella also predicted 2022 would be the year VR gains mass market momentum, an idea that may have been boosted a bit by Sony's announcement of a new Horizon game for PSVR 2.)

QUOTE | "Activision is deeply committed to the wellbeing of all of our teams, including our QA workforce." - An Activision spokesperson, in response to the ongoing Raven Software employees strike to bring back laid off QA employees at the studio.

QUOTE | "I think we definitely have been able to instill the culture, the skepticism and pessimism and fear that you should have in an economy like we are in today. And so, while generally people talk about the recession, we are pretty good at keeping people focused on the deep depression." - Activision Blizzard CEO Bobby Kotick in 2009 explains just how committed to the wellbeing of his teams he is. (I'm as tired of bringing this quote up as you are of reading it, but it's going to be relevant to every discussion of Activision Blizzard employee wellbeing so long as Kotick is still CEO.)

QUOTE | "Stewart was somebody I truly considered to be a friend. He was always there to help. He never judged. He would often call me on the phone to check up on how I was doing. He was passionate about games and our industry. I will miss him terribly, we lost a genuine friend today." - PlayStation principal engineer Byron Atkinson-Jones is one of numerous people who paid tribute to Just Add Water founded Stewart Gilray, who died this week at the age of 51, several weeks after being hospitalized with COVID-19.

QUOTE | "He was one of the kindest people I've ever worked with and had an incredible sense of humor. His work brought thrills and laughs to millions of players. He will be greatly missed." - Eidos Montreal's Ethan Petty remembers Ubisoft Montreal narrative director Russell Lees, who died this week.