Square Enix 2013 Annual Report Download - page 6

To Our Shareholders
In the SG category, existing titles are continuously contributing to the profit
of this segment. “Kaku-San-Sei Million Arthur” (Diffusible Million Arthur),
an SG title released in April 2012, has been successful not only in the
domestic market, but also in Korea, where the game has become an
instant hit since its launch in December 2012. In this manner, new titles
are expanding satisfactorily. In the fiscal year under review, the SG
category’s net sales amounted to ¥22,686 million, which resulted in
significant growth in net sales and operating income from the previous
fiscal year ended March 2012. We expect further expansion of the SG
category as a key growth area.
In the HD games category, we delivered three major titles in the fiscal year
under review, primarily in Europe and North America. These titles—
“SLEEPING DOGS,” “Hitman: Absolution,” and “TOMB RAIDER”—failed to
reach their respective targets, and resulted in financially unsatisfactory
consequences, whereas the HD business in Japan remained strong
through sales of the Nintendo 3DS version of “DRAGON QUEST VII: Eden
no Senshitachi” (Warriors of Eden) and others.
These three titles, which were developed for consumer game consoles,
were critically-acclaimed through media coverage, and therefore, I believe,
were successful from a game development perspective. However, we
were exposed to increasingly severe competition with a number of
blockbuster titles from major publishers, and experienced great difficulties
in price control of these titles from a marketing perspective. We had to
expend considerable incentive programs offered to retailers such as price
protection, back-end rebates, and promotional cooperation costs, which
generated a certain level of shipment quantity but with lower margins
than expected. As a result, provision for sales returns increased
considerably year on year, reaching ¥3,927 million, and was a major
factor in the deterioration of profits.
We do not recognize this situation as a temporary phenomenon that can
be dealt with merely by restrengthening the distribution system, but as a
structural problem in the HD business. That is to say, the financial results
posted in the fiscal year under review reflect an intrinsic problem within
the HD game business model that has come to the surface.
The Publication segment made steady progress with net sales of ¥11,086
million and operating income of ¥2,484 million. The segment is taking
effective control of the business process from creation of new titles to
enhancement of comic book sales through deployment of TV animation
series to generate steady business expansion. In addition, our web-based
new media called “GANGAN ONLINE” is accelerating on full scale
development of new IPs such as “Watashi ga Motenai no wa Dou
Kangaete mo Omaera ga Warui!” (It’s obviously you guys’ fault I’m not
popular!) and “Gekkan Shojo Nozaki-kun” (Monthly girl’s comic magazine
“Nozaki-kun”), and thus “GANGAN ONLINE” is increasing its presence as
an additional medium alongside magazines for highlighting new titles. The
emergence of electronic books is making a major change in the paper
media-oriented publication industry. The Group is taking a responsive
approach to the new tide of the industry, and will strive to capture new
opportunities precisely for further business expansion.
The Merchandising segment showed steady performance, posting net
sales of ¥3,264 million and operating income of ¥667 million. In the fiscal
year under review, we launched a collector’s box and held special
concerts to commemorate the 25th anniversary of the FINAL FANTASY
series, which received favorable reception from our fans. We also opened
an official merchandise store, ARTNIA, at our new headquarters, following
our relocation, and crowds of people have come to enjoy shopping at the
store. On top of the merchandising of character goods and CDs, the
ARTNIA store is contributing to further elevation of our brand value.
Now let me discuss the Digital Entertainment segment. This segment is
divided broadly into three categories; HD games, MMO (Massively-
Multiplayer Online) games, and social gaming and others (“SG”) for
internal management purposes. While HD games turned in disappointing
results, MMO games are highlighted by two major titles; “DRAGON QUEST
X: Mezameshi Itsutsu no Shuzoku Online” (Rise of the Five Tribes Online)
(“DQX”) and “FINAL FANTASY XIV: A REALM REBORN” (“FFXIV”). DQX has
been operating steadily since its launch of service in August 2012. The
development of FFXIV, another major pillar in this category, has been
smoothly progressing toward the goal of its August 2013 launch.
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