Square Enix’s Letter From The Chairman – A Spicy Hot Take

Stop being concerned about the Square Enix letter, please.

I’m not sure how to start this brief writeup, but that’s okay. Anyway, now that we have a starting sentence, have you read the investor letter from Square Enix’s president? Here’s a link to the actual letter.

This letter has a lot of people hot and bothered, because it has terms in it like “NFT” and “Blockchain.” A large number of people are acting like he announced that the Square Enix servers will be powered by harvesting life energy from the Earth and that he’s renaming the company Shinra.

This interpretation is incredibly stupid for a variety of reasons, but it makes me think that people, perhaps understandably, don’t quite know how to read this sort of letter.

Brief diatribe. I think NFTs in their current implementation are fairly stupid. The idea of exchangeable digital property? Kind of neat. Everything about how they currently work, including the lack of oversight/controls, massive wastes of power, use for money laundering, and general pointlessness? Miserable, awful, needs to die in a fire.

Anyway, we’re talking about this specific type of letter. See, the purpose of a letter to investors is more or less to just buoy investor confidence. It’s not directed at consumers. If you do not care about SQENIX’s stock price, there is no reason to care about the content of this letter. Buy their games, products, and services based on what they actually release, at release. As a result, these letters tend to be filled with the appropriate buzzwords and terminology to signal to investors that the company leadership has their finger on the pulse of the industry.

As an example of this, I want to bring up the 2017 letter from the Chairman. In this letter, you’ll see extensive reference to virtual reality, augmented/alternate reality, and the key importance of smartphones. Why are they talking about Augmented Reality even though they haven’t ever made a augmented reality game? Simple. Because Pok√©mon Go came out in 2016 and made a godscrillion dollars while being a worldwide fucking phenomenon for several months.

So, with that as the context, let’s go back and dissect the actual letter with the framing, and the offending paragraphs that have people so annoyed.

Paragraphs 1 & 2 are primarily fluff about the concept of the “Metaverse.” They end with the following line.

As this abstract concept begins to take concrete shape in the form of product and service offerings, I am hoping that it will bring about changes that have a more substantial impact on our business as well.

Yosuke Matsuda, 2022 Letter from the Chairman

No promises. No commitment or statement of investment. Just 2 paragraphs of fluff that if these concepts transition into actual products and services instead of a pipe dream, they may impact the gaming and entertainment industry.

Paragraph 3 is the spicy one that actually talks about NFT’s.

 However, we do observe examples here and there of overheated trading in NFT-based digital goods with somewhat speculative overtones, regardless of the observed value of the content provided

Yosuke Matsuda, 2022 Letter from the Chairman

In case anyone is wondering how you say “Right now the value of any of this is massively fucking inflated, and the things being sold are pretty much worthless” in this sort of letter, here you go.

Paragraphs 4 & 5 touch on AI technology and cloud services. Of these, only paragraph 4 includes any actual statement of action, noting that the company has established SQUARE ENIX AI & ARTS Alchemy Co., Ltd. with a stated goal of R&D on AI.

5, 6 & 7 are all about token economies/crypto. They’re the second set of paragraphs that have people annoyed, and so I’m going to break them down a little bit here. I don’t actually agree with some of the concepts espoused here, but I’m gonna put my thoughts at the end.

Paragraph 5 is mostly a definition of the concept of “Play to Earn”, Blockchain-based games, and their theoretical differences from standard game development.

Paragraph 6 is, interestingly enough, the most consumer focused paragraph of the whole thing. I think this paragraph is attempting to make the case that there is value in the technical space that has been opened by Crypto. I think this paragraph is trying to win over people like myself who don’t like Crypto.

Paragraph 7 is the densest section of the letter, and has multiple concepts. Again, I encourage you to read the letter yourself, first from your own perspective, and then from the perspective of someone who is financially invested in Square Enix. I will likely not cover all aspects of it.

Loosely, I would summarize it as follows:

  1. People play games for multiple reasons, which in some cases include modding, creative expression, and gold farming. Traditionally, gaming structures do not have built-in methods for rewarding those types of players.
  2. The technology around Blockchain-based design, and social acceptance is currently mature enough to support creating games that do reward those types of players.
  3. Square Enix will continue to observe these changes, and will move to expand their portfolio of entertainment products to include what they define here as “Decentralized Games” if they think they can make money off it, which could include systems that financially reward those types of players.

8 is a generic wrap-up, and acknowledges the worldwide pandemic. Nothing too special here.

So, that’s the letter. It contains some overviews and definitions of some trendy topics in the video game sphere of business. It has a single concrete statement of action about AI for something they already did in march of 2020.

PS: I really do not agree with the definition of Decentralized Gaming presented in this letter. If the fundamental technology stack that is needed to actually run and play a video game from a technical standpoint is not actually freely available and modifiable, you have not created a decentralized game. You have simply created a game that uses Blockchain/a decentralized database as a repository for user game objects. But hey, that’s just my opinion. It remains to be seen if it ages like wine, or like my high school quote about how “The iPad will be a failure because it doesn’t support Flash”.

That’s a real thing I said.