Breaking Down Square Enix’s New Year’s Letter About The Metaverse And NFTs

Like the cadres of games studios dazzled by the profit-churning potential of NFTs, Square Enix has decided to make plain its intention of diving into the very technology for its own games—in the form of a less-than-rousing, but somewhat celebratory new year’s day letter from their President, Yosuke Matsuda. Lead features editor Jade King has since penned a strongly-worded piece about what a horrid idea this whole affair is, but also suggested that she will pat any readers on the back if “you make it past the first two sentences without curling into a ball and rolling off a cliff”.

Because I’m touch-starved, and have a sordid history of reading corporate jargon and legalese before I became a full-time journalist (I have worked for a Japanese tech company previously), I’ll gladly dive into the entire letter—yes, even beyond the first two lines—to break down exactly what Matsuda is saying, paragraph by paragraph. Here’s me rolling up my proverbial sleeve—and Jade, I’m looking forward to that pat on the back.

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“I would like to begin by wishing everyone a Happy New Year.”

To be honest, no one is really enjoying the new year sir, but I’ll take the hearty greeting.

“The metaverse was a hot topic in 2021, inspiring a lively global conversation first about what the metaverse is and then about what sort of business opportunities it presents. Against this backdrop, Facebook changed its name in October to Meta, serving as evidence that the concept is not a mere buzzword but here to stay. The metaverse garnered so much attention that 2021 was dubbed the “Metaverse Year””.

Business opportunities! For Square Enix, it’s clear that the metaverse is first and foremost a business decision, ahead of anything else. Plus, Facebook’s decision to rename itself to ‘Meta’ is also inescapably a PR manoeuvre to steer away from all the bad press it seems to have studiously garnered over the past few years—dissemination of false news, doing nothing about Instagram’s harmful impact on the body image of teenage girls, privacy issues—so it’s important to keep that context in mind.

“I attribute this in large part to advances in extended reality (XR) technology, the increasing prevalence of the cloud and 5G, more sophisticated blockchain technology, and other technological evolutions that have taken place in a variety of fields over the past several years. That is because these advances are giving rise to services that fall under the metaverse umbrella. The metaverse will likely see a meaningful transition to a business phase in 2022, with a wide range of services appearing on the scene. 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.”

This is a lot. What Matsuda is saying is that the growth of the metaverse is due to the rise in XR technology—your virtual reality, augmented reality, mixed reality, all that jazz—while citing cloud technology, blockchain and other tech features that will probably become an indispensable part of the metaverse. Again, he brings up “business phase”, which further emphasizes that he sees this shift as a business opportunity most of all. The rest is all business hogwash about the firm’s hopes and dreams. Like fairytales, but whispered into the ears of investors to help them sleep better. Boring stuff, even for me.

“Another term that gained quick currency in 2021 was “NFT” or “non-fungible token.” The advent of NFTs using blockchain technology significantly increased the liquidity of digital goods, enabling the trading of a variety of such goods at high prices and sparking conversations the world over. I see 2021 not only as “Metaverse: Year One,” but also as “NFTs: Year One” given that it was a year in which NFTs were met with a great deal of enthusiasm by a rapidly expanding user base. 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 This, obviously, is not an ideal situation, but I expect to see an eventual right-sizing in digital goods deals as they become more commonplace among the general public, with the value of each available content corrected to their true estimated worth, and I look for them to become as familiar as dealings in physical goods.”

NFTs are finally making an appearance now! This is the part where most people doze off or call it a night, but I will persevere, because I love pain. Matsuda goes on to explain what he thinks NFTs are, referring to their capacity to increase liquidity. Liquidity, in short, is the ease of turning a specific asset into cash. Stocks and bonds, for instance, are very “liquid”, but land is not, because it may take months or years to sell your land. In other words, Matsuda loves the idea of NFTs because it makes the jpeg of the Bored Ape Monkey Primate doodles, or other virtual items, much easier to sell. It’s also another one of those business jargons that you see in press releases or in heartfelt letters to investors, which clearly indicates that this letter isn’t written for the general public or gamers.

Here, Matsuda also explains that 2021 is the first year of the metaverse as well as NFTs, because it was met by great enthusiasm—your mileage may vary, of course. He then subtly hints at the notoriety of NFTs with choice words like “overheated trading” and “speculative overtones” and “observed value”. I get the feeling he can’t say the bad words outright—words like scams, fraud, passing fad—to investors, so he creeps around the implied meaning. That said, he expects that more people will buy NFTs eventually, as it evolves into a purchase that will be as common as shopping for physical goods. Like your groceries, perhaps.

Note: For those who are interested in economics, overheating is when the economy is expanding too rapidly because of excessive growth. In other words, it’s the heating up of the economy, rather than the heating up of the planet. Both are objectively bad—the former can lead to out-of-control inflation for the economy, and the latter will eventually cause extreme climate changes that may doom us all—but it’s clear where many games companies’ priorities lie. With overheated NFT markets, as Matsuda was referring to in this letter, it means that the growth of NFTs may get too immense, to the point where their value will be eroded—not an “ideal situation” according to him. I’m not an economist though, so this is just an incredibly layman explanation of the term.

Whew. That’s a long bit, so let’s move on.

“To address these changes in our business environment, the medium-term business strategy that we unveiled in May 2020 identified AI, the cloud, and blockchain games as new domains on which we should focus our investments, and we have subsequently been aggressive in our R&D efforts and investments in those areas.”

This should be straightforward enough: AI, the cloud, and blockchain games are going to be aspects Square Enix will focus more of their investments and research on.

“In the AI space, we established SQUARE ENIX AI & ARTS Alchemy Co., Ltd. (“AI & AA”) in March 2020 to pursue development efforts in the wider field of “entertainment AI” rather than being constrained by traditional concepts of gaming AI. The firm’s R&D efforts focus primarily on natural language processing, world models, and simulation technology. These efforts will help us develop the games that we release into the world and enhance their overall quality, but that is not all. By incorporating the output of these R&D efforts into virtual avatars and elsewhere, we plan to apply that output to a wide variety of content and provide the relevant technology to other companies, with a view to leveraging these R&D efforts across our entire Digital Entertainment business.”

Matsuda wants Square Enix to move towards entertainment as a business, rather than just gaming. It will focus its research on artificial intelligence and things like natural language processing, world models, and simulation, so the company can improve games, while also loaning the technology to other companies. Sounds okay so far.

“We are exploring potential efforts in the cloud space from two primary perspectives, the first being leveraging cloud technologies to distribute content and the second being developing content that offers customers new forms of excitement enabled by the cloud’s attributes. More telecommunications infrastructure is being built, as exemplified by expanding 5G coverage. Devices are also making performance gains. As these trends continue, I believe that the content we provide will become more accessible, making it more likely that our customers will discover enjoyment as we gain new touchpoints with them. Leveraging cloud technologies is extremely effective as a means of making our content and services uniformly available and as a catalyst for creating new forms of excitement that expand upon the content development capabilities for which we are known. As such, we will be making ample investments in the cloud space.”

Square Enix is super into cloud technology now. Cloud, for the uninitiated, is not new—it’s about storing data online rather than on your physical hard drive. Dropbox and Steam, for instance, provide cloud services. To Matsuda, better research in cloud technology means better games, better performance, better content™, better accessibility, better everything. To Square Enix, this is all very exciting.

“Lastly is blockchain games. Be they single-player or online games, games have traditionally involved a unidirectional flow whereby creators such as ourselves provide a game to the consumers that play them. By contrast, blockchain games, which have emerged from their infancy and are at this very moment entering a growth phase, are built upon the premise of a token economy and therefore hold the potential to enable self-sustaining game growth. The driver that most enables such self-sustaining game growth is diversity, both in how people engage with interactive content like games, and in their motivations for doing so. Advances in token economies will likely add further momentum to this trend of diversification. I see the “play to earn” concept that has people so excited as a prime example of this.”

BLOCKCHAIN GAMES, BLOCKCHAIN GAMES, BLOCKCHAIN GAMES. Matsuda thinks that blockchain games will allow players to influence the direction of games and sustain games as a product itself. He uses the word “diversity” to refer to the way people will engage with games, as well as bring up the concept of “play to earn”, a term that’s now a buzzword among NFT gaming circles. I’ve delved into this in my piece on the NFT game Axie Infinity, and how this model will erode the very joy of playing games.

“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. This fact is not unrelated to the limitations of existing UGC (user-generated content). UGC has been brought into being solely because of individuals’ desire for self-expression and not because any explicit incentive existed to reward them for their creative efforts. I see this as one reason that there haven’t been as many major game-changing content that were user generated as one would expect.”

Here comes the paragraph that’s now the scorn of gaming circles online—the suggestion that playing games for fun, which is surprisingly the main reason why people play games, is somehow antithetical to innovation and creativity in games. The paragraph is also full of contradictions; Matsuda states his belief that there are people who will want to play games to contribute in making games more exciting, a line that’s already filled with ambiguities. How would he define this sense of excitement, or quantify this contribution? Plus, has he not seen the community and the amount of fan works, wikis, guides, and walkthroughs that people have created for their favourite Square Enix games, often for free? His subsequent line about how players are motivated by “inconsistent personal feelings as goodwill and volunteer spirit” immediately contradicts his original premise here, but hold on—in the same breath, he also attributes these to merely outlets for self-expressions. Goodwill isn’t usually associated with self-expression, so to speak, so I’m just as confused as you are.

“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. I believe that this will lead to more people devoting themselves to such efforts and to greater possibilities of games growing in exciting ways. From having fun to earning to contributing, a wide variety of motivations will inspire people to engage with games and connect with one another. It is blockchain-based tokens that will enable this. 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. If we refer to the one-way relationship where game players and game providers are linked by games that are finished products as “centralized gaming” to contrast it with decentralized gaming, then incorporating decentralized games into our portfolio in addition to centralized games will be a major strategic theme for us starting in 2022. The basic and elemental technologies to enable blockchain games already exist, and there has been an increase in the societal literacy and acceptance of crypto assets in the past few years. We will keep a close eye on societal shifts in this space while listening to the many groups of users that populate it, and ramp up our efforts to develop a business accordingly, with an eye to potentially issuing our own tokens in the future.”

My eyes are watering at this point. Matsuda suggests that players will be sufficiently incentivised to, hmm, “play to contribute” with blockchain games, which will see games grow, because players will earn money, have fun, contribute, and connect with one another. Communities will sprout from the once barren lands of video games, where no one talks to each other and connections were never made. Square Enix will invent communities through NFTs.

There are also more bits on “decentralising games”, in which he meant that games will soon be a two-way relationship where players can influence and shape how games will look like, and how that would be their new, strategic thrust moving forward. Even more bits about how crypto is becoming increasingly accepted, and Square Enix will keep an eye out if anyone doesn’t like this direction that they’re embarking on. You have been warned.

They will also issue their own tokens in the future. Life Is Strange NFTs may become a thing.

“Our lifestyles have changed, and we are learning to coexist with COVID-19. Against that backdrop, I believe that the new technologies and concepts that I have discussed and the changes that they bring to our business environment will provide us with numerous opportunities to enrich people’s lives through digital entertainment, which is at the core of our business. This at the same time means that we are seeing the beginnings of further leaps forward for our business. We remain committed to creating, developing, and providing world-class content, and we will contribute to the happiness of society and its people by offering new forms of excitement.”

Matsuda ends off by reminding us that COVID is a reality for all of us now, and that all these new-fangled technologies will better their business environment and enrich all our lives. We are going to be living and breathing NFTs in our future Square Enix entertainment. Would you want that? Would you like to see a Bored Ape jpeg featured in Nier Automata? Would you like to make a living out of mining Matsuda masks?

“I wish you all the best for 2022.”

No.

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