The rise of Japan’s blockchain game market: Square Enix, the developer of the Final Fantasy series, leads the development

Author: Ponyo, Research Analyst/Xangle

Edit: Zen, PANews

Square Enix launched "Symbiogenesis" on December 21, 2023, strategically entering the vibrant blockchain game market. As a catalyst for the Japanese RPG craze and leading the creative force behind classics like Final Fantasy and Dragon Quest, Square Enix is now a powerful player in the Japanese gaming scene, with a market capitalization of over $4.6 billion. This report explores the dynamics shaping Japan’s blockchain market, Square Enix’s strategic interpretation of blockchain’s value proposition, and the underlying motivations driving its first blockchain project, Symbiogenesis.

The End of Hibernation: The Awakening of Global Gaming Giants

Japan’s strategic move to achieve market recovery in 2023 with crypto-friendly regulations

Japan has responded resolutely to major hacking incidents such as Mt. Gox (2014) and Coincheck (2018) with strict regulations. But now the country is signaling an active embrace of Pro-Web3 as a linchpin of new capitalist policies under the Kishida administration. At the same time, Japan has also readjusted regulatory guidelines to develop emerging fields such as NFT and the Metaverse. It is worth noting that in July 2022, Japan also established a Web3 Policy Promotion Office, placing the blockchain industry with Web3 as the core at the forefront of the national development strategy.

Based on suggestions from all parties, the government’s white paper on virtual asset supervision announced in April 2023 was finally approved, liberating ecosystem participants who were hindered by strict supervision and prompting all parties to work together. At the same time, the Japanese government is actively easing the burden on the market by providing incentives, including supporting stablecoin issuance, reducing personal income tax rates by 20%, and exempting companies from corporate taxes on issued tokens.

In September last year, a proposed bill to allow startups to issue cryptocurrencies was proposed, suggesting that Japan may introduce new policies this year to address the scalability challenges startups face in accessing new investment funds. Regulatory clarity from governments has not only encouraged startups but also prompted large companies to venture into the market. Apparently, Progmat (the subsidiary of MUFG that manages digital asset issuance), a key player in the existing Web2 finance space, has partnered with XRP. Additionally, Mitsui & Co., Japan’s largest general trading company, and Sony Group are making strides in the market through new blockchain-enabled businesses, highlighting the proactive regulatory environment established by the government.

Japan’s blockchain gaming market gains momentum

As Japan's regulations on cryptocurrency change, it will be crucial to observe strategic moves within the gaming industry. Japanese gaming companies are strategically positioning themselves to be quick followers in this changing space. Although Japan entered the blockchain market slightly later than South Korea, its approach to integrating blockchain closely matches that of its Korean counterparts: Japan has shifted from considering blockchain adoption to actively exploring business directions.

The differences between Japan and South Korea are due to two key factors. First, Japan may view blockchain integration as a research and development priority before a mature model emerges in the market. The blockchain game expected to be released in 2024 will serve as an initial test to assess market response. Secondly, Japanese game companies are more dependent on game IP than their Korean counterparts. Therefore, they will be more cautious in utilizing IP for blockchain games. While major gaming companies are discussing leveraging major IPs, the actual planning, development and release of such projects is expected to be lengthy. Therefore, it is expected that Japanese game companies will gradually actively participate in the development of blockchain game businesses, with a more obvious presence expected to begin around 2025.

The bright future of Japan’s blockchain gaming market: market size, intellectual property and culture

Expectations for the Japanese blockchain gaming market are based on three compelling factors: market size, intellectual property, and cultural impact. As an undeniable gaming giant, Japan ranks third in the global gaming market revenue rankings in 2022, behind the United States and China (see table below). The fact that seven of the top 10 video game IPs ranked by cumulative revenue are from Japan highlights its pervasive impact on the gaming industry.

Iconic IPs such as "Pokémon", "Hello Kitty", "Super Mario", "Gundam", "One Piece" and "Yu-Gi-Oh!" reflect cultural phenomena originating from Japan. The country has fostered a vibrant subculture around anime characters, contributing to a diverse consumer landscape across gaming, music, movies and more. It is worth noting that the seven highest-grossing Japanese films are all animation productions, including famous works such as "Demon Slayer", "Spirited Away", "Your Name" and "Magic Princess". Tokyo's Akihabara district is a microcosm of the prosperity of Japanese anime culture.

The richness of this culture extends its influence across the globe, reflected in the global demand for Japanese content. In 2021, the training simulation game "Umamusume: Pretty Derby" achieved cumulative global sales of more than US$2 billion in the second year, while Makoto Shinkai's film "Suzuya's Journey" attracted more than 30 million global viewers and achieved It grossed $167 million at the global box office. The opening song "IDOL" composed by YOASOBI for the animation "OSHI NO KO" has topped the Oricon weekly streaming chart for 13 consecutive weeks. It entered the top ten of the Billboard global chart on June 10 and ranked on the YouTube music global chart. Won first place in the top 100.

Square Enix leads the Japanese blockchain game market

Given the huge potential of the Japanese market, discussions with Japanese game companies indicate that Square Enix and Konami are the two companies most committed to blockchain games. The difference is that they are directly involved in game development, unlike other companies that outsource game development to DoubleJump.Tokyo and are only responsible for final review and distribution.

Former Square Enix president Yosuke Matsuda said the company has been working since 2018 to understand the transformative impact of blockchain and explore ways to integrate the technology into its gaming ecosystem. Matsuda’s unwavering confidence in blockchain was evident in his New Year’s speech, especially in his 2022 speech, where he mentioned the word “blockchain” 7 times. By 2023, he officially positioned blockchain as a key area in Square Enix's mid-term business plan, clarifying that the company is committed to developing a number of blockchain games rooted in original intellectual property and investing heavily in the area.

Square Enix’s commitment to blockchain gaming fits perfectly with its growing business trajectory. In 2018, the company established a $25 million venture capital fund covering areas such as 3D modeling, artificial intelligence, robotics and blockchain. Subsequently, in 2022, Square Enix and SBI Holdings invested a total of US$52.7 million in the blockchain gaming and NFT fields through cooperation with GUMI. The company’s blockchain entertainment business unit has been responsible for developing NFT projects including Symbiogenesis since its establishment in 2022. In his 2024 New Year's address, Square Enix's current president Takashi Kiryu outlined restructuring and reallocating resources to strengthen business areas planned for 2023.

Advancing Token Economics: Square Enix’s vision for enhanced scalability and profitability through blockchain adoption

Square Enix’s overarching goal of embracing blockchain is the pursuit of improving “scalability” and “profitability,” a fundamental restructuring aimed at reinvigorating the token economy. This strategic point was elaborated in Square Enix's 2022 New Year's address, which emphasized that decentralized games have the potential to achieve self-sustaining gaming growth and provide users with novel experiences. Traditional game models face limitations in content diversity and scalability. Unlike earlier eras when gaming was primarily about content consumption, contemporary gaming requires a constant influx of new content to attract users. The challenge lies in the inherent gap between the speed at which game developers can create content and the speed at which users can consume it. Traditional methods limit companies to produce content at a fixed rate and cannot keep up with the dynamic pace of user content consumption.

The essence of blockchain games lies in building a token economy and a customized incentive system that can stimulate user-generated content (UGC). By cultivating an ecosystem where users actively contribute to content creation, a self-sustaining decentralized gaming ecosystem becomes a reality. This transformative shift allows users to not only consume content, but also take on the role of a producer or studio. For a company like Square Enix, this evolution represents a transformation from a mere game developer to an influential content publisher.

Symbiogenesis: Shape the blockchain game narrative of original IP with 10,000 players

Immersive browser-based storytelling focused on "information exchange" in a vast universe

Symbiogenesis is a browser-based entertainment project that immerses players in a compelling narrative, where the exchange of information is the key to unlocking the game's intricate story. Each of the 10,000 NFT characters minted on the Ethereum and Polygon blockchains has a unique story that is only accessible to the NFT owner. Players can choose to either "monopolize" information about their character, embarking on a solo narrative journey, or "share" information with other players, engaging in collaborative exploration (naturally, the more information accumulated, the more complete the game). Players must unlock the secrets of the Symbiogenesis universe and complete missions and adventures based on daily published story and character information.

The overall narrative is divided into six chapters, each introducing new NFT characters and stories. As participants complete all six chapters and earn key items in the missions, the top three achievers will gain entry to the final "World Quest," a critical event that determines the fate of Symbiogenesis. It is worth noting that Square Enix released 500 NFT characters at the same time when the first chapter of Symbiosis Origins was released on December 21, 2023.

Focus on providing memories for loyal fans with craftsmanship spirit

The basic idea of Symbiogenesis is to provide players with indelible memories. Crafted to be a two- to three-year gaming experience, the game features a vast narrative set in a nuanced Japanese world. Despite averaging 10 to 20 minutes of gameplay per day, Symbiogenesis offers an impressive balance of being enjoyable as a light-hearted webcomic while maintaining a high level of immersion thanks to the integrity of the narrative. Notably, Square Enix not only provides in-game content, but intentionally leaves narrative gaps for the community to engage with, fostering a deeper connection with players who actively contribute to the storyline.

In sharp contrast to the mainstream trend of most blockchain games and NFT projects that regard NFTs mainly as financial assets and emphasize their market value, Square Enix goes in the opposite direction and puts "memories cultivated after games" at the top of the list. While NFT prices may fluctuate, Square Enix's focus is on ensuring users receive value beyond their financial investment. Square Enix not only measures success through external NFT price metrics, but also seeks user feedback to confirm enjoyment. Regardless of NFT price dynamics, reaching user satisfaction is considered a success. This unique approach, which places a strong emphasis on user experience and memories formed through gameplay, is Symbiogenesis' real differentiator.

A successful example demonstrating the potential of blockchain will be established in Japan

Symbiogenesis is Square Enix's groundbreaking blockchain game, which is completely different from the mainstream genre of famous games such as Final Fantasy and Dragon Quest. Compared to platforms that emphasize NFT price surges, Symbiogenesis intentionally avoids token economic structures that focus purely on capital gains.

Instead, it's most important to deliver new and profound gaming experiences to thousands, if not millions, of loyal fans. The game's main goal is to gain new followers for Square Enix within the Web3 community, prioritizing long-term growth over immediate revenue spikes. The clear vision behind the development of Symbiogenesis became a focal point, attracting attention regardless of its ultimate success. From this perspective, it is extremely important to record this as a successful case that embodies the potential of blockchain in Japan. It is worth noting that Square Enix’s key role in the Japanese blockchain gaming market is particularly notable, despite some tax and regulatory challenges for Japanese public companies. By doing so, Square Enix is showing other Japanese game companies what is possible in Web3 game development and playing a key role in shaping the Japanese blockchain game market landscape.