20 Years Ago, Square And Enix Teamed Up To Create An RPG Powerhouse

The merger between Square and Enix is celebrating its 20-year anniversary today, April 1, 2023. Below, we take a look back at the social and economic conditions surrounding the deal, from the perspective of a Japanese resident.

20 years ago, the Square-Enix merger created a Japanese gaming Goliath amongst a gaming boom

But there was a lot going on in the background overseas observers weren’t aware of.

It was late 2002 when the announcement came: Two massive Japanese game publishers, Square (known as SquareSoft in the West) and Enix, would be merging into a single company effective April 1, 2003. This meant that the holders of the number one and number two RPG franchises in Japan–Dragon Quest and Final Fantasy, respectively–were going to combine their forces. I was living in Japan at the time, and to say it was a big deal was an understatement. The Japanese console gaming market was at a zenith, and optimism about the future of the industry was sky-high. The idea of these two once-rival companies at the forefront of the industry joining forces to create new media experiences was very exciting, to say the least.

Square was first and foremost a game development and publishing company, while Enix was a more multifaceted company, publishing not just software but books and manga as well. Square did much of its game development in-house, while Enix subcontracted with numerous other developers for most of its software output. Both companies had attempted to make a push into Western markets in the early ’90s, retreated at the end of the 16-bit generation, and then worked to re-establish themselves overseas during the PlayStation’s massive success. Square, through a publishing partnership with Electronic Arts, was doing quite well in the West, though Enix was still struggling.

But the main market for the two at the time was Japan. Enix was riding high off of the tremendous sales of 2000’s Dragon Quest VII, which was still doing numbers years later, and Square was prepping Final Fantasy X-2, the first-ever direct sequel to a numbered Final Fantasy. Relations with first-party companies were also making news: While Enix and Nintendo were always on amicable terms, Square had just begun its post-PlayStation-exclusivity “reconciliation” with the house of Mario, starting with a few games published on Game Boy Advance.

Meanwhile, PlayStation 2 was selling gangbusters, as was GBA (GameCube, less so). Major game releases frequently sold over a million copies in Japan alone–a rarity for non-Nintendo titles nowadays–and the big franchises from Square and Enix’s stables were among these massive megahits. Nintendo DS was still a ways off, and mobile phone gaming was still in its infancy. Despite how fancy and powerful Japanese phones were at the time, most mobile games were still very basic Java games with wonky number pad controls and restricted availability based on phone model and carrier.

But as we all know, things would change dramatically for the game industry, and by the end of the decade, console gaming in Japan was on a sharp decline as portable systems and more advanced phone apps began to dominate. The merged Square-Enix didn’t hesitate to get into the mobile market fairly early–a decision that paid off quite well, helping carry them through the rough transition to HD gaming that saw many Japanese developers and publishers, including Square-Enix itself, struggling to catch up.

But a question still remains: Why did the companies choose to merge at that exact point in time? Perhaps it’s because things only looked rosy for the Japanese industry at the time, and there were rumors swirling about other big mergers in the industry. (Specifically, a merger between Namco and Sega was rumored around then, though that didn’t come to fruition, and it’s dubious as to if it was ever on the table at all.) But one thing is for sure: Despite their current software sales successes, both companies were also facing issues.

At that point in time, Square’s attempt at a media publishing division, a subsidiary company called Digicube, was floundering miserably. While Digicube published books and soundtrack CDs related to Square’s titles, its main goal was to be a distribution service, providing boxed copies of games to be bought from convenience stores. Japanese convenience stores are extremely widespread, offer an amazing variety of products tailored to local community needs, and have robust POS systems for tracking product sales data, so Square figured this would be a great new outlet to sell games. Why go all the way to the electronics specialty store when you could grab a new game just a block away at the convenience store? Plus, unlike typical distribution, the stores could return unsold stock–but Square believed that the data it would glean from the operation would help predict hits and prevent this.

Unfortunately, that didn’t happen. Digicube started pushing convenience store distribution in 1998 and soon afterwards, Square, now marketing both its titles and third parties’ offerings to convenience stores, made an unfortunate discovery. The convenience store POS system, which worked great for tracking demand of grab-n-go lunches and booze, was much less effective at predicting how games would sell. Itsoon found itself inundated with returns of unsold products. Also, because Square’s business relationship with Nintendo was on the rocks at the time, it couldn’t sell games for Nintendo platforms–and the games never went on sale below MSRP. Similar business ventures, such as selling music recordings through multimedia kiosks, were also disastrous. Hugely in debt, Digicube would officially cease to exist in November 2003.

(The Digicube partnership was a value-add for customers, as it sometimes included unique bonus items. I only ever bought a game through Digicube once during my time living there: a copy of Devil May Cry 2 for a friend in Singapore. It came with a neat exclusive: sheets of big, specially printed construction paper to cut out and build a papercraft model of Dante with–an activity that would likely be more fun than playing Devil May Cry 2.)

Meanwhile, Enix had a stronger background in traditional media publishing, and in recent years had found success in publishing numerous manga series through its anthologies under the Comic Gangan banner. However, an internal clash between factions of authors and editors about the direction of the anthologies led to many staff leaving and forming independent publishers. Several popular-at-the-time manga series, such as Saiyuki, Aqua, and Mamotte Shugogetten, went along with their creators to the new publishers. Even though Enix had just begun publishing a series that was gaining a lot of steam–Hagane no Renkinjutsushi, better known outside of Japan as Fullmetal Alchemist–the mass departure of talent had left its comics publishing business badly damaged.

One oft-cited myth needs addressing. Many folks believe that it was the failure of Final Fantasy: The Spirits Within that caused the merger to happen, but some sources claim the opposite–the merger would have happened sooner had the The Spirits Within not crashed and burned spectacularly. Regardless, Sony actually absorbed a good chunk of the film’s losses by buying Square stock, so it wasn’t a huge consideration.

Could these issues have been part of what drove the merger? They were almost certainly part of the considerations and negotiations, but you can’t definitively say they were the reason. We’ll probably never know precisely why Square and Enix decided to merge at that exact point in time–we can only speculate. But it’s interesting to imagine a different timeline where they didn’t merge: Would they have weathered the shift to HD? Could somebody else have taken over Eidos and handled its properties better? Would they still be what they are today–a game, media, and merchandising powerhouse on their own–or would one or both have been gobbled up by a bigger conglomerate amid the current flurry of mergers and acquisitions? We’ll never know, but one thing’s for sure: The merger remains one of the defining events of Japanese gaming history.