The big problem is that they have a multimedia approach. They didn't only make a game, but also have a weekly anime show and a lot of merchandise offerings running at the same time. It requires a lot of planning to exploit those components to the fullest. An anime series is very expensive; I won't make their money back with only those TV advertisements between episode segments. They need a lot of physical merchandise, but the pivot of the entire series is the role-playing video game. Level-5 moved away from 3DS to mobile in the middle of the 3DS' lifespan, but mobile was a lot harder than expected, which is why projects like Layton Mystery Journey (Lady Layton), and The Snack World got 3DS sibling versions. During that time, Level-5 shifted focus to home consoles - I think that coincides with when they saw the Switch behind the scenes, but that's just my guess. When they revealed Inazuma Eleven Ares, it was a Android/iOS/Switch/PS4 game, but we haven't seen anything about any mobile version of it at all. That's another sign that they were super serious about mobile, but moved back to console in the last couple of years.
Unfortunately, Youkai Watch isn't the only franchise at Level-5 that's having problems. Inazuma Eleven Ares has been delayed for at least two years (remember when we were hoping it would come out with the World Cup? One year later, it even missed the Women's World Cup), but the anime has been running and has progressed, but it needs to stay in line with the game, so it can't continue too much, because that would mean the game's story needs to be massively overhauled. But more than a year of running a weekly anime show without a new game that will be the major source of investment returns, that's just wasted money, and you can see that with the declining animation quality throughout the seasons.
Then there's The Snack World, which just wasn't as appealing as previous Level-5 franchises, but also had the problem that it launched in 2017 on mobile (where it couldn't find success) and on 3DS (which had become pretty much irrelevant). So The Snack World was a failure as well - it sold 275k units on 3DS lifetime, and the 'Gold' version for Switch (released April 2018) added 113k units to that.
Inbetween, there was Layton's Mystery Journey (previously known as Lady Layton), which also didn't set the charts on fire (137k on 3DS, slightly more than half of the last Professor Layton game's LTD, which is also on 3DS). It cost $20 on mobile as a premium game and double on 3DS. The gameplay was dumbed down for mobile use, which made the 3DS version lose a lot of its appeal.
I expected further franchise decline, especially after Youkai Watch 3, but that never was much of a problem for Level-5, as they would invent the next big thing for schoolkids when the old thing was fading away. However, The Snack World, their reimagined Inazuma Eleven, their Professor Layton successor, and the continuation of Youkai Watch all flopped, and they haven't launched a new IP since. Megaton Musashi, which is a robot throwback to the 90s (or so?) has an identity crisis. It was first shown in 2016 (
link), where concept images were shown 'on PlayStation hardware and 3DS' and the thing was supposed to come out in Summer 2017. It looks like Hino's focus was already on console back then, as he wanted to see Megaton Musashi on '
screens as big as possible'. Very promising, but if you want it out within a year, you better have a clear idea of what it's going to be already, especially its target platforms. We didn't hear anything back from Megaton Musashi until
last Christmas. Still no platforms, still looks like a nostalgia party for 1980s/1990s kids rather than 2010s/2020s kids.
In other words, Level-5 is having a very, very rough time and I think it's better to focus on the games first before making further investments in expansion to other media, such as anime series and movies. The games are the fundamentals of all of their properties, and since HD console development is something entirely different than 3DS development or the live service maintenance of free-to-play mobile games, I'm afraid it's going to take the rest of the Switch's life cycle (and well into the life cycle of the PS5) before Level-5 can return to its former glory, but only if they have already found a clear vision for the future of the company and its IP development processes.
