Well I mean they just said that a few days ago. I think our disagreement is over what a middle-sized project is and, most importantly, what kinds of middle-sized projects they're willing to greenlight.
Overall, I don't think they're willing to fund things that, for example, are handheld titles they feel will sell 200-400K units worldwide.
Now, if the titles do only sell that much, I don't feel that invalidates that opinion unless they continue to actually make that series despite what it's selling.
Basically I see Square Enix as a company that's focused on high margins, and the vast majority of high margin titles fall into a few categories:
1.) MMOs with recurring subscriptions or notably successful f2p models.
2.) Relatively high earning mobile titles (they seem okay with supporting top 100 titles), which is part of why they abandon titles that fail after 6 months and focus on new ones with higher potential instead. They do release some ports of titles (and things like Hitman Go), but they have noted these are basically to onboard people onto the products that make a ton of money and they usually have very small teams (Hitman Go was made by 4-5 people, and the other games are often straight ports or really quickly done titles with sprite filters).
3.) Handheld games that are selling 1+ million units while not costing a fortune to make. It's plausible that Theatrhythm's costs are so low and DLC sales so good that it bucks this trend and is high margin despite this. This can also extend to Japanese market specific console titles that are made for a relatively low budget. Dragon Quest Heroes is going to be much closer to 1 billion yen than 10 billion yen, so it can sell in line with the handheld titles (or even adjust for price and sell less) and get the same margins.
4.) Major AAA blockbusters where the sales hopes are usually in the 4+ million unit range. These are your standard Final Fantasy mainline titles
5.) In the West, f2p PC games, which is their newest business line (Nosgoth, Triad Wars). They don't have big earners here obviously, but they hope to some day, and it's not hard to name off a bunch of major successes other companies have in this category.
To tie this all back to the original question, someone at Square Enix sat there and went "Having these people work on FFXIV makes more sense than Final Fantasy Tactics Advance 3 because the margins will be better versus their time, since they're senior staff and FFXIV is a big hit and FFTA3 isn't likely to make a ton of money to make switching them over worthwhile."
I think if we look at their decisions through this high-margin title lens (and often high sales goes hand in hand with that at retail), Square Enix's decisions become less confusing, even if their ability to execute is poor. Square Enix's tagline for Hitman Absolution was "The Original Assassin" and they set sales expectations at 4-5 million for the fiscal year, which is about half of what Assassin's Creed does in its first few months. They didn't hit that, but their statement there is pretty clear, and I don't think that changes the original intent of the strategy.
