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Special Report August 13, 2007, 11:45AM EST

Sega Goes Beyond Sonic

(page 2 of 2)

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Sonic the Hedgehog was introduced in 1991 to compete with Nintendo's Mario. Sega is planning to release two Sonic games for handheld consoles later this year, as well as a joint Mario-Sonic game for the Nintendo Wii. Bloomberg

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In order to become a top-five video game publisher, Sega is counting on the success of movie-related game franchises such as the upcoming Iron Man, based on an old title from Marvel Comics. Sega

Under Jeffery, the company has refocused on developing the slam-bang action titles that have been so popular in the West. Instead of acting as a distributor of Japanese games, Sega of America built its own product development and marketing divisions and has formed partnerships with prominent game studios.

In the last two years, Sega has climbed from 11th to sixth place among third-party publishers in terms of games sold. But it is still far behind the market leaders in terms of revenue. The central problem is that the Big Five—Electronic Arts, Activision (ATVI), Ubisoft (UBIP), THQ (THQI), and Take Two Interactive (TTWO)—have dominated the fast-growing Western market while Japanese companies have struggled to gain acceptance outside of their stagnant home market.

A Move Toward Licensing

Capcom, which publishes the Resident Evil and Street Fighter franchises, has had to correct similar imbalances, says Executive Vice-President Mark Beaumont. When he took over the company's Western operations in 2005, Capcom was "out of whack," doing 60% of its business in Japan when that country was only 20% of the total market.

Later this year the company will release the motorcycle racer MotoGP, its first video game based on a license that was purchased in, developed in, and geared toward the West. Although Capcom is still dedicated to its own intellectual property—another Resident Evil game is in the works—Beaumont says the company has recognized the importance of licensing in the West.

When Jeffery joined Sega, his first order of business was forging relationships with top development studios, something at which he was successful while president of game publisher LucasArts. Sega purchased Creative Assembly, the creator of the medieval real-time strategy game Total War, Secret Level, the studio behind the action game America's Army, and Sports Interactive, which makes a sports team management simulation.

Diversifying Into Violence

Sonic the Hedgehog, Sega's famous mascot, is still a moneymaker, although developers have had marginal success in developing blockbuster games for him. The next major console game featuring the character will actually be a partnership with longtime rival Nintendo (NTDOY). Titled Mario & Sonic at the Olympic Games, the game will be released for the Wii in time for the holiday season.

Jeffery is looking beyond Sonic, which he says is "an amazing recruitment vehicle" for younger gamers but "loses its cool factor when you get about 12 years old." To compensate, Sega has focused on developing games for more mature audiences. In one of its most violent games, Condemned: Criminal Origins, players solve a series of grisly murders while engaging in bloody hand-to-hand combat. A sequel is due out this holiday season.

Billy Pidgeon, a program manager for the market intelligence firm IDC, says Sega is taking the right approach by not relying on just one or two potential blockbuster games. "You have to have a diversified portfolio right now," he says. "You can only get so much mileage out of Sonic and company."

Clearly, Jeffery has diversified Sega's roster of games. Now he has to hope the lineup includes some real superheroes.

Megerian is an intern at BusinessWeek. He is a rising senior at Emory University, where he co-majors in journalism and international studies.

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