Innovation & Design

Sega: The Blue Sky Company


Six years after the Dreamcast debacle, Sega's back in the news with positive press. How did it rebuild itself? And how will it achieve market dominance?

The last time Sega made headlines this often was in 2000, when it was losing everything. The underperformance of Dreamcast, the overspend on sales and marketing, the $400 million losses, and the resignation of president Shoichiro Irimajiri signalled dire straits for a company with two other loss makers in its recent history—its amusement arcades and the Saturn.

Then came announcements: Dreamcast discontinued, inventories to be expediently sold, cutbacks to be made, and Sega the platform-holder to be reborn as Sega the platform-agnostic content-provider. Its presence in the videogame software market had slumped to a low of 4.2 per cent; now its goal was to achieve 25 per cent dominance. Its traditional model of recruitment and development was insular and Japanese; now it wanted a world of talent on its payroll.

It’s taken more than six years for that new Sega to emerge, still in transition but clearly once again in control. The severest cutbacks—the layoffs of almost a third of its Tokyo workforce in 2001 and the shedding of unprofitable ISP operations SegaNet and Dreamarena in 2002—helped turn the first profits in three years within a few months. And when arcade giant Sammy acquired all of Sega’s stock in 2004, creating holding company Sega Sammy, profits for the year tripled to ¥8.76 billion ($76.9 million or £38 million). But headlines over this past year, once again swamped by news of Sega and its unlikely endeavours, have seen something more than the return of its money—its confidence.

Sega Sammy, like Bandai Namco, is a union built to survive a storm. Totalling over 60 different companies, its subsidiaries handle far more than just videogames, pachislot machines and arcade halls. Real estate company Recipe, Top One toys (aka Sega Toys), Telecom Animation Films, Sega Sammy Golf Entertainment (owner of Hokkaido’s North Country Golf Club) and XYZ Cinemas are all examples, as are operators of Tokyo’s popular electronic darts games and venues. Between them, they’re theoretically capable of responding to every entertainment trend, anticipated or not, that arises.

And they have to be. The prolonged precariousness of Japan’s amusement trade has chequered Sega’s past with opposing losses and gains. One announcement might herald the steadiness of its videogame divisions, to cite February’s nine-month financial reports, while at the same time noting a 23 per cent drop in profits thanks to the decline of the pachinko machine market, Sammy’s once-lucrative monopoly. Meanwhile, Sega’s Ryu Ga Gotoku 2, a CERO D rated roaming brawler, ships over 500,000 units and dominates the Japanese charts. DS dating sim Oshare Majo: Love And Berry repeats the success and fends off Nintendo’s Jump Ultimate Stars, and the Wii, a quirky, unapologetically toylike console built on last-generation technology, outsells PS3 three-to-one and conquers the gaming world. You wouldn’t like to put money on any one aspect of the industry in which Sega has to invest.

So it’s investing in them all. In a bid to exploit the unique growth potential of the Western arcade scene, GameWorks, the arcade chain founded by Sega, Dreamworks and Universal in 1996 and now wholly owned by Sega Sammy, has been reinvented. While Sammy oversees Japan’s facilities, managing the ascending IC-card and outgoing (or so it would seem) pachinko markets, GameWorks is exploring the broader entertainment traditionally offered by bowling alleys and leisure complexes. Several sites now feature flatscreen-dominated sports cafes (dubbed Arena Sports Bar & Grill) alongside traditional game floors, and parent company Sega Amusements USA continues to trial eastern imports, such as Mushiking, in the hope of building its heavily merchandised genre a western audience.

Sega’s balance of home and arcade development has been heavily scrutinised ever since Sammy boss Hajime Satomi, at the birth of Sega Sammy, voiced a desire to shift Sega’s focus from home development to low-cost coin-op manufacture. Sammy’s JAMMA-compatible Atomiswave board was to be the platform, and Satomi warned that if Sega didn’t capitulate on such key issues then Sammy would buy up a controlling number of shares. “It’s true that our original merger proposal was rejected,” he told stockholders, “and that some Sega executives have been opposed to the stock acquisition.” Whether Rikiya Nakagawa, the chief of arcade subsidiary WOW, who quit a week into the merger, was among them is unknown.

Though it’s some way off owning 25 per cent of videogames, those early fears of Sega turning into some kind of super-Sammy have been allayed. Its operating efficiency, meanwhile, has vastly improved. Continued support of its mobile games division and the immediate embrace of Wii’s Virtual Console have made a portfolio current that might otherwise be extinct, or worse confined to the ever-lacklustre Sega Ages series. As we went to press, there were 19 of Sega’s classic titles on the UK VC, with Sega Mobile resuscitating IP such as Puyo Puyo, Wonder Boy and Space Harrier, and a freshly announced wave of Saturn titles heading to online PC subscription service GameTap. Elsewhere, the benefit of having wide-ranging avenues for re-launching franchises is clear. Without After Burner Climax in arcades, there might still have been potential for PSP’s After Burner: Black Falcon, but would there have been the impetus or technology?

Opportunism and insight, not brand-mania and doggedness, define the new Sega. Its ‘Sega Loves Your PSP’ campaign, launched at a time when few publishers seem to share the sentiment, is a prime example. Of the six titles promoted—Black Falcon, Full Auto 2: Battlelines, Virtua Tennis 3, Alien Syndrome, Crazy Taxi and Crush—five are either ports or franchise revivals.

And Black Falcon developer Planet Moon was among several new Sega collaborators ideally chosen for their assignments. Others include urban action/horror maestros Monolith (Condemned), and cross-platform wizards Sumo Digital (OutRun 2006: Coast 2 Coast, Virtua Tennis 2 and 3). Upcoming titles include Universe At War: Earth Assault, by RTS boutique Petroglyph, Crush, by Kuju’s innovative Zoe Mode outfit, and RPG and FPS games based on the Aliens franchise by Obsidian (Neverwinter Nights 2) and Gearbox (Brothers In Arms). A freshly announced partnership with comic publisher Marvel includes licensed characters such as Iron Man, Captain America, The Incredible Hulk and Thor, and while a developer has yet to be announced for any associated games, it would follow that an action specialist will land the job.

Not every star of Sega’s western expansion has been recruited in such a bespoke manner. Two of its high-profile acquisitions—Creative Assembly in 2004 and Sports Interactive in 2006—seem better designed to secure certain strongholds in this tumultuous market. Creative’s Total War and Sports Interactive’s Football Manager series are both proven, ambitious stars with assured futures and cross-platform potential, as shown by Spartan: Total Warrior and upcoming MMO Football Manager Live. The third acquisition, of San Francisco-based Secret Level in 2006, seems more an investment in the studio’s R&D talents than its portfolio. Prior to the announcement of a Golden Axe remake, slated for sometime this year, its resumé included the unremarkable Karaoke Revolution and controversial recruitment shooter America’s Army: Rise Of A Soldier.

Yet despite coverage of almost every modern genre, a hole still exists in Sega’s catalogue, once filled by second-party studio Visual Concepts. Its sale to 2K Games in 2005 is often tied to Satomi’s aggressive stance towards loss makers, and its departure has left little apparent appetite within Sega for further sports sim development. Who shares the outlook is unknown, especially given the dislocation of several voices within the company. The restructuring of Sega’s internal studios in late 2003 inspired as much concern as it did intrigue, with many hallowed games seen as pet projects of their creative teams. Behind Sonic, Phantasy Star Online and Nights there was Yuji Naka’s Sonic Team; behind Rez, Sega Rally and Space Channel 5 was Tetsuya Mizuguchi’s UGA, and so it went on.

Put simply, the new ‘Sega East’ reorganised those studios into three primary divisions, designed to focus internal talent on key areas of interest. Global Entertainment Software R&D, comprising six departments and headed by Naka prior to his departure last year, handles the bulk of Sega’s home console development, though Sonic Team remains notably detached. New Entertainment R&D, headed by former Amusement Vision president Toshihiro Nagoshi and Suzuki, generates fresh IP, such as Ryu Ga Gotoku, and games for new technologies, such as Lindberg’s OutRun and After Burner Climax. Amusement Entertainment R&D incorporates the old AM studios, producing games such as Virtua Fighter 5 for the arcade market, while the Solihull-based Racing Studio handles iterations of series such as Sega Rally.

Sticking Point

At face value, it looks like very little has really changed, at least when it comes to autership. Shenmue Online continues its journey to PC under Suzuki, Nagoshi oversaw both Ryu games as well as Super Monkey Ball: Banana Blitz, and the forthcoming Nights: Journey Of Dreams for Wii is in the hands of the original game’s lead designer, Takashi Izuka, albeit at breakaway studio Sonic Team USA. But the merging of UGA with Sonic Team in 2003, which inspired Mizuguchi’s departure to form Q!, is a perennial sticking point. And somehow, despite Naka’s best intentions (before he himself left to form the Sega-sponsored Prope last year), the world was still treated to the HD rebirth—some would argue re-death—of Sonic.

The importance of mascots for new Sega is beyond doubt—Sonic Heroes sold over a million copies in Europe alone—but Sega’s readiness to exploit the characters hasn’t sat well with those who see them not as the marketing phenomena they clearly are but as some kind of listed gaming property. Good luck to said people, then, as they contemplate Mario & Sonic At The Olympic Games, a watershed Wii showdown described by SOA president Simon Jeffrey as a move towards the reinvention and reaffirmation of Sonic as a brand. Had Robert De Niro and Al Pacino passed up their opposing roles in Heat and picked Smokey And The Bandit 3 instead, the response from fans would have been similar.

Mario & Sonic could be brilliant, of course. Fans of WOW’s Friday night favourite Sports Jam will know the value of a good sports party game, and if these two distant warlords can finally bury the hatchet aptly and charismatically (in each other, in other words) then what better way to bring them together? It might not make a great game every time, but Sega has rediscovered how to make the right games. Mario & Sonic should arrive in good time for the 2008 Beijing Olympics; Sega Rally moved sensibly to Britain following the pitiful Sega Rally 2005; Aliens is due a renaissance; the PC is thundering; arcades are recapturing a sense of identity. Sega Sammy has it covered.

The exciting unknown is just how far it’s prepared to go. Will it seek revenge on EA for the outcome of NFL2K3 versus Madden 2003, a thrashing so severe as to drop Sega of America’s profit forecasts by 70 per cent and prompt then-president Peter Moore to resign? Will it start flexing its increased purchasing power and honour a plan, voiced by marketing vice president Charles Bellfield in 2002, to start buying the competition? Publicly traded companies with strong teams and game franchise rights were identified as candidates—only EA was ruled out. One thing seems certain: it won’t be looking back.

Speaking in October, Sega Europe boss Mike Hayes predicted the acquisition of “two or three” more studios to finally complete Sega’s Western portfolio, although nothing official has yet been announced. “Who they would be and when that will happen is based on the market and the opportunities that arrive,” he said, “so we’re constantly on the lookout.”


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