http://www.bizjournals.com/sanfrancisco/stories/2005/02/14/focus1.html?page=1
Sega's new playbook
Adrienne Sanders
Sonic is fighting for his life.
Sega, creator of beloved cartoon Sonic the Hedgehog, has been struggling to reinvent itself since quitting the console game in 2001. Last year was a particularly trying one for San Francisco-based Sega of America -- its Japanese parent company was acquired; it released no new hits and sold its popular sports business to a rival.
Now, the game maker is looking to its new San Francisco-based CEO, a streamlined business model and upcoming titles such as "The Matrix" online for fresh vigor.
"We're approaching a renaissance period in terms of game content," said company spokesman Bret Blount. "We expect to unlock the potential of the Sega brand."
Gen-Xers remember Sega for Sonic, the Genesis console and arcade games. The company came back as a software maker after its last Dreamcast console flopped in 2001.
But reincarnation hasn't been easy.
The company's initial games for Microsoft's Xbox and Sony's Playstation "didn't feel like the Sega of old," said Shane Bettenhausen, Previews editor for Electronic Gaming Monthly. "They're still trying to figure out how to be a third-party publisher like Ubisoft or Konami."
It's hard to know exactly how well -- or poorly -- sales are faring because Sega's parent company, Sega Corp., doesn't report separate figures for its subsidiaries. Overall, the company's revenue totaled $1.4 billion in the nine months ended Dec. 31, a 1 percent increase over the same period last year. Net income was $33 million for the nine months ended Dec. 31 -- less than half the net income during that period in 2003.
Game gets tougher
Meanwhile, the video game industry as a whole is humming.
PriceÂwaterÂhouseÂCoopers predicts the U.S. market will generate $15.3 billion in sales by 2008.
But Sega's not part of the buzz. You don't have to look farther than store shelves to see that Sega of America had a lackluster year.
"Almost every (new) game they released last year was met with dismal sales," Bettenhausen said. Indeed, the company's old Sonic games -- in anthology form -- are what's providing much of Sega's current oomph.
These days, smash hits are crucial, as game budgets and schedules approach those of Hollywood movies.
"A smaller number of titles are accounting for a larger piece of the pie," said Jupiter Research analyst Jay Horowitz. "So it requires substantial resources to lock up licensing, like the NFL, stay diversified in many areas, as well as to develop the games. Sega is one company that has fallen victim to that trend."
Sega's longstanding ESPN football game, co-published last year with Take-Two Interactive Software, was a top seller in 2004, due in part to a discounted price tag. But Sega won't continue to savor that success. Monster-competitor Electronic Arts of Redwood City snapped up exclusive licensing deals with the NFL and Disney's ESPN this winter, blocking Sega -- and everyone else -- from the use of those logos, players, stadium images and other content. In January, Sega sold its sports development studio to Take-Two and left sports gaming altogether.
The company is now targeting adventure, driving and shooter games, among others, Blount said. "Eighty percent of the video-game market is not sports."
New CEO retools
Sega of America's new CEO, Naoya Tsurumi, downplayed the importance of the sale. "The ESPN Videogames line has not been a key profit driver in the North American market for Sega," Tsurumi said in a written statement. "While Sega recognizes the strength and depth of the ESPN Video franchise, we must remain committed to growing content that will help boost revenues across all Western territories."
Prior to Tsurumi's arrival in San Francisco this month, Sega's president ran the U.S. subsidiary from Tokyo. Tsurumi, also the CEO of Sega Europe, will manage the two markets as a block with the help of several new executives, including former LucasArts President Simon Jeffrey.
"This gives us, from Sega's perspective, a smarter way of going about sharing marketing resources, institutional knowledge and acquisition decisions," said Sega spokesman Scott Steinberg. "This decision is going to have lot more efficiencies for the organizations as we head toward the next generation (of consoles)."
'Ambitious project'
Game makers have an opportunity to win loyalists when the next wave of boxes reach stores, expected by 2006. Sega's new gambling blood -- Sammy, Japan's top maker of pachinko slot-pinball machines, acquired Sega Corp. last year to form Sega Sammy Holdings -- may serve the company well as it takes new risks.
An example is Sega's release of a new, multiplayer version of "The Matrix," co-produced with Warner Brothers Interactive Entertainment.
The game, due out this spring after several delays, is a big gamble. Online subscription-based games such as "The Matrix" are not only extremely expensive to develop, but require around-the-clock monitoring, customer support and billing, said IDC analyst Schelley Olhava.
"This is an extremely ambitious project," Blount acknowledged. "And it's tied to a successful Hollywood franchise, so it has to meet Warner Brothers and Sega's standards."
Steinberg said the company is "extremely bullish" on the game and has invested in a multimillion-dollar marketing campaign to support it.
Critical poke
But Bettenhausen and other industry watchers question the value of the Matrix license, after the third movie failed to gross half as much as the second.
"I hope Sega does well with it, but I just don't know," Bettenhausen said.
Trade magazines and chat rooms such as Eurogamer rattle with mixed reviews about "The Matrix" online's test version, released to a limited group and retooled based on users' comments.
Hard-core gamers are a notoriously critical lot. Wrote one chat room member named Pirotic, "I had been in the Beta test for this, but after a couple of weeks, I uninstalled it and decided it would be more fun to poke my own eyes out."
Adrienne Sanders covers digital entertainment for the San Francisco Business Times.
