Mobilization of the New SEGA Group

Aiming for Sustained, Stable Earnings Growth

At the core of the digital game area in the Entertainment Contents Business segment is SEGA Games Co., Ltd. SEGA Games has a company system in which the SEGA Networks Company is responsible for games for smart devices, while the Consumer Online Business Company manages PC games and home video games. The aim of this system is to enable economies of scale, for example through efficient asset use, and accelerate decision making by having separate companies each with a chief operating officer.

In the game business, whether or not a company can create hit titles affects its earnings significantly. Such potential fluctuation makes preparing medium-to-long-term strategies and investment plans problematic and could become a cause for concern among shareholders and other investors. As I did in the former SEGA Networks, Ltd., I will establish a business model that accumulates multiple hit titles to realize sustained, stable earnings growth in SEGA Games.

Realization of Competitive Advantages in the Digital Game Area

Making the "High-End" Era the SEGA Era

The former SEGA CORPORATION divested the main capabilities of its network businesses to establish SEGA Networks, Ltd. (now the SEGA Networks Company), in July 2012. Since then, the company has been driving growth in the digital game area and become a leading contributor of revenues and earnings in the SEGA Group.

The SEGA Group and its partner companies in Japan and overseas account for more than 10 studios, which are simultaneously advancing development and conducting operational management of titles. Through these studios, we are building one of the industry's most extensive and diverse product lineups. At the same time, the SEGA Networks Company centrally manages title marketing through a team that specializes in building optimal business models and designing effective marketing strategies. With experience in a range of industries, team members have garnered expertise in title lineup composition, operational management of titles, marketing, public relations, and operational infrastructure. This combination of rich development resources and a team that specializes in building optimal business models enables us to be one of the industry's most consistent producers of hit products and generate stable earnings.

From a longer-term perspective, we enjoy major advantages. In Japan, although the market growth is gradual, competitive conditions are changing. In its early stages, the digital game market focused on casual games. The resulting low entry barrier led to a market in which large numbers of companies competed fiercely. Since then, as smart devices have evolved with remarkable speed, apps have become increasingly high-end, offering higher-resolution graphics and more complex, multilayered worlds. As only certain companies can meet the development and marketing costs that high-end apps require, an oligopoly of leading companies has become more pronounced in recent years. Testifying to this trend, the growth of companies with the highest sales is outpacing market growth. In 2015, the monthly sales of the top three titles rose from 2012's level of between ¥50 million and ¥100 million to more than ¥2 billion. Anticipating this trend, we have focused efforts on the high-end area consistently. We believe that, eventually, the trend will lead to the creation of digital games with the same quality as home video games. Therefore, when the market reaches this stage, digital game development will resemble home video game development—requiring the concentrated efforts of numerous personnel over long periods. We are certain that the expertise in large-scale development that the SEGA Group has accumulated over many years will be a major advantage. Another competitive advantage is our long-standing competence in raising cost-effectiveness. For example, as development costs rise we will shift development offshore to regions with lower personnel expenses or share game engines.

Growth Strategy of SEGA Networks Company

Launching a Full-Fledged Effort to Become One of the World's Top Three Digital Game Companies

SEGA Networks Company's goal is to become one of the world's top three digital game companies. The key to achieving this goal is creating "medium hit" products steadily. Companies cannot create major hit products at will. However, steadily generating "medium hit" products heightens the probability of a hit product. In aiming for a place on the podium in the global market, making headway in overseas markets is extremely important. Accordingly, we intend to grow SEGA Networks Company's overseas sales as a percentage of net sales from fiscal 2015's 10% to 50% as soon as possible.

In fiscal 2016, we expect to boost the SEGA SAMMY Group's sales in the entire digital game area 58% year on year. As well as contributions from numerous existing titles, the marketing of approximately 20 new titles— including mainstay titles that we decided not to release as scheduled in fiscal 2015 and whose quality we have been heightening rigorously—will support this significant growth. We are rolling out a series of highly appealing titles packed with features that we view as critical to success in the current market: multiplayer compatibility, a greater sense of real action enabled by operability and user interface advances, and intellectual properties that create immersive worlds.

Released in April 2015, the orthodox role-playing game (RPG) Hortensia SAGA has grown into the largest guild-vs-guild* title in history, with more than 100,000 players participating in the game daily. Furthermore, despite reaching 2 million downloads less than a month after its May release, newera hunting action RPG MONSTER GEAR continues to surpass growth targets significantly. Further, the title portfolio is expanding steadily as the number of mainstay titles increases, with, for example, the ocean adventure battle game Sen No Kaizoku released in August making a favorable start.

• * Games in which large numbers of players form groups and compete against each other

Overseas, the United States and Europe market and Asia's rapidly growing market each account for sales of about ¥1 trillion. In particular, we view traditional Chinese character areas such as Taiwan, Hong Kong, and Macau as extremely promising markets, partly because of their strong affinity with Japanese culture.

Our strategies fall under two broad categories: those for the United States and Europe and those for Asia. In Asia, rolling out domestic titles is comparatively easy because of the region's greater cultural affinity with Japan. However, the United States and Europe call for a different approach that involves adapting titles to suit Western culture. For each region, optimal operational management of titles and business models is different. Therefore, while sharing management resources, independent business management systems in each market will pursue independent strategies. To prepare for implementation of this approach, we made an all-out effort in fiscal 2015.

As part of preparations, we acquired or took stakes in four studios. In the United States, we made Demiurge Studios, Inc., a wholly owned subsidiary. This studio's representative titles include Marvel Puzzle Quest, which is a fixture at the upper end of sales rankings. In another U.S. investment, when a group of individuals boasting impressive development track records at major companies and expertise in free-to-play (F2P) business models established Ignited Artists, Inc., we took a stake in it. As for Europe, we invested in Space Ape, Inc., the parent company of Space Ape Games (UK) Ltd.

In Asia, we concluded a capital and operational tie-up with Auer Media & Entertainment Corp. of Taiwan. This company increases our options, particularly in areas that use traditional Chinese characters. Specifically, we can undertake conventional licensing out, have Chinese or Korean companies localize titles for areas that use traditional Chinese characters, or distribute titles under our own brands.

Based on local development capabilities that now include four new studios, in fiscal 2016 SEGA Networks Company will triple the size of its development pipeline at a stroke by implementing four main strategies:(1) Have local studios develop, distribute, and conduct management for local markets, (2) Distribute and manage apps from Japan overseas, (3) Have overseas studios localize, distribute, and manage titles produced in Japan, and (4) License out to local partner companies and delegate publishing to them. Through these strategies, we aim to lift sales dramatically, achieving year-on-year increases of 256% in the United States and Europe and 463% in Asia.

Noah Pass Reciprocal-Customer-Sending System for Apps

Opening Up Limitless Possibilities—A Reciprocal-Customer-Sending System Focused on Games

The Noah Pass system enables apps to send customers to each other and thereby increases marketing efficiency and reduces costs. The system is expanding rapidly.

When the service began in August 2013, 15 companies participated. By May 2015, 100 companies were using it. Over roughly the same period, total users have risen from around 20 million to more than 100 million. Thanks to this momentum, the number of titles available through the service is approaching 500. As of May 2015, monthly active users* had jumped 126% year on year, to 11.19 million. By amplifying hit products extremely effectively, the Noah Pass system's features are supporting the rapid expansion of a business area centered on games. These features include (1) free participation, (2) an open environment without strategic restrictions, and (3) the reduced cost of attracting customers and higher charge rates and continuation rates.

The Noah Pass system facilitates business-to-business sharing. Industries and companies provide each other with such capabilities as billing services and portal services, which they would not otherwise have. Aiming to evolve business-to-business sharing, we have begun providing a series of highvalue-added services beyond reciprocal customer sending among apps. One such service is Dashboard.

As the size of the market nears maturity, efficient marketing is becoming difficult. Dashboard combines analysis results and unique reports derived from the Noah Pass system's huge volume of traffic as well as analysis data from such tie-up partners as Metaps Inc. and Datasection Inc. These new capabilities provide powerful marketing support to companies participating in the Noah Pass system.

Tie-ups among companies from a range of different industries are accelerating. One example is the reciprocal sending of 200,000 customers between an app and the manga (comic) Koi to Uso , included in MangaBox, the manga magazine app of DeNA Co., Ltd. This testifies to the effectiveness of tie-ups with digital comics. Also, based on the Noah Pass system, we are advancing a tie-up with a free manga app, Magazinepocket, which we developed with Kodansha Ltd.

NFurthermore, we have begun efforts to generate profits from the Noah Pass system itself. We have introduced a business model that realizes earnings through banner advertising from industries outside the game industry and through online-to-offline advertising, which offers store-visit incentives. Online-to-offline advertising, conducted on trial basis, proved to be a major success. For example, advertising through a single title that offered incentives to visit restaurants resulted in the sale of several hundred thousand additional meals. As well as producing results on the "offline side," in other words in bricks-and-mortar stores, a feature of the earnings model is that it shares advertising earnings with the "online side," meaning the companies that develop game apps and participate in the system. We believe that preserving this mutually beneficial relationship will ensure the Noah Pass system's continued prosperity.

• * The number of users that use an app at least once a month

Business Strategy of the Consumer Online Business Company

Increasing Differentiation versus Major Overseas Publishers

As well as its in-house development team, the SEGA Group benefits from the capabilities of its powerful development companies. These include ATLUS. CO., LTD., which develops the Persona series in Japan; The Creative Assembly Ltd., which develops Total War in the United Kingdom; Sports Interactive Limited, which develops the Football Manager series in the United Kingdom; and Relic Entertainment Inc., which develops Company of Heroes in Canada. The download-type digital distribution of PC games, such as Steam, is steadily growing in size in the United States and Europe. Against this backdrop, our titles are performing well, and we aim to continue growth. In Japan, the online network RPG PHANTASY STAR ONLINE 2, marketed three years ago, continues to perform steadily as we advance cross-platform rollouts. In addition to a PC version, a PlayStation_® Vita version, and a smartphone version, which account for 3.5 million registered IDs, we recently announced the release of PS4™ version.

We also see opportunities in packaged game software. Although conditions in Japan remain tough, overseas PS4™ has become the fastest-spreading PlayStation_® home video game console in history. Even in Japan, sales of the new home video game console promise to grow as the SEGA Group and the other companies add titles to their lineups in earnest. From a global perspective, business opportunities are emerging. In Asia, for example, there is increasing reluctance to purchase copied products in areas that use traditional Chinese characters.

However, we do not intend to try matching major overseas publishers who initially invest tens of billions of yen in a single title. While keeping costs at an appropriate level, we will combine rollouts of packaged game software and digitally distributed or downloaded content to establish a business model that generates earnings reliably. Furthermore, the recently released traditional Chinese character version of Ryu ga Gotoku 0: Chikai no Basho is selling well. Adopting this approach for other titles, we will heighten investment efficiency by planning games not only with Japan in mind but also with a view to their translation into multiple languages and roll out in a wide range of countries.

On the other hand, our focus is not only on games. We will concentrate efforts on fostering games' intellectual properties. To give one example, in North America Cartoon Network began airing the animation series Sonic Boom in fall 2014. Based on the very favorable response the series has received, we have begun marketing merchandise with a range of different companies. We want to create further successes outside the game area to broaden the scope of business opportunities.

Game Changer

Restoring the SEGA Brand's Luster

The SEGA Group's mindset is changing.

Until the 1990s, by remaining an innovator the former SEGA CORPORATION adhered to its founding principle: "CREATION IS OUR LIFE." However, I feel that during the long slump in the 2000s we perhaps lost some pride in the illustrious history that our predecessors built. When launching the SEGA Group, I urged all employees to rediscover this pride and create the next chapter of the company's history in their generation.

Previously, we had quite a strong tendency to interpret "CREATION IS OUR LIFE." as meaning the creation of new products and services. This might explain why we failed to appeal to the world despite being in the vanguard of the latest developments. We should change our mindset from focusing on creating new products and services to focusing on creating moving experiences for fans. Therefore, with "CREATION IS OUR LIFE." as our most important value, we redefined our role and mission as continuing to create moving experiences. At the same time, we set out Game Changer as a target profile.

To better communicate the new SEGA Group's mission and target profile, we produced a mission video and distributed it widely in-house. As a result, I have a real sense that employees are steadily regaining pride.

Although the SEGA brand that we established around the world has weakened, we still have name recognition. By pursuing quality rigorously and continuing to exceed expectations, I want to regain trust and restore the SEGA brand's luster.

The new SEGA Group's future is promising. We have begun moving forward with our sights set on creating new paradigms for games, industries, and society as a Game Changer.