Constant Change in the Business Environment

Long-Term Downtrend in Pachinko Machines since 2010

In contrast to the long-term ongoing downtrend in pachislot machines, pachinko machines followed an uptrend until 2009, boosted by the replacement of pachislot machines directly impacted by the “No. 5 machine model shock.” In 2010, however, pachinko machines entered a downtrend that still continues to date, owing to deterioration in business conditions for pachinko hall owners amid the shrinking population of players, weak replacement demand due to higher prices for the machines, and changes in voluntary regulations at industry associations. Marketing that focused on lower-priced pachinko balls in a bid to expand the user base failed to turn around market conditions.

“Passion for Creating” is a
Strength of the SEGA Group

There is an ethos at SEGA Games Co., Ltd., that is always present and flowing throughout the SEGA Group. It is our passion for creating. Our thorough pursuit of quality is an undeniable strength that is evident in the innovative products and services that SEGA has created to date, including its graphics, game systems, world views, and music. This ethos is a strength of the entire SEGA Group, shared among Group operating companies and studios inside and outside Japan. In the packaged games area, in recent years sales have remained brisk as a result of our leveraging this strength in overseas business, which is being reinforced under the Group’s long-term vision Road to 2020. With overseas business a growth driver, earnings have been trending upward on a worldwide basis.

SEGA’s World-Acclaimed Quality

Sonic is perhaps the SEGA Group’s most widely recognized IP. Released in August 2017, Sonic Mania has become a major hit with over one million downloads worldwide. This game title is a tribute to the original Sonic titles that hails back to the Mega Drive (Sega Genesis) game console era, including Sonic the Hedgehog which was the first title of series released in 1991. While staying true to the world views of the original version, this game title is loaded with new elements that have won over many gamers, especially people overseas who have long been fans of Sonic since the time Sonic was a 2D graphic. Over the past few years, sales of packaged games in the overseas market have tended to be strongly influenced by ratings published on game review websites. On Metacritic, one of these review websites for games, movies, and music, Sonic Mania has received very positive reviews.

Group company ATLUS. CO., LTD., released Persona5 overseas in 2017, and it ranked No. 1 overall in PlayStation®4 ranking 2017 out of the huge number of games available, including the titles of global mega-publishers.

This game title is a successful hit with more than 2.2 million copies sold worldwide, and overseas sales are more than double the sales in Japan. I would like to stress that this success came despite the game being an RPG based on Japan’s view of the world, with Japanese high school students as the main protagonists in the story.

In Yakuza 6: The Song of Life, althorgh the main character is played by the legendary Yakuza and set in Tokyo and Hiroshima, it has sold as many copies overseas as it has in Japan. In the past, the Japanese market has generated the bulk of sales for these series, and although it has elements that are appealing to overseas. However, the game was not developed with European and U.S. markets in mind. Thanks to painstaking efforts to create a game that Japanese fans will appreciate, the title has become popular not only in Japan but also won over fans overseas who praise the refined game sense of the title. I believe this is why Yakuza 6: The Song of Life has become such a popular hit around the world.

Improving perceptions of the SEGA Group are also a reflection of the steady repeat sales in foreign countries. In the past, the key was how many copies can be sold in the first two months of a game’s release, because thereafter it was necessary to release discounted versions and cut prices in order to move inventory. Nowadays, however, repeat sales tend to hold steady thanks to demand remaining firm for titles that have been out a few years since their original release, owing in part to successful measures to introduce series titles like the Sonic the Hedgehog series, in addition to the popularity of the Steam a game distribution platform, which has created a huge market especially in Europe. Needless to say, repeat sales after development costs are amortized are a boon for profitability.

Localization Capabilities for Global Releases

There is one more key factor that explains the brisk sales overseas. Before a Japanese game is released overseas, it is localized into the language of each country and region. For example, Persona5 has been translated into three languages (English, traditional Chinese, and Hangul). No matter if a game is popular in Japan, it is unlikely to win over fans around the world if the localization is insufficient. The SEGA Group has localization studios that make a huge difference when games are sold overseas. ATLUS became a member of SEGA Group due to the transfer of business in 2013, which has the studio located in California, U.S.A. The studio understands both Japanese and American games very well, and is able to localize Japanese games in a way that accurately conveys the unique world views of Japanese titles to local gamers. The studio is able to maximize the entertainment value of localized games that reflect these unique world views, and this has led to very positive reviews from local gamers. During the product development stage, game content is shared with the localization team for translation before the development is finished, facilitating the rapid release of foreign language versions of the game. We will strengthen such collaboration further with the aim of simultaneously releasing games around the world, which is an objective of Road to 2020.

System for Designating Responsibility for Profits in Projects

No matter how much we seek higher quality, unless profits can be earned, we would be unable to continue providing moving experiences. We have raised awareness to a higher level for thinking about what our customers truly desire, while at the same time clarifying responsibilities for profits (operating income) in each development project. The aim is to encourage the creation of games that can thrive on the market while giving everyone a sense of accomplishment and autonomously controlling development costs. While we cannot create popular hits intentionally, it is possible to gain some control over keeping unprofitable titles from emerging. When we judge if it is not worth spending additional investment to continue the project made based on a disciplined assessment of profitability, we have reluctantly made decisions to discontinue some projects. The instilling of this kind of framework for improving the cost efficiency of each project has also made a significant contribution to stronger profitability over the past few years.

In contrast to the strong-performance in packaged games area, the digital games area has struggled to grow these past few years with inadequate returns on investment. Time has passed since the launch of major titles including CHAIN CHRONICLE, Puyopuyo!! Quest, and Hortensia Saga, and these titles seem to have run out of steam. Although new titles Shin Megami Tensei Liberation Dx2 and kotodaman have elicited a response, we still do not have enough popular titles. We must reassess what our customers truly desire in order to create new hit games, and strengthen management of development schedules and costs in addition to our post release operational capabilities. In this area, we are adopting the same approach—clarifying responsibilities and setting targets for operating income in each project—that led to results in the packaged games area. Since digital games take less time to develop than packaged games, we aim to enhance development precision, including schedules and costs, by carefully checking progress on a monthly basis in addition to reviews in meetings for each development phase.

Aiming to Maximize the Value of Extensive IP Assets

Amid rapid growth of the digital games market, we split off companies along game device types, and our business expanded at the same pace as market growth. As market growth begins to taper off, however, it makes more sense to have a management structure that maximizes the value of our extensive IP assets by utilizing them regardless of game devices. For this reason, in April 2017 SEGA Games discontinued the company system based on game device type, and switched to an organization centered on IP. With the goal of creating global hit titles under Road to 2020, the Company is taking full advantage of IP assets, including existing IP, idle IP, new IP, and outside IP, to better coordinate IP in multiple channels and expand IP for global markets.

By realigning our organization along IP, development teams that used to create packaged games are now also working on digital games such as Ryu ga Gotoku ONLINE, as they challenge themselves to create games for different platforms. Collaboration across the organization has also picked up. One example of this collaboration is employees at ATLUS and SEGA Games working together on Shin Megami Tensei Liberation Dx2, which was released in January 2018 as a smartphone app version of the Megami Tensei series of RPGs for home game consoles. Moreover, titles made in collaboration with outside IP owners, such as Total War: WARHAMMER 2, have been doing well.

Regarding idle IP, in 2018 we re-released Shenmue I&II, a revival of Shenmue, which debuted in 1999, and Shenmue II.

This title was the culmination of cooperation across studios with SEGA Europe Ltd., our development studio based in the U.K., directly involved in its publishing. In addition to re-releases, we are also working on completely new games using idle IP like New Sakura Wars (working title), which was announced in April 2018.

The SEGA Group has more than 4,000 developers around the world. By working together across countries, regions, and studios, we aim to establish a framework for creating games globally for markets around the world.

Considerable Potential of the SEGA Group

While we have successfully improved earnings to some degree, we have only just crossed the start line. We will be able to deliver moving experiences to more people around the world by taking a two-pronged approach to growing existing IP, reviving idle IP, and effectively utilizing outside IP, and to creating new IP. The SEGA Group is confident there is considerable potential for growth in each prong of this approach. I believe realizing this growth potential would delight our shareholders as well. With our employees, we aim to draw out the considerable potential of the Group.