Sonic's Creator Spins Out of Sega

Yuji Naka, the man behind the company's ubiquitous hedgehog, is striking out on his own. But Sega will still enjoy access to his talents

Yuji Naka doesn't look like the type who can command the adulation of millions. Bespectacled and slight, he has boyish features and a preference for wrinkled button-down shirts. But in the video-game universe, he's a bona fide superstar, an uber-nerd with a cult following.

Since leading the programming team for Sonic the Hedgehog in 1991, he has masterminded a handful of Sega's most popular games. That helped elevate the Japanese company to a household name, and earned Naka the industry's top honor -- an International Game Developers' lifetime-achievement award -- four years ago.

So intertwined was Naka's success with Sega's brand that it was hard to imagine one without the other. Until now. On May 9, after weeks of denying rumors about Naka's imminent departure, Sega said its creative officer for R&D would leave to run his own Tokyo-based game-software studio, called Prope (pronounced "pro-pay," which means "near" in Latin). The high-profile resignation raises questions about who will lead the development of the new Sonic title for Microsoft's (MSFT) Xbox 360 and Sony's (SNE) PlayStation3, an effort Naka had overseen since its announcement last September.


  Coming up with a blockbuster for those consoles will be key for Sega, whose gaming business has had few bright moments since disappointing sales for its Dreamcast system forced the company to abandon the console business in 2000. In the past two years, Sega hasn't had a Top 10 title in either Japan or the U.S., the two biggest gaming markets, losing out to rivals Nintendo, Square Enix, Bandai Namco, and Konami (KNM).

At a time like this, how could Sega let go of one of the industry's most gifted creators? The fact is, Naka won't be going far. Sega will foot 10% of Prope's $90,000 startup cost, which will go toward creating games for the newest generation of game consoles. And Sega's U.S. and European units have already signed on as Prope's first customers, starting from June, though it's unclear what Naka will do for them.

What prompted Naka to leave after his prolific two decades at Sega remains an open question. The gaming visionary has programmed and produced dozens of top-selling titles since joining the company as a high-school graduate in 1984 -- but has faced criticism about the eroding quality of his work in recent years. Company officials wouldn't comment on speculation that the 40-year-old Naka's declining productivity might have led to his ouster. "Sonic isn't as popular as it once was, and Naka hasn't made a hot-seller for years," says one analyst.


  Another possibility: Naka's job of having to squeeze out more games featuring Sega's Sonic icon had left him feeling trapped by his own creation. Naka couldn't be reached for comment. He revealed little in a statement expressing his hope that Prope would bring "game entertainment much closer to users."

His decision to leave comes two years after Sega's merger with Japanese Pachinko-machine maker Sammy. That union had brought stability to Sega's profits -- operating earnings are forecast to have risen 20%, to $1.08 billion, in the fiscal year through March -- but it also forced the company to spread spending in sectors outside of gaming.

Naka has served as the poster boy at Sega for more than a decade. He was only 25 when he wrote the code for the fast-action Sonic the Hedgehog, which led to more than 20 spin-offs, a cartoon series, and a movie for the spiky blue mascot.


  Other titles he produced from the late 1980s and 1990s, including Nights into Dreams, Phantasy Star, and Burning Rangers, have won wide acclaim and helped Sega adapt as the industry shifted from arcade machines to living-room consoles, PCs, portable consoles, cell phones, and online multiplayer venues. But his rising importance also brought mixed feelings. In several media interviews, he said he missed his creative period as a programmer.

If freedom is what Naka was after, he's likely to get it at Prope. The financial ties to Sega may limit his repertoire initially, but it will buy him time to show his entrepreneurial side. Meanwhile, Sega can call on his expertise when needed. The venture-capital model, which Sega intends to replicate in the future, offers a glimpse of how other game makers that have suffered brain drain might satisfy their antsy creative talent.

In January, Electronic Arts (ERTS) and its vice-president of technology for new platforms, Kaz Hashimoto, parted ways. Hashimoto later said he left Silicon Valley to strike out on his own in Hawaii. Two months later, Sony Online Entertainment creative officer Raph Koster walked away, despite a stellar track record as the designer for Star Wars Galaxies and Ultima Online.


  "If Sega can successfully avoid an unhappy ending with Naka, it could offer a positive example for the gaming industry," says Hirokazu Hamamura, president of Japanese market-research firm Enterbrain. He thinks many designers find management duties stifling.

Sega seems to have learned its lesson after the loss of big-time talent Tetsuya Mizuguchi in 2003. A 10-year Sega veteran, Mizuguchi headed development for Sega Rally, Rez, and Space Channel 5. He left after reportedly feeling unhappy when his United Game Artists group was combined with another department.

While Naka hasn't entirely left Sega's orbit, the company will no longer be able to trot him out for the events that are a staple of the hard-core gaming community. Sega will eventually need to find another prodigy, and that won't be easy, considering the competition includes Nintendo and Square Enix. Still, Sega's venture-capital idea is unique, and for now it has at least kept Naka from running off to a rival. The hard part will be luring the independent creative self-starters who can deliver a top-ranking title when the company needs it most.

Before it's here, it's on the Bloomberg Terminal.