Sega Goes Beyond Sonic

The video game maker has a plan to break into the top five. It involves moving past the pre-adolescent set with fantasy, speed, and violence

Can Iron Man, the Incredible Hulk, Captain America, and Thor save Sega? The venerable video game publisher, which has been knocked around the industry like a character in a video game, is tired of being relegated to the second tier. Sega is determined to break into the top five of video game publishers in the next year. That means more than doubling the company's revenue in the midst of what could be one of the most competitive holiday gaming seasons in recent memory.

How does Sega plan to crack the top tier of game publishers? The goal is to hitch the company's fortunes to a shooting star—more specifically, a comic-book movie star. Sega, like other Japanese companies that have struggled to make inroads in the West, has been aggressively pursuing high-profile movie licenses. The licenses are part of a strategy aimed at diversifying Sega with more games for a wider variety of gaming platforms and audiences.

For a company best known for a quick-footed blue ball of fur named Sonic the Hedgehog, Sega is making some uncharacteristic acquisitions. It is primed to release an adventure game based on The Golden Compass, a fantasy movie starring Nicole Kidman and the new James Bond, Daniel Craig, that hits theaters Dec. 7. The company also snatched up the licenses to four Marvel Comics characters—Iron Man, the Hulk, Captain America, and Thor—that have movies in development or under consideration. In addition, Sega is planning two new games based on 20th Century Fox's Alien movies.

Out of the Hardware Market

Of course, there are no sure things in the high-risk world of video game development. Movie games typically sell well but have a reputation for poor quality, and the movie itself could bomb at the box office, potentially sinking the game version. In addition, next-generation gaming technology has increased development costs. Admits Sega of America President Simon Jeffery: "It only takes a couple of $20 million games to fail at market, and we're out of business."

Sega knows how easy it is to reach that point. When it launched its Dreamcast console in 1998, the company was already hurting from previous failures in the hardware market. The technologically advanced Dreamcast was warmly welcomed by gamers, but the popularity of Sony's PlayStation 2 forced Sega out of the hardware business in 2001. That year, the company reported losses of about $435 million and axed a third of its Tokyo workforce.

That's when Peter Moore, then president of Sega of America, began the push to transform Sega from a hardware manufacturer to a platform-agnostic game publisher. The company began to pull out of the red when it discontinued unprofitable online services such as Seganet, but it continued to gasp for air. Sega's successful line of football games was left out in the cold when Electronic Arts (ERTS) cut a deal with the National Football League and the NFL Players Association, giving the company exclusive rights to portray NFL players, teams, and stadiums. Sega's football games, which were considered high quality despite costing only $20, were left out in the cold.

Back in Action Games

Sega limped along until 2004, when it was acquired by Sammy Corp., a Japanese creator of games and slot machines. When Simon Jeffery became president of Sega of America early the following year, the company had begun pursuing an aggressive global expansion strategy. "It really was a paradigm shift at the top at Sega Sammy," Jeffery says. Although the Japanese old guard wanted to reenter the hardware business, he says, "There really had to be an absolute flushing out of that old way of thinking."

Under Jeffery, the company has refocused on developing the slam-bang action titles that have been so popular in the West. Instead of acting as a distributor of Japanese games, Sega of America built its own product development and marketing divisions and has formed partnerships with prominent game studios.

In the last two years, Sega has climbed from 11th to sixth place among third-party publishers in terms of games sold. But it is still far behind the market leaders in terms of revenue. The central problem is that the Big Five—Electronic Arts, Activision (ATVI), Ubisoft (UBIP), THQ (THQI), and Take Two Interactive (TTWO)—have dominated the fast-growing Western market while Japanese companies have struggled to gain acceptance outside of their stagnant home market.

A Move Toward Licensing

Capcom, which publishes the Resident Evil and Street Fighter franchises, has had to correct similar imbalances, says Executive Vice-President Mark Beaumont. When he took over the company's Western operations in 2005, Capcom was "out of whack," doing 60% of its business in Japan when that country was only 20% of the total market.

Later this year the company will release the motorcycle racer MotoGP, its first video game based on a license that was purchased in, developed in, and geared toward the West. Although Capcom is still dedicated to its own intellectual property—another Resident Evil game is in the works—Beaumont says the company has recognized the importance of licensing in the West.

When Jeffery joined Sega, his first order of business was forging relationships with top development studios, something at which he was successful while president of game publisher LucasArts. Sega purchased Creative Assembly, the creator of the medieval real-time strategy game Total War, Secret Level, the studio behind the action game America's Army, and Sports Interactive, which makes a sports team management simulation.

Diversifying Into Violence

Sonic the Hedgehog, Sega's famous mascot, is still a moneymaker, although developers have had marginal success in developing blockbuster games for him. The next major console game featuring the character will actually be a partnership with longtime rival Nintendo (NTDOY). Titled Mario & Sonic at the Olympic Games, the game will be released for the Wii in time for the holiday season.

Jeffery is looking beyond Sonic, which he says is "an amazing recruitment vehicle" for younger gamers but "loses its cool factor when you get about 12 years old." To compensate, Sega has focused on developing games for more mature audiences. In one of its most violent games, Condemned: Criminal Origins, players solve a series of grisly murders while engaging in bloody hand-to-hand combat. A sequel is due out this holiday season.

Billy Pidgeon, a program manager for the market intelligence firm IDC, says Sega is taking the right approach by not relying on just one or two potential blockbuster games. "You have to have a diversified portfolio right now," he says. "You can only get so much mileage out of Sonic and company."

Clearly, Jeffery has diversified Sega's roster of games. Now he has to hope the lineup includes some real superheroes.

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