SEGA SAMMY taking entertainment to the next level

Japan is well known for being a pioneer when it comes to gaming. Firms such as SEGA and Nintendo revived the industry in the West after the great gaming crash in the 1980s, however in recent times, many overseas firms have surpassed Nippon companies in terms of technologies. The Unreal Engine is the preferred engine for game development and The Xbox Series X has the title of the most powerful next-generation console. Despite this, two of the three major gaming consoles in the market are Japanese: Sony’s PlayStation 5 and the Nintendo Switch. What is your take on the current state of the Japanese gaming and entertainment industries? What do you believe are Japan's unique strengths when it comes to this specific sector?

That is a great question, and I would like to hear the answer, too. About 20 years ago, the market share was divided by about a third for each region – nearly 40% for North America, 30% for Europe and the other 30% for Japan. This was due to console gaming not being affordable in many countries. Only the Japanese market was big enough to do business.

However, after the launch of smartphones, PC gaming became increasingly popular at the same time. Numerous games are free to play on PCs and smartphones, and the market has been growing tremendously. Over the last two decades, the rest of the world outside of the Japanese market has been growing and becoming much larger than it used to be. Now Japan’s market share is about 10% — only a third of what it was previously. Today, as a Japanese company, it will not be easy to survive in the future if you do business only in Japan. Nintendo, Sony and SEGA were successful in expanding their businesses on a worldwide basis, and that is one of the reasons Japanese games are still so popular.

We are seeing a shift when it comes to how games are distributed with the rise of digital content: events, expansion packs, and downloadable content. In your opinion, how do you think game distribution will change in the next 5-10 years?

In the next 5-10 years, it may be only digital distribution. The majority of our revenue already comes from this instead of packaged goods and has helped a lot in maximizing our business potential. We used to have a sales office in Sydney, Australia, and in many regions of Europe like France and Germany. However, we do not need these offices now because of digital distribution.

Most business done on consoles and PCs comes from digital distribution, while on smartphones it is 100% digital. This has helped to increase the market size, especially in developing countries. We no longer need to open an office in India for distribution; we just upload the game to platforms run by Apple, Google or Steam to distribute the game digitally there and elsewhere in the global market.

One discussion amongst gamers is the preservation of games because distribution has changed. You have digital content, but also streaming services growing in popularity. The concern with this is that preserving titles will become much more difficult in the future, as the game can be taken off the streaming service or the digital store without a physical release. Do you believe that game development and publishing firms have a responsibility when it comes to preserving games as time goes on, especially considering the rise of digital distribution and the potential of subscription services in the game industry?

Yes, I think so. We are porting some of our old games to every platform. You mentioned consoles, and Genesis games are available on Switch, while our other individual games are available for certain markets, such as PlayStation Network, Xbox and PC.  Incidentally, business model-wise we originally saw games as physical goods. Now that is optional. Currently, subscription services are coming to the video game market too, but the speed of penetration is different. Originally, the music industry was the first to do this, and now most of its business comes from subscriptions. Today, the video streaming market is growing in popularity. However, the biggest difference between music, movies, and video games is the time spent consuming and enjoying the content. Music is 3-5 minutes long for a song. TV shows are longer, and movies are about 90-120 minutes, but with some video games, like our Persona games, players spend more than 100 hours playing them.

Even if you sign up for a subscription service, how many games can you actually play? Being a subscription service means a large amount of content is available. There is no shelf limit on digital distribution services and no need to worry about selling out. That is the difference from physical stores. On the other hand, this may prevent people from finding a certain game. That is why the penetration speed of subscription services for video games is slower than that for music and movies. Also, people want to buy games from day one instead of waiting a month or two. That is why some platforms try to start subscription services at the same time as the game launches.

As distribution becomes more and more digitally driven, there are also fewer touchpoints between game developers and players. With this changing environment, how do you ensure that SEGA can maintain these touch points with this audience?

Yes, we try to do that with our CRM (Customer Relationship Management). Of course, we have done community management with our old media business. We are engaging consumers by tracking those records, and we attempt to increase the quantity and quality of engagement with our fans on a worldwide basis.

If everything is being downloaded, one challenge you are going to face is piracy. People illegally distribute the game through torrents or different forms of distribution networks. How are you ensuring that your games can fight against online piracy?

As an example, Football Manager always faces the problem of piracy, so how long we can protect ourselves from that is key for sales. That is why we always work hard to put anti-piracy codes in games. Currently, new technology is based more on a cloud or activation basis. If you buy a pirated copy, you cannot access the full cloud service or certification of reputation. As a result, people do not want to buy pirated copies but the real thing. So, in that respect, the market is changing: People want to buy the genuine product, not a pirated version.

One of the big evolutions we are seeing in the gaming sector is the integration of novel technologies. Pokémon Go was one of the first successful concrete applications of augmented reality and a lot of companies have touted VR as the next frontier to achieve. What is your vision for the future of these novel technologies like AR and VR, and are you personally a believer in VR? Do you think that it is going to change the gaming sector in future?

I believe that the difference is the size of the screen used. The smartphone is the smallest, the PC is medium-sized, and the TV is the biggest. With VR, your current view is the same size as the TV and you can see around the edges, but it is not 100% immersive. Technology in the coming years will help solve this. Put simply, how you want to enjoy your content is what determines the size of the screen you use. In the future, most games will try to be multi-platform with multi-language support. PC, Xbox and PlayStation may offer the option of VR, and while right now some titles are only available for use with VR hardware, in the future they will be integrated into one game.

VR headsets are still too heavy for a lot of people, and currently, the most suitable platform for them is arcades and not home use. VR still makes people nauseous or tired after playing for an hour, so I believe that advances in technology will help us solve those issues sooner than later. The new Google Glass is quite light, but the best VR headgear is still a bit heavy. Hopefully, the devices will get lighter, like sunglasses. That would make it easy to switch from VR to AR, or mixed reality. I think then everybody will want to play VR games. However, it is still too soon for most. It is mainly early adopters or innovators that are enthusiastic about VR, but it is not yet popular in mass markets.

How long do you think that will take?

I think it will happen within the next five years. 2016 was when people were saying, “Oh, this is the beginning of the age of VR”, but it still has not dominated the market yet. However, I think the issues I mentioned will be solved and VR will become established in the next five years.

One game that SEGA recently released was Sonic Frontiers. It is the franchise's first open-world game and it also reflects a trend we are seeing with long-standing IPs – they are looking towards open-world design as a way to reinvigorate the franchise. Given that Sonic's first open-world game has been a success amongst fans, where would you like to take the Sonic games in the future in terms of design or gameplay?

Technically, we do not call it an ‘open world’, but an ‘open zone’. We would definitely like to offer many different genres of Sonic games. Originally, they were side-scrollers, and from Sonic Adventures, we made it a 3D world game. So, depending on the platform or timing, we can offer a different genre of Sonic game suitable to our fans.

Sonic Frontiers
©SEGA

Sonic has been successful when it comes to its film franchise, however historically, film adaptations of video games have not seen the greatest success. But with 2019’s Detective Pikachu and 2020’s Sonic the Hedgehog, they were met with positive fan reception, and Sonic’s sequel set the record for the top-grossing video game adaptation of all time in 2022. We know there is a third instalment, as well as a Knuckles spin-off in development. Why do you believe that film adaptations of video games have seen recent success? What are your expectations for the Sonic film franchise going forward?

We spent more than a decade negotiating this with Hollywood. Originally, we wanted to make fully 3D animated Sonic movies, but when we discussed it with the producers and directors, they recommended making a hybrid movie, like Detective Pikachu. Since we were to use real actors and actresses, the version of Sonic in the movie had to be more realistic than the animated version. However, when we first launched the trailer, the fans hated it. We have to listen to our fans, and that made us change the design to be a little more like the in-game character. While it is not the same as the 3D Sonic of the video games, it is closer than the original version. Now people love it, and it has contributed to the success of the film. The producer and director wanted to listen to the fans and what they wanted, and that is one of the reasons why it was successful.

In terms of characters and as an IP, Sonic has been going strong. We have many merchandising partners, and if you go to Walmart or Target in the US, you will find a growing abundance of Sonic goods available, which also helps to nurture the IP’s fanbase. We have already announced a Knuckles spinoff, and we are also working on the third Sonic film. Unfortunately, I cannot say more than that.

Thanks to Sonic’s success, Hollywood studios and producers have approached us about making films or TV series for SEGA's other IPs, and we are currently negotiating with them. While we have already announced some projects, there are others we have yet to announce. We are also working on bringing back more old IPs to the current market.

SEGA has many well-known IPs - Sonic the Hedgehog and Puyo Puyo, but you also acquired others such as Atlus’ Persona. Are there any IPs you are looking to see growth in, particularly in Western markets?

For console games, we try to provide multi-platform and multi-language support. Some of our games, especially Japanese studio titles, had originally been focused on certain platforms. Yet now, even Japanese studios want access to the worldwide market, so we try our best to offer their games on as many platforms and in as many languages as possible. The Yakuza series, for example, was rebranded Like a Dragon and has multi-platform titles. The latest release by itself dramatically increased the series’ playing audience.

Previously, the Persona series had only been available on the PlayStation, but now we offer the older games for Xbox and PC. The latest instalment will probably be multi-platform, too. The smartphone game with the most active users for us in Japan is “Project SEKAI COLORFUL STAGE! feat. Hatsune Miku", a rhythm game that we now offer in other countries where it is also gaining popularity. We are marketing games like this extensively. We already market Western studio titles on a worldwide basis. One we announced was Hyenas, which was developed by Creative Assembly, and we will be marketing it globally.

The Japanese gaming market is a unique consumer base. Many foreign companies have spent years trying to make mobile games that would work in Japan. It was quite interesting to hear you talk about how these Japanese apps are developed here with Japanese consumers in mind, and then they can be popular overseas. From your point of view, what are some of the particularities of the Japanese gaming market, and what makes it so adequate for international expansion?

It is a mix of different things. The success of Persona 5 was a surprise for us. The studio made the game for Japanese consumers, with a story based on Japanese high school students, so it is quite ‘local’. We were surprised at the fact that Westerners would understand and love Japanese high school characters, but the triumph was in making a good game translated into several languages, so-called ‘culturalization’.

Localization is simply translating dialogue from Japanese to English, but culturalization is the term for carefully choosing what word would be culturally appropriate in a certain region. The Atlus team in the US was very good at that, as many on their staff loved Japanese anime and other content. Again, that helped the Yakuza series sell well because we asked them to ‘culturalize’ the game into English and other languages to try and sell it in North America and Europe. It did much better than what we had previously achieved there.

In addition to that, there are many people, young and old, who watch Japanese anime. In the past, Americans disliked reading subtitles. They never had to because all of the content available was in English and they never watched non-English content. However, thanks to streaming services, people in the US now watch media in the language it was made in. This includes Korean TV shows, and especially anime, which has unique voice actors. Some also listen to the original dialogue. Teenagers in particular love to listen to the Japanese version of anime instead the localized English ones. While little children prefer the local language, teenagers love to listen to the original, so they are getting used to reading subtitles.

The way content is consumed has changed. Even for our Yakuza series’ original title, we only made it available in English for the US; we did not think of releasing the Japanese version there. However, many fans complained that they wanted to listen to the original Japanese dialogue. Since then, we have put in an option to have voiceovers in English, but you can also choose Japanese or another language. These kinds of customizations are not just simple localization, but culturalization – which includes listening to what the local fans want. That helps sales in the end.

When it comes to one of your IPs, you are striving to create a ‘super game’, as you have titled it, by the year 2026. Can you tell us a little bit more about this new IP that you are currently working on?

We hope we can announce something this year or the next. This is related to the Metaverse topic. What I have said is that we are not intending to make a Metaverse from scratch. There are three kinds of metaverses. One is simply the Zuckerberg world that makes a metaverse from scratch as a virtual world. The second is the so-called ‘digital twin’, which is a virtual model designed to accurately reflect a physical object: a virtual version of a thing or an experience. The third is where the metaverse comes from a video game like Fortnite, Roblox or Minecraft. The original intent was not to make a metaverse, just to make a video game. Yet, people played it and said, “Oh, this looks like a metaverse”, and it became one.

That is what we really wanted to focus on, so we are not intending to make a metaverse. Instead, we will focus on making video games and adding content through communities or networks. In the end, people might say: “This is like a metaverse experience”. The Fortnite experience is built around a battle royale scenario, but there are many people there — Travis Scott had a concert in-game, and millions of people watched it simultaneously. That was the biggest live concert ever held in a game. So, our focus is on making video games.

You could say in the 2000s, every game had to have couch co-op, and then by the early 2010s, every game had to have an online multiplayer experience, regardless of if it was a primarily single-player game or not. With the release of Fortnite, many games started having a battle royale mode. Moving forward, what do you believe is the next trend in gaming, based on your experiences so far?

Currently, our goal is to reach about 3 billion gamers in the world. The definition of a gamer is different from what it used to be. Many people are into video games. Of course, the biggest customers are the players. While they pay us money, there are even more people who do not play and rather watch them on YouTube or other video streaming platforms. Some streamers stream their games like they are professional e-sports players. So, there are many people engaged in video games. We used to only focus on the players, but now the viewers outnumber them.

While viewers do not pay us yet, we may somehow be able to make money from them. While there are only a few out there already, in the future, there will be more games available where viewers can influence the game somehow, such as through a live streaming service where they can donate money. The real-time element of video games, where viewers may be watching a contest between teams of five people, is popular with streamers. Currently, viewers are just watching these competitions, but you could allow some parameters to change at their request without it being detrimental to the gameplay itself. That kind of element is already available in games such as Formula-E. How we make viewers interact more with the players could be the next trend in the market.

In 2001, SEGA stopped manufacturing consoles and started focusing solely on providing software as a third-party developer. As such, all your games are now released on former rivals’ consoles such as Nintendo, with whom you had a well-documented rivalry in the 80s and 90s. What was this transition to being a software provider like?

As I said, we are trying to reach 3 billion gamers worldwide. The strategies today are different from when you have your own console. In those days, the number of players was limited to how many consoles we sold. Now, we are focused on multiple platforms and would love to work with any partners.

The market has been growing, as well. As I said, 20 years ago, our partners were only Microsoft, Nintendo and Sony, but now there are many of PC streaming services like Steam, and others are looking to enter the market such as Amazon, Google, Apple, and even Meta and Netflix. Numerous platforms are opening their doors to video games. Nearly all of their owners have approached us to offer games on their platforms as launch partners. However, that depends on the situation in the business model. We would need those platforms to help increase our market share.

You might remember that SEGA was a launch partner when the App Store opened. After Steve Jobs’ presentation, our producers presented our first smartphone game, called Super Monkey Ball, on stage. Since we had several appealing titles available that we could easily offer Apple, we were able to form a great partnership with them that continues to this day. Some studios have narrowed their lineups to focus on just one big title, which is how it worked over the last decade. SEGA is a little more flexible and can move around and offer those kinds of games.

Xbox has been taking sustainability into account with the Xbox Series X and SEGA SAMMY also announced a sustainability vision in May 2022, with focuses such as strategic commitment to action on climate change. Can you tell us a little bit more about the sustainability vision you have in place for SEGA SAMMY?

This office uses carbon-neutral energy. However, this was a corporate decision because it is more expensive than normal electricity. Why do we buy highly-priced energy? We not only need to explain why to our stakeholders, but to our employees as well, because we always ask them to cut costs. As a manager, asking them to buy energy at a higher price presents a dilemma.

Our increased accountability as managers is why we are doing this since the world has changed in just the last decade. A decade ago, a corporation’s purpose was to maximize both its profit and the returns of shareholders. Now the world asks, “How do you make money?”, not “How much money do you make?”. Today, a corporation’s purpose is about making money by doing the right things, the things that consumers care about. The way people consume products has also changed: They care about whether a company is doing the right thing or not. That is why we have to react accordingly. SEGA SAMMY is going to be carbon neutral by 2030, but since we have a sizable resort hotel, that part of our business cannot be carbon neutral by then. However, at least SEGA and Sammy - our two corporations - will be.

Sammy Corporation makes many pachinko and slot machines. However, we know that through facing low investment capacity due to the player population decrease, along with stricter regulations and rising machine prices, pachinko hall operators are replacing their machines less often and increasingly selecting titles that promise a consistent return on investment. As such, we are seeing a shrinkage of the pachinko and pachislot markets. How is Sammy adapting to the shrinkage of the market that we are seeing?

The biggest reason for this shrinkage is simply the changes in regulations. In this market, we have to develop machines that comply with them. That means machines’ specs sometimes differ from what players want. However, thanks to reregulation a few years ago, the latest machines have higher specs than before. Finally, we were able to entertain fans more, and every time we launched a new machine, it performed better over the following 12 months. The market has hit bottom and is increasing little by little. In that sense, we are not that worried. We are quite confident that we can attract dormant players and new players in the market.

Smart Pachislot Hokuto No Ken
©Buronson & Tetsuo Hara／COAMIX 1983, ©COAMIX 2007 Approved No.YRA-114
©Sammy

In addition to your entertainment content and pachinko machine operations, SEGA SAMMY Holdings also has a resorts business, with locations such as the Phoenix Seagaia Resort in Miyazaki, as well as Paradise City, which is South Korea's first integrated resort facility. As a holdings company containing mainly entertainment firms and games firms, why did you decide to diversify into resorts and hospitality?

Our mission is “Constantly Creating, Forever Captivating”. We want to entertain people and break through barriers, from video games and animation to pachinko and slot machines. We manage resorts and run golf courses as well and have started running basketball and other sports teams too. All these things are part of the same mission. We want to entertain fans, and in that sense, we are aligned with a variety of video game business segments.

Phoenix Seagaia Resort

Entertainment conglomerates around the world are seeking to acquire talented studios, showcased by Microsoft’s acquisition of both Bethesda and Activision Blizzard, which is still pending. In 2019, SEGA acquired Two Point Studios, which is based in Farnham, England. Are you looking to add more overseas studios to the SEGA group?

Yes, but it depends on the price tag and there is another important factor. When we negotiated with the shareholders, the owners and the founders, we do not simply quote them a price we were prepared to pay. The question is how we could secure the independence of the studio. When we acquired other studios in the past, we talked directly with them about how they could secure their independence and respect. This helped Amplitude decide to become part of the SEGA family. The cultural fit between your two companies is more important than the actual money you are using to invest. This is something we have been very careful about.

Could you describe a little bit more about the culture you are looking for when it comes to these studios that you would like to acquire?

All the studios love their content / IPs, and they love their video games, but some of them are lacking in certain areas, such as online services or sales. We can add more value as a publisher, while at the same time respecting the original culture of the studio, which is involved in making the best possible game. The owner of a studio should think that there is more value to be had from being with SEGA than with another company.

SEGA is a world-renowned brand, with locations across North America, Asia and Europe. Have you identified any specific regions of the world where you would like to see further growth?

Yes, of course, North America is the biggest market for us, with a huge fan base, but it is interesting that Central and South America, while not being a focus of ours, have responded well to the Sonic movies, so there are a lot of Sonic and SEGA fans over there as well. In the 80s and 90s, there were many pirated games available in those markets, and perhaps in other areas as well, but that helped our brand awareness there. While there were many regions we did not directly sell games in, people there played them in some form, and that helped our sales. More people realized that they could trust games endorsed by SEGA.

What is your favourite game and why?

I get asked this question sometimes, and I have to be diplomatic with my answer. One game that surprised me was Uncharted 2. The beginning of the game was like a movie. I think it was on the PlayStation 3, so you may think it is not so graphically beautiful if you saw it now, but in those days, the graphics were amazing.

I cannot remember all the details, but at the beginning, there was a train crash and then you were able to start controlling your character. You were just hanging off of the train. That was so stunning. Japanese games are typically gentler towards players. They teach players how to play the game at the beginning, and always have weak monsters first that are easy to beat. Uncharted 2 was nothing like that. It was remarkable and the reason why I remember it.

Imagine we come back to interview you again on the last day of your presidency. What would you like to have achieved by then?

At the very least, we want to be the number one entertainment company in Japan. If we can achieve that, it will show that we are one of the best entertainment companies in the world. Currently, I think that title goes to Sony Group because they have movie, music and video game businesses in addition to hardware and semiconductors. Their brand does not necessarily give that impression, because people see it in different ways depending on their favourite Sony products. Among teenagers in Japan, Sony is best known for its insurance products due to the many TV commercials for them. Sony does not advertise their hardware products, such as cameras and TVs, but they advertise its insurance a lot. Camera enthusiasts would consider Sony an electronics product company. If you love　video games, Sony is the PlayStation company, so it depends on one’s perspective. In any case, that is my goal: To be number one.

Interview conducted by Karune Walker & Antoine Azoulay