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Part one of the interview translated via DeepL:

Why is "Sonic" selling so well in North America? The amazing backstage of "SEGA-style marketing" that generates enthusiasm.

The video game industry continues to grow steadily. In the North American market, which boasts the largest market size of all, SEGA has a strong brand and a large number of ardent fans. Recently, the first (released in 2020) and second (released in 2022) movies "Sonic the Hedgehog," based on the company's main IP (intellectual property) "Sonic," were big hits in North America and created a big buzz. Although Sonic's presence in Japan is not that high, he is as popular as Pokemon and Mario in North America. Why has Sonic captured the hearts of young North Americans? We interviewed Mr. Shuji Utsumi, Executive Vice President of SEGA, a company that is doing extremely well.

Why Sega is doing so well

── I was a little surprised to hear that SEGA is doing well at the moment, with all due respect, but they went through a restructuring in 2015 and closed their San Francisco location. In recent years, both the pachinko/pachislot and resort businesses have been hit hard by the Corona disaster, and the company is restructuring again in 2020 and selling its arcade (game center) division, which is also its ancestral business.

Shuji Utsumi (Utsumi): In my view, in the overseas context, Sega has been saved by its signature character, Sonic. In particular, the success of the Paramount films "Sonic the Hedgehog" (2020, $320 million) and "Sonic the Hedgehog 2" (2022, $405 million) have strengthened the brand, which has led to various opportunities again. The third film, Sonic the Hedgehog 3, is scheduled for release in 2024.
　Furthermore, the home video game industry itself, while benefiting from the tailwind of the Corona disaster, is also experiencing a turnaround in various businesses, thanks in part to the structural reforms that we have been pursuing.

(SEGA-Sammy Group revenue)

── Sega is currently doing very well, but have sales returned to the level of the 1990s, which is considered the golden age of Sega?

Utsumi: That is not yet. When we were selling the "Genesis" home video game console ("Mega Drive" for Japan) (Note 1), there was even a time when Sonic was right up there with Mario. At present, we recognize that we have not yet reached that point.
Nevertheless, from the stagnant period in the 2000s, sales are currently growing strongly. The big difference from the past is the way we hit the market. Compared to those days when we only had games, now we have animated TV shows and movies, and the success of the "ROBLOX" collaboration, etc., the wave of growth is "thicker" than before. This is a phenomenon that did not exist in Sega 20 years ago.

Note 1: In 1988, Sega's third home video game console was launched as "Mega Drive" for Japan and "Genesis" for North America. More than 30 million units were sold worldwide. Compared to the Family Computer's sales record of 60 million units, it was no match in the Japanese market, but had a larger share of the U.S. market than Nintendo.


Where did Sonic's popularity come from? What is Sega's marketing style?

── Sonic is in the top 10 most popular video game movies of all time, along with Mario, which grossed a record $1.4 billion at the Hollywood box office this year, and the immensely popular Pokémon. Furthermore, looking by region, "Sonic the Hedgehog 2," which will be released in 2022, has sold $190 million in the U.S., not as much as Mario's $570 million, but more than "Detective Pikachu" ($140 million). There is no other character that is so biased in its popularity toward North America, even though it originated in Japan.

Utsumi: Among Japanese video game characters, Sonic is actually as well known in North America as Mario and Pokemon. However, the Mega Drive (released in 1988) was not a big hit in Japan, and his name recognition in Japan is limited.
When a character sells so well mainly overseas, the people in charge of development and marketing in Japan do not feel that it is "selling well. It is difficult to implement measures without a clear sense of what is going on.

In North America, on the other hand, Sonic himself has become the face of Sega. This is partly the result of Tom Kalinsky's (Note 2) conscious branding of Sega in its golden age, but it is also because Sonic and Sega have a "slightly grown-up, delinquent image" in contrast to Nintendo's conception of game consoles as "family computers for families to enjoy together. Nintendo's image is that of a "family computer and family fun. If Nintendo is like Coca-Cola, Sega is like Pepsi. The colors are red and blue.
This spirit of "rebelliousness," as it is called in English, is still strong among North American users, and we are still taking care in our branding to convey this spirit in every aspect of our business.

Note 2: Former CEO of Mattel, one of the world's largest toy manufacturers, Hayao Nakayama was headhunted by SEGA founder Hayao Nakayama to become president of SEGA of America from 1990 to 1996, creating the peak of SEGA's North American expansion.


How well has "Sonic" contributed to our business performance? Amazing Achievements

── In Kevin Maney's book, "The Impact of Megamedia: Japan's Losing Structure Alone" (1996), the following sentence appears: "For teenagers, Sega is a more powerful brand than any other well-known megamedia company. The only brand name that can compete with Sega in this generation is MTV...(omitted)...Sega's market share is 55% to 65%, while Nintendo's is 35-45%. Nintendo is not as aggressive or innovative as Sega." "Sega has had far greater success than Nintendo in terms of attracting older customers.

Utsumi: Indeed, there was a time when we had such a reputation. However, Sega had not had many hits in overseas markets since the "Sega Saturn" (released in 1994, Sega's home video game console), and we began to outsource development to companies.
　At the time, I had just returned to Japan and was in charge of Dreamcast titles, so I insisted that Sonic should be at the center of Sega's North American expansion. There were many opinions, but it was decided that "Dreamcast" (released in 1998, Sega's home video game console) would be the centerpiece of the global development of "Sonic Adventure" (game software released in 1998).
　Sonic's sales had been declining for several years, but I think it sold very well for the Dreamcast, which was a tough console at the time. Perhaps the "Sonic is selling well" status has skyrocketed in recent years, thanks to the success of the movie, but before that, "Sonic Adventure" left a strong impression on me.

──Mr. Utsumi rejoined the company in 2019, 20 years after the legacy created by Sonic's US expansion around 1996-2000, and is now promoting various projects for the US. It's quite an interesting current situation, like a pass from you to yourself in time leap.

Utsumi: That's right (laughs). We are currently developing various revivals, including other works that have yet to be announced, and when we thought about how to visualize Sega's strength from the outside in a way that would make it look more attractive, we came to the same conclusion as 20 years ago: "It seems strange that Sonic is not in the center this time around. I came to the conclusion that it would be strange for Sonic not to be in the middle.
　This is what we are actually seeing in the numbers with the Hollywood movie that we have made with Paramount Pictures. There are many titles that are still in the works, and there are many projects that I cannot mention, so I expect that the value of the SEGA brand will continue to increase in the medium to long term.


Conditions for a "hit" movie based on a video game, and why negotiations with Hollywood are super important.

──I assume that one of the reasons for Sega's success has to do with the success of the Sonic movie in North America, but how do you go about establishing a relationship with a Hollywood company so that you can negotiate with them to make the movie?

Utsumi: The first premise is that many of the top producers in Hollywood today are strongly influenced by Japanese game productions. In the past, I used to have to make elevator pitches to people in the film industry (where I was forced to make a sales pitch based on the amount of time I spent in the elevator), but now I can introduce myself and say, "I used to work on Kingdom Hearts and Crash Bandicoot," and this alone will earn me respect and a long conversation. I can talk with them for a long time. The generation of gamers who grew up in those days are now active in the middle of the entertainment industry, and they give you enough respect as a business partner to start negotiations with them.
　The trend of adapting original video games into movies is a phenomenon that did not exist in the 1990s. Hollywood is also having trouble with original works. Disney went with fairy tales for their series, and Marvel went with comics for their series. When we ask what the next theme will be, we are in a situation where games are being sought after as quite potent original works.
　From Pokemon to Mario to Sonic, we have achieved so much, and I think there is still a lot of potential for Japanese game IP as material for Hollywood movies now.

──Yes, there is a clear tendency to do so. At the same time, however, it is often the case that even IP from Japanese companies are so tightly bound by contracts with Hollywood companies that they have no say in the content of the film when it is made into a movie. They take all the rights under a master license, and the Japanese side cannot develop anything. Even if they have the rights, they are not even told when the movie will be released until just before the release of the film.

Utsumi: In making a movie, they are investing tens of billions of yen in the production process. It may be natural that there are limits to what we can intervene just because it is a Japanese company that owns the original work.
　However, as far as Sonic is concerned, the fire incident played a major role, and this was the beginning of a very cooperative relationship. At first, when the trailer for the movie they made was released, there was a huge bashing of the character's design, saying that it was too creepy.
　In the end, we reverted back to the Sonic design that we had given our opinion as the original, which turned the tone of the fans around and made the movie a success. Since then, the Paramount side began to listen to our advice in various ways, and we became a team that could work cooperatively to create the film. Recently, our relationship has really improved, and we have become a team that works together while consulting and discussing with each other in every way possible.
　No matter which side of the argument you take, in the end it comes down to whether or not the fans will follow you, so as long as the original creators have a good understanding of what the fans are looking for, they will listen to you.


── How do you decide the degree of localization? It is difficult to find a balance between the parts that should not be changed and the parts that should be changed as a Japanese company.

Utsumi: It really is. For example, if we were a sushi restaurant, we would be faced with the choice of whether to offer California rolls or not for each content. Even if it is out of line in terms of the Japanese sushi restaurant industry, we ourselves have to change our policies as the users change. Of course, we also need to draw a line between what we should protect as part of our identity.


What determines the probability of a character hit? Why is "distribution" important?
── I believe that "distribution" is also an important factor in determining a character's chance of becoming a hit.

Utsumi: Entertainment is partly about how many hits you can produce, but the key is distribution.
　For example, when Sony acquired Columbia Pictures, I remember then Sony President Ohga saying, "We didn't buy the creative side, we bought the distribution side," which I thought was a great quote. I think that was a great quote.
Whether it's Netflix or Amazon, we can say that they didn't originally start out as creative companies, but rather as companies that held down the infrastructure and distribution.
Recently, Sega has also started to negotiate directly with GAFAM with gusto, including Netflix. Anime is also being distributed, but few Japanese anime production companies are going that far.
　I was also in the music industry (former president of Warner Music Japan), but even there, there were limits to how much Japanese music could be distributed on a global scale. In the game industry, since the PlayStation era, small companies have been competing to hold down global distribution. I believe that the game industry has grown so much because of this culture, in which companies, as content holders, themselves conduct sales and develop their own business.

Part two of the interview translated via DeepL:

The highest salary in the industry? SEGA's "secret plan" to increase overseas sales is the reason for the company's "strong performance.

In 2023, Sega announced the acquisition of Rovio Entertainment, developer of the mobile game "Angry Birds. While Nintendo and Capcom have a policy of keeping their game development divisions in Japan, Sega has been actively acquiring game development divisions overseas, including Creative Assembly, which developed "Total War"; Sports Interactive, which developed "Football Manager"; and Relic Entertainment, which developed "Company of Heroes. SEGA has been aggressively acquiring game development divisions overseas, such as Creative Assembly, which developed "Total War," Sports Interactive, which developed "Football Manager," and Relic Entertainment, which developed "Company of Heroes. Has SEGA been able to link overseas M&A to growth? We interviewed Mr. Shuji Utsumi, Executive Vice President of SEGA CORPORATION, about the company's overseas M&A aims and secret measures to increase sales.

To what extent will the game market grow?

──How much do you see the game market continuing to grow in the future? Although the global market is doing well, the Japanese market has reached a plateau in both the arcade and consumer segments, and the mobile game segment has become quite stagnant.

Shuji Utsumi: In the mid-1990s, the Japanese market accounted for between 30% and 35% of the global market. At that time, the Japanese market had that much of an impact, but 20 years later, it is now less than 10%.
　On the other hand, the U.S. market has been growing for a long time, and Southeast Asia, South America, the Middle East, and South Asia are also growing. There is still room for growth in regions such as India.
　If we look mainly at Japan, there may be a sense of stagnation, but in the case of SEGA, we have a strong global brand, and if we include distribution, I have a hypothesis that it should be relatively easy to expand overseas in the mobile game domain.

Can the Struggling Mobile Business Change? What is "a way out"?

──I think that SEGA is currently doing very well in the consumer division, thanks to the market itself, but what about other areas?

Utsumi: The consumer division has entered the overseas shift rather neatly. The mobile game division has not yet reached that point at all.
For example, SEGA's mobile game division has released "Project Sekai: Colorful Stage! feat. Hatsune Miku," "D×2: Shin Megami Tensei: Liberation," and "Puyo Puyo! Quest", but sales are the exact opposite of home video games, at 80% domestic and 20% overseas.
　This is the situation not only for us, but for all mobile game companies in Japan. The domestic market is shrinking rapidly, and we are faced with the question of what to do next.
　One way out of this situation was our acquisition of Rovio Entertainment. They released "Angry Birds" in 2009 and are known as the first company in the world to create a hit mobile app game. 2016's successful Hollywood adaptation of Angry Birds has also boosted mobile game sales, and they have dominated the international market in the mobile game world for the last decade. The company has been dominating the international mobile gaming market for the past 10 years. We believe that the key to our success will be the synergy with such a company to grow our numbers globally.
The 100 billion yen acquisition was the largest in Sega's history, and since Rovio Entertainment itself is a huge development company with over 500 members and has European offices in every location, we are currently exploring ways to leverage these and other opportunities.


Will Sega's overseas M&A really lead to growth?

──Even after acquiring an overseas company, there are difficulties in managing it afterwards. While both Nintendo and Capcom mainly develop games in Japan, Sega is the only Japanese company, along with Sony, that has actively acquired overseas development divisions, including Creative Assembly (UK) in 2006, Sports Interactive (UK) in 2007, and Relic (Canada) in 2013. (UK) in 2007 and Relic (Canada) in 2013.

Utsumi: Recently, I have been visiting Finland, where Rovio Entertainment is headquartered, at least once a month. One of our Japanese employees is stationed there, and we are currently studying ways to create synergy between the two companies on a truly global basis.
　Currently, SEGA has about 2,000 development staff in Japan and about 1,500 overseas, and we are also developing overseas and have IP. SEGA Europe has been bringing them all together as one unit for development and sales.
　However, the European market as a whole is getting tougher, and all of our European bases are struggling quite a bit. Of course, the games themselves are selling well, but in addition to not seeing as much growth as in North America and Asia, the fixed costs of development are rising rapidly. Under these circumstances, we are now at a point where we need to rethink our portfolio and decide where we should focus our efforts, North America, Europe, or Asia.


──If we follow the example of Sony Interactive Entertainment (SCE), we could position North America as the headquarters and create products through global development that is no longer related to the Japanese context.

Utsumi: The game market is larger in North America, and it is easy to reach this conclusion, but I don't think it is the same as saying that all companies aiming to go global should become a Google-like company with a focus on North America.
　The direction to aim for should be determined based on the strengths and weaknesses of the company, and moreover, I think that entertainment is a rare industry in which each company is very differentiated from the others.
　In the service industry, it is easy to struggle with differentiation because there is a trend for all companies to implement such strategies at the same time, because better and superior services are already determined. However, in the case of entertainment content, it is difficult to differentiate oneself from others because there is a tendency for companies to implement such strategies all at the same time. In a sense, the uniqueness of entertainment content is what makes it unique and differentiates it from others. In a sense, this is an area where we can compete on the basis of uniqueness, so even games with an Asian flavor can gain a certain number of fans in the West as long as they are interesting.


The Secret to Increasing Overseas Sales: "Bringing Certain Processes In-House

── Looking at SEGA SAMMY as a whole, the 2010s appear to have been a period of steady decline and hardship. An organization in such a situation would not change just because of the recent blockbuster hit of the Hollywood movie based on Sonic, would it? What exactly did you change that led to the current strong performance?

Mr. Utsumi: We have changed the way we communicate with overseas businesses so that there are no "overseas business" specialists in between. We have eliminated the "Overseas Business Department," a localized organization that is easy to understand, and have changed it so that the development studio, marketing department, and corporate department each communicate directly with the US and European branches and work together with them. When overseas sales account for 80% of our total sales, our business is now integrated into a single global entity. We have thoroughly implemented a stance of selling on multiple platforms around the world at the same time.
In fact, it used to be unthinkable to release the Japanese and English versions at the same time. Sonic has already done so, but we still haven't been able to achieve it with "Ryu ga Gotoku," for example.
　We did it with the derivative title "JUDGE EYES" (2018), but for this title, the next "Ryu ga Gotoku 7 Gaiden: The Man Who Erased His Name" will be the first to be released simultaneously worldwide. In order to make this happen, we had to communicate closely with the overseas offices from the development stage. If we play the game of messages through an intermediary, the information will be corrupted and lost. Even now, of course, we have an overseas support department, and we are struggling to make English lessons available free of charge throughout the company, but communication is much smoother now than it was before.
Even if you look at each staff unit, if you are overworked but trained to deal with the global world, your market value as a career will increase. If you change jobs, you can easily obtain higher positions. The more you sell overseas, the higher the salary you can pay everyone. In this sense, there is an overall positive attitude toward doing business directly with overseas offices and divisions from a global perspective, or rather, the feeling is changing to the effect that this is fundamental.


Top salaries in Japan, developers who "now find themselves on the world stage

──Sega is ranked 6th in the overall ranking of science majors (11th in liberal arts majors) in the "Mynavi Nikkei Job Hunting Company Ranking for University Students Graduating in 2024," along with Sony Group and Mitsubishi Heavy Industries, etc. In the game industry, Sega was the clear winner. The fact that SEGA overtook Bandai, a regular No. 1 player, was a surprise.

Utsumi: We may raise the salary level, and we are also considering increasing opportunities for overseas business trips to broaden the experience level of our personnel. Also, within Rovio Entertainment, which we acquired, we are holding the "Rovio Conference" (RovioCon) as a technical conference, and we are planning to have domestic developers participate in that as well, in order to stimulate them.
　Following the Sonic movie, we need to do more transmedia work based on Hollywood movies in the future, and we also need to strengthen the licensing business itself. We also need to think about how to build a fan base overseas, and we need to do not only games but also video production and media building.
　In this way, in terms of developing business, we need to recruit people who are not only game developers, and we need to gather a wide range of people with know-how that has never existed before.
　The fact that we are serious about creating good products is one of Sega's strengths above all else. It may sound obvious, but not many companies can actually say that. It depends on whether or not many people in the development studio have the mindset that "we are now standing on the world stage," and whether or not they can continue to hone their strengths. It is not just a few people, such as management, who have to bear this responsibility, but whether or not everyone is truly convinced of this. This is also the challenge that SEGA is currently undertaking to reform its internal culture.

Japanese companies' "game development capabilities" and why they can be said to have high overall strength.

Utsumi: SEGA has gone through a number of consolidations and closures, and this has allowed us to see some aspects of the company. For example, in Japan, we integrated the arcade game development division and the consumer game development division. Developers who had been making only arcade games for a long time did a very good job when they tried making consumer games, and this gave us an opportunity to learn the strength of our employees to deal with such changes in the environment.
　This may be a characteristic of the game industry as a whole. I was also in Warner Music, so I noticed that compared to the music industry, games have evolved in terms of both people and business every time a new technology is introduced.
　For example, when VR technology is introduced, there are VR games; when blockchain is introduced, there are blockchain games; and even AI is introduced.
On the other hand, there hasn't been that much change in the music and other entertainment industries, including business models. Even when mobile and smartphones were introduced, the devices for viewing changed as platforms for mobile devices, but in the end, the style of "listening to music" and music itself have not changed significantly.
　It's a digital-first game, so we had to change the way the experience and the service should be as the technology evolved. And we have examples like Minecraft and ROBLOX.
　Also, Japanese developers have the ability to build up and keep on building, as well as the stability and long-term proficiency as a development team.
　Of course, there are many excellent engineers in the U.S. as well, but again, the mobility of human resources is very intense, and the cost of accumulating know-how in a particular studio is extremely high. In terms of increasing their overall strength, Japanese companies have a certain advantage.

 

[Unknown?]

Man I'm looking forward to that third movie! We know Shadow will be in it, but I'm curious what other characters are introduced, maybe Metal Sonic?