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Sega's video game business is still not coping with change

Sega's video game business is still not coping with change

May 10, 2013 | By Mike Rose

Although it would appear at first glance that Sega's last fiscal year was healthy, with soaring profits recorded, this is actually far from the truth.

For the fiscal year ended March 31, 2013, the publisher posted profits of 33.5 billion yen ($330.1 million), up 53.3 percent year-over-year.

However, it was deferred tax assets as a result of the liquidation of some of its U.S. subsidiaries that caused this boost to the company's net income figure. In reality, Sega's business operations continued to struggle, with operating income painting a better picture of Sega's fiscal woes -- 19.1 billion yen ($188.2 million), down 67.3 percent year-over-year, and revenues of 321.4 billion yen ($3.2 billion), down 18.7 percent.

Sega's video game sector is still not coping, regardless of the company's major restructuring plans a year ago. Sega blames weakened demand for games in the U.S. and Europe, and says it needs to adapt better to a market that is geared towards social and mobile games.

As part of the company's plans to restructure its video game business, Sega nearly halved the number of games it sold -- just 10.8 million software units sold, compared to 17.2 million in the previous year. Breaking this figure down, Sega sold 4.2 million units in the U.S., 4.4 million in Europe, and 2.1 million in Japan.

Sonic & All-Stars Racing Transformed and Aliens: Colonial Marines were Sega's two best sellers, with 1.36 million and 1.31 million units sold respectively. Meanwhile, Football Manager 2013 sold 940,000 units, London 2012 sold 680,000 units, and the Japan-only release Ryu ga Gotoku 5: Yume Kanaeshimono sold 590,000 copies.

In comparison, Sega had more luck with its mobile games. Phantasy Star Online 2 in particular exceeded 2.5 million downloads, and revenue from in-app purchases far surpassed Sega's forecasted intake.

In fact, Sega's digital revenue nearly surpassed its packaged games business for the first time -- 29.7 billion yen ($293.0 million) compared to packaged games' 35.6 billion yen ($351.2 million).

Overall, the company's consumer business recorded revenues of 84.7 billion yen ($836.0 million), down 2 percent year-over-year, and operating losses of 732 million yen ($7.2 million), an improvement over the previous year's losses of 15.2 billion yen ($149.8 million).

Sega's other businesses aren't looking so hot either. Its pachislot and pachinko business saw operating income drop by 66.9 percent, while operating income from its amusement machines business was down 74.3 percent.

How 2013 is looking

Looking to the current fiscal year, Sega notes that its video game business is still undergoing "rationalization" as it attempts to swing back to profits.

The upcoming next-gen consoles should help, says the company, and should lead to sales of around 11.7 million software units for the year ended March 2014. Sega noted its recent acquisition of Relic Entertainment, and said that this studio will be put to good use in the coming months.

The company says it will release 42 retail games for current consoles during the current fiscal year. This includes 5 PS Vita games (down from the 8 it released last year), 6 3DS games (up from 3 last year), 4 Xbox 360 games (down from 9), 7 PS3 games (down from 14), and 7 Wii U games (up from 2 last year.)

Notably, this figure does not appear to include games for next-gen consoles, and Sega is keeping the full extent of its next-gen projects quiet for now.

And of course, Sega will continue to push its social and mobile games business, as well as focusing on downloadable PC games, in the name of shifting its business to adapt to the current environment.

As a result the company has made bold estimations for the current fiscal year, forecasting overall revenues of 485 billion yen ($4.9 billion) for the current fiscal year, up 50.9 percent year-over-year, and profits of 47 billion yen ($463.7 million), up 40.7 percent year-over-year.

It says part of this will be down to a swing to profits for its video game business, with revenues in this sector of 109.5 billion yen ($1.1 billion), up 30.7 percent, and operating income of 3.9 billion yen ($38.4 million), compared to last year's 732 million yen ($7.2 million) losses.

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