Sonic the Hedgehog

Sega is refashioning itself as a PC game maker

August 8, 2013: 11:18 AM ET

The one-time king of consoles is increasingly banking on computer games.

By John Gaudiosi

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FORTUNE -- Back in the 1990s, Sega was on top of the video game world. Its Sega Genesis was giving Nintendo a run for its money thanks to a blue hedgehog that could run at supersonic speeds and a library of addictive arcade franchises like Golden Axe, Streets of Rage, and Outrun. But a series of console hardware missteps, beginning with the Sega Saturn and ending with the Dreamcast, a beloved system that was almost immediately outperformed by Sony's (SNE) PlayStation 2 and Microsoft's Xbox (MSFT), resulted in Sega exiting the hardware manufacturing business for good.

Now Sega (SGAMY) is undergoing another revamp. After years of developing its franchises, including the still-popular Sonic the Hedgehog, across all platforms, the company is targeting the global PC games market. Sega has been investing more heavily in the PC gaming space of late. The company recently acquired Relic Entertainment and its World War II-based real-time strategy (RTS) franchise, Company of Heroes. Sega published Company of Heroes 2 on June 25.

On September 3, Sega will publish the ninth installment in the Creative Assembly's bestselling RTS franchise, Total War: Rome II. The series has sold over 7 million copies worldwide and has remained a critical favorite with the discriminating PC gaming press. The Total War franchise has sold over 3.4 million copies in the U.S. according to video game tracker NPD Group, and Total War: Rome has a U.S. installed base of 876,000. Sega plans on capitalizing on the global market this fall. According to Rob Bartholomew, brand director at the Creative Assembly, Total War: Rome II has the biggest marketing budget in Total War history.

"Total War: Rome II outscales any previous war game we've ever made before," said Mike Simpson, studio director at the Creative Assembly. "Our budget for this game was 40% larger than we had for Shogun 2. The gameplay campaign, itself, is around four times the size of Shogun 2's campaign. The game has 700 battlefield units for players to use and nine playable factions to command with different cultures, weapons, and tactics. It's an undertaking of a completely different step."

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Three of Sega's core game pillars (Company of Heroes, Total War, and Football Manager) are PC-based, and Sega owns the developers (Relic, Creative Assembly, and Sports Interactive) behind these franchises. "PC is a very important part of our business," said John Cheng, President of Sega of America. "Total War sold 2 million units last year without a tent pole release and the upcoming Rome II had over six times the number of pre-orders in its first official week compared to Shogun 2, making it the fastest selling pre-ordered title in the series." He added that Football Manager 2013 became the fastest-selling game in the history of the bestselling annual franchise, passing one million Steam activations in May of 2013 (reaching that milestone almost five months earlier than its predecessor).

Jesse Divnich, vice president of Insights at video game research firm EEDAR, believes Sega's focus in the PC space is a wise strategy because the market is smaller, but also less crowded with competitors, and overall presents a better opportunity for Sega. "With the launch of the next-generation home consoles, we'll see a lot of focus shift away from core PC gaming from the major publishers, which will leave a lot of room for Sega to make some moves," said Divnich. "When the PlayStation 3 and Xbox 360 launched in 2005 and 2006, many thought the PC gaming industry was on its last leg. They were wrong."

Video game research firm Newzoo has forecast that globally more money will be spent on games played on the PC screen than on the TV screen as the game industry transitions to next-generation consoles. According to Peter Warman, founder of Newzoo, game revenues generated through PCs represent 39.2% ($27.6 billion) of the global market this year vs. 36.7% ($25.4 billion) for the TV screen. Market segments that make up the PC revenues are online social and casual gaming, massively multiplayer online (MMO) games, and PC boxed and downloaded games.

Sega faces multiple obstacles in the console business. The game publisher has come under fire from gamers after partnering with Gearbox Software on a sequel to 20th Century Fox's Aliens movie called Aliens: Colonial Marines. The game was lambasted by critics, earning a Metacritic score of 43 (PS3), 45 (PC) and 48 (Xbox 360) out of 100. Californian gamer Damion Perrine filed a class action lawsuit against the publisher and developer for "false advertising" because the gameplay footage that was previewed at international trade shows was different from the final version that shipped to consumers. American law firm Edelson LLC is handling the ongoing litigation.

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"Certainly the Aliens: Colonial Marines brand took a hit with its 2013 release onto consoles, but it is unlikely to impact Sega's overall brand image," said Divnich. "Consumers tend to punish the game's brand more than the publisher's brand. It's no different than in movies. Just because The Lone Ranger was a box office flop, doesn't mean people will think twice about the next Disney movie."

Sega also has aligned itself with its once-rival Nintendo (NTDOY). While many companies, including Electronic Arts (EA), Bethesda Softworks, and Take-Two Interactive (TTWO), have abandoned Nintendo's struggling Wii U console, Sega has expanded its partnership to bring exclusive new Sonic Lost World games to the device (and Nintendo 3DS) this fall. Sega and Nintendo have had success with their on-going Mario & Sonic at the Olympic Games franchise, which features characters from both game worlds. Global sales of that franchise have surpassed 12 million copies, according to Divnich. It remains one of the bestselling franchises on Nintendo's platforms.

Cheng believes this relationship with Nintendo will help drive both hardware sales for Nintendo and software sales for Sega. The Japanese company continues to release Sonic games for mobile devices like Sonic Dash. "Sonic's role at Sega has never been more important," said Cheng. "He is a much loved character and a highly valued global brand that performs incredibly well in areas such as mobile, clothing, and toys. We look forward to expanding the brand further into other areas outside of games."

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