Recession Hits the Game Industry

Wired.com warns: The house that Sonic built is getting significantly smaller.

Sega's Japanese main branch said Tuesday that it will close 110 arcades, cancel some games in development, and seek to lay off 18% of its staff. The game publisher said that these significant cost-cutting moves are in anticipation of its recording an annual loss of 25 billion yen (about $238 million) during the fiscal year that will end on March 31.

Arcades: Sega owns and operates 450 videogame arcades in Japan, and said that it would close 110 of them with "poor future potential and profitability." Sega said that this move "may" make its arcade business profitable even if the arcade business gets tighter in the coming fiscal year.

Software development: Sega says that it will chop 20 percent off of its research and development budget for arcade and consumer games. It says it will do this by "consolidating titles to be developed" and "enhancing the self-manufacture ratio."

Running this through my translated-Japanese-to-English translator, these phrases mean that Sega will cancel some games in development and develop more games internally, rather than outsourcing them to outside developers. (I've asked Sega for clarification.)

Twenty percent is a lot of games.

Layoffs: Finally, Sega said that it would "solicit the voluntary retirement" of approximately 560 of its 3,127 employees. I want to mention again what I said about Japanese layoffs, in general, in 2007:

But even if a company decides they need to restructure, downsize, lay people off, etc., it's not that easy. It's so ingrained into the Japanese outlook on the company that such a thing is simply not done (again, it's like disowning your children) that often they will just not do it. If they have to, it's generally a long and involved process in which each individual employee is sat down and convinced, over a period of literally weeks, to resign.

Noting that I have no insider information about the inner workings of Sega's Japanese branch, this would seem to be precisely what's going on. Note that in the language of the official statement, Sega seems to leave absolutely no doubt that the "voluntary retirement" will take place as envisioned:

Furthermore, to maintain the appropriate size of its work force compatible with its current revenues, SEGA has determined to solicit voluntary retirement of approximately 560 employees. Consequently, SEGA will be able to reduce labor cost by approximately ¥5,000 million for the year ending March 31, 2010 and thereafter to ensure improvement of the earnings in its amusement facilities business and consumer business, as well as whole businesses.

Sega's American branch, based in San Francisco, reportedly laid off 30 last month.

Sega is a division of Sega Sammy Holdings, which has a variety of other amusement companies under its umbrella. Today's announcements concern Sega specifically.

Also on Wired.com:

Pole's Adventure for WiiWare, Sega's Dirty 8-Bit Parody
Report: Sega of America Lays Off 30
Sega Announces Iron Man 2 Tie-In

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