Despite continued strong sales of videogames over the Christmas period it's been a harrowing few months for the games industry, it seems, with distributors, retailers, developers and publishers all suffering in some way.
One company that ended the year on a strong note, however, was Sega Europe - buoyed by the ongoing success of the Football Manager franchise and Mario & Sonic, the company rose to fourth in the market share stakes for the UK, behind only Nintendo, EA and Activision Blizzard.
Here, the president and COO of the company, Mike Hayes offers his evaluation of the present economic circumstances, what he thinks we'll see as a result, and explains why Sega Europe is quietly confident it has the tools to come through.
Part two will follow next week.
Q: There have been recessions before, and people for the most part seem confident that the games industry will emerge relatively intact - what are your thoughts on the current economic climate?
Mike Hayes: Well, there are definitely three ways in which it's different. The first thing is credit - it's a big issue. You can't get credit in Eastern European countries, it's harder in the Middle East, there's no credit insurance. You've got retailers where credit's on hold, like Toys R Us - even though people aren't going to stop buying videogames, our ability to get through the channel is harder.
The second thing is retailers, definitely in the United States, are being far more prudent in what they buy, so they're clearly going to focus on the triple A titles, but their day one orders are coming down. What they're saying is that they'll take in as little as need to, see how it sells through, and then they know they can order again in a matter of days if not hours. So that's hurting us.
But I also think that this time around there's definitely an oversupply of good games in the market from publishers. I think that was very evident in the UK at Christmas when you had fantastic games coming out and selling great in the first week, maybe two, and then falling off a cliff.
We were fortunate, because we only had Football Manager and Mario & Sonic, so we weren't bringing out any new IP - but speaking to friends at other publishers, they have been saying they were disappointed with sales, they were being quite open about it.
The price therefore comes down, which is great for the consumers because they're great games, but I just think this time around all of those three things means that we're as embroiled in the situation, if not as much as anyone else, then we're at least in there fighting, and it's therefore difficult.
We need to be aware of that in how we're going to trade going forward.
Q: From the consumer's perspective, having too many great games... it's the best problem in the world...
Mike Hayes: Oh it's great for the consumer.
Q: Maybe 12 months ago people were buying two or three games, instead of one - but doesn't it come back to the point that videogames are still at luxury price points compared to other entertainment media?
Mike Hayes: I don't think it's so much the price. If you buy your Call of Duty, you know you're going to be playing it for a month while you get the value out of it. The last Call of Duty was fantastic. You know, when you buy Football Manager, that's three months.
I don't think it's accessibility of price, I just think it's physically about the time you've got. You've got Gears of War 2, FIFA, PES, Football Manager, Mirror's Edge - I don't think you've got enough time to actually play them all. I think there were about 350 titles released.
The downside is that I think that publishers in general will reduce the number of titles that they'll bring to market. Whether than means people will focus less on innovation and more on sequelisation of course is a big debate. It's easy for me to say that, because your next question would be, "What's Sega doing about that?"
What we're actually doing is getting rid of the bottom tier of titles that we were putting in to get an extra bit of market share, of money. We're getting rid of those, and we're going to focus on the biggest titles - but we do have a lot of new IP coming out. We've invested in things like MadWorld, for example, and we feel our line-up is good enough that we can take that.
But I think a lot of other publishers, and EA have been quite open on this, will stop a lot of projects and cut back. Ultimately I think the number will go down, which will probably be less good for consumers.
Q: It's been a criticism levelled at the industry for some time that there's too great a focus on franchises and sequels - but when EA put out new IP last year, such as Spore, Dead Space and Mirror's Edge, it didn't sell so well despite the product being good.
Mike Hayes: Exactly. If you look at 2007 - I'm yet to check on 2008 numbers - in the UK the top 40 games of the year there were only five new IPs. Three of those were from first party, and if first party can't make a new IP, because you can bundle it or do whatever you want with it...
So of the remaining two, one was Assassin's Creed, and I forget the other one. But five, out of 40 - when we have to spend USD 15-25 million on a new IP, before you market, manufacture and distribute it, that's quite a risk. That's quite a risk, from scratch.
So think of those two - therefore how many failed? We know, we tried with The Club, which we struggled with, and Vikiing, which we also struggled with. There are other reasons I think - we didn't give Viking enough time, to be fair, I think we could have done better with that one. But we've tried, and spent money on it, but it's hard for the consumer to adopt new games.
Again, I wonder if it's because people get so much pleasure out of the mainstream games that are in there?
Q: You could look at the online components in games such as Call of Duty that keep people playing for much longer than just the single player campaign, and probably persuade them not to trade in either.
Mike Hayes: Because you know at some point you might fire it up again.
Q: And because you've got your profile that you've worked on over time. So online is adding value, but maybe disincentivising people from more frequent purchases?
Mike Hayes: Yeah, absolutely. That point about innovation is good, because I think what's happened with franchises is that publishers and developers are now innovating within them. So for example, FIFA this year. Now, I'm a PES player traditionally, but I thought the innovation that EA put in was first class.
If developers and publishers can innovate with brands that they've got - and I'd like to think that Mario & Sonic was an innovation with Sonic - if we can do that with our existing brands then hopefully we keep the consumer happy, and wanting to come back and play. Activision deserves credit for what they've done as well.
So maybe the future's more about what we can do with things like Football Manager and Football Manager Live? What can we do with Total War, maybe something to go on console? What can we do with our existing franchises that will delight the consumer, but on which we won't have to take a great risk on tonnes of new IP.
Q: Microsoft is investing in the Halo universe in that way, for example. But it does make you wonder that if the industry is cutting back on new IP, then further down the line... all it takes is for one Call of Duty game to not hit that sweet spot -
Mike Hayes: Need for Speed.
Q: That's a perfect example, and EA's having to go back and rethink the franchise. For EA I'm sure they'll look at new content around Mirror's Edge and Dead Space in the future, but those aside, might there be a genuine lack of choice and variety further down the line - and if so, what will that do to the industry?
Mike Hayes: I think that's a very good point. From our side, we're going to balance it. We're going to do three broad things - we'll take on existing franchises and innovate, like the Football Manager 3D engine, FML, and we've got some interesting stuff on the future of Total War, and where we want to take that, because times are changing and online is becoming far more relevant.
Secondly, we will go for the new IPs, the MadWorlds, and so on. And the third point is that we will constantly try to reinvigorate what we've had before with new ideas. We've had limited success - Sega Rally was a great game, but didn't press any buttons. Samba de Amigo was a great game on Wii, but it didn't really break out.
But we do have that catalogue that we like to look at. There are a lot more things that we can do properly with Sonic, where we develop in the West. Sonic Chronicles on the DS is an excellent game - not commercially huge, but an RPG on the DS is never likely to be so. It was a nice, profitable, critically-acclaimed game. Sonic needs that quality to come back into it.
So we think that if we balance those three things, we're not going to get it all right, but hopefully if we can get one new IP out of that in the next two years, we'll be delighted.
Hopefully other publishers will take that mixed approach, and that balance will get us through.
Q: Sega of America recently announced it was making job cuts - will Sega Europe be forced to do the same?
Mike Hayes: No, we're in great shape, in fact we're still recruiting. We've reinvented ourselves in the last five years - when I joined the company there were 30 staff, now with full time QA we're up to 650-something.
In a way we've filled ourselves out, and we're still filling out Spain and Australia, our network crew which covers Football Manager Live and our PlaySega venture.
So we're actually in good shape, and we're also having a very good trading year. In the market share results we were fourth biggest in the UK. It was Nintendo, EA, Activision Blizzard, then Sega - so we're actually having a really good time.
I think the markets are very different. In the United States you've got five customers, and those customers - as we said earlier - are saying that they don't need to order four weeks' stock, I'm going to order two. I don't want all this inventory
But Europe is such a mosaic of opportunities - while all the retailers are being more aggressive, and we understand why, Europe's a much more fluid and flexible market to manage, so we're in a good position.
I think you'll find most publishers in the United States will be having similar challenges, to be honest. We'll never say never, only a fool says that, because you don't know what's going to happen, but we certainly don't have any plans for cuts right now.
Mike Hayes is president and COO at Sega Europe. Interview by Phil Elliott.