Sega's Mike Hayes Part 2

The way Sega was running itself was we had a sub-headquarters in London and a sub-headquarters in San Francisco, both doing packaged goods and digital, so there was a lot of duplication. Because London has much bigger operations from a distribution point of view it made much more sense to put the packaged goods base in London and have the US be more or less a territory within that. And then because of the skills base in the Bay Area, and the people we already have, it made sense to put the digital base in San Francisco.

The definitions however are always slightly blurred. The remit in San Francisco is all digital downloads, like mobile devices and also XBLA, PSN and PC downloads. It also covers the new social games business that we're building up, where we're taking a bottom up rather than purchase approach, although we will be putting in a lot of people from outside of our core industry into that. It's interesting, if you look at the top 25 social games - not that they're easy to identify - none of them come from a traditional games company. They're made, they think and they operate in an entirely different way. Whilst we can take our traditional values across to certain devices like the iPhone or iPad, social gaming is completely different.

Where it gets a bit blurred is our electronic service delivery, which to us is PC distribution, that business just happens to be run out of London. Even though the big partners are in the US, like Valve and Steam. But direction for that comes out of San Francisco. And then there's paid DLC which blurs the boundary as well but is a download, but should be owned by the packaged goods team. It's more or less logical.

We've got three titles with OnLive – Virtua Tennis, Alpha Protocol and Sonic and Sega All-Stars Racing. Those would be managed out of the USA as part of the digital business. If we were starting from scratch we'd run it all out of the US but the heritage of electronics sales just happens to be in Europe, and it doesn't make sense to move it across.

It's an interesting thing and I'm sure other publishers you speak to say the same thing; To create titles for the core gamer on Xbox 360 and PlayStation 3 is a very expensive and risky thing. Do you spend $50 million trying to compete with Call of Duty: Black Ops, which is a very challenging task, or do you take that $50 million and look at different ways of investing it? That's not to say we're not in the core market, because with things like Aliens Vs Predator and Vanquish you can see that we are, but in terms of where do you start diverting funds, it's definitely digital and devices that bring different gaming experiences and different consumers that are a very important part of what Sega's doing. That is something we need to do in the West and it's coming from our headquarters as well as where we are headed in the next five to ten years restructuring our business.

The market in Japan is completely different, the PSP sales are phenomenal, but Facebook only has one million users. Whilst the entire company has a digital approach it's very clear that what we have to create in the West is very different to what we're creating in Japan for digital markets.

We've spent a lot of our time on taking what we've already got, whether it's brands or existing titles like the Genesis games and Dreamcast games. Now where we're spending time and money is not just on creating new IP on those platforms but actually on different ways of gaming. That's important with devices like the iPad, you can't just put regular games on there with a bigger screen, you have to think about what the iPad is about. That is going to apply more and more to the different ways of playing different games. How do you create different gaming experiences and make money? Because the vast majority of what is available on the iPad is free to play, or is very low development costs for low return. As publishers we need to get something that gives us a bigger return. I think we have to try and be smart enough to do gaming in a different way.

Two reasons, and here's a good example. Sega has always had a hugely successful mobile business in Japan, and that region was always technically ahead with 3G and the likes. Now with what's happened on iPhone - it has revolutionised the West and brought mobile front and centre. When we began looking at mobile in the West we wrestled with the issue of should we buy or build from scratch? And we went through the process of looking at a major acquisition. Five years ago every company making mobile games was worth an absolute fortune, but now we've seen what happened to mobile 1.0. I'm not saying that about social gaming, but the value of what is current - you could argue is actually too high. If you look at a lot of famous companies, I won't mention any names, but look at their balance books and they are not making any money. They have value.

The other thing is, with the Sega name and the money we have, we believe we can bring people in to build those things up. The good news is that particularly from a game design and production point of view the teams are relatively small. But as a company at Sega we can fund all the back end stuff fairly easily – the operations and customer service, the servers ,the bandwidth. The clever bit, we think we can do that organically. It's not a gold rush.

I would urge caution. The digital titles that are making the most money for us are our heritage titles. How you craft new experiences – look at new gaming experiences from traditional publishers on any digital device and you don't see many new ideas there. Controlled profitable growth in digital is key. With digital, well, we won't use that word in three years time. It's going to happen and be the norm. It's nothing we have to rush into and use a lot of money on. It's something some company's need to get into quickly but carefully, and that's exactly the way we're going to approach it.

That's part of it. To be blunt, it's people that are in successful social gaming companies. Not only do they think differently, but there's a lot of plagiarism that goes on the social space, and you've got to be so quick, and so fleet of foot. Traditional publishers don't work that way because we're used to commissioning $30-40 million projects and there's lots of chin scratching and due diligence. If you do that in social gaming you're absolutely dead. The speed of idea, thinking and putting into operation is quite remarkable, it's something Zynga do remarkably well. It's having that completely different way of constructing games and bringing them to market as opposed to the way traditional games companies do, it's that kind of skill we're looking for. And that can come from a broad pool, whether mobile devices, web design and there's a big pool of talent in the San Francisco.