Is Sega finished with console retail?

Sega Sammy Holdings has outlined broad structural reforms, including both voluntary retirement and layoffs for its workforce, as it seeks to combat declining sales and dwindling profits by focusing on the "growth area" of Digital Games.

In a meeting of the board of directors held this morning, the company's Amusement Business was singled out for the most stringent measures, which will include a narrowing of its product lineup and the withdrawal or consolidation of many of its services.

Sadly, this kind of corporate-speak generally masks the human cost of such decisions, and that is certainly the case here. However, the emphasis for Sega Sammy right now seems to be on "voluntary retirement," which will be offered to around 120 employees in the Amusement Business over a two-week period starting February 9, 2015. The employees in question will be asked to take their retirement before the fiscal year ends in March.

"That Sega singled out 'Digital Games' is telling. In doing so, the company has snubbed the growth potential of both AAA console and physical retail"

Other employees caught up in the structural changes will be moved over to Digital Games, which is focused on PC and smartphone titles. Sega Sammy has identified Digital Games as a key growth area for the company, and one of its best hopes for regaining stability.

The fact that Sega's directors singled out "Digital Games" is telling. In doing so, the company has snubbed the growth potential of both AAA console and physical retail games, which are a separate sub-division of its Consumer Business.

There was evidence of that only last week, when Sega announced that The Creative Assembly's Alien: Isolation had reached 1 million sales. However, while the milestone was presented to the world in a positive light, it seems very likely that Sega had higher expectations for its most ambitious, and perhaps most expensive, release of 2014. Right now, 1 million sales in three months is far from the standard expected of a AAA hit, especially one based on a popular IP, and one that had been in development for at least four years.

Those conditions will certainly have contributed to another of Sega Sammy's measures to improve the business: the "streamlining" of its "local organisations" handling packaged software in Western markets. The company did not specifically mention redundancies, confirming only that Sega of America will be relocated from San Francisco to an unspecified location in Southern California before the summer.

A clearer picture of how the impact these changes will have on Sega's employees was provided in a document released this morning, in a section titled, "Future Outlook."

"The number solicited for voluntary retirement and such for the entire Group is scheduled to be around 300 (regular employees) and the early retirement benefit is expected as a result of this measure. The Group also plans to rightsize employees, including fixed-term employees."

"In terms of money made from games, Sega has looked more like a publisher of PC and digital software than console for a year at the very least"

Exactly what kind of retail and high-end console presence Sega will have after the changes is open to debate, but the shift to digital has been apparent in the company's financial reports for some time. And, with Sega, Digital Games still covers some popular IP: the Football Manager and Total War franchises have been consistent sellers for many years, while the potential of Relic's back-catalogue still hasn't been realised in the time since its acquisition.

And that's the salient point when contemplating a question like the one posed by the title of this article: based on the money it makes from video games, Sega has looked more like a publisher of PC and digital software than console for a year at the very least. Couple that with the huge popularity of smartphone games in its native territory of Japan, and it becomes harder to justify the high-risks and narrow margins of boxed console products.

On October 31, 2014, Sega expected to earn ¥370 billion ($3.1 billion) in revenue and ¥4 billion ($34 million) in profit by the end of the fiscal year - the latter figure a precipitous drop from the previous year's ¥30 billion ($255 million) profit.

It should be noted that, by the end of October, Alien: Isolation had been on sale for less than a month.