Pachinko and Pachislot Machine Business

DETERMINATION Establishing an Unshakable Market Position

Overview by Business Segment Pachinko and Pachislot Machine Business

Composition of Net Sales The pachislot machine business will concentrate efforts on devel- ¥160.3 billion oping machines with gameplay that will revitalize the market. 41.7% In the pachinko machine business, we intend to heighten our presence by strengthening development capabilities and brand Pachislot Machine Business power even further. 13% ¥51.7 billion For details on market trends, please refer to the supplementary “INFORMATION” document.

Pachinko Machine Business 27% ¥103.1 billion Basic Information Building a business platform that to development processes in order to further

Other generates stable earnings bolster development capabilities. Another 1% ¥5.5 billion Accounting for approximately 41% of consoli- distinctive feature of this business segment is dated net sales, the Pachinko and Pachislot its ability to cater to diversifying user needs Fiscal 2010 Business Results Overview Machine Business segment is the SEGA through a multi-brand strategy based on Net sales SAMMY Group’s earnings driver. The business Sammy, RODEO Co., Ltd., TAIYO ELEC Co., ¥160.3 billion ▶ segment’s core operating company, Sammy Ltd., and GINZA CORPORATION. Down year on year 0.8% Corporation, maintains a solid position as a In the pachinko and pachislot machine Operating income leader in the pachislot machine market. Re- market, earnings conditions are undergoing ¥29.5 billion leased in 2004, the pachislot machine Hokuto dramatic change due to regulatory revision.

Up 103.1% year on year No Ken shipped 620,000 units, setting an in- Therefore, we aim to build an earnings struc- ▶

Pachislot machine unit sales dustry record for unit sales. Meanwhile, the ture durable enough to function amid such 162,000 units pachinko machine business has built brand change. To this end, we will establish a system power and rapidly carved out one of the largest in which the pachinko machine business and Up 32.2% year on year ▶ shares of the pachinko machine market. the pachislot machine business generate stable Pachinko machine unit sales Enabling these stable earnings, the hit products as well as enhance cost competi- 360,000 units

▶ strengths of this business segment are creativi- tiveness by reducing costs and shortening pro- Down 8.1% year on year ty and development capabilities that constantly duction lead times.

Pachinko board sales ratio generate fresh types of entertainment. At pres- 69.1% ent, it is strengthening collaboration between development divisions and marketing divisions Up 58.6 percentage points ▶ as well as introducing rigorous quality checking

30 Net Sales Operating Income/Operating Margin Pachinko and Pachislot Machine Unit Sales Billions of yen Billions of yen % Thousands of units % 240 80 40 800 80

180 60 30 600 60

120 40 20 400 40

60 20 10 200 20

0 0 0 0 0 07 08 09 10 11 FY 07 08 09 10 11 FY 07 08 09 10 11 FY

■■ Net sales 160.3 200.0 ■■ Operating income (left) 29.5 35.0 ■■ Pachinko machines (left) 360 410

Plan ● Operating margin (right) 18.4 17.5 ● Pachinko board sales ratio (right) 69.1 30.4

Plan ■■ Pachislot machines (left) 160 210 Plan

FY 2010 Overview Earnings rise significantly thanks to AN For 2009, the SEGA SAMMY Group accounted increase in pachislot machine unit sales, for 10.8% of the pachinko machine market, down AN IMPROVEMENT in pachinko board sales from 11.7% for the previous year, and 21.3% of the up RATIO, and cost reduction pachislot machine market, up from 13.5% for the The pachinko machine business saw unit sales de- previous year. cline 8.1% year on year, to 360,000 units, which In earnings, multifaceted initiatives improved was partly attributable to the absence of the contri- the profit margin. These included reducing cost of bution to sales that the hit product Pachinko CR sales and operating expenses by withdrawing from Hokuto No Ken made in the previous fiscal year. the unprofitable pachinko and pachislot machine Consequently, the business recorded an 11.5% peripheral business, lowering part procurement year-on-year decrease in net sales, to ¥103.1 billion. costs centered on LCDs, and revising pricing strate- Nevertheless, sales of flagship titles remained solid. gies for pachinko machines and pachislot machines. Pachinko CR SOUTEN-NO-KEN Pachinko CR SOUTEN-NO-KEN sold 94,000 units, In particular, stepped-up sales efforts for pachinko © 2001 Buronson & Tetsuo Hara Approved No. SAG-309 while Pachinko CR Sengoku Ranbu Aoki Dokugan boards, which reduce the capital investment burden © Sammy shipped more than 50,000 units. Ongoing strength- on pachinko hall operators, contributed to improved ening of development capabilities is steadily raising profitability. As a percentage of pachinko machine the level of unit sales across a range of key titles. business unit sales, pachinko board sales rose from Regarding the pachislot machine business, the previous fiscal year’s 10.5% to 69.1%. Pachislot Psalms of Planets Eureka Seven, which Also, with our sights set on the current fiscal incorporates popular animation, recorded 56,000 year and onward, we strategically reorganized unit sales and helped reactivate a market that has businesses. For example, we merged with Sammy stagnated since the 2004 regulatory revision. Rental Services Co., Ltd., following the ending of Despite strategically postponing the release of rental plans for pachislot machines. And, GINZA certain major titles until the current fiscal year, the CORPORATION, responsible for one arm of business posted year-on-year increases of 32.2% our multibrand strategy, became a wholly owned in total unit sales, to 162,000 units, and 53.0% in subsidiary. net sales, to ¥51.7 billion. As a result of these efforts, although net sales edged down 0.8% year on year, to ¥160.3 billion,

operating income was up 103.1% year on year, Pachislot Psalms of Planets Eureka Seven © 2005 BONES / Project EUREKA • MBS to ¥29.5 billion. The operating margin improved © Sammy 9.4 percentage points from the previous fiscal year, © 2009 NBGI to 18.4%.

SEGA SAMMY HOLDINGS ANNUAL REPORT 2010 31 DETERMINATION Pachinko and Pachislot Machine Business

FY 2011 Outlook and Strategy Target higher revenues and earnings business plans to introduce 12 titles, including SEGASAMMY by steadily building up unit sales and the major Sammy-brand title Pachinko CR Insight reducing costs Hokuto No Ken Raoh. As a result, the business

The pachinko machine market is showing signs aims to grow unit sales 50,000 units, to Pachinko Machine Boards of slight deceleration. This is because casual 410,000 units, and achieve a 25.6% rise in Pachinko machines comprise two parts: frames players are leaving the market as installations net sales, to ¥129.5 billion. For the current fis- and boards. Controlling the paying out of of pachinko machines with a strong gambling cal year, although pachinko board sales as a pachinko balls, the frame has attached to it a element increase. At the same time, the growth percentage of pachinko machine business handle, a glass frame unit, and speakers. The of the “one yen pachinko” market, aimed at sales are likely to decline year on year due to board comprises LCDs, tulip-shaped devices, broadening customer bases, is reducing the introduction of new-model pachinko and numerous pins. The board incorporates pachinko halls earnings and thereby curbing frames from the launch of Pachinko CR Hokuto many electronic components, such as boards machine replacement. On the other hand, unit No Ken Raoh onward−in order to heighten and sensors that control gameplay, including sales per title and utilization rates indicate that quality and security−the business will maintain images and win chances presented by the the pachislot machine market has bottomed its profit margin by reducing part procurement pachinko machine’s LCDs, and payouts. The out. Following the 2004 regulatory revision, this costs and reusing parts rigorously. boards give pachinko machines their distinctive market slumped. However, products compliant The pachislot machine business is target- characteristics. Because frames can be used with the current regulations and popular ing a 47,000-unit increase in unit sales, to continuously for certain periods, pachinko hall among customers are entering the market. In 210,000 units, and a 22.8% rise in net sales, operators can purchase pachinko boards and at- light of these market trends, for fiscal 2011 the to ¥63.5 billion. For fiscal 2011, the business tach them to frames installed at pachinko halls. Pachinko and Pachislot Machine Business seg- has slated 13 titles for marketing, including the The price of a pachinko board is less than the ment is targeting year-on-year increases of mainstay Sammy-brand title Pachislot SOUTEN- price of an entire machine. This arrangement 24.8% in net sales, to ¥200.0 billion, and NO-KEN. In conjunction with these efforts, we meets the needs of pachinko hall operators 18.6% in operating income, to ¥35 billion. intend to enhance the profit margin by reusing looking to hold down capital expenditures. For Looking at individual businesses and strat- parts, particularly those related to LCDs, which manufacturers, sales of pachinko boards not egies, in fiscal 2011 the pachinko machine account for a large proportion of costs. only offer higher profit margins than sales of machines, but also help maintain the manufacturer’s share of machine installations. This is an efficient business model for both pachinko hall operators and pachinko machine manufacturers.

Boards

32 DETERMINATION Leading Market Revitalization

Overview by Business Segment Amusement Machine

Sales Business BORDER BREAK © SEGA

Composition of Net Sales We are committed to developing products that increase investment ¥45.1 billion efficiency for amusement center operators, providing stable long-term 11.7% earnings for the Group, and broadening user-base in the market.

For details on market trends, please refer to the supplementary “INFORMATION” document. Domestic Amusement Machine Sales Business 10% ¥38.9 billion Basic Information Overseas Amusement Machine Sales Business Focusing on developing products that uses the ALL.Net network service to link amuse- 2% ¥6.2 billion exploit advanced technologies and ment centers. In a similar vein, we have been stimulate the market promoting standardized cabinets that enable Its considerable share of amusement arcade ma- amusement center operators to changeover to chine sales make this segment a major manufac- new products rapidly and at low cost. Fiscal 2010 Business Results Overview turer. An unerring ability to develop novel Net sales products is its greatest strength. Over many years, FY 2010 Overview ¥45.1 billion ▶ it has generated demand by creating a spectrum Improving profitability through a range Down 27.1% year on year of new genres. The business segment has a par- of measures to reduce costs

Operating income ticularly large lead in the market for the develop- In fiscal 2010, the segment’s net sales declined ¥7.0 billion ment of large, high-value-added machines 27.1%, to ¥45.1 billion, due to the absence of

Up 3.0% year on year differentiated from home video game consoles. the previous fiscal year’s major title launches. ▶ Another strength is an extensive lineup of prod- However, operating income rose 3.0% year on R&D expenses/content production expenses ¥7.8 billion ucts that not only cater to high-frequency players year, to ¥7.0 billion, and the operating margin ▶ but also appeal to families and a broad base of improved 4.6 percentage points, to 15.7%. R&D Down 31.6% year on year other players. expenses and content production expenses de- Facing a flat amusement center market in creased from ¥11.4 billion for the previous fiscal recent years due to the downturn in consumer year to ¥7.8 billion. Further, we reduced costs by spending, we have turned to leading-edge tech- adopting standardized cabinets, introducing new nology to reactivate the market by improving multipurpose computer graphics boards for ar- amusement center operators’ investment effi- cade games−RINGEDGE and RINGWIDE, which ciency. At the same time, we have concentrated reduce costs more than 30% compared with our on building an earnings platform that will main- previous computer graphics boards−and lowering tain and expand our customer base while stabiliz- part procurement costs. ing earnings over the long term. An example of In fiscal 2010,BORDER BREAK, which uses initiatives to revitalize the market is our introduc- a revenue-sharing business model, enjoyed favor- tion of a revenue-sharing business model that able utilization and grew revenues. By fiscal

SEGA SAMMY HOLDINGS ANNUAL REPORT 2010 33 DETERMINATION

Net Sales Operating Income/Operating Margin R&D and Content Production Expenses

Billions of yen Billions of yen % Billions of yen % 80 12 20 16 20

60 9 15 12 15

40 6 10 8 10

20 3 5 4 5

0 0 0 0 0 07 08 09 10 11 FY 07 08 09 10 11 FY 07 08 09 10 11 FY

■■ Net sales 45.1 53.0 ■■ Operating income (left) 7.0 5.5 ■■ R&D and content production expenses (left) 7.8 8.5 Plan ● Operating margin (right) 15.7 10.4 ● % of net sales (right) 17.3 16.0 Plan Plan

year-end, four amusement arcade machine titles year and market five new titles that exploit highly SEGASAMMY Insight were operating under the revenue-sharing busi- appealing content, including BAKUGAN and ness model. These titles are helping generate sta- Transformers. ble earnings. In addition, kits for upgrading such Amid the continuing severity of conditions Reactivating the Amusement Market mainstay titles as SEGA Network Mah-jong MJ4 in the Japanese market, strategies focused on SEGA is promoting revenue-sharing in which it Evolution sold solidly. Asian markets and China in particular are critical provides cabinets at low prices and content if this business segment is to grow earnings over without charge and then shares revenues FY 2011 Outlook and Strategy the medium-to-long term. from machine utilization with amusement Target further incorporation of Accordingly, we will bring to bear industry- center operators. This business model uses revenue-sharing business model leading development expertise accumulated SEGA’s ALL.Net network service. While this Challenging conditions are likely to persist in the over many years and brand power in overseas enables amusement center operators to intro- amusement industry, due to the downturn in markets to develop products that reflect game- duce amusement arcade machines with a consumer spending since the emergence of con- play preferences and characteristics, and price minimal initial investment, SEGA can secure a fusion in financial markets as well as the continu- competitiveness in each market. In these efforts, continuous flow of earnings by maintaining ing difficulty amusement center operators are we will look at efficient and effective ways of join- the market value of content, rather than only having in raising funds. Therefore, this business ing forces with overseas local companies for receiving revenues from machine sales. segment views continuing to heighten investment product development, production, and sales. We are energizing the industry. For example, efficiency for amusement center operators while For fiscal 2011, the business segment is we are furthering the penetration of standard- stabilizing earnings over the long term as a key targeting a 17.5% year-on-year increase in net ized cabinets that allow the flexible, low-cost strategy going forward. In fiscal 2011, the busi- sales, to ¥53.0 billion, due to the transfer of the marketing of products as well as providing ness segment plans to market an amusement ar- kids’ card game business from the Amusement new multipurpose computer graphics boards cade machine version of HATSUNE MIKU Project Center Operations segment to the Amusement for arcade games−RINGEDGE and RINGWIDE DIVA, which was very well received in fiscal 2010. Machine Sales Business segment. Meanwhile, −which enable us to develop amusement This new offering, HATSUNE MIKU Project DIVA we anticipate a 21.4% year-on-year decline in arcade machines more efficiently. Arcade, will use the same content and be based operating income, to ¥5.5 billion, resulting from Revenue-sharing business model focused on a revenue-sharing business model. We intend the equalization of R&D expenses and content on coexistence and coprosperity with amusement center operators to step up such initiatives that create synergies production expenses recognition−due to the through the multiple deployment of content in elimination of the effect of a change in the Game users collaboration with the Consumer Business seg- accounting standard relating to the expenses− ③ ment. Also, in the fall the business segment plans and an increase in cost of sales and operating Revenues shared in accordance with to launch SENGOKU TAISEN as a major trading expenses. R&D expenses and content production ① machine utilization ② Cabinets supplied Play fees card game, an area where the Group has out- expenses are expected to increase 9.0% year at low prices, content provided without charge standing competitiveness. In fiscal 2011, the kids’ on year, to ¥8.5 billion. Amusement center operators card game business* will increase the utilization * From fiscal 2011, the kids’ card game business was transferred from the Amusement Center Operations segment to the Amusement of the eight titles marketed in the previous fiscal Machine Sales Business segment.

34 DETERMINATION Number of Amusement Centers in Japan/ Operating Loss/Capital Expenditures Net Sales Operating Income/Operating Margin R&D and Content Production Expenses Strengthening Profit Net Sales from Existing Amusement Centers and Depreciation and Amortization

Billions of yen Billions of yen % Billions of yen % Centers % Billions of yen 80 12 20 16 20 Structures 600 110 20

60 9 15 12 15 450 100 10

40 6 10 8 10 Overview by Business Segment 300 90 0 20 3 5 4 5 Amusement 150 80 –10 0 0 0 0 0 0 0 –20 07 08 09 10 11 FY 07 08 09 10 11 FY 07 08 09 10 11 FY 07 08 09 10 11 FY 07 08 09 10 11 FY 年3月期

■■ Net sales 45.1 53.0 ■■ Operating income (left) 7.0 5.5 ■■ R&D and content production ■■ No. of amusement centers (left) 260 248 ■■ Operating loss –1.3 –1.5 expenses (left) 7.8 8.5 Center Plan ● Operating margin (right) 15.7 10.4 ● Existing amusement center sales (right) 91.7 95.8 ■■ Capital expenditures 7.7 6.6 ● % of net sales (right) 17.3 16.0 Plan Plan ● Depreciation and amortization 8.2 6.9 Plan Operations Plan

Composition of Net Sales Aiming to achieve profitability at an early stage by revising its ¥54.7 billion amusement center portfolio and strengthening operations.

14.2% For details on market trends, please refer to the supplementary “INFORMATION” document.

Domestic Amusement Center Operations Basic Information 13% ¥49.3 billion Various amusement center formats and Although net sales of existing amusement Overseas Amusement collaboration with the Amusement centers were below the previous fiscal year, Center Operations 1% ¥5.4 billion Machine Sales Business segment are this earnings began to improve. Operating loss con- business segment’s strengths tracted from ¥7.5 billion to ¥1.3 billion, due to Nationwide, SEGA operates a diverse network of the curbing of capital expenditures by revising amusement center formats to suit different loca- our amusement center portfolio and limiting Fiscal 2010 Business Results Overview tions, including TOKYO JOYPOLIS, SEGA WORLD, amusement center openings, lowering deprecia- Net sales and CLUB SEGA. Coordinating with the Amuse- tion, reducing personnel expenses, and heighten- ¥54.7 billion ▶ ment Machine Sales Business segment, this seg- ing operational efficiency. Down 23.2% year on year ment is trying to attract a wider customer base.

Operating income (loss) Due to contraction of the market, it is revising FY 2011 Outlook and Strategy ¥—1.3 billion its amusement centers portfolio and increasing Continue and intensify measures to efficiency to move into the black rapidly. improve profitability Improved ¥6.1 billion ▶ In fiscal 2011, despite some signs of bottoming, year on year FY 2010 Overview overall the industry will likely see harsh conditions Amusement centers in Japan Enhancing earnings by reforming our continue. We project net sales will decline 19.6%, 260 centers ▶ amusement center portfolio to ¥44.0 billion, while operating loss remains at Down from previous 62 Continuing from fiscal 2009, this business seg- ¥1.5 billion. We will continue closing or selling fiscal year-end ment fortified earnings structures by closing or amusement centers with inadequate profitability or selling amusement centers in Japan with inade- potential. The business segment plans to open five quate profitability or potential. In fiscal 2010, we amusement centers and close 17. Amusement opened four amusement centers and closed or centers in Japan at fiscal year-end will be 248, sold 66. By fiscal year-end, we had 260 amuse- down 12 from the previous fiscal year-end. We are ment centers in Japan, down 62 from the previ- targeting a 4.2% decrease in existing amusement ous fiscal year-end. To boost profitability, we center net sales. We aim to continue reforming closed eight amusement centers in North America. our amusement center portfolio and reinforcing Consequently, net sales declined 23.2%, to ¥54.7 operations to improve earning capabilities. TOKYO JOYPOLIS billion. SEGA’s existing amusement centers in Note: From fiscal 2011, the kids’ card game business was transferred from the Amusement Center Operations segment to the Japan saw net sales decrease 8.3% as consumer Amusement Machine Sales Business segment. spending slumped. SEGA SAMMY HOLDINGS ANNUAL REPORT 2010 35 DETERMINATION Creating Entertainment with Unconventional Ideas

Overview by Business Segment Consumer Business

Composition of Net Sales This business segment will improve profitability by increasing ¥121.5 billion development efficiency in the home video game software business 31.6% and advancing multimedia roll-outs of intellectual properties through Group companies. Home Video Game Software Business For details on market trends, please refer to the supplementary “INFORMATION” document. 20% ¥77.5 billion

Network Games and Other Business Basic Information • Toy sales business • Online and mobile Home Video Game Software Business SEGA and Sammy NetWorks Co., Ltd., are content business • Animation business Selecting and concentrating titles for responsible for the online and mobile content 11% ¥44.0 billion development business. SEGA provides a diverse range of game SEGA CORPORATION’s home video game soft- content that is used for smartphones and other ware business accounts for 60% of the Consum- mobile phones and online through PCs. The Fiscal 2010 Business Results Overview er Business segment’s net sales. This business is mainstay services that Sammy NetWorks pro- Net sales pursuing a multiplatform strategy that entails provides are the online game for PCs, 777 Town. ¥121.5 billion ▶ viding software for a wide range of platforms. net, and content for mobile phones, Sammy Down 7.4% year on year Owning a large array of such intellectual proper- 777 Town.

Operating income ties as Sonic the Hedgehog, the business boasts SEGA TOYS CO., LTD., operates the toy sales ¥6.3 billion particularly powerful brand appeal overseas. In business. SEGA TOYS is a fabless company, the European market, the business includes the meaning it does not have production facilities. It Moved into the black ▶ major development studio SPORTS INTERACTIVE has built a distinctive position by developing and Home video game software unit sales Ltd., which develops the Football Manager se- marketing unique products that go beyond the 26.7 million ▶ ries, and The Creative Assembly Ltd., responsible limits of the toy industry. In particular, BAKUGAN, Down 9.2% year on year for the Total War series. By concentrating our which SEGA TOYS developed with the Canadian R&D expenses/content production expenses management resources on titles that promise re- toy manufacturer Spin Master Ltd., is expanding ¥19.6 billion ▶ liable returns, we are furthering development effi- its fan base. In the United States, BAKUGAN won Down 40.2% year on year ciency and improving earnings. the 2009 Toy of the Year Award and claimed the Boys Toy of the Year Award for two consecutive Network Games and Other Business years. In around 120 countries, animation based Operating companies establishing on BAKUGAN is broadcast and related products unique positions in their business areas are available. This business mainly comprises the online and The animation business’ core operating com- mobile content business, the toy sales business, pany TMS ENTERTAINMENT, LTD., is engaged in and the animation business. the production of many major products that have

36 Net Sales Operating Income (loss)/Operating Margin R&D and Content Production Expenses Billions of yen Billions of yen % Billions of yen 160 10 10 40

120 5 5 30

80 0 0 20

40 –5 –5 10

0 –10 –10 0 07 08 09 10 11 FY 07 08 09 10 11 FY 07 08 09 10 11 FY

■■ Home video game software business 77.5 52.9 ■■ Operating income (loss) (left) 6.3 7.0 ■■ R&D and content production expenses 19.6 18.1

■■ Network games and other business 44.0 47.1 ● Operating margin (right) 5.2 7.0 Plan Plan Plan

earned worldwide acclaim, including Lupin the 10.6% year on year, to ¥44.0 billion, mainly SEGASAMMY 3rd and Detective Conan. This company is due to lackluster toy sales in Japan reflecting a Insight growing earnings by developing the licensing slump in consumer spending. business in addition to the planning and pro- In earnings, the business segment Establishing a CGI Animation Studio duction of quality animation. Further, we estab- achieved operating income of ¥6.3 billion, Previously involved in the production of CGI lished SEGA SAMMY VISUAL ENTERTAINMENT compared with an operating loss of ¥0.9 billion animation for video games, the VE R&D INC. (which changed its name to MARZA for the previous fiscal year. This improvement ■ 遊技機事業パチンコ・パチスロ遊技機の販売台数の増加 Department has spun off from SEGA’s R&D ANIMATION PLANET INC. on July 1, 2010) 部材調達コストの低減 was principally thanks to a 40.0% year-on-year パチンコ遊技機の盤面販売比率の上昇 Division to establish MARZA ANIMATION as a subsidiary for the planning, production, 周辺機器事業からの撤退による営業費用の削減reduction in R&D expenses and content pro- PLANET INC. as a wholly subsidiary of SEGA and sales of CG animation around the world.価格戦略の見直しduction expenses that resulted from narrowing ■ アミューズメントレベニューシェアによる配分収益の好調 SAMMY HOLDINGS INC. As a CGI animation 機器事業 CVT＊キット販売好調down the number of titles for Japan and im- 研究開発費・コンテンツ制作費の削減 film studio, MARZA ANIMATION PLANET has FY 2010 Overview■ アミューズメント店舗ポートフォリオの見直しproving development efficiency. 施設事業販管費や減価償却費を中心とした営業費用の削減 set out providing “The Best Stories for Chil- Home video game software business ■ コンシューマ事業国内タイトル数の絞り込みによる開発の効率化 dren around the World” as its management returns to profitability by streamlin研究開発費・コンテンツ制作費の削減- Home Video Game Software Business vision. The new company will take advan- ing the number of titles Earnings improve in Japan’s market, tage of technology, systems, and a pipeline For fiscal 2010, the segment saw a 7.4% year- but struggle overseas fostered in its years as the VE R&D Depart- on-year decrease in net sales, to ¥121.5 billion. The home video game software business sold ment to streamline large-scale production. Within the business segment, the home video 6.53 million units of Mario & Sonic at the MARZA ANIMATION PLANET is committed game software business recorded a 5.6% year- Olympic Winter GamesTM for the U.S. market to delivering memorable experiences on-year decline in sales, to ¥77.5 billion, be- and the European market, its mainstay title through characters and imaginary worlds cause it reduced titles for Japan’s market and in fiscal 2010. In Japan, the latest edition of that exploit state-of-the-art CGI technologies. postponed the launch of some titles to the the popular Ryu-Ga-Gotoku 4: Densetsu wo current fiscal year. Meanwhile, in the network Tsugumono series shipped 560,000 units. games and other business sales were down Further, marketed as a global title, BAYONETTA sold 1.35 million units.

SEGA SAMMY HOLDINGS ANNUAL REPORT 2010 37 DETERMINATION Consumer Business

For sales in Japan, aiming to balance the reintroduction of BAKUGAN to Japan. earnings size and development expenses appro- Operating online and mobile content busi- priately, we concentrated development and sales ness, Sammy NetWorks Co., Ltd., benefited from on titles likely to generate a certain level of unit a major contribution to earnings from mainstay sales and return. As a result, the business more pachinko and pachislot PC online game than halved the number of titles sold in Japan to 777Town.net. Another boost to earnings came 17 titles. Consequently, the profitability of sales from the dramatically enhanced profitability of Mario & Sonic at the Olympic Winter GamesTM TM IOC. Copyright © 2009 International Olympic in Japan improved markedly because develop- Sammy 777 Town content for mobile phones, Committee (“IOC”). All rights reserved. ment efficiency increased and high-margin titles which resulted from changing over to a pay-per- SUPER MARIO characters © NINTENDO. SONIC THE HEDGEHOG characters © SEGA. accounted for a larger share of sales. Overseas, use business model. In addition, we withdrew however, sales struggled principally because new from the solutions business, which was unprofit- title sales slumped due to tough market condi- able, and built a system that concentrates man- tions characterized by flat consumer spending. agement resources on core businesses. Viewing In response to this change in overseas market expansion of the content market for smartphones conditions, the business closed a North American as a good opportunity to increase points of con- development subsidiary, Secret Level, Inc., and tact with customers, SEGA is stepping up efforts reorganized businesses in North America and to cater to such growing demand by drawing on Europe. Through this reorganization, we expect to the high-quality assets and development capabili- reduce the cost of sales and operating expenses ties that it has accumulated. roughly ¥2 billion for the current fiscal year. The animation business’s core operating company, TMS ENTERTAINMENT, LTD., saw pro- Network Games and Other Business duction revenues decline year on year due to its SEGA TOYS transfers to new business reduction of animated movies in accordance with management system, Sammy NetWorks initiatives to enhance profitability. Nevertheless, Ryu ga Gotoku 4: Densetsu wo Tsugumono © SEGA posts record earnings sales revenues remained firm due to higher roy- The core operating company of the toy sales alty revenues stemming from the popularity of business, SEGA TOYS CO., LTD., recorded solid BAKUGAN overseas and an increase in box-office sales overseas. In particular, sales of BAKUGAN- revenues due to the success of a movie-theater related products continued to grow worldwide. version of Detective Conan. Meanwhile, continuing to face challenging conditions in Japan, SEGA TOYS closed an unprofit- FY 2011 Outlook and Strategy able subsidiary as part of efforts to select and Targeting lower revenues and higher concentrate businesses and products. Also, aim- earnings by streamlining overseas titles ing to rightsize its workforce to suit the current For fiscal 2011, the Consumer Business segment

777Town.net level of earnings, the company introduced a is targeting net sales of ¥100 billion, down © ASAO TAKAMORI · TETSUYA CHIBA / KODANSHA © Sammy voluntary early retirement plan and transferred to 17.7% year on year. This decrease will mainly a new business management system. Further, result from the home video game software Group companies led by SEGA TOYS established business’ consolidation of titles for overseas Bakugan Limited Liability Partnership (Bakugan markets. This business segment aims to increas- LLP), which steadily advanced preparations for es operating income 11.1%, to ¥7.0 billion,

38 primarily by improving the profitability of the through the selection and concentration of home video game software business through businesses and the reduction of fixed costs. reduction of R&D expenses and content produc- Bakugan LLP will lead a concerted effort by the tion expenses and enhancing the profitability Group to expand the BAKUGAN business in of subsidiaries. Japan. Also, we will grow sales of the 2010 U.S. Toy of the Year Award winner Zhu Zhu Pets, Home Video Game Software Business for which we have obtained exclusive marketing development efficiency by streamlining rights in Japan. game titles for overseas markets As for the online and mobile content busi-

Conditions in the Japanese market will likely ness, Sammy NetWorks has its sights set on in- HATSUNE MIKU –Project DIVA– 2nd © SEGA remain tough. We will market 18 titles in Japan, creasing earnings even further by introducing © Crypton Future Media, Inc. approximately the same number as in the previ- signature titles to its mainstay services 777Town. VOCALOID is a trademark or a registered trademark of Yamaha Corporation, Japan. ous fiscal year, and we hope to ship 3.38 million net and Sammy 777 Town, extending pay-per- units, about 440,000 fewer than in fiscal 2010. use, and commercializing a new content service We aim to reach this target based on such major in earnest. SEGA will proactively provide content titles as HATSUNE MIKU –Project DIVA– 2nd, the for SNS and smartphones, markets that are likely second installation of a series that has attracted to continue expanding. fans. Due to downturns in consumer spending, In the animation business, TMS overseas markets are also contracting. Therefore, ENTERTAINMENT plans to increase earnings plans call for narrowing down the number of by expanding businesses related to BAKUGAN titles for overseas markets from 49 for fiscal and advancing operations for the production of VANQUISH 2010 to 38 titles in the current fiscal year. This animation for pachinko and pachislot machines. © SEGA will cause a 9.36 million year-on-year decrease Also, we will concentrate efforts on establishing in unit sales, to 13.57 million units. While height- new businesses engaged in such activities as ening development efficiency, we intend to re- brand management relating to an agreement lease a new offering in the SONIC series as a concluded with Japan Post on the joint owner- major new title and bring VANQUISH to market ship of copyrights for its Posties image characters as a global title. as well as licensing sales. In another effort to de- Through these initiatives, for fiscal 2011 the velop a future source of earnings, the segment home video game software business is targeting will add infant medical treatment to its business total unit sales of 16.96 million units, a 36.6% areas. In this initiative, we intend to roll out the year-on-year decrease. world’s first preparation support terminal for infant medical treatment, Smiletouch, which will Network Games and Other Business make effective use of our animation assets.

Reintroduce BAKUGAN to the Japanese Zhu Zhu Pets © 2010 Cepia LLC. market In the toy sales business, SEGA TOYS is expected to record lower revenues due to a change in the transaction format for BAKUGAN. However, the company is targeting improved profitability

SEGA SAMMY HOLDINGS ANNUAL REPORT 2010 39