CNBC Transcript: Haruki Satomi, President, Sega Sammy Holdings

Following is the transcript of a CNBC interview with Haruki Satomi, President, of Sega Sammy Holdings. The interview will play out in CNBC's latest episode of Managing Asia on 4 May 2018, 5.30PM SG/HK time.

All references must be sourced to a "CNBC Interview".

Interviewed by Christine Tan, Anchor, CNBC.

Part 1

Christine Tan (CT): Where do you see Sega Sammy in the next five years? What will the company look like?

Haruki Satomi: At least we'd like to be the number one entertainment company in Japan, and we try to be a game changer. Our 2020 March target is available and that is about 500 billion yen, 75 billion operating profit yen but at least this number we would like to achieve in five years as well.

CT: Can it happen sooner?

Haruki Satomi: We hope so, yes, depending on the hit title, we can easily achieve those numbers.

CT: Haruki, your father founded Pachinko machine maker Sammy in 1975. What was it like as a young boy watching him as you grew up, building up his Pachinko Business?

Haruki Satomi: When I was young actually the company was next door, it's a one minute walk from my house to the office so I actually grew up with my father's employees. It feels like a part of the family.

CT: So you spent a lot of time in the arcades playing games?

Haruki Satomi: Yes.

CT: What did you play? Do you remember?

Haruki Satomi: Yeah, I remember, some mahjong game that was available in the office, Nintendo games or the pachinko and slot machines available and I was playing for test.

CT: You were testing the games for him?

Haruki Satomi: When I was young, yeah.

CT: You initially worked for a securities firm in Japan then you joined Sammy in 2004. As his son were you always expected to join the family business?

Haruki Satomi: Actually I was not. That's one of the reasons why I started my business from the investment bank first. I did not want to join my father's company at that time.

CT: Why?

Haruki Satomi: Because I felt the big pressure. And since he is an entrepreneur I wanted to be an entrepreneur at the time and to do that you have to see a lot of business models, so I decided to join an investment bank at the time.

CT: What made you change your mind to join the family business in the end?

Haruki Satomi: Actually one of the senior managers from my father's company asked me to join. My father never actually asked me to join his company, or take over or carry on. Simply at the time one of the senior managers who were the youngest one at that time asked me to join his team and I agreed to it.

CT: You joined the family business around the time when your father acquired Sega in 2004 and merged both companies together. At that time Sega had already abandoned its console business and was focusing very much on software development. What was the vision back then of your father to bring these 2 companies, Sega and Sammy together?

Haruki Satomi: He definitely wanted to be a global entertainment company at the time and by adding the Sega part into the business and moving in a different direction, it was easier to achieve. But when he made the decision at that time it was not only a business decision because the former owner of Sega was my father's mentor and had even asked him to be the CEO of Sega prior to acquisition. But at the time he had to focus on the Sammy business so he denied being the CEO of Sega. But after he passed away, Sega's senior management got in trouble as you know. Their performance was not great, so he decided to come to the rescue, and it was him giving back to his mentor.

CT: Mm, so he felt obligated to save Sega because it belonged to his friend?

Haruki Satomi: Yes.

CT: You joined Sega immediately after the merger. The company had a huge fan base, but it was bleeding. Turning the company around was difficult and you had issued a statement to say you betrayed the trust of fans and you were working very hard to improve the quality of games. What actually happened?

Haruki Satomi: Simply that several years ago when we launched a Sonic game, the reception was very bad, there was a site called Meta-critic that aggregates the critics and scores games from 1-100, and at that time the Sonic game got 30 out of 100 so I felt like we…

CT: Disappointed fans?

Haruki Satomi: Yeah disappointed, did not meet those expectations for the big fan base we have. So after I took the lead it will never happen again and I told our development team or even sales team that we should not release a game unless we 100 percent agree with and are confident of the quality.

CT: So what are some of the lessons learnt during that time, those difficult times that you take with you today to make Sega successful, to turn Sega around?

Haruki Satomi: Sega is very known company, many people on the website emails or Facebook messages asking me to make this kind of game, or please bring back this title again, or please improve the quality of this title again, so I try to answer those questions and requests.

CT: So back in the 90s Sonic the Hedgehog was one of the most successful and well-known franchises of Sega. Now fans of Sega are wondering when Sonic is going to make a successful comeback. What are you telling them?

Haruki Satomi: One of the answers I gave was the latest two titles which we launched last year, Sonic Mania and Sonic Forces, especially Sonic Mania which got a 80s, 85ish Meta-critic score and fans are excited about this game and people really love it, actual sales was very strong, and we introduced a Sonic animation series over the last two years. We recently announced the new partnership with Paramount for a Sonic movie project that's going to be available November 15th to December 19th so it's a little more than one year but it's coming soon and we're really excited about it. We can bring Sonic to the next level and not only bring the Sonic game to existing fans but we try to grow our fan base worldwide.

CT: So you think this movie is going to be a big thing when it comes to reviving Sonic the Hedgehog, making a successful comeback?

Haruki Satomi: Yes, one of it, one of our efforts to do so.

CT: So do you think Sonic can beat Super Mario?

Haruki Satomi: I think there is a possibility of beating Mario, but you know, Mario and Sonic used to be big rivals who competed against each other but now we have become friends. As you may know we have this Mario and Sonic Olympic Games since Beijing Olympics 2008 and 2012 we did the other game and recently 2016 we launched the Mario & Sonic Rio Olympics games so now we are friends.

CT: So you're teaming up to fight the enemy?

Haruki Satomi: Yeah. Not the enemy but we're teaming up to entertain our fans.

CT: Well these days Sega which is now under your entertainment contents business, pulls in something like more than half of overall sales. Sales of packaged games have been going up, but digital sales have been going down because of a slowdown in the Japanese smartphone market. You see a pickup in digital sales soon? What are you doing to beef up your digital titles?

Haruki Satomi: Simply the competition in the smartphone game has been very high and higher and higher so we decided not to release too many titles over the last two years; instead we developed more quality games to be more competitive in the market, then since this year we will keep these new titles so our digital sales will grow again.

CT: How many titles are you hoping to release this year?

Haruki Satomi: More than 10. When we try to launch our game, typically Japanese developers focus only on the Japanese market but we keep asking them to see the global market and we agreed with them to at least launch the game simultaneously in Asia and Japan, and then we'll bring it to the West as soon as we can.

CT: I'm curious how much work is involved, launching a gaming title? What is involved and how involved are you in these games yourself?

Haruki Satomi: Actually I try not to get too involved in the game content or the design itself.

CT: Do you test them out?

Haruki Satomi: A little bit, but I try not to see the details because I'm not a creative video game type. Of course I see if something is affected in the game itself but instead of me saying so, our trusted man, trusted producer should be responsible for the specific title. But I decide the direction of the game, like I said we should prioritize the quality not schedule and we should listen to the consumers or fans opinions.

CT: What are your favorite games, just out of curiosity?

Haruki Satomi: One of my favorite is the Yakuza Series or the Valkyria Chronicle Series.

Part 2

CT: Christine: These days Sega Sammy has ambitions beyond pachinko machines and beyond entertainment content, it is now moving into the integrated resorts business. With the expected casino legislation happening in Japan to make gambling legal in the country, is this where the big money is going to be for Sega Sammy? Is this your next pillar of growth?

Haruki Satomi: Yes, I think that market is something that we tried to get into and in order to do so we acquired the Phoenix Seagaia Resort in 2012 which is a smaller integrated resort without casino. We then got involved in the Paradise City Project that is the joint venture between Paradise Group Korea and Sega Sammy Group. We opened an integrated resort from scratch, developed and operated it together and we sent more than 50 Japanese people into the vicinity so we're heavily involved in the operation by now. If the Japanese government opened the market for integrated resorts like Marina Bay Sands, we would definitely like to be a part of it.

CT: So these two resorts will obviously help you increase your chances of getting selected. You had to build a casino resort from scratch, what was it like? What did you know about casino development? What did you know about resort development? What were the initial learnings like?

Haruki Satomi: It is my father's aspiration to be, to develop and operate an integrated resort in Japan. That's why we're currently learning like how to run the hotel business and how to develop the resort with Paradise City- its supply and demand, how many rooms we should have, how many tables for casino floor, that kind of demand you have to decide first. Then how many rooms we provide, that is something that we have to figure out from scratch.

CT: Have you figured it out?

Haruki Satomi: We are trying, yes.

CT: I understand you want to take a majority stake in your casino venture. Who are your likely partners?

Haruki Satomi: Yeah we were quite open to partner with anyone, and what we publicly say right now is since it is a Japanese project, we try to lead the project, which means we try to take the majority of stake. If we don't get the partners, it's ok to be a minority share. That'll be a possible candidate.

CT: You talking to any of the foreign casino operators like MGM or Las Vegas Sands?

Haruki Satomi: Yeah, we can't say their specific names but yes, most of the operators we have had discussions with already. But some operators obviously said that they'd like to be majority stakeholder of project. Those we haven't discussed details yet but some operators agree that they can be a minority in this Japanese project.

CT: Are you close to any sort of formal tie up with these foreign operators?

Haruki Satomi: Yes, we've already been closely discussing with some of them.

CT: In terms of your casino development, which locations are you eyeing?

Haruki Satomi: We haven't openly disclosed which city is our priority but we actually prefer bigger cities around the Metropolitan Tokyo area or Osaka area. Secondarily, if we are able to secure the majority of stake we would consider the suburb like Hokkaido, perhaps Okinawa or Kyushu area.

CT: When do you think the licenses will be given out? What's the talk within the industry? What are you hearing behind the scenes?

Haruki Satomi: Of course, depending on the law passed in the Diet for now but if the promotional bill is passed to the Diet this year hopefully in early summer, the license given to the specific city and operator would be in 2021.

CT: Are you frustrated that things are moving so slowly in Japan just to get the casino license?

Haruki Satomi: Yes, actually the Japanese government started discussing the casino business even earlier than in Singapore but still we haven't passed the bill yet. It takes a lot of time so of course it's frustrating. We have a business model and we've been preparing for it with a team but still the bill is not passed yet, and even if the bill is passed this year, the local government will decide opening the first around the end of 2019 or in early 2020. Only then can the city and operator propose to the government together and they will then give the license officially I think in 2021.

CT: So when could you possibly have a casino resort up and running at the earliest? What sort of time frame are we looking at?

Haruki Satomi: At this rate, three to four years to develop from scratch including the infrastructure.

CT: So that'll be 2024, 2025?

Haruki Satomi: That'll be 2024 and 2025.

CT: And you're confident of being selected?

Haruki Satomi: We're trying to be.

CT: Could the casino resort business eventually overtake your key entertainment content business?

Haruki Satomi: Yes I think so; there is huge potential if we are able to build a Marina Bay Sands-size integrated resort in Japan. It can exceed the revenue in the existing business.

CT: When you say Marina Bay Sands, are you using that as a model for your casino development in Japan?

Haruki Satomi: That size of integrated resort is a good benchmark in an urban city.

CT: How many rooms are we talking about?

Haruki Satomi: If we open the integrated resort in a Metropolitan Tokyo area or Osaka we would need at least 3000 rooms.

CT: And it would include a convention centre as well? An integrated feel of the resort?

Haruki Satomi: Yes, course there will, we need an entertainment part.

CT: What would you call the casino resort? Have you got a name for it yet?

Haruki Satomi: No, not yet.

CT: These days you're working to position Sega Sammy as the number one global entertainment company. You've launched a 2020 road map. Tell us, what are you doing in the next two years to achieve that vision?

Haruki Satomi: We are not a simple video game or pachinko slot machine makers, we are the company that provides people's moving moments or emotional excitement. As long as we can offer these kinds of things we will expand our business. That's why we recognize that the resort business including casino is part of those kinds of business. Our vision is to be a game changer. We'd like to impact the society in a good way with our business model. Even though the casino or pachinko business is controversial, we believe we can put in more positive things than negative.

CT: Let's talk more about the pachinko business that you mentioned because obviously it was the beginnings of your family business, your father founded Sammy, a pachinko machine maker. But these days there are lots of concerns about casino legislation and the competition it would pose to the pachinko industry. What does the future hold for the company's pachinko business?

Haruki Satomi: Pachinko business itself is very lucrative; it is a cash cow business for us. So even though we do not expect a lot of growth, it is our foundational business as a group and we would like to make more efficiency in the business. Since we cannot expect the growth of the market as whole, what we try to do is increase the share and drastically cut the production cost especially the cabinet cost and then improves the margin. We will then try to reinvest that cash to other business like entertainment business like the video gaming business, or to the resort business in the future

CT: As a cash cow like you say the pachinko business right now pulls in about 40 percent of the overall revenue, where do you see this contribution from pachinko business in the next couple of years as you move towards this vision of number one big entertainment company?

Haruki Satomi: Revenue wise, it could be less than 10 percent in the future if we are able to open the integrated resort in Japan and take a majority stake. But profit wise it will still not be smaller than 10 percent, it would be like 20 percent as a whole business model, still significant in the group I think.

CT: So revenue contribution would fall?

Haruki Satomi: Yes.

Part 3

CT: Your father's the legendary Hajime Satomi who founded Sammy, pachinko machine maker. He has been ranked one of Japan's 50 richest in terms of net worth. What important lessons have you learnt from him, has he passed on to you about running and building a successful business?

Haruki Satomi: I believe he's a remarkably successful businessperson in Japan and he is a very successful entrepreneur. What I have learnt from him is he simply never gives up until he reaches his satisfaction level. I also respect him because he has the courage to believe people. Even though he has been betrayed by very close senior management or business partners, he doesn't stop believing people. That gives empowerment to our employees and is one of his strengths.

CT: He is the Chairman and CEO and you're the President and COO as his son, obviously he's still in charge. As the second generation, as his son, how much input do you give on how to drive the company forward? Is your father receptive to your ideas?

Haruki Satomi: Sure, yes. I'm very appreciative when he empowers me, currently he pretty much focuses on external communication like our industry association chairs while I manage the internal business. Most of the time, I don't report to him often.

There are 2 kinds of reports like pre-report or post-report. Pre-report means you don't decide anything and ask your seniority to make a decision but post-report means I made the decision and reported what happened. So I try to report to my father after I've made a decision, not asking him what I should do.

CT: How would you describe your working relationship with your father even though you don't report to him?

Haruki Satomi: Occasionally yes, I report to him if I think it is a very important thing to him but usually he doesn't care much about details.

CT: So he leaves it entirely to you?

Haruki Satomi: Yes.

CT: In terms of leadership style, how different do you think you are from your father?

Haruki Satomi: Mm, that is, it's a good point. I think it's similar, I try to empower my staff instead of try to make a decision by myself everything because I know, or I try to hire, or assign the smarter people than me, they should make the decision as I said for the game development. Instead of me deciding what kind of games I should make, the producers or directors of games should make the decision. That is a similar approach to what my father had.

CT: So you're following in his footsteps?

Haruki Satomi: Yes.

CT: As his son, you're the COO and the President; obviously you're being groomed to take over from your father one day. What impact do you want to make at Sega Sammy?

Haruki Satomi: The mission what I say, is to be the reason to be.

CT: The reason to be?

Haruki Satomi: Yes. As long as we're providing a positive impact to the society or to our fans, as I said. Even if pachinko business or video game, or casino is controversial, there are anti-video game guys, anti-casino people, but as long as we are providing a positive impact on the society and there are fans behind us, we are allowed to be this smart and reject increase the fan base in the future.

CT: Haruki thank you so much for talking to me.

Haruki Satomi: Thank you very much.

END

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