The house that Sonic built is getting significantly smaller.

Sega's Japanese main branch said Tuesday that it will close 110 arcades, cancel some games in development and seek to lay off 18 percent of its staff. In a series of press releases, the game publisher said that these cost-cutting moves come in anticipation of its recording an annual loss of 25 billion yen (about $238 million) during the fiscal year that will end March 31.

Arcades: Sega owns and operates 450 videogame arcades in Japan, and said it would close 110 of them that show "poor future potential and profitability." This move "may" make the company's arcades profitable even if the that segment of the business gets tighter in the coming fiscal year, Sega said.

__Software development: __Sega says it will chop 20 percent off its research-and-development budget for arcade and consumer games. The company plans to do this by "consolidating titles to be developed" and "enhancing the self-manufacture ratio."

Running this through my Japanese-to-English translator, these phrases mean that Sega will cancel some games in development and develop more games internally, rather than outsourcing them to outside developers. (I've asked Sega for clarification.) That's a lot of games.

Layoffs: Finally, Sega said it would "solicit the voluntary retirement" of approximately 560 of its 3,127 employees. I wrote in 2007 about the culture of Japanese layoffs: It's simply not done. Laying people off is like disowning children – it's a long process that may take weeks of consultation with employees to convince them to resign.

While I have no insider information about the inner workings of Sega's Japanese branch, this would seem to be precisely what's going on. In its official statement, Sega seems to leave no doubt that the "voluntary retirement" will take place as envisioned:

Furthermore, to maintain the appropriate size of its work force compatible with its current revenues, Sega has determined to solicit voluntary retirement of approximately 560 employees. Consequently, Sega will be able to reduce labor cost by approximately 5,000 million [yen] for the year ending March 31, 2010 and thereafter to ensure improvement of the earnings in its amusement facilities business and consumer business, as well as whole businesses.

Sega's U.S. branch, based in San Francisco, reportedly laid off 30 employees last month.

Sega is a division of Sega Sammy Holdings, which has a variety of other amusement companies under its umbrella. Tuesday's announcements concern Sega specifically.

See Also:- *Pole's Adventure *for WiiWare, Sega's Dirty 8-Bit Parody