Due to the difficult economic climate and changes in the video game market in the U.S. and Europe, Sega Sammy has said this morning that it expects Sega’s operating losses for the previous year to hit billions of yen, and also a stoppage of game development along with a shrinkage of the company may take place.

Staggering from an expected 7.1 billion yen loss, Sega Sammy officials say they need to “streamline organizations in the field of video game software in the U.S. and Europe.” Which means a major cut in games under development, shifting to the digital market and a possibility of layoffs.

The measures mentioned in an early morning press release are quite major, though very general. It includes creating a smaller company positioned for sustained profitability and narrowing the sale of titles down to its strong franchises like Sonic the Hedgehog, Football Manager, Total War and Aliens.

Sega’s current announced games in development include Binary Domain (for Windows), London 2012, Virtua Fighter 5: Final Showdown, Jet Set Radio, Sonic the Hedgehog 4: Episode 2, Anarchy Reins, Aliens: Colonial Marines, Phantasy Star Online 2, Super Monkey Ball: Banana Splitz, Doctor Who: The Adventure Games, Yakuza 5, and Hell Yeah! Wrath of the Dead Rabbit.

Sega became a subsidiary of Sammy back in 2004, creating Sega Sammy Holdings. That parent company has reported that while Sega was hit with massive loses in its fiscal year ending in March 2012, the company will see an overall projected income of 20 billion yen. Most of that profit comes from the company’s successful Pachislot and Pachinko Machines Business, Amusement Machine Business and Amusement Center Operations Business.