Instead, the company will now focus on producing software for its existing arcade business, making games for mobile phones, set-top boxes and handheld computers. In addition, Sega will make games for its former rivals; deals are already in place to develop for Sony’s PlayStation 2 and Nintendo’s Game Boy Advance, and it’s in negotiations to develop for Nintendo’s GameCube and Microsoft’s Xbox. “When you look at Sony finally putting out enough software, Nintendo’s $5 billion war chest and Microsoft’s $500 million marketing budget for Xbox, Sega can’t compete,” says Sega spokesman Charles Bellfield. “We’re focusing on what we know best: content.”
No one in the industry was surprised that Sega pulled out of its videogame Vietnam; in fact, some are wondering why it didn’t do so sooner. Trip Hawkins, whose company, 3DO, had to make a similar transition when its own console failed to catch on in the mid-’90s, says he knew the Dreamcast machine would be a failure from the beginning. “When I met with Sega about developing for Dreamcast, I asked them how far ahead of Sony they would come out; they said ‘a year.’ I asked if PS2 would be better, they said ‘Yes.’ I asked them how soon PC technology would catch up to them, they said ‘Almost immediately.’ That told me everything I needed to know.”
In Hawkins’s opinion, Sega lucked out with the design for the wildly successful Genesis console, because they’ve failed at every other piece of hardware they’ve introduced, from Genesis add-ons like 32X and Sega CD to consoles like Saturn and Dreamcast. “I’ve always thought of Sega as Disney, using the arcade the way Disney uses movie theaters to build its brands, laying the foundation for home video and other products. Sega’s insistence on making its own hardware would be like Disney making its own VCR format.” Indeed, even though Sega had originally projected that it would sell 7.5 million Dreamcast units in the United States by March 2001 (a target it later reduced to 4.5 million) it has only been able to sell around 3 million units thus far, even with aggressive promotions like a free Dreamcast for signing up with its Seganet ISP and slashing the price to $149. And with Sony having sold 1.46 million of its pricey PS2 machines in a little over two months, even Sega could tell that it was about to be game over.
The company’s new goal is to become the world’s largest multiplatform software developer, going toe-to-toe with such giants as Electronic Arts. “If you’re a hardware company, there’s one company whose content you want to get your hands on-ours,” says Bellfield. “We were the number six game publisher in the U.S. with an installed base of just 3 million. Imagine what the potential is when we publish on all platforms. So watch out, EA [Electronic Arts]. We’re after you on a global basis.” To which EA spokesman Jeff Brown shoots back: “This is like Volkswagen announcing that they’re shutting down for 18 months to start producing BMWs. Don’t assume those Beetles are going to turn out to be BMWs the minute they roll off the line. Developing for PS2 is no small task.”
The question is, will this new strategy succeed? No one-including EA-disputes that Sega is one of the world’s best developers. In a press conference yesterday, Sega of America president Peter Moore cited the company’s long list of industry firsts: the first-ever arcade simulator game (Hang On, 1985); the first 3D fighting game (Virtua Fighter, 1993); and the first ever online console videogame (NFL 2K1, 2000). But as a console company, Sega only had to worry about making games for Sega machines, allowing them to focus on maximizing the potential of a single machine. If Sega plans to make games for PS2, Game Boy Advance, Palm, set-top boxes and other devices while continuing to support its Seganet online gaming network, it loses that focus and runs the risk of becoming a jack-of-all-trades and master of none.
That would be a serious mistake, given the time and resources it will require to make great games for PS2 and other next-generation platforms. EA, for instance, has a worldwide development staff of 2,000, of which 750 work on sports titles alone. By comparison, Sega has 1,100 people who work on its games worldwide, of which fewer than 80 work on its internally developed sports titles. “It takes an enormous investment to understand other people’s technology,” says EA president John Riccitiello. “We understand the PS2 better than Sony does. That’s why we introduced eight titles in the U.S. before Sony released their first title of note. There’s no doubt in my mind that Sega has a lot of talent and an appreciation for how hard this is. But you don’t know what it’s like to get hit in the face until it happens.”
The impact of those punches will be doubled by Sega’s precarious financial situation. Shutting down the Dreamcast business alone is expected to cost Sega $689 million. That has been relieved somewhat by Sega’s deep-pocketed president, billionaire Isao Okawa, whose gift to Sega of $732 million is the latest in a series of cash injections that he’s given the company. Still, Sega will need more money to move forward with its ambitious plans. “They’ll have to raise cash,” says Edward Williams, an analyst for the research firm Gerard Klauer Mattison, “because one of their goals will be to increase the number of development teams they have in North America.” And after four straight quarters of losses, it’s hard to tell whether that will be enough to convince the capital markets in Japan to put more money into Sega.
There’s even more skepticism about Sega’s foray into the set-top box business. Britain’s Pace Micro Technologies, the largest European set-top box manufacturer (which also supplies some set-top boxes to Time Warner and Comcast in the U.S.) has agreed to incorporate Dreamcast technology into future products. There are several potential positives to this setup. Consumers never pay the lump sum cost of a set-top box-it’s amortized in their monthly bill-making the barrier to entry much lower. Users wouldn’t have to go to the store to buy the games because the set-top box won’t use CD-ROMs; instead the games will be downloaded in three minutes via broadband and stored on a hard drive inside the set-top box, similar to playing games in a hotel room. And Sega says that it can take existing off-the-shelf games and repackage them as episodic content, e.g. monthly chapters of their action role-plaring game Shenmue or new levels of the arcade classic Sonic the Hedgehog.
Yet as good as all of that sounds for Sega, one fundamental issue remains: people who want to play console games purchase game consoles. Will they wait for their local cable company to bring them a Pace set-top box? That’s highly unlikely, especially since Sega’s own support for Dreamcast after the end of 2001 is questionable at best. “If only Dreamcast games are going to be available on the system, it won’t succeed,” says Williams. “And others will only support it if the market is big enough.” Also, the set-top box market is likely to be more in sync with the casual gamer than the hardcore gamer. So the kind of people who would play games on a set-top box will probably look for games like hearts, solitaire, Who Wants to Be A Millionaire and Deer Hunter-not Shenmue, Sonic, Jet Grind Radio or Phantasy Star Online.
As for Sega’s ambitions to bring PS2 and other console users onto Seganet, expect a hard slog there too. “To transform from a hardware and software manufacturer to a multiplatform developer is a 7.0 degree of difficulty dive,” says EA’s Riccitiello. “Adding multiplatform online is a 9.0 degree of difficulty. Right now, Sony, Microsoft and Nintendo have no online component. Creating a multiplatform online component is not easy, and it’s doubtful that Seganet was engineered to support that. Also, they’ve got to get the console companies to agree to this. In my opinion, we’re two years a way from a significant online business on next-generation consoles.”
In other words, the next 12 to 18 months are going to be a trial by fire for Sega. Even though retailers like Babbage’s Etc. are fairly positive that Sega will be able to clear out its excess Dreamcast inventory at the new $99 price, it’s possible that disillusioned fans will turn away from Dreamcast after yesterday’s announcement and save their money for PS2, GameCube or Xbox. Independent developers that planned to ship Dreamcast games this year are already re-evaluating their decisions, which could lead to a slew of canceled titles. The restructuring could prompt key talent to leave at a time when good men (and women) are hard to find. Right now, Sega is like a talented player trapped in a game’s toughest level who just got an extra life. And if it doesn’t make the smartest use of that extra life, Sega may just have temporarily postponed the dreaded GAME OVER.
