Shoichiro Irimajiri, the effervescent president of video-game maker Sega Enterprises Ltd., is a veteran warrior. He spearheaded Honda Motor Co.'s charge into the U.S. market, where he built up the auto maker's operations in the 1980s. Irimajiri was being groomed to take over at Honda when he was sidelined by a serious illness. He recovered, but found himself relegated to the sidelines at Honda headquarters. So five years ago, he chucked a top management job at Honda to move to Sega, a company one-tenth Honda's size, in terms of revenue.
Now, Irimajiri is intent on rebuilding the troubled Sega — by betting everything on the success of the company's new 128-bit Dreamcast console, a new platform with Internet capability. On the eve of the U.S. launch of Dreamcast, Irimajiri spoke to Business Week's Tokyo Correspondent Irene M. Kunii about his plans and expectations for the new business. Here are excerpts from the interview (translated from Japanese):
Q: What are your forecasts for the U.S. launch of Dreamcast?
A:We have very high expectations, and more importantly, anticipation is steadily rising on the part of our customers, the retailers. I just had a teleconference with the managers of Sega of America and, as of [Aug. 25], pre-orders [for the Dreamcast console] had exceeded 265,000 units. That's extremely good, considering that last week's total was 225,000. It looks like pre-shipment orders will surpass 300,000 by the time of the launch. It's a record high if you look at the history of new game console launches in the U.S, so we're very excited.
We have 16 launch titles, and that too is a record level. By Christmas, we'll have 40 titles on the market. That will help us achieve our sales target of 1 million Dreamcast consoles by the Christmas season. By the end of next March, our target is 1.5 million units. In Japan, we sold 1 million units as of late May, and by the end of next March, we hope to hit the 3 million mark. In Europe, it's 700,000 by Christmas, and 1 million by next March.
Q: When do you expect to begin making a profit?
A: We won't start reaping profits until we've sold enough consoles, which will then push up game software sales. That's why it's crucial for us this year to build up the infrastructure, which means getting the hardware installed [in homes].
Q: Will Dreamcast become a profitable business if you can achieve target sales of 5.5 million units by the end of next March?
A: Next year, we do expect to become profitable. An important point is that we're changing our business model. Until now, the game business has been such that you sell hardware and then software, and that was it. But we'll be offering an online service. By getting customers to subscribe and use our services, we'll be able to reap more income. In that way, we're creating a new business model. In Europe we've tied up with British Telecom and in the U.S. with AT&T to make this possible.
Q: Will this become a significant part of Sega's operations in the future?
A: It'll be a very important business. The Internet will change not only the way we play games but the way we do business. For example, in the U.S., E-commerce, or sales over the Internet, is growing rapidly this year. We're involved ourselves through our Sega.com web site, and in the upcoming Christmas season we will be selling through eToys.
Q: Are you concerned about being left behind?
A: Of course. For online games, a lot will depend on how good a console you have. Our main competition is the PC, but the graphics and sound capability of Dreamcast is better than a high-end PC. We're now developing an online game system that will make it possible to play the fastest games ever interactively. Unfortunately, it won't be ready in time for the Sept. 9 launch, but we'll be marketing it next spring in Japan, the U.S., and elsewhere.
Q: How effective is your ad campaign in the U.S.?
A: It's getting good reviews. We're concentrating on ads on MTV and that's been effective. On Sept. 9, we'll be the main sponsors of MTV's award show.
Q: Do you think you should have been better prepared for the Japan launch [which took place last December]?
A: It's true that everything didn't proceed according to plans. The biggest problem was in the production of the graphic chip by NEC, which had trouble raising the yield rate. Another one was the lack of game titles. We had planned to introduce more software, but creators fell behind schedule as they learned to work with new technical tools.
Finally, we have a decent number of software titles, around 70. One of our latest, Seaman, has turned out to be a huge hit. And now we plan to release it in the U.S. as well. First, we thought it wouldn't go over well with Americans, but trials indicate that it'll be popular there as well. You'd think it would be something for maniacs, but the majority of people buying it are those who have never played a video game before. It's popular because it can be manipulated by voice commands, so you don't need a control panel.
Q: Sony and Nintendo have just lowered the price of their consoles in the U.S. Will this affect your business?
A: We'd been expecting them to cut prices, and it was in our business plan. Those who wanted PlayStations and N64 machines have already purchased them, so we don't expect it to affect our business. Those who'll be buying Dreamcast in the initial stage will be our core users. We have about 2 million core users in Japan, and in the U.S. we estimate the number to be around 4 million.
Q: Still, the fact remains that just when you expect to begin making a profit in your Dreamcast business, both Sony and Nintendo will be unveiling their own 128-bit machines. Won't that hurt your business?
A: In America, the magic number for a price tag is $199. In the history of the game machine business, the majority of consumers won't purchase anything that costs $200 or more. If you don't attach a lower price tag, you won't sell. There will be people willing to pay more, but they won't number more than 500,000.
Looking at the architecture of PlayStation 2, I can see that the machine will be quite extravagant. Sony won't be able to sell it for under $200 for two or three years. It will have an impact on us, but it won't hurt our business.
Another point to remember is that by the time it debuts next year sometime, our online system will be up and running. We'll be encouraging our users to move to online games, and expect that 30% to 40% will do so, in Japan and overseas. Right now, about 33% of our Japanese Dreamcast owners subscribe to our online service, where at this stage they can do E-mail, surf the Web, and play some games.
We have a microphone on the market, and next year we'll market a videocamera that can be attached to Dreamcast. It'll make it possible to use the television as a monitor to conduct online chat.
Q: Are you really that confident about the success of Dreamcast?
A: I believe that networked society, with the U.S. taking the lead, will grow rapidly. Naturally, the game industry will have to change to meet the requirements of this new age. We'll be the first [in the industry] to ride this wave, and I'm confident that we can provide users with an innovative and much more fun way of playing games online. We'll also be creating a new business model.
Q: Will this wave reach Japan, and when do you think it'll happen?
A: It'll definitely happen in Japan, but I don't think we'll see an Internet boom until 2001. Right now, we're in the initial stages. Sega already has more than 300,000 online subscribers in Japan.
Q: You've just lost the head of your U.S. operations, Bernard Stolar. Did he leave or was it an ouster? And are you concerned that this will hurt your upcoming launch of Dreamcast?
A: It's unfortunate about Bernie's departure, but I can't go into any details regarding why he left. However, he's completed almost all of the necessary preparations, and the momentum is high among retailers and the third-party community. [Toshiro] Kezuka will take over at Sega of America as the chief operating officer. He has plenty of experience doing business in the U.S. [as a former Honda executive], and he has experience after helping to launch Dreamcast in Japan. Our marketing and sales chiefs are also highly accomplished, so we don't expect operations to be affected.
Q: Market analysts are concerned that Isao Okawa, chairman of CSK, your parent company, is interfering in Sega's management. Is that fair criticism?
A: Chairman Okawa started CSK as a computer firm in 1968 because he believed that computers would change our lives. And he was successful. Then 20 years ago, he decided that advances in communications would lead to networked systems and change the world. So he changed the direction of CSK to focus on networks and now the Internet is booming. He regards Dreamcast as an inexpensive network device. For us, it's a fantastic game console, but for him it offers an outstanding set-top box that can be installed in every home. So he's very excited about Dreamcast, since it's the realization of a long-held dream. He can hardly contain himself.
Some people may think he's interfering, but he's offering us a lot of support. We were thinking of Dreamcast only in terms of hardware and software sales, but he has convinced us that we have to offer exciting entertainment in the networked age. That's been his message.
Q: You announced a restructuring plan in April. Are you making progress?
A: We made a new plan between April and June, cut staff and are now implementing changes. We changed part of the organization and we're finally starting to see some good results. A major change was in our arcade business. We used to conduct software development for arcade and consumer games separately, but now we've combined it. There was some confusion but now our developers are beginning to develop games for different formats.
Q: Will the arcade business recover?
A: The arcade business as we now know it will definitely shrink. That's why we cut staff and outlets. By reducing overhead costs, it's once again a profitable business for us, but we're going to face the same problem next year as the industry continues to decline. So our challenge is to revitalize the industry. We're trying out new things. For example, in Gifu Prefecture, we opened a theme restaurant where we built a huge computer screen as a wall that evokes the feeling of being in an aquarium. We'll be involved in other projects like this.
