BUSINESSWEEK ONLINE : DECEMBER 18, 2000 ISSUE
INFORMATION TECHNOLOGY

Sega vs. Sony: Pow! Biff! Whack!
Sega is gaining but still can't catch Sony

In the cutthroat video-game business, this Christmas season features an epic shoot-'em-up between Sega Corp. (SEGNY) and Sony Corp. (SNE) You could call it the X-mas Deathmatch--except, almost everyone agrees, the players are poorly matched. Sega is the struggling underdog, and this could well be the company's last great battle.

In fact, earlier this year, many analysts had already given up on Sega. Through much of the past 18 months, the buzz surrounding Sony's upcoming PlayStation 2 game console was so thick you could slice it. Sales were roaring in Japan, and its Oct. 26 U.S. launch was sure to be a knockout. Sega's Dreamcast machine, meanwhile, was posting decent sales, but never stole the thunder from older, more primitive consoles from Sony and Nintendo Co. (NIDOY)

Then, last summer, Sega got a big break. Gremlins crept into Sony's semiconductor production process, forcing the company to trim U.S. sales projections. Instead of the one million-plus PS2 units Sony had promised by Thanksgiving, the company was suddenly talking about 500,000 to 700,000.

SMART ALECK. Sega leaped into action. At the end of August, Sega of America President Peter Moore slashed Dreamcast prices to $149 from $199 and rushed thousands of extra units out to retailers. In early October, he approved an unorthodox ad campaign whose pitchman was a smart-aleck kid snidely offering condolences to Sony. And Sega made sure every gamer was aware that only 50 games were available for the PS2, compared with 200 for Dreamcast.

Despite all that, the results for Sega have been mixed. In the past five weeks, Dreamcast's unit share of the $2 billion U.S. game-console market has jumped to 20.5%, from 12.1% in October--inching up on PS2's 26%. But with just 2.6 million units sold to date, Sega is far short of the 5 million units analysts say it needs to attract new-game developers. That hurts, because royalties on games are where Sega makes most of its meager profits. Meanwhile, in terms of total U.S. industry revenues, Sega's share has slumped to 19.8% from 31% last Christmas, while Sony has a 48% stake. And Sega is strapped in other ways, too. Unlike its competitors, it lacks the resources or the will to develop a new console.

Instead, for future revenues, Sega is banking on an online game site called SegaNet, crafted around Dreamcast. That's a novel idea. But if money doesn't roll in, management may just cut its losses on Dreamcast, cease production, and throw everything it's got into its arcade and game software businesses. Considering the estimated $163 million loss on the console so far, that may be Sega's smartest move yet.

By Cliff Edwards in San Francisco, Calif.

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