Sega Games the Systems

Simon Jeffery, head of the software maker's U.S. arm, talks about the Sony PS2's staying power and where the money is in game development

by Kenji Hall

In the video game industry, it's known as the transition. That's the months-long window when manufacturers Microsoft (MSFT), Nintendo (NTDOY), and Sony (SNE) launch their new breed of consoles and start phasing out the old. By now, investors know the drill: The companies will absorb big losses as they buy brand-new technologies, organize supply chains and assembly lines, and spend money on splashy ad campaigns.

But software makers don't have that luxury. They're expected to steadily rake in profits regardless of the transition. That can make it a nerve-wracking time to be a game software company. Just ask Simon Jeffery. As the chief operating officer of Sega of America, he's got to make fast, tough decisions. Among them: how to divvy up resources between games for the huge audience that owns older consoles, and games for a small group who are moving on to new consoles.

Jeffery's in a better position than most to make the call. Sega, the gaming division of Japan's Sega Sammy Holdings (SGAMY), is one of the few that has been on both sides. The Tokyo-based company was in the hardware contest until 2001, when it pulled out after sales of its critically acclaimed Dreamcast living room console fizzled. BusinessWeek's technology correspondent in Tokyo, Kenji Hall, recently spoke with Jeffery about creating games for Sony's PlayStation 2, the transition to next-gen consoles, and the challenges of staying ahead in an industry that can shift with unnerving speed (see BusinessWeek.com, 12/28/06, "The PlayStation 2 Still Rocks").

Sony's PlayStation2 is now six years old, yet it's still going strong. How do you explain this?

The PS2's very large user base is partly the reason. It's also that Sony is still actively building, promoting, and selling the PS2. At its current price—we expect another price cut in the not-too-distant future—we believe the PS2 in November-December next year probably has the capacity to sell more than any other format. We think the PS2 will actively be sold for another two holiday seasons (2007 and 2008) and will continue to sell millions of units.

Is there anything different about this transition to a new generation of consoles?

This is an interesting transition in particular because the retailers themselves are affecting it. The original Xbox (from Microsoft) and (Nintendo's) GameCube are being delisted by retailers because of the competition for shelf space and the fact that there are so many different types of hardware now. And that means the software business for the Xbox and GameCube goes away overnight, which leaves one remaining console from the previous generation—PS2.

Ordinarily, when you go through a technology transition you're able to optimize your development budgets across a couple of the old platforms. But this time we can't do that because retail has effectively taken away the Xbox and GameCube market. We have to just build games for PS2. And that makes the PS2 games more expensive than they otherwise would be.

By having two consoles on the market at once, isn't Sony at risk of having one machine cannibalize the other's target audience? How can an older machine like the PS2 compete against newer, faster machines with better graphics?

We don't think people who are looking to buy an Xbox 360, Wii, or PS3 will buy a PS2. We think the people who will buy the PS2 already have a next-gen console but want something for the kids. The PS2 has become a mass-market machine for kids and families. It will be in bedrooms rather than downstairs on the big HDTV. It's more in competition with the Nintendo Wii or the Nintendo DS (portable console) than it is with the PS3 or Xbox 360.