Originally created 10/27/01

Sega switches to making games for other machines



TOKYO -- Sega Corp. recently treated reporters to a 1998 in-house film never shown outside the company - a Japanese "yakuza" gangster movie depicting a turf war in which the gang bosses are all played by Sega executives. The warring gangs are named Sega and PureSute - the Japanese abbreviation of PlayStation, the hit video game machine from Sony Corp.

In real life, Sega lost that fight.

Earlier this year, Sega was forced to abandon its Dreamcast console, whose sales never caught up with rival PlayStation 2. Getting rid of inventory at slashed prices, Dreamcast sales only recently reached 10 million. But PlayStation 2, which went on sale last year, has already doubled that number in shipments worldwide.

The failure of Dreamcast has made Sega rethink its role in the video game market. It's no longer focusing on hardware, but on making games for other machines - not only PlayStation 2 but also Nintendo Co.'s new GameCube and portable Game Boy Advance and Microsoft Corp.'s soon to be released Xbox.

"We are being reborn as an entertainment company," said Tetsu Kayama, Sega's chief operating officer.

So far, the shift from machines to games seems to be helping Sega's finances. The company said Wednesday it expects a first-half pretax profit of $36.7 million, a turnaround from its original forecast of a $19.6 million loss. Revenue should reach $790.4 million, up from an original forecast of $668.1 million, Sega said.

Sega and other Japanese game designers will be critical factors in the three-way video game machine war that is sure to intensify over Christmas. While there were concerns after the Sept. 11 terrorist attacks in the United States that demand for video games would slacken, now it appears that any negative impact would be minimal because families are expected to spend more time and money on activities at home.

GameCube goes on sale for $199.95 in the United States on Nov. 18, three days after Xbox. Xbox, the only machine among the three with built-in hard disk and broadband access, costs $299, the same as PlayStation 2.

"It's going to be difficult to overcome PlayStation 2's head-start," said Jay Defibaugh, analyst with Credit Suisse First Boston in Tokyo. "The balance of power will be decided by the availability of software."

That is why wooing game software-makers is extremely critical for the machine makers. Even more critical is clinching exclusive games - and Sega isn't about to stake its future on any one machine.

It is making 13 games for Xbox, including versions of the Internet-linking "Phantasy Star Online" and "Shenmue," whose Dreamcast version has sold more than a million copies. To market its Sonic games, Sega has chosen Nintendo, a machine believed to be a good draw for younger children. And it's offering some of its strongest titles, such as "Virtua Fighter," to PlayStation 2.

Because of its lead in the market, PlayStation 2 has a huge edge in its game lineup, with nearly 300 games for the Japanese and American markets each. Sony's machine is likely to have the easiest time acquiring games because designers generally want to make titles for the console that has sold the most.

Nintendo's GameCube has just three games out in Japan so far - two Nintendo originals and "Super Monkey Ball" by Sega. But Nintendo, which has a powerful lineup of in-house games such as "Mario" and "Zelda," says it plans to sell 1.1 million consoles in the United States.

Microsoft, meanwhile, expects to have about 20 Xbox games when the machine goes on sale in the United States. But that's just the start; Hirohisa Ohura, managing director of Microsoft's Japan unit, said 150 games are being manufactured for Xbox by 80 Japanese makers.

Sega has also decided to use the Xbox motherboard, a main computer part, for its arcade games - an area Sega dominates. Ohura said Microsoft and Sega are also together developing online games for personal computers in North America, and more online tie-ups are in the works, he said.