January 11, 2000 1:55 PM PST

Sega's sales fly despite business woes

Sega of America today reported continued strong sales of its Dreamcast game consoles, but trouble may still loom for the company.

Sega said 1.55 million of the devices were sold by Sega Dreamcast the end of 1999 in the United States. Such sales would seem to answer critics who wonder if the company's newest console would sell in foreign markets after floundering initially in Japan. U.S. sales reached the 1.5 million mark in about three and a half months, compared to 1 million units sold in four months after the launch in Japan.

But with the company continuing to lose money and products from Sony and Nintendo expected later this year that will leapfrog the 128-bit chip in the Dreamcast system, analysts still aren't certain the company will fully recover from its past mistakes. Sony, in particular, has been pushing the benefits of its upcoming PlayStation 2.

Sega of America could not be reached for comment.

"(Dreamcast) sales have been better than expected," said Ed Roth, vice president of NPD Group, a market research firm. "The big question is are they going to be able to compete with the new systems coming out? They've sold a nice number of systems, but consumers are beginning to become aware of upcoming systems from Sony and Nintendo."

The key is for Sega to find a solid strategy to sell to the broader market after having tapped out the early adopter market.

In the U.S. market, that means licensing and bringing to market more children's games, Roth said. With the built-in modem, the Dreamcast system also has the potential to allow Sega to provide an array of services to grow profits.

Corey Wade, research director with Alexander & Associates, a games business consulting firm, said that in order to survive, game console manufacturers such as Sega need to be able to garner 20 percent of the market so that game developers stay interested in the platform. Sega has a tough battle ahead, but so far, they've made the right moves, Wade said.

"Sega's been proving a lot of people wrong (by selling better than predicted). They are on the right pace to get to that 20 percent level. I wouldn't have said that a year ago," he said.

Meanwhile, in Japan, Sega is finding some success in keying into a broader market. Salomon Smith Barney analysts there said they believe Sega should now be valued as an Internet company "rather than as the maker of a game platform." After raising their share target price, Sega shares rose to their highest level in two years in trading on the Nikkei.

In Japan, the PC is not a fixture in the home consumer market. The Dreamcast console could be become a low-cost means of getting online for Japanese consumers. Sega is working with investment firm Nomura on doing a TV set-top device for online trading, as an example of one potential service the company is planning on offering in its home market.

So far in the United States, Sega won't be selling the system as anything but a game machine, even though it has the ability to download Internet content and display it on a television, similar to Microsoft's WebTV offering.

Instead, the company will initially focus consumers on Dreamcast's ability to let players download game hints, tips, new characters, scores, results and enable them to keep track of scoring in real time.

Still, there are hints of things to come for Dreamcast. Just last month, Excite@Home and Sega signed a deal that means Excite will be the exclusive portal partner for the Sega Dreamcast Network. Those who surf the Web via Sega's online service will see Excite-produced content and personalization features, such as Excite Mail and stock quotes. Eventually, the companies said, Excite will produce an interface for a Dreamcast TV-based Web browser.

Sega wouldn't be the only company aiming to extend the reach of the game console into new areas. Sony's plans for the upcoming PlayStation 2 include offering DVD movie and CD audio playback. Sony is planning on the system being able to download games from the Internet onto a hard disk via a high-speed connection such as a cable modem. Later, analysts expect Sony to use its considerable clout in the movie and music businesses to offer PlayStation users the ability to purchase and download music or video for playback.

Whether or not both consumers and "gamers," as the audience of hard-core game aficionados are called, purchase a Sony product instead of a Dreamcast is still up for debate. The only thing that's certain is that Sega has to do something to gain ground on Sony and Nintendo, or else risk falling out of the race altogether in an industry that totaled $7.2 billion last year, according to NPD.

Bloomberg contributed to this report.

 

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