Sega: `We're Going To Blow Them Out Of The Water'

But will its new game console really threaten Sony and Nintendo?

Shoichiro Irimajiri, president of game maker Sega Enterprises Ltd., thrives on risk. When he was at Honda Motor Co., he led the development of a revolutionary passenger car and later helped spearhead the charge into the U.S. Now, Irimajiri is making his biggest gamble, with the Nov. 27 Japanese launch of Dreamcast, Sega's new video game console. It's a cool machine, but it pits Sega against Sony Corp. and Nintendo Co., the gameland titans that turned Sega's Saturn console into an also-ran. Yet in assessing the odds, Irimajiri sounds as cocky as Sonic the Hedgehog, the Sega character who will continue his death-defying stunts in Dreamcast games. "I'm personally not used to losing fights," he says. "We're not really going to compete with Sony or Nintendo. We're going to blow them out of the water."

From a purely technical standpoint, such bravura may be justified. Driven by a 128-bit processor, Sega's $250 Dreamcast has bullet-train speed and dazzling graphics that should appeal to Sega's core Japanese fans. Game writers love the depth and fluidity of the images they can achieve on its hardware. Says game designer Kenji Eno: "I finally can create the kind of 3-D graphics I only dreamed about." Dreamcast will certainly get noticed in Japan and the U.S., where it debuts next September.

But technology alone is not enough. Four years ago, Sega introduced the state-of-the-art 32-bit Saturn, but then got trounced by Sony's slightly inferior PlayStation, also a 32-bit. Sony swamped stores with game titles and marketed its console much more effectively than Sega, whose $2.3 billion in sales is dwarfed by Sony's $50 billion. "Sega can get by with its core market," says Robert Burghart, an analyst with ING Barings in Tokyo. "The question is whether it can create a hit." Yet a hit is precisely what Sega needs. Pretax profits for the first half of fiscal 1998 tumbled 47%.

To improve Sega's chances, Irimajiri is taking lessons from Sony. Before launching PlayStation, Sony's game division wooed game developers with an impressive library of technical tools. So Irimajiri traveled around the world asking developers what they wanted to see in a next-generation console. The end result, he says, is a central processing unit that delivers three times the power of a PC and a graphics chip developed by NEC Corp. of Japan and VideoLogic Group of Britain that renders dazzling 3-D images. Sega is also introducing Internet capability, making it possible to play online games and handle E-mail.

"ARROGANT." Sega appears to have learned from the past, when it considered itself the gold standard. "Sega got arrogant," admits Irimajiri, recalling the Saturn fiasco. "They forgot about the customers, and the developers needed to make the technology a success." To get products quickly to Japanese stores, Irimajiri has cut out slow-moving middlemen and set up direct links to 5,000 retailers across Japan. He has also lined up more than 300 software developers, with two dozen games due for release in the next four months. Included are new versions of popular games like Sega's Sonic Adventure and Virtua Fighter.

But the launch is a huge effort for a company Sega's size. Marketing and development costs--including the expenses of the U.S. introduction--approach $300 million. Complicating matters has been a delay in the delivery of NEC's graphic chip. Sega had hoped to sell 1.5 million Dreamcast consoles by the end of next March, but now figures it can only make 1 million. For its Japan launch, Sega is doing all it can to scrape together 100,000 machines, far short of the 500,000 it had promised.

Competition is certain to heat up. Sony and Nintendo have been lowering the price of their current consoles in anticipation of Dreamcast's arrival. In the U.S., prices for Nintendo's N64 and Sony's PlayStation are expected to fall below $100 next year. Nintendo is now working on a new version of N64, while Sony has dropped numerous hints about a 128-bit, digital videodisk-based PlayStation 2 in the lab, due to hit stores in late 1999 or beyond. Maybe Sega needs two new games: Nintendo Negator and Sony Smasher. Then, surely, Dreamcast would be a hit.