Sega's Dream Machine

Can Dreamcast put it back on top?

Shoichiro Irimajiri, the tanned, exuberant president of video-game maker Sega Enterprises Ltd., looked ready to whoop for joy as he strutted out of a recent meeting at Tokyo headquarters. The news from Sega of America Inc. couldn't be better, he said. As of late August, U.S. consumers had ordered 300,000 units of the Sega Dreamcast, a lightning-fast game machine with dazzling graphics. That's three times as many machines as Sony Corp. sold when it launched its now-ubiquitous PlayStation in 1995. And Dreamcast won't arrive until Sept. 9. "It's a record for game console launches in the U.S.," says Irimajiri, 59. "We're very excited."

Is Sega the once-and-future titan of the game universe? In this fickle business, anything is possible. In 1990, Kyo-to-based Nintendo Co. was the undisputed leader, with nearly 90% of the $13 billion global market for video-game software and hardware. Then came Sega, which by 1993 owned almost half the market with its popular Genesis. With PlayStation, Sony seized the title.

AWESOME. Sega, now a distant No. 3, hopes Dreamcast--the first player powered by a 128-bit microprocessor--will win it back the crown. Or it could be Sega's last hurrah. After a $389 million loss in 1998 and big debt payments ahead, analysts say Sega cannot afford for Dreamcast sales to flag. Sony and Nintendo are scrambling to hit the U.S. with their own high-powered machines over the next 18 months.

Whatever the outcome, Sega gets credit for one awesome machine. In European tests, Dreamcast was four times more powerful than PlayStation and two times more than Nintendo 64. Its graphic processing power is four times that of the Pentium II. And it's the first game machine with a built-in modem to log onto Sega's imminent online game service. Sega has lined up leading game-software developers and now has dozens of titles ready. "Sega has a great machine," says Shohei Tatemi, a senior executive at Capcom Co., a leading Japanese game-software house. "If it can sell 1.5 million units in the U.S. by next spring, it'll be on its way to success."

To boost momentum, Sega is mounting a $200 million global marketing blitz. In the U.S., its tactics run from trendy to downright wacky. It's sponsoring the MTV Video Music Awards and hosting hundreds of events across the country. Two huge metallic "mother ship" trucks jammed with Dreamcast consoles will visit 44 U.S. cities in the next three months. In Hollywood, gamers splashed about in vats of mashed potatoes, looking for the letters making up "Sega Dreamcast."

The goofy antics mask Sega's desperation. Sega's sales have dropped from $3.9 billion in 1996 to $2.4 billion last year. And 1999 is expected to be its third money-loser in a row. Over the next year, $800 million in payments are due on debts Sega piled up during the game wars of the early-1990s. Not helping matters is the hasty departure over strategic differences in mid-August of Bernard Stolar, who ran Sega of America and built up its retail network.

LIMITED WINDOW. And Dreamcast's high-tech edge won't last long. Sony is determined to launch PlayStation 2, a 128-bit machine that will play dvd-formatted games, by early next year in Japan, and in the U.S. the following Christmas. In a recent software demonstration, Sony showed off graphics of supercomputer quality. "Dreamcast is better than anything on the market now," says games-industry analyst Lisa Spicer of Westlb Securities Pacific in Tokyo. "But as we've seen with computers, the PlayStation 2 will be better, and Nintendo's Dolphin even better."

That's the big reason Dreamcast's early reception is crucial. Sales in Japan hit 1 million in May. While that's two months behind schedule, Sega expects to meet its target of 3 million by next March. In the U.S., Sega aims to sell 1 million machines by Christmas.

Winning a mass following is essential to lure big-name game developers in the U.S., such as Electronic Arts, to supply Dreamcast products. And since developers don't get serious unless they think they can sell millions of copies, Sega's fortunes rest on its ability to get as many machines as possible into the market. "If Sega only sells 300,000 units, you know there's no way a developer will sell more than 300,000 games," says Todd Hays, president of Hunt Valley (Md.)-based game-accessories supplier InterAct Accessories.

In Japan, Sega has already recruited all the leading developers, enabling it to bring 70 titles to the market so far with another 80 due by March. It also has lined up such U.S. titles as the popular arcade fighting game Soul Calibur--advertised as "Hot Chicks. Massive Weapons." On Dreamcast, it will run at 60 frames a second--twice as fast as in arcades. But Sega eventually needs a much wider selection. Sony has 661 PlayStation titles in the U.S. alone.

The stakes are high for Sega's rivals as well. The N64 and its handheld Game Boy have made Nintendo one of Japan's top corporate performers. And at Sony, which has been hit hard by dropping consumer-electronics sales, PlayStation generated 41% of operating profit in fiscal 1998. "Without the PlayStation, Sony wouldn't have much of a future," says Ken Kutaragi, head of Sony Computer Entertainment. Sony will spend $150 million to prop up U.S. sales of the original PlayStation. With Dreamcast priced at $199 in the U.S., Sony has slashed PlayStation's retail price to $99, from $129. Nintendo matched Sony's price cut on its N64.

Sega is equipping each Dreamcast console in the U.S. with a 56K modem that will let users play games over the Internet and to send E-mails, although it won't roll out the service until next spring. Sega will spend $45 million to build a global network for online multiplayer gaming in Japan, the U.S., and Europe. That would enable Sega to charge for Internet access. "Until now, you sold hardware and software and that was it," says Irimajiri. "With our online service, we reap more income."

For good measure, Irimajiri is using a little guerrilla marketing. When Sony rented the Wente Vineyard golf course in Livermore, Calif., to stage a tournament for game developers recently, Sonic the Hedgehog, Sega's video-game mascot, crashed the party in a golf cart and unloaded hundreds of golf balls with Dreamcast's logo. An airplane dragging a Sega banner buzzed overhead. And in mid-August, Sega commissioned a huge sidewalk drawing of the Dreamcast logo in front of Sony's Metreon entertainment complex in San Francisco. Gentlemanly, no. But in the game business, you play to win.