HEY KIDS! IT'S SEGA ON DEMAND

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A planned test of new distribution technology could kill long lines for the latest Mortal Kombat video-game.

Sega of America last week said it will participate in a test with NewLeaf Entertainment, the joint venture of Blockbuster Entertainment Corp. and IBM Corp., to offer videogame rentals on demand.

The test is scheduled to start in August in 10 to 15 Blockbuster Video stores in one Southeast market and will likely last two to four months, said Michael Beaudoin, VP with Deerfield Beach, Fla.-based NewLeaf.

The potential for NewLeaf is great, said Doug Glen, Sega group VP-business development.

"If we could grow the rental business, then logically we're going to grow the sell-through business," Mr. Glen said.

Analysts estimate game rental is the fastest-growing segment of the videogame business, ranging between $1 billion and $2 billion a year.

Inventory shortages of top titles are stalling that growth, though. By creating titles on demand, shortages would be eliminated, and sales ultimately would rise as renters later decide to buy, Mr. Glen said.

Although no Sega licensees have yet signed on for the test, Sega will have plenty of games to offer since it publishes about half of all software available for its platform.

"It's really a no-brainer from [the publisher's] standpoint," Mr. Beaudoin said. "It gives them the opportunity to dip their toe in the water [with] electronic distribution."

For retailers, the NewLeaf system would eliminate the dilemmas of over- or understocking titles, and what to do with titles after their three-month to four-month life cycle has been completed. The Sega titles will be created on reusable cartridges.

"This way, no matter what the mix or demand is, you're going to cover it," Mr. Glen said.

Still, there are several concerns about the new distribution format. Its impact on traditional retail channels has yet to be determined, and the payment of royalties remains an issue.

Mr. Beaudoin said NewLeaf and Blockbuster will tally rentals as part of the test and pay appropriate fees to Sega and participating licensees.

"In our model, we would now have a revenue sharing program between the retailer and the publisher," Mr. Beaudoin said. "Each time a game is produced through the NewLeaf system, the publisher receives a royalty."

NewLeaf is a multifaceted system that Blockbuster can use in a number of its divisions. The hardware can easily output everything from videogame cartridges to audio, movie and multimedia CDs to analog cassette tapes.

In fact, NewLeaf was first envisioned as a music delivery system. But its announcement last year met with strong resistance from recording industry executives who hadn't been consulted beforehand and worried about lost revenues.

Mr. Beaudoin said discussions between NewLeaf and recording label executives continue.

"We think over time ultimately there will be one universal system that will be able to support a whole variety of different formats," he said.

Unlike the music application, which would use NewLeaf's sister company, Fairway Technologies, to transfer more than 80,000 titles on demand, the smaller videogame files will be stored in the system on-site. When new games become available, system operators can simply download them from manufacturers via telephone link or data stored on CDs.

"For games, that's what's economically viable," said Mr. Beaudoin. "If you have 500 to 1,000 titles, you might have all of the titles available for a platform."

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