Sega pins turnaround to U.S. Dreamcast debut

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Talk about an early buildup.

Sega of America's Dreamcast won't debut in the U.S. for another 11 months. But folks across the country are so hankering for the next generation videogame machine that they're walking into retail outlets and adding their names to a growing list of customers who will receive a phone call when it hits store shelves.

"A lot of people are asking for it and we can't turn customers away," said a spokeswoman for one national retail chain. "While we aren't officially doing a pre-order, we are letting them sign up for it." The retailer declined to be identified because it didn't want to encourage more early orders.

Sega's Dreamcast, a 128-bit machine that's twice as fast as Sony's PlayStation and Nintendo 64, debuted in Japan two weeks ago. The launch was supported by a coming-out party in Tokyo that attracted some 15,000 Sega fans. Similar revelry is expected in cities across the U.S. next fall when Sega introduces Dreamcast to players with a $100 million U.S. marketing budget. U.S. advertising is handled by Foote, Cone & Belding, San Francisco.

Yet amid all the hoopla there remains an undertone of desperation at company headquarters. Once the runaway leader in home videogames, Sega is now on the brink of becoming, in its own game terms, "House of the Dead."

FROM FIRST TO LAST

The marketer, which at its peak dominated the category, now is hanging onto a 3.9% share of the $6 billion home videogame market. That's a distant third to Sony's 48.5% share for PlayStation and Nintendo's 38.8% for 64. So much, in fact, is riding on the success of Dreamcast that Sega is investing $500 million to market it worldwide.

"If Dreamcast doesn't succeed, it could seriously hurt the company," said analyst Sean McGowan of Gerard Klauer Mattison & Co. "It could be crippling."

The high stakes are one reason Sega is waiting a year to introduce the product in the U.S. The company hopes to spend the next 11 months smoothing the way with software developers, and tinkering with new game titles for Dreamcast.

"We also think we can leverage the fact that Sony and Nintendo will be peaking this year," said Sega spokesman Dan Stevens. "By next year, consumers will see their platforms as old and will want the next innovation."

Sega also needs the next 11 months to smooth retailers' feathers, which were ruffled considerably four years ago. Sega's last machine release, Saturn, debuted in 1994 and flopped miserably.

According to the company's own account, it rationed consoles to some key retailers in an attempt to stoke demand. Retailers balked; at least one, Kay-bee Toy & Hobby Shops, refused to sell Saturns at all.

ROUTE TO FAILURE

To add to the problem, Sega underestimated the complexity of the system for game developers and didn't market appropriately to them. The marketer also launched the Saturn machine without a "Sonic" game. An egregious offense considering Sonic ranks as one of consumers' all-time favorite games.

What's more, the marketer erred in trying to please everyone. By 1994, Sega was marketing at least five separate videogame systems and juggling a mind-boggling array of software titles. Game Gear, SegaCD, 32X, Nomad and Pico had varying degrees of success at retail, none spectacular. Today, all have been phased out but Saturn, which, in turn, will be replaced by Dreamcast.

"We've looked at those years over and over again," Mr. Stevens said. "We made a lot of mistakes."

Enough missteps for the competition to take charge. In 1995, Sony did what seemed like the impossible--Its nascent PlayStation walked off with Sega's leading market share. Analysts credit Sony's exclusive game partnerships and a giant library of titles for PlayStation's success.

With next year's launch, Sega is determined to learn from its past. Retailers such as Babbage's Etc.; Kay-bee, Sears, Roebuck & Co; Toys "R" Us; and Wal-Mart Stores are already on board. All the chains have committed to stocking Dreamcast come next November. Experience and a stockpile of third-party-developed games are expected to boost Dreamcast's prospects. In Japan, Sega sold 150,000 Dreamcast machines within hours of hitting the market.

Analysts remain cautiously optimistic. "At this point, to try to beat Sony and Nintendo, you might need more than just a super machine," Mr. McGowan said. "But I'm not willing to write them off yet."

Whatever else analysts think, they agree the Dreamcast machine is superior to existing consoles. Dreamcast not only has the doubled 128-bit rate, which results in better graphics and game play, but also debuts several innovative features.

Plug-in modems will allow users to connect through the Internet for multiplayer games. Visual memory cards with small display screens will plug into the larger console and "remember" where play stopped, so picking up a game again is easy.

CYBERSPACE FRENZY

The frenzy has already kicked off in cyberspace, where more than 75 Web sites devoted to buzz, rumors and news about Dreamcast can be found. Net correspondents flew to the Tokyo premiere for live reports. Several sites even direct customers on how to buy a Japanese Dreamcast machine through import stores in the U.S.

"This business goes through dramatic changes in technology," said analyst Stewart Halpern of ING Baring Furman Selz. "It is a requirement that one can manage those changes well. History has shown a lead in this business can easily flip-flop." Sega is hoping history does indeed repeat itself.

Copyright December 1998, Crain Communications Inc.

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