Can the Dreamcast save Sega?

Sega wants to lift its market share out of the single digits. Will a cool new console, $100 million in ads and fresh leadership do the trick?

Published August 16, 1999 4:00PM (EDT)

Sega of America announced last Wednesday that its most widely recognized executive, president and chief operating officer Bernie Stolar, would be replaced by vice chairman Toshiro Kezuka, effective immediately. It was a shocking announcement for many Sega employees and gaming insiders. A major change like this, so close to September and the U.S. launch of Sega's new system, the Dreamcast, couldn't help but cause consternation.

After all, the Dreamcast is Sega's best, and maybe last, hope. The new 128-bit gaming console is impressive, the graphics are incredible, it moves fast, costs only $199 -- and it comes with a built-in 56K modem for online play purposes, a first for a console. But right now that is not enough; it needs to be a smashing success.

Dreamcast has to turn Sega around. In 1993, Sega controlled more than 50 percent of the video game market. Its Genesis console, released in 1989, was enormously popular; at the time many a kid joked that SEGA stood for System Eating Grade point Average because of the amount of time spent playing it. But the Saturn, Sega's 32-bit console released in 1995, suffered from all kinds of problems -- including a lack of third-party developer support, few titles at launch, and an expensive $400 price tag. Sega lost its market share rapidly as Sony's PlayStation became the platform of choice, and Sega eventually stopped supporting Saturn, much to the ire of the gamers who had made the pricey commitment to its platform.

Now, folks like Jarett McCarthy, 19, a hardcore gamer and a hardcore Sega fan, are wary. "I think that they burned us by going into [Saturn] half-assed. If you look back, [Sega was] able to succeed against the superior Super Nintendo Entertainment System with their Genesis by advertising aggressively and releasing games that were as good as, if not better than, their Nintendo counterparts. With the Saturn though, it seemed as if they gave up ... after the PlayStation started to beat them out in console sales. Then they started releasing fewer good games and not porting certain excellent Japanese titles," he says.

McCarthy expresses only "cautious" excitement about the Dreamcast. "I think that they are going to have to win people all over again," he says.

Sega knows this -- and is going all out, with a $100 million marketing campaign and efforts to entice game makers to build cool games for the new platform. If the console fails to win over huge numbers of gamers, conventional industry wisdom says, it will be the end of Sega. The company has been hemorrhaging money of late -- it reported a net loss of almost $400 million in April -- and its market share has dwindled a pathetic 5 percent, according to some reports. Meanwhile, the Dreamcast hasn't done as well as expected in Japan, missing its target of 1 million units sold by last March.

So, a great deal of weight has been placed on the United States launch, which is why it's so surprising that Sega would make such a major and unexpected executive change so close to Sept. 9 -- launch day.

Speculation about the reasons for Stolar's departure is widespread. The official company line is "not to comment on personnel decisions." But the timing was certainly odd. Some Sega staffers think that parent company Sega of Japan wanted one of its own in the top slot to bring the two divisions closer together (Kezuka worked at the Japanese offices prior to moving to the United States earlier this year). Perhaps, say some, Stolar was pushing a different strategy than Japan. Others say that Stolar was a stiff public speaker and made for an awkward front-man, which is not what Sega needs right now. Certainly, he never inspired the respect that Shigeru Miyamoto, Nintendo's prize game maker and gracious unofficial company representative, garnered -- or even that of Howard Lincoln, Nintendo of America's smooth chairman.

At a recent industry conference, Peter Moore, Sega of America's senior vice president of marketing, jokingly called Stolar the "Prince of Darkness," in a lightly veiled reference to Stolar's reputation among many gamers. Stolar's popularity took a decided hit when Sega stopped supporting its Saturn. The Saturn was in serious trouble before Stolar arrived on the scene, but it was on his watch that the company ultimately pulled the plug and, for many, he is associated with its demise.

Startling as Stolar's departure may be, it is only one of several personnel changes. Sega Enterprises, the parent company, let go of nearly 1,000 people in Japan after announcing the $400 million loss. And in the United States, things haven't been running perfectly smoothly. For instance, Stephen Ackroyd was brought in as vice president of and general manager of business development to manage Sega's network
gaming and e-commerce business model last September, but was gone by March. Since then, Sega has hired several new executives with the hope of reinvigorating the company's brand -- and to distance Sega from the Saturn debacle. Moore, who was at Reebok when Sega had its Saturn problems, has spoken loudly and often about Sega's previous mistakes, and repeatedly promised that things will be different this time around.

"We screwed up," Moore told retailers in back in April. "Everything that went wrong with Saturn, we've learned from: insufficient distribution; poorly thought out marketing campaign; hardly any software at launch -- all of those things have been resolved and are well in our past."

This time around Sega is promoting its console big-time. The plan is to build up an extensive community of gamers before Sony and Nintendo can get next year's PlayStation 2 and Dolphin into gamers' hands. So, Sega has deluged retailers with glossy marketing materials and unleashed pre-release rental units at a video store chain. Its advertising campaign includes sponsorship of the MTV Music Video Awards -- conveniently airing on Sept. 9 -- and ads featuring the cool Dreamcast logo, (a spiral, often swirled inside a hazel or orange eye), in Spin, Rolling Stone, Vibe and gaming publications, plus airtime on Fox, ESPN, WB and UPN.

The "It's thinking" ad campaign is slick and high-tech, with movie-like commercials conveying the message that the Dreamcast is an intelligent machine with the power to communicate through its network connection. (The early teaser campaign offered a more mysterious collage of provocative, fast-moving images and faces whispering "It's Thinking.")

But more important than any marketing or advertising, the Dreamcast will launch with a strong lineup of games. Thirteen titles will be available Sept. 9, including Sega's platformer Sonic Adventure, starring Sega's popular mascot, Sonic, in a 3-D world; Namco's fighter Soul Calibur, which has received rave reviews for its graphics, control and depth; and Midway's quick and entertaining boxer, Ready 2 Rumble. There are plans for 14 more games to be released before the new year -- and game demos will come with the official Dreamcast magazine, published by Imagine Media.

Plus the built-in modem will enable users to upgrade games online, as well as send e-mail, chat, check stats, participate in communities and most importantly, engage in head-to-head play. Sega recently announced a deal with AT&T to provide online services, but at the time of launch, no games with head-to-head play will be available. Sonic Adventure will take advantage of the modem in small ways (you can upload and download scores and stats, for example), but head-to-head racing in the much-anticipated Sega Rally 2, along with all other serious online gaming, will have to wait. "The building of the infrastructure is an enormously complex undertaking," says Moore.

All of the effort is absolutely necessary if you talk to some gamers. One employee at Electronic Arts, a game-making company that has no public plans to build a Dreamcast game, said he was impressed by the Dreamcast's showing at the gaming convention E3, but that he is "not particularly motivated to buy a Dreamcast because I think the PlayStation 2 will be significantly better." The employee, who asked that his name not be used, owns a Nintendo 64 and plays games on his PC as well, getting in ten to 20 hours of gaming a week -- and he says he is "intrigued by the DVD aspect" of the PlayStation 2, which will be DVD-based, as opposed to the GD-Rom format of the Dreamcast. He'd be thrilled if Sony rigged the new PlayStation to play DVD movies as well as games -- though that's not currently part of the plan. (If Sony doesn't make the PlayStation 2 movie-compatible, the Electronic Arts employee says he "wouldn't be surprised if there was a hack out for it shortly" after the system's release.)

But what impresses this gamer most about the PlayStation 2 is what he hears from other game developers. "Everything I know from the industry says the number of games for the PS2 will be astounding," he says. It's going to get "a lot of support," he confides, far more, he suspects, than what the Dreamcast has now.

Still, Sega is not without prospects. In fact, something at Sega is working -- be it the marketing blitz, the gorgeous screenshots of new Dreamcast games like Sega Sports NFL 2K, or the recently hired executives. Sega announced that it has more than 200,000 pre-release orders for the system.

"These are among the strongest pre-sell results we've ever seen, and they do indicate a very high level of demand for the system for this holiday season," says Sean McGowan, an analyst at market research firm Gerard Klauer Mattison & Co. And Sega is, at the moment, on track to meet its goals of selling 1.5 million Dreamcast units by March 31, having surpassed its pre-order targets.

"They're doing some things very differently," says McGowan, who credits Sega with having a "dramatically better product than anything else on the market." By going after a broad swath of retailers, rather than the few it targeted with the Saturn, and launching in September rather than May, when kids are getting ready for camp and outdoor activities, he says, Sega is showing that it has changed. Beyond all that, "the price is terrific," he says. "For $199, buyers get the best deal ever on a new system at launch, as measured in 'power per dollar.' And a modem. Finally, the number of titles available at launch and within three months of launch is, perhaps, the best ever."

Yet McGowan sounds a note of caution. "I think the 500,000 to 1 million buyers of Dreamcast in the next six months are people who have been waiting four years for a new video game system, so even if they plan to buy the PlayStation 2, they don't want to wait another year. And they may be just as likely to buy [Dreamcast, and also] PlayStation 2 and Dolphin when they are launched. The real battle is not for the hearts and minds of the first million. It's the next 30 million that matter, and that battle comes after Christmas 2000."

But right now, the next-generation systems from Sony and Nintendo are basically still on paper, and Sega is looking to get hold of gamers early and hook them, long before next year's releases of other systems. "I'd rather be where I am right now," says Moore, "than having the promise of where Sony might be a year from now. The ball's in our court; if we screw it up, drop it, fumble it, it's our own fault."

Sega's marketing campaign and attempted seduction of gamers will continue into the coming months, and will receive a helping hand from the Dreamcast itself. Dreamcast users will be able to connect to Sega-sponsored community areas, which will build loyalty, and also keep Sega in touch with who its users are and what they are looking for. "The great thing is that everyone who is a part of the [Dreamcast] network is 100 percent a consumer," says Moore, "because they need to own the hardware to be on the network"

"I like to say I get to boys in their bedrooms," Moore jokes, "but my PR department says that's not the right thing to say."

It's this sort of edginess, Moore's impulse to talk about boys in their bedrooms, that Sega is shooting for -- a hip, xtreme, raw image that harkens back to the days when the Genesis was king and cool. Sega is aware that this is its last chance; it's lost so much money and market share in past years that it simply can't withstand another failure.

It's not clear whether Stolar's reported ouster was related to this drive to change, and it will be months before the effectiveness of any of the company's changes can be measured. But many gamers sound hopeful about the Dreamcast's chances of success. Says gamer Adam Richardson, who has been playing on a Dreamcast console imported from Japan, "I am looking very much forward to [the U.S. Dreamcast] launch. I have played the system and many of its games extensively and I feel it is something that has been a long time coming." A long time coming indeed.

By Moira Muldoon

Moira Muldoon is a senior editor at Computec Media.

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