Who will save Sonic the Hedgehog?

After four straight quarters in the red, Sega needs a savior. Enter Microsoft.

By Jim Lynch

Published November 3, 2000 8:30PM (EST)

Sega is the Russia of the video-game industry, a former superpower now rotting away, unable to get a grip on its problems and build a prosperous future for itself. The company has dwindled away since its glory days with the Sega Genesis and is now on its last legs as a hardware maker. And like the former Soviet Union, it is in desperate need of some outside help.

Since there's no IMF to bail Sega out, aid will have to come from a different source. Enter Microsoft. The software giant is moving aggressively into the video-game industry with its upcoming X-Box system. Sega could be a tasty morsel for the software giant to devour as it girds for an all-out battle for video-game supremacy with Sony and Nintendo.

Last week Sega reported a quarterly loss of $204.6 million -- its fourth straight consecutive shortfall. Desperate, the company is promising to retool its business, moving away from hardware and toward becoming a software provider to multiple hardware platforms. Sega has also announced that it would license its Dreamcast technology for use by other hardware vendors.

Sega deserves a pat on the back for finally admitting that its business model isn't working and for trying to retool itself as a software-only company. But will it be enough to pull the company out of its death spiral and bring it back to profitability? Don't count on it. Sega still has to execute its new strategy, and there's no guarantee it will succeed.

Sega started out in 1951 in Japan as Rosen Enterprises, an export company. Later it merged with a jukebox company, changed its name to Sega (which came about as a contraction of "Service Games") and jumped into the coin-operated game industry.

In the 1980s the company released the Sega Master System, hot on the heels of the Nintendo Entertainment System. Though SMS had better technology, it never caught on the way Nintendo's system did. SMS trailed NES until the late '80s when Sega got a jump-start on the 16-bit market by introducing the Sega Genesis.

Genesis was Sega's high point in the industry, competing effectively with the rival Super Nintendo Entertainment System throughout the late '80s and early '90s. Unfortunately, as the life of Genesis began to ebb away, Sega made a near-fatal error by releasing its next piece of hardware, the ill-fated Sega Saturn.

Sega Saturn was too hard for developers to program for and subsequently lacked enough high-quality games to attract gamers to the system. Slowly but surely, it wilted under the onslaught of Sony's PlayStation and, later, the Nintendo 64. By this point Sega had slipped into the No. 3 slot among video-game makers, a terrible place to be in such a competitive market.

The Sega Dreamcast, released in 1999, was widely regarded as an opportunity for Sega to jump ahead of Nintendo and Sony, both of whom were still supporting older consoles that were beginning to show their age. Although Dreamcast has sold well in the United States, the costs of producing it have kept Sega in the red. The latest blow to Sega's position arrived with the recent launch of the PlayStation 2, which forced Sega to cut prices on Dreamcast and incur an even higher loss for each Dreamcast produced.

To make matters worse for Sega, next year Nintendo has a new console coming and Microsoft is jumping into the console market with its X-Box video-game system. To its credit, Sega has finally seen the handwriting on the wall. Video-game hardware has just become too brutal a marketplace, and Sega is massively outgunned financially by all three of its rivals.

Although some Sega fanboys will recoil at the very idea, a marriage between Sega and another company makes a lot of sense. Hardware aside, Sega has some very attractive assets including some of the most recognizable video-game properties around: Sonic the Hedgehog, Phantasy Star, various and sundry sports titles, Ecco the Dolphin and many others.

It's doubtful that Nintendo would be interested in such a deal, given its own powerful video-game franchises like Mario, Zelda, Metroid, etc. Sony also has its own franchises, along with nearly every other developer under the sun already involved with making games for PS2. So that leaves us with one likely candidate to purchase Sega: Microsoft.

Microsoft has already worked closely with Sega in providing the Dreamcast's operating system (a scaled-down version of Windows), and Sega would be an invaluable asset to Microsoft's attempt to penetrate the video-game industry. Sega's franchises would also be a great way for Microsoft to quickly guarantee AAA-quality titles for the X-Box.

So don't be surprised if you see Sonic the Hedgehog standing in front of a Windows logo someday. In the long run, assimilation might be the only hope left for the shriveled remains of a former video-game superpower. How sad.

Jim Lynch

Jim Lynch is a consultant, writer and editor. He is a frequent contributor to ZDNet, PC Magazine, MSNBC, Forbes, Express.com, eWeek, The FamilyEducation Network and Computer Gaming World.


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