Sega Enterprises Ltd., thus far an also-ran in the video-game-machine market, has an audacious new plan to grab market share:Give away the hardware.
Starting in August, Sega will borrow a tactic from the everything's-free world of the Internet and provide its Dreamcast console at no charge. The offer is available to customers who subscribe to a new Sega Web service for two years at $21.95 a month. Customers who have already bought the Dreamcast console, which lists for $199, will get a free keyboard and a $200 check if they subscribe.
The company is betting the new strategy will spur sales of its game software and help it tap into the expanding community of Internet game players. "We may give up $400 million in hardware revenue," says Peter Moore, vice president of marketing at Sega of America in San Francisco. But with two-year service contracts, he says, "we can make $1 billion in Internet-service-provider revenue."
Since it introduced Dreamcast in North America in September, Sega's game-console market share has climbed to about 15% from 0.5%. But it is still far behind market leader Sony Corp. and No. 2 Nintendo Co., and its rivals plan to introduce new machines of their own.
In particular, Sega hopes to steal a march on Sony, which will launch its next-generation PlayStation2 machine in the U.S. this fall. Sales of the new PlayStation in Japan, where it was introduced in March, have been worrisome for Sega: They're way ahead of Dreamcast sales, and sales trends in Japan are often replicated in the U.S. Any market share Sega can gain this year will also help it battle Nintendo's next game player and the X-Box game machine that Microsoft Corp. plans to introduce in 2001.
Sega will probably borrow heavily to finance the hardware giveaways, but Mr. Moore says financing shouldn't be a problem if Sega has two-year contracts with gamers. It spent $100 million last year to launch its Dreamcast video-game system in the U.S., Sega officials say.
In the world of consumer electronics, giveaways have been a mixed bag. Providing free or discounted cellular phones to consumers who sign service contracts has worked well, but last year's free-PC movement fizzled.
Sega responds that it won't make the mistake PC vendors did of not having the manufacturing capacity to meet demand. Free PC makers also had a distinct disadvantage compared with Sega. Most of them didn't own the Internet service provider that reaped the revenue from the multiyear service contracts tied to their hardware giveaways. They also didn't market software or accessories whose sales could be spurred by the hardware giveaways.
No one really knows whether there's a critical mass of game players who want to hook their machines to their television sets and cruise the Web. The business potential of online games has received a lot of attention, but the usual game medium is still the personal computer.
Still, about 20% of Sega Dreamcast owners are already using the console's built-in modem, Mr. Moore says. They go online to cruise the Internet or send e-mail messages. In March, the company launched the first Internet game played from a video-game console. In the simple game, Chu Chu Rocket, players help lead mice through mazes and escape from pursuing cats.
The current Sony and Nintendo consoles don't have modems, and the PlayStation2 doesn't come with a modem. It does have a connector for hooking up to a cable modem, phone-based digital subscriber line or standard modem -- but only for an extra fee.
To run its online operation, Sega will set up Sega.com, an independent company headed by Brad Huang, a 35-year-old whiz kid and former hedge-fund manager who pitched the strategy to Sega Chairman Isao Okawa a year ago. Sega's online-gaming Web site, SegaNet, will make its debut in August. The Web site will be Sega's portal to the Internet, providing a gathering place for Sega fans -- and a target for all sorts of sales pitches.
Sega.com will have initial funding of $100 million and 120 employees, Mr. Huang said. One scenario under discussion: Sega.com could go public in the future, giving Sega some Internet cachet and helping it reap much-needed cash for the online expansion.
During the year, Sega expects to launch 12 online games, including versions of smash PC hits such as "Quake III Arena" and "Half-Life." In addition, Sega will offer multiplayer online console games such as football and basketball. Gamers could play basketball over the Internet, for example, with as many as eight human players on two teams. Eventually, Sega hopes to provide games for which it will be able to charge a premium monthly fee.
Gamers with Dreamcast consoles will be able to use any Internet service provider to access the SegaNet site. But Sega hopes to persuade them to sign up for its service, which will be provided by GTE Corp.'s GTE Internetworking unit.
Sega subscribers will be able to play much faster games, Mr. Moore says, because GTE will host the SegaNet site on its high-speed communications backbone. Subscribers will get to the site in only one or two steps from their log-in point.
Other players will have to hop through as many as 10 connections, slowing down the response time each time they make a move.
Analysts and retailers say Sega had to do something bold. Jill Hamburger, a vice president at retailer Best Buy Co. in Eden Prairie, Minn., expects the console giveaway to boost the company's software and accessory sales.
"Sega had to move attention away from Sony's superior technology," says Michael Gartenberg, an analyst at Gartner Group in Stamford, Conn. |
