JANUARY 15, 2001 VOL. 157 NO. 2

Sega's Dream Past?
The game-console maker, threatened by Sony's PlayStation2, may be facing an unhappy ending
By DAFFYD RODERICK

Cedric Pioline smashes a nasty forehand down the line and pumps his fist in the air. He owns the French Open. But this isn't Roland Garros Stadium, it's Sega's Virtual Tennis in Euan Soo's living room in Hong Kong. A gamer since he was 3, the 17-year-old Malaysian owns seven different consoles: Nintendo, Sony, Sega, they're all here. But in the place of honor beneath the 50-inch TV screen is Sega's Dreamcast. "It has a higher polygon count and hugely better graphics," he explains as a defeated Carlos Moya drags his tail off the court. But Sega's lead is slipping: as soon as he can afford it, Soo is plunking his money down on the 300 MHz PlayStation2, knocking the 200 MHz Dreamcast from center court.

ALSO IN TIME COVER: The Truth About Tiananmen A stunning new book gives a revealing account of the power struggle in Beijing that led to the massacre • Sourcing: Orville Schell analyzes the evidence THE PHILIPPINES: Turmoil and Tragedy Damning testimony rocks Estrada's presidency as Manila struggles to recover from a series of deadly bomb blasts AUTOMOBILES: Burning Rubber Head honcho Carlos Ghosn hopes to keep Nissan on the high road with the rejuvenated Z car • Design Central: Shaping the future of Nissan TECHNOLOGY: War Games Sega's Dreamcast has been a disappointment—and with Sony's Playstation2 taking over game land, that means trouble TRAVEL WATCH Live Like a King in the Castles of Rajasthan

The fiercest competition in video games isn't on the screen, it's in toy-store aisles and on e-tailing websites. It's a hostile environment, where fickle teens craving thumb-candy—the latest first-person shooter games pushing the most polygons—decide which game consoles live or die. Surviving is a little like playing the games that make up the $20-billion-a-year global industry—a single misstep can mean a horrible, painful death. And there's no restart button in the console business. Just ask Atari.

So it's no wonder Sega threw a fit like an a.d.d.-afflicted kid denied his fix of Final Fantasy when the New York Times published a story last month claiming the company was about to be swallowed whole by arch-rival Nintendo for $2 billion. "Not only did this erroneous allegation cause the trade of Sega's corporate stock to be temporarily suspended," read an open letter to the Times on the company's Japanese website, "it also severely damaged Sega's corporate and brand image during a very precarious time in the video-game industry." Nintendo also flatly denied the rumor. But while the takeover talk may be off-base, that doesn't mean all is well in Segaland. The company, owner and creator of such gaming hits as Sonic the Hedgehog and NFL 2K1, is predicting a net loss of $208 million in the fiscal year ending in March 2001, which would be its fourth straight year in the red. Contrast this with Nintendo's forecast profit of $710 million and Sony's bright future with the PlayStation2, and it's easy to see why rumors are swirling.

One of the pioneers of the modern game console, Sega desperately needed a hit with Dreamcast. It wasn't a complete wipeout, but with worldwide sales of 5.87 million units between its release in November 1998 and September last year, the little white box didn't go platinum in the game-land charts. (PlayStation2, on the other hand, is expected to be in more than 11 million homes by March, only six months after its debut.) Equally worrying is the lack of support from independent game developers, whose backing can make or break a console. Without software, who needs the hardware? It's particularly damning for Sega that software makers Electronic Arts and Squaresoft both chose not to produce games for Dreamcast. Jeff Brown, spokesman for Electronic Arts in Los Angeles, says, "We see a four- to five-year leadership position for PlayStation2. We did not see that for the Dreamcast."

And neither have enough consumers. Sega has had to sell consoles for as low as $100 each—discounted from $300—in order to lure players to its software. Ironically, Sony's breakaway success with Playstation2 provided some salvation for Sega in the Christmas season: Sega sold more Dreamcasts than expected in the U.S. partly due to Sony's inability to deliver enough Playstation2s. "Our installed base will be 5 million units by March, and that's a critical mass," says Peter Moore, president of Sega of America. "We're the Rodney Dangerfield of consoles: we don't get no respect."

The more immediate problem is that it gets no profits. Despite the better than expected fourth quarter, Sega's hardware business is still a loss leader. Munehiro Umemura, Sega's spokesman, says a key part of the company's strategy is to increase the number of outlets for Sega's library of game titles. And it's adapting its software to work on platforms like mobile phones and personal digital assistants. Sega is also hoping its online gaming site, Sega Net, will begin to contribute to the bottom line. More than 100,000 subscribers signed up in the first month, and why not? Sega is basically paying them to join, offering incentives like $150 rebates and free keyboards. Sounds like a typical web strategy. Only a few years too late. If that's the best Sega can do, then it might just be game over.

With reporting by Barry Hillenbrand/Washington, Jen Wei Ting/Hong Kong, Deborah Jones/Vancouver, Sachiko Sakamaki/Tokyo and Chris Taylor/San Francisco

Write to TIME at mail@web.timeasia.com