Sega started off on the wrong foot when it launched its 128-bit Dreamcast game console in Japan Nov. 27, 1999, and has been unable to regain its balance ever since.

Due to chip shortages, Sega only managed to ship 150,000 consoles at the launch. Though Sega executives hoped to sell well over 1 million consoles by the end of the year, they had barely reached 900,000 by February. In March, PlayStation 2 launched, and the market became Sony’s.

The U.S. launch of Dreamcast had more impact. Sega sold more than 1 million consoles at its launch, but sales still turned soft. By January, U.S. Dreamcast sales seemed to be in the same doldrums as sales in Japan.

With Sony’s PlayStation2 coming out in the second half of 2000, and new consoles from Nintendo and Microsoft in the not-too-distant future, Sega of America executives set to work looking for ways to step up their business.

In May, Sega announced plans to create SegaNet, an Internet service provider that would be specially designed to work with Dreamcast’s 56K modem. Over the summer, Sega dropped the U.S. price of Dreamcast to $149.99, and offered free consoles to consumers who signed an 18-month contract with SegaNet.

“The decision to drop the price of Dreamcast to $149 was made after a number of meetings with Japan based upon where we needed to go with the install base,” claims Sega of America president and COO Peter Moore. Sega ended the summer with just over 2 million consoles sold, according to Moore, and the company needed to bring in the next wave of consumers. “We’re [now] going after that next cusp of users where price becomes a little more sensitive.”

With a lower price, a wave of attractive new games that included NFL 2K1 and Jet Grind Radio, and a well-run ISP, Sega saw its sales more than double in September.

“Dreamcast has definitely built some momentum from where it started early in the year. Sega will sell in the neighborhood of 1.5 million, compared to the 1.4 [million] last year,” says analyst Richard Doherty of Envisioneering. “I think they will do a little better this year.”

But part of Sega’s success came from an unforeseeable circumstance — a shortage of PlayStation2s.

Like their Japanese counterparts, U.S. video game enthusiasts seemed anxious to get their hands on Sony’s PlayStation2. In September, Sony announced that it would only ship half the inventory it had planned to bring in to the U.S. for the October launch.

Sony originally announced plans to ship in 1 million units at launch. That number was slashed to 500,000 with an additional 100,000 shipped in every week after launch. (According to tracking estimates, the original shipment was closer to 400,000 consoles.)

With the holidays coming and millions of consumers primed to purchase a new video game system, this opened the doors for Sega to increase its holiday projections.

“It’s really difficult to put a number on this,” says Moore, “but incrementally, it’s going to be in the hundreds of thousands of units on top of what we had already planned to be a very strong holiday period.”

“As long as we have a situation where Sony is supply constrained on PS2, that is a marginal benefit,” says Doherty, who takes a more wait-and-see attitude as to how large Sega’s holiday sales will be. Doherty, who points to the importance of software in hardware sales, has questions about Sega’s future library. “Third-party guys are only mildly committed to supporting Dreamcast. The creation of future games will almost completely be in Sega’s hands.”

But Moore remains confident about his company’s future. He believes that with the additional sales from Sony’s stumble, Sega will be able to create a large enough customer base to survive the launches of PlayStation2, Nintendo Gamecube, and Microsoft Xbox.

“We are still on target to have an install base of 5 million units of Dreamcast by March 31, 2001,” says Moore. “We are focusing on sales of somewhere between 1.4 to 1.6 million units of Dreamcast that will flow through retail in the next 90 days or so.”