SEATTLE — With its recent decision to abandon the 128-bit Dreamcast video game console and to publish games for PlayStation2 and other gaming platforms, Sega appears to be leaving the game hardware business permanently. Sega Enterprises cofounder David Rosen says it’s about time.

“I have been advocating this for more than seven years now,” said Rosen, who helped create the company by merging his Rosen Enterprises with one of Japan’s leading jukebox manufacturers, Service Games, in 1964. “I always felt it was a bit of folly for them to be limiting their potential to Sega hardware.”

While Sega’s decision has undoubtedly disappointed Dreamcast owners worldwide, the mathematics upon which the decision was based can’t be denied. Since releasing the system in 1999, Sega has sold 6.5 million Dreamcast consoles worldwide. By comparison, more than 80 million people own Sony’s original PlayStation.

Sega has done far better than Sony in its ratio of software to hardware sold. In the United States, Dreamcast’s biggest market, Sega has sold an average of eight games for every console. By comparison, in Japan, currently the largest and oldest market for PlayStation2, the software-to-hardware ratio remains at less than three games for every console sold.

“Sega failed to reach the targets we wanted, and the hardware fell through,” admitted Charles Bellfield, vice president of marketing and corporate communications at Sega of America. “Therefore our software fell through in the same time frame and it did not reach the levels that we expected it to.

“. . . An 8-to-1 ratio on that poor of an install base did not give us the revenues nor the profits that we needed for our business models.”

New directions

Rosen, who currently serves on the board of directors of a number of Sega’s subsidiary companies, says he wanted to get out of the hardware business after Sega discontinued its 8-bit Genesis game system (sold in Japan as the Mega-Drive).

“We purchased Sega back [from Gulf & Western] in 1984, and I was originally pleased with the directions Sega went through in 1992 and 1993 . . . until the post-Genesis period. Things sort of went south at that time.”

While Mega-Drive did not sell well in Japan, Sega of America sold approximately 19 million Genesis consoles in the U.S. Saturn, Sega’s 32-bit followup to Genesis, failed in the U.S. and Europe and trailed badly behind PlayStation in Japan.

Sega executives hoped that by beating Sony and Nintendo to market with a next-generation console that was aggressively priced and suitably powerful, they could recapture the market. What they did not count on was their competitors’ clout and marketing dollars.

“When you consider that Microsoft has announced a $500 million marketing program for the launch of Xbox, that Nintendo has a $5 billion war chest, and the overall power behind Sony’s PlayStation brand, Sega does not have the ability to compete against those companies,” Bellfield said.

In its new role as a third-party software developer, Sega will no longer have to compete with giants such as Sony and Nintendo. In fact, Sega has already announced projects it is developing for PlayStation2 and Game Boy Advance.

Sega arcade legend Yu Suzuki, whose AM2 design team’s credits have included such hits as “Virtua Fighter” and “Daytona,” is creating a PlayStation2 version of “Virtua Fighter 4.”

Meanwhile, “Sega Rally” designer Tetsuya Mizuguchi is working on PlayStation2 games that will feature characters he presented in a Dreamcast game called “Space Channel 5.”

Sega has also announced plans for the handheld market. Yuji Naka, leader of Sega’s successful Sonic Team, is working on Game Boy Advance versions of the Dreamcast games “Chu Chu Rocket” and “Sonic Adventure.”

Sega has not yet announced projects for Gamecube and Xbox, but Sega spokespeople said that discussions with Nintendo and Microsoft are under way.

A brighter road ahead

There is no question that Sega developed a large and impressive library of games as it struggled to keep Dreamcast afloat. Now, having abandoned the platform, it has the largest and most respected collection of completed 128-bit games of any company in the world.

Many of these games will undoubtedly be released for older systems such as the original PlayStation. Sega has, for instance, licensed three games to Acclaim Entertainment for release for PlayStation.

Going forward, Sega is likely to adapt several of its most popular properties for PlayStation2. With hit franchises such as NiGHTS, Sonic The Hedgehog, Daytona, Shenmue, Virtua Fighter, Sega Rally and Burning Ranger, Sega is well positioned to take top spot in the publishing world.

“Sega will absolutely be the first-round draft pick for hardware developers in terms of working with software publishers going forward,” said Bellfield. “Going forward, our sales will only be limited by the amount of people who want to play games.”

Rosen is even more specific. He sees Sega overtaking Electronic Arts as the world’s largest independent game publisher.

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