Sega to Halt Dreamcast Production

ByABC News

Jan. 31, 2001 -- It’s game over for the Sega Dreamcast.

The struggling Japanese game maker said today it would stop production of its much-hyped console and focus on making games for what had been, until today, its rivals.

Sega Corp. said in Tokyo it would post a net loss of $502 million for the 2000-2001 fiscal year, its fourth consecutive loss, and must shift focus to compete.

The move has been the subject of speculation for weeks, and the company admitted last week for the first time that it was considering scrapping its flagship product.

The machine has sold about 6.5 million units worldwide. The price of the Dreamcast in the United States will be cut to $99 from $149 to clear remaining inventories of about 2 million units. Between April and December, the company sold 2.3 million units — far below the company's estimate of more than 8 million.

Sony, by comparison, has sold more than 75 million PlayStation units, while Nintendo has sold some 30 million of its N-64 machines.

There was no immediate word on the fate of Sega's newly-launched online gaming service, SegaNet.

The company expects to market the Dreamcast and its games for another year, and anticipates that 30 more titles will be released for the machine during that period.

Sega Once Dominated the Market

Sega, which has been making game consoles for 17 years, once led the industry with its Genesis console.

It has since fallen to third place, behind the Sony PlayStation and Nintendo 64. The company was hoping Dreamcast, the first 128-bit game console, would restore its former glory.

The Dreamcast was launched a little more than two years ago, giving it a significant head start over Sony's PlayStation 2. But parts shortages delayed shipments at key times, and many gamers have apparently chosen to wait for the new Sony machine, launched in the United States last autumn, rather than purchase the Dreamcast.

Ironically, the PlayStation 2 is now facing similar parts shortages and other delays, to the point where the machine is almost invisible. Before Christmas, the machines were fetching $500-$600 through secondary channels such as eBay; now the machine is selling for between $300 and $400 in those same places — bringing it much closer to the suggested retail price of $299.

Sony hopes to catch up with demand by early spring.

Ominous New Rivals on the Horizon

However, weak sales are only part of the Dreamcast's troubles. Sega's decision to quit the hardware business comes as two powerful new rival machines inch closer to market: Nintendo's GameCube and Microsoft's X-Box, which will reportedly have a marketing budget of about $500 million.

"Sony, Nintendo and Microsoft have huge war chests and Sega is unable to compete with them at their game," Charles Bellfield, vice president of communications for Sega of America, told the New York Times.

Bellfield told the newspaper there would be layoffs, but did not say how many jobs would be affected, nor where the cuts would be made. The Bloomberg news agency is reporting that 400 people devoted to Dreamcast production, sales and development would be cut.

Sega employs about 3,500 people worldwide.

Once an Enemy, Now a Market

The company said it will provide games for the Nintendo 64, Nintendo Game Boy, the original PlayStation and the Palm handheld devices. It is in talks to produce software for the X-Box and GameCube, both of which are scheduled for release later in the year.

An interesting rumor making its way through gaming circles is that the X-Box will be compatible with the Dreamcast.

An industry analyst told Warren Communications News called the rumor "wild conjecture," but said such a deal was "within the realm of reason."

On Monday, Sega and Britain's Pace Micro Technology said they would release a set-top box allowing on-demand access to hundreds of Sega's games.

The games would be downloaded via a cable, satellite or other broadband connection and onto an internal hard disk. The two companies said it would be released sometime in 2002.