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Head of Troubled Sega Enterprises to Step Down

Video games: Announcement of a restructuring came after the maker of Dreamcast reported a $398-million loss for fiscal year.

May 27, 2000|P.J. HUFFSTUTTER | TIMES STAFF WRITER

The battle over the $7-billion video game industry claimed its first casualty on Friday when the president of financially troubled Sega Enterprises announced that he will step down after the giant game maker reported a staggering loss for the third straight year.

The Tokyo-based game giant said it lost $398.1 million for fiscal 2000, matching last year's deficit. Sales jumped nearly 27%, to $3.17 billion.

Sega President Shoichiro Irimajiri, 60, said he will step down Thursday after two years at the helm. He will be replaced by the company's chairman, Isao Ohkawa, 74.

Analysts wonder whether a management shift can turn things around when lagging sales and profits are hurting the entire industry. Indeed, rival Nintendo Co. said Friday that its profit dropped 35% on declining sales.

"The scene is set for a consolidation in this marketplace," said Van Baker, vice president of the e-business group at research firm Dataquest. "Could someone buy [Sega] for its titles or its relationship to the developer community? Sure. They could also buy part of Sega to put it out of its misery."

Sega launched a major restructuring in Japan last year that involved closing about 100 video-game arcades and slashing more than a quarter of its domestic work force. But those moves weren't enough to offset another huge loss.

"Particularly in the Japanese game market, we've suffered," said Charles Bellfield, spokesman for Sega of America Inc., the company's North American arm. "We've reacted painfully slow at a time when we needed to be fast."

Indeed, Sega said expenses from launching its Dreamcast video game machine in Europe and North America last year contributed to the losses. The device, the first of a new generation of video game machines, is seen as more than just a toy.

The Dreamcast--and competing ones being unveiled by rivals--are billed as all-in-one entertainment centers that let people play games, listen to music CDs, watch DVD movies and surf the Web from their TV sets.

Sega has sold more than 5 million Dreamcast consoles since last year, but the company has struggled--and some say failed--to fight off Sony, maker of the hotly anticipated PlayStation2 game machine, set to hit U.S. stores in October.

The U.S. game market is dominated by Sony and its original PlayStation. Sony holds 53% of the console market, with an estimated 25 million PlayStations sold in the U.S. and 70 million worldwide.

Adding to Sega's problems, say analysts, is Microsoft's recent push into the fray. The software behemoth said it will launch a game machine, dubbed the X-Box, by next year. Set to rival both the PlayStation2 and the Dreamcast, the X-Box marks Microsoft's latest effort to gain a dominant role on the Internet, where digital appliances such as cell phones and TVs are connected to the Net and to each other.

Hoping to offset future financial problems, and react more quickly to its larger rivals, Sega said Friday that it would break up its arcade games, software research and development divisions into separate companies.

That follows plans by Sega of America to revamp its business by creating a separate company and an Internet access service, then spinning off the operation with $100 million in funding.

That new company, Sega.com, will start its SegaNet Internet service this fall to let customers play against each other over the Internet with a Sega Dreamcast machine.

"Sega's losses are not surprising, considering that it normally takes between $400 million and $500 million to launch a new [game machine]," said James Lin, an industry analyst with ING Barings. "Still, it's not unreasonable to see any part of Sega's breakup as an acquisition target."

Industry speculation has Microsoft swallowing part of Sega to jump-start its entry into the video game console business. Microsoft and Sega were partners in a failed collaboration to offer the Windows CE-based development effort for Sega's Dreamcast console game.

Both companies' officials declined to comment about a possible union.

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