Sega feels the pinch as games war rages

The brains behind the rogue ads for Sega Saturn flyposted around London last week obviously saw the writing on the wall before the rest of the workforce.

The ads, which started appearing before news of the Sega restructuring (MW last week) broke, screamed “DHSS”, “No Respect” and “Sign On” – advice that at least 40 Sega employees in London will be taking to heart. The sentiment behind the original typographical work declaring “Respect” had obviously been lost even before Sega began merging its UK and European operations.

The restructuring could cost up to 40 people their jobs – about a third of the company’s 124 employees.

The first casualties were UK managing director Alan Sharam, his marketing director Noel Dardis and European marketing and product director Barry Jafrato – Sega’s old guard. All three were axed as a preliminary move which sees the Sega Saturn marketing manager, Andrew Mee, take control of all UK and European marketing operations. There will be further job losses in Sega’s other European markets – Germany, Italy, Spain and France where both the managing and marketing directors have already left.

The 20m pan-European advertising, handled by McCann-Erickson, is also under review. Sega’s new financial year starts on March 1 and it is completing its budgets. Insiders expect further cuts.

The restructuring is blamed on the collapse of the UK video games market from a peak value of more than 500m in 1992 to about 250m in 1995. But it is not just the UK or just Sega – the whole market is hurting. Sega Europe has failed to post a profit since 1993 and is looking at its third consecutive year of heavy losses. Other manufacturers, including Nintendo, 3DO Europe and Acclaim, are also restructuring.

Some observers believe Sega’s move reflects an inertia dogging the company: “Three years ago Sega had a pan-European marketing budget of more than 70m in a market worth 500m. It still has the same organisation with the same overheads for a market half that size and a budget much closer to 20m. The restructure was inevitable but should have happened much earlier.”

It comes after a disastrous Christmas, when Sega was outdone by Sony in the battle to sell CD-Rom “next-generation” games machines. Sony made its first venture into the games hardware market with its Play Station last September.

“Sega has had to rationalise to take part in the next phase,” says a Sony spokesman. “It overspent on a market that was dying. The only growing part of the video games market is in 32-bit technology and PCs. Sega’s core business is in old technology.”

Nintendo took an even more radical approach, virtually withdrawing from the UK. All marketing and distribution has been co-ordinated by the John Menzies subsidiary Total Home Entertainment since the summer (MW August 4). The move was seen as an attempt by the Japanese parent to tighten its control over the UK operation – a scenario now predicted at Sega.

Nintendo’s much-delayed Ultra-64 will not now reach the UK until the end of the year. The company has been little more than a peripheral witness to the heightened competition between Sega and Sony.

Observers speculate Sega may pull out of the hardware market. Indeed there were rumours Sega was planning exactly that just before the redundancies were revealed.

Sega’s expertise, runs the argument, is where the money is made – software. The theory has some merit but Sega will not take a unilateral decision to get out of hardware, because the moment it does that it will have to find an alternative supplier to produce hardware for its existing console games.

“Nobody will ditch hardware until a substitute format is found,” says one Sega insider. “If the market moves to a single format then you will see a change. But only a cut in the cost of PCs will bring that.”

The games giants remain adamant that for best performance they cannot be beaten. The processing power of the latest consoles provides 3D effects with stunning speed. But as versatile PCs come down in price they will steal an increasing share of the market.

Sony is pursuing a strategy of keeping as many fingers in as many technology pies as possible. It says the PlayStation has the potential to be connected to the Internet, but this option is not being pursued until the cable technology is in place. It is also working with US company Intel, the world’s biggest manufacturer of computer chips, on a home entertainment device.

One Intel insider says: “Sony and Sega are fighting to build a brand franchise to support the new technologies which will come out in the next two to three years. The distribution of games on CD is a limited medium. Internet and cable are the future. We will see ‘pay-per-play’, in the same way as video on demand. There will be a a blurring of the entertainment media.”

Sega’s restructuring has been interpreted by some as an exit strategy. If that is true the flyposters could be up again soon, spelling out the company’s future.