Sega makes a play to win back top UK slot

The last time Sega occupied the number one spot in the UK computer games market the war in Yugoslavia was raging and John Major had just been re-elected Prime Minister.

But since 1992, the company has seen its lead eroded to the point that in 1997 – the best year for computer games sales in UK history – the relative newcomer Sony sold 1.2 million PlayStations, while Sega sold only 90,000 Saturn consoles.

The figures go a long way toward explaining the importance of the new console Sega announced last week, which is scheduled to launch in Europe during 1999. It is an attempt to claw back some of the ground lost to Nintendo and Sony.

According to figures produced by ChartTrack for computer magazine CTW, the PlayStation, which launched in 1994, sold 1.2 million units in the UK last year, with a sales value of 162m. Sony did this by appealing to an older and more affluent market. Rival Nintendo sold 600,000 N64 units, worth 84m, which left Sega’s Saturn console an also-ran, with sales of only 90,000 units worth 11.7m.

For its new system Sega is teaming up with Microsoft, although both sides still dismiss this as a “rumour”, and will have to spend a sum in the region of 500m on development. But some analysts are questioning whether Sega should stay in the console games market at all.

Caroline Dale, broker at Daiwa Europe, believes Sega needs to do something big. “It’s becoming increasingly difficult for the company to have a niche and it’s high time it developed something new. If the product heralds a new era in home games and Sega is able to compete, then that’s good. But it will be a disaster if the new system does not succeed – a lot of capital expenditure for nothing.”

Sega refuses to give details about the new system but game industry insiders see Microsoft’s involvement as significant. According to Nick Gibson, games analyst at Durlacher Research, games produced for a PC-friendly console will be easier to convert to PC games and vice versa. Development companies currently incur large costs – as much as 100,000 – to convert each successful game to different formats. The deal also opens access to a huge back catalogue of games.

“A partnership with Microsoft opens up all sorts of avenues,” says Gibson. “Conversion costs a lot of money and is not straightforward because the existing PC and console platforms are very different. No one will be writing off Sega if it can do this.”

Few, in fact, are doing so. Sega, reported total sales of $2.9bn (1.8bn) in the year ending March 1997. But a large proportion comes from manufacturing amusement arcade machines and operating theme parks in its home markets. However, its UK operations have not been so successful in the past few years.

The beleaguered Segaworld at London’s Trocadero centre fell short of its target 1.7 million visitors by 750,000 and has been forced to scrap admission charges. The entertainment centre is looking to develop sponsorship links with big name drinks manufacturers – Pepsi sponsors the Trocadero but not Segaworld. The Trocadero management has a clause in its ten-year deal with Sega that allows it to pull out after three years unless it has recouped 3m in profit.

Last week, the US arm of the business cut its staff by 25 per cent and last year both European chief executive officer Malcolm Miller and European marketing director Andy Mee left in separate restructures. Jo Bladen is the UK marketing director but promotion in the UK has been hampered by budget cuts.

In the face of these troubles, some analysts are calling for a more fundamental change in Sega’s strategy.

“We were quite disappointed when we heard this (the new console),” says Steven Richardson of New Japan Securities. “Sega is a good software developer and its amusement machine business is highly profitable. We were looking for Sega to get out of the home games business and concentrate more on game software development. I think it would be better for the company to stick to what it’s good at.”

Sega Enterprises and sister company CSK announced in December that it had bought a 45 per cent stake in Japanese software and multimedia company Ascii, signalling that the company was strengthening its position in this area.

Further development of software and games gives Sega the chance to create another Sonic the Hedgehog and an attractive revenue stream in the shape of merchandise licensing.

The company is stepping up its licensing operations and claims to have made 200m out of Sonic merchandising since 1992. “We see licensing as a lucrative new business and it’s also attractive because it helps the brand,” says Francesca d’Arcangeli, Sega’s business development director.

Rivals Nintendo and Sony say they are not worried by Sega’s new hardware. “We have nothing planned in response to the new console,” says Sony UK director of marketing Alan Welsman, while a Nintendo spokesman adds: “We’ll wait and see what it’s like – we are not worried at all.”

Despite the bluff, the re-emergence of Sega into a sector it dominated so recently will have awakened interest and not just among its rivals. Sega is coming back.