Game giants braced for mortal combat

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The fights that take place on the screens of video games are starting to look pretty tame compared to the three-cornered battle taking place between the machines' main Japanese manufacturers - Sega, Sony and Nintendo.

Sega, once the top dog by virtue of its best-selling hedgehog Sonic, has just cut the UK price of its 32-bit Saturn console by pounds 50 to pounds 249 - the second price cut in less than a year, taking its retail price down from pounds 400 since its launch last July. Andy Mee, Sega's European marketing manager, insists the move is intended to bring the console to the "mass market" - though he also admits that Sega still has just 40 per cent of the 32-bit market, against Sony's 60 per cent. Worldwide, analysts reckon Sony is winning the sales race by a margin of four to three.

But both players are worried about what may happen when Nintendo, the oldest of the trio, introduces a 64-bit games system, called Ultra64 - either later this year or early in 1997. Sources at Nintendo suggest the UK price could be around pounds 250, for a machine which would - on paper - offer far better processing and screen quality than its rivals.

The result could be a fight to the death. However, Nintendo has hardly had things its own way. In recent years, the video-games market has exploded - but also, as exploding things tend to do, it has fragmented.

In 1991, Nintendo's sales were pounds 3bn, and it was making more than pounds 600m in pre-tax profits. It controlled 90 per cent of the video games business. But then came 16-bit, and CD-Roms - where Nintendo lagged behind Sega - and after them came the deluge, including newcomers such as 3DO, an American start-up (whose machines were actually made by Panasonic) and of course Sony itself.

Now, the industry is worth $15 billion worldwide, but it is split between consoles and PCs, with an increasing number of games shifting to the latter: at present, it is 40 per cent, compared to 27 per cent in 1994.

PCs have the advantage, in the eyes of the parents who tend to be shelling out for hi-tech gifts for children, of having other possible uses, such as education and accounts, whereas a games console has no other application. "It's not the death of the console, but it's certainly going through a difficult phase," said one games executive recently.

Meanwhile, the launch of the Ultra64, which has been three years in the making, has been delayed repeatedly. In February the expected spring launch date was put back to an unspecified date in the autumn. Some analysts think this is bad news. "Over this Christmas season, next-generation [64- bit] systems are really going to take off," says Walter Miao, vice-president of financial analysts Link Resources. "If others get their foot in the door, it'll be a lot tougher for the Ultra64. If Nintendo doesn't release it by Christmas, it can kiss the Ultra64 goodbye."

The result is that Nintendo is expected to make some definite announcement at a key industry trade show next month - with a knock-on effect on rivals. "We're expecting that Sony will drop its price," says Mee. "We've been hearing whisperings from the retail channels."

However, it's unclear how a Sony price cut could possibly help Sega. The head-to-head competition has been hurting it. In the financial year to the end of March, it announced a pounds 160m write-down on the costs of cutting its European staff from 300 people to 125 and shifting to smaller premises in London. The grand days of an Earl's Court address with a Sega- sponsored Formula 1 car in the lobby have gone.

The pounds 160m write-down also included unsold stocks of 16-bit machines, first introduced in 1991 and 1992, which have been superseded by the newer 32-bit systems. Sales of 16-bit systems from all manufacturers, have fallen sharply since 1993, when 1.5 million were sold in the UK. In 1994, a million were sold, and in 1995 just 500,000.

The 32-bit systems were warmly welcome by games players - though the differences can be seen by a few lines from one eager young reviewer, based in Japan, who got early access: "The Saturn is slightly disappointing, but these things almost never live up to the hype ... The Playstation, on the other hand, EXCEEDS the hype."

However, whether any amount of hype will be able to reflate an industry that once seemed to have found the modern licence to print money remains to be seen.