Sega profits plunge as rivals turn up the heat

Fight to the death: Analysts believe computer giant may quit games market unless 32% decline is reversed

MATHEW HORSMAN

Media Editor

Sega, the once mighty power in computer games, has lost further ground in the battle for supremacy in the cut-throat market, announcing sharply lower profits for the half-year to September.

Pushed by its competitor Sony, and still awaiting a frontal assault from the arch-enemy Nintendo, the Japanese company yesterday reported profits down 32 per cent to 11bn (pounds 679m) from 16bn last time, citing soft demand in the key markets of the US and Europe.

The worst may be ahead. The all-important Christmas season could make or break Sega's claim to being market leader in an industry worth pounds 600m a year in the UK alone.

If its fortunes do not improve soon, some in the industry even expect Sega to get out of the hardware business altogether, concentrating on providing software alone. That would be an admission that the highly competitive business may not have room for three giants.

Richard Rosen, analyst at Durlacher Securities, said: "This is more than just a transition. Sega is plagued with problems."

He cites marketing mistakes, the rushed introduction of the new Sega Saturn and inferior game titles for the plunge in half-year profits.

Sega said yesterday it expected full-year pre-tax profits to be roughly in line with 1994. But analysts were divided yesterday, with some suggesting that results could plummet yet further in the face of competition from other manufacturers.

"The company is clearly at a crossroads," a senior New York-based analyst said.

Two of the three big games producers, Sega and Sony, introduced new higher-performance game consoles into the UK market this year, promising better graphics, sound and action for titles such as Sony's Ridge Racer. They are vying for a share of the pounds 600m annual market for games and accessories.

The third leading manufacturer, Nintendo, has delayed the launch of its new-generation console until next spring, but continues to sell titles for its old 16-bit equipment.

The key period for Sony and Sega will be the lead-up to Christmas, and both have launched marketing campaigns. Sony is outspending Sega five to one, with a pounds 20m campaign that includes televison spots, a presence at raves and other youth venues and narrowly targeted newspaper and magazine advertising.

Sega's Saturn was rushed into shops early, to beat Sony's PlayStation to the punch. But since Sony's CD-based system was introduced last month at pounds 299, it has sold more than 60,000 units, three times as many as Saturn, despite a decision two weeks ago by Sega to lower the price to pounds 299 from pounds 399 in the UK.

Simon Jobling, marketing director for Sony in the UK, said: "We believe we are outselling Sega Saturn in nearly every market."

Sega's theme park and amusement arcade division performed strongly in the first half, helping to offset the decline in the sale of mass-market games. Sega has traditionally relied on its arcade business to create a demand for new games, customising them for the home market a few months later.

But analysts say Sega did not provide enough high-quality product for the rushed launch of the Saturn.

Not all industry analysts are ready to call the contest. The real test for both Sony and Sega, they say, is likely to come with the introduction of Nintendo's Ultra 64, more powerful still than either the PlayStation or the Saturn.