Sega Revamps, Primes Market for Web Play

Brandweek, May 1, 2000 by Terry Lefton, Todd Wasserman

With Sony, Nintendo and Microsoft set to flood the market with more console boxes backed by hundred million-plus launches, Sega of America will devote around 30% of its $135 million marketing budget to reposition itself with an Internet play late this year.

By launching SegaNet in late summer, the gaming giant hopes to remove hardware as a differentiator and finally cash in on the promise of online gaming, a brass ring the industry has tried to grab almost since its inception.

The site goes live in August, but supporting ads won't roll until Sept. 7 when Sega again will use its sponsorship of MTV's Video Music Awards as a launching pad. Four new ads will push games and its new gamer themed ISP, SegaNet. The campaign's tag: "Opponents are everywhere."

Among the initial games being pushed are Quake III, NFL 2K1 and NBA 2K1. Sega will continue to use Randy Moss to push its NFL title and Allen Iverson for the NBA game, while Pedro Martinez will endorse a forthcoming World Series baseball game.

Adopting the razor/razor blade philosophy, Sega will give away a Dreamcast system, or $200 to those who already own its gaming console, and sign up for SegaNet as their ISP for two years at $21.95 a month.

"Everyone in this industry is bleeding to death trying to build up an installed base, so we're saying here's a better way to do it more akin to cable TV, where no one pays for the set top boxes," said Peter Moore, the former Reebok marketer who was recently elevated to president and COO of Sega from the svp-marketing slot.

Moore said the Web business can break even with 200,000 subscribers, adding that the attraction of the site to teen-hungry advertisers plus the revenue from the ISP, along with potential e-commerce sales, was a better economic model, aside from giving Sega an unassailable first-to-market claim for online gaming.

Sega's regular retailers will serve as signup points for SegaNet and the Dreamcast giveaway will give them the same margins as a normal sale. "We're not sure about broadband rolling out generally for a few years, so this will allow us to define some space now," Moore said.

"Software has always been what drives this market, so the new model we're proposing is about content, not selling as much hardware as you can without going absolutely bankrupt."

Despite a successful launch last fall, Dream-cast sales are slowing down. Nintendo's N64 console outsold Dreamcast by a 3-to-1 margin in March, per NPD Group, Port Washington, N.Y.

Meanwhile, parent Sega Enterprises said it will cut operating costs by $283 million in the fiscal year that began April 1. Analyst Michael Goodman of The Yankee Group, Boston, said those cuts aren't likely to affect Sega's U.S. operations, its main focus.

But Sega's decline is a matter of perception. "If you want to compare Sega to [Sony] PlayStation, it's a bit unfair," said Goodman. "But they've carved out a nice niche for themselves."

Sega has shipped 2 million Dreamcasts in the U.S., vs. 17 million PlayStations and 12 million N64s, Goodman said.