Monday April 3 6:38 PM ET

Sega to Unveil Online Gaming, Free Console Strategy

By Therese Poletti

SAN FRANCISCO (Reuters) - Sega of America Inc., anticipating serious competition in the cut-throat video game business, will unveil on Tuesday a radical shift in its business strategy by offering its own Internet service and giving away to subscribers its Dreamcast video console via a $200 rebate.

Sega, the U.S. unit of Sega Enterprises Ltd., (7964.T) will launch a new company devoted to online gaming called Sega.com, and its own branded Internet service, to be called SegaNet. The high-speed service will let gamers play each other over the Internet with a Sega Dreamcast, which was launched last year.

With a business model not unlike the companies that offer free PCs or Internet devices in exchange for monthly Internet access, Sega will offer a rebate of $200 -- the cost of the Dreamcast game console -- to gamers who sign up for two years of SegaNet Internet service. It expects to launch this service in the fall, at a cost of $21.95 a month. Subscribers will also get a free keyboard. Sega also hopes to woo gamers away from PCs, which currently allow users to play a limited number of games over the Internet. Currently, there are no Sega games available online.

Sega launched its comeback attempt in the video game industry last year with the Dreamcast and now faces looming U.S. competition from industry leader Sony Corp. (6758.T) and its much-heralded new Playstation2 this fall. Nintendo Co. Ltd. (7974.OS) also is launching a new system next year and now software behemoth Microsoft Corp. (NasdaqNM:MSFT - news) has said it plans to enter the market with the X-Box, a game console using PC technology, in the fall of 2001.

``The market is all about leapfrogging each other and the consumer is confused,'' said Charles Bellfield, a spokesman for Sega. Sega needs to distinguish itself from its rivals, which have hundreds of millions of dollars in their coffers to spend on marketing, so Sega is placing its bets on online gaming and giving its console away for free.

``It's a radical change but a radical change is needed,'' said Sean McGowan, a video gaming analyst with Gerard Klauer Mattison & Co. ``It's a very risky strategy... This is not a company that is sitting on a ton of cash. They are betting the ranch because they have to. Sega is clearly the weakest financially of all the major players. They have got to do something drastic.

Sega said it will have sold two million Dreamcast units in North America in April since its launch last September. The number is impressive until compared to the Sony Playstation2, which sold over one million units just in its weekend debut last month in Japan.

The company said its goal with its new give-away program is to distribute four million more Dreamcasts by 2001, giving it an installed base in North America of about six million users.

``In the first two years, we will break even,'' said Brad Huang, the newly appointed president and chief executive of Sega.com Inc. Sega.com, like Sega of America, will be based in San Francisco's Multimedia Gulch district. ``It will be community building.'' Huang also noted Sega will face a lower cost to acquire its Internet service customers than giants such as AOL.

Sega is convinced that its target audience -- serious gamers ranging from 12 to 24 years old -- wants to play games over the Internet. The Sega Dreamcast console is the only console that comes with a modem pre-installed. The modem can be popped out and switched for an Ethernet connection for broadband Net access.

``Our audience wants to go the next level,'' said Sega's Bellfield. ``They want rivalry and competition and they can only get that by competing with each other.''

Sega said the attempts by some game developers to make games more difficult using artificial intelligence will not answer the needs of the hard core gamers, because they will eventually learn all the tricks.

Sega said that at launch, it will announce a major Internet service provider as the backbone for SegaNet. The company said SegaNet will be faster than the typical Internet service provider, because it will have its own virtual private network.

About a dozen major games are expected at the launch.

Sega also plans to have a specially designed MP3 player that inserts into the Dreamcast console, in the space which is currently occupied by the visual memory unit, for downloading music from the Internet. The device will cost below $100 and its 64 megabytes of disk space will store about two hours of music.

``The key is they are going to have to execute, the titles are going to have to have tremendous playability,'' said Michael Gartenberg, an analyst with the Gartner Group. ``It's a very good offensive move on their part to get the online gaming stuff going as quickly as possible.''

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