Sega Shoots Ahead With Hot Console, AT&T; Online Pact

Hoping to capitalize on the expanding market for playing video games online, Sega Enterprises and AT&T; on Wednesday announced a partnership that would bring together Sega’s next-generation console and AT&T;’s WorldNet Internet service.

The deal is key for the No. 3 gaming company, whose Dreamcast console will be the first system that can connect to the Internet using a built-in 56k modem. The console, with processing power that rivals Pentium computers, is scheduled for U.S. release Sept. 9.

Wednesday’s alliance highlights the importance of the Internet to console manufacturers, who are looking for ways to capitalize not only on the growing market for online gaming but on the e-commerce and community-building potential of the Internet.

For Dreamcast users who opt for the service, AT&T; WorldNet will provide a keyboard and access to a specialized portal site offering chat, game reviews and previews of new releases in addition to traditional Web surfing and e-mail.

“This gives us a ground-floor opportunity to reach consumers by providing the Internet in a new way,” said Gene Lockhart, president of AT&T; consumer services. “It’s a new distribution channel for us to deliver our brands to consumers.”

Tokyo-based Sega’s future is riding on the success of Dreamcast, whose 128-bit processor creates better graphics and more realistic game play.

Sega had a hit with its Genesis system in the early 1990s. But its Saturn console, released in 1995, bombed, in large part because it had fewer games and was less powerful than rival machines.

Dreamcast’s time in the spotlight will be short--main competitors Sony and Nintendo plan to release new consoles in the next 18 months. Both machines are expected to have an online component.

Sony holds about 60% of the U.S. video game hardware market, while Nintendo holds more than 30%. Sega has less than 5%, analysts said.

For Sega and AT&T;, the combination gives both companies access to customers they might otherwise have difficulty reaching. AT&T; hopes to tap into Sega’s core devotees--mostly males from 12 to 24 years old--while Sega hopes to entice some of WorldNet’s 1.6 million subscribers to buy a $199 Dreamcast.

“We believe the next-generation capabilities that you can get for $199 as opposed to what you can get from a more expensive PC make this an exciting way to connect to the Internet,” said Bernard Stolar, Sega of America’s president and chief operating officer.

Stolar stressed, however, that Dreamcast is first and foremost a gaming machine. Analysts agreed, saying its success will ultimately depend on the number and quality of the games available to play on the machine when it is released in the U.S. next month.

“I’m not convinced that this device will necessarily stimulate people to go out and buy it to connect to the Internet,” said Jeremy Schwartz, a senior analyst at Forrester Research. “It allows you to look at the Web on TV, but it constrains you as to how you can interact with the Internet because you can’t have your own home page, etc.”

Sega may face other hurdles as well. In Japan, Dreamcast sales have been below expectations, with about 1 million units sold since the console debuted there last winter. But early interest in the U.S. has been strong. Sega said it has inked 200,000 pre-orders for the new console.

Last month, the company kicked off an unusual promotion with about 1,000 Hollywood Video stores, where customers can rent a Sega Dreamcast and the only game currently available for the new system--”Sonic Adventure.” Sega said it plans to release a second game this month, with 14 more available when the machine is introduced at retail.

“From talking to our store managers, people . . . really like the machine,” said Jeff Yapp, president of Hollywood Entertainment, which owns Hollywood Video. “But the question is, where are the games?”

All of the console makers are looking to the online gaming audience, which is made up largely of men and women between ages 25 and 55, a demographic niche that is prized by advertisers and marketers.

But Sega’s only online offering at the launch date will be “Sonic Adventure.” Others won’t be released until early next year.

Revenue from online game portals is expected to increase from about 3% of the $6.3-billion video game industry to about 24% in 2002, according to Forrester Research.