Sega May Drop Dreamcast After All

Sega Enterprises in Japan acknowledged Wednesday that it may stop production of its Dreamcast video game console, reversing statements made by the company’s U.S. operations Tuesday.

Sega also confirmed Wednesday that it will consider producing games for rivals Nintendo Co. and Sony Corp. Sega said it may develop games for Game Boy Advance, a hand-held device made by Nintendo that’s due to hit store shelves in March, and for Sony’s PlayStation 2 console.

“We will consider the possibility of halting the manufacture of [Dreamcast] hardware,” a Sega spokesman told Kyodo News Service. Instead, Sega said it will focus on being a software contractor as part of a broad restructuring.

The shift is a remarkable strategic withdrawal for Sega, which has been in the U.S. video game console business since 1989. The Dreamcast is Sega’s latest console model, offering state-of-the-art graphics and Internet access. Sega has sold more than 6 million Dreamcasts worldwide since the console’s debut in 1999. But Sega continues to lose market share to Sony and Nintendo. Later this year, Microsoft will intensify the competition by introducing its Xbox game console.

Although Dreamcast games have garnered rave reviews, Sega continues to hemorrhage money. Sega lost 42.8 billion yen, or $357.4 million, in its fiscal year that ended in March 2000. This year, the company expects to post a loss of 23.6 billion yen, or about $202 million.

Video game console makers generally lose money on every machine they sell but hope to turn a profit by selling games and licensing their technology to other software makers.

“This comes as no real surprise,” said P.J. McNealy, senior analyst for Gartner Group Inc. “On the hardware side, they saw the writing on the wall with PlayStation 2 here now, and Nintendo’s GameCube and Microsoft’s Xbox coming up. In other words, they’re getting squished by the big boys.”

For months, there have been rumors that Sega has been in merger discussions with other companies.

“It’s the worst kept secret in the industry that they’ve been shopping around,” according to an executive at one company approached by Sega last year. “Everyone wanted the software without having to buy the hardware. But it’s not in Sega’s interest to do that.”