Friday, May 23, 2008

Let It Go People... Let It Go...

For some reason, there are still people out there who think Sega should take another stab at the hardware market. As provocative as this sounds, it's not very viable financially. Everyone knows the terrible shape Sega was in financially for almost a decade after it released the Saturn, and it's only been in the last few years that the company has reached any type of solvency at all. That's why re-entering the hardware market now would sound the death knell for Sega, especially with three solid and successful consoles already in the public's consciousness.

This isn't the mid '80s anymore, when a virtually unknown company in the U.S. could launch a new console and revive the home market. Remember when the NES debuted? How many people could identify the Nintendo brand at merely a glance? As the story goes, former NOA chairman Howard Lincoln couldn't get anyone to give the NES (then called the AVS, or Advanced Video System) a second look when it debuted at the January 1984 Consumer Electronics Show. No, today, everyone knows what a "Wii" is, and the terms "Xbox" and "Playstation" have been firmly entrenched in the public's mind. For Sega to even consider entering such hostile territory, it would take either the greatest software push and creativity ever seen in video gaming, and quite possibly the world's biggest death wish.

Which is why I find it odd that someone, a games journalist at that, would publish an article proposing that Sega do exactly that. C|Net's Don Reisinger wrote a lengthy piece last week entitled Why Sega Should Release a New Console. In it, Mr. Reisinger lays out what he thinks could be a winning formula for Sega to get back into the game and reverse its economic fortunes. Unfortunately, the article contradicts itself a few times and Reisinger comes off as not really knowing his history. Let's take a look at some of his major points:
  • The company incurred a loss $501 million during its 2008 fiscal year and its video games division lost about $56.3 million.
Those numbers look frightening, don't they? $56 million is enough to keep anyone up at night. But when you compare it with the overall amount of Sega/Sammy's losses - the overwhelming majority of which came from its sagging Pachinko business - it's not so bad. Add to that that Sega has seen the gaming side of its business become solid over the past three or four years, and you realize that the monetary misfortunes the company is facing stem from the Sammy side of things.

Sega began to turn things around as early as 1992, not even two years after relieving itself of the albatross around its neck that was the Dreamcast. The House of Sonic is confident that things will turn around next year, thanks to its software side making up for Sammy's failings. With game sales picking up overseas and the success of titles like Yakuza 3 in Japan, it's obvious that the game maker isn't responsible for the problems the overall group is facing.

True, Sega is still being dragged downward by Sammy's Pachinko woes, and while I don't think it will be able to overcome those losses just by its game sales alone, I also think that the games division is on an upswing that has put it in a better position than it ever was as a hardware maker. Consider that Sega incurred $398 million in debt in 1998, the year before it released the Dreamcast. That's $342 million more than this year's loss. Yes, the company is losing money. But when you compare it to how it was bleeding cash for years while pushing failing hardware formats, the loss has been substantially reduced.
  • Sega's Sonic franchise is floundering.
In terms of quality, definitely. In terms of sales, no. Just look at the numbers. Sonic Heroes: over a million units sold. Shadow the Hedghog: over a million units sold. Mario & Sonic at the Olympic Games: over five million units sold. Even Sonic & the Secret Rings was a best seller for its respective debut month, and has reportedly gone on to sell over a million units as well (I can't confirm this though). Does this look like a series that's in decline to you?

Just a year ago, Sega/Sammy reported losses for the third straight year but saw a 32% increase in software sales, prompted by the famous hedgehog. Sonic has two upcoming releases, Sonic Unleashed and Sonic Chronicles: The Dark Brotherhood, both of which are highly anticipated. Sonic has consistently been a big seller, regardless of diminishing quality, and this consistency goes back to his first third party outing, Sonic Adventure 2 Battle on the GameCube. We as gamers are lamenting the decline in quality of the franchise, but the sales numbers do not lie, and Sega's foremost concern is with sales. As long as the games sell well, no one will shake this hedgehog's tree, so to say that the franchise is "floundering" isn't just exaggerating; it's plain wrong.
  • Depending on the study you read, the average gamer is anywhere between 30-35 years old. Because of that, it's safe to assume that the vast majority of gamers remember the days of Sega console gaming and there is still a huge group of Sega zealots in the wild that long for another Dreamcast.
The average gamer Mr. Reisinger refers to are the same ones that snubbed the Saturn in favor of a Playstation and ignored the Dreamcast in anticipation of the Playstation 2. These older gamers still remember the money they spent on their 32X and Sega CD attachments, and just the mention of either add-on is enough to release years of pent-up angst. Why on Earth would this particular demographic buy another Sega console after such a long and storied history with the company? After more than half a decade with their Xboxes and firmly enjoying their Wiis and Playstation 3s, why would they add another console into mix now?

If anything, this should be the target audience Sega should avoid. They most likely aren't the ones who bought Mario & Sonic or any of the other new releases, and we've seen just how far the support of older gamers goes with Sega with such massive flops as Panzer Dragoon Orta, both Otogi titles, as well as recent flops like Sega Superstars Tennis, which dropped to $20 about a month after its release. All of these are excellent games that should be in everyone's libraries but were largely ignored by the very audience Reisinger says Sega should pursue.
  • There's no debating the fact that Sega has been a relative failure in the software space. Since its decision to drop out of the hardware game, the company has had a few minor hits, but nothing has been developed that we can classify as a blockbuster.
Once more, the sales numbers for the Sonic franchise soundly contest this, but he may be right about the rest of Sega's line up since going third party. Of course, how he thinks this will magically change because of new hardware is beyond me, and I believe Sega already launched a new console with an amazing library of original and creative games that was totally crushed in the market. It was called the Dreamcast.
  • In order for Sega to truly keep its game division afloat, it'll need to develop hardware that's both forward-thinking and inexorably tied to the online space. Beyond that, it'll need to repair the issues it may still have with retailers and some other developers and endeavor to build a console that can compete on the same level with the Xbox 360 and the Playstation 3.
Sega did a good job of repairing its relationship with retailers when the Dreamcast debuted. Remember how Kay-Bee Games refused to stock anything Saturn-related because of Sega's suprise launch in May of 1995? They stocked Dreamcast games and systems. However, Reisinger's assertion that the new hardware would have to be online has been tried before, again by the Dreamcast. He must have forgotten that Sega couldn't get people to play it online even when it gave the console away just for signing up for SegaNet. Why would it be more successful now? Furthermore, how would Sega fund such an endeavor, when Reisinger opens his article citing how much money the company has lost? It cost Microsoft over a billion dollars just to get Xbox Live up and running, and Sega hasn't seen that much cash since the Genesis was still its product. It's just not possible for Sega to even consider such an investment, especially - as Reisinger so poignantly illustrates - the company has been losing money for four consecutive years.
  • Third-parties are having trouble selling games on the Wii and if they believe that they can turn an even greater profit by selling games on three consoles, the deals should start to build up.
Has Resinger even been playing games for the last three years? Third parties are using the Wii to farm easy cash with quick ports and shovelware, and you know what? They're making money. How else could you explain crap like Carnival Games selling almost a million copies? I should also remind Reisinger of the success Capcom has had with Resident Evil 4 and Ubi Soft's massive sales of Red Steel and Rayman Raving Rabbids. And companies are already turning greater profits by selling games on multiple platforms. Again, Capcom reaped the rewards of this strategy with Devil May Cry 4, and Ubi Soft cleaned up with TMNT. Companies are doing just fine, and while another console could mean more potential copies to sell, but it wouldn't be a major attraction to a new Sega console, especially one with zero user base, considering how well the big companies are already doing.
  • After forming the deals with developers, Sega will need to build the hype machine up as much as possible. Instead of following the faulty plan of years ago, it needs to show off a console that's both more powerful than anything available, offers a Blu-ray drive, and has the kind of online component we're only seeing in the Xbox 360. The company also needs to play by the rules: it shouldn't announce the console and release it on the same day and it should take as much time as it needs to ensure all of its ducks are in a row before it launches it.
Again, where is Sega supposed to get the cash to do this? How is a company that's posted four straight yearly losses supposed to secure the capital for a machine more powerful than the Xbox 360 and the Playstation 3? And how would it sell it for a reasonable price? People complained of the current consoles pricing of $400 and $500, and Sega would definitely have to target the higher end of the price spectrum to avoid losing its shirt. Factor in the news that a price drop is most likely coming this year for the two next gen consoles (yeah, I went there), and Reisinger's argument collapses completely.

Look, I agree that it would rock to have Sega back making consoles. As one of those older gamers Reisinger refers to, it still feels odd to me to not have a Sega system in the market after almost two decades of buying its hardware. Unfortunately, the reality of the situation does not favor such a move by the company, and it's likely that we'll never see another Sega console again. It's nice to dream, but if Reisinger is serious in his contention that Sega could and should return to making hardware, then he's not living in the same reality as Sega.


Nick said...

Is this article published somewhere, or do you always put that much time/thought into a personal blog?

I think we all agree that the article in question was poorly thought out and shakily supported; you pretty much topple his argument.

Anything else I can say has been said a million times before - as long as Sega makes good games, who cares if they have a console; they need to stop whoring Sonic since no one cares about the franchise anymore. New IPs are the way to go.

And yes, they need to stop catering to the niches - mostly the arcade-action lovers at the top of the gaming age spectrum - and start releasing games to the younger (18 to 20-something) masses. As you pointed out, the demographic Sega's trying hardest to sell to is the one that keeps on burning Sega the most.

But maybe this just ties into the way Sega's style of gaming is dying? And if they change their style in order to stay relevant, how are they Sega anymore?

Ken Horowitz said...

This is just my blog. :)

I just can't believe that Reisinger actually thinks Sega could make a new console work. It makes no sense financially, and Sega is actually better off now as a game maker than it's been since 1994.

Mike Sieber said...

The only thing I could add is that the video game market today is one that's controlled by mega-corporations. Sony and Microsoft (and Nintendo to a lesser extent) have virtually unlimited amounts of cash to throw at marketing and R&D. They can afford huge losses if needed in order to get market penetration. I'm not sure if it's true, but I remember hearing that X-Box has never been profitable for Microsoft.

Sega is still a relatively small company when compared to these giants - even compared to Nintendo. They simply don't have the cash resources to effectively develop, launch and market a new console. And they certainly can't afford to start taking the massive losses it would take in order to get a new piece of hardware out the door.

I'm a big fan of Sega's past hardware, but it simply doesn't make any financial sense for them to consider getting back into the console business when they've been soundly crushed twice in recent years.