Sega's long-awaited Dreamcast console will hit UK shops on 23 September, and for the first time in a decade, the games console market has something to get its juices flowing again - the run-up to what could be the biggest games-format battle yet.
Sega's Dreamcast debuts against a backdrop of industry mumblings that it could be the company's last chance to re-establish itself in the games market. Sony and Nintendo, Sega's rivals, are sharpening their horns in readiness for the battle. Their next-generation machines, Playstation 2 and the Dolphin, are expected to be launched in September and at Christmas 2000, respectively.
But while the prospect of new consoles is exciting, it can serve to destabilise the market. Retailers and distributors jockey for positions to determine themselves as the place to go for the new products.
Retailers offer numerous bundling deals, usually sparking price wars, to motivate the market. Manufacturers do the same by cutting hardware prices. Loyal Sony customers are getting confused, wondering if they should hold off until Playstation 2 is out, or risk finding the Dreamcast irresistible.
This in turn causes fear of a dip in leisure-sector sales.
It also signals a different phase for the consoles and software of the previous generation, because hardcore gamers won't be buying the older titles or consoles any more. It will be the younger people with less money who will buy the software and hardware of previous generations, putting pressure on prices in that sector, but also breathing life into the cheaper, second-rate titles and the second-hand games and console markets.
Each console giant has been doing its bit to fuel the anticipated contest, by steadily drip-feeding the market with an array of announcements.
Details of Sony's 128-bit Playstation 2 say it will be amazingly powerful, contain a chip called the Emotion Engine which will create very lifelike characters and scenery, and, perhaps more importantly, will be backward compatible, enabling old games to be played on the new platform. There is even talk of Playstation-themed pubs, planned to coincide with the release of the Playstation 2 console.
Nintendo has surprised the industry by re-entering the fray, stating that in partnership with IBM it will provide a 400MHz chip for its device, which will come with a DVD drive in a move away from its N64's outmoded cartridge format. Nintendo has also said that Dolphin developer kits should be available for game developers roughly around the same time as those for Playstation 2.
Sega's winning formula for Dreamcast is its built-in modem which will allow internet access, although it's not yet clear if access will be limited to email and Sega's website. Paul Donnelly, managing director of Dreamcast's secondary distributor Gem, says: "There will be no comparison to Dreamcast.
It's a great opportunity for Sega, it will be the only next-generation console out there at first. Sony put out a statement in January, but by May we saw a more wary forecast. Sega will position itself very firmly at the forefront of the console market."
Hitting the right price point is also part of the hurdle each console maker has to overcome. Sega's Dreamcast will launch in the UK with a price tag of £199, and with the software will be more in the region of £250.
To dampen the Dreamcast launch, Playstation has already announced that its hardware will drop from £99 to £79. A move from Nintendo to cut its N64 price has yet to happen.
The second part of the hurdle is for each console to have the strongest, best, and as many game titles as it can. This is what has kept Sony ahead of its rivals. Sega has obviously taken a cue from its rivals, as the Dreamcast is expected to launch with about 10 titles, working up to 30 by Christmas.
As Roger Bennett, director general of European Leisure Software Publishers Association (ELSPA), says: "The consoles will only be as good as the games that can be played on them. Sony achieved its impact because its games had strong technical content, good sound and graphics, and they were playable. There is a lot of brand loyalty to Sony, but if Sega gets it right, there's no reason why it should fail to do well."
Although Sega has a head start on its rivals, it does have a lot of work to do. Sony's Playstation has sold some 50 million units worldwide since its Japanese launch in 1994, and it is in the lead against its rivals with market share. Datamonitor recently said that the software market revenue in the US and western Europe for 2003 would see the Playstation 2 with 27 percent of the market, Nintendo's Dolphin with 25 percent, and Sega with only two percent.
But Sega is steadily making sales and it has now passed the one million mark. Figures from Japan for a week in May showed that Sega sold 3300 Dreamcasts while Sony sold 19,000 Playstations. Sega expects to sell 5.5 million units worldwide by the end of the year.
Chris Ratcliff, publisher of the Game Guide, says: "We know that Dreamcast is going to sell. It's no use its rivals trying to conduct a price war because there will only be a limited number of units initially, and you can guarantee they'll be gone in the blink of an eye. Apparently, in the US where the Dreamcast will launch a few weeks before the UK, it has been pre-ordered and subscribed three times over. It's coming in at an excellent price point and there's still a bit of margin to be made on it."
But Clive Bishop, general secretary of the National Association of Specialist Computer Retailers (NASCR), does not underestimate the power of the Playstation: "A lot of our members are anticipating some good business with the Dreamcast. A recent survey we conducted showed that a third of our members, numbering roughly about 250, said they would still be selling Sony but would also stock Dreamcast, which isn't bad.
"Speaking to people on the street, they have said they think Dreamcast will be great, but that they will be waiting for the Playstation 2. It's amazing how many Playstations are sitting on computers in the lounge. It just goes to show that they have become part of family entertainment, not just stuck up in the kids' bedroom."
Although the mood on the console front is bright, the games software market paints an unsettled picture. There is no denying this part of the market has always been fraught with price wars, but the most recent flurry of game price cuts can be seen as an indication that the market is already hitting a low, as it readies itself for the next-generation products.
At the beginning of June, retailers Virgin, Our Price and Dixons slashed top-selling Playstation titles such as Driver, Ridge Racer and Rugrats from £40 to £29.99. Tomb Raider III was cut to almost half price from £45 to £25 by Virgin, and Asda put its prices down across the board to £28.99. The price cuts - or price promotions, as the retailers like to refer to them - lasted until 15 July, although Asda has remained the exception, stating that it will keep its prices at £28.99 for as long as possible.
Jim Bachelor, head of product at Virgin Megastores, says: "Our price cuts were designed as a price promotion. We believe you cannot continue to charge consumers £45 for a video game. In general, consumers simply aren't prepared to pay those types of prices. It's obvious, because we have sold more units at £19.99 than at full price. Paying £40 for a game before it goes platinum is unrealistic."
He adds: "Hardware prices have come down to £199, and as hardware is cheaper, the ratio of having high-priced software just doesn't work for the consumer.There's also the issue of piracy: the industry knows it happens - consumers can get hold of games for a fiver. National retailers are supporting the second-hand games business, so pricing has to be sorted out."
As David Bell, CD-Rom buyer for Playstation at Asda, points out: "Everyone has gone back to full RRP now. The prices keep yo-yo-ing, but we don't want to do that, so we have held the £28.99 price even on new releases.
Our sales have gone up over the past five weeks due to the cuts. It's the first rule of marketing - to offer value to the customer. Kids can't afford to pay £44.99. I only got £1.50 pocket money when I was a child, so how can the manufacturers expect kids to afford these prices?"
Bachelor adds: "We want the industry as a whole to look at pricing. Everybody from the retailer back up to the publisher and Sony should be more realistic: if Sony wants to shift a high volume of stock, it only has five months left to do so. Undoubtedly Sony will look at how many units were sold in the price promotion, and what would happen if it brought the price down. We took a hit on our margin, but it's for the company to decide. We will continue to view the market and wait and see what happens - we may reduce prices again if we feel it's right for the market."
But Bennett does not agree with the retailers' price argument: "They consistently argue that the games are too expensive, but if you consider the prices on an hourly rate, they are worth every penny. If you buy a video game, it's played for hours, days, months - I think they offer very good value for money. Hardware is very cheap in comparison to produce, so naturally it will be cheaper.
"Price cutting is not good for the industry - we want to be seen as consistent. It's all about market share. If retailers want to charge these prices, then they can. The publishers have no say whatsoever over what they charge. Compared to retailers, publishers' margins are relatively small. But it does concern me that the market is not structured to deal with things like this."
But it does seem implausible that two of the big retail chains have taken on the role of champion of the people, embarking on a moral crusade to ensure that consumers get a better pricing deal when it comes to buying games software. According to many industry players, this is by no means the retailers' motive behind the recent price promotions.
A spokesman at HMV, which had to match the price cuts, says: "We're committed to building a strong games industry where we can get reasonable returns and reinvest in it. We're frustrated with the price reductions - it sends out mixed signals. If you're a consumer, it makes you cynical about the prices. Virgin is using the price reductions to project itself as the consumer's friend, but it probably did it to gain market share or shift a stock overload.
"These different motivations from retailers to start price cutting damages the market. Such moves devalue the product and create confusion. Once a price has been significantly reduced, it's difficult to introduce higher prices at a later stage. The customer will come to expect the lower price."
Don McCabe, managing director of independent retailer Chips, believes it's more to do with retailers trying to assert their position in the market. He says: "The move by Virgin was partly a publicity stunt, driven by the fact that it was getting worried it would lose its position. It's the same old games they all keep playing, it's just that the toys are bigger."
He adds: "Virgin's move has caused a lot of instability in the games market, which isn't good. The independents have fallen back on the second-hand part of the market and have taken it forward to a great point. We may not have the turnover the multiples have, but our profit margins would probably make most of the big boys weep. These price cuts do cause independents a lot of despair. On Driver, for example, some were making a £1 profit on a £30 game."
Bishop agrees: "There was no reason for Virgin to hit those products at all. Everyone was ready to make some money and then they found themselves making about 3p on Driver when they tried to compete with Virgin. The independents have nowhere to go with this one."
But Will Copeland, managing director of independent retailer One Step Beyond, sees the recent price cutting as a benefit to his business: "It's the one instance where the independents are better off than the multiples. Virgin did this because game prices were static. Multiples and retailers have seen their profit margins halved overnight, but our second-hand and budget titles have been selling very well. These price wars will see publishers suffer. They prostitute themselves in the name of volume."
So as the marketplace falls into a pattern of uncertainty, who is the discord down to? Is it the manufacturers and publishers, as the multiples claim, or are the multiples leading the way with ever-increasing power over the publishers?
Donnelly says: "The promotions on price were the retailers' choice, they were not endorsed by distributors or publishers. Virgin isn't buying at a better price, it has no interest in making money."
But McCabe believes both are at fault. He says: "Unofficially there's a situation where publishers have to do what the multiples want. Publishers are realising that multiples are turning into ogres, but they don't know what to do about it. It's a dangerous market and it's still very immature."
Roy Campbell, sales director at leisure publisher Infogrames, which has the licence for developing UEFA Striker, due out in October - the first football game for Dreamcast - explains that publishers are not ultimately responsible for the problems and that retailers should be getting their message directly across to Sony.
"We sell products that retail at £39.99, but retailers want to buy from us at the price point they cut it down to. We can't afford that, Sony won't allow it. We have to pay for our licences, seven figures plus royalty and development costs, and there's no way we can do it, the industry would collapse. If Sony dropped its prices, then we could say we have a new price point. Until then, what Virgin is doing is creating a false price point."
He adds: "Virgin can afford to experiment because games are only 15 percent of its business, but other retailers live and breathe the market.
We are trying to get through to Sony, but it's playing a clever game: it's waiting to see what happens with the new games titles and the Dreamcast launch, then it may start changing. We're really hoping that no-one starts getting silly with the prices when Sega launches, because it will just rock everything."
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