EVERY BIT AS STRONG

DAN ALAIMO

Reports of the death of 16-bit video games have been greatly exaggerated, at least in supermarket video departments.

At this week's E3 show in Los Angeles, the latest high-tech game systems will be the focus of attention. But back in the stores, it's the older-generation 16-bit games that will be adding big dollars to rental revenues.

The buzz in the industry is that 16-bit is passe, yet retailers contacted by SN said rental activity of 16-bit software has been thriving -- and in some cases growing. Games for the Super Nintendo Entertainment System and Sega Genesis dominate the market this year and will continue to be strong at least into 1996.

SN's State of the Industry Report on Supermarket Video, published in the March 27 issue, found that video games increased slightly as a percentage of video revenues in 1994 to 12.6% from 11.2% in 1993. This was a time when the overall sales of games had started to decrease.

"Actually, 16-bit is pretty much all we do at this time and we haven't seen any decline in it at all," said Dave Mathis, buyer-coordinator at Super Food Services, Dayton, Ohio.

Mathis has heard a lot about the new systems and how they are going to eclipse 16-bit. "But it's all talk," he said. "The bottom line is our 16-bits are staying strong." SN's survey found that retailers are beefing up all their video game products for rental, but 16-bit games are carried by nearly all of those with video programs. According to the study, 96% of these retailers carried both Super Nintendo and Sega Genesis in 1994. Sega Genesis was up from 85% in 1993 while Super Nintendo was up from 93%.

Business is so good now in 16-bit that some retailers said there were not enough new products coming out in the first part of the year.

"It seems I haven't seen as many cartridges, or at least quality cartridges," said Greg Davies, director of video operations at Dierbergs Markets, Chesterfield, Mo.

He attributed this to uncertainty among game developers about what to do for the new platforms that are coming out. But he said the good ones are renting well.

"We are ordering extra copies for a lot of the locations," he said.

"There are too many date changes," said a video executive with a major Midwestern retailer, who asked not to be identified. Game manufacturers are shifting release dates on better 16-bit titles either until the new platforms shake out, or until the hot selling season arrives at the end of the year.

"It's leaving the open-to-buy dollars we've budgeted sitting there with no product to keep the category going," said the executive.

The lack of good titles could result in a self-fulfilling prophecy for 16-bit games, he said. "If they were more consistent with the release dates, the category would grow by leaps and bounds until the compact disk market begins to take off," said the executive.

In 1994 some 45.5 million 16-bit cartridges were sold, far ahead of any other game platforms, and about the same number as the year before, according to Adams Media Research. This is expected to decline to 39.3 million units in 1995 and to 32.5 million units in 1996, but it will take until next year before all other new game platforms combined equal the sales of 16-bit, according to Adams.

"We are expecting 1995 to be a down year for 16-bit sales and they will not be entirely made up by the new formats yet," said Tom Adams, president of the Carmel Valley, Calif., research company. "By next year we expect that the growth in the new formats will make up for the continued decline in 16-bit, and we will be back in a growth mode for the overall business. This year is the transition year, and we expect there to be a little bit of pain

and suffering to

spread around amongst everybody."

Despite the strong movement of 16-bit titles, retailers are starting to heed the warnings of analysts like Adams. "Video games are strong," said Davies of Dierbergs. "It's a good category for us, but you need to be cautious and not go overboard."

"It's still a good profit center for us," said Clifford Feiock, video coordinator at Nash Finch Co., Minneapolis. "There is no reason to even consider getting out of it. You just have to pay a lot more attention right now to what you are buying and how many copies."

Seaway Food Town, Maumee, Ohio, is increasing its commitment to 16-bit games, said Sharon Stagner, merchandising coordinator. "We have been expanding more of our budget for games, and we see that as a positive for the future," she said. Another chain expanding with games is Food Giant Supermarkets, Sikeston, Mo., which has five freestanding video stores in addition to its 75 supermarket rental sections. "For us in rural America, it is getting stronger," said Tim Harrison, video supervisor. "People have the equipment out there. Nobody is quite sure what the definitive answer is for the future of games, so they are sticking with what they have."

Harrison maintains that 16-bit will do well for his stores this year, saying challenges are going to hit the bigger markets first. "With any luck, we will be able to learn from the actions that they take," he said.

Food Giant has started to sell games, mostly speed tables of $19.95 and $24.95 products. This is a program of older titles supplied by video distributor ETD Entertainment Merchandising, Houston. "We've had pure success with them. We have already had to reorder an entire tableload," said Harrison.

The retailer first tested the program in one of its freestanding video stores, has now rolled it out to its other four video stores and has begun to test it in select supermarkets, said Harrison. "The results have been positive at one supermarket, so we are looking at expanding the program to other supermarkets," he said.

As the video game business changes and consolidates, supermarkets will become a more important distribution channel, said Ted Lannan, president of Fairfield Research, Lincoln, Neb. "Alternate channels will become more important because there is more of a struggle to get the product out to the consumers," he said.

Lower prices in the $20 range are certain to follow. "When there is a need to move product and there is a lessening of demand, one of the things to give is price," he said. "The same thing happened in the prerecorded video industry. That is when supermarkets started to get a bigger and bigger share, and became more and more important as a distribution channel."

The strength of 16-bit in supermarkets is noteworthy, considering all the competing platforms the old format is facing. The new systems that will debut later in the year, such as Nintendo's Ultra 64, Sega's Saturn and Sony's PlayStation, could eventually achieve dominance, but not until their prices are cut drastically from introductory levels, said industry observers.

Other new systems already on the market, like 3DO, Philips' CD-I, Atari's Jaguar and Sega's 32X, have had little impact on 16-bit, but have contributed to consumer confusion over how long 16-bit will last. Meanwhile, the rapid growth of CD-ROM for personal computers most threatens 16-bit's current dominance of the games market, said the retailers.

"Certainly the growth that we saw a year ago is not there any longer. It's leveled off. We are having to be much more careful in what we are buying. But if you are picking the right titles, they are still renting very, very well," said Feiock of Nash Finch. "I do think there are a lot of people waiting to see what the new formats are going to look like."

Jeff Rouse, vice president of electronics/multimedia at Ingram Entertainment, La Vergne, Tenn. also said there's confusion, especially on the part of third-party software developers that produce the game cartridges. But, he said, "we feel that the installed base of 34 million units, and the 5 million more that will enter the market this year, will continue to drive 16-bit sales for 1995. There is no other format that is even close to that right now."

A video coordinator for a large grocery wholesaler said, "When you talk to the stores, they are definitely tired of the changing formats. Some stores are still renting 8-bit cartridges. Our stores are all in the Midwest, and I think we are going to get a lot more mileage out of 16-bit. The video coordinator expects 16-bit to stay strong at least through the 1995 holiday season."

Summit Trading Co., Puyall-up, Wash., a one-store independent, declined to put video games into the live inventory department in its recently opened store. "Partly it was because we haven't had any calls for them," said Gary Carlson, store director. "But the main reason is that we are just not sure of where that market is going right now."

At K-VA-T Food Stores, Grundy, Va., Brenda Vanover, video coordinator and buyer, expects rentals of 16-bit games to continue to be strong. "I don't look for them to drop off, especially in the geographical area that we are in."

K-VA-T still carries 8-bit, although rentals have slowed down, said Vanover. "We still have some people asking for them, but we aren't buying any new 8-bit games," she said.

Most other retailers said they have already started to phase out 8-bit. According to SN's recent survey, the number of respondents carrying the old 8-bit games dropped from 92% in 1993 to 72% in 1994. Adams Media Research sees 8-bit declining from 12.8 million units sold in 1994, to 5.9 million units in 1995, to 700,000 units in 1996 and to zero in subsequent years.

The platform to watch in the short term, agree retailers and analysts, is CD-ROM for personal computers.

CD-ROM, though, does not immediately threaten the core audience of 16-bit games, which is mostly boys ages 9 to 15, said Adams. "The way I look at it is, the PC is circumscribing the game market to some extent," he said.

"A lot of people are buying them for their younger kids," he said. Many are concerned about exposing their children to violent games like "Mortal Kombat," said Adams.

While the number of families buying CD-ROM-equipped computers for their young children is increasing, the existing base of game players is getting older, noted Lannan of Fairfield. "The kind of product that they want is a little different than it used to be. There is less demand for young children's video games because there are fewer young children in video game households," he said.

There are now about 13 million CD-ROM-equipped households, said Lannan. This compares to about 16 million Super NES households and 18 million Sega Genesis households, according to Ingram Entertainment.

But the CD-ROM game category is weak, Lannan noted. "There are not a lot of good games on CD-ROM yet. Right now, almost 75% of CD-ROM PC use is by adults," he said.

Some retailers said they see a bright future in computer products like CD-ROM. Rick Ang, director of video operations at Bel Air Markets, Sacramento, Calif., said the cartridge business has slowed up in the first quarter, while computer software products of all kinds, including CD-ROM, have increased.

"Right now it seems like products with computer applications are the next step toward the future," he said.

"Computers are where it is going to be," he said. "We are going to wait and see about 3DO, Jaguar and later on Ultra 64. But if the hardware numbers continue to grow, I think computer-based CD-ROM is where the market is going."

While other retailers expect CD-ROM to grow in the future, they said it's not there yet. "There just isn't enough hardware penetration in our market yet to justify carrying the software," said Davies of Dierbergs.

At a recent meeting, Dierbergs' store-level associates said they haven't had any requests for CD-ROM. "I was willing to try it in a couple of stores, but nobody had any interest in it," he said.

It's the same story at Nash Finch, where Feiock is testing CD-ROM in five stores. "It has not done fantastically. I would not consider expanding it to my other stores at this point," he said.

K-VA-T Food Stores is offering CD-ROM on a limited basis for rental, said Vanover. "It is not going real fast right now, but it is starting to pick up," she said. Food Giant is testing the sales of CD-ROM priced under $10, said Harrison. "It has sold steadily, and the people who are into it are repeat customers. It seems that once you hook a customer, they will be back and they will be back frequently," he said.

Of the new technologies that are already on the market, such as the Sega CD, Sega 32X, 3DO and the Atari Jaguar, the retailers who have them said rental activity has been slow.

Several high-powered -- and heavily marketed -- new technology platforms will be released later this year, such as Nintendo's Ultra 64, Sega's Saturn and Sony's PlayStation. Most retailers will wait until there is sufficient hardware penetration to justify the investment in rental inventory. The new Nintendo 64-bit unit will be priced around $250 and will use cartridges. The others will be priced higher and use compact disks.

For the 16-bit systems, hardware price points of $100 to $150 were the key to mass market acceptance, noted Lannan. "People willing to pay more will probably trade all the way to a personal computer," he said.

"There will always be early adopters, but the fact is that [the new technology game platforms] are not going to hit 15 to 20 million units until the price comes down," he said.

Games People Play

Although the 16-bit cartridge is expected to decline in unit sales, it's still the biggest game in town.

Video Game Software Unit Sales (in millions)

1994 1995 1996

16-Bit Cartridges 45.5 39.3 32.5

8-Bit Cartridges 12.8 5.9 0.7

All Others 5.6 14.5 32.6

Total 63.9 59.7 66.1

Power Shift

The 16-bit games are on top, while 8-bit titles are starting to fade. Handheld games and CD-ROM titles are growing strong. Video Game Products Retailers Carry (multiple responses allowed)

1993 1994

Super Nintendo (16 bit) 93% 96%

Sega Genesis (16 bit) 85% 96%

Nintendo (8 bit) 92% 72%

Nintendo Game Boy 20% 28%

Sega CD 13% 24%

CD-ROM (computers) * 20%

Sega Game Gear 10% 17%

Other Game Software 12% 15%

* Category not included in 1993 survey

Holding On to 16

Retailers will wait until new technology platforms achieve broad market consumer acceptance before they cut their investment in 16-bit rental inventory.

Hardware Systems in the Market (in millions)

1994 1995

Nintendo 16 Bit 15.8 18

Nintendo Ultra 64 -- 1**

Sega 16 Bit 17.7 21

Sega CD 2.5 2.9

Sega 32X/Neptune 0.5 2

Sega Saturn -- 0.5**

Philips CD-1 0.25 0.75

3DO 0.2 1

Sony PSX -- 1

Atari Jaguar 0.05 0.25

**projected by end of first quarter 1996