SONY AND SEGA SURPRISES LIGHT UP GAMES MARKET

DAN ALAIMO

LOS ANGELES -- A series of dramatic announcements at the Electronic Entertainment Expo here, May 11 to 13, brought the future of the video games business into focus. The games business has been seen by many to be in a transitional period -- with the old 16-bit systems phased out and replaced by newer technologies. However, no one has known exactly what the new systems would be, how much they would cost and which would succeed. All this changed with two major surprises revealed during E3 keynote speeches:

Tom Kalinske, president and chief executive officer of Sega of America, Redwood City, Calif., said the company's 32-bit Saturn system is immediately available from certain retailers, including Toys "R" Us and Babbages. Saturn retails for between $399 and $449.

Steve Race, president of Sony Computer Entertainment of America, Forrest City, Calif., and Olaf Olafsson, president of Sony Electronic Publishing, said the new Sony PlayStation would be priced at $299 when it is launched Sept. 9.

Meanwhile, shortly before E3, Nintendo of America, Redmond, Wash., said it would postpone bringing its Ultra 64 system to market until next April, when it will be priced under $250. This year, Nintendo will focus on introducing its new Virtual Boy portable product and on marketing advanced 16-bit games, such as "Killer Instinct," Chairman Howard Lincoln said during a third keynote speech at E3.

E3 drew 40,851 people to Los Angeles, a number that was considered to be well above expectations by most at the show. There were 420 exhibitors in about 750,000 square feet. The exhibits and seminar program covered all aspects of video games and interactive multimedia of interest to

retailers. But the hot topic at the show was the new technologies. Low prices on the basic game hardware units will determine how quickly and how widely the new platforms are accepted, and then the size of the market for rental and sell-through software, said industry observers. Sega's immediate presence in the market and a $50 million advertising program that began during E3 give it an immediate edge in the race for market share, but Sony's lower price when it debuts will help it make up for any lost time, observers said. Though Nintendo has been late to get its products to market, it has still done well, said observers. With its strong consumer following and an introductory price even lower than Sony's, Nintendo should not be counted out, they said. As a result of these announcements, the games market emerges as a four-way battle among these three hardware platforms and compact disc read-only memory games for personal computers. CD-ROMs were also displayed prominently during E3 and discussed extensively in the seminar programs. That battle will be waged largely through advertising, said Sega's Kalinske. "I cannot imagine a product category where there is a closer connection between successful advertising and product success," he said.

Kalinske estimated that a half-billion dollars will be spent on advertising this year, including $100 million from Sega, $150 million from other manufacturers and the rest from big retailers like Toys "R" Us and Wal-Mart. While criticizing the idea that CD-ROMs for PCs will eliminate dedicated games-playing machines, Kalinske said Sega plans to get into that market. With the Saturn platform, Sega will continue to target an older consumer base, he said. "Forty-nine percent of our business is already with adults 18 or older, and that trend is going to continue. We are going to see a broader based group of ages and demographics buying interactive entertainment," he said. Sony's Olafsson also began by criticizing PC-based CD-ROM games where consumers often have to spend hours working out hardware and software configurations. "Computers are not designed for easy access to entertainment. With all entertainment software, consumers expect 'plug and play,' " he said. The key consumer for games is the "digital kid," he added. "He can't remember anything before the PC and MTV. He lives in a fast-moving technoscape with the sound bite and the 20-second commercial as syntax. He eats shock radio for breakfast. The Internet is lunch. But if we continue to serve him two-dimensional scrolling games, he'll leave the table. As a result, we'll never grow as an industry. "PlayStation, with its superior technology, was developed to deliver an immersive, totally absorbing entertainment. The technology and entertainment delivered by PlayStation will create a retail 'buzz,' " he said. When it came to announcing the price, Olafsson invited Sony Computer Entertainment President Steve Race to the podium for "a brief presentation." Race only said, "$299," which was greeted with wild applause from the audience. "With this pricing, we've achieved a magic mass market price point. The entertainment pie is substantial," said Olafsson. Lincoln of Nintendo said the Ultra 64 hardware is ready, but the company decided to delay its launch so software could be created that is a dramatic improvement over 16-bit. Recent advances in 16-bit games, such as last year's "Donkey Kong Country" and the upcoming "Killer Instinct" and "Donkey Kong Country 2" have "raised the entertainment bar on 16-bit game play," he said. In a press conference at E3, Peter Main, Nintendo's vice president of marketing, noted that "the video game industry at this point is soft -- S-O-F-T. Overall sales are off about 26%" for all platforms.

A big part of this decline is "because of the lack of breakthrough game experience out there. The gamers have been telling us over and over: 'Give me something unique and I'll buy it. If you don't, I'm going to pass on it.' " The success of "Donkey Kong Country," which has sold 3.5 million units in the United States, is a good example of this, he said. Like Sega and Sony, Nintendo will be in the marketplace with big advertising dollars this year, said Main. "Killer Instinct," which he characterized as "a breakthrough game," will launch Aug. 30 with a $20 million marketing program. Nintendo forecasts it will sell four million units before the end of its fiscal year March 31, 1996, he said. A second 16-bit game, "Donkey Kong Country 2," will reach the market Nov. 13, and will be supported by $10 million in marketing spending. This title is expected to sell three million units, Main said. Virtual Boy, a three-dimensional handheld game unit that will retail for $179, will launch in August with five software titles, he said. Nintendo will spend $25 million to promote it, including a special offer in Blockbuster Video stores. Consumers will be able to rent the hardware and two software titles for two nights for $9.99, and then get a $10-off coupon for the purchase of Virtual Boy when they bring it back, said Main.