THE NEXT STAGE OF THE GAME

DAN ALAIMO

LAS VEGAS -- No one knows exactly what is going to happen next in the video game business. This new industry is in the midst of yet another "transitional" period as consumers decide which of a number of competing, noncompatible systems will replace 16-bit game cartridges as the technology of choice on the mass market.

But while there is uncertainty in the market, supermarkets still can play an important role in video game rental and sales, game company executives told SN during the Winter Consumer Electronics Show here last month. For example, they said, rentals of the top 16-bit games for the Sega Genesis and Super Nintendo platforms will continue to be strong throughout the year. "There is still lots of opportunity out there for the 16-bit platform for our software, and we will continue to support it," said Sally Reavis, corporate communications assistant manager at Nintendo of America, Redmond, Wash.

Meanwhile, as consumers start to purchase new systems, whether CD-ROM, Sega 32X, Sega Saturn, Nintendo Ultra 64, 3DO, Philips CD-I, Atari Jaguar, Sony PlayStation or others, they will want to rent new software titles before they purchase them. That is another opportunity for supermarket video rental programs.

"The rental business is a very important part of our industry, and as you go to new platforms, rental becomes even more important," said Richard Brudvik-Lindner, director of communications at Sega of America, Redwood City, Calif.

On the sell-through side, few supermarkets sell cartridge games that retail in the $50 to $70 range, but more value-priced and close-out titles priced under $20 will be available as the 16-bit systems begin to phase out. Many budget-priced compact disc read-only memory titles are priced well under $20.

"As we transition away from 16-bit, people also are going to be able to go into a grocery store and get a software title for their 16-bit systems at a reasonable price," said Sega's Brudvik-Lindner.

"We think the CD-ROM market is there now for supermarkets," said Leo Goshgarian, senior vice president of sales at Spectrum HoloByte, Alameda, Calif., which is now developing a value-priced line to sell through supermarkets. "The CD-ROM market right now is just at its birth, but growing very rapidly."

Here is what the executives had to say about supermarkets and video games in the year ahead:

Richard Brudvik-Lindner director, communications

Sega of America Redwood City, Calif.

A number of major chains do rental and it works well for them. It certainly works well for us. We think it is a great sampling mechanism, and it's a great way for supermarkets to be involved in our business.

Beyond that, there are close-out items, and supermarkets are probably a good place to make close-outs available to consumers. It's more of an impulse purchase, depending on how the store has the merchandise set up. I'm not sure that supermarkets are the best place for the high-end systems, like 32X and Sega Saturn, which will come out later this year.

We have made great progress with 32X. We have sold about 500,000 units in just about six weeks' time, which is a tremendous blossoming for us. That system this year will have a sizable rental market. So I think it is very attractive to the supermarkets.

We are in a transitional period. It started at the end of 1994 because new products like 32X, which is a 32-bit system, were coming on-stream. Sega's Saturn technology is the next generation that is in a multiple 32-bit chip.

As those systems come to the marketplace, 16-bit is going to fill a role that it hasn't up till now. That is, it will appeal to first-time purchasers and people who have been very resistant to price on game systems. With price-conscious people buying 16-bit on the software side, that means you are going to see people looking for inexpensive software. Because it is a transitional year, I think there will be a fair amount of software out at a lower price point, and close-outs as we move forward.

But remember that 16-bit is a very strong industry. We are going to sell 34 million pieces of software next year. When you think of transition, it is a relative word.

So overall, supermarkets' future in games is very positive. The rental business is a very important part of our industry, and as you go to new platforms, rental becomes even more important.

Sally Reavis corporate communications assistant manager

Nintendo of America

Redmond, Wash.

There is still lots of opportunity out there for the 16-bit platform for our software, and we will continue to support it. Rental is definitely a growing segment of this industry, and Nintendo has stepped in and is definitely looking to make sure that the titles are available, that there is fulfillment and consumer drive as well.

We are supporting our products with full advertising campaigns. "Donkey Kong Country" is an excellent example of a launch of a great product that was aggressively marketed. Various chains did put key price points on it to draw consumer traffic, and that was a very profitable decision for both the retailers and Nintendo. It sold six million units worldwide. In the United States alone, we sold 2.5 million units in the first 45 days of sale. So those are pretty exciting numbers.

With the combined marketing support that we have, the rental industry obviously benefits. If the word out on the street is that "Donkey Kong Country" is a hot, must-have title, one of consumers' first options is to rent it and check out this exciting game.

Stuart Snyder executive VP and general manager

Turner Home Entertainment

Atlanta

Supermarkets have to evaluate their customer profiles and demographics in regard to whether or not there is a demand for them to be carrying CD-ROM products at this time. There have been very good success stories that have already happened with trials of the sale of CD-ROM products in supermarkets. But just because there have been pockets of success, that is not an indication that supermarkets should be moving extremely aggressively into this market.

It is still an emerging marketplace. It is still dominated by software stores and clubs. But as the business grows, and we are optimistic about it turning into a sampling or rental business, then I could see a great opportunity for supermarkets to expand their product line into CD-ROM.

I wouldn't go so far as to say that rental is the greater opportunity for supermarkets, but I would say it is a wonderful way of sampling whether there is a marketplace for the sale of CD-ROM products. We are true believers that a sampling mechanism has to exist for products.

If CD-ROMs and games are going to be priced at the higher price points, certain products are going to break out and sell. But more products would sell if the products were being sampled by the consumers and the rental opportunity will enable that.

I don't think you are going to see a decrease in price points. There are tremendous costs involved in the development of this product. There are significant costs in regard to marketing and waking up a consumer market base to this product. The only way to recover these costs and to earn profits for the developing and distribution companies is to maintain the price points.

Certainly, there is a market right now for low price-point products. But that market exists because of the flooding of products that has taken place over the last two to three years. There is not enough of a marketplace, or shelf space area, for all these products, so they end up being low-balled at what I believe are artificially low price points.

At the same time, because everyone is racing into this business, there are bad products that deserve to be at that price point. But high-quality products, with a good marketing campaign and solid distribution, are going to justify a higher price.

Michael Karaffa executive VP

New Line Home Video

Los Angeles

The grocery channel of distribution needs to be patient with CD-ROM because a couple of things have to take place. One, there has to be a stabilization of the retail environment, and that clearly is not the case today with these new technologies.

There also has to be a necessary evolution of the product and the marketplace before grocery stores take on this new segment in a meaningful fashion. Supermarkets have been in the last couple of years the fastest growing segment of the video business, and for good reason. They have a huge amount of foot traffic and they came in at the right time. They didn't come in too early and frustrate their customers. They came in with rental programs and well thought-out sell-through programs.

We are several years away from the kind of installed base of computers and the maturation level where grocery stores can be the kind of distribution player they are today in the home videocassette business, whether it is rental or sale of this new disc-based technology product.

Leo Goshgarian senior VP, sales

Spectrum HoloByte

Alameda, Calif.

Supermarkets will end up playing a significant role with us in regard to our growth. We are always looking for unusual channels of distribution for software. This company is now developing a software line specifically for supermarket and drug store chains that will be relatively inexpensive, offer the retailer a relatively healthy markup and still be priced reasonably for a supermarket's customers.

This will be a line of older, catalog products that we will put into CD-ROM. We can do that at a relatively inexpensive price. We will package it differently than we do for our regular trade, and put a program together that makes sense for supermarkets. We will probably be ready to go out to the supermarket trade at the end of our fiscal year in March.

We think the CD-ROM market is there now for supermarkets. The CD-ROM market right now is just at its birth, but growing very rapidly. We believe that by packaging these kinds of products for the CD-ROM platform at a very inexpensive price, people who go into supermarkets will pick them up.

We are looking at that happening the same way it did with video. This is a middle-America business, it's not a hobbyist business anymore. The customers that go into supermarkets are CD-ROM users and players.

Ben Tenn VP, sales

ActiVision

Los Angeles

I think supermarkets should continue to expand what they are doing in the rental of video games. Video games traditionally sell for a fairly high price, so they are really not right for a supermarket to sell. But for rental, they will continue to be a very viable part of their business if they rent home videocassettes.

On the sell-through side, there's a possibility that there will be some testing of lower priced CD-ROM products in the supermarkets in the same way that lower priced home videocassettes started in supermarkets. That could certainly happen in the second half of 1995, or even in the first half of 1995 on a test basis with certain aggressive supermarkets. In CD-ROMs, there are either high price points or real low price points. The supermarkets might be interested in starting in the lower price point area. The critical price point for supermarkets is certainly under $20.

We had our biggest quarter ever in our company's history. We've sold over 500,000 units of "Pitfall: The Mayan Adventure," making it one of the most successful titles of the year, and we know that a big chunk of that went into supermarkets for rental.

Bruce Reilly VP, sales

Sunsoft Interactive Entertainment

Cypress, Calif.

The 16-bit market as we know it today is in transition. But the supermarket as an entity is not a vehicle for transition products. It is an entity for mass merchandised, bulk, high-volume, low-margin items. So in today's video game business, it is going to be difficult for grocery stores to be successful.

They are probably going to be able to take the No. 1 title of each period and make that a success. For example, if "Donkey Kong Country" had been available to the supermarket chains in the fourth quarter, they would have been successful selling it at $50. But that doesn't leave them any margin and that's their dilemma.

Although there is an option to sell distressed or close-out goods, you are dealing with a relatively uneducated consumer who is not going to understand the difference between one game or another, distressed or otherwise.

The challenge is a lot different today because we are all transitioning to new systems -- to Sega's Saturn, to Nintendo's Ultra 64, to Sony's Play Station. Those are all cutting edge technologies and their price points alone will put them out of reach for most traditional grocery accounts. So the supermarkets have to redefine their role.

Some people are always good at taking new technology and running with it and being very successful. You take a Wegmans, an H-E-B, a Vons or a Lucky's, and each has its own strategy and niches. Maybe it is a video store inside a store. If you have a large video store inside a large supermarket, then you probably should deal with transition products or close-outs.

Daniel Jeung associate marketing director

Sport Accolade

San Jose, Calif.

We haven't really thought of the supermarket as a distribution place for our video games, although I have noticed that there are some chains doing video rentals. If you notice most of the products sold in the supermarkets, the retail prices are much lower than what most of our games retail for in the specialty stores. Even in the mass merchants, the price points are around $59 to $69. I don't think most consumers are going to be looking for that type of high-priced product in a supermarket.

Each publisher is looking for new, innovative ways of merchandising and marketing products. We've gone from the specialty retailers to the toy chains to the mass merchants. What's left but the drug stores and supermarkets? That seems to be the next course of distribution, especially as the price points come down.

Rental is a definite opportunity for us. Most parents bring their kids shopping with them, and the rental area is a nice place where they can leave their kids for 15 to 20 minutes while they are doing their grocery shopping. Supermarkets are very important in game rentals now.

Robert Picunko product manager

Acclaim Entertainment

Oyster Bay, N.Y.

As we have seen over the past year, the hits have sold larger and longer. A lot of the other products, while they did well, they just didn't have the longevity and were discounted so that they would move through. Maybe there are opportunities for certain supermarkets to take that inventory into their distribution channels.

One thing we are now doing with supermarkets is with "NBA Jam," we are working with CBS/Fox, which is coming out with an "NBA Jam" video using the same art work, and it will have game tips on that tape. CBS/Fox has tremendous distribution in supermarkets. They are going to carry our hot-spot promotion on their point-of-sale materials for supermarkets. We've been doing cross-promotions with many video companies. We work with PolyGram Video on our Marvel products, we work with Coliseum Video on our WWF products. We also are working right now with LIVE Home Video, which is putting out the "StarGate" movie. We are going to have a commercial on the front of their video for our game, and we are going to work with them co-promotionally. We believe that they will have tremendous distribution through the supermarket channels.

In many cases like this, the video game comes out after the movie, much closer to the home video release. Video games' target audience is age 12 to 17, which is probably a pretty significant portion of the video rental market, especially on a movie like "StarGate." The co-promotional synergy that we can create will not only help us sell our products, but also move the video.

David McElhatten president

Philips Media Games

Los Angeles

Supermarkets can offer a significant retail opportunity for game developers and publishers. One of the big problems in our business right now is reduced shelf space, and while shelf space is money at supermarkets too, there is definitely money in the video game business and certainly hit products could be had at supermarkets.