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Nintendo's new 64-bit platform sets off a scramble for market share

By Cesar Bacani and Murakami Mutsuko / Tokyo

Go to a comparison chart of Sony, Nintendo and Sega

NINTENDO president Yamauchi Hiroshi(interview) knows a thing or two about thrill-a-minute entertainment. Remember the 8-bit Famicon TV video-game player of the 1980s? He is the man who sold 60 million of them worldwide. But when his company introduced the more sophisticated 16-bit Super Famicon in 1990, it moved only 44 million units. Sega, a maker of arcade players, had launched a competing system, the 16-bit Mega Drive (known as Genesis outside Japan). Yamauchi then decided to skip a generation and make a 64-bit machine that could run arcade-quality games on a television set.

The new player hit Japanese stores last July -- more than two years behind schedule. By that time, video-game fans were already zapping away on 32-bit machines like the Sega Saturn, which was launched in 1994, and the Sony PlayStation, which came to the market in 1995. Still, Nintendo is notching up phenomenal numbers. "Sales will reach 6.1 million by the end of March -- 2.1 million units in Japan, 3.3 million in North America and 700,000 elsewhere," says an ebullient Yamauchi. Market leader PlayStation needed one year to sell 2 million units in Japan. Nintendo did it in less than eight months.

Game over, winner Nintendo? Not so fast. True, fans are raving about its player's real-time action and superior three-dimensional graphics. (go to a game review)And Yamauchi confidently predicts the demise of 32-bit machines. But Sony rejects that idea. The Sony PlayStation has sold 13 million units since its launch. "The video-game player can become another home entertainment appliance," says Tokunaka Teruhisa(interview), president of PlayStation-maker Sony Computer Entertainment. His goal is to make the PlayStation a fixture in most of Japan's 50 million homes -- and eventually in the rest of Asia and the world.

And don't count out Sega just yet. Admittedly, the Saturn has not been as hot as the PlayStation or Nintendo 64, selling just 7.6 million units in two years. "But Sega has a loyal core of followers, many of them avid gamers who play software only Sega can produce," says Morita Mitsuko, an analyst at Morgan Stanley in Tokyo. No one can touch Sega in arcade games, and many of its bestsellers are being converted for home use on the Saturn. The company is also laying the groundwork to become the world's biggest toymaker. In January, Sega announced a merger by Oct. 1 with Bandai Corp. of Mighty Morphin Power Rangers fame. Their combined annual turnover: $4.5 billion, nearly a third more than Nintendo's sales.

Other media for video software are catching up. CD-ROM games for personal computers have been appearing in greater numbers in tandem with advances in computer technology such as powerful Pentium microprocessors and 3D accelerator video cards. The latest innovation is the MMX multimedia function for the Pentium, which promises to make computer graphics run more smoothly. Online games are also being developed. Subscription-based websites like Mpath and the Total Entertainment Network are attracting thousands of cyber surfers who play against multiple opponents. "The Internet will be a contender when transmission capacity dramatically expands," says Kubota Masashi of ING Barings in Tokyo.

Tell that to the folks at Nintendo. "There has been no PC game that has drawn a mass following," says Yamauchi dismissively. "I see brighter prospects for the new genre of video games." That is, for Nintendo 64 video games. Yamauchi is taking advantage of the new platform's faster speed -- it can process 64 bits of information per second, twice what 32-bit players can read -- to reinvent video entertainment. A 64DD attachment to be made available late this year will allow players to draw their own characters and change heroes and villains for new ones through a modem. Also coming up: a "jolting pack" that goes to the bottom of the Nintendo 64's controller. Explains Yamauchi: "It jerks at explosions or collisions, so users feel they are right there at the center of the action."

Innovations like these partly explain why Nintendo has opted to keep cartridges as its storage media of choice. The PlayStation and Saturn use CD-ROMs. "The cartridge has more space for other devices such as a programmable memory, enabling users to do more with their machines," says Yamauchi. He concedes that CD-ROMs are easier, cheaper and faster to produce: "But if users really want the software, they can wait." He also debunks the notion that a CD-ROM has the edge over a cartridge in information storage: "A Nintendo 64 cartridge contains a memory device that has nearly the same capacity as a CD-ROM."

Dubbed a MASK-ROM, the device makes possible yet another innovation. "We call it the 'Game Kiosk' concept," says Yamauchi. Players will soon be able to purchase new software by bringing a Nintendo cartridge to any of 5,600 Lawson convenience stores across Japan that are fitted out with a just-in-time inventory system. There the game in the cartridge can be erased and replaced by a new one uploaded through telecommunication links. The shops would no longer need to set aside precious display and storage space for physical goods. "We hear many convenience stores are disappointed at the inventory risks of carrying CD-ROM games and the slow sales," says Yamauchi.

Analysts like the idea. "It can change the game-retailing system," says Kubota. The kiosk network can also lower Nintendo's production expenses, help it deliver new games faster and keep cartridges in the increasingly CD-ROM driven game. Kubota estimates that manufacturing costs for a CD-ROM program at about 200 yen ($1.60) per disc. The more complicated cartridge is ten times as expensive. "Lead time for CD-ROM production is two to three days," he adds. "You would need two to three weeks for a cartridge. This translates into higher profitability for CD-ROMs and gives stronger incentives for software houses to develop games using this medium. Above all, the CD-ROM is becoming the standard storage device, making interchangeability between different appliances possible in the future."

The attractiveness of the cartridge format to software developers is crucial. A key complaint against Nintendo 64 is the limited number of game titles -- 15 so far, compared with 700 for the PlayStation and 150 for Saturn. "We are most concerned about storage capacity," says a spokesman for Square Co., a major video game developer that created the Final Fantasy role-playing series. "We need the greater capacity available on CD-ROM, that is why we ended up teaming with Sony instead of staying with Nintendo." Enix, another leading software house known for its Dragon Quest games, recently switched from Nintendo to Sony as well. Company president Fukushima Yasuhiro admits that his programmers were attracted to the possibilities opened up by Nintendo 64, but those 13 million sold PlayStations tipped the balance for Sony.

Yamauchi argues that quality should come first. "Not all game creators who can handle CD-ROM can write for Nintendo 64," he says. "The new technology requires new inspiration, imagination and talent." Perhaps, but a developer with a software company that makes games for both Nintendo and Sony does not want to overstate the difficulties. "For us, the number of bits does not really matter," he says. "When processing speed moved from 8 bits to 16 and then to 32, the change was indeed dramatic, like changing from black-and-white TV to color. But the move from 32 bits to 64 does not have the same impact. Game creators have become comfortable with the 32-bit platform. We are now more concerned about the game's content."

Sony designed its counter-attack around Nintendo's vulnerabilities. It has promised to introduce 100 new titles this year, both in-house and from third parties. To entice independent programmers, Tokunaka has set corporate royalty rates at levels generally lower than Nintendo's, though the actual figures are kept secret. The Sony Computer president has also slashed hardware prices. In 1995, the PlayStation sold for 29,800 yen ($238 at the current exchange rate). A PlayStation can now go for just $158 -- if buyers can find one, that is, since the device has been out of stock in Japan since November. Nintendo fought back last month by cutting Japanese prices 32% to $134.

For its part, Sega has kept Saturn prices in Japan at $160. Its home video-game division lost $268 million in the year to March 1996 and is not expected to turn around this financial year. Company profits have been shrinking since 1994 largely because of development costs for the Saturn, competition with the PlayStation and unsold 16-bit Mega Drive consoles. After announcing the merger plan with Bandai, Sega chairman Okawa Isao told a Japanese newspaper that Sega may become irrelevant if it insists on keeping its hardware standard for video games. The merged Sega Bandai, he hinted, may do better by focusing on software.

In giving up the Saturn, Sega Bandai could play kingmaker in the video-game war. Sega's Virtua Fighter, a spin-off of the popular arcade game, is one of the world's best-selling combat programs. Another arcade staple, the sneaker-wearing hedgehog Sonic, was recently converted for the Saturn. Bandai can contribute characters from its extensive library, including the virtual pet Tamagotch, a huge hit in Japan and lately in Hong Kong and Singapore. Some analysts applaud the proposed merger. "This is an opportunity for Sega and Bandai to grow into something like Walt Disney," says Sawake Hironobu of the Nikko Research Center.

Sega already has seven virtual-reality theme parks in Japan. More are being built overseas, including the U.S. The huge fun centers feature simulator rides and high-tech arcade games. But the Sega-Bandai partnership is not yet a done deal. Last week, a Bandai spokeswoman said the Oct. 1 deadline may have to be extended. "The top people -- Sega chairman Okawa, Sega president Nakayama Hayao and Bandai president Yamashina Makoto -- say different things," says Morgan Stanley's Morita. "What they need to do is decide how to get rid of non-core and duplicative businesses."

How does Asia figure in the battle of the games? At the moment, none of the three rivals see the region as a key market. "Maybe as a production center," says Yamauchi. "Unfortunately, pirated software is common in Asia and the concept of intellectual property rights has yet to be fully accepted." Nintendo 64 players are sold in limited numbers in Hong Kong. Sony is building a network of licensed dealers in the territory and three other places (Singapore, Thailand and Malaysia) that it believes have adequate intellectual property laws in place. That is not always true. In Hong Kong, you can buy PlayStations that can read pirated CD-ROMs. Unscrupulous technicians pull out the computer card designed to prevent this.

In any case, Nintendo and Sony Computer have their hands full just meeting demand in Japan and the U.S. Who will emerge the victor? "Nintendo will reap good profits from Nintendo 64 in the next two years, but it will be tough going after that if it continues to have only cartridges," predicts ING Barings' Kubota. "Overall, Sony is likely to enjoy the advantage." Some industry watchers see the rivals specializing in niches: Sony for multi-function game consoles (a PlayStation that can play back video-CDs is being launched in Asia); Nintendo for stand-alone game players; and Sega for arcade games. Or maybe not. "In this industry, you never know what the landscape will be like," says Morita. "No one was talking about Internet games five years ago." Holographic virtual reality on-line, anyone?


How the Combatants Stack Up

Sales ($bn.) (1) 44.0 3.3 3.4
Profit ($m.) 1,000 504 42.4
Game player/ PlayStation Nintendo 64 Saturn
price (2) $192 $175 $175
Units sold (3) 13 million(since 1995) 6.1 million(since 1996) 7.6 million(since 1994)
Titles available/ 700 15 150
price range $26-$77 $65-$78 $45-$58
Processor one 32-bit chip, 33.8mhz one 64-bit chip, 93.7mhz two 32-bit chips, 28mhz

(1) Projected consolidated group results for financial year to March 1997, converted at $1=125 yen. Sony Computer Entertainment, which makes the PlayStation, is an unlisted subsidiary of Sony Corp. (2) Recommended retail prices in Hong Kong for hardware and software. (3) Cumulative totals as of March 1997. Sources: Sony, Nintendo, Sega

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