After months of whispers and wild guesses, Sega has made it official: It is ceasing production of its Dreamcast videogame console and licensing both its games and hardware architecture to other companies.

Sega will lay off a substantial percentage of its 2,000 employees, 800 of whom are in the U.S. The painful restructuring makes sense. As a hardware company, Sega got kicked around by its stronger competitors. As a software company, it is suddenly very popular. The Tokyo-based company already has software in the pipeline for Sony's PlayStation 2 and Nintendo's Gameboy Advance, as well as a new agreement to produce both Internet and stand-alone games for Palm handhelds.

Other deals are inevitable. New game machines from Microsoft, Nintendo and Sony will all be competing for retail shelf space and customers this year, and they will look more attractive if they run titles in Sega's videogame library. Sega has several popular arcade brands and console games, like the Sonic the Hedgehog line.

"We're going to see a battle for the spoils," says Andy Eddy, editor of GameWeek magazine in Burlingame, Calif. "Sega's value goes up as a pure software company."

Today's announcement is not surprising, as the company has lost more than $1 billion since 1997 and expects to lose $202 million for the fiscal year ending March 31. Since Dreamcast launched in September 1999, even loyal fans have questioned whether Sega could survive the PlayStation 2 and its marketing steamroller. Sega's shares jumped last week after it said it would consider abandoning Dreamcast. The company believes that by exiting the money-draining hardware business, it can regain profitability by March 2003.

"This is the first time in a long time that we have a light at the end of the tunnel," says Jennifer Walker, a Sega spokeswoman in San Francisco. "The ugly truth about game hardware is that after manufacturing and marketing, you're $50 to $200 in the hole on each machine - and yet consumers don't want to pay more for better graphics."

Now Sega must quickly change from a proprietary hardware business into a free-loving software company. It hopes that the Dreamcast architecture has a future in Internet appliances and other devices; on Jan. 29, it announced that it had licensed Dreamcast to U.K. set-top box maker Pace Micro Devices.

In the near term, Sega will concentrate on squeezing as much money from its existing game library as it can. Microsoft and Nintendo both have next-generation game consoles coming out this year, and Sega has just enough time to adapt its existing games to the two new platforms before they launch.

Based on unit sales, Dreamcast doesn't rank with Sega's other notorious failure - the Sega Saturn, released in 1995. Saturn sold less than 2 million units in the U.S. before Sega took it off life support in 1998. The company has sold 4.5 million Dreamcasts in the U.S since September 1999. To clear its warehouses, Sega is cutting Dreamcast's price from $150 to $99 beginning Feb. 4, which makes it one-third the cost of the PlayStation 2. Sega is promising to release 30 exclusive Dreamcast titles this year, but it will still be a tough sell.

Anyone who buys a videogame console expects it to become outmoded. But that usually happens after three or four years--not a year and a half.

Source: www.psx2.com