The Dreamcast is over for Sega

To "stop the hemmorhaging" from a money-losing business, Sega says it plans to withdraw from the videogame hardware market in order to focus on developing games for competing game console companies Sony (SNE) and Nintendo, as well as for wireless devices and broadband-connected set-top boxes, says Peter Moore, president of Sega of America.

Layoffs in the company's worldwide hardware divisions will follow shortly, to be announced at a later date, Moore added. It remains unclear exactly how many employees from the company's estimated workforce of 1,600 will be given their walking papers.

Sega will immediately cease manufacturing its Dreamcast system, and will discount its remaining Dreamcast inventory from $149 to $99 per unit in the U.S. The company plans to publish 30 new games before the gradual withdrawal is completed by the end of the year.

In addition, Sega announced it has inked publishing agreements for the Sony PlayStation2 system, and that it has acquired software development kits to create games for both PlayStation2 and Nintendo's Gameboy Advanced handheld game system. Sega is still negotiating with Microsoft (MSFT) and Nintendo to provide games for Microsoft's upcoming X-Box system and for Nintendo's next-generation game console, the Gamecube.

"We have to get the costs that the hardware business has brought us behind us," Moore says. "That's why you'll see a withdrawal from the hardware platform, and that's why you'll see Sega do what Sega does best: develop games for consoles, phones, PDAs and any other platforms."

Sega's announcement Tuesday, timed to coincide with the end of trading on the Tokyo Stock Exchange, includes revised projections for the company's fiscal year ending March 31. At press time, Sega declined to provide specifics on those projections, but said the information would be released after market close in Tokyo.

For more than a month, Sega has been the target of takeover speculation, first reported in the New York Times. Moore reiterated a firm denial of any plans to sell the company.

But even as the news of Sega's retreat from hardware brings an end to weeks of takeover rumors, one question remains: What will become of SegaNet, Sega's Internet gaming service? Moore says the company plans to forge ahead with the online subsidiary, pointing to the recent release of the global multiplayer role-playing game Fantasy Star. But without a hardware base on which to run such games in the next few years, Sega's Internet strategy seems short-term at best.

Even as Moore maintained that SegaNet is still a core component of Sega's future, he admitted that the unit's longevity will depend on how quickly online games are adopted by the remaining console videogame makers - Sony, Nintendo and Microsoft.

"The power of SegaNet will only be gated in by the ability of other console manufacturers' willingness to [go online]," he says.

Sony has said it will begin offering online capabilities, and that PlayStation2 units will include communications ports and a storage bay for a hard drive. Beyond that, Sony has not yet articulated a broad Internet strategy.

Sony is quietly ramping up its e-commerce site, however, rolling out a feature Tuesday that makes its game units available for sale online for the first time. Still, that effort is a far cry from the company's mandate in late 1999 to create a broadband distribution system.

Moore said he hopes Sega's expertise in online gaming will help accelerate an industry-wide shift to create online games and make them financially viable.

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