Sega linked to Playstation, XBox

The dreamcast failed to live up to expectations, and Sega was forced to cut the price

Debt ridden electronic games maker Sega has reportedly concluded a strategy-shifting deal with its rival Sony that could lift it out of its troubles.

Sega, maker of heroic Sonic the hedgehog, has suffered from intense competition, with its Dreamcast console failing to match the popularity of its bestselling rival, Sony's PlayStations.

But a deal to provide software to Sony, rather than focusing on the production and marketing of its own games console and games, could be one way for the firm to return to profitability.

Japan's Jiji news agency said Sega would unveil a business plan to supply software for Sony and possibly Microsoft's new game console system XBox, scheduled to be launched later this year.

Both parties are still to confirm the deal.

"We do not comment on things that are not set in stone," a Sony spokesman in London told BBC News Online.

Popular alliance

But the industry is responding enthusiastically to the news, despite the lack of official confirmation.

Sony's popular playstation has undermined Sega's sales

"This is a welcome move for PlayStation 2, Sega has excellent technology and a pool of popular game software," said a spokeswoman for Sony in Japan.

Analysts also rated the possible deal highly, seeing a strategy shift from hardware to software as the way forward for Sega.

"Sega has the strongest manpower when it comes to game creators. Supplying software to others will give it a chance to make the best use of its human resources," said Yuta Sakurai, an analyst at Nomura Securities.

And Sega's share price was eagerly traded on the Tokyo stock market on Tuesday, climbing almost 19%.

Profit warnings

This rise is in contrast to a 70% loss over the past year.

In December the share price received a temporary boost when it was reported to be in talks with Japanese competitor Nintendo about a takeover.

But this was denied although a deal may involve Sega providing software aimed at its rival's Gameboy format.

In October, Sega unveiled a business strategy that included plans to provide game software for rival makers' consoles.

But at that time it did not specify which rivals and emphasised it would not withdraw from its core Dreamcast hardware business.

Losses expected

"At the moment, we have nothing to add to last year's announcement and cannot comment on specifics including names of the companies with which we are going to provide our content and the timing," a Sega spokeswoman said.

Sega has already warned that it expects to suffer losses of about $200m in the financial year ending next March, its fourth consecutive year of losses.

And even Sony's profits are expected to have fallen when it announces third quarter earnings later this week.

The three Japanese game-makers, Sega, Sony and Nintendo have been battling for market share, and will be faced with more competition still when Microsoft launches its XBox console later this year.