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The BBC's Mark Gregory
"The company also faces the prospect of new competition from Microsoft"
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Wednesday, 24 January, 2001, 12:28 GMT
Sega considers axing Dreamcast
Sega dreamcast console
The dreamcast failed to live up to expectations, and Sega was forced to cut the price
Game-maker Sega has said it is considering ending production of its Dreamcast console - just one day after confirming its commitment to the product line.

"We are considering restructuring Dreamcast hardware operations worldwide for the next business year, and ending Dreamcast console production is one of the options'', a company spokesman told the Reuters newsagency.

A final decision is expected soon, possibly by the end of January. Sega reportedly would continue to provide customer service as well as new software titles for existing Dreamcast users.

Sega of America issued a written statement Tuesday, stating its continued commitment to the platform and intending to release "more than 100 games worldwide... in the next year".

Surprise development

The announcement came in response to news reports in the Japanese media speculating on the possibility of an alliance with rival Sony or Microsoft's XBox venture to help lift Sega out of its financial troubles.

Debt-ridden Sega said it would not confirm or deny the alliance, saying it was not company policy to comment on rumours.

Sega has suffered from intense competition, with its Dreamcast console failing to match the popularity of its best-selling rival, Sony's Playstation.

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 Tuesday that 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 on Tuesday.

Shares soar

Japanese investors responded enthusiastically to the news, despite the lack of official confirmation, sending shares of Sega higher by 16% on the Tokyo Stock Exchange.

Sony's popular playstation has undermined Sega's sales

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 the firm 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.

Late last month, Sega and rival Nintendo denied a New York Times report that Nintendo would acquire Sega for $2bn.

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See also:

23 Jan 01 | Business
Sega linked to Playstation, XBox
28 Feb 00 | Business
Sega warns of losses
13 Sep 99 | The Company File
Sony's new weapon: Playstation 2
14 Mar 00 | Business
PlayStation fault hits Sony shares
27 Dec 00 | Business
Nintendo denies Sega bid
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