The GIA's Andrew Vestal had a chance this week to speak with Peter Moore, President of Sega of America. Joining us on the call was Shahed Chowdhuri of Next Level Gaming. The questions ranged from general questions about the company and its future to franchise-specific questions concerning Phantasy Star Online, Shenmue, and others. A big thanks to Alicia Kim and Jennifer Walker at Sega for helping make this happen; and, of course, to Peter Moore for his time.

Peter Moore at E3.

GIA: I know that with Sonic Adventure 2 launching just this past week it's a really big time for Sega.

Peter Moore (PM): Actually, yeah, let's talk about that, we've had just phenomenal, phenomenal sellthrough for Sonic Adventure 2. We're just gathering the numbers over the next 24, 48 hours, but I think it's indicative of the strength of the Dreamcast installed base that a title like this can come out strong out of the blocks. We're all very happy here today about SA2.

GIA: That's great that it's selling, because I know that a lot of people are wondering about the viability of new Dreamcast software at this point.

PM: Well, they should worry no longer. [laughs]

GIA: My first question would be about Phantasy Star Online ver. 2--that's a game that our site's very interested in. Is it still due for release in the U.S.?

PM: Yes it is.

GIA: All right. 'Cause Sega's official site removed the release date last week...

PM: Yeah, and I think that's not so much to say that it won't release in the US, it's just that we're working through some business issues on it that we're still not comfortable we've got resolved--and until we have something that's robust and solid out there, we're not going to lead gamers along, especially for an eagerly anticipated title like this.

I think we'd rather just say that we're working on it, and then we'll get back to you rather than make you think that it was going to be July-something, which I think they had posted up there, and when we clearly knew that that wasn't going to be the case.

GIA: I know that with Sonic Adventure 2, there's an ad for it on the back of the instructions, so clearly you guys are still serious about it....

PM: No, it's gonna happen, but like anything else in this business, it's just a question of when.

Next Level Gaming (NLG): For me, personally, I think the Dreamcast was a great success...it had a lot of good games...you know, better than the competition has. And the graphics were good, and it was the first one to come out with online play. But it seems like, to the general public it seemed a little short-lived. What do you think happened?

PM: Well, I think a number of issues... I think the Dreamcast came ahead of its time, for me. Next-generation perspective, if we called the so-called 128-bit systems that are now the next gens: the Gamecubes, the PS2s obviously, and the Xboxes, and I think that at a time when the industry was going through a transition. Everybody was digging in, we were trying to break the trend and actually drag the industry out of some level of transition.

I think that that coupled with some of the baggage of the past that we had to deal with, not necessarily in this country, but on a global basis, financially it made it very difficult to continue in the hardware business. And you know, we've, I think, over and over and over again, reiterated all of the reasons why we believe that we had to do what we had to do. It ultimately is the right decision.

We're all very excited about the future that being a top-class third-party publisher holds to us from a fiscal perspective. We're all very disappointed that our beloved Dreamcast cannot continue on and grow, but the nature of the business is that, ultimately you've got to make money somewhere. And you've followed our earnings and announcements over the last few years, and seen how difficult that has been if you're entrenched in trying to make a business out of hardware. And you know, on January 31st, we told the world that that was not to be. So yes, I think in the US, I think you can say that as we approach about a 3.6, maybe even 3.65 [million] installed base here for Dreamcast, and ultimately we'll top out at about four and a half million, then it has been a success.

But one can't judge your goal business by its performance in one marketplace, and as important as US is, Europe and Japan, I think, probably, were not able to meet those numbers to allow us to have the critical mass we needed.

So as a result, I think that the right decision was made, and our studios, as you saw at E3, were already busy working on other platforms, and twelve months from now, I think we'll be in a very good position to hold our content on any of those platforms up against anybody else. So, we're excited, you know, for the opportunity--a little disappointed on an emotional basis for--we couldn't continue with the Dreamcast, but overall I think the right decision for the company has been made.

NLG: I understand the excitement about the future. I'm sure we all are [excited], I guess there is a little disappointment. But you just talked about "critical mass," now there is something else with the core audience, meaning the "hardcore audience," who would normally go out and buy a Sega product...

PM: I think we were very successful there.

NLG: My question would have been, did Sega accomplish what they set out to do with the Dreamcast, in that category?

PM: With the hardcore gamer? Absolutely. I don't think that there's a gamer worth his or her salt that's out there right now, that would argue with you, that as we stand today, if we walked into a store today, and you only had a certain amount of money to spend against, what is the best value for money for videogaming today in America, it's the Dreamcast.

GIA: Sega's now in a transition year where they're leaving the hardware business behind to focus on software. But Sega has a very strong hardware background, and I was wondering if there's any lessons you've learned just from being involved in the hardware business--

PM: --don't do it again.

[laughs]

PM: No, I think it's a very good question because it just put us in a very unique position, relative to our competition, is that that we've got--I mean, my boss Sato-san, in thirty-one years at Sega, and all ostensibly in various iterations of hardware, whether it was you know, maybe back in those days, pinball machines, but ultimately, wherever or whatever consumers were using from a hardware perspective to get their gaming entertainment, Sato-san has been there. And of all the people that it probably hit hard, you know, it him harder than anybody, having seen this company been so successful at times, in pushing forward the peanut of what this industry is all about, particularly with platforms like the Genesis.

And then with Dreamcast as well, regardless whether you tell me whether it was a success or failure, you make the point (and mindfully so) that it was the first console ever that we were able to connect the Internet and play our games on the television set. And that can never be taken away. And it's probably more advanced at that level now than any of the three platforms are in their stage of development.

GIA: Is SegaNet going to continue in the future?--

PM: --Yes it is--

GIA: --on other platforms?

PM: I don't know about other platforms--I certainly think that that is a great possibility and I would hope that we're able to leverage all of our experience and expertise, not only with the back-end network, but also with the game development--of how to build code, network code, that is stable and robust and allows gamers to play at any bandwidth right now, you know, from a dialup perspective or into broadband. And I'm hopeful we'll be able to apply that to different platform holders. And certainly we're in conversation with all of our new friends about how we bring our experience to them, and they're all very eager to learn, as you might imagine.

NLG: Well, we talked about Sega's strength in software development. Right at this moment, I feel that Sega does have the potential to be number one in software sales in the near future. And in the past, we've heard some snide remarks from Electronic Arts about Sega entering this new field. Would you like to make some comments on Sega's future as a third-party software developer?

PM: Yeah, I think that--I don't know when the--depends on your determination of "near future" in the next couple of years, I think we certainly have the opportunity. We are, right now, undergoing a transition that no other company's done before, which is, while we're still in the hardware business, we are very aggressively gearing up to be a pure-play third-party publisher. So the ability for us to certainly just turn the spigot on and all of a sudden top quality Sony Playstation2 and Xbox and Gamecube titles start flowing out, that's unrealistic in the short term.

In the long term I will hold our development talent up against anybody in the world to be able to be able to figure out these platforms very quickly. But I think that it is going to be difficult to catch up in the next few months against our competitors-- EA being one, but there's also a lot of worthy competitors out there--that have had, in some instances, close to two years on Playstation 2, figuring out the hardware and building their toolsets and libraries for that particular platform. But it won't take us long to catch up, and I think once we do that, getting what I call being in the "rhythm" of the third-party, in which we're consistently launching titles at the right time for the right content for the right demographic at the right price point, then I think we will be giving these guys a very good run for their money, as early as Holiday 2003.

And, you know, we stated at E3 that our belief is that we can be challenging for that top spot around that period of time, certainly in the videogame space--if one takes away maybe the portable space and the PC space--then I think we're in a very good position. We've certainly got all the ingredients, and it's our job here at our end here in SOA to make sure the recipe, you know, comes together well. And I think we have all the opportunity in the world to challenge the current incumbents for the top spot.

NLG: I have another question about third-party development. There's two strategies that you can take, or I guess you can do both. You can either do exclusive software titles for a particular platform--as you said, for a particular demographic--or you can port the same game to several platforms. Now, is Sega working on both of these? Which one is more important to you?

PM: [emphatic] I think the latter is more important. I think if we're to be a true third-party, platform-agnostic publisher, then we need to make sure that we are providing opportunities for every gamer to play our games. And that's as important as ever in the early years where we've become a third-party because we've got to do a lot of missionary work with people who've maybe never enjoyed Sega games for whatever reason.

We need to make sure we give everybody that's bought a Nintendo platform, a Sony platform, or a Microsoft platform a taste of what great gaming really is. And from our point of view, I think we're looking, as you've seen from our announcements, while we'll be premiering many titles on specific platforms, that these are not exclusive deals by any stretch of the imagination.

NLG: So would it be safe to say that maybe Virtua Fighter 4 would end up on some of the other platforms as well?

PM: It could be ... you know, I can't talk about specific plans. But, one of the things that you need to take note of in our announcements is that the word "exclusive" is not used a lot.

GIA: Currently, Sega's third-party development seems to be split along developer lines: Smilebit's working on Xbox, Sonic Team seems to be focusing on GameCube ... but I gather from what you're saying that these are just to be taken as "premieres" and not necessarily exclusives?

PM: Right. I think what will happen, and already we're seeing with some of the... I mean, it's a great thing about having such in-depth and bench-strength of studios, is that, you can afford to have certain studios specialize in particular platforms that either their strength in content are applicable to, or they just like the hardware better than something else. And we're already starting to see that, and you guys saw at E3, where, let's say, Smilebit might be leaning more towards Xbox because they like the PC-style architecture that hardware brings. Whereas Sonic Team may be leaning more towards GameCube.

But ultimately, our developers are smart enough to understand, that it's not so much what they like, but it's what the content--how it fits the demographic--and I think that, a year from now, we'll be looking very closely at what the demographics of each platform are, and what, you know, what they're bringing different to each gamer. And it may well be that Xbox has fully fleshed out what the hard drive brings, and that our studios start moving towards Xbox more aggressively, because they like the opportunity the hard drive brings. On the contrary, they may like the, what the Playstation2 is doing with its online strategy for both dialup and broadband in the same adapter peripheral. And, you know, some of the stuff we're seeing from Playstation 2 particularly, obviously, the size of its install base, is gonna be very important. And then it may be what GameCube brings from a demographic perspective as we have some content that maybe skews just a tad younger, then it may well be more applicable to bring out particular content in GameCube.

So, I think it's this combination of our studios looking very closely at what their content is, but equally as importantly, seeing how the demographic shakes out for each platform, you know, as we get past the holiday rush and the dust starts to settle next year.

NLG: My next question is about the Internet features. Let's say the Xbox is the online-ready box right now, with the Ethernet and the hard drive built in...

PM: Yeah.

NLG: Now, will Seganet servers be up and running for online Sega games at launch, or is that something you've had...

PM: Well, a lot of this is going to be dependent on the announcements that Microsoft makes over the next few months about how they're gonna configure their Xbox online experience. We already know, obviously, that it's going to be broadband only, and you're right, we do like the fact that it's got an Ethernet port already in there, and the hard drive built in, so you don't get the normal degradation rate of people who are willing to go out and buy peripherals on top of that. So a hundred percent of that install base will have that capability. From then on in, we're still waiting to understand clearly what Microsoft is going to determine to be the true online experience, whether it's going to be a closed network that everything has to root through, inside, let's call it a firewall, if you will, but you can't get to it through a different ISP--a lot of that is yet to be determined.

But I'm hopeful, on all three platforms, that SegaNet has a role to play, and certainly Sega and it's online experience is heavily coveted by all three manufacturers and... you know, as we... certainly, we've only made a real strong announcement about Xbox because we really only have the knowledge about Xbox, and the fact that in Summer of 2002, the Xbox online experience will launch. That we have, you know, feel comfortable that Microsoft will be able to pull this off. And we will have all the necessary code, i.e. the network code to put into our games, even if necessary, ahead of time, so that when they do turn on the network, then our games are ready to go.

NLG: On the other platforms, PS2 and GameCube, they offer optional Internet features ... will Sega offer to pioneer online gaming on these platforms, or will they wait for first-party online titles?

PM: Well, I think that we certainly are very interested in PlayStation 2's plans, and again, I think that we're just starting to see that come together. We know that, for example, the modem or the adaptor will retail at $39.95, and I believe that it's going to be available for sale in Fall. What we're still unclear on is price point and availability of the hard drive for PlayStation 2. But clearly, if any of the three manufacturers wants to get aggressive with their online, and share the belief that Sega does, that online gaming is the future, then we are, in every way, intending to be a major part of that.

Now whether that means pioneering or being right there as soon as possible after launch, is yet to be determined, 'cause we don't know enough to be able to make that determination. I'm hopeful that all three of them will finally, you know, come to the table with us, and say, "These are our plans definitively, and we'd like you to be a part of them".

GIA: I know that Sega has a big role with the three big consoles coming out, but the Dreamcast still has some major titles coming out for it.

PM: Absolutely.

GIA: And one title we're interested in is Shenmue II. And that's gonna be a huge title for you guys, but it's gonna be launching the same month as the Nintendo GameCube and Xbox. I was just wondering how you planned to juggle a launch like that--clearly it's going to be a big title, but there's also gonna be a lot of other stuff going on in the videogame world at the time.

PM: Yeah, it's a good point, and something we're well aware of, as we look at it; it's gonna be in and around the time frame that two major consoles are launched, and how much money will be left on the table is a very good question--particularly, as we believe, that the original Shenmue purchaser in the first two or three weeks, is what we always call the "early adopter" that is more than likely to buy an Xbox or GameCube on Day One--

GIA: Or both!

PM: [laughs] Like you guys, for example.

But, I still believe that Shenmue has had such a profound impact on the gaming community, that--and having seen where Yu Suzuki is with Shenmue II--that this will be something that people will tuck away their money for. And from our point of view, we're still going to be extremely aggressive with Dreamcast; it's a very important part of our business plan this fiscal year. And we've got, not only Shenmue II, but also, obviously all of our sports titles for this Fall, as well as titles such as Floigan Brothers, Ooga Booga, Propeller Arena, Bomberman Online--we've got a lot of good stuff coming out! And our sports will be huge with the addition of both NCAA Football and Sega Sports Tennis. So when you add in the normal sports offerings and you build those two into the sports collection, we've got a very powerful lineup on Dreamcast.

GIA: The [Shenmue] franchise will continue after the Dreamcast on a to-be-determined platform?

PM: I hope so; Yu-san is still finishing up Shenmue II, and typically doesn't like to worry about the next iteration until he put closure on the current game. But if we are to believe all of his announcements prior to the original Shenmue, is this has all of the potential to be a long-life franchise for the Sega brand regardless of which platform it goes on next. So, I think we're all hopefu, as are hundreds of thousands if not millions of gamers, that there will be a Shenmue III, IV, V, VI, beyond; but that will probably be determined by where Yu-san sees the success of the Shenmue franchise, the pick-up from the gaming community on Shenmue II, you know, where we need to take it next from a pure business perspective. Is it something that, like some of the more classic RPGs, actually build as they go further into their lifespan? Final Fantasy being the best example, I guess.

NLG: About the SegaNet ISP service: we have the narrowband service, which works on a PC or a Dreamcast. will SegaNet be offering a broaband ISP service in the near future or partnering with someone else to offer it?

PM: I think there's a possibility of the latter. I don't think that SegaNet will be--to my knowledge anyway--be looking at putting broadband into the SegaNet offering, because it's such a complex ... narrowband is relatively easy; everybody's got a telephone line and it's not that difficult to build a backbone. Broadband is, from the very nature of the way that the business is done in the U.S., is very fragmented with different carriers regionally, and what have you, so, that might be more complex to do it ourselves, but I certainly think that we'd be able to partner with somebody. But I think that all of those decisions are still being made.

GIA: To go back to Phantasy Star Online ver. 2 for a moment, you said that it had been put sort of on the back burner as Sega worked through some of the business issues. Is this related to the announcement that there would be a fee to play? Is Sega reconsidering that decision?

PM: I don't know if they're reconsidering; obviously, you saw our announcement, that we're working on a business model that, you know, has a pay-per-play basis to it. And thank goodness, some common-sense stuff was written after the initial hue-and-cry about the situation, people started to take a look back, and say, "well, wait a second, if we're really to have this kind of content continue to flow, the business model has to work for all parties." The gamer has to feel he's got his value for his money and the great experience.

But there is an incredible backend requirement to making something like Phantasy Star Online work, that, in the original game, has simply been absorbed by SoA, SoJ, and Sonic Team. You know, building global network server farms, and keeping them up, and keeping the maintenance going, and the customer service. This is all money that we have had to, that had to be funded out of somewhere. And I think that their, our belief is that, you know, once everything--the dust--settles on this, people will realize that this is an experience worth paying for on a monthly basis. And, you know, will think that, whatever it is, ten dollars, fifteen dollars, whatever it ends up being--it's small potatoes in relation to the experience you get out of it.

There is an incredible amount of expense built into a title like Phantasy Star Online, that the gamer never ever sees.

GIA: I think there's sort of a general awakening going on right now that Internet content can't be free forever. And gamers are realizing whether it's website content or gaming content that if it's going to be a worthwhile experience, they're going to have to pay.

PM: Yes. Exactly. I'm glad that you see it that way. And there were a number of, a couple of good articles written about this. And I think that once everybody realizes, you know, what the entire business environment around an online game is all about, I think they'll see sense, and I agree with this because, otherwise we just can't--you know, at some point, we'll just have to say, "Hey, we love doing this for the gaming community, but if we're going to lose money all the time, we have to find things that are profitable, so we can keep plowing those profits into development of better games."

GIA: As an old-school RPG fan, I'm just happy to see Sega bringing back the Phantasy Star brand, and renewing it. Do you think that the success of Phantasy Star Online might increase the chances of a future offline Phantasy Star title? Now that the name's back in circulation.

PM: You know, that's a good question, and I don't know, and I think, if we need to, my philosophy would be, and I'm not Naka-san ... my philosophy would be that, it's made its mark online now, and it's broken boundaries again by the fact that it was the world's first global console RPG. And I think we need to continue to invest in that and bring communities together globally, which it started to do, primarily between the U.S. and Japan. And to back off that into an online [sic, should be offline], although the game is playable online [sic], I do recognize that it's not one-fifth of the experience that it is online, when you're interacting with people in Japan. That, you know, that I think that I would, if I were Naka, and--but again, I can't get inside his head--and continue to push the boundaries of what online community building is all about.

We have so much other stuff in our back pocket for offline basis, including some great RPGs, that we could pull out, and either start from scratch, or somehow repurpose them. And it's one of Sega's strengths, that when I look back into the libraries of what we have, and we've already, you know, made an announcement going forward with titles like Panzer Dragoon for Xbox; that we have an incredible amount of content that we can bring back to life very effectively, that would delight gamers.

So ... Phantasy Star offline? I don't know. Would I be surprised to get an email tonight, saying that that is going on? Probably not. But I think that knowing Naka's commitment to this... and the uptake that version two has had in Japan in the last ten days, has been phenomenal online. And I just think that at this point in the evolution of gaming to go offline, would actually, possibly, be seen as a retrograde step, I don't know.

NLG: I'm pretty much done. Is there anything else you'd like to comment on?

PM: The only thing is, just to reiterate where we are with Dreamcast, which is, something that we spent a lot of time talking about the future of the third-party; there's still an important role the Dreamcast has to play within the gaming community this calendar year, and perhaps a little bit beyond as well. This is still, as I said, the best gaming value for money, if you had, you know, so much money to spend, and you needed a great gaming experience right here and right now. And that will continue to flourish as long as we have titles such as Sonic [Adventure 2] shipping last week, but then, as we look forward to a lot more network titles, and then, of course, our great sports franchises going forward.

So I think that, you know, Dreamcast should not be forgotten and dismissed out of hand here, even with the looming launch of two what hopefully from our point of view, and everybody's point of view in the industry, will be very successful platforms going forward. So having said that, we're very, very happy that we're able to contribute to the success, we think, of GameCube and Xbox at their launch as well as hopefully getting on the PS2 wagon as quickly as possible, but not forgetting the role that--in the business--that Dreamcast has to play both at retail and the gaming community this year.

GIA: No further questions here. Just thank you for your time.

PM: Thank you guys. Take care.

NLG: Take care.