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Sega forecasts loss, will cut 1,000

Japanese video game maker Sega Enterprises warns of a gaping annual loss and admits its dream of toppling rival Sony's PlayStation remains elusive.

Sega's recently launched Dreamcast game console has yet to help the company emerge from a two-year nightmare of losses and job cuts.

Sega Enterprises of Japan said it will report a net loss for the second year in a row and will reduce its workforce of some 4,000 employees by 25 percent.

The company will post a loss of 45 billion yen ($378 million) for the year ended March 31, which includes one-time charges due to inventory write-downs and restructuring. Some 100 arcades operated by the company will be closed by the end of 1999 as a part of the company's restructuring efforts, Sega said.

A number of factors played into Sega's disappointing results, including write-offs of parts used to make its older 32-bit Sega Saturn game console and the liquidation of its U.S. software arm, Sega Entertainment. But more disconcerting for Sega was the reported shortfall in expected sales of its 128-bit Dreamcast game console.

A November forecast called for a profit, but the company has revised its revenue estimates downward by 14 percent. Analysts think Sega will fall short of even those revised numbers because Dreamcast isn't doing as well as predicted.

"There's no way Sega will make good on its original forecast," said Hirotoshi Murakami, an analyst at Kokusai Securities Co., to Bloomberg. "They'll probably revise downward the Dreamcast sales projections." Sega said that 900,000 units had been sold by March, falling short of the million unit mark company executives were hoping for, and software sales reached three million, compared to a projected five million units.

"Only hard-core Sega fans have ended up buying the Dreamcast," Murakami said.

Sega looks to U.S. Dreamcast launch
Sega, which trails Sony and Nintendo in the video games market, has failed to gain much ground in the $15 billion market for video games. Sony's PlayStation is still king of the market, having sold about 50 million units since 1994.

The widely anticipated rollout of Dreamcast in the U.S is looking to be a bellwether event for Sega's fortunes overall. Here too, though, the company faces a number of challenges.

For one, promotional efforts in the U.S. will certainly be an added financial burden on the company at a time when Moody's Investors Service is pondering a downgrade of Sega's debt rating.

Earlier this month, Sega of America president Bernard Stolar promised a huge ad campaign to support the rollout of the Dreamcast in the U.S. market, along with an aggressive price of $199. Stolar said at that time that the company already has an "impressive" list of backorders from U.S. retailers.

The September rollout of the system, a sales success or not, will still be an important event in terms of the convergence of PC and consumer electronics technologies. The system offers the ability to run games written for the Windows CE operating system from Microsoft; at least two of the expected 12 titles initially available for Dreamcast will be Windows CE titles, while the rest use Sega's own application programming interfaces (APIs).

However, plans for a new PlayStation system to be available in 2000 have already been announced, in part to keep customers from switching to Sega's new system.

To boot, WebTV, makers of Internet set-top boxes, may offer machines by the end of the year that add better 3D graphics capabilities along with the ability to run Windows CE-based games, according to hints offered by chief executive Steve Perlman at a recent trade show. While Sega would still capture most sales to game fanatics, WebTV could potentially take away some sales of customers less interested in high performance games--if enough developers bring out games on Windows CE.

Reuters and Bloomberg contributed to this report.