Ultra 64 2

Howard Lincoln is expected to announce within days that the Ultra 64, Nintendo's advanced game player will be as much as half a year late, missing the crucial 1995 Christmas sales season. The delay couldn't have come at a more pivotal time for Nintendo and the entire video-game industry, whose products sometimes generate hits and revenues that dwarf those of Hollywood's movie studios.

Nintendo and archrival Sega of America Inc., the U.S. unit of Sega Enterprises Ltd., together control nearly the entire $4 billion industry in the U.S. For all of this decade, they have been battling it out, going from what is now seen as crude, eight-bit technology -- bits are a rough measure of computing power -- to what soon will be widespread 32-bit and 64-bit games with lush colors, stereo sound effects and lightning-fast graphics.

To date, most of the market has been in game cartridges that pop into a player and are displayed on a standard television set. However, the video-game market lately has stagnated, and Nintendo, Sega, powerful new entrant Sony Corp. and others hope to galvanize their mostly teenage and younger and mostly male customers with hot new game players offering big advances in realistic 3-D animation.

But because of the technological changes, none of these new devices will run the millions of games that youngsters already own -- meaning the two giants essentially must start over in their battle for market and mind share. Sega and Nintendo will have to rely solely on their financial and marketing muscle, which Sony also has in abundance. A well-regarded but struggling upstart, 3DO Co., of Redwood City, Calif., also has a chance to make a mark.

"It's a high-stakes game they play," observes Scott Marden, chief executive officer of a software unit of Philips Electronics NV of the Netherlands.

Nintendo is taking two big gambles. First, it is betting that delaying the Ultra 64 until next year won't cost it dearly, as happened when Nintendo failed to match Sega's introduction of a new 16-bit machine, the Genesis, in 1989. That gaffe, and others, led to the loss of half of Nintendo's market share in a swift three years. Sega plans to start selling its equivalent of the Ultra 64, the Saturn, in U.S. stores on Sept. 2, and Sony will introduce its PlayStation around the same time.

Second, Nintendo has made what could be either a brilliant move or a devastatingly bad call: It has decided to stick with game cartridges while its competitors move their video games to machines that will use CD-ROM drives. CD-ROM disks can hold vastly more video, graphics and sound than cartridges, but Nintendo is betting that with a revamped and revved-up cartridge player, it can deliver a cheaper, but phenomenally faster, game system. Boasting 3-D software and microchips that theoretically can match the power of a supercomputer, the Ultra 64 is expected to retail for about $250.

"Nintendo will be seen as either visionary or an idiot," Mr. Lincoln says.

Mr. Lincoln himself has at times been seen both ways. A longtime senior vice president of the company, he took over as chairman of Nintendo of America, of Redmond, Wash., in February 1994. Hiroshi Yamauchi, head of the Kyoto-based parent company, had concluded that his son-in-law, Minuro Arakawa, wasn't aggressive enough in running the important subsidiary.

Mr. Lincoln, 55 years old, is fun-loving and avuncular. He is still a close friend of Mr. Arakawa, who remains president of Nintendo's U.S. unit, and he is popular with his own staff. But Mr. Lincoln has a frenetic, combative way of dealing with competitors and even suppliers, demonstrating a flair for popping off and, occasionally, for composing insulting poetry.

His major accomplishments include shamelessly copying Sega's successful television campaign featuring grungy, screaming teenagers, plus coming up with the megahit Donkey Kong Country game in time for the 1994 holiday shopping season. Donkey Kong Country is expected to generate retail sales of more than $400 million eventually. Many video games are lucky to gross $100 million. Since Mr. Lincoln took over, Nintendo's market share has jumped to 57% in the U.S. 16-bit game market from 39% a year ago, according to latest March figures by NPD Group Inc., a market-tracking firm.

In the process, he has constantly kept Sega off balance. When Sega came out with a game called Night Trap, depicting a scantily clad woman under attack, Mr. Lincoln lambasted it in hearings on Capitol Hill. Sega had to pull it. When Tom Kalinske, president of Sega of America, complained about the tactics, Mr. Lincoln sent him this ode over business news wires: "Dear Tom, Roses are red, violets are blue, so you had a bad day, boo hoo hoo hoo. All my best, Howard."

Mr. Lincoln also skillfully sabotaged a Sega commercial showing a seemingly mentally handicapped man playing a Nintendo portable machine. He alerted various groups for the disabled, who raised such an outcry Sega was forced to kill it. "They got us on that one," Mr. Kalinske concedes.

But Mr. Lincoln occasionally speaks and acts hastily. When Sega came out with the ultraviolent Mortal Kombat, he pledged to avoid such gore on principle and sold a similar but toned-down version of the game. After it became clear Sega was cleaning Nintendo's clock with the real thing, Mr. Lincoln released an equally gory version. "We learned a lot of Americans felt we should be in the video-game business, not the censorship business," he now says.

Mr. Lincoln suddenly reversed course after suing a major microchip supplier, Samsung Electronics Co., earlier this year, alleging it conspired with counterfeiters of Nintendo games. When Samsung countersued for defamation, Mr. Lincoln said it was like "a crook suing his innocent victim." Shortly thereafter, Nintendo settled the suit, saying it had learned that an unidentified third party was the culprit, not Samsung.

Those were all minor skirmishes, however. The question now is whether Mr. Lincoln has enough savvy to navigate through the industry's make-or-break transition to the next generation of game players. Despite recent successes, Nintendo is struggling with a general malaise in the video-game market.

While Nintendo was one of the great success stories of the past decade, with world-wide sales reaching $4.7 billion last year, demand has sagged recently as the market for 16-bit players reached saturation and teen players didn't find many new games enthralling. Analysts expect sales of 16-bit players to fall by as much as 40% this year. Meanwhile, some video-game fans began to switch to the personal computer, which with the advent of cheap CD-ROM drives is becoming a popular game machine in its own right.

The conventional wisdom is that game jockeys have to have more powerful machines, fast. But industry analysts say games that take advantage of the power of an Ultra 64 or competing player won't be widely available until next year, so Nintendo may not need to hurry its new system to market.

Earlier this year, Mr. Lincoln predicted that the Ultra 64 would ship before Christmas with 10 to 20 games, including a home version of the arcade hit Killer Instinct. Recently, he has been saying he is counting on a lineup of new 16-bit games for Nintendo to buoy the company this Christmas and expects to sell millions of them.

As for the expected delay in Nintendo's advanced game system, a survey by Forrester Research Inc. in Cambridge, Mass., suggests that the crucial year for deciding the winner in such systems will be 1996, not 1995. Adding up the fall launches of new Sega and Sony players, plus the powerful players from 3DO and Atari Corp. that have been in the market for months, Forrester predicts that U.S. shipments of advanced consoles this year will "barely top" one million units, and that they will be "hampered by a title shortage."

Next year, however, Forrester expects U.S. unit shipments of advanced players to explode to four million. Forrester analyst William Bluestein says that "3-D sports and violence will make an advanced console the super-exciting, must-have toy of 1996."

An unrelated event also has had a significant effect on Nintendo's thinking: the success of Donkey Kong Country. The developer, a small British outfit named Rare Ltd., tweaked the 16-bit software code on the game itself to achieve a dramatic improvement in the appearance and action of the characters, including the star ape. Kids were so impressed with the realistic graphics that Nintendo has sold some three million copies in the U.S., grossing an estimated $200 million.

Nintendo now is convinced that there's life yet in the 16-bit market and that it can be milked for big profits for at least another year. A spurt in the existing video-game market would mean the transition to the Ultra 64 is less urgent. At the Las Vegas trade show in January, Mr. Lincoln told distributors that a Donkey Kong sequel will be out this Christmas, along with other improved 16-bit games. Recently he reiterated that vow for the holiday shopping season, saying: "We will have the strongest lineup of 16-bit titles this year."

That song about sticking with an older market has a familiar ring. It was precisely the strategy of Mr. Lincoln's predecessor, Mr. Arakawa, in 1989, when a little upstart called Sega introduced a new machine, the Genesis, that had twice the power of the first generation of eight-bit players. Because Sega was too tiny to be considered a threat and Nintendo was still profiting from the older games, Mr. Arakawa didn't push Nintendo's own 16-bit player, the Super NES, into the U.S. market until 18 months later.

"We felt above them," he now admits. "There was some arrogance."

The wait-and-see attitude proved a huge strategic mistake. Sega of America had a brash new president, Mr. Kalinske, who formerly headed Mattel Inc.'s Barbie line. He found a hit game that chronicled the adventures of a purple hedgehog named Sonic; then he chopped prices and launched the MTV-style television advertising blitz. Sega hurtled past Nintendo in 1993 and reached a peak 64% share of the 16-bit market early last year.

Mr. Kalinske thinks it can all happen again, with Sega's Saturn getting an early lead on Nintendo's Ultra 64. "They didn't learn from the last go-round," he says. "The consumer is dying for a new experience now. They are not going to wait another year."

Mr. Kalinske's plan is to offer his customers a choice between relatively cheap interim add-ons to the cartridge-based Genesis, such as a 32-bit adapter and a CD-ROM attachment, and the Saturn due in the U.S. in September. The Saturn may not take off immediately because of its price, expected to be between $300 and $400. The 32-bit Interactive MultiPlayer from 3DO has struggled at that price point, and Sony's PlayStation will be similarly expensive.

Mr. Lincoln's strategy is far bolder -- and riskier. He will try to leapfrog all of his competitors with technology from an American company renowned for its 3-D software, Silicon Graphics Inc. SGI developed the "3-D engine" that enabled Steven Spielberg to create realistic digitized dinosaurs in "Jurassic Park." Silicon Graphics says it can come close to offering that kind of realism in Ultra 64 games by marrying a less-elaborate version of its 3-D software with an inexpensive but powerful microprocessor and graphics chip.

The technology, if it works, promises some real advances. Players will have an enhanced experience of being the protagonist inside the game and surrounded by the action. Using high-speed mathematical calculations, Silicon Graphics' hardware throws realistic "textures" on moving 3-D frames, while eliminating the fuzzy boundaries around objects that make them look artificial. It will allow players to zoom in and out of scenes without images losing any of their clarity. Zooming now commonly causes images to dissolve into blocky squares of color.

Sega claims that it will match Silicon Graphics' 3-D prowess with its own set of microchips and software. That's "completely untrue," says George Zachary, manager of Silicon Graphics' consumer electronics marketing and the man credited with inventing the phrase "virtual reality," now commonly used to describe the sensation of being inside a digitized scene.

"We have some features that are unbelievably important in making people feel that they are there in the game, and Sega can't do these," Mr. Zachary contends.

Mr. Kalinske, Sega's chief, says he turned down Silicon Graphics' technology for use in the Saturn. Thomas Jermoluk, Silicon Graphics' president, says this isn't true, and "I'll tell him that to his face."

The real trick, of course, is to cram this kind of technology into a box that will cost only $250. Mr. Lincoln is confident that feat will be accomplished, giving Nintendo a significant price advantage next year over rival boxes. Silicon Graphics believes that the CD-ROM drives used by Nintendo's competitors and on PCs won't be fast enough to match the speed or realism of Ultra 64 games for a long time, unless they are crammed with expensive memory chips that make them uncompetitive from a price standpoint.

Raw power won't guarantee Nintendo success. It needs great games from developers. In a first for the company, it agreed last month to buy a 25% stake in Rare Ltd., the Donkey Kong Country creator, and has forged alliances with game powerhouses Acclaim Entertainment Inc. and WMS Industries, among others, to make 64-bit games. Eventually, Mr. Lincoln says, Nintendo will move to a secret new storage medium, which the Japanese press has reported to be some kind of magnetic recording disk that could be on the market by 1997.

"Our goal is not to simply maintain momentum, but to regain industry dominance," Peter Main, Nintendo's marketing vice president, told Nintendo's sales force recently. "Ladies and gentlemen, we are here to stay."

At a January meeting of distributors in Las Vegas, the chairman of Nintendo Co.'s U.S. unit strode up to the podium to denounce "rumors" that the video-game giant would be late in introducing a powerful new game player, the Ultra 64. "The fact is," Howard Lincoln said in his usual emphatic style, "we will introduce the Ultra 64 world-wide in the fall of 1995."

Whoops.