Sega Nintendo December 1991

 Super Mario, Nintendo Ltd.'s acrobatic video-game hero, has met a daunting obstacle: the competition.

According to reports from several analysts and toy-industry officials, Sega Enterprises Ltd.'s Genesis video games outsold Nintendo's new Super Nintendo series during the crucial Christmas buying season by a wide margin, especially in stores that carry both systems.

Although Nintendo retains a comfortable lead in total video-game sales in the U.S., the Christmas performance indicates that the longtime leader may have failed in its bid to come up with a dominant system that employs the latest technology. Both Genesis and Super Nintendo have 16 bits of computer memory, compared with the eight bits used in earlier generations of games. The games are sold on cartridges that plug into a game-player, which in turn is plugged into a television set. The game is viewed and played on the TV.

The numbers also underscore the increasingly hot rivalry between Sega and Nintendo, which could mean future pricing pressures as the two Japanese concerns vie for sales in what may be a shrinking or stagnant market.

Nintendo, entering the more advanced video game market this fall -- two years after Sega -- thought it could lure new fans by including the fourth version of its popular Super Mario game with its $199 Super Nintendo system. But the $149 Genesis, which features a popular game called Sonic the Hedgehog, outsold Super Nintendo by about two-to-one in the last week before Christmas, says John Taylor, an analyst for L.H. Alton & Co. in San Francisco, who says he has surveyed many retailers.

The sales lag comes despite a $25 million advertising blitz by Nintendo, two and a half times what Sega spent promoting Genesis since Nintendo's introduction.

"There's no question Sega is beating the dickens out of Nintendo," says Thomas Kully, analyst for William Blair & Co. in Chicago. "Sonic is the most exciting game since Super Mario III."

Nintendo, which has set 2.2 million Super Nintendo units as its 1991 sales goal, maintains that consumers will buy "more than two million units" by year's end. A Nintendo spokesman, William White, said, "We are pleased with our sales, given the poor retail environment." But a number of retailers and analysts quarrel with the estimate of more than two million units. Mr. Kully of William Blair figures only 1.2 million Super Nintendo units will be sold this year.

"I don't see how Nintendo can possibly achieve its numbers," adds Mr. Taylor.

Sega contends that it will sell 1.6 million Genesis units in 1991 and that its Christmas sales have exceeded expectations. For instance, Thomas Kalinske, president of Sega's U.S. unit, says in the final week before Christmas Genesis outsold Super Nintendo by an average of 2.5 to one at Toys "R" Us Inc. outlets, by 4.6 to one at Babbage's Inc. and by 1.8 to one at KayBee Toy & Hobby, a Melville Corp. unit. Babbage's president, Gary Kusin, said he "had no trouble" with the accuracy of the estimate for its stores. Toys "R" Us declined comment. The other ratios were corroborated by analysts who have surveyed retailers and asked not to be named.

Nintendo didn't dispute Mr. Kalinske's numbers. However, Mr. White added that based on October sales, the latest published figures, and from checking with retailers from time to time since then, Nintendo will sell twice as many 16-bit systems as Sega when the full-year tallies are done.

The next few months will be a critical period for both Sega and Nintendo as they battle for market share, analysts say. Twice magazine, a consumer electronics publication, estimates that Nintendo had 70% of the $4 billion U.S video games market in 1991, vs. 20% for Sega and 10% for others. Those figures include sales of previous-generation machines and software, and handheld games.

Not wanting to break its momentum, Sega says it is supplying retailers by air, despite the added expense. "I don't want to give up any sales to Nintendo," says Mr. Kalinske, noting that it takes 11 days to ship products by sea.

In 1992, Sega plans to go after the core of the video game playing market -- children eight to 12 years old -- a Nintendo stronghold in older systems. Until now Sega has directed more than two thirds of its advertising toward adults and teenagers, who have purchased most of the Genesis systems. But Mr. Kalinske says the company plans to spend nearly half its $40 million advertising budget in 1992 promoting Genesis on childrens' TV and in childrens' magazines.

Nintendo says it plans to "significantly" increase its 1992 advertising budget but won't know by how much until after the Consumer Electronic Show next month in Las Vegas. Typically, such trade shows are good for gauging retailer interest in new products.

"I think 1992 is going to be a watershed year," says L.H. Alton's Mr. Taylor. "It marks an important juncture for Nintendo, which must find a way of stopping Sega's momentum."

For starters, analysts suggest, Nintendo must lower its $199 price tag on the Super Nintendo by at least $30 to compete with the cheaper Genesis system. More importantly, they say, Nintendo must also improve the quality of games and put more of them on the market. Sega currently has 159 games compared with Nintendo's 25. Nintendo, which hasn't made a game for its old system since August, has stepped up production on Super Nintendo games hoping to market another 50 Super Nintendo games by June.

How good the games will be is debatable. "It takes a good year for a programmer to understand the nuances of a machine," says William Blair's Mr. Kully, adding that it would be difficult for Nintendo to come up with exciting selections before next fall because of its relatively late entry.

Nintendo concedes it has stumbled somewhat in developing games for the 16-bit system, but Mr. White noted that Nintendo software developers are well on their way to improving their games.

Both the Super Nintendo and Genesis systems are based on similar microchip technologies. The Nintendo machine can display 256 colors on a screen compared with only 64 colors for Genesis. But Genesis uses its computing power to make characters move more quickly on a screen -- an advantage that helps Sega sports games like Joe Montana and John Madden football.

Speed is the main Genesis attraction for James Shaunessey, 18, of San Mateo, Calif, a sports video-game afficionado. He says he has played games on both systems. "Let me put it this way," he says, "Genesis makes me forget girls for a while; with the Super NES, I'm still thinking about them."

Sonic the Hedgehog also has fans. The game is similar in concept to the Super Mario game, with multiple levels of challenges. Sonic, a hairy blue porcupine, moves from strata to strata of video strife doing flips, scaling bridges and scooting through tunnels.

Not everyone agrees. Steven Worthington, another Babbage's patron, has been in the Super Nintendo camp since Thanksgiving, when he played it at a friend's house. "I think with Nintendo the games can get really complicated, which I like."

Credit: Staff Reporter of The Wall Street Journal