Playing for Keeps

By Philip Elmer-DeWitt

Journalists who cover the computer and video-game business always look forward to the annual pre-Christmas visit from Trip Hawkins, chairman and founder of the upstart game-system company called 3DO. Hawkins is a rarity in the uptight game industry -- a straight-shooting top executive who actually enjoys the products he sells. His press tours, first as chairman of Electronic Arts and then as front man for 3DO, usually combine a lively round of game playing and a dose of blunt talk about the business -- shaded ever so slightly to set his own company apart. This year, however, there was no hiding the fact that Hawkins' firm is up against the wall -- surrounded by enemies and running out of lives. "The price is right, and the software is in place," he says. "If the customers don't buy 3DO this year, they probably never will."

The next few weeks are critical for Hawkins -- and indeed the entire $5 billion video-game industry. Traditionally, the month of December is make-or- break time in the business -- when millions of parents decide what to buy their game-playing vidkids, and when manufacturers rake in 35% to 40% of their annual revenue. But the situation is particularly dicey this year. The industry is in the middle of a delicate transition -- from the so-called 16- bit technology at the heart of today's Sega and Nintendo machines to the next-generation game systems that can process data 32 or 64 bits at a time. It was during a similar transition that Atari collapsed in the early 1980s and, a ^ few years later, Nintendo was eclipsed by Sega, in both cases by having miscalculated the cost of keeping up. Whether the industry continues along the path set by the Japanese giants, veers off in the direction pioneered by Hawkins or is displaced by something entirely new could be determined by what happens this month.

The news, so far, is mixed. In the U.S. most video-game makers are having a miserable year. Specialty stores such as Babbages, Software ETC. and the Electronics Boutique report that sales of video-game software and hardware are down 15% to 30% from last year. At K-Mart and Toys "R" Us, games like Gauntlet and SolarStriker that used to sell for $30 or $40 are marked down to $9.99. The good news for Hawkins, however, is that America is no longer the center of the video-game business. The real action this year is in Japan, where parents are gearing up for Golden Days, the gift-giving holiday season. There it's a three-way race between Sega's Saturn, which hit the market in mid-November, Sony's PlayStation, which appeared 10 days later, and 3DO. That's why Hawkins is not ready to give up.

When he announced two years ago that he was going build a game machine that was 50 times as powerful as Sega's or Nintendo's, Hawkins was greeted with the kind of fawning attention usually reserved for rock stars and conservative talk-show hosts. He was backed by some of the biggest names in entertainment -- including Matsushita (Panasonic), AT&T, MCA and Time Warner. His initial public stock offering raised $26 million even before the first machine was built. The hoopla subsided soon after the machine hit the market. The initial price tag -- $799 -- was too high. The software was late. The games were derivative. Wall Street turned sour on the new machine, and last Christmas the video-game-playing public simply ignored it.

Hawkins has been scrambling ever since. He cut the price twice, once in February to $499 and again in September to $399, sweetening the deal for his hardware manufacturers by giving them a couple of shares of 3DO stock for every machine they sold. He hounded game developers to write more software and, when they didn't respond fast enough, started developing his own. When money ran short, he put up $12.5 million from his own savings.

In the end 3DO was saved by the sheer marketing muscle of its Japanese manufacturing partner, Matsushita, which aggressively pushed 3DO machines through company-owned stores and sold roughly two boxes in Japan for every one in the U.S. Those sales bought Hawkins enough time to get the second generation of software in place, including some flashy new titles such as Road Rash and FIFA Soccer. He still doesn't have that killer application -- a Mario Bros., say -- that could turn it into a machine game players feel they have to own. But he's got a few months to find one before Sega and Sony -- and possibly Nintendo -- land in the U.S. with their next-generation systems.

The wild card in all this is the flood of new games published on CD-ROMs for personal computers. Having languished on computer-store shelves for nearly a decade, CD-ROM's for Macintosh and IBM-compatible PCs are suddenly taking off. "Trip got blindsided by CD-ROMs," says John Taylor, an analyst at L.H. Alton, a San Francisco-based investment firm. "People who bought PCs for all sorts of reasons are saying, 'I just spent $2,500 for my multimedia computer. Why should I spend $400 on a dedicated game machine?' "

Hawkins' strategy is to stay just ahead of his competitors -- whether they are PCs, CD-ROMs or video-game systems. So his next project is a plug-in device called the M2 that turns the 32-bit 3DO into a 64-bit system -- yet still plays all the old software. That's if he makes it through Christmas.