Publish date:

Pulse: Sega! Microsoft Could Be Cheering Game Foes' Scaling Back

Author:

A pair of announcements from

Sega

(SEGNF)

and

Sony

(SNE) - Get SONY GROUP CORPORATION SPONSORED ADR Report

tilted the video-game landscape a little bit -- possibly toward Redmond, Wash.

After initial denials, Sega of Japan acknowledged yesterday that it may scrap the disappointing Dreamcast and get out of the video-game console business. And today, Sony announced during its third-quarter earnings report that it wouldn't meet already lowered shipment numbers for the PlayStation 2 console by the end of March.

That news is potentially good news for the powerful new upstart in the gaming console industry.

Microsoft

(MSFT) - Get Microsoft Corporation (MSFT) Report

, the once and future console developer, may be the winner from the video gaming news of the week.

Sony's announcement wasn't especially welcome for those game developers madly working on games for Sony's new console, especially the leading independent game developer,

Electronic Arts

(ERTS)

. EA is second only to Sony in creating games for the PS2. Its library of sports games has some of the industry's biggest sellers.

Big problem, though. There aren't enough PS2s to go around. And that means that there are unsold games sitting on retailer shelves. Not just EA's games, but those by other leading developers such as

THQ

(THQI)

and

TheStreet Recommends

Activision

(ATVI) - Get Activision Blizzard, Inc. Report

.

Sony plans to have 9 million -- as opposed to an original estimate of 10 million -- shipped by the end of March. And it stuck to a figure of 20 million shipped worldwide by next year, a number that drew a dubious reaction from

Lehman Brothers

analyst Felicia Kantor.

"Their announcement was pretty disappointing, exacerbated by the fact that there is so much software in the pipeline," Kantor said. Lehman has done no underwriting for the companies mentioned.

The PS2 shortage pinches EA, which had 10 PS2 titles out by the end of last month and is counting on another four to six titles by the end of March. Unsold games on the shelves causes a product backlog down the line.

Sony's announcement probably will cause some high-fiving in Redmond, where Microsoft is straining to get its PS2 competitor, the Xbox, out by late fall. Most of those who follow the industry still see Sony as the leader in the $7 billion-a-year market, with Microsoft and

Nintendo

battling for No. 2.

After all, every PS2 that isn't sold means a potential sale for the competing Xbox, or for Nintendo's Gamecube, also due out in the fall.

But Sega's potential news also is potentially good news for Microsoft and Nintendo.

While Sega never really hit the top as a gaming-hardware maker, it did well with video games. And it's axiomatic in the video gaming industry that it takes good games for a console to succeed. EA, for example, never developed any games for Sega's Dreamcast.

But Sega could succeed by making games for other platforms, something it couldn't do when they were making hardware.

"There is no question that if they get out of the hardware business, they could be a significant share player," said John Taylor, director of equity research for

Arcadia Investment

. Arcadia does no investment banking.

As part of its announcement yesterday, Sega acknowledged that it is talking about developing games for Nintendo and Sony. There is no doubt that Microsoft will rush to court Sega as well. And one of Sega's best titles aimed right at the heart of EA's top offerings -- sports.

Having Sega's creative team and its sports titles "could move the market-share needle for somebody," Taylor said.