Small Firms Challenge Nintendo in New Games

IN video games and the hardware that drives them, new Davids are appearing for industry Goliath, Nintendo of America. Introduced here last week in the form of game figures, one is a hedgehog named ``Sonic'' (Sega of America) and another a detective named ``Sherlock'' (NEC Technologies Inc.). Both are slinging rocks at the most popular figure in the history of toys - the plumber named Mario whose animated incarnation has helped Nintendo capture about 85 percent of the industry's $4 billion in 1990 sales.

Though the two challengers are a distant second and third in the United States market share - basically dividing the 15 percent of the video game hardware market left over by Nintendo - they are positioning themselves for a new phase of video game wars.

That phase has been signaled by the recent downturn in sales - after five years of massive gains - of Nintendo's cereal-box sized console that hooks to the back of a TV and can drive about 300 different video games. For the first time, sales of the so-called NES (Nintendo Entertainment System) dropped - from 9.1 million in 1989 to between 5 million and 7 million last year.

Sega, a Japan-based high-tech firm, has taken the early lead with a new system that uses 16-bit computer technology that produces far clearer graphics and color and more sophisticated effects. The company introduced eight new games to play on the system, as well as a hand-held version - also in color - to compete with Nintendo's black-and-white, hand-held games known as Game Boy.

NEC, also a Japanese firm, has been pushing a video game technology on CD-ROM compact discs. The company introduced the first video game disc to feature real actors and digitized sound. Known as ``Sherlock Holmes, Consulting Detective,'' the murder mystery game was produced using movie production techniques with 35 actors and Victorian-era sets.

``It's perfectly feasible that over the next few years the home video game market will be dominated by 16-bit technology,'' says Paul Valentine, an analyst at Standard & Poor's Corporation. ``If it does, Sega has definitely jumped out ahead and clearly established a major beachhead.''

In 1989, 16-bit hardware represented only 8 percent of total video game hardware sales. In 1990, the figure had grown to 30 percent, according to Al Nilsen, director of marketing for Sega. Of that, 80 percent is Sega.

Mr. Nilsen notes that Nintendo will introduce its own 16-bit system - now sold in Japan as ``Superfamicom'' - to the US next fall.

``That's evidence to us that they know where the market is headed,'' he says. More than 60 percent of Sega's 16-bit buyers have traded-up from Nintendo, he adds. Sega's 16-bit ``Genesis'' console, which plays about 60 games, costs about $189 compared to NES's 8-bit console at $99. NEC's CD-ROM is $300.

``The good news for Sega is that when Nintendo does come into the 16-bit market, it will give the whole format instant legitimacy,'' says David Leibowitz, an analyst for American Securities. ``The bad news,'' adds Larry Carlat, editor of Toy and Hobby World Magazine, ``is that Nintendo will have its massive advertising budget with it.'' That budget for 1991 is $135 million compared to $26 million for NEC and $45 million for Sega.

Nintendo's Bill White points out that such dominant name recognition has helped Nintendo sell 1.6 million ``Superfamicom'' units in the first three months of sales in Japan, nearly the same as Sega and NEC combined over 18 months in the same market.

There seems to be no dispute as to the superior graphics and sound produced by 16-bit systems. ``They are demonstrably superior,'' Mr. Leibowitz notes. ``The question will be who can take the lead in play-value of the games, that ethereal term that can't be defined but which every kid knows.'' So far, NEC sales are taking a drubbing from Sega at a rate between 2-to-1 and 3-to-1, according to Toy and Hobby World Magazine survey of retail outlets.

The other question, is how much money parents and children are willing or able to spend for the new system consoles and games at $189 and $300, nearly double and triple today's already-hefty $99 consoles. Not to mention $35 to $65 for each game cassette.

``Whatever parents will spend, kids will play,'' says Howard Zwick, general buyer for Toytown stores in Rosemead, Calif. Though some retailers have complained that the new systems make sophisticated leaps of fancy that are unnecessary and may be too demanding for kids, Mr. Zwick disagrees. ``Don't ever underestimate these kids,'' he says. ``They'll master this generation [of games] and the one after that.''