Japan's Hardware-Software Choice

PROVEN masters at new technologies, Japan's consumer electronics companies are facing a chicken-and-egg dilemma.

What, ask some industry leaders, will drive new products to success in the future: innovative hardware or creative software?

Hardware still commands the most attention. In fact, Prime Minister Kiichi Miyazawa warned the Japanese last month that the United States had lost the ethic of "producing things" with added value. But software, which includes anything from the film Bugsy to Microsoft Corporation's Windows computer program, has proven to be Japan's shortcoming in some markets.

Japan's efforts to sell its new high-definition television sets, for instance, are impaired by its inability to produce compelling programs. Sony Corporation and Matsushita Electric Industrial Company, which waged a costly battle in making videocassette recorders, have tried to fortify themselves for future products by buying up Hollywood film studios and other software winners.

Last week, Apple Computer's chief executive, John Scully, said in Tokyo that hardware-based consumer electronics firms still need to understand that the industry is now being driven mainly by developments in software. "It's like trying to make automobiles without gasoline to run them," he said.

The dilemma of software versus hardware hit home most forcefully last year when Nintendo Company, the world leader in home video games, forecast pretax profits of $1.2 billion for fiscal year 1992, which would surpass for the first time hardware giants such as Toyota, Hitachi, Nippon Steel, and NEC.

As the Japanese leader in software, Nintendo profits have risen nearly nine-fold in a decade, and still the company has only 840 employees, compared with millions of workers at the big hardware producers.

But even within the video-game industry itself, a rivalry has emerged over whether to accent hardware or software.

Nintendo, which banks more of its success and its profits on new games than on hardware, is being challenged on the issue by its main Japanese competitor, Sega Enterprises Ltd. Many industry analysts are watching the battle closely.

Sega has eaten into Nintendo's market share by being the first on the market with two new devices. A 16-bit cartridge game machine was introduced by Sega in 1989 that outpaces the more common 8-bit machines Nintendo pioneered in 1983. And in January Sega offered a machine in Japan built around the emerging technology of CD-ROM (compact disc, read-only memory).

Nintendo put its 16-bit machine on the market only last September to match Sega, and has delayed introducing a CD-ROM machine until next year. Sega says its CD-ROM machine will hit the US this fall. Sales in Japan already exceed 100,000 units.

"Sega got in the market early with new hardware, while Nintendo waited too long," says Tokyo-based analyst Joy Walbert of Baring Securities. "The result is that the US market in home video is now up for grabs."

The corporate philosophy of Nintendo president Hiroshi Yamauchi is that software developers must first demand different hardware, rather than be forced to design for new hardware.

Hayao Nakayama, Sega's president, takes a more balanced tack. "Software depends on how much you understand the potential and characteristics of the hardware," he says. "If you don't have the hardware, how can designers design the game?

"We won the game on 16-bit machines because we started earlier on the hardware and [software] design. In Japan, a lot of people will buy the first model of anything. We wanted to be first."

Sega claims it has about 60 percent of the US market for the 16-bit games, although some analysts dispute that. Its success also was helped by price-cutting, comparative advertising, and a popular screen creature, Sonic Hedgehog.

"Nintendo counted too much on customer loyalty," Ms. Walbert says. "But customers decided Sega was better, cheaper, and first. Nintendo also didn't realize that Sega would come up with Sonic Hedgehog, which is rated highly by game freaks."

Indeed, Nintendo may have become too complacent. "They stopped being overconfident last year when their sales went down and when we came out with our 16-bit game," Mr. Nakayama says.

Nintendo's president does worry that the company's dominance will lead to employees becoming lax in their work, says Hiroshi Imanishi, public relations manager. Nintendo's confidence in software-led success relies on its managers' ability to inspire creativity in the scenario writers, designers, programmers, and sound creators who come up with new games.

"This is not a contest of which company introduces a game first," says Mr. Imanishi. "The question is whether we can introduce a very good game.

"Some say CD-ROM should be the machine of the next generation. But I don't believe it. Our games include shooting, action, and role-playing. We won't introduce CD-ROM until there is a wholly new game. So far, we don't know the answer."

Sega's Nakayama admits that software is lagging for CD-ROM, despite its big memory and ability for sound. The company presently has only five games on the market. The bestseller is "War of Heros," a rather slow simulation of warlord struggles in 16th-century Japan. "Maybe the advantages of CD-ROM will come out in the future," he says. "We're still trying new concepts. But with CD-ROM you have to be 'in' the game, not playing it objectively. There's more picture, more story, more sound, more involvement."

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