Sega dares the China market

Sega, the game maker behind Sonic the Hedgehog, hopes to capture 10% of China's game market in one year

By CNN's Kristie Lu Stout and wire reports

TOKYO, Japan (CNN) -- Japanese game maker Sega plans to enter the Chinese game software market next month after long avoiding the piracy-laden country.

Sega will release two titles for PC gamers in China on June 15 with Beijng-based game developer Merix Interactive Entertainment.

Merix, owned by Hong Kong investment firm Hisun Ltd., will work with Sega to produce Chinese-language versions of its games.

Sega products will also be sold via Merix's sales distribution network in the Mainland.

Market expansion, with little upside

Analysts are already commending the game maker's entry into China's nascent gaming market.

"Of course, the Chinese market would be one important market to have continuous growth for the Japanese game makers," said Takiko Mori, a Tokyo-based games analyst at UBS Warburg.

"We can't expect that much growth in the Japan market, the rate is already high here."

But industry watchers also recognize the limited upside potential and risky nature of a China marketing strategy.

"I think it's good for Sega but I'm not sure it would have a huge impact on their earnings," said Mori.

"Also, in Asia, we do recognize piracy problems. I know the Chinese government is working on the IP rights issues but I don't know if it would be totally solved in two to three years."

In the past, Sega avoided game title sales in China due to fears of rampant piracy.

But apparently convinced that the market will be an increasingly copyright-protected one, Sega has entered China with hopes to capture 10 percent of the gaming market there by next June.

China now has an estimated 19 million game users.

Struggling towards profitability

Last month, Sega reported a record net loss for the past year, hit by a hefty charge from pulling the plug on its loss-making Dreamcast game console.

The struggling game maker, which aims to morph into a video game software developer, has forecast a return to profit in the business year to next March.

That would mark Sega's first time in the black in five years.

Sega is making game titles for Sony's PlayStation 2, 11 for the soon-to-launch Microsoft Xbox, and seven for Nintendo's GameCube, in addition to 30 new games for the Dreamcast.

For the year to March 2002, Sega said it would achieve a net profit of $17.2 million on sales of $1.5 billion.

But analysts say Sega should focus on reaching profitability by software sales in secure markets, not generating new opportunities in the risky China market.

"If they are planning to do that, that's too dangerous," said UBS Warburg's Mori.

Shares in Sega closed down 2.42 percent at 2215.00 yen in Tokyo on Thursday.