How are they going to make it work?

After the amount of dust kicked up by the long-awaited announcement of the 3DO Interactive Multiplayer at the Consumer Electronics Show earlier this month, it’s somewhat unbelievable that there could be anything more to say on the subject. A long valentine from the Wall Street Journal, plenty of coverage on major TV networks, actual excitement on the show floor — Trip Hawkins’s “great moment,” as he happily called it from the stage, certainly did not go unobserved.

And that’s as it should be. At the very least, if 3DO never makes a dime off its technology (which is not likely to be true), it has made a great and needed contribution to the nascent industry of interactive multimedia by raising the bar faster and farther than anyone else has been able to do. From this moment forward, anyone introducing a new video game machine or a consumer multimedia player to the market, or attempting to sell one that’s already on the market today, will be forced to match the performance and specs of 3DO if it wants to be taken seriously.

One heck of a spec. The CES demonstration was impressive, even more so when Hawkins informed us that the alpha software was only running at half speed. When it is shipped in October, however, he promises the 3DO player will deliver 50 times the performance of today’s standard personal computers and video game systems for graphics and animation; the ability to use millions of colors simultaneously for realism; CD-quality sound with digital signal processing; full-screen, full-color and full-motion video (30 frames per second); a sophisticated central processor (called a RISC chip) for interactive applications; a double-speed CD-ROM player for fast data access and transfer; and compatibility with music and Photo CDs.

An MPEG digital video cartridge will be available not long after the player is shipped, and Hawkins says a “network” version will be available in 1994.

Microcosmically speaking, nearly everything is right about 3DO’s technology, its partners and its business plan. It has the best chance of success of any new platform vendor to date. But in the bigger world, where sharky companies like Nintendo and Sega aren’t likely to hand over their market share on a platter, Hawkins may face the fight of his career.

A SIMPLE PLAN

Hawkins’s plan for 3DO is fairly simple. First, design a consumer graphics machine that can do killer video games. Make it play other kinds of discs so it’s easier to sell and has a growth path out of video games. Make hardware licenses available free to any manufacturer who wants to build one, deliver a rebate for every machine sold, and leave the architecture open so that vendors can create arrays of products with different capabilities so they can easily differentiate themselves in the market.

Partner with some of the largest consumer electronics hardware companies in the world — Matsushita and AT&T, for example — who will exploit the possibilities of an open architecture, manufacture and sell your technology through their massive retail pipelines, and attract other manufacturers simply via their presence in the market.

Then, since software is key, partner with some of the largest media companies in the world — Time Warner and MCA, for example — that are committed to developing the “next generation” of entertainment products. Lure other video game developers by giving them a significantly better deal than they get from the prevailing market leader (i.e., a $3-per-unit fee instead of the $10-per-unit that Hawkins believes archrival Nintendo collects), promise that they will never have to pay a dime more, and keep them happy with massive support and sophisticated development tools.

CAN YOU SPLIT HARDWARE AND SOFTWARE AND STILL WIN?

Some skeptical video game developers wonder whether it is possible to separate the hardware and software businesses and still have both sides make money. Their skepticism is understandable: if they have never done video game titles, that’s the only model they know. But how do you break the chicken-and-egg cycle of attracting vendors and developers to a new, unproven platform?

This is part of the beauty of the 3DO strategy. Hawkins estimates that Nintendo and Sega charge their developers a royalty of about $10 per manufactured unit of software. For 3DO developers, he slashed that price by more than two-thirds, to $3. A percentage of this money will be used to continue development on the 3DO system; the rest will be bounced back to hardware companies as incentives to stay committed to the platform.

In addition, Hawkins’s research shows that a $100 video game machine costs about $75 to make and wholesales at about $85; the manufacturer and retailers make almost nothing from them.

However, when 3DO is shipped in October at $700 SRP, Hawkins says its manufacturing costs will be about $325, it will wholesale at about $500 and retailers will put about $200 cash money in their pockets for each one sold. That’s about a 35 percent gross margin; the average margin in the consumer electronics business is about 32 percent.

“Over time, parts costs will drop,” says Hawkins, “but the same margin structure will remain.” As a result, he figures vendors and retailers will be much happier to make and sell 3DO boxes than retailers are to sell Nintendos today. And happy retailers make sales.

In addition, he says, there’s enough play in the margins and enough money to be made off reasonably priced software that he believes retailers will be willing to lower the price of the hardware so they can set the software hook.

HOW MUCH CLOUT DO NINTENDO AND SEGA HAVE?

Be that as it may, it’s hard to imagine Nintendo and Sega executives are taking this lying down. Their response to 3DO is likely to be the biggest challenge Hawkins will face because they have the attention, and to some extent the wallets, of their existing customers.

Nintendo has already announced a “Super FX” add-on that is claimed to provide some of the graphics power that 3DO is boasting for a significantly lower cost (i.e., less than $100). In addition, a Jan. 3 press report out of Japan claims that Nintendo plans to build a CD-ROM machine based on the NEC V810 RISC chip, the same type of processor (a RISC chip) that 3DO has built its machine around. (The rumor about this new Nintendo player was that it was built around a MIPS RISC chip, but sources at MIPS say this isn’t true.)

Nintendo hadn’t made any announcements by press time about releasing this new machine in the U.S., but it doesn’t take a rocket scientist to figure out that it intends to go head-to-head with 3DO if there’s even a whisper of demand for a very high-performance game machine. Though it’s next to impossible that Nintendo could deliver a graphics computer of 3DO’s sophistication at a reasonable cost any time soon, it’s not necessary actually to deliver 3DO performance. All Nintendo has to do is provide 50 percent performance for 25 percent of the price, and 3DO sales will certainly suffer.

WHY AND HOW 3DO WILL MOVE QUICKLY BEYOND VIDEO GAMES

For many years now, people in the digital media world have been expecting video games to be the “back door” winner in the interactive multimedia platform wars. They expected the company to move quickly to hook Game Boys or Genesis machines out of kids’ bedrooms and into the living room to connect with online services, cable TV, CD-ROM peripherals, etc. But aside from a couple of eminently forgettable exceptions such as language software and stock quotes, they’ve put very little energy into other applications, and Nintendo and Sega may soon rue a missed opportunity.

As part of his usual spiel, Hawkins estimates that by the end of one year, between 500,000 and one million 3DO machines will be bought by early adopters and innovators who always buy when there’s a performance increase of magnitude, as there is with 3DO.

Although games are what will get 3DO into the living room, it is called a “multiplayer” for a reason. That’s why it is so important that people who are not interested in the game market are paying close attention to what 3DO is doing. If successful, it will place in homes large numbers of the most powerful, most sophisticated and most broadly capable box yet conceived.

Partners provide clout for 3DO. This is where 3DO’s impressive array of partners is liable to tilt the scales toward success. Where Nintendo and Sega have but one purpose, 3DO’s network of support includes some of the largest companies in the world — all of whom say they’re committed to moving interactivity into the living room, where they can forge new markets far more diverse than the pre-pubescent boy who is addicted to video games.

MOVING INTO THE WORLD OF THE STORY

Skip Paul, the executive VP at MCA who’s been shepherding the 3DO project both through his organization and Matsushita (MCA’s parent company), says he’s been waiting a long time for 3DO to come along. Despite its vast archives, MCA hasn’t bothered to build titles so far because “until now, the technology hasn’t offered us the ability to develop stories — comedy, drama,” says Paul. “But the 3DO hardware has technical features that will allow stories to be told.”

Paul says MCA is working on entertainment titles that will be ready when the player is shipped, and is putting together an interactive studio as well. He’s starting to gather creative people to work on interactive projects that are very different from anything available today. “This is a significant opportunity for us to take our existing properties and skills and get into a new software business,” says Paul. “It’ll go in a hundred different directions.”

Existing game developers such as Hawkins’s Electronic Arts, Spectrum Holobyte and nearly 100 others are equally excited about developing for 3DO. It presents them with the opportunity to go far beyond what they have done before. Like game players themselves, many are bored and frustrated with trying to maneuver around all the same old hardware limitations. They have ideas that need wings, and it’s clear that many of them see 3DO as the means to fly. This is a powerful motivation. Market realities can temper this desire, but if any people can rationalize a good business by doing what they really want to do in their hearts, they will almost certainly follow the heart.

Hardware people seem to sense a new creative potential in 3DO as well. Adam Yokoi, vice president of technology for Matsushita and another 3DO partner, is also convinced that the 3DO player will become as ubiquitous as a TV receiver or a VCR. AT&T’s last-minute entry as a 3DO partner also bodes very well for the company. Clearly it will do more than manufacture boxes; 3DO is likely to play a significant role in AT&T’s growing interest in cable television and delivering video programming into the home. AT&T Communications is a leading developer of decompression algorithms for the cable industry, and is one of the companies manufacturing guts for digital set-top boxes. If it decides to use 3DO technology for those boxes, 3DO would be immediately and powerfully connected to cable giant TCI, General Instruments and the nation’s cable operator.

Beyond set-top boxes, 3DO partner Vinod Khosla, of the venture capital firm Kleiner Perkins Caufield & Byers in Palo Alto, CA, says he’s fascinated by the possible variations on 3DO hardware that are bound to be developed after the CD version is shipped. “You might see someone build a built-in video editor for home movies,” he says. “You could build a whole home video control system. You could build a 3DO box with network connections and offer a whole set of services over the phone lines. I’d love to see innovative projects like that.”

Combine these visions with titles built from what may be the best collection of copyrights in the world — motion pictures, TV, animation, music, photo and interactive CDs — and the cable TV clout of Time Warner — and it’s possible to imagine a team like this successfully driving a flying wedge into whatever Nintendo or any other competitor has to offer.

THE VIDKID GROWS UP, AND DOES THE RIGHT THING

Many years ago in an interview, Trip Hawkins declared that the video game of the future would be one that you could be immersed in rather than watch. He’s pushed hard on a trusted team to make technology fit that vision, and the results are impressive. Is 3DO the right idea? Yes. Will it be a success? That depends on how quickly it responds to the vicious competition that’s bound to come from the video game world, and how quickly it can branch out from the video game buffs who will certainly be its first customers. Frankly, despite increased sales of CD-ROM drives, no other CD-ROM format and/or consumer multimedia player on the market can touch 3DO’s performance, so that category of competitor is not likely to make any further headway into the “living room” market that 3DO is targeting.

Grilling Hawkins on the minutiae of 3DO’s plans, it seems as if there isn’t a base he hasn’t covered, either by forethought or the bloody hindsight of experience. Even seasoned skeptics find it hard to find anything wrong with this company’s plans. No matter what the outcome for 3DO, however, the digital media industry should thank Hawkins for having the guts to raise the bar so high in a market already so splintered. It was a tough job, and we’re glad he did it.

Denise Caruso, Jonathan Seybold