As Sega of Canada gears up to launch Sega Channel north of the border in June, it’s all systems go in the U.S.

According to Shawn Badding, an analyst monitoring the Sega Channel for Paul Kagan and Associates in California, Sega Channel is meeting its monthly targets on par with its goal of one million subscribers in the first year. Its second-year goal is five million subscribers, or nearly 65% of the eight million U.S. homes that have cable service and own a Sega Genesis system.

If the projection pans out, it could result in billings of approximately us$900 million for Sega and the cablecos, says pk&a.

Sega Channel is currently available to seven million U.S. cable subscribers after its initial rollout in 21 markets on Feb. 9. By the end of the year, 20 million homes will have access to the system, a joint venture between Sega, Time Warner and Tele-Communications, with a start-up price tag of about $20 million.

In Canada, Sega’s penetration projection at the low end is 100,000 subscribers in the first year, says Jon Gill, director of new business development at Sega of Canada. Gill won’t detail the start-up costs for the Canadian service, but does say the regulatory process ran $1 million and that Sega is bringing a portfolio of games worth $1.5 billion to the table.

Despite uncertain capital costs, 15 Canadian cable companies representing about 40% of the cable market have applied to the crtc for the required licence amendments to offer the video games network.

Absent from the group are Rogers Cablesystems and Shaw Communications, which together represent about 66% of the Canadian cable market. Rogers is keeping an eye on how U.S. projections pan out before making a decision to offer the channel, says Colin Watson, president and ceo of Rogers Cablesystems.

Watson rebuffs any industry speculation that Rogers is looking at launching its own service. ‘There is no basis for that. We have no plans to start up our own channel.’

The cablecos planning to offer the Sega system say profitability is down the road a distance but in the meantime, the channel will help reposition them as providers of the kinds of leading-edge interactive services their competitors boast of offering.

Dean MacDonald, vice-president and ceo of Cable Atlantic in Newfoundland, says launching the pioneering service is a bit of a risky venture, in spite of the knowledge that there’s a market hungry for video games.

Questions loom over how Canadian consumers will respond to an extra $15 to $20 a month charge, possibly coupled with a portion of the capital costs of $30,000 to $35,000 necessary to equip the cableco’s head-end facilities to offer the service.

MacDonald says research needs to be done to determine exactly how much the consumer is willing to pay. Cable Atlantic estimates capital investments will run $200 to $300 per home. MacDonald’s not sure how much of the costs consumers could shoulder, ‘but if they’re paying $80 to have one game right now and we’re offering 50 games, it’s a fairly safe bet that they’ll be willing to be out-of-pocket to some degree to join the club,’ he says.

Optimistic that Cable Atlantic can be in a profitable position with Sega Channel by year three, MacDonald says the financial investment, still somewhat undetermined, could affect projections. The price of the unit that goes into the home will depend on consumer demand, and since the equipment will be supplied by an American company, Scientific Atlanta, the value of the Canadian dollar will play into the investment.

Production costs for the home adapters are largely dependent on the price of the 3MHz D-Ram chips. The price of the chip today is us$75, up from us$50 in 1994. The price of the adapter has gone up accordingly to us$175 from us$125 last year.

‘It’s not a slam-dunk, that’s for sure. But from a cable company’s point of view, it’s a nice ancillary service to offer in terms of increasing the breadth and scope of what we offer. It’s good, new-generation positioning for the company.’

Similarly, Linda Ahern, vice-president programming services at CF Cable in Quebec and Ontario, says it’s healthy for the cable companies to begin offering something different than traditional broadcasting services. The delay in rollout will mean CF Cable won’t begin offering the Sega Channel to 350,000 of its subscribers until the fall.

Like Sega of Canada, the cable companies aren’t sharing revenue projections.

Says Gill: ‘We know the consumer because we’ve been serving them for years, but it’s a discretionary service on a new delivery system so it’s difficult to speculate what the return will be.

John Kuhn, director of telecommunications for Aurora Cable in Ontario, adds that for some of the smaller cable companies, new builds can affect the long-term outlook.

Aurora Cable is expecting to be profitable by the third year, but the 3,000 new homes being built in the area this year may skew projections, says Kuhn.

It’s also difficult to pin down how much funding will be available for video game producers. For video games already on-shelf, Sega will pay royalties to the producers. Funding for developing new projects will come from the Sega Interactive Fund (minimum $1 million in the first two years), and from Sega itself, which will back an unspecified number of new projects.

‘Sega of Canada’s strategy is to do more development in this country and put together the talent pools that have an interest in video game production. What form and what size is that business going to be? All I can say is we’re putting an awful lot of time and resources into the research. We’ll sit down a few years from now and put some numbers to it, says Gill.

The cost of developing a video game runs from $300,000 on the low side to $2.5 million to $3 million.

The Sega Fund will feed several projects and isn’t designed to cover the cost of any one game. What it will do is give other financial backers without experience in video games development confidence in the project, says Gill.

‘We regularly get calls from investors looking to participate in game development. They’re hesitant because they don’t know the business, but they say, if you guys back it, we’ll tag in behind you.’

As part of its licensing agreement, games on the Sega Channel in Canada must be 10% Canadian content. The definition of a Canadian video game Sega is working with is any game ‘that had Canadian hands in it as it was developed,’ says Gill.

‘So the company may be an international company. Electronic Arts in Vancouver, that’s all Canadian talent. The fact that it’s owned internationally is neither here nor there. The crtc wanted to see a contribution back into the Canadian production and development community, and that’s where these jobs should be made. I think the Canadian-content regulation and the development fund will do that.’

The committee administering the Sega Fund will be named within the first three months of operation. Representatives from Sega, and the broadcast, cable, education and creative industries will be on the panel, screening video game projects and examining other edutainment-type programs that may play a role in the emerging multimedia environment.

Producers of traditional children’s programming are playing down the inevitable invasion of the video games channel and its potential to occupy kids who might otherwise be watching their shows.

Robert Mills, president of Radical Sheep Productions, says kids are already finding the time to play video games and watch television programs.

‘I don’t find the channel threatening at all. They’re just making maximum use of the audience they already have.’

Similarly, Peter Moss, head of children’s programming at cbc, says comparing the two types of programming is misleading.

‘It’s not a challenge to real, genuine storytelling, especially for younger kids.’