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As widely reported, the company ended production of the Dreamcast console. Though the move disappointed video game fanatics, it was hailed by analysts as necessary to stem the company's flow of red ink. Sega said it would take $689 million in extraordinary losses, causing it to lose a record $516 million in the fiscal year that ends March 31, marking the fourth straight year of losses.

Despite some great marketing and a solid lineup of games, Sega has only sold about three million Dreamcast hardware units in North America since its highly publicized launch in September 1999. Last summer, the company began migrating some of its business online by launching SegaNet, a game service and ISP for Dreamcast users. Sources say there are approximately one million consumers currently paying about $20 monthly to subscribe to the service, which offers game play, news and community in a relatively advertising-free setting.

Earlier this week, Sega had announced a deal with UK-based Pace Micro Technologies to build the Dreamcast platform into set-top boxes equipped with 40Gb hard drives. Pace marketing director Andrew Wallace said the agreement would make "the entire portfolio" of Dreamcast games available through Pace's "digital home gateway" device on an on-demand basis. The software will be provided under a "pay to play" model that would give consumers access to Sega content for a fixed period of time. Sega also announced deals to make games for Palm hand-held devices and Motorola cell phones.

Sega of America president Peter Moore said the business model for the Palm product is still being worked out, adding the company is looking closely at a subscription model for delivery of a "Game of the Week" type service.

Jupiter analyst Billy Pidgeon suggested the Pace, Palm and Motorola deals may be just the beginning, adding that if Sega gets enough hardware partners they could create a net-centric strategy where people with various hardware devices could meet online to play Sega games on the SegaNet service. Moore said SegaNet would be able to generate revenues going forward through subscription, commerce and advertising.