We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.

The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.

These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.

When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?

Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.

Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.

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Wednesday, July 09, 2008

Did Dreamcast Fail Because it was Ahead of its Time?

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Matt Egan

FOXBusiness

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Seemingly doomed from its launch and now dubbed “ahead of its time,” the Sega Dreamcast signaled the end of Sega’s game console endeavor and the beginning of a three-horse race in the video game industry.

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When Dreamcast was first introduced in 1998, the expectations were high as gamers anticipated that Sega would reenter the pantheon of console makers. By the time the company stopped selling the Dreamcast in 2001, it was clear the system was a failure, and Sega subsequently got out of the console industry entirely.

It wasn’t that Sega put out a weak product. In fact, the Dreamcast is still hailed as innovative and has been credited with paving the way for several widely successful game systems.

“The legacy of the Dreamcast is that it was Sega’s last hurrah. And they did it really well. If it wasn’t Sega, it would have been considered one of the greatest game consoles of all time,” said Don Reisinger, a tech columnist at CNET.com.

Sega burned bridges with developers and retailers years earlier when it botched the release of the Sega Saturn game console. The company released the Saturn months ahead of time, catching retailers like Wal-Mart (WMT) off guard and paving the way for the failure of the Dreamcast.

“Sega ostracized its developers and the retail chain. And this is not a business where they don’t remember things,” said Reisinger.

When the dust settled, Sega was only able to sell an estimated 10 million Dreamcast systems globally. By contrast, Sony’s (SNE) Playstation 2, the direct beneficiary of the Dreamcast bust, has sold an estimated 150 million units.

“If we learned anything from the Wii it's that to really be successful in gaming you’ve got to have that mass market appeal. The Dreamcast didn’t really have that,” said Paul Jackson, gaming analyst at Forrester Research.

And while the Dreamcast system was hailed as innovative, it quickly became obsolete when Sony released Playstation 2, which included a then cutting-edge DVD player.

“If Dreamcast had had DVD it would have been a huge success. Dreamcast bet on the Internet. Sony bet on DVD media,” said Richard Doherty at the Envisioneering Group. At the time, Internet use meant mostly dial-up, which Doherty reminds us also meant “Mom and Dad can’t use the phone while the game system is on.”

Since Dreamcast was so out in front of the other game consoles of the time, video game developers were presented with the huge challenge of creating games on two different generations of systems.

“Sega jumped the gun…It’s not always the best idea to be first. Your hardware becomes obsolete. They all catch up,” said Reisinger.

At the same time, it ensured that future game consoles would be developed almost in tandem so that no one system was too far out in front.

“The industry learned [not] to try to do a half step on your own. You may feel heroic but the developers will hate you. That was the lesson for Sony, Microsoft and Nintendo that I don’t think anybody is going to repeat in this lifetime,” said Doherty.

Game console developers did repeat much of what the Dreamcast offered as far as features, including online gaming capabilities and game controllers that had multiple analog sticks allowing for greater controls.

Dreamcast also helped spur the growth of “episodic gaming” on game consoles rather than just PCs, said Jackson. “It broke the mold in that respect,” as Sega realized the benefits of creating an “ongoing relationship with a consumer rather than [just] selling them a box,” said Jackson.

It’s not clear how much money Sega lost on the Dreamcast but Jackson estimated it never sold much more than 10 million units globally, whereas Nintendo has sold six million Wii systems in Europe alone. Jackson said it can often take more than 10 million units sold before a company can even breaks even.

The weak sales performance was enough for Sega to discontinue sales and quit the console business altogether, focusing instead on software. The move left Sony, Microsoft and Nintendo to battle it out for the top spot in the console business as Sega went on to have mixed success on the software side.