With its lavish nightclub/arcades performing below expectations, Sega GameWorks has shifted its focus. It now wants to put smaller, family-oriented arcades in malls across the nation.

The latest twist from the company, founded in 1996 as a joint venture of Sega Enterprises Ltd., Universal Studios Inc. and DreamWorks SKG, is designed to capture the mini-theme-park feel of the arcades at a fraction of the original concept’s scale.

Company executives insist that the new arcades, dubbed GameWorks Studios, represent merely the next stage of development.

“We are very much in this business for the long haul, and we are very committed to both the original-style GameWorks and the new Studios,” said Michael Montgomery, president and chief executive of Sega GameWorks. “At this point, we are taking our time to make sure that we’re doing everything right.”

Over the last year, five adult-oriented GameWorks facilities have opened nationwide, boasting bars, rock music, restaurants, theme-park-style rides and state-of-the-art video games. The nearest GameWorks outlet is in the Ontario Mills mall.

“The original GameWorks concept is a good one, but they decided to bring it down to a more manageable level,” said Debbie Anderson, associate editor of Woodland Hills-based RePlay magazine, which tracks the video-game industry. “Some of the larger centers weren’t as profitable as they had hoped, but not to the point that it has discouraged them from opening other sites.”

Revenues at the original GameWorks locations are behind expectations, with some outlets doing better than others. The Seattle outlet had annual revenues of a little over $10 million, according to Sega GameWorks spokeswoman Melissa Schumer, who wouldn’t disclose revenues at the other locations because she said they have been in business for less than a year.

“(The Seattle outlet’s revenues were) just under the original goal, but we’re satisfied,” Schumer said.

Montgomery and Schumer insist that the company hasn’t abandoned its original plans for larger venues, though they added that only seven more will be built by 1999, bringing the total to 12. Company officials said last year that they planned to open 100 outlets by 2002.

“We’re in the process of building only as many GameWorks (facilities) as make sense,” Schumer said.

Montgomery emphasized that the smaller arcades are merely the next step in the company’s expanding niche strategy.

“Our critics in many ways were right in the sense that Sega GameWorks started out too fast, and we didn’t have time to tweak our concepts,” he said. “We’re fine-tuning the concepts, expanding our demographics and making the individual sites as fun as they can be.”

Montgomery also isn’t concerned with statements by industry pundits that the days of video-game arcades are over.

“I’m not sure how successful a traditional arcade can be nowadays,” he said. “But the audience is definitely there for our kind of entertainment business.”

Industry observers agree that both kids and young adults are interested in spending time and money in GameWorks’ amusement park-like environment.

The new arcades will have the same video games as the flagships. But instead of a restaurant, there will be a food cart and no bar. They are designed for shopping-mall locations, occupying between 5,000-square-foot and 15,000-square-foot storefronts.

By contrast, the Las Vegas flagship GameWorks sprawls across 50,000 square feet, and the Ontario location is over 30,000 square feet.

The first GameWorks Studio opened in Puente Hills last month. The company declined to reveal how many more Studios will open in the near future.

Analyst Kevin Skislock of L.H. Friend, Weinress, Frankson & Presson Inc., described the Studios concept as a way of lowering GameWorks’ overhead without lowering revenue potential.

“The Puente Hills Studio is less than one-third the size of the Ontario GameWorks, but it was designed for a great deal less than one-third of the cost while still transporting visitors to the neat world of a sound stage,” he said. “Meanwhile, Sega GameWorks is broadening its appeal to capture family cross-traffic from the malls.”