IGN Presents the History of SEGA
The secrets of SEGA's past are revealed.
by Travis Fahs
April 21, 2009 - There will never be another SEGA. While their reign as a first-party has long
ended, and the name hardly carries the cachet it once had, the industry owes deep debt to the
former giant. An innovator and an unrivaled creative powerhouse, they were perhaps the
greatest single developer in gaming history.
While rival Nintendo has shown an unmatched ability to maintain a small handful of blockbuster
series, SEGA churned out brilliant original franchises one after another with such frequency
they made it seem effortless. Their hit series were practically disposable, because they knew
the next one would be just as good. All across the world, from Tokyo, to San Francisco, to
Lyon, their studios always bet on the gamble, always took chances, and to their fans, they
were always winners.
Unfortunately, SEGA didn't win many battles in the hardware market. Their history is riddled
with mistakes – some that you probably know well, and a few you've never heard before, but all
of them heartbreaking. Their moment on top was fleeting, lasting just a few years before it
all came crashing down. When SEGA retired from the hardware business, it felt like originality
and creativity had lost the battle against bigger brand names. SEGA's way of doing business
didn't pay off, and even as a third party they've continued to struggle.
As SEGA's star has faded, some are quick to whitewash their history; to act as if their
success was the fluke and their failure inevitable. It's natural – the victors always write
the history books – but that isn't the way it happened. This is the story of SEGA; the good,
the bad, and the possibilities of what could have been.
Service Games
SEGA's early history has many strands that wove themselves into the fabric we would later know
so well. Its story goes hand in hand with that of Japan and its relationship with America.
Following World War II, Japan was a defeated nation. The loss of industry and human life had
left the country economically devastated, and although the United States was there to support
her growth, Japan's recovery would take time. Sega's founding fathers came from America and,
for various reasons, their paths converged on Japan.
Marty Bromley had formed Standard Games in 1940 to provide coin operated amusements to
military bases in Hawaii. He was in Hawaii when the Japanese bombed Pearl Harbor, where he
maintained the base's slot machines, but he never harbored the negative feelings toward the
Japanese that so many others at the time did. In 1952, when the United States outlawed slot
machines, he saw the emerging Japanese market as an opportunity. He purchased slot machines
from the government, and set up a company to import them to Japan. He called it Service Games.
Around this time, a man named David Rosen set out on a business venture of his own. Rosen was
a New Yorker, stationed in Japan during the Korean War. His sharp business sense and tireless
determination would serve as a guiding force for his company for the next 45 years. While in
the Air Force, he saw a nation working tirelessly to build itself up – a great opportunity to
invest in a business and a people. His ventures followed the recovery of the nation itself:
his first business exported portraits painted from photos by Japanese artists for a fraction
of the cost that an American would charge. After this, he opened a series of photo booths to
provide inexpensive pictures to be used for IDs needed for work and travel. As the US's
military operations brought more money into Japan, he finally decided it was time for fun, and
he began importing electromechanical arcade games.
The amusement machine industry in the US was sagging, outside of the booming pinball business.
Arcades were seen as seedy locales, and hardly the kid-friendly playgrounds they would become
many decades later. Machines could be had for cheap and sold on the Japanese market with none
of the baggage they faced in the US. The thriving arcade business that developed is a legacy
that remains with SEGA to this day. Throughout the company's history, its arcade operations
were its spine, keeping SEGA on the cutting edge even when the console business was sagging.
In 1964, the two paths converged. Rosen Enterprises negotiated a merger with Service Games,
resulting in the abbreviated SEGA Enterprises Ltd. The two companies seemed a logical fit; an
appealing blend of American and Japanese business culture with a strong, stable foothold in
the market. Had they been successful in joining with their other competitor, Taito, who knows
how huge they could have become? Service Games served as the parent company in the merger, but
Rosen assumed control as CEO. He would remain with the company until 1996.
In 1966, they began designing and manufacturing original arcade machines. Their first was a
submarine-themed shooting game called Periscope. The colossal machine was nearly ten feet deep
and six feet wide and cost twice as much to play as competing machines, but audiences and
arcade owners agreed that it was worth it. Periscope was so successful that SEGA began
exporting their games to America, establishing them as an international company with a
Japanese base. Not long after, SEGA was sold to Gulf + Western, with Rosen remaining on board
to helm the ship.
The 1970s saw the complete reinvention of the arcade industry. Video games didn't take long to
overtake electromechanical games and pinball machines. Not long after, microprocessors
replaced discrete logic games. When Taito released Space Invaders in 1978, it was so in demand
it famously created a coin shortage in Japan.
To keep pace with the rapidly-evolving gaming market, SEGA acquired San Diego-based Gremlin
Industries to develop and manufacture new microprocessor-based arcade games. Shortly after
this union, they released Head On, a game renowned for pioneering the maze chase genre further
popularized by Pac-Man. It was also during this time that SEGA purchased a distribution
company run by Hayao Nakayama. He was named vice president of distribution, beginning his long
and important career as key part of SEGA's story.
The company began expanding rapidly, producing more and more elaborate hits, and recruiting
new developers that would help to define the company creatively. SEGA's games would come to
distinguish themselves from their peers with their eye-popping graphics that marked some of
arcade gaming's baby steps into 3D. Turbo became the first racing game to use sprite scaling
with full-color graphics. Zaxxon delivered scrolling graphics with an isometric view and 3D
gameplay. Buck Rogers: Planet of Zoom trumped both with its fast 3D scaling and detailed
sprites. SEGA had become a leader in the arcade video game business.
The game industry was booming and SEGA along with it, but a storm was brewing in the industry,
and David Rosen knew it before the rest of the world was willing to face it. He urged the
arcade business to reform, and start offering conversion kits to allow operators to
inexpensively turn over machines. This idea would later help the arcade industry to begin its
second life, but at the time, his remarks were met only with boos and jeers. Rosen's fears
were well founded, and when Atari began its downward spiral in 1983, many lost confidence in
the industry. SEGA's benefactors (who by then included Paramount) began looking to get rid of
the company.
Coming Home
The extent to which Atari's massive crash directly impacted the sales of other sectors of the
gaming industry is debatable, but it certainly spooked investors. The "crash of '83" has
become a much fabled dark age for video games, but for the Japanese market, the scare came
early in 1982, as arcade game sales had a recession of their own. Against the backdrop of a
plummeting console market in North America, two arcade giants, SEGA and Nintendo, turned to
the home market as the next frontier. Their rivalry would rage on for nearly two decades.
The Japanese console business was still in its infancy, without a real hit console like the US
had with the Atari VCS, but the two arcade giants both set out to change that almost
simultaneously. In fact, their first home systems launched on the same fateful Friday, July
15, 1983. Nintendo released the Family Computer (Famicom for short, and NES to Americans), and
SEGA released the SG-1000. SEGA's console cost 15,000 yen, and the Famicom was just 200 yen
less, putting both at about $130 in today's dollars -- economical by any measure.
We don't have to tell you who won this battle. The SG-1000 hardware showed none of the
ingenuity SEGA brought to their arcade games, and instead used off-the-shelf parts that left
the system virtually identical to the older ColecoVision console and the MSX computers.
Nintendo's system had multicolored sprites and, more importantly, hardware scrolling, which
opened gamers up to vast new worlds that made the single-screen arcade games of the early '80s
seem quaint. While many didn't realize it at the time, the move to scrolling graphics would
prove nearly as pivotal as the leap to 3D many years later.
With the media scaring everyone into believing video games were a passing fad, and a sag in
the arcade market that began a year before the crash in '82, Gulf + Western was having a bout
of buyer's remorse, and offered David Rosen a chance to buy back the company he helped to
found. The $38 million dollar price tag was too hefty for Rosen alone, but the company had
earned $214 million in 1983, and Rosen knew it had a future, regardless of present industry
trends. He and his partners shopped the company around, and when they were unable to find any
buyers, Rosen and Nakayama assembled a group of backers, including a group called CSK
Holdings, led by Isao Okawa. Nakayama-san was named CEO of the newly independent Japanese
company, and Rosen served on the board from his office in Los Angeles, tending to the
company's export affairs.
Rosen and Nakayama had a unique partnership. Their friendship and rivalry would shape the
company's future through its best years. Rosen was by most accounts a quiet, contemplative man
who served as the company's architect, while Nakayama was fearless, passionate, and ruthless.
The two were known to be competitive, even when their goals were the same, but they held a
deep respect for each other at all times.
As the American and European markets turned increasingly toward home computers like the
Commodore 64 and ZX Spectrum for gaming, SEGA tried to jump on board with the SG-1000 Mark II
and the SC-3000, which added keyboard functionality while maintaining compatibility with the
existing library of games. The move didn't work very well outside of New Zealand and Taiwan,
and the platform stagnated in its native country.
The SG-1000 wasn't a success in terms of market share, but it was a valuable experience for
the company. SEGA established a new console R&D division, and some of the company's greatest
creative minds started off working with the SG-1000 hardware. Yu Suzuki wrote his first game,
Champion Boxing, on SG-1000 arcade hardware, and Sonic-creator Yuji Naka wrote his debut,
Girl's Garden, on the underpowered console. Despite essentially being a repackaged
ColecoVision with more RAM, SEGA's developers were able to push the hardware to do some
impressive feats. Games like Orguss, with its basic parallax scrolling, and Doki Doki Penguin
Land, with its complex puzzles, seemed far beyond the last generation of systems. There was
even an amazingly smooth conversion of the 3D arcade shooter Zoom 909 (Buck Rogers).
With the SG-1000, SEGA built the infrastructure that would found their future efforts in the
home market. It didn't so much matter that the system itself failed to make waves, as SEGA had
gained something far more valuable than a good year against Nintendo.
World War
Having failed to cash in on the computer market, SEGA realized that the only way to take on
Nintendo was to truly have the better machine, so they carefully plotted the next upgrade to
the SG-1000. The Achilles heel of their console was its dated, off-the-shelf Texas Instruments
video processor. For their next system, they created a highly customized version of the
processor that supported hardware scrolling, a massive palette boost, and detailed, 16-color
sprites. Along with a huge increase in the system's RAM, and native support for larger
cartridges than the NES had at the time, it had everything needed to shame Nintendo's
hardware.
The SG-1000 Mark III was released in Japan in October of 1985, about the same time American
kids were scooping up the newly christened Nintendo Entertainment System. It wasn't long
before Nintendo had a stranglehold on two markets, and console games were once again the
massive business they had been at the height of Atari's reign. With a bit of envy, SEGA
decided to invade the American market in the hopes that it might be more receptive than their
native turf.
Their ambition was well grounded. By the time their system would launch in 1986, the SEGA name
was starting to carry quite a bit of clout with arcade goers. In 1985, Yu Suzuki had released
two games that surged miles ahead of the competition in terms of graphics: Hang-On and Space
Harrier. Using their new "Super Scaler" technology and 16-bit graphics hardware, these games
threw around gorgeous, detailed, pseudo-3D graphics effortlessly. Not long after, they
introduced their popular System 16 hardware, which would eventually introduce a string of hits
like Fantasy Zone, Shinobi, and Altered Beast. The SEGA name meant cutting-edge graphics, and
they hoped that would be the foot in the door they needed to take over America.
The Mark III was redesigned and christened the "Master System" in the US, and made its way to
market in late 1986. SEGA studied Nintendo's playbook closely. They launched the base system
packed with Hang-On and Astro Warrior for $199, and a bundle that included a light gun with
Hang-On and the Duck Hunt-inspired shooting game Safari Hunt for a bit more.
The Japanese launch of the Mark III had been virtually invisible, with scarcely any games at
launch and only a slow trickle in the first year. SEGA didn't want to repeat the same mistake
in the US. With a conversion of their recent arcade racing hit included, SEGA was working hard
to leverage their position as an arcade developer. Early in the system's life, home versions
of Fantasy Zone, Space Harrier, Wonder Boy, Choplifter, and Zaxxon all helped to build the
platform's reputation as the superior arcade-at-home experience. Later on, more big hits like
Outrun, After Burner, and Shinobi would stand as some of the system's biggest games.
SEGA also understood the need for console originals. Super Mario Bros was a huge part of the
NES' success, especially in America, and SEGA needed a Mario of their own. Not long after the
Master System's US launch, SEGA released Alex Kidd in Miracle World, a side-scrolling platform
game with more than a few original ideas. The title was met warmly, but alas, SEGA didn't
understand how powerful Nintendo's bundling strategy was. They hoped to reap profits from the
game, rather than including it in the box to entice gamers, and the plan backfired. Alex Kidd
was one of the more successful games on the system, and remained an unofficial mascot, but the
platform just didn't have the installed base to land a true hit.
Attempts to win the audience with gimmicks failed as well. The Master System proudly boasted
the ability to store games on small, lightweight cards as well as cartridges, and SEGA hoped
that the novelty of carrying a bunch of games in your pocket would have some schoolyard
cachet. Alas, no one cared, and the format was quickly abandoned. In January of 1987, SEGA
revealed their next big selling point: an add-on that allowed for 3D glasses with LCD shutters
to display full-color 3D images on your TV. Spectators at the Consumer Electronics Show were
amazed by the effect, and SEGA left the show feeling like winners. Sadly, when the accessory
was released, the hefty price tag and limited support from games made it a dud, and only a
handful of titles ever supported the innovative gadget. The effect was great, and the LCD
shutter technique has since been widely imitated and is still used today in products like
NVidia's 3D Vision, but SEGA saw none of that success.
By the end of 1987, Nintendo's market share was estimated at around 90%. The Master System was
sinking fast and showed no signs of improving. SEGA of America fought hard to get the system
good distribution in all the major chains, but they simply couldn't muster the advertising
muscle needed to take on Nintendo. To help alleviate this, SEGA shut down the American
consumer division, and sold distribution rights to Tonka Toys, who funneled $30 million into
marketing the system.
The move helped to create better awareness of the system, and may have prevented its premature
death, but the Nintendo juggernaut was simply too much. At the start of 1988, Nintendo had
sold more than 7 million systems already, and that number more than doubled by the end of the
year. This lead gave them power, and they ruled over their third-parties with an iron fist.
Companies that might have supported the Master System were threatened with losing the license
to make Nintendo games. SEGA and a small handful of partners were forced to code their own
licensed conversions of popular third-party games to stay competitive, but it just wasn't
enough. Even with cutting-edge exclusive titles like Phantasy Star and Wonder Boy III, there
was simply no way to compete with the Nintendo juggernaut and its army of partners.
In Japan, the system had fared even worse. With an extra two years head start, Nintendo had
already beaten them before they even began. In 1989, they discontinued support, and diverted
their development efforts to games for the Western audience. In Europe, where the market was
more divided between computer games and consoles, Nintendo didn't have the same foothold, and
the Master System fared much better, with support lasting well into the '90s. This victory
ensured that a trickle of games would still make their way to hungry SMS owners in the US, as
well, even as the Nintendo fans of the world passed them by. In Brazil, the Master System
managed to do better still, achieving near total dominance at one point. Alas, the South
American market isn't an influential one.
SEGA Strikes Back
The Master System battle was hard-fought, and supporting its library nearly alone turned
SEGA's internal R&D into a towering software factory, banging on all cylinders. They were
tough-as-nails, and though the Master System was defeated, SEGA had just begun. The wonderful
thing about the game industry is that no empire lasts forever.
Though Nintendo's market share had swelled to near total dominance, their business – and by
proxy the industry itself – was shrinking by the end of the '80s. We now know this is the
generational tide of the gaming industry, but Nintendo's next generation system was still
years away from being ready. The time had come for SEGA to strike back.
The moment to pounce was fleeting. NEC launched a much-publicized 16-bit system with Hudson
Soft in 1987, and it would eventually make its way abroad, leaving SEGA with a narrow window
before they'd have to risk battling another juggernaut. To maintain their competitive edge
(and stay on a tight schedule) they leveraged the biggest asset they had: their arcade
division.
SEGA had been on the cutting edge of 16-bit hardware for years, and its most successful board
was the versatile System 16 that powered games like Golden Axe and Altered Beast. Their goal
was to build a consumer console based on the System 16, while maintaining backward
compatibility with their previous system (though this required an adapter in the final spec).
After brainstorming nearly 300 names, they finally dubbed their home arcade the "Mega Drive."
The Japanese launch arrived just before Halloween in 1988. It was a bust. Super Mario Bros. 3
had released just one week earlier, and it seemed that all of Japan's gamers were too busy
exploring the Mushroom Kingdom to notice SEGA's new system. The console's first year was not a
complete flop, but the 400,000 units they sold were far from a smashing success. Next year
would be different, or so they believed.
"Hyakumandai!" That was the chant Hayao Nakayama made his executives chant. "One million
units!" They had laid out their goal and repeated it every day. Their new system arrived in
the US in the summer of '89 with the Christian-friendly name Genesis, and the occult-friendly
pack-in Altered Beast. It was time for SEGA of America to get back in the game, and they
needed a new leader to guide them.
Michael Katz was a no-nonsense pragmatist, who had been through more than enough ups and downs
in the videogame business. He worked at Mattel during Intellivision's heyday, and Coleco
during their console venture. When he first encountered SEGA's new console, he was working at
Atari. Having closed their American branch for a time after selling Master System to Tonka,
SEGA was looking for an American partner and hoped Atari might be interested in getting in the
16-bit game. Katz was interested, but Jack Tramiel was famously cynical about the console
market and wanted no part of it. SEGA moved on to release the system themselves, but they had
found just the person to spearhead their effort.
Katz was named President of SEGA of America one month after the Genesis' launch, and given his
initiative to sell one million systems in the next coming year. As a realist, he didn't know
or particularly care if that goal could be achieved. His only interest was to do the best job
he could. At the time, SEGA's biggest problems were advertising, third-party support, and a
lack of games catered to the Western audience. Katz devised a plan to deal with all three.
SEGA couldn't get big third-party franchises on their system, since Nintendo had their
licensees under lock and key. To get the star power they needed, they decided to license
celebrities instead. Katz felt that sports games would be key to winning over the American
audience, especially with the increasingly large young adult demographic. Their first
high-profile signing was with San Francisco 49ers quarterback Joe Montana. The deal netted the
football star $1.7 million, and proved to be worth every penny. Soon after, Tommy Lasorda and
Evander Holyfield joined the SEGA team, along with the King of Pop, Michael Jackson.
After their first development deal for their flagship football game fell through, they needed
someone who could turn a gridiron game in a hurry, so they turned to a small developer named
Electronic Arts, located not far from SEGA's American headquarters. EA was hardly the giant we
now know them as, and were, in fact, not in very good financial shape. They needed the money
and with their young John Madden Football franchise already in development for the system,
they had a good base to work from. Of course, EA put a bit more love into their own pigskin
sim, and Joe Montana Football shipped late, but SEGA could hardly feel bad about having two
massively successful football games on their system. "I don't regret [EA developing Joe
Montana for SEGA] at all," remarks former SEGA of America CEO Tom Kalinske, "but I love
teasing [former EA CEO] Larry Probst and [EA founder] Trip Hawkins by saying 'If it hadn't
been for me and SEGA, you guys would all be out of business.'"
SEGA also needed a Mario-killer; a blockbuster game with worldwide appeal. An international
creative team worked to develop their new mascot, while the Japanese staff made the game
itself. After experimenting with countless ideas ranging from a bulldog, to a wolf, to a
spiky-haired fat man in overalls, they finally settled on a super-fast hedgehog with
characteristically '90s in-your-face 'tude. Michael Katz hated the idea. He thought the
average American kid wouldn't respond to an animal that most of them weren't familiar with.
Seeing is believing, however, and there were few who weren't convinced upon laying eyes on the
first Sonic the Hedgehog.
Lastly, SEGA needed to rethink its advertising strategy completely. Their first slogan was "We
bring the arcade experience home," but that only spoke to a limited audience and side-stepped
Nintendo completely. They knew they had the superior product, and they needed to make some
noise about it. Katz had always been a fan of competitive advertising, and with a 16-bit
powerhouse facing a veritable antique, their claims were righteous. They launched a multimedia
advertising campaign proudly proclaiming "Genesis does what Nintendon't."
Hayao Nakayama's goal to sell a million units may have been a fantasy. SEGA of America was a
small company of about 50 people when he joined, and much of his tenure was spent laying the
groundwork for the platform's later success. It didn't matter. The Genesis had only sold
500,000 units, and Katz was taking the fall. Nakayama and Dave Rosen began looking for a
replacement.
Welcome to the Next Level
History would prove Michael Katz's efforts to leverage sports games and target Nintendo
successful, but his matter-of-fact management style didn't click with Nakayama's grand
ambitions. Katz' failure to meet their goals of a million units were likely not the only
reason he was ousted. In fact, they were looking for his replacement not long after he started
the job. They wanted a different kind of manager; a positive, ambitious leader who could sell
his dream to others.
Tom Kalinske was just the man they needed. A long-time veteran of the toy industry, Tom knew
how to get a product onto shelves and into the minds of kids. At Mattel, he steered the
company through the rise of the Intellivision and helped them weather its subsequent crash. In
1984, SEGA had even tried to negotiate a buyout with him, and five years later, they still
remembered him as just the kind of man they needed. Tom was a confident, amiable personality
capable of charming people into seeing things his way, as well as playing hardball when things
got tough. He recalls his initial recruitment:
"I was on vacation in Hawaii. A shadow blocked out the sun, and I looked up and it was Hayao
Nakayama. He said, 'What are you doing here?' and I said, 'I'm trying to get a tan with my
family, you're in my way.' He said, 'Come back to Japan with me. I want to show you some
really neat technology.' So, I go back to Japan with him and I see the first glimpse of 16-bit
technology. Then he showed me what would become Game Gear… which was a lot better than any
handheld anyone had seen at that point. So, I decided to join up with them, because I thought
there really was a chance for SEGA to overtake Nintendo in the videogame market. I joined the
company in the fall of 1990." -- Tom Kalinske
Kalinske was named CEO of SEGA of America. Katz stayed on as president for a short time, while
Tom learned the ropes. Kalinske had little experience in the video game industry after the
Intellivision, and for the first few months, he observed and carefully assessed the situation,
leaving some to wonder if he was really the assertive leader they needed. After a few months,
he saw a number of issues with the way they did business, and he came up with a plan. First of
all, the Genesis' price point was too high. At $189, the system would be relegated to a "rich
kid's console," especially since their main competition was, at the time, still the aging NES.
Second, he felt their advertising wasn't pointed enough, and they really needed to give their
commercials some bite.
Lastly, Kalinske was afraid that the "arcade-at-home" strategy was too limiting, and that they
had to do more to define the Genesis as its own experience. Along those lines, the system's
pack-in, Altered Beast, was an average arcade game, and Kalinske feared the zombies and
sorcery wouldn't go over well in the Bible Belt. To replace it, he wanted their upcoming
blockbuster, Sonic the Hedgehog, packed into the box on day one.
Once he solidified his plan, he went to Japan and pitched his ideas to Hayao Nakayama and the
board of directors. They didn't see it his way. They feared that cutting the price would cost
money. They worried that playing down the arcade angle would be neglecting a great strength.
They thought that giving away their biggest game would cost them revenue. Kalinske remembers:
"They were all talking in Japanese and I didn't have any idea what was going on. When they got
to the door, Nakayama said, 'No one in this room agrees with one thing that you have said.' I
thought to myself, 'That's nice, it was a short career. I guess I'll go find something else to
do.' Then Nakayama said, 'But we hired you to turn this situation around, so go ahead and do
what you want and we will fund you.'" -- Tom Kalinske
Nakayama put his trust in Kalinske, and gave him the go-ahead to try things his way. Politely
highlighting the superior word-length of the Genesis' processor wasn't enough to really take
on Nintendo, so SEGA launched their famous "Welcome to the Next Level" campaign punctuated by
the SEGA Scream, giving the company an edgier, almost arrogant persona that fed right into the
console wars raging on America's schoolyards. The Game Gear was backed by an ad that compared
Game Boy owners to dogs, and nebulous concepts like "blast processing" were touted to frame
the Genesis as the only system for action game lovers. The extent to which Genesis ever really
had a hardware advantage for action games is debatable, but the pervasiveness of that
perception is a testament to their brilliant advertising.
Even with solid marketing, SEGA still had a major problem earning the confidence of other
companies. We usually think of these struggles as the kind of problem Nintendo had to deal
with after Atari's collapse, but the Big N's dominance in the '80s made the market similarly
inhospitable for others. Wal-Mart, Target, and K-Mart were all refusing to carry Genesis.
To win over Wal-Mart, Kalinske devised a plan to make the company so sick of SEGA that they'd
buy their product just to get some peace and quiet. In Bentonville, Arkansas, where Wal-Mart
is headquartered, they rented out a store in mall by the local branch and filled it with demo
units running all the hottest SEGA games. They bought out all the local billboards they could,
saturated the radio advertising, bought space at the local college football stadium, and had
Bentonville's teens playing games in their store at all hours. "After a few months of this,
the executive vice president of purchasing Doug McMillan called me," remembers Kalinske, "and
said 'Please, just stop. We'll take Genesis into our stores.' He was just getting killed by
the local community."
Third-party support was likewise an issue. The public had so little confidence in SEGA's
system that Electronic Arts stock dove when they pledged their support. Once retailers got on
board, and the advertising had people talking, the job got easier, but it was largely thanks
to vice president of licensing Shinobu Toyoda that they were able to secure support from
third-parties on both sides of the Pacific. Eventually, Europe's developers jumped on board as
well, encouraged partially by the system's commonalities with the popular Amiga hardware.
The biggest boon to the system came in the summer of 1991, when Sonic the Hedgehog launched in
all three major territories. Just as Kalinske wanted, the game came packed in with new Genesis
systems for $149, just before the Super Nintendo launched with Super Mario World for $199.
Both pack-ins proved to be worthy killer apps, but Sonic was positioned perfectly for SEGA's
strategy. Super Mario World was a game that stuck close to its 8-bit roots, while Sonic packed
razzle-dazzle stunts and blazing speed. To many onlookers, Mario looked like an out-of-shape
has-been.
By the time the Super Nintendo released in the US, SEGA had done a pretty good job of
squashing the TurboGrafx-16 and gotten a considerable jump on the 16-bit market, but the war
was still hard. In Japan, SEGA had not fared so well, pridefully ignoring the strategies of
the American division. The Mega Drive was sagging behind even NEC's system by a considerable
margin, and the Super Nintendo was the nail in the coffin. They were more successful than they
had been in the previous two generations, but the United States and Europe were propping the
platform up.
SEGA's rise was meteoric, and they would eventually overtake Nintendo's market share. For a
time, they were kings, but the sad thing about the gaming industry is that no empire lasts
forever.
Divide and Conquer
SEGA had the hottest system on the market, and they wanted to keep their competitive edge.
SEGA was always thinking about their next move. The problem was they were never really sure
what that would be. Instead, they hedged their bets on many different directions, some of
which you know well, and some of which you've probably never heard of. The mistakes made are
simply heartbreaking, for fans and even for the people that made them.
It all began innocently enough with the SEGA CD. Rival NEC had previously released a CD add-on
for their system, and the CD-ROM media was beginning to take off for computer games. It was
clear to most that optical media was the future, and SEGA was eager to get their feet wet. "We
were trying to give ourselves some experience in developing an optical disc product," former
CEO Tom Kalinske admits. They knew that their add-on would never overtake the stand-alone
Genesis, but it was a way for them to get ready for the inevitable leap.
They needed software that showed off the power of the CD media; a game that would offer an
experience wholly different from anything that could be done on a cartridge. They found that
in a small developer called Digital Pictures and their publisher, the newly established Sony
Imagesoft. The company was adapting a pair of games designed by Tom Zito and Atari legend Rob
Fulop for an unreleased console that used multi-tracked video tapes. Their games consisted
almost entirely of video-clips, allowing gamers to effectively "play a movie."
The novelty was compelling, and their first two games for the system, Sewer Shark and Night
Trap, both proved to be massive hits. To exploit this, SEGA later bundled Sewer Shark with
their revised model SEGA CD. They also produced and published the company's full-motion video
boxing game, Prize Fighter, before Digital Pictures went on to develop a string of other
titles inserting full-motion video into every genre they could. Older laserdisc-based arcade
games like Dragon's Lair and Time Gal were suddenly revived with new ports, as well.
There were plenty of games that made more conservative use of the SEGA CD hardware, enhancing
traditional gameplay genres with voice, recorded music, and animated cut scenes, especially in
Japan and Europe where the FMV craze was not as big. Sonic CD was seen by many as one of the
best games in its series, and a port of an older computer game called Snatcher proved that the
CD media could turn games into a powerful storytelling medium.
But this was not what the public saw. The FMV craze was a massive fad that obscured everything
else, and then got tossed to the side like snap bracelets, Tamagotchis, and so many pogs. In a
few short years, the SEGA CD had gone from an enviable accessory to a joke. Nintendo had once
sought to partner with Sony to develop their own CD project (the Play Station), but when that
deal fell through, they abandoned the idea altogether.
More than just a change in media, SEGA needed to think about their true next-generation system
long in advance. It's a subject that immediately brings up bad memories for SEGA fans as well
as for Tom Kalinske. At the time, SEGA of Japan handled all hardware development, and they
assembled a crew called the Away Team to craft a 32-bit system to take the company to the next
generation. But when the product of their labor reached the desks of SEGA of America, there
were immediate signs of trouble.
Project Saturn was by most accounts an inelegant, overly complex jumble of mostly stock parts
assembled on a large and expensive to manufacture board. It had two CPUs, two graphics chips,
and several other processors, none of which were designed to work together. It would be
difficult to program for, difficult to market at a competitive price, and had little advantage
over cheaper, simpler hardware.
American head of R&D Joe Miller recognized the problem right away, and went to Tom Kalinske.
Although SEGA of America generally stayed out of hardware, they needed to give Japan a good
alternative, and they did just that. Kalinske recalls the first effort to steer away from the
Saturn:
"We went down the road to Silicon Graphics and met with [sGI founder] Jim Clark. They had
bought MIPS Technologies, and they were developing a chipset for use in a game machine. We
liked it, so we called up the Japanese guys to come take a look at it. The hardware guys came
over, and they really pooh-poohed the whole effort. The chip was too big; there would be too
much waste; lots of objections from a technical standpoint. It was upsetting to us, because we
thought it was better in terms of speed, graphics, and audio.
"So after we had this meeting, I had to report back to Jim Clark, who was then Chairman of
Silicon Graphics and tell him that SEGA wasn't going to be buying, and he asked, 'Well, what
should I do now?' and I said, 'Well, there's this other game company up in the Seattle area. I
think their name starts with an N.' And of course, he did. He went up there and sold it to
them, and that, of course, became the foundation for the Nintendo 64." -- Tom Kalinske
The story immediately conjures up questions of what could have been. If SEGA had scooped up
the Nintendo 64's 3D hardware and used CD-ROM media, as they surely would have, who knows how
the coming generation could have played out? The possibilities are beyond frustrating.
Kalinske was not yet defeated. He still had plenty of connections, not the least of which was
Sony. SEGA had a good relationship with them, having worked together on the SEGA CD, and SEGA
had helped them to get their feet wet in the software business. Sony had been working on a
deal with Nintendo that had had recently fallen through and were interested in continuing
their work on a game console. Kalinske tells of the Sony deal:
"We got together with [sony] and defined what we'd like to see in our next hardware. We had
this great idea that it should be a joint SEGA-Sony hardware system. If we had to take a loss
on the hardware (which was the norm then), we'd split the loss on the hardware, but we
wouldn't split software, so any software they did, they'd get 100% of the profits, and any
software we did, we'd get 100% of the profits. It seemed like a fair deal since we were eons
ahead of them in terms of software development.
"So we go to Japan, and Sony management liked the idea. Then we went to SEGA, and Nakayama
hated the idea. [laughs] So that was the end of that, and the rest is history once again.
Those were the specs that became the PlayStation." -- Tom Kalinske
That's right, SEGA had an opportunity to grab up both of the systems that would later be their
undoing, but were denied both times by SEGA of Japan. Nakayama was a notoriously stern boss,
abusing his executives verbally and even physically. He admired the success of the American
branch, but that admiration may have made the American branch seem like the favorite son to
many at SEGA of Japan, and doing things their way was a point of pride. "There were some guys
in the executive suites who really didn't like that Nakayama in particular appeared to favor
the US executives," Kalinske speculates. "A lot of the Japanese executives were maybe a little
jealous, and I think some of that played into the decisions that were made."
With SEGA of America's attempts to find new hardware defeated, they gradually accepted the
inevitability of the Saturn. Tensions rose again when SEGA of Japan decided they wanted to cut
their support for the Genesis and focus entirely on the Saturn. The move made sense in Japan
where the Mega Drive never got much traction – in fact, they had cut off their previous two
systems in Japan shortly after their successors arrived – but this was different.
The Genesis was still the leading platform in the US, and their biggest next-gen competitors
were still a ways off. It simply didn't make sense to give up on Genesis when Nintendo was
still putting their full energy into the Super Nintendo with games like the Donkey Kong
Country series and Yoshi's Island. Kalinske confesses, "I really didn't want to launch Saturn
at all, if truth be known."
Still, the next generation was coming one way or another. By 1994, it was already encroaching
with the 3DO and Atari Jaguar giving gamers their first taste. SEGA of Japan's R&D wanted to
combat the new technology – as well as the Super NES – with the Genesis 2, an inexpensive,
updated version of the existing console, with some updated video capabilities and a bigger
palette to make up for the system's shortcomings. Joe Miller, SEGA's head of R&D in the US,
thought this was a terrible idea. He felt the enhancements should be available to all Genesis
owners in an inexpensive upgrade and that they should be more substantial, so he spearheaded
the development of a new product that eventually became the 32X.
Truthfully, neither idea was particularly wise. NEC had failed miserably when it released the
SuperGrafx (an updated TurboGrafx with better video), and the Genesis already had a major
add-on to support with the SEGA CD. Joe Miller wanted to make the product more compelling by
borrowing the Saturn's architecture and transforming the Genesis into a full-fledged 32-bit
competitor. Getting software ready for the Saturn's US launch would be difficult, and the 32X
offered a way for SEGA to test the 32-bit waters and get a jump on the new gen while they
waited for the Saturn.
"32X was really a marketing ploy," Kalinske admits bluntly with a hint of regret in his voice.
The system was never meant to last, but rather to take the edge off the competition, and allow
SEGA to dabble in the 32-bit generation with a relatively inexpensive add-on. To fill the
software void, SEGA quietly employed a number of contract developers to quickly and
inexpensively build games for them quietly and without credit, resulting in an uneven library
of games that ranged from good to terrible. Many third-party games were little more than
re-colored rehashes of existing Genesis games, reinforcing the (false) belief that the add-on
offered little advantage over the existing hardware.
It was a stop-gap measure to tide them over until the Saturn arrived (Trip Hawkins famously
called it a "Band-Aid"), but a stop-gap of only seven months accomplishes little more than
confusing the audience and leaving those unlucky enough to have believed in the 32X feeling
betrayed. Fortunately, the system never sold much, but if it had, it could have split their
fan base between the two platforms.
Few people know about it, but there was also another system being worked on at the time. SEGA
had taken a sizable chunk out of the Game Boy's market share, and with the green-screened
handheld experiencing a lull (long before Pok?mon arrived to save it), SEGA had a golden
opportunity to strike with a new handheld of their own. According to Kalinske, the system
would have packed 16-bit graphics, a very high quality, higher resolution screen, and a
touch-screen interface – years before the Nintendo DS, or even the Tiger Game.com.
Unfortunately, the spec was a dream at best. The system would have been prohibitively
expensive – $289 by Kalinske's recollection. SEGA chose to shelve the idea, leaving the Nomad
-- a handheld version of the Genesis – as the Game Gear's only successor.
Reap What You Sow
SEGA had never managed to capture much market share in Japan. They steadfastly refused to
follow the lead of their American counterpart, and they paid dearly for it. They had been
warned about the Saturn's hardware, and about the folly of relying too heavily on arcade
games, but they simply wouldn't listen. They had been proven wrong many times, but if you pull
the lever enough times, you just might hit the jackpot.
The Saturn launched early in Japan, arriving on November 22, 1994 -- weeks ahead of the 32X's
Japanese debut. The initial shipment of 200,000 systems sold almost as fast as stores could
get them on shelves. The key was, contrary to the wisdom of Kalinske, an arcade game: Virtua
Fighter.
Since the mid-'80s, SEGA had been on the cutting edge of arcade technology, banking hard on
16-bit technology and hardware scaling before their competitors – incremental steps forward.
In the early-to-mid '90s, they jumped on board a more important revolution: the leap to 3D.
Their Model 1 hardware powered games like Virtua Fighter, Virtua Racing, and Star Wars Arcade.
In 1993, they began publicly testing their Model 2-powered Daytona USA. The blazing-fast,
detailed racing game featured filtered, texture-mapped polygons that were simply light-years
ahead of anything anyone had seen. It was impossible to walk by one of SEGA's machines in 1994
and not be impressed by the graphics.
Of course, the Saturn had none of the technical innovation that made the Model 2 so great, but
it would be home to its ports all the same. These games formed the backbone of the Saturn's
library, and carried it to much of its early success -- in Japan. In the US, the arcade
industry was in recession by some accounts, and in a freefall that never ended by others.
Virtua Fighter just wouldn't be enough.
SEGA surprised the world at the first Electronics Entertainment Expo in May of 1995 when they
announced that they were releasing the console early – immediately. It was too early, but with
SEGA of Japan forcing the Genesis into early retirement, they really had no choice.
Unfortunately, Sony managed to steal much of the early launch's thunder with a short, to the
point speech by Sony Computer Entertainment of America's CEO, Steve Race. He took the stage,
said "$299," and left the press to whisper excitedly. That was all it took.
The early launch was ugly, to boot. SEGA didn't have much software lined up for the first
year. There were some ports of arcade games, along with the arcade-styled Panzer Dragoon.
Clockwork Knight and Bug! helped to fill the void of "mascot" games, but many were left
wondering when we'd see Sonic. The long, nightmarish, and ultimately fruitless development of
Sonic's Saturn project is quite a tale in its own right, but suffice it to say, the blue
blaze's flagship 32-bit title would never arrive. To make matters worse, retailers that were
not informed of the early launch were angry, and some would later refuse to carry SEGA's
games.
The negative publicity surrounding the Saturn, 32X, and SEGA in general did little to
encourage developers to brave the jungle that was Saturn's Titan architecture. Electronic
Arts, once one of SEGA's greatest allies, had banked hard behind the 3DO and later jumped ship
for Sony, leaving SEGA without the strong lineup of sports games that had won over so much of
their base in America.
Frustrated by SEGA of Japan's decision-making, particularly regarding the Saturn hardware, Tom
Kalinske departed SEGA in 1996. He was replaced with the company's COO, Bernard Stolar, who
had recently been hired away from Sony. He was a valuable asset to the company, having played
a major part in luring third-parties to the PlayStation, including securing Mortal Kombat 3 as
a timed exclusive, and courting Electronic Arts as a partner for sports games.
Stolar was a very different sort of leader. He was a no-nonsense, shoot-from-the-hip
executive, who was more interested in getting his way than being liked. He relished the tough
negotiations that his job entailed and respected those who were able to take the upper hand.
Stolar recalls his decision to leave Sony for their rival:
"I thought the world of [Hayao] Nakayama because of his love of software. We spoke about
building a new hardware platform that I would be very, very involved with, shape the direction
of this platform, and hire a new team of people and restructure Sega. That, to me, was a great
opportunity." -- Bernie Stolar
From Stolar's account, it's clear that he had little interest in the Saturn, right from the
start. Major mistakes had been made by SEGA with the Saturn's design and the subsequently
fragmented marketing of platforms and sub-platforms. To him, the Saturn was little more than a
redheaded stepchild; an unfortunate inheritance that he only intended to deal with for as long
as he had to. His views have changed little since then. "I thought the Saturn was a mistake,"
he asserts bluntly. "The games were obviously terrific, but the hardware just wasn't there."
With difficult hardware and a lack of third-party support, Stolar knew he couldn't win on
quantity, so he made his initiative to reinforce quality. He hoped the Saturn could justify
its higher price tag with a consistent stable of quality games. This also meant holding back
some of the games from the Japanese market that he thought wouldn't be as appealing or
wouldn't represent the system well. This is a controversial policy, especially on a platform
experiencing much greater success in Japan. During his tenure at Sony, he had been a vocal
opponent of localizing and RPGs, which he felt didn't nurture the system's image as a next-gen
powerhouse in its early years.
SEGA tried their best to support the system with quality software. They were successful in
that regard, and the system is remembered fondly by fans for SEGA-published games like Panzer
Dragoon Saga, Shining Force III, Guardian Heroes, and NiGHTS into Dreams. In Japan, the Sakura
Taisen series proved to be a major boon, but American support quickly sputtered and died.
Rumors swirled about new Vectorman and ToeJam & Earl titles, but they never came.
Yu Suzuki was charged with building what he believed would be the killer app for the
struggling system. Playing on the strengths of the Virtua Fighter series, he wanted to create
a revenge epic in the tradition of Chinese cinema, centered on the origins of Virtua Fighter.
Eventually, the fighting game tie-in would vanish (outside of the game's battle mechanics). It
would be re-titled Shenmue.
Shenmue would never get its chance to save the Saturn. At E3 in 1997, just 2 years after the
system launched, Stolar did what most would find unthinkable for a CEO. He said, "The Saturn
is not our future." The move didn't mean the immediate end of the system, which would still
see a trickle of releases into mid-1998, but it marked the end of the fight. Consumer
confidence is everything in console wars, and Stolar no longer had any interest in lying to
people.
"The company was bleeding cash, and I wanted to build a new team," he explains without
remorse. Stolar's decision to abandon the Saturn made him a villain to many SEGA fans, but he
had more vision than most gave him credit for. SEGA had a lot of work to do before they'd be
ready for the next battle, and it was better to regroup than to enter the next fight battered
and bruised. Dreamcast would be Stolar's redemption.
The Last Hurrah
From the very beginning, Stolar had been planning SEGA's next move. He knew that their next
system would have to be completely different. The hardware had to be simple, easy to program
for, and powerful. SEGA had learned their lesson with the Saturn. While they balked at
Kalinske's ideas for the next-gen, history had quickly proven them wrong, and Stolar would
carry a considerably greater influence. Kalinske speculates, "Coming from Sony after the
PlayStation's early success might have given him more influence than I had."
To create the system that would become the Dreamcast, SEGA split their hardware development
into two teams, one headed by Genesis creator Hideki Sato (initially called "White Belt" and
later "Katana"), and another "skunk works" project based in the United States (called "Black
Belt" before being renamed "Dural"). The two projects would develop and compete independently,
and SEGA would have their choice of the better system.
In classic fashion, the American team used American components, building their candidate
around 3dfx's chipsets, which were revolutionizing the PC gaming market. The Japanese team
likewise kept its spec domestic, with a Hitachi CPU and NEC graphics chip. When 3dfx made
their initial public offering, they divulged details of the project with SEGA, resulting in a
spat that some speculate cost them the contract. Stolar holds firm that this is not the case.
"It was really just the technology end of it."
With the hardware settled upon, the system needed content. This was Stolar's mantra, and as
painful as the Saturn's early death was, it gave SEGA the time and resources they needed to
hit the ground running with their next system. Yuji Naka's Sonic Team got an early start on
the completely reinvented 3D Sonic title that the Saturn so sorely lacked. Yu Suzuki pulled
his Shenmue project off the Saturn, and began anew on new hardware that would truly do justice
to his grand vision.
To recapture the sports market that they needed in America, SEGA purchased Visual Concepts.
Stolar had previously dealt with the company when they were working on the PlayStation's first
Madden title, and although that project had been cancelled, he believed their company could
compete with anything EA did.
Courting developers would not be easy, but this was a field of expertise for Bernie. With
attractive hardware, Namco, Capcom, and Midway soon got on board – all arcade game developers,
who would bolster the system's reputation as a true arcade experience. But there was at least
one company that would not sign on. To this day, many credit Electronic Arts' lack of support
as the Dreamcast's undoing, and much mystery and speculation has surrounded the falling out.
Stolar has been kind enough to illuminate the situation, once and for all:
"[Former Electronic Arts CEO] Larry Probst is a dear friend of mine. Larry came to me and
said, 'Bernie, we'll do Dreamcast games, but we want sports exclusivity.' I said, 'You want to
be on the system with no other third-party sports games?'
"I looked at him and said, 'You know what? I'll do it, but there's one caveat here: I just
bought a company called Visual Concepts for $10 million, so you'll have to compete with them.'
Larry says, 'No, you can't even put them on the system.' I said 'Then Larry, you and I are not
going to be partners on this system.'" -- Bernie Stolar
Despite later smack talk from EA against SEGA and the Dreamcast, Stolar always respected tough
negotiation. "I have to applaud EA for asking for that," he admits, before fondly recalling
another audacious EA negotiation. The deal fell through, but SEGA was confident that Visual
Concepts could outdo even the great Madden franchise, and according to some critics, they were
right.
To help leverage their long-standing position as a leader in the arcade market, SEGA got an
arcade version of the system ready early. Dubbed the NAOMI, they positioned it as an
inexpensive successor to their Model 3 board, and made it their flagship system. SEGA had
released arcade boards based on all of its previous consoles, but they were generally just
used for inexpensive ports of popular console titles. NAOMI was different, eventually rivaling
the Neo Geo as one of the most popular pieces of arcade hardware ever, not only for SEGA but
third parties as well.
Stolar had one more trick up his sleeve that would differentiate the Dreamcast from every
console before it: He wanted to include a modem with every system. Ultima Online was showing
just how powerful a medium online gaming could be, and Stolar wanted in on the ground floor.
He fought hard with Japan to make his case. They didn't believe in the vision as much as he
did, but they did things his way in the end.
The Japanese launch of the Dreamcast came too soon, in November of 1998. Like so many Japanese
launches, there wasn't much software, save for a mediocre, outsourced port of Virtua Fighter
3, which wasn't nearly as popular as its predecessors to begin with. Sonic Adventure followed
a month later, giving a boost to the system just in time for Christmas, but it was a slow
climb.
The American launch, however, was epic. September 9, 1999 (9/9/99) is a date that will forever
be remembered by SEGA fans. There were 17 titles to choose from, spanning all the major
genres. NFL2K delivered a true-next gen football game, Soulcalibur was hailed as one of the
great fighting games of all time, and Sonic Adventure helped SEGA's mascot reclaim his former
glory. There were some duds in the lineup, but with so many choices, the Dreamcast could
satisfy anyone.
It was the most successful console launch in history, up to that point. SEGA was back on top.
Trouble Below the Surface
The Dreamcast's outlook seemed pretty good in 1999, but things had been changing at SEGA.
Nakayama had stepped back to concentrate on arcade games, while vice president Shoichiro
Irimajiri took control. Soon after, Nakayama left SEGA to pursue other business ventures.
During the upheaval, Isao Okawa, Chairman of SEGA's parent company CSK, assumed a more active
role in the company's business, eventually claiming the title of CEO for himself.
"I had a relationship with Nakayama and [shoichiro] Irimajiri that was about constantly
understanding vision," laments Stolar. "I just don't feel like I had that with Mr. Okawa." It
may well be that Okawa's vision and Nakayama's were diametrically opposed. Nakayama wanted
SEGA to be a great hardware company, and Mr. Okawa simply did not. Tom Kalinske affirms that
this was the case even early in his tenure: "Okawa was telling [Nakayama] to get out of
hardware; just become a software company; it's not worth it to keep fighting the hardware
battle. He started saying that right from the beginning."
This conflict may have doomed the Dreamcast right from the start. Without Nakayama at the
helm, SEGA's top brass didn't believe in the platform as a long-term goal. Stolar, who had
never had the relationship with Okawa that he did with Nakayama and Irimajiri, was ousted
shortly after the Dreamcast launch and replaced with their head of marketing, Peter Moore.
More competition was brewing on the horizon as well. Sony and Nintendo were anticipated by
all, but Microsoft, the new generation's dark horse, surprised a few. It was no shock,
however, to Stolar. Early in the Dreamcast's life, they came to SEGA "offering" to put Windows
CE on the Dreamcast, a move that Stolar saw as a transparent Trojan horse to get into the
hardware business. He explains his frustrations:
"[Microsoft] brought a whole team of people in. They got to learn the business and then walk
away. I said to sell them the company, and they should have, because then they could have
gotten out of the hardware business clean. I knew [Microsoft President of Entertainment &
Devices] Robbie Bach really well, and I said, 'Hey, let's just get this done.' [sighs] Those
things happen in the world of business." -- Bernie Stolar
His story is yet another missed opportunity that ignites the imagination. If Microsoft had
picked up the Dreamcast, would we have seen a more effective marketing strategy? A more solid
online plan? And would SEGA have been able to dodge the Sammy takeover? These are just a few
more questions that will never be answered.
SEGA pressed bravely onward all the same. In 2000, they decided to play to the strength of
their creative talent by restructuring their teams into semi-autonomous studios with greater
individual freedom. This helped to nurture a culture in which fans would bond with the games
of specific creators, and ushered in one of the most creative periods in the company's
history.
The Dreamcast's life was fleeting, but it was saturated with memorable titles, most of which
were completely new properties. Rather than rehashing past glories – most of which had been
long forgotten by the public – they released ambitious, creative, colorful games that helped
earn them a new generation of fans. Games like Crazy Taxi, Jet Grind Radio, and Shenmue are
remembered today as defining games of their time. The novel virtual life sim Seaman served as
one of the system's few major hits in Japan. The new series launched on the Dreamcast are too
numerous to name.
The PlayStation 2 dealt a devastating blow to Dreamcast, leveraging its DVD playback
capabilities against Dreamcast's initially-superior library of games. With two more
competitors on the way, the noose was quickly tightening. The Dreamcast slashed their price to
$99, resulting in a healthy boost in sales, but it did nothing to alleviate the fact that SEGA
was hemorrhaging money. Even with a number of million-selling games to their credit, they were
losing too much money on hardware to make it back on the games.
At the beginning of 2001, SEGA admitted defeat. After 18 years in the console business and
only a few short years of real financial success, they were finally calling it quits. The
Dreamcast ceased production in March of 2001, and the final units were cut to $50 before
disappearing from stores. The announcement echoed Stolar's decision to leave the Saturn, but
lacked the silver lining. As with the Saturn, SEGA and a handful of third parties put on a
brave face, and games continued to ship in the US into the first half of 2002. By that time
the GameCube and Xbox had made their way onto shelves, and the Dreamcast's last hope was gone.
SEGA's last console maintained a cult following, and its relationship to the NAOMI arcade
hardware ensured that a trickle of Japanese arcade ports would make their way to the system
for five years after the last Dreamcast game landed on American shelves. Some of these games,
like Border Down, TriZeal, and Under Defeat remain coveted collector's items.
But SEGA had moved on. Without them, the Dreamcast was a ghost, and SEGA's fans would have to
come to terms with a new chapter in the company's history or simply leave them behind.
Life After Hardware
At the time they left the hardware business, SEGA was a creatively fertile company with a
rapidly expanding stable of properties to draw from. It seemed like they were in a perfect
position to start a new life as a developer/publisher. Not everyone believed. When SEGA went
public with their announcement, EA compared the move to General Motors trying to make BMWs.
SEGA's start was promising. They capitalized on the launch of the GameCube with Super Monkey
Ball, scoring a massive hit with one of their first tries. The Xbox saw critically acclaimed
releases like GunValkyrie and Jet Set Radio Future that targeted the hardcore audience with
less success, but the runaway train that was Virtua Fighter 4 soon redeemed them.
CSK Chairman Isao Okawa had long envisioned SEGA becoming a software company, but he was still
their biggest supporter and invested heavily to allow them to survive for as long as they did.
In March of 2001, just as SEGA was ceasing production on the Dreamcast and beginning their
transformation into the company he envisioned, Isao Okawa passed on, leaving a disinterested
CSK board to control SEGA's destiny.
CSK held a controlling share of the company since its reformation under Hayao Nakayama in
1984. With Okawa gone, the remaining board of directors had little interest in the fledgling
third-party. By February of 2003, rumors were swirling that SEGA would be seeking to merge
with pachinko manufacturer Sammy to ensure their future. A few months later, Namco surfaced as
another candidate, followed by Bandai, and later Microsoft. All seemed to acknowledge that
SEGA was in bad financial shape.
Negotiations fell through when the partners were unable to find agreeable terms about the
merger ratio and executive appointments. Instead, Sammy simply bought out CSK's shares of
SEGA, effectively beginning a corporate takeover of the company. Sammy had long dabbled in the
software business, but they wanted to be a full-blown international publishing giant, and SEGA
had what they needed.
They were not, however, interested in the self-indulgent whims of SEGA's creative talent. They
re-consolidated SEGA's studios into internal divisions without individual brand identities.
Good talent got axed in the process, including UGA president Tetsuya Mizuguchi, who would go
on to found Q Entertainment. Others would leave of their own accord in the coming years,
including Sonic Team leader Yuji Naka, and most recently, long-time AM2 head Yu Suzuki.
Not all stories have a happy ending. SEGA is not dead, but they may be in shackles. Since the
Sammy takeover, the flow of internally-developed SEGA games has slowed to a small fraction of
what it once was. Arcade operations have been pared down sharply, and Western developers have
been handed the keys to SEGA's franchises, even when the original creators are still on staff.
Many industry legends still work there, but too few are being allowed to do what they do so
well. Occasionally we are allowed glimpses of SEGA's potential greatness in games like Yakuza,
but more often we simply wonder what they could possibly be working on for so long.
Either way, we know it will never be the same. Whatever we have to look forward to, it will be
different than what it was. The important thing is that we don't let the present color the
past. It's a tendency of writers, and perhaps just human nature, to focus on the victors and
their glorious paths to conquest, but it often doesn't reflect the complexities of history.
SEGA was one of the most active, creative, and productive developers the industry has ever
known, and nothing that can happen to their name since will change that.