The History of Sega: Part 2

By 1993, Sega was America’s leading video game company, but was everything as good as it seemed? This second part of our documentary-style series on the History of Sega explores the company’s focus during the mid 90’s and the series of missteps that led to its troubled times.

Journey back with us to the mid 90’s to take a look at Sega’s hardware from the MEGA CD and 32X, to the Sega Saturn and its launch at the very first Electronic Entertainment Expo. Greg dives into the details with the help of video game historian, Alexander Smith.


Sega! Few companies have had the profound amount of influence on the video game industry and few companies have experience the highs and lows that Sega experienced. Especially in the 90’s..

Ahhh yes. A time of some of the best sitcoms, fanny packs, boy bands, and most important to this episode, a decade of rapidly changing technology. Cell phones, personal computers, the internet, CD-Roms, DVDs and of course, video games! And Sega was the video game company that was on that forefront of that technological expressway that was the 90’s.

Sega’s Hardware Focus

You see, for Sega, hardware innovation had always been the most important thing behind the company since it’s early days. When you are a coin-op and arcade company, the newest toy or the most unique cabinet, that’s what gains attention and that’s what leads to success for the company.

Alex Smith:  well I really think that comes down to Sega’s roots right? So Sega Started very much as a coin-op company, well before video games. And in coin-op, there is always a need to reach for something new.

That’s Alexander Smith. Writer, podcaster, researcher and all around video game historian. He’s been deep into the weeds of video game research for quite some time too.

Alex Smith: My name is Alexander Smith, and I have been researching the history of the video game industry for about 16 years. Now. I am a published author in the field. I’ve written a book called a “They Create Worlds, the Story of the People and Companies that Shaped the Video Game Industry.” I also podcast as they create worlds with my co-host Jeffrey Daum. We released podcasts like clockwork twice a month on the first and 15th going in depth on a subject in video game history.

See? In addition to all those things, he also works on other cool projects

Alex Smith: I also have been involved in an oral history project with the Smithsonian called the video game. Pioneers archive is the head researcher where we do really, really in-depth oral histories with some of the pioneers within the industry.

I told you! As an expert in the field and someone who’s has spent many many hours studying Sega’s history, you’ll be hearing a lot from him throughout this episode.

Anywho, back to Sega and the companies focus on hardware.

Alex Smith: Coin-op is a novelty field inviting someone to come up to your machine whether that be video game, pinball or jukebox, and put a coin in to put to experience some thing that they’ve never experienced before. That’s kind of the main crux of how coin-op works. The corollary of that is if someone has already put the quarter in and seen that thing they’re done with it and they go onto the next thing. And so, in coin-op there’s a constant need to change and improve. Sega was a true leader in coin op hardware.

A machine that’s new, that’s cutting edge, or any kind of arcade cabinet that stands out among a crowd of other games, that’s what sells.

And this philosophy, this mentality was Baked into Sega’s core. Staying on top of the latest technology and creating unique products.

And when Sega finally decided to get into the consumer home console market in the early 80’s, that mentality carried over, despite it being a very different business model than the location based arcade market.

It took a few years before they found success in the console market, and when they did find success, part of it was due to Sega releasing their 16-bit console a full 2 years before the competition. The Mega Drive (or the Genesis) came to the market exactly two year before the Super Famicom (known in the US as the Super Nintendo)

Game Gear

When they weren’t the first to the market with a new type of product, they were quick to respond with something even more technologically impressive. Nintendo released their black and white, handheld Gameboy in 1989, and just 18 months later, Sega released their handheld game console the Game Gear, only it was in full color, back lit, and a lot more powerful.

The Game gear released in 1990 in Japan and ‘91 in America and although it remained behind the runaway success of the Gameboy, it ended up being the only handheld device that could compete against Nintendo.

Sega CD

Sega was also one of the first companies to market with CD based console hardware. In the late 80s and early 90s, everyone knew that the CD-rom was the future. With the ability to store more information and manufacture more cheaply, everyone was pushing for this. From companies like Nintendo and even to Sony. Who was looking to get into the video game industry in some capacity.

And Sega came up with a very unique solution to introduce this technology. Rather than create a brand new console just 3 years after the release of the Genesis, they developed it as a separate add on to the console called the Mega CD or the SEGA CD in America.

The Sega CD not only added faster processing power and improved graphics, but it could also play CDs! Blasting the space Jam soundtrack through your TV speakers? It doesn’t get better than that!

In December of 1991, the Sega CD released in Japan, and a year later in the US. And although it was fairly expensive, it helped Sega to realize that leading edge hardware could be developed in conjunction with the Genesis. And develop add-on hardware, they did.

Sega of Japan’s focus vs Sega of America

Going back to Sega’s Coin-op roots, SEGA of Japan had a full R&D lab where they were dedicated to creating these leading edge products. And in the late 80’s and early 90’s. while the parent company, Sega of Japan, was busy creating the latest and greatest hardware, it’s subsidiary, Sega of America, was focused on another goal. The consumer video game space. Selling consoles and games, but more so, focused on building an attractive and recognizable brand that could compete against the juggernaut that was Nintendo

And as we covered in Part 1, SEGA of America was able to achieve that goal. In large part, thanks to Tom Kalinske.

By 1993, things seemed to be going very well for Sega of America. The scrappy underdog of a company was able to match their giant of a competitor in a short period of time and Sonic the Hedgehog and aggressive marketing had a lot to do with it.

Alex Smith:  So the fact of the matter is that Tom Kalinske and Sega of America did a fantastic job of building market share in the United States in the period, most especially, between 1991 and 1993. They did this using a lot of techniques that I know you went through in your last episode and, and many of which are reported on accurately. By creating a cool image for Sega, by using edgy marketing commercials with lots of quick cuts and quirky images, very akin to MTV, that really captured a generation that was growing up on MTV. By being competitive on price by making sure that they had their best software and Sonic front and center with the console. All of that is true. The problem with that is it costs a lot of money, a lot, a lot of money.

In America, Tom Kaliske’s strategy worked to put SEGA on the map with aggressive marketing and branding worked. But the financial impact was felt.

And who’s money were they spending? Well, SEGA of Japan’s money. The company as a whole.

To really understand what happened to SEGA and why they stopped making consoles, you have to understand the company’s financials during this period of time.

Alex Smith: I mean, Kalinkse deserves all the credit in the world for, for making that Sega brand work in the United States, but at the same time, the exact same things he did to make that brand successful were in large part responsible for the downfall.

Alex Smith: By 1993, 1994 Sega of America, despite all of its success, despite finally ascending the mountain top and overthrowing the Nintendo juggernaut, even if just, barely in 1993, was breaking even. They weren’t losing money, but they weren’t really making money either.

The company was not making money during its most successful time. They managed to gain market share and displace Nintendo, but at the end of the day It didn’t matter how many SEGA Genesis’ were sold in America and it didn’t matter how popular SEGA had become as a brand. SEGA of America was simply not making profit.

But Tom Kalinske and Sega of America weren’t the only group spending money. By this time, Sega of Japan R&D department was toiling away on the next leading edge hardware to put SEGA ahead of the competition. .


Where SOA was able to claim nearly 55% of the 16-bit market by 1993, SOJ didn’t find that same success. They only managed to capture 25% of the market.  Nintendo dominated this sector.

So if Sega couldn’t find success with their 16-bit console in Japan, then they would be first to the market with 32-bit video games! The problem was, while the team was well underway with the development of the next generation, 32 bit hardware, the full console, the SEGA Saturn,  wouldn’t be ready in time to be first to market.

Not only that, but there was a fear about what the competition was releasing and when they would be releasing it.
So SEGA had to act fast. They came up with a new device. One that wouldn’t be a new stand alone console, but an add-on to the Genesis. Yes ANOTHER add on for the Sega Genesis. But this one would plug into the cartridge slot of the Genesis to massively improve the processing power of the console. The device would be called the “32X.”

Alex Smith: But it does go back to that, that hardware mentality, again. At least according to some of the other people that were in the initial meetings. The Atari Jaguar was coming…

…and of course the Jaguar ended up being a disaster, but at that time, nobody knew yet that it was going to be a complete disaster. And Nakayama was, was afraid that the system that was coming out and advertising itself as a 64 bit, which it wasn’t, but it was being advertised that way, was coming so much sooner than they’d be able to get Saturn out. There was a fear, I think, that they were going to lose a technological edge and that they had to do something to show that they were still technologically relevant. I don’t think that that’s particularly rational way to approach the video game market, the consumer video game market.

The fear of losing the “technological edge” to their competition is what drove Sega to develop the 32X.

New games could plug into the top of the 32x add-on and older Genesis cartridges would also work. The device could even work in tandem with the Sega CD. You could put your Genesis on top of the Sega CD and then plug the 32X into the cartridge slot of the Genesis to create THE TOWER OF POWER!

Not only would the 32X allow for Sega to be first to market, it also would be a cheaper alternative to Sega’s next console, and get more use out of their Sega Genesis. The 32X was set to release in late 1994.

Sega Channel

There was more though! More technical innovation that Sega has been working on that was slated to release that same year.

You see, in the early 90’s, Beside video games, the World Wide Web, or, ya know, the internet, was all the rage. And Sega was eager to incorporate this into video games, somehow. And they attempted this in Japan in 1990 with a Mega Drive accessory called the Meganet. but that didn’t pan out.

Refusing to give up on the idea, the Sega looked to America. Which was starting to expand into broadband cable TV. So Sega partnered with Time Warner Cable and created a device called the Sega Channel! Learning from their mistakes, the Sega of America team worked closely with Time Warner to create the hardware and ensure that the home cable network could stream games without interruption. The team worked carefully and developed a device that would plug into the cartridge slot of the Genesis connected with a coaxial cable to the device. They also worked with Time Warner to set up the infrastructure to allow for a million people across America to be able to use the Sega Channel at once without interruption.

It would cost only $25 for the device and an activation fee and the user would pay $15 a month and have access to up to 50 games, with games rotating monthly and sometimes even weekly!

Yes! This was Xbox Game Pass, but in the early 90’s. 27 years ago, you could stream a heap of games and it was the same price as Xbox Game Pass is today.
The Sega Channel was set to release in late 1994.

All of these add ons were great, but don’t forget that Sega of Japan’s R&D team was also working hard on the next generation of Sega consoles, the 32 bit Sega Saturn!

More on the design and eventual sloppy launch of this console, after the break.


Sega Saturn

The Sega Saturn was going to be a BIG leap for Sega. Not only their first console to utilize only CD based games, but it would be a 32 bit powerhouse. And the focus would be on sprites! Here Alex explains it it better than me.

Alex Smith: So when Sega Saturn development began, there was no inkling amongst the powers that be within the video game industry ,that polygonal graphics, 3d graphics in the home, were anywhere close to happening. Polygons were still years away.

3D polygon graphics on a home console seemed impossible to make cheaply and effectively in the early 90’s. It was something only arcade hardware could pull off. And SEGA was doing that with games like Virtua Fighter and Virtua Racing. So because this was likely far out, Sega focused on what was great about the Genesis and aimed to amplify what was great about that!

Alex Smith: So the Saturn was created to be the best sprite based machine that had ever been done. It was created to have more sprites and more colors and more particle effects and more layers of parallax scrolling and just be the most amazing Sprite pusher you’ve ever seen.

Similar 2D graphics of the Genesis, but more! Much more. More could be in screen at once, it could scroll faster, you thought Sonic 1, 2 and 3 were fast, you just wait!

So under the hood of the Saturn, they decided to utilize a dual core processor and a high end graphics chip. Everything was shaping up great and the design was nearly finished,  until…. Sega learned about it’s competition! 

Alex Smith: So they’re going along development is what it is. And then Sony announces the PlayStation and you know, the early demos, like the famous T-Rex demo start making the rounds.

And it looks like this thing is just, it’s bringing full 3D into the home, which is stunning. Now in truth, it didn’t bring full 3D into the home. Most of the, the big games, your, Resident Evils and your Final Fantasy 7’s and whatnot are three dimensional characters in pre-rendered two dimensional environments. You know, it’s, faking a lot of it, but when it was first announced, they were saying, it’s going to move 300,000 polygons a second. And, this T-Rex was wowing everybody. And it’s like, oh my God, it’s here! And Nakayama was not happy. Nobody was happy, but I mean, you know, the, the engineers weren’t happy either, but when Nakayama not happy, he screams. And apparently there was a lot of screaming going around Sega.

Sony threw everything off. With a demonstration video of the capabilities of the PlayStation, Sony showed off an amazing looking, polygonal 3D T-Rex animation. Not only would this be leading edge hardware, but Sony was able to do this cheaply and effectively on a home console. So SEGA had to do something.

Alex Smith: So it was clear that they were going to have to do something to make the Saturn do 3D, do geometric solids, better. And so they looked into increasing the speed of the SH2 processor. They had a meeting in late 1993 with the people at Hitachi where they were looking into that, well, “can we increase the speed?” And the answer was “well, not really without causing other problems.” However, it just so happens completely separate from the Saturn project because the SH2 was not made specifically the Saturn that they had created a way, to link two SH2 processors together and be as somewhat efficient dual processor system. So Hitachi said, “we can’t really make the SH2 chip faster, but we could give you two of them” and SEGA was like, “oh, well, that’s interesting.” And so they end up deciding and late 1993 to do a dual processor setup. Two SH2s.

This gets a little technical, but stay with me. It gets more complicated too

Alex Smith: I don’t know if they also decided to add the second graphics chip at this time. But in addition to having two processors, the system also ends up having two graphics processing units. GPU’s. So we’re talking about balancing performance across a group of four primary chip.

With the added processor, the Saturn’s design was now a very complicated one. It had a dual core design AND two separate graphics chips. Without getting into to details, understand this was a unique design and one that game developers were not used to working with. They were likely going to have issues and this meant, there could be issues getting games on the system. All in all, it wasn’t great.

Alex Smith: It’s a series of missteps that are a combination of being so set in their ways that they couldn’t see the future in the same way an outsider, like Sony, could. And just being caught wrong-footed and doing relatively last minute adjustments to the way that the system was going to operate that created a real struggle for that system and for people that tried to make games on that system.

So the year is 1994 and SEGA was getting worried. Very worried. Particularly when it came to the emerging competition and what they were developing compared their upcoming new console, the Sega Saturn. SEGA might lose that leading technological edge that they were known for. The reality may just be that they might not be able to stack up against the competition.

It’s important to remember SEGA’s financials leading up to the launch of the Sega saturn.

Alex Smith: So Sega of America is breaking even, Sega of Europe is losing money. and I know I’m throwing a lot of economics at you, but it’s, it’s really important to understand why this failure happened and why it wasn’t just, oh, everyone’s fighting with each other on top of everything. The yen is in this period appreciating in value.

Sorry to get into the economics, but when your business relies on exports, your home currency’s value going up, means that you lose a lot of money in currency transitions. All this to say, by this point in time, right ahead of a new console launch, finances were not looking good.

Saturn Launch – Japan

On November 22nd, 1994, Sega released the Sega Saturn in Japan. And despite the concerns, the launch in Japan went fairly well! In large part due to one particular game that launched alongside the Saturn. The most popular arcade game in Japan at the time, Virtua Fighter. The appeal of 3D graphics on a home console was evident in Japan.

Outside of Japan, fans would have to wait a year for the international launch. While they waited though, l Sega would still be able to treat the public to new tech.

Other Hardware Releases
During the wait for the Saturn, Sega of America released the 32X AND the Sega Channel for the Christmas season in 1994. It had to have been a tough call for Sega fans. Wait a year and save money, or buy these fun accessories for the Genesis to get more life out of that console. The 32x would be a much cheaper alternative, costing $160, and the Sega Channel was a great way to plan tons of Genesis games without having to buy them.

Donkey Kong Country

While these were fine options, Sega’s competition would throw a wrench in the gears. You see, Sega was happy because Nintendo announced a delay with their next generation console. It would not be available until 1996. So Sega assumed they were well ahead of this competitor and didn’t need to worry about them.

Problem was, on the same day, November 21st, 1994 Nintendo released a new game for the Super Nintendo. A game that looked and sounded better than any other 16 bit game up to that point. A game that VERY quickly became the fastest selling video game of all time. That game, was Donkey Kong Country. In the 1994 Christmas season alone, the game sold over 6 million copies and was met with critical and commercial acclaim.
This game brought much needed attention back to the Super Nintendo and helped to revitalize the video game market as a whole, which was facing a bit of a recession in 1994.

With much of Sega’s focus on leading edge hardware and accessories, Nintendo was able to achieve success with a focus on “great and fun games.” Sure there were plenty of great games for Sega at the time, both in the arcade world with Virtua Fighter as well as the Genesis with Sonic the Hedgehog 3, which released earlier that year, but the success of Donkey Kong Country was astounding.

Alex Smith: But in the end, it just, it’s like, “well, it’s expensive and it’s not really a Saturn. And we know SEGA is working on another system. So why are we going to get that?” And, “oh, look, here’s Donkey Kong Country! Nintendo, didn’t have to release a fancy new add on to do that!” I think that captures some of the, the dichotomy. It’s a bit reductive to reduce it just to a battle of “32X versus DCK” I think 32X would have died a messy, horrible death if Rare had never come up with Donkey Kong Country.…

All this to say, the 32X, well it didn’t sell very well. Whether it was due to the success of Donkey Kong Country or not, or just the timing next the upcoming launch of the Saturn, people did not buy the 32X. SEGA spent a lot of money to develop and market this thing, and it was not money well spent. Not only that, but it hurt a lot of SEGA’s relationships too

Alex Smith: Retailers ate the 32X up. Sega had been very good for them and the retailers thought that this was just going to be great because Sega’s great and they’ve been great. And so retail has ordered a lot of those things and, and then they sat on shelves. They were not bought. And I’m sure that also made retailers a little more leery about trusting a piece of technology, just because it had that Sagan name on it.

E3 1995 – Saturn Launch

Nintendo had managed to garner attention in a big way, and this made Sega a little worried. But Nintendo was NOT Sega’s biggest fear by this point in time

Alex Smith: So the system launched in late 1994 in Japan and was going to launch in late 1995 in the United States.

But Sony had also launched in late 1994 in Japan, and was also going to launch in late 1995 in the United States. And there was still a fear of Sony. There was a fear of Sony because they were such a big company. They could afford to spend anything, do anything, risk, anything to break into the business. And they definitely seem to be serious about it. They were lining up companies like Namco that were very well-respected. They were hiring industry veterans to, to run their subsidiaries. They seemed very serious about this.

I think there was a sense in Japan that Sony’s coming and we’re not going to be able to beat him in a head to head fight. I mean, in Japan, they were able to get an initial leg up because they had the latest Virtua Fighter game, which everyone wanted to play and they had the name recognition amongst the arcade aficionados and they did okay relative to Sony in the beginning. Now Sony started outstrip them pretty quickly, but in the beginning they were doing okay. But I don’t think there was any confidence that they could win a head to head fight with Sony in the US market because they just wouldn’t be able to compete on spending and on titles, number of games available, and everything else.

So Sega needed to have a smash hit success story with the Sega Saturn’s worldwide launch. The launch was successful in Japan, but could that success be repeated?

Sega of America had a great launch planned for Fall of 1995, BUT there was just one issue. Competition. The Sony Playstation had already launched alongside the Sega Saturn in Japan, and the Saturn’s launch was more successful, but not by much.

The thing was, in America, Sony was slamming the world with a MASSIVE marketing campaign. Taking the strategy straight out of Sega’s playbook, Sony’s American division president, and former Sega marketing manager, Steve Race, was going to make the PlayStation the “coolest thing to have” and ensure the competition looked bad by comparison.

Faced with this competition, and in the midst of financial troubles, What did Sega decide to do?

Alex Smith: Nakayama comes up with the idea that they, they have to beat Sony to market it’s imperative and not by a day or a week. I mean, they have to beat Sony to market by a significant amount of time in order to have any chance at success. So he comes to Kalinske and basically orders Kalinske to launch early, launch in the spring. Well, Kalinske, he says he’s not happy. He’s a marketing guy and they were very carefully putting together a rollout for a “Saturnday” in in September. You know, just like “Sonic 2sday,” you know, another big marketing event there. They’re getting this whole thing together. Now he’s being told, “you can’t do that.”

So Kalinske made some new plans.

Alex Smith: So handed this mandate Kalinske decides that they need to make a splash. If we’re going to launch early, if we’re going to launch before we have inventory built up, if we’re going to launch before all of our development partners have their games ready, then we have to have a memorable launch.

The very first E3, which we have covered a few times at this point on previous Level Zero episodes. but at this massive event, this new expo, Tom Kalinske got up on stage and not only announced the the Sega Saturn, but the price and availability and… you know what, here just let me play that clip from Sega’s presentation at E3 1995.

As you can hear, the crowd was excited. And Kalinske was confident this surprise announcement would give Sega all the attention it needed.

Alex Smith: And he kinda think to himself, “we’ve done it. I mean, this, this launch is kind of awkward. There are still a lot of hurdles, but at least we got to make a splash!”… And then Sony’s turn comes.

And Sony would announce the PlayStation and show off the upcoming features and games on the system.

Alex Smith: And Olaf Olafson, who is the head of Sony electronic publishing and is kind of, sort of running this whole thing. (The, the reporting structures are complicated.) He comes up and he starts giving a presentation.

And then part way through his presentation, he says, “..and now I’d like to introduce the head of Sony Computer Entertainment America, President Steve Race to say some more about whatever.” And Steve race comes up. He puts his notes down on the podium, says “$299.”

Yes, the Sony PlayStation would not only be the leading piece of technology and have a wealth of great games available, but it would be $100 cheaper than the competition.

This was a devastating blow to Sega, but at least they were out first, right?

Alex Smith: Sega does not end up being the talk of E3. Instead ends up alienating retail that were not part of the initial rollout and ends up with only about 30,000 systems to go around and very few games because everyone was still working on their games, which weren’t supposed to be released until the holidays. So they, they don’t win anything with that. It’s, it’s just kind of a disaster. It’s a stumble right out of the gate.

Noone was happy. Supply for the system was low, so fans were mad. Retailers were caught off guard so they were mad, and game developers were mad because they did not have the time they needed to complete their games on time for the launch.

Sega of America had worked VERY hard over the last 5 years to develop excellent relationships with retailers and this one decision ruined a lot of that hard work. Retailers were furious, unable to scramble to make the shelf space and a lot of them outright refused to carry the Sega Saturn or any Sega Saturn games.

Obviously this was all very bad for Sega. And things really only got worse from there.

Alex Smith: They were losing a hundred dollars a system, you know, selling it at $399, they were losing a hundred dollars a system. And then they were forced to cut the price because they couldn’t match Sony’s prices, but they at least had to get closer to Sony’s prices to have a chance. And so then they had to cut the price from there. They were bleeding, they were hemorrhaging.

So there SEGA was in the Spring of 1995. Just a year and a half after being the leading video game company in America, they were suddenly on the bottom. This is a fast moving industry and at the end of the day, there’s not a lot of room for missteps. And SEGA had a couple of big missteps.

Being focused on leading edge hardware was only getting them so far. And when the hardware suddenly ends up not being the best and not easily accessible to consumers, well that’s not good. And when SEGA was in this position, and the company was not making money, well that’s when things would have to change.
And change, SEGA did. The changes within SEGA and their last ditch effort in the console market, on the next episode.

Episode Show Notes:


Alexander Smith of “They Create Worlds”




Twitter: @tcwpodcast –

Also featuring: 

Bob Buel of 99 Questions

99 Questions –

Twitter –

Special thanks to Alex Brinegar for the Logo!

Twitter – @clobberinthyme –

Graphic Design –

More from Level Zero:




Drop a question or leave a suggestion here!


Corrections and Feedback:

Twitter: @LevelZeroPod –

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  1. Emmanuel says:

    The podcast audio plays part 3 instead of part 2.

    Liked by 1 person

    1. Level Zero says:

      Thank you for letting me know! It should be fixed now.

      Let me know if it still showing the wrong episode.

      – Greg


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