The History of Sega: Part 3

After the sloppy launch of the Sega Saturn in 1995, Sega was struggling. The second half of the 90’s would prove to be a challenge for the company, but there was one more shot at success: The Dreamcast. Would it be enough to save the company?

Journey back with us to second half of the 90’s to take a look at Sega’s internal struggles, the “most successful launch in entertainment history” with the Dreamcast, and what brought about the end of Sega in the console market. Greg dives into the details with the help of video game historians, Alexander Smith and Ken Horowitz.

Transcript

Alexander Smith: Sega, as we said, was not doing well financially in this period.

A lot can happen over the course of a decade. 10 years doesn’t seem like a long time, but when you are a small business, especially one in technology, a decade or even 5 years can seem like an eternity! AMore than enough time to experience a boom of success, or just the opposite. and in some cases, as was the case with Sega, enough time for both of those things to happen. And that decade was the 90’s.

The year is now 1996. Sega of America had released the Sega Saturn with a surprise launch at E3 of 1995. A massive stumble out of the gate with an early launch that limited availability of the console and availability of games. Not only that, but their new competition, SONY, released their competing console, the PlayStation, a full $100 cheaper than Sega in America. So with the Sega Saturn not selling well, and many of the other problems we talked about in the previous episode, Sega was really struggling despite being the top video game company in America, just a few years prior.

Alexander Smith: I think Sega built up a lot of Goodwill in the first part of the decade and then spent the middle part of the decade really really squandering a lot of that Goodwill,

That’s Alexander Smith, the writer, podcaster and video game historian who was featured in Part 2. You’ll be hearing more from him throughout this episode.

So Sega Saturn had a VERY messy launch in America in an attempt to release 6 months before their competition.

And well, it didn’t exactly work. The PlayStation managed to meet the sales of the Saturn and completely outpace them in just a few months. This did not put Sega in a good position with retailers either. And of course, the 32X, well like we mentioned last episode..

Alexander 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 Saga name on it….

Between the sloppy launch of the Saturn and the failure of the 32X, store owners, retailers, they weren’t happy to stock Sega things anymore.

Genesis pulled

At least this was the case in America, but over in Japan, the Saturn was actually selling decently well. It was being outpaced by the Sony PlayStation, but still selling pretty well. So that’s when Sega of Japan decided to make this next move.

Because the Saturn was doing well in Japan, and likely due to not having enough money to manufacture both, Sega of Japan decided to completely discontinue production of the Mega Drive / Genesis and end support for that and all of its accessories, including the 32X. And all this happened in 1996.

This was likely a good move for Sega in Japan, where the mega drive didn’t sell as well, but it was a bit devastating in America. There were a lot of Genesis’ in people’s homes and ending support for this console was likely premature. The 32X and the Sega Channel had just launched 18 months prior and the Sega Channel was still premiering through Time Warner. So ending production of the Genesis would hurt game and accessory sales, and it put the nail in the coffin for the 32X, which struggled in sales from day one. And not only was this not great, but soon Sega would have to worry about their old friend and rival.

N64 Launch

That was a clip from the 1996 promotional VHS was sent out to Nintendo Power subscribers. Oh, the good old days where trailers were sent out over a video tape.

In the Fall of 1996, the Nintendo 64 released in America and it was a massive hit. Selling 500,000 units in America in the first four months and 3.6 million by the end of its first full year. Tripling the lifetimes sales of the Sega Saturn by that point.

Even though there weren’t many games at or near launch, Nintendo again found success with a focus on quality of their games. Seeing Mario in full 3D was a site to behold, and with a full open world to explore and fun gameplay, it was an experience that people were excited for. Even the news was running stories about the Nintendo 64.

And what is more crazy is the PlayStation continued to outsell them all and by a wide margin.

Between numerous diverse games available on the PlayStation, and the new experience Nintnedo was bringing to the table, these were not two competitors you wanted to be next to. Especially without their mascot, Sonic, to help with the appeal. there was no sonic launch game for the Sega Saturn. Even if the Sega Saturn didn’t have any of the hardware problems we discussed in the last episode and even if the launch was a smooth one, this was a tough market to be a part of.

Alexander Smith: Once Nintendo was there too, there just wasn’t any market share left. It was not a market that could support three consoles. The market today is able to support three consoles, but the market back then really could not. And, and Sega was the odd person out.

With the company losing money, the next few years would be a very tough road for Sega.

Alexander Smith: Even before Saturn was, was a flop, they were not doing well. 1993 was the high watermark. 1994. Their profits went down a little bit. Then 1995, their profits fell by half. And then in 96 they fell by half again. They’re starting to go into a free-fall in this period from a profit perspective for all the reasons we’ve already talked about.

Sega Management Turmoil

Whether as a result of these financial troubles or not, 1996 is what marked a large shift in management change for the company, and it wasn’t great.

Alexander Smith: So there’s a lot of contention and a lot of problems going on within Sega corporate at this time. As I kind of hinted that previously, this is a period when the company is growing and kind of maturing and trying to put a real management structure in place.

Even though the company had been operating for over 30 years. At this point, it was always being run like a startup company, and that was poised to change.

Alexander Smith: And this leads to a lot of infighting within factions within the parent company.

The changes and that fighting would start In 1996, when Tom Kalinski retired from Sega. The differences he had with Sega of Japan’s management was too much and Kalinski was ready to move on. He would move on to create the company known as Leap Frog, who to this day remains a leader in educational technology for children. And this started the domino effect of management changes.

When Tom Kalinski left Sega of America, the Executive Vice President of Sega of Japan, Soichiro Irimajiri, was made head of Sega of America.

Alexander Smith: Irimajiri was a legend in the automotive industry. He was called the prince of Honda because he was one of the major driving forces behind Honda’s international success. And one of the major forces behind the company’s transition from a pure motorcycle company to a full on automotive company.

A bit of an odd hire for Sega, but Irimajiri ended up leaving Honda due to health reasons. And when he got better, he was sought out by the CEO Nakayama. And at this point, he was put in charge of SEGA of America.

Alexander Smith: So Irimajiri is here and he is really trying to push to improve, once again, Sega’s performance overseas where they’ve had success before. This is why he takes on the mantle of, of president, of Sega of America when Kalinske leaves. And he commissions a team of IBM engineers to create a next generation console, a successor to the Saturn.

Dreamcast Design Decisions

Yes, now we will finally get into the creation of the Dreamcast. As it turns out, there was some contention with the design of that console.

Alexander Smith: Meanwhile, Hideki Sato, the head of R&D whom we’ve mentioned before ,is leading the Japanese R&D team in creating the next console. Now they knew about this. They knew that both of these things were happening. In fact, technically Sato was in charge of both of them because he was the head of R&D. So it’s not like this was a surprise where they just kind of sprang it on him, but there was a thought that it was okay to kind of let these two projects ride and kind of figure it out later, which is generally not a good idea and was not a good idea in this case.

Having two teams come up with separate designs for the console at the same time…

https://www.youtube.com/watch?v=lD_ag67tH3I

..not great

So on the two sides, you had Irimajiri’s team, who was planning for IBM and American based hardware, while Sato’s team wanted to go with Japanese, Hatach,i based hardware. You would think that since Sato didn’t make the best choices with the Sega Saturn, they would want to go in a different direction, but they went with Sato’s team for the design of the Dreamcast anyways.

This decision would eventually cause major supply problems when the Dreamcast released, but more on that in a minute.

So when it came to the design, Irimajiri did not get his way. And then things would change a little bit more. He was running Sega of America until a man by the name of Bernard Stolar came in to run Sega of America.

Alexander Smith: Bernie Stolar was a street fighter that that went way back. I mean, he was kind of this tough East Coast guy. He had come up in the arcade industry and he had worked for a Jack Trommel’s Atari briefly in the early nineties marketing the LINKS. And and then he had gone to Sony and was part of the launch team of the PlayStation. He was in charge of third-party relations.

With first hand experience in both the arcade industry as well as experience working with SEGA’s biggest competitor, Stolar was yet another strategic hire. And he was brought in for a specific reason.

Alexander Smith: So he wasn’t brought in to try to save the Saturn or, or push the Saturn. He was brought in to prepare Sega for the next battle.

Stolar quickly moved up the ranks at Sega of America, until eventually he was named President. And when it comes to SEGA’s history, Stolar is often cited as a major part of SEGA’s downfall, specifically with the “premature ending of the Saturn.”

You see, at E3 of 1997, Bernie Stolar directly said, “The Saturn is not our future.” Although he was likely trying to build excitement for SEGA’s next console, the Dreamcast, phrasing like that went a long way to upset fans and ensure game development for the Saturn all but ceased.

Just imagine being a Sega fan who spent a lot of money on a Sega Saturn just two years earlier, only to hear the president of Sega of America tell the public that there’s not going to be a focus on the Saturn in the future.

Now, although this moment is a memorable one, that is often mentioned when discussing SEGA’s history, it is certainly over emphasized when it comes to explaining why SEGA had a downfall. It was no secret the Saturn wasn’t selling well and a new console was inevitable for SEGA.

No, there are many many more, less public reasons SEGA was circling the drain. And of course, we will get into those reasons, after this short break.

**break**

So the reason the Sega was circling the drain came down to two main points. Financial troubles, which we’ve mentioned several times already, but not only that, executive management disagreement at the very top of the company.

And that disagreement came down to four people. Now stick with me here. These are all Japanese names, which makes it a little tough to remember who is who, but it’s important to understand the disagreements.

You had Hideke Sato, the head of R&D and was responsible for the design of every Sega console
You had Irimajiri, who was the Executive Vice President, helping to oversee SOA
There was the CEO of the entire company, Hayo Nakayama, who we spoke about last episode, who had his roots in the arcade industry and has always sought after leading edge, hardware
You had the man that Nakayama reported to, the Chairman of Sega and the head of the company CSK, that owned the majority shares of Sega, Isao Okawa.

Remember the companies financials are struggling, and Okawa understands that they need SEGA to seek out a merger. A deal nearly happened with fellow competition within the arcade business Bandai. The deal almost went through, but at the last minute, the deal fell apart.

Sega Management Turmoil Gets Worse

And this was a devastating blow for Sega and caused a lot of problems after the next thing happened. Because what had to happen was the CEO, Nakiyama, had to be forced out of the company in a “face saving: move as a direct result of this failed merger. And Irimajiri, the Honda guy, becomes the new CEO of Sega of Japan.

And so further disagreements arise regarding the design of the Dreamcast that we discussed earlier. And it only gets worse from there, because Irimajiri wants to push the Dreamcast hardware as hard as he could with as much marketing budget as possible. But Isao Okawa, he was really wary. He didn’t want to spend a lot of money and he wanted to focus more on software. Meanwhile, over in Sega of America, Bernard Stolar, who’s the president, he was actually fired as a direct result of all of the work that he had done in all of this infighting. So Okawa and Irimajiri have this huge power struggle. And Hideki Sato had his design with the Dreamcast. And of course, Irimajiri doesn’t like him, but Okawville really likes Sato.

And there’s this whole….

[Interrupted by a call]

OK look, at the end of the day, SEGA was not doing well financially and executive leadership was having major disagreements about how to run the company.

Dreamcast Launch Plans

But despite all of the struggle and fighting, finally, in the November of 1998 in Japan, and in the fall of 1999 internationally, the Dreamcast launched. And they called it the “Dreamcast,” not the “Sega Dreamcast,” because after the 32X and the Sega Saturn, they didn’t want to put the Sega name next to the console.

But this time, they had a well thought-out launch planned. Doing well in Japan and even better in America. This time it would be released on a special day, September 9th, 1999 or 9/9/99. And with a lofty $100 million advertisement budget that Sega had for the Dreamcast, they sure as heck made sure that the Dreamcast was the talk of the town.

At the end of the day, this really was something new and innovative that Sega was doing. This was a video game console that was connecting to the internet and it was really the first device to connect to the internet that was not a computer. Sega was confident of the future of video games and the internet and the console space. And here’s a quick interview from the 1999 game spot promotional episode about the Dreamcast. And this is an interview with Peter Moore.

And in addition to this hardware innovation, Sega also made sure to have a big lineup of unique games for the Dreamcast when it launched. Games like Shenmu, an amazing 3D open world game that modern games like grand theft auto continue to draw inspiration from. Games like Hydro Thunder, a popular arcade boat racing game that remains one of my favorite racing games to this day, the amazing fighting game Soul Caliber and of course, this time around there would be a Sonic launch title. Much like the N64 gave the world Mario in full 3D for the first time, the Dreamcast brought back Sonic the Hedgehog in amazing looking full 3D and this time fully voice acted. With the same fast paced gameplay, Sonic Adventure was a showcase for the Dreamcast.

With all of these unique and amazing looking exclusive launch games, Sega proudly boasted that the launch of the Dreamcast was the best single day in entertainment history. Going beyond consumer electronics, comparing themselves to music and movie releases.

It had a bigger launch than anything ever, but, well, it might’ve been a little bit overblown. Here’s Alex Smith again.

Alexander Smith: I mean, they, they tout that they have the best single day in entertainment, history you know, in terms of dollar volume, but you know, a couple of caveats, first of all, you know, when, when your system costs hundreds of dollars of, of course, you’re going to have a bigger day than, than the movie blockbusters where, you know, tickets are not a hundred hundreds of dollars to get into the theater.

But also second of all, it, it was one of the first consoles where there was a real, huge emphasis on pre-ordering. So they kind of, they kind of manufactured it in a way to make sure that the first day sales would be impressive because they, they pushed pre-orders in a way that they just hadn’t been pushed on prior systems in the U S so, you know, of course they had a huge day. They, they kind of designed it that way. You know, the sales pretty quickly fell off after that.

Although this time around, they were better prepared for this console launch compared to the mess that was the launch of the Sega Saturn, history repeated itself for Sega.

Alexander Smith: Once again, Sega decided they had the launch first, they had to be to market and build market share before the bigger players got in because they’re hemorrhaging money at this point, they, they can’t even, they can afford to spend on marketing even the less than they could afford to spend on marketing.

Despite an excellent launch, Sega, have really struggled to keep the momentum of the Dreamcast going. And a lot of that came down to Sega’s financial struggles and their lack of a marketing budget. But honestly it might’ve been okay if they were only facing Nintendo head to head again. But, there was Sony.

Playstation 2 Launch

Alexander Smith: And then once again, just like with the PlayStation, Sony massively over promised what the PlayStation 2 could deliver now. I mean, what the PlayStation 2 delivered was impressive. Don’t get me wrong, but they were promising way more than that from, to hear them tell, this thing was basically a super computer in your living room. And everyone was so blown away by that, that they’re like Dreamcast, no, because PlayStation 2 is coming and it’s going to be so much cooler. So, you know, it never stood a chance.**

Despite launching well ahead of the Playstation 2, as soon as Sony got to market, SEGA was done for. There was no possible way they could compete on marketing. To highlight what I mean here, between the Playstation 2 and the Dreamcast and the marketing differences between these two companies, here is a quick story from Ken Horowitz, the author and video game researcher who is heavily featured on part one of Sega’s history. And here’s what he remembers about the launch of the PS2 and the Dreamcast.

Ken Horowitz: I mean, the Dreamcast was unfortunate, because I remember I was on vacation with my family and we went to a mall. And I always went to the Electronic Boutique or the GameStop to see, you know, what games they had and, see what Dreamcast games they had. And they had a sign outside. And in chalk it said, “Trade in your Dreamcast for a $100 credit towards a Playstation 2.” And this was like in July. Like months before the launch. And I’m like, you, you buy the Dreamcast for $200 and if you trade it in, we’ll give you half the value. The console wasn’t even out yet!

You wouldn’t really even see any games that you could say, “Oh man! I’m going to get a PS2 for those games!” at that time yet. They were already “Trade in your Dreamcast.” You know? it’s like the retailers having that kind of perspective, you know? it’s very difficult to compete when you don’t have the money to back up your product and tell retailers “no, no, no, no, no! Don’t do that because look at this and we have….!”

You know, it’s very difficult to compete and Sony just has deep, deep, deep pockets.

Sega’s relationship with retailers was apparent with this story and how they supported Sony instead.

The Dreamcasts hardware was somewhat comparable, but the fact stood that the Playstation 2 was a more powerful console. And not only that, but the Playstation 2 was also a DVD player and the DVD player was one of the biggest selling points.

Ken Horowitz: Yeah, I think that people underestimate, like, I think it was when the Playstation 2 came out, the number one product that was bought along with it, was the DVD of The Matrix.

Ken Horowitz: The fact that you’re getting a game console and DVD player, for lots of people, that was a perfect introductory level DVD player. Because, like, you’re going to spend $300. This is 2000, right? How much did a DVD player cost in 2000? And for about that price, you’re also getting a Playstation 2 that will also play your PSOne games.

So the Dreamcast never really stood a chance in this market, unfortunately.

And at the same time, the in-fighting continued between the executive leadership. The big disagreements specifically between the CEO, Irimajiri, and the Chairman, Okawa. And once the Dreamcast began to falter, that was all the reason Okawa needed to remove Irimajiri from the role of CEO. And Okawa began to take on the role of CEO himself. There was just one problem. Here’s where the story gets a little bit dark and tragic

Death of Okawa

Alexander Smith: At the same time, Okawa it is dying of cancer, and knows he’s dying of cancer. He knows he’s ill. And so he decides this is the time to start running the company while he’s also dying, which is not a great time generally to start running a company.

So, while dealing with a terminal illness, Okawa attempted to run the business, but in the face massive competition, and without the ability to spend a lot of excess money, there wasn’t a lot of hope for Sega by this point. Okawa tried to save a dying company, while also dying himself. And one thing ended up saving Sega’s name.

Alexander Smith: Sega actually, would’ve probably cease to exist except that when Okawa did die, and as I said, he knew he was dying, so he had time to set his affairs in order. He made a personal gift of his shares in Sega, back to the company. And this quite frankly probably saved Sega. That is not an exaggeration.

These shares of SEGA were worth nearly $700 million at the time.

Sega Bought Out

Alexander Smith: He just gave them back. It allowed Sega to pay down its debts. It allowed Sega to make the transition. It was still a rocky transition and they still ended up not being able to survive on their own.

Okawa passed away in 2001 and he was replaced as CEO of Sega of Japan by Hideki Sato, the former head of R&D. Ironically, Sega really wouldn’t be needing much in the way of hardware anymore when it came to consoles.

Sega Gets Out of the Console Market

So after just 2 years after the launch of the Dreamcast, in January of 2001, SOA’s president, Peter Moore announced to the public that Sega was leaving the console business and would focus on software, games, and their arcade business and that was it. And they would also continue to seek out a merger.

Alexander Smith: They had to merge with Sammy and they were, I mean, it was a merger, but they were bought. They were bought by Sammy. It wasn’t a meeting of equals.**

The company Sammy was a Japanese Pachinko company. A very different type of company than what Sega was. And when this merger happened with Sammy in 2003, there was a mass exodus of Sega staff. This point in time marks when SEGA changed for good.

SEGA Today

Sega quickly shifted to a third party video game developer, partnering with none other than Nintendo. Releasing games like Sonic Adventure 2 on the Nintendo GameCube among many others. And to this day, Sega continues to develop video games, most recently the Yakuza series. And although this 3rd party developer is different in many ways from who they used to be as a company, it’s still the same company.

Alexander Smith: There is continuation, there is congruity between the Sega of today and the Sega back then, absolutely. It is the same company. I mean, it’s subsidiary, but I mean, that company still exists and it still has its, its proud history. It still has its franchises.

Sega still holds onto the popular IP’s they created decades ago and they still have great success from time to time as a third party developer today. Sega is still creating arcade games as well, but at the end of the day, they will likely never come close to the company they were back in the 90’s.

Sega’s Influence

I’ve personally spent the last few months researching Sega and its history and it’s clear to me that there is still a HUGE fanbase of people with a deep love for all things Sega. Fans holding on to their old consoles, while looking forward to new releases. And video game historians, like Ken Horowitz and Alexander Smith, who are eager to tell an account of Sega’s history and preserve what Sega did over the course of several decades.

To me, I think the thing that is most clear about Sega is the profound influence the company has left on the industry.

Alexander Smith: Sega has been incredibly influential on the industry.

So when you look at the home console industry, Sega was able to become a direct competitor to Nintendo, who had a monopoly and stronghold on the industry. And they brought a new target demographic to the marketplace. Video games were not just toys for children, but something cool that can be consumed by everyone. You could zoom in and point to things like the Sega Channel with game streaming or being one of the first companies to bring online gaming to the home, which we didn’t really discuss, with things like Phantasy Star Online with the Sega Dreamcast.

But zooming out, Sega influenced video games as a whole from the arcade world. They reinvented the arcade industry multiple times over, influenced the culture of Japan as a whole, brought new types of games to different countries, and was the first company to bring 3D polygonal graphics into the video game space. And this whole thing has an ironic twist on how Sega influenced the industry as a whole.

Alexander Smith: I think a perfect way to encapsulate that and end that is, I told you that everyone thought at the time the Saturn was being developed that polygonal graphics, 3d graphics in the home were far, far away. And of course, Ken Kutaragi at Sony was trying to convince developers that the future was here and it’s called Playstation. And they were getting no kind of reception to that at all. All the companies they visited were like, “there’s no way you’ll actually be able to make this and it’ll do everything you say for a price to people buy it and, and polygons are years away and it never going to happen.” And then say, go released Virtua Fighter in the arcade.

And suddenly everybody believed Sony. So again, Virtual Fighter was a big part of what got buy-in on the Playstation. There it is again, Sega has that hardware legacy, but it doesn’t always benefit them when it happens.

So that about, does it on the history of Sega! Special, thanks to all of these esteemed video game researchers that helped make the episode possible. Alexander’s. And Ken Horwitz, thank you again so much for taking their time and talking with me and teaching me about the history of Sega. And, you and allowing me to use their voice for this episode.

Episode Show Notes:

Featuring:

Alexander Smith of “They Create Worlds”
Bio: https://videogamehistorian.wordpress.com/about/

Website: https://theycreateworlds.com/

Podcast: http://podcast.theycreateworlds.com/

Book: https://www.amazon.com/They-Create-Worlds-Companies-1971-1982/dp/1138389900?_encoding=UTF8&camp=1789&creative=9325&linkCode=ur2&tag=storypodca-20&linkId=2P4S6EY6B462X4AR

Twitter: @tcwpodcast – https://twitter.com/tcwpodcast

For more on the downfall of Sega, check out “Dreams of Sega” – http://podcast.theycreateworlds.com/e/dreams-of-sega/

Ken Horowitz

Website: https://sega-16.com/

Books and Bio: https://www.amazon.com/Ken-Horowitz/e/B07BFY3D6L%3Fref=dbs_a_mng_rwt_scns_share

Special thanks to Alex Brinegar for the Logo!