SEGA had a meteoric rise in the early ’90s, going from 10% market share to over 50%. But by the early 2000s, they had abandoned the hardware business and became strictly a software company. So what happened? There are a lot of reasons SEGA fell so fast; it grew too big too quickly. There were constant disagreements between SEGA of Japan and SEGA of America, which led to a lot of missteps and missed opportunities.
But let’s take a look at three specific instances where SEGA went wrong. These are SEGA’s three biggest mistakes, and we begin with an awkward add-on for the SEGA Genesis. SEGA and Nintendo both saw tremendous financial and critical success with their 16-bit consoles, but with success came pressure.
That pressure heated up in 1993 when Atari released the Jaguar, a 64-bit console. Atari’s powerful new console sent a strong message, one that SEGA took seriously. SEGA of Japan was ready for the next big thing. SEGA of America, by contrast, wasn’t exactly rushing to put out a new console. The Genesis was still doing well in North America, but SEGA of Japan was in charge. So, in January of 1994, they pitched SEGA of America an idea for a 32-bit Genesis, which would double the colors of a traditional Genesis, at a lower price point.
SEGA of America’s Head of Research and Development, Joe Miller, pushed hard against the idea. According to former SEGA of America Executive Producer Michael Latham, Miller said, “Oh, that’s just a horrible idea. If all you’re going to is enhance the system, you should make it an add-on. If it’s a new system with legitimate new software, great. But if the only thing it does is double the colors…” For what it’s worth, Miller doesn’t recall being quite that blunt. He also credits the idea for an add-on to SEGA CEO Hayao Nakayama.
Regardless, the group agreed to move forward with an add-on for the 1994 holiday season. Under tight time constraints, a SEGA of America group, led by Joe Miller and overseen by SEGA of Japan, rushed to create the new add-on. Meanwhile, SEGA of Japan was quietly developing their own 32-bit system, which would eventually become the SEGA Saturn. The end result of months of hard work was a mushroom-shaped add-on that inserts into the Genesis cartridge slot, transforming the 16-bit Genesis into a 32-bit system. It allowed the Genesis to work much faster, and even display texture mapped 3D polygons.
They designed the system to be a permanent addition to the Genesis, so players could plug the 32X in and play either a 32X game or a Genesis game. SEGA launched a multimillion dollar ad campaign to promote the 32X. For a little while, the 32X looked like it might be a success. The ads generated a lot of buzz amongst consumers, but industry insiders were skeptical. By that point, it was widely understood that the SEGA Saturn would hit the market soon. Which begged the question: if SEGA had a 32-bit console in the works, what was the point of this 32-bit add-on?
Despite that nagging question, when the 32X launched on November 21, 1994, demand was fairly high. According to some reports, demand outran the supply of 600,000 units that were available at launch. It debuted for around $160, but the momentum died quickly, mainly because of the games. Only three titles were available when the 32X launched.
Many of them were rushed through production, and it showed. For example, the port of Doom was poor quality, and it was missing levels. Cosmic Carnage was so bad, that SEGA didn’t even want to ship it out. Sales of the 32X dropped off sharply after the 1994 holiday season. By 1995, the price dropped from around $160 to $99 and, finally, to the clearance price of $19.95. The 32X library eventually grew to include 40 titles – a handful of which you have to have the 32X and the SEGA CD to play.
Not long after the 32X debuted it was forgotten, and SEGA began pushing the Saturn. Scott Bayless, a senior producer at SEGA of America, said, “Frankly, it made us look greedy and dumb to consumers, something that a year earlier I couldn’t have imagined people thinking about us. We were the cool kids.” The 32X was expensive, had a poor library of games, and was a terrible stop gap between the Genesis and the Saturn.
Consumers began losing confidence in SEGA, which didn’t bode well for the company’s future. In my video on Nintendo’s three biggest mistakes, I ranked Nintendo’s failed partnership with Sony at number one. But SEGA made a very similar mistake. To recap Nintendo’s misstep, Sony and Nintendo made plans to develop a CD add-on for the Super Nintendo.
But at the last minute, Nintendo changed their mind and decided to work with rival company Philips instead. It completely humiliated Sony. It also led to an embarrassing use of Nintendo characters on the Philips CD-i console. So Sony pitched their console idea to Nintendo’s rival, SEGA.
Sony Electronic Publishing President Olaf Olafsson and Sony America President Mickey Schulhoff met with SEGA of America President Tom Kalinske. According to Kalinske, they said, “Tom, we really don’t like Nintendo. You don’t like Nintendo. We have this little studio down in Santa Monica working on video games, we don’t know what to do with it, we’d like SEGA’s help in training our guys. And we think the optical disc will be the best format.” Kalinske agreed, and the two companies began working closely.
They invested in two developers working on CD games – Imagesoft and Digital Pictures. Digital Pictures would later release the infamous Night Trap. Eventually, engineers from SEGA and Sony began working together on specifications for a CD-based video game console. The idea was then pitched to Ken Kutaragi of Sony of Japan, the man behind Sony’s PlayStation project. According to Tom Kalinske, he said, that “it was great, and as we all lose money on hardware, let’s jointly market a single system – the SEGA/Sony hardware system.
And whatever loss that we make we split that loss.” It was an exciting opportunity for both parties, but Tom Kalinske still had one final roadblock: SEGA of Japan. When it was pitched to SEGA of Japan, they turned it down. They said, “that’s a stupid idea. Sony doesn’t know how to make hardware. They don’t know how to make software either.
Why would we want to do this?” Since Nintendo and SEGA rejected them, Sony decided to go solo. They released the Sony PlayStation in 1994, went on to sell more than 100 million units. Ouch. Tom Kalinske called it the stupidest decision ever made in the history of business, but, in my opinion, it isn’t their biggest mistake. My number one choice sent shockwaves through the industry, and caused one of the most unforgettable moments in video game history.
On November 22, 1994, SEGA launched their brand-new 32-bit console: the SEGA Saturn in Japan. Initial sales were good. SEGA sold 500,000 systems in the first month, thanks in large part to the popularity of the launch title Virtua Fighter.
The North American launch was set for the following year, in September of 1995. A massive $50 million advertising campaign was prepared to show off the Saturn. SEGA of America wanted to appeal to an older crowd and show off the raw power of the system, but SEGA of Japan President Hayao Nakayama grew nervous. The Sony Playstation was slowly beginning to outsell the SEGA Saturn in Japan, despite the Saturn launching two weeks earlier. Nakayama ordered SEGA of America President Tom Kalinske to launch the system in May – four months ahead of schedule. Kalinske warned Nakayama that having a surprise launch could jeopardize the system’s success in North America, but Nakayama refused to budge.
On May 11, 1995, at the inaugural E3 Expo in Los Angeles, Tom Kalinske previewed the SEGA Saturn in several software titles. At the end of his presentation, he announced the SEGA Saturn was available immediately at several large retailers, including Toys R Us and Software Etc. The cost: $399.
The announcement surprised everyone, but at the next presentation, Sony delivered one of the most iconic and savage moments in video game history. After discussing their new PlayStation console and the technical details, Sony Electronic Publishing President Olaf Olafsson called up Sony Computer Entertainment of America President Steve Race to give a brief presentation. Race had a lengthy speech prepared, but at the last minute, he ditched it. Race went up to the podium and uttered one word… “$299” [APPLAUSE] It was the price heard ’round the world. SEGA’s launch of the Saturn may have surprised everyone, but that surprise eventually led to anger.
Many consumers who were saving money for the SEGA Saturn weren’t ready to make the purchase. The promise of 20 launch titles shrunk down to 6. Only big retailers receive shipments of the SEGA Saturn, which angered the smaller retailers.
KB Toys refused to carry the SEGA Saturn as a result. Even developers were annoyed; the surprise launch threw development schedules completely out of whack. The SEGA Saturn didn’t launch with a single third party game. It was also notoriously difficult to program games for the system.
Even SEGA’s own Yu Suzuki stated, “I think that only one out of a hundred programmers are good enough to properly program the Saturn.” With limited supply and a hefty price tag, SEGA’s four-month head start resulted in about 80,000 units sold. When the Sony Playstation finally launched in September of 1995, it sold a hundred thousand units in two days.
It was $100 cheaper than the Saturn and had a great variety of launch titles. Said Tom Kalinske, “Had we waited until we had more and better games, launching with all retailers instead of with a few, with marketing that could reach every player, we would have been much more successful.” SEGA never recovered from the disastrous launch. The SEGA Saturn faded into obscurity. Tom Kalinske resigned from SEGA of America less than a year later. In 1997, new SEGA of America President Bernie Stolar said, “The Saturn is not our future.”
By 1998, the Saturn was discontinued, and SEGA of Japan President Hayao Nakayama left the company. SEGA followed up the Saturn with their final console – the SEGA Dreamcast. Although it was a huge improvement, it, too, had its shortcomings. Games were easily pirated, and the lack of a DVD player made the PlayStation 2 a much more appealing system.
By 2001, SEGA discontinued the Dreamcast, and announced they were no longer making hardware. The surprise launch of the SEGA Saturn doomed the company from ever competing again in the console wars. So there you have it – SEGA’s three biggest mistakes. Obviously, these aren’t the only issue SEGA had, so I’d love to hear what you think are SEGA’s biggest mistakes in the comments below.
That’s all for this episode of The Gaming Historian. Thanks for watching. Funding for Gaming Historian is provided in part by supporters on Patreon. Thank you.