Sega Games Co., Ltd.(JP) is a video game developer and publisher headquartered in Tokyo, Japan. The company is a subsidiary of Sega Holdings Co., Ltd., which is part of Sega Sammy Holdings. The name "Sega" is a portmanteau of "Service Games".
In 1940, American businessmen Martin Bromley (born August 6, 1919 in New York, USA, died September 7, 2008 in Culver City, CA), Irving Bromberg (born June 10, 1899 in New York, USA, died January 20, 1973 in Los Angeles, CA, USA), and James Humpert formed a company called Standard Games in Honolulu, Hawaii, to provide coin-operated amusement machines to military bases. They saw that the onset of World War II, and the consequent increase in the number of military personnel, would mean there would be demand for something for those stationed at military bases to do in their leisure time. After the war, the founders sold that company and established a new distributor called Service Games, named for the military focus. In 1951, the government of the United States outlawed slot machines in US territories, so Bromley sent two of his employees, Richard Stewart and Ray LeMaire, to Tokyo, Japan, in 1952 to establish a new distributor. The company provided coin-operated slot machines to U.S. bases in Japan and changed its name to Service Games Japan(JP) by 1953. Service Games' first use of the name Sega occurred in 1954 on slot machines, in particular on one model called the Diamond Star Machine. During 1954, Humpert sold his interest in Service Games back to Bromley and Bromberg at a price of US$50,000 each. Stewart and LeMaire later purchased shares from Bromley and Bromberg, resulting in an equal split among the four men for ownership of the company.
As Service Games grew larger, it began to attract attention from the US and Japanese governments. While the company had managed to get out of charges of bribery and tax evasion, between 1959 and 1960, Service Games was banned from US air bases in Japan and the Philippines. On May 31, 1960, Service Games Japan was formally dissolved. A few days later, on June 3, two new companies were established to take over its business activities: Nihon Goraku Bussan Inc.(JP) and Nihon Kikai Seizo(JP). Kikai Seizo focused on manufacturing Sega slot machines, while Goraku Bussan served as a distributor and operator of coin-operated machines, particularly jukeboxes. As part of the operations move, Kikai Seizo and Stewart's company Utamatic, Inc. purchased Service Games Japan's assets. Bromberg and Bromley sold Service Games Hawaii in 1961 for a price of US$1.4 million, while retaining the name. Kikai Seizo and Goraku Bussan were merged in 1964.
The founding of Sega Enterprises
David Rosen (born January 22, 1930 in Brooklyn, New York City, NY, USA) an American officer in the United States Air Force stationed in Japan, launched a two-minute photo booth business in Tokyo in 1954. This company eventually became Rosen Enterprises(JP), and in 1957, began importing coin-operated games to Japan. In 1965, Nihon Goraku Bussan acquired Rosen's company to form Sega Enterprises, Ltd.(JP) Rosen was installed as the CEO and managing director of the new company. Shortly afterward, Sega stopped its focus on slot machines and stopped leasing to military bases in order to focus on becoming a publicly-traded company of coin-operated amusement machines. Products imported included Rock-Ola jukeboxes and pinball games by Williams, as well as pinball and gun games by Midway Games. Because Sega imported second-hand machines that frequently required maintenance, Sega began the transition from importer to manufacturer by constructing replacement guns and flippers for its imported games. According to former Sega director Akira Nagai, this led to Sega developing their own games as well. Sega's first release of their own manufactured electromechanical game was the submarine simulator game, Periscope. The game sported light and sound effects considered innovative for that time, eventually becoming quite successful in Japan. It was soon exported to both Europe and the United States and was placed in malls and department stores, becoming the first arcade game in the US to cost 25 cents per play. Sega was surprised by Periscope's success, and for the next two years, Sega produced between eight and ten games per year, exporting all of them.
After dealing with financial struggles and rampant piracy, Sega was sold to American conglomerate Gulf and Western Industries in 1969. Bromley and Stewart sold their shares, 80% of the company, for a total of US$10 million, while LeMaire retained his 20%. As a condition of the sale, Rosen was to remain CEO of the company until at least 1972. Six months later, with the deal done, Bromley joined with Stewart to form a company called Sega S.A. SONIC in Spain, which imported coin-operated machines to Europe. The company was active until around 1986.
Rosen continued to develop his relationship with Gulf and Western chairman Charles Bluhdorn (born September 20, 1926 in Vienna, Austria, died February 20, 1983), and in 1974, Gulf and Western made Sega a subsidiary of an American company renamed Sega Enterprises, Inc. During 1973, Sega would release Pong-Tron, its first video-based game. In 1978, Sega acquired Gremlin Industries, a manufacturer of microprocessor-based arcade games. Sega also acquired Esco Trading(JP), a coin-op distributor led by Hayao Nakayama(JP) (born May 21, 1932 in Tokyo, Japan). Rosen would later admit that he mainly purchased Esco Trading for Nakayama's leadership. In the early 1980s, Sega was one of the top five arcade game manufacturers active in the United States, as company revenues rose to $214 million. In 1982, Sega introduced the first game with isometric graphics, Zaxxon.
While Sega had enjoyed success in the early 1980s, the success didn't last. A downturn in the North American arcade business in 1982 lead Gulf and Western to sell Sega's North American arcade manufacturing division and the licensing rights for its arcade games to Bally Manufacturing. The company retained Sega's North American R&D operation, as well as its Japanese subsidiary, Sega Enterprises, Ltd.
Sega enters the console market, continued arcade success
With it's arcade business in decline, Gulf and Western executives turned to Sega Enterprises, Ltd. president Nakayama for advice on how to proceed. Nakayama advocated that the company leverage its hardware expertise gained through years working in the arcade industry to move into the home console market in Japan, which was in its infancy. Nakayama received permission to proceed, leading to the release of Sega's first home video game system, the SG-1000. The first model to be developed was the SC-3000, a computer version with a built-in keyboard, but when Sega learned of Nintendo's plans to release a games-only console, they began developing the SG-1000 alongside the SC-3000. The SG-1000 and SC-3000 were released in Japan on July 15, 1983, on the same day as Nintendo launched the Family Computer (Famicom) in Japan. Though Sega only released the SG-1000 in Japan, rebranded versions were released in several other markets worldwide.
Due in part to the SG-1000's steadier stream of releases, and in part to a recall on Famicom units necessitated by a faulty circuit, the SG-1000 chalked up 160,000 units in sales in 1983, far exceeding Sega's projection of 50,000 units.
Shortly after the launch of the SG-1000, Gulf and Western began to divest itself of its non-core businesses, so Nakayama and Rosen arranged a management buyout of the Japanese subsidiary in April 1984 with financial backing from Computer Service, Inc.(JP)(later known as CSK), a prominent Japanese software company. The Japanese assets of Sega were purchased for $38 million by a group of investors led by Rosen and Nakayama. Isao Okawa(JP) (born May 19, 1926 in Osaka, Japan, died March 16, 2001 in Tokyo, Japan), chairman of CSK, became the chairman of Sega, while Nakayama was installed as CEO of Sega Enterprises, Ltd.
Sega re-entered the North American arcade market in 1985 with the establishment of a new division at the end of a deal with Bally. The release of Hang-On in 1985 would prove successful in the region, becoming so popular that Sega struggled to keep up with demand for the game. In 1986, Sega would start distributing their arcade games to North America themselves.
At this point, Nintendo no longer developed their own arcade games.
Sega Mark III/Master System
As a result of the lack of success of the SG-1000, Sega began working on the Mark III in Japan in 1985. Engineered by the same internal Sega team that had created the SG-1000, the Mark III was a redesigned iteration of the previous console. For the console's North America release, Sega restyled and rebranded the Mark III under the name "Master System". The futuristic final design for the Master System was intended to appeal to Western tastes.
The Sega Mark III was released in Japan on October 20, 1985 at a price of ¥15,000. Despite featuring technically more powerful hardware than its chief competition, the Famicom, the Mark III did not prove to be successful at its launch. Difficulties arose from Nintendo's licensing practices with third-party developers at the time, whereby Nintendo required that titles for the Famicom not be published on other consoles. To overcome this, Sega developed its own titles and obtained the rights to port games from other developers, but they did not sell well.
Contrary to its performance in Japan and North America, the Master System eventually outsold the NES by a considerable margin in Europe. As late as 1993, the Master System's active installed user base in Europe was 6.25 million units. The Master System has had continued success in Brazil, where new variations have continued to be released long after the console was discontinued elsewhere, distributed by Tectoy.
Mega Drive/Sega Genesis
Sega released the Mega Drive in Japan on October 29, 1988, though the launch was overshadowed by Nintendo's release of Super Mario Bros. 3 six days earlier. Positive coverage from magazines Famitsu and Beep! helped to establish a following, but Sega only managed to ship 400,000 units in the first year. The Mega Drive was unable to overtake the venerable Famicom and remained a distant third in Japan behind Nintendo's Super Famicom and NEC's PC Engine, though the PC Engine was discontinued in 1994. Sega announced a North American release date for the system on January 9, 1989. The console was renamed "Sega Genesis". Former Atari executive and new Sega of America CEO Michael Katz instituted a two-part approach to build sales in the region. The first part involved a marketing campaign to challenge Nintendo head-on and emphasize the more arcade-like experience available on the Genesis, summarized by slogans including "Genesis does what Nintendon't". Since Nintendo owned the console rights to most arcade games of the time, the second part involved creating a library of instantly recognizable games which used the names and likenesses of celebrities and athletes. Nonetheless, it had a hard time overcoming Nintendo's ubiquitous presence in consumers' homes. Tasked by Nakayama to sell one million units within the first year, Katz and Sega of America managed to sell only 500,000 units.
While Sega was seeking a flagship series to compete with Nintendo's Mario series along with a character to serve as a company mascot, Naoto Ohshima designed "a teal hedgehog with red shoes that he called "Mr. Needlemouse." The character was renamed Sonic the Hedgehog. The gameplay of Sonic the Hedgehog originated with a tech demo created by Yuji Naka, who had developed an algorithm that allowed a sprite to move smoothly on a curve by determining its position with a dot matrix. Naka's original prototype was a platform game that involved a fast-moving character rolling in a ball through a long winding tube, and this concept was subsequently fleshed out with Ohshima's character design and levels conceived by designer Hirokazu Yasuhara. Sonic's blue pigmentation was chosen to match Sega's cobalt blue logo, and his shoes were a concept evolved from a design inspired by Michael Jackson's boots with the addition of the color red, which was inspired by both Santa Claus and the contrast of those colors on Jackson's 1987 album Bad; his personality was based on Bill Clinton's "can do" attitude.
In mid-1990, Nakayama hired Tom Kalinske to replace Katz as CEO of Sega of America. Although Kalinske initially knew little about the video game market, he surrounded himself with industry-savvy advisors. A believer in the razor and blades business model, he developed a four-point plan: cut the price of the console, create a U.S.-based team to develop games targeted at the American market, continue and expand the aggressive advertising campaigns, and replace the bundled game Altered Beast with a new game, Sonic the Hedgehog. The Japanese board of directors initially disapproved of the plan, but all four points were approved by Nakayama, who told Kalinske, "I hired you to make the decisions for Europe and the Americas, so go ahead and do it." Magazines praised Sonic as one of the greatest games yet made, and Sega's console finally became successful. In large part due to the popularity of Sonic the Hedgehog, the Sega Genesis outsold its main competitor, Nintendo's SNES, in the United States nearly two to one during the 1991 holiday season. This success led to Sega having control of 65% of the 16-bit console market in January 1992, making it the first time Nintendo was not the console leader since December 1985.
In the end, Sega was able to outsell Nintendo four Christmas seasons in a row due to the Genesis' head start, a lower price point, and a larger library of games when compared to the Super Nintendo at its release. Sega's advertising positioned the Genesis as the cooler console, and as its advertising evolved, the company coined the term "blast processing" to suggest that its processing capabilities were far greater than those of the SNES. However, according to a 2014 Wedbush Securities report based on revised NPD sales data, the SNES still outsold the Genesis in the U.S. market.
In 1990, Sega launched the Game Gear to compete against Nintendo's Game Boy. The console had been designed as a portable version of the Mark III, and featured more powerful systems than the Game Boy, including a full-color screen, in contrast to the monochromatic screen of its rival. Due to issues with its short battery life, lack of original games, and weak support from Sega, the Game Gear was unable to surpass the Game Boy, selling approximately 11 million units.
Mega CD/Sega CD
By 1991, compact discs had gained in popularity as a data storage device for music and software. PCs and video game companies had started to make use of this technology. NEC had been the first to include CD technology in a game console with the release of the PC Engine CD-ROM add-on, and Nintendo was making plans to develop its own CD peripheral as well. Seeing the opportunity to gain an advantage over its rivals, Sega partnered with JVC to develop a CD-ROM add-on for the Mega Drive. Sega launched the Mega-CD in Japan on December 1, 1991, initially retailing at JP¥49,800. The CD add-on was launched in North America on October 15, 1992, as the Sega CD, with a retail price of US$299; it was released in Europe as the Mega-CD in 1993. In addition to greatly expanding the potential size of its games, this add-on unit upgraded the graphics and sound capabilities by adding a second, more powerful processor, more system memory, and hardware-based scaling and rotation similar to that found in Sega's arcade games. The Mega-CD sold only 100,000 units during its first year in Japan, falling well below expectations. Although many consumers blamed the add-on's high launch price, it also suffered from a small software library; only two games were available at launch. This was due in part to the long delay before Sega made its software development kit available to third-party developers. Sales were more successful in North America and Europe, although the novelty of full motion video (FMV) and CD-enhanced games quickly wore off as many of the Mega-CD's later games were met with lukewarm or negative reviews.
Development on Sega's next video game console, the Sega Saturn, started over two years before the system was showcased at the Tokyo Toy Show in June 1994. The name "Saturn" was the system's codename during development in Japan, but was chosen as the official product name. According to Kalinske, Sega of America "fought against the architecture of Saturn for quite some time". Seeking an alternative graphics chip for the Saturn, Kalinske attempted to broker a deal with Silicon Graphics, but Sega of Japan rejected the proposal. Kalinske, Sony Electronic Publishing's Olaf Olafsson, and Sony America's Micky Schulhof had discussed development of a joint "Sega/Sony hardware system", which never came to fruition due to Sega's desire to create hardware that could accommodate both 2D and 3D visuals and Sony's competing notion of focusing on 3D technology. Publicly, Kalinske defended the Saturn's design: "Our people feel that they need the multiprocessing to be able to bring to the home what we're doing next year in the arcades." To ensure high-quality 3D games would be available early in the Saturn's life, developers from Sega's arcade division were asked to create Saturn games.
Sega released the Saturn in Japan on November 22, 1994, at a price of ¥44,800. Virtua Fighter, a faithful port of the popular arcade game, sold at a nearly one-to-one ratio with the Saturn console at launch and was crucial to the system's early success in Japan. Fueled by the popularity of Virtua Fighter, Sega's initial shipment of 200,000 Saturn units sold out on the first day, and was more popular than the PlayStation in Japan. In March 1995, Sega of America CEO Tom Kalinske announced that the Saturn would be released in the U.S. on "Saturnday" (Saturday) September 2, 1995. However, Sega of Japan mandated an early launch to give the Saturn an advantage over the PlayStation. The events that followed led to fractured relationships between Sega and retailers, multiple price reductions of the Saturn, and financial loss.
The Dreamcast attracted significant interest and drew many pre-orders. Sega announced that Sonic Adventure, the next game starring company mascot Sonic the Hedgehog, would arrive in time for the Dreamcast's launch and promoted the game with a large-scale public demonstration at the Tokyo Kokusai Forum Hall. However, Sega could not achieve its shipping goals for the Dreamcast's Japanese launch due to a shortage of PowerVR chipsets caused by a high failure rate in the manufacturing process. As more than half of its limited stock had been pre-ordered, Sega stopped pre-orders in Japan. On November 27, 1998, the Dreamcast launched in Japan at a price of JP¥29,000, and the entire stock sold out by the end of the day. However, of the four games available at launch, only one—a port of Virtua Fighter 3, the most successful arcade game Sega ever released in Japan—sold well. Irimajiri hoped to sell over 1 million Dreamcast units in Japan by February 1999, but less than 900,000 were sold, undermining Sega's attempts to build up a sufficient installed base to ensure the Dreamcast's survival after the arrival of competition from other manufacturers. Prior to the Western launch, Sega reduced the price of the Dreamcast to JP¥19,900, effectively making the hardware unprofitable but increasing sales.
Poor Japanese sales contributed to Sega's ¥42.88 billion ($404 million) consolidated net loss in the fiscal year ending March 2000, which followed a similar loss of ¥42.881 billion the previous year and marked Sega's third consecutive annual loss. Although Sega's overall sales for the term increased 27.4%, and international Dreamcast sales greatly exceeded the company's expectations, this increase in sales coincided with a decrease in profitability due to the investments required to launch the Dreamcast in Western markets and poor software sales in Japan. Sega's attempts to spur increased Dreamcast sales through lower prices and cash rebates caused escalating financial losses.
Shift to third party development
In 2000, Sega and CSK Corporation chairman Isao Okawa replaced Irimajiri as president of Sega. Irimajiri had been replaced as a result of Sega's financial losses. Okawa had long advocated that Sega abandon the console business. His sentiments were not unique; Sega co-founder David Rosen had "always felt it was a bit of a folly for them to be limiting their potential to Sega hardware", and Stolar had previously suggested that Sega should have sold their company to Microsoft. In September 2000, in a meeting with Sega's Japanese executives and the heads of the company's major Japanese game development studios, Moore and Bellfield recommended that Sega abandon its console business and focus on software—prompting the studio heads to walk out. On November 1, 2000, Sega changed its company name from Sega Enterprises to Sega Corporation.
On January 23, 2001, a story ran in Nihon Keizai Shimbun claiming that Sega would cease production of the Dreamcast and develop software for other platforms. After initial denial, Sega of Japan put out a press release confirming they were considering producing software for the PlayStation 2 and Game Boy Advance as part of their "new management policy". On January 31, 2001, Sega announced the discontinuation of the Dreamcast after March 31 and the restructuring of the company as a "platform-agnostic" third-party developer. Sega also announced a Dreamcast price reduction to $99 to eliminate its unsold inventory, which was estimated at 930,000 units as of April 2001. After a further reduction to $79, the Dreamcast was cleared out of stores at $49.95. The final Dreamcast unit manufactured was autographed by the heads of all nine of Sega's internal game development studios as well as the heads of Visual Concepts and Wave Master and given away with 55 first-party Dreamcast games through a competition organized by GamePro magazine. Okawa, who had previously loaned Sega $500 million in the summer of 1999, died on March 16, 2001; shortly before his death, he forgave Sega's debts to him and returned his $695 million worth of Sega and CSK stock, helping the company survive the third-party transition. He also talked to Microsoft about a sale or merger with their Xbox division, but those talks failed. As part of this restructuring, nearly one-third of Sega's Tokyo workforce was laid off in 2001. By March 31, 2002, Sega had five consecutive fiscal years of net losses.
After Okawa's death, Hideki Sato became president of Sega. Sato, a 30-year veteran of Sega, had previously developed Sega's video game consoles.