Short The Death of Sega

Summary Notes


In the Acquired podcast episode "The Death of Sega," hosts Ben Gilbert and David Rosenthal discuss Sega's rise and fall in the gaming industry. They explore Sega's initial success with the Sega Genesis console, which captured over half the U.S. market, and the subsequent missteps leading to its exit from the console business after the Dreamcast. The episode delves into Sega's ill-fated attempts to innovate with add-ons like the Sega CD and the 32X, and the rushed launch of the Sega Saturn, which failed to compete with Sony's PlayStation. The hosts also discuss Sega's arcade business, which was significantly impacted by the shift to home consoles. Ultimately, Sega's story serves as a cautionary tale about the challenges of hardware innovation, market timing, and competition, as well as the importance of strategic decision-making in the tech industry.

Summary Notes

Sega Scream Impression

  • Ben Gilbert and David Rosenthal discuss the iconic Sega scream from their advertisements.
  • The voice actor for the scream was ill on the day of recording, contributing to the unique sound.
  • Despite the voice actor's sickness, the scream was considered perfect for the ad.

"Sega, they talk about it in console wars." "I think he had thrown up earlier in the day, and he was just in such a bad physical and mental state that he could do this insane scream." "It was perfect."

  • The quote describes the circumstances under which the Sega scream was recorded, emphasizing the voice actor's condition and the resulting effectiveness of the scream in advertising.

Introduction to Acquired Podcast Episode

  • Introduction of the Acquired podcast by Ben Gilbert and David Rosenthal.
  • The episode is the first "acquired short," focusing on concise storytelling.
  • Discussion of Sega's rise and fall in the video game console market.

"Welcome to this episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them." "Today we have for you our first acquired short."

  • The quotes set the stage for the episode, explaining the podcast's focus and the format of the particular episode being a shorter story.

Sega's Market Position in the Early 1990s

  • Sega held over half the video game console market in the US with the Sega Genesis.
  • The question arises of how Sega went from market dominance to abandoning the console business after the Dreamcast.

"How exactly did Sega manage to go from having over half the video game console market in the US with the Sega genesis to abandoning the console business entirely after Dreamcast in a few short years?"

  • The quote poses the central question of the episode, looking at Sega's dramatic shift in market position.

The Shift to CD-ROM Technology

  • Compact discs were becoming the standard for various industries, including video games.
  • Sega and other companies explored CD-ROM add-ons for existing consoles.
  • Sega CD was launched with the game "Night Trap," which led to controversy and the creation of the Entertainment Software Ratings Board (ESRB).

"It has become clear that compact discs are the future, not just for the video game industry, but for everything." "So in late 1992, they launch the Sega CD add on for the Genesis in North America."

  • The quotes discuss the industry-wide transition to CD-ROM technology and Sega's response with the Sega CD add-on.

The Problems with Console Add-ons

  • Add-ons limited the potential market to existing console owners, reducing software developer interest.
  • Sega CD failed to maintain strong sales, only selling 3 million units compared to the Genesis's 30 million.
  • The industry began to realize that console add-ons were not a viable path forward.

"Add on technology for consoles is never really a good idea because the business model of the video game console industry, it's a razor and blades model."

  • The quote explains the flawed business model of console add-ons and how it negatively impacted Sega's strategy.

Sega's Continued Missteps with Add-ons

  • Sega followed up the Sega CD with another add-on, the 32X, which was also unsuccessful.
  • Sega then released the Sega Saturn, a native 32-bit system, which further confused the market.
  • Sega of America was reportedly against these decisions, which were pushed by Sega's Japanese management.

"They decide that they are going to follow up their failed console add on with another failed console add on." "This whole thing is just weird."

  • The quotes highlight Sega's continued investment in add-ons despite past failures and the resulting market confusion.

Sega Saturn's Premature Launch and Failure

  • Sega Saturn was prematurely launched at E3 in 1995, surprising the industry and consumers.
  • Lack of preparedness, including no major game releases, led to the Saturn's poor performance.
  • Sega Saturn sold just over 9 million units, a significant decline from the Genesis's success.

"Tom Kalinsky comes out on stage for the Sega keynote and says, actually, I know we told all of you that we were going to launch in September. Well, surprise, we're launching today." "The Sega Saturn is coming out right now."

  • The quotes describe the unexpected and ill-advised early launch of the Sega Saturn, contributing to its commercial failure.

Sega's Internal Struggles and Market Decline

  • Sega of America's success with the Genesis was not replicated in Japan, leading to tensions between the regional divisions.
  • The author of "Console Wars" suggests that Sega's Japanese management was envious of Sega of America's achievements.
  • Poor decision-making from Sega's Japanese management is cited as a key factor in the company's decline.

"They, at Sega of America, fought against all of these decisions, that the Japanese parent company was jealous of Sega of America's success with the Genesis."

  • The quote reflects on the internal conflicts within Sega and how they may have influenced the company's downfall.

Sibling Markets and Corporate Dynamics at Sega

  • The dynamic between Sega of Japan and Sega of America is compared to sibling rivalry, with Japan being the original favored "child" in the corporate family.
  • Sega of Japan eventually reasserts control, leading to frustration and departure of key Sega of America staff.

sort of sibling markets, and the parent's favorite child used to be Japan. And as the parent showed more favoritism toward America, the Japan leadership sort of retaliated and found ways to kick and scream and say, hey, you need to pay more attention to me.

This quote illustrates the competitive dynamic between Sega of Japan and Sega of America as they vied for the parent company's attention and resources.

Sega's Shift and the Dreamcast's Innovations

  • Sega of Japan takes over leadership and decides to discontinue the Saturn console.
  • Sega introduces the Dreamcast, the first online console with built-in Internet connectivity and other innovative features like the VMU.
  • Despite its innovations, Dreamcast struggles against the PlayStation 2 and is discontinued, leading Sega to exit the hardware market and focus on game development and publishing.

They decide after a couple years to give up on the Saturn, they launch another new internally developed console, the Dreamcast. The Dreamcast actually had some real innovations to it. Like, it was the first true online console that shipped with Internet connectivity built in.

This quote highlights the strategic shift by Sega of Japan to introduce a new console with groundbreaking features, although it ultimately did not succeed in the market.

The Downfall and Sale of Sega

  • Sega's decline is marked by the exit of key personnel and the company's transition to solely a game developer and publisher.
  • Sega is sold to Sammy, a Japanese pachinko machine manufacturer, signifying a "sad ending" for the company.

The company really just becomes a shadow of its former self. It limps along. And then finally, after a couple of years, from kind of 2001, 2002 into 2003 of Sega just making games for other platforms, the company gets sold off to another japanese public company company called Sammy, that was a manufacturer of pachinko machines, which is kind of like the japanese equivalent of pinball machines.

The quote describes the final stages of Sega's decline and its acquisition by Sammy, marking the end of its era as a major console manufacturer.

The Untold Story of Sega's History

  • There are more corporate transactions involved with Sega than initially discussed.
  • The podcast hints at a deeper story behind Sega's history, suggesting that the commonly known narrative is not the full picture.

And David, I feel like there's more to this story because I pulled up pitchbook to look, there are a lot more transactions around this company than you've sort of mentioned so far.

This quote from the transcript indicates that there is a more complex history behind Sega's corporate transactions than what is commonly known.

Sega's Arcade Legacy and Paramount Acquisition

  • Sega was originally an arcade company with a significant international presence.
  • The company's success led to its acquisition by Gulf and Western, which also owned Paramount Pictures.
  • Notable executives Michael Eisner and Barry Diller were involved in Sega's management during its time under Gulf and Western.

Sega is part of the Paramount empire. So much so that they take their two most talented paramount executives and they put them on the internal Sega board within Gulf and western. Do you know who those two people are? Michael Eisner and Barry Diller.

The quote reveals the surprising fact that two future media moguls, Michael Eisner and Barry Diller, played roles in Sega's history during its time as part of the Paramount empire.

Sega's Impact on the Arcade Industry

  • Sega's influence on the arcade industry was significant, with the company standardizing the quarter as the cost for an arcade game.
  • The company thrived with hit arcade games and operated its own arcade centers, generating substantial revenue.
  • Sega's arcade business remained strong even during the home console market crash.

Sega's got hundreds of these arcades that they are just printing cash out of because they're making money from selling the cabinets to their own arcades and other arcades. And then the arcades themselves are like, hugely profitable businesses.

This quote emphasizes Sega's dominance and profitability in the arcade business, which was a major part of their operations and success.

Sega's Management Buyout and Public Offering

  • Sega underwent a management buyout led by David Rosen and Hayao Nakayama, facilitated by CSK Holdings.
  • The buyout allowed Sega to become a Japanese company and later go public on the Tokyo Stock Exchange.

This is how Sega becomes an actual japanese company, even though they were started by Americans to serve military bases back in the day.

The quote explains the transition of Sega from an American-founded company to a Japanese enterprise through a management buyout and later its public offering.

Sega's Home Console Business Strategy

  • Sega's entry into the home console market was driven by Nakayama's vision and was initially not fully supported by the board.
  • The success of the home console business, particularly the Genesis, was a surprise to the parent company, which was focused on arcades.

Now you can start to see another perspective on things here. In 1981, Sega publishes the game Frogger that Konami had made. But Sega published it. They made hundreds of millions of dollars on that thing.

This quote points out that Sega's foray into the home console market was not the company's main focus, which was firmly rooted in the lucrative arcade game publishing business.

Arcade Technology and Hardware Dynamics

  • Arcade games were developed with iterative hardware designs, each with proprietary cabinets.
  • Sega's R&D worked on a core base platform, like the System 16, and tweaked hardware for each new game.
  • This iterative approach meant there was no need for a standardized platform for developers, unlike home consoles.

"Every game that came out was its own proprietary hardware cabinet."

This quote highlights the unique nature of arcade game development, where each game had its own specialized hardware, contrasting with the home console approach of a standardized platform.

The Arcade Market and Technological Advancement

  • Arcades were technologically advanced due to the iterative nature of their hardware.
  • Home consoles had longer life cycles, leading to less cutting-edge technology compared to arcades.
  • Sega's arcade unit thrived in the early to mid-90s with innovative 3D games like the Virtua series.

"The arcades are where the most technologically advanced games are during this era, because the hardware cycle is so iterative."

This quote emphasizes the reason behind the technological superiority of arcades over home consoles during that era, which was due to the constant iteration of arcade hardware.

Sega's Impact on the Video Game Industry

  • Sega's Virtua Fighter was a major financial success and demonstrated the viability of 3D polygonal games.
  • The success of Virtua Fighter influenced Sony's focus on 3D graphics for the PlayStation.
  • Sega's arcade dominance was threatened by Sony's entry into the home console market with advanced technology.

"After Sony witnessed the success of Sega's Virtua fighter in 1993 in japanese arcades, the direction of the PlayStation became, quote, 'instantly clear' and graphics became the console's primary focus."

This quote shows how Sega's success with Virtua Fighter directly influenced Sony's strategic direction for the PlayStation, highlighting the game's impact on the industry.

Sony's Strategy and Market Disruption

  • Sony targeted non-Sega arcade manufacturers to bring their games to the PlayStation.
  • The PlayStation was positioned as an "arcade killer," bringing advanced technology into the home market.
  • Sony's strategy and financial strength led to a significant decline in the arcade industry's revenue.

"The PlayStation basically killed Sega's arcade business and their console business."

This quote summarizes the impact of the PlayStation's launch on Sega's business, both in the arcades and in the home console market, leading to a decline in Sega's dominance.

Sega's Response to Sony's Challenge

  • Sega's add-ons and hardware releases were reactionary measures against Sony's growing influence.
  • The Sega Saturn's rushed launch was an attempt to preempt the PlayStation but was ultimately unsuccessful.
  • Sega faced a strategic conflict between maintaining a console business and transitioning to a games-only model.

"We have a whole different perspective now. All this crazy hardware schizophrenic add ons. These are like panicked responses to the coming tsunami of Sony not just worrying about the home market, but worried about their arcade dominance as well."

This quote reflects on Sega's frantic attempts to maintain its position in the face of Sony's aggressive strategy, which ultimately disrupted both the arcade and home console markets.

The Console Wars and E3 1995

  • The E3 conference in 1995 was a pivotal moment in the video game industry, where Sony undercut Sega's Saturn with a lower price for the PlayStation.
  • Sony's strategic pricing and superior technology led to a loss of consumer, retailer, and developer confidence in Sega.
  • The moment Sony announced the PlayStation's price is considered one of the most significant in video game history.

"This exact moment in the afternoon of May 11, 1995, is the death of Sega."

This quote marks the moment at E3 1995 when Sony's pricing announcement for the PlayStation effectively ended Sega's competitive edge in the console market.

Sega's Path to the Present

  • Sega had to navigate a difficult transition from a hardware manufacturer to a games business.
  • The story of Sega's evolution post-1995 is one of adaptation and change in strategy.

"Now, listeners, as you can imagine, there is a tough path that they have to now traverse to get to the 2023 Sega that we're going to talk about and what they look like as a games business today."

This quote sets the stage for discussing Sega's journey from the challenges faced in the mid-90s to their position in the gaming industry today, emphasizing the significant shift in their business model.

Crusoe Energy and AI Workloads

  • Crusoe Energy offers a solution for utilizing excess energy from sources like wind farms to power AI workloads.
  • This approach benefits the environment and reduces costs for customers, as it doesn't rely on the traditional energy grid.
  • Energy is a significant cost in running AI, second only to the cost of chips from Nvidia.
  • Lower energy costs from Crusoe's method are passed on to customers.

"Obviously it's a huge benefit for the environment and for customers on costs, since Crusoe doesn't rely on the energy grid."

This quote highlights the environmental and cost-saving benefits of Crusoe Energy's approach to powering AI workloads using surplus energy from renewable sources.

Data Center Location Strategy

  • Crusoe Energy's data centers are in remote locations where excess energy is available, which is unlike traditional hyperscalers.
  • Hyperscalers like AWS, Google, and Azure need to build data centers near major traffic hubs due to their reliance on cloud services.

"It's super cool that they can put their data centers out there in these remote locations where quote unquote energy happens, as opposed to the other hyperscalers such as AWS and Google and Azure who need to build their data centers close to major traffic hubs where the Internet happens because they are doing everything in their clouds."

The quote explains Crusoe Energy's unique strategy of situating data centers in remote locations to capitalize on locally available excess energy, contrasting with the location needs of larger cloud service providers.

Isaiah Okawa and Sega's Transition

  • Isaiah Okawa was the chairman of CSK and later Sega.
  • In 1999, Okawa loaned Sega $500 million and forgave the debt in 2001, also returning $695 million worth of stock.
  • This financial support allowed Sega to transition from a console manufacturer to a game creator.

"So in 1999, he had loaned Sega $500 million. I believe personally, in 2001, the writing was on the wall. He was coming to the end of his life. He actually forgave Sega's debts to him ahead of his death and returned $695,000,000 worth of Sega and CSK stock, which basically was the bridge that Sega needed to transition a massive shift from the Sega that we've been talking about this whole episode to just being the game creator that they are today."

The quote details the crucial financial support provided by Isaiah Okawa, which enabled Sega to shift its business model away from hardware and towards game development.

Sega's Challenges with Console Development

  • Sega invested heavily in R&D for new consoles like the Saturn and Dreamcast.
  • These consoles were overshadowed by Sony's PlayStation, which significantly impacted Sega's finances.
  • The Dreamcast sold less than the Saturn, and the PlayStation 2 became the best-selling console of all time.

"It takes hundreds of millions, if not billions of dollars in R and D to create these consoles."

This quote emphasizes the substantial R&D investments required for console development, highlighting the financial risks involved for companies like Sega.

Sega's Arcade Business and Pure Akura Machines

  • Sega's arcade business faced challenges but found temporary success with Pure Akura machines.
  • These photo booth-like machines generated significant revenue in the late 90s.
  • However, the success was short-lived due to the fad nature of the product and increased competition.

"The photo booths in the late ninety s make over a billion dollars in revenue that Sega plugs into their quote unquote arcade business division."

The quote explains how Sega's Pure Akura machines briefly revitalized their arcade business division with substantial revenue, despite not being traditional arcade games.

Sega's Evolution into a Game Publisher

  • Sega transitioned from hardware to becoming a games publisher, with Sonic available on various platforms.
  • They also ventured into mobile games, with titles like Super Monkey Ball adapted for the iPhone.

"Well, they become a games publisher. You can get Sonic on Nintendo platforms and on the PlayStation and on Xbox. And that's great."

This quote summarizes Sega's transformation into a game publisher, making their games accessible across multiple gaming platforms.

Sega Sammy Merger and Market Position

  • Sega merged with Pachinko manufacturer Sammy, forming Sega Sammy Holdings.
  • The merged company is valued at $4.3 billion, with an enterprise value of $3.6 billion and annual revenue of $2.7 billion.
  • The market's valuation suggests a perception of Sega Sammy as a "zombie company."

"Today, they're a $4.3 billion market cap company. If you back out their cash, they have an enterprise value of about 3.6 billion."

The quote provides financial details about Sega Sammy's market capitalization and enterprise value, indicating its current standing in the market.

Sega's Intellectual Property and Potential

  • Despite past mistakes, Sega has valuable intellectual property, with successful franchises like Sonic and Akuza.
  • There is speculation about the potential for a takeover or better utilization of Sega's IP.

"They do have some pretty great ip in the company. The Sonic movie. It's no Mario movie, but it did pretty well."

This quote acknowledges the value of Sega's intellectual property, particularly with reference to the commercial success of the Sonic movie.

Sega's Missed Opportunities and Partnerships

  • Sega America's CEO Tom Kalinsky proposed a partnership with SGI for console chips, but Sega of Japan declined.
  • This missed opportunity led to SGI partnering with Nintendo, which influenced the development of the N64.
  • The decision by Sega of Japan was influenced by a desire to maintain control and a reluctance to partner with external entities.

"But the way that that came about is crazy. It was actually Tom Kalinsky, the CEO of Sega America, who wanted to do the partnership with SGI."

The quote recounts a significant missed opportunity for Sega to partner with SGI, which could have altered the company's trajectory in the console market.

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