Sega, a now creatively bankrupt company, was once a dynamo in the Video Game industry. Back in the day, when you heard the name Sega, you thought of quality entertainment. Nowadays, not so much,especially their localization teams.
Anyway, In this multi-part project, I'm gonna do a dive into the rise and fall of Sega during the Console Wars. Yeah, Sega sucks Now, but I'm just gonna focus on the Console Wars.
For those not in the know, the Console Wars took place in the 90's and it was between Sega of America and Nintendo of America for control of the North American Video Game Market, which Nintendo Ultimately won.
Let's dive in to What Destroyed Sega. But first, I'm gonna lay out the company's origins.
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Chapter 1: Humble Beginnings
It all began with a businessman, a businessman named Irving Bromberg. He had been a major player in coin-op distribution since establishing the Irving Bromberg Company in New York in 1931 His son Martin Bromley joined the business after graduating high school. They saw an opportunity to bring something special to our troops during World War II So In 1940, Bromberg, Bromley, and family friend James Humpert formed Standard Games in Honolulu, Hawaii, to provide coin-operated amusement machines to military bases.
In May 1945, Bromberg, Bromley, and Humpert established a second Hawaiian coin-op distributor called "California Games", and they dissolved Standard Games that August. California Games was eventually terminated the next year, after which the trio established "Service Games" to replace it on September 1, 1946.
At the time, the United States Army ceased operating slot machines and sold its inventory to Bromley. Service Games then restored the machines and sold them. In 1951 the Transportation of Gambling Devices Act outlawed slot machines in US territories, so in 1952, Bromley sent two of his employees, Richard Stewart and Ray LeMaire, to Japan to find a new distributors. Initially operating under a few different names such as "LeMaire and Stewart", the company provided coin-operated slot machines to U.S. bases in Japan and changed its name to "Service Games of Japan" by 1953.
A year later, all five men established "Service Games Panama" to control its various entities. The company expanded over the next 7 years to include distribution in South Korea, the Philippines, and South Vietnam. Service Games Panama was equally owned by all five men, and purchased coin-op machines from Chicago-based Gottlieb and Bally Manufacturing for distribution.
The name "Sega", an abbreviation of "Service Games", was first used in 1954 on the Diamond Star Machine, a slot machine. During 1954, Humpert sold his interest in Service Games back to Bromley and Bromberg at a price of $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. Over the next seven years, Service Games continued to grow.
As Service Games expanded, 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 of 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 and Nihon Kikai Seizō.
Kikai Seizō, doing business as Sega, Inc., focused on manufacturing slot machines, while Goraku Bussan, doing business under Stewart as Utamatic, Inc., served as a distributor and operator of coin-op machines, like jukeboxes. As part of the operations move, the two new companies purchased Service Games of Japan's assets. Bromberg and Bromley sold Service Games Hawaii in 1961 for a price of $1.4 million, while retaining the name. Kikai Seizō and Goraku Bussan later merged in 1964.
David Rosen, an American officer in the United States Air Force stationed in Japan, started Rosen Enterprises Ltd. after the Korean War. According to Rosen, he saw that the Japanese required photos for identification, rice ration cards, and employment. Because of this, he came up with an idea to import automated photo booths from the US to Japan and adapt them for use for these purposes. Rosen's business began in Tokyo in 1954.
By 1957, Rosen recognized that there was disposable income available in the Japanese economy, as well as an increase in leisure time in the Japanese culture. He began importing coin-op games to Japan, particularly focusing on hunting and shooting.
Rosen stated that he had to acquire a license from Japan's Ministry of Industrial Trade and Industry to import games, and that he had to pay a 200% duty on his imported machines, plus duties on the shipping. As a result, importing games cost three times the cost of the machine. Despite this, Rosen says his machines made enough to pay for their cost within two months of operation because of how many plays they were receiving. He also claims that at his company's height, most Japanese cities had at least one of his arcades there, and that he had a virtual monopoly for approximately two years. Later, Rosen had competition in the form of Taito and Nihon Goraku Bussan.
In 1965, Nihon Goraku Bussan acquired Rosen's company to form Sega Enterprises, Ltd., although Rosen has called it a "merger". Rosen was installed as the CEO and managing director of the new company. According to Rosen, "Sega" was the brand name that Nihon Goraku Bussan was using, and that the decision was made to name the company with the most recognized name upon the merger, while the word "Enterprises" came from Rosen Enterprises.
Shortly afterward, Sega stopped its focus on slot machines and stopped leasing to military bases to focus on becoming a publicly traded company of coin-op amusement machines. Products imported included Rock-Ola jukeboxes and pinball machines by Williams, as well as gun games by Midway Manufacturing.
Because Sega imported second-hand machines that frequently required maintenance, They 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 electro-mechanical 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 the United States and Europe 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. Despite this, rampant piracy in the industry would eventually lead to Sega stepping away from exporting its games. One such example occurred when Sega developed Jet Rocket. According to Rosen, after its American release in 1970, it was cloned by three Chicago manufacturers. This negatively affected the game's market performance.
To advance the company, Rosen had a goal to take the company public, and decided this would be easier to accomplish in the United States than in Japan. Rosen was advised that this would be most easily accomplished through Sega being acquired by a larger company. In 1969, Sega was sold to American conglomerate Gulf and Western Industries. Bromley and Stewart sold their shares, 80% of the company, for a total of $10 million, while LeMaire retained his 20%.
As a condition of the sale, Rosen remained as CEO of the company until at least 1972. According to Martin Bromley's daughter Lauran, her father—who was in his fifties at the time—and the other owners saw the sale as an opportunity to retire. Six months later, with the deal done, Bromley joined with Stewart to form a company called Sega S.A. (also known as Segasa and Sega/Sonic) in Spain, which imported coin-op machines to Europe.
In 1970, Gulf and Western placed Rosen at the head of a new company called Gulf and Western Far East Pacific, headquartered in Hong Kong. Sega Enterprises, Ltd. became a subsidiary of this new company, which Gulf and Western chairman Charles Bluhdorn hoped would become a powerful Asian conglomerate (though this hope would never come to fruition). Rosen, however, continued to develop his relationship with Bluhdorn, who took Sega Enterprises Ltd. public in the United States in 1974 by making it a subsidiary of an existing publicly traded corporation owned by Gulf and Western, called the Polly Bergen Company.
Rosen was appointed CEO of Polly Bergen, which was renamed Sega Enterprises, Inc. Sega Enterprises, Ltd. executive vice president Harry Kane took control of day-to-day operations at the Japanese subsidiary. In July 1975, Sega Enterprises, Inc. opened a new North American subsidiary called Sega of America in Redondo Beach, California. Kane took charge of this subsidiary in 1976 and was replaced in Japan by a new executive vice president named Dane Blough.
So, as you can see, despite popular belief, Sega got it's start as an American Company, run by Americans. Sega would be fully Japanese owned later.
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Chapter 2 - Into The Arcades
At the end of 1970, Sega opened a 125-game arcade center in Sapporo. During the opening, Sega announced a partnership with Godzilla creators, Toho Films, for a joint venture of arcades, with a 70-game arcade to open in Nagasaki in January. These "family fun centers" began a business of arcade operation in Japan which Sega continued until January 2022. During 1973, Sega would release Pong-Tron, its first video-based game.
In North America in 1975, Sega purchased a 50 percent stake in Kingdom of Oz, a company that operated arcades in California shopping malls. Sega took full control by March 1976 with all arcades becoming Sega Centers, and announced more centers to open in California in June 1977. Following the model set forth by Chuck E. Cheese, created by Atari founder Nolan Bushnell, Sega opened its first P.J. Pizzazz, a Family Entertainment Center, in West Covina, California in June 1980.
Despite competition from Taito's hit arcade game, Space Invaders in 1978, Sega profited well from the arcade gaming boom of the late 1970s, with revenues reaching $100 million by 1979. During this period, Sega acquired Gremlin Industries, a manufacturer of microprocessor-based arcade games, and operated as Sega/Gremlin after the acquisition. In 1979, Sega also acquired Esco Boueki (Esco Trading), founded and owned by Hayao Nakayama. This brought Nakayama into Sega Enterprises, Ltd., where he was named executive vice president and shared leadership responsibilities with Dane Blough. Blough continued to run finance and administration, while Nakayama took charge of sales, marketing, and R&D.
Rosen later admitted that he mainly purchased Esco Trading for Nakayama's leadership. In 1979, the company released Head On, which introduced the "eat the dots" gameplay Namco later used in Pac-Man. In 1981, Sega licensed and released Frogger, its most successful game until then. In 1982, Sega introduced the first game with isometric graphics, Zaxxon. 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.
Around the end of 1981, Gulf and Western transferred Sega to Paramount Pictures, in an effort to get into the gaming business, and launched its home gaming division.
Despite Sega's successes, Rosen was cautiously optimistic about the future in a December 1981 interview for Cashbox. He stated that he felt the growth of the industry was slowing and that expansion options were becoming more limited. He also spoke of Sega's focus on their Convert-a-Pak program, which allowed for new games to be installed in existing arcade cabinets. This was introduced on Sega's G80 arcade system board. Rosen took further actions in his worries, including pushing the Gulf and Western board to buy out the minority shareholders of Sega, himself included, and advising at a distributor meeting that the industry needed to make major changes.
Around the same time, Sega/Gremlin announced a name change to Sega Electronics, Inc. As Rosen predicted, a downturn in the arcade business starting in 1982 seriously hurt Sega, leading Gulf and Western to sell its North American arcade manufacturing organization and the licensing rights for its arcade games to Bally. The company retained Sega's North American R&D operation, as well as its Japanese subsidiary, Sega Enterprises, Ltd. Sega Centers were sold to the Time-Out arcade chain, and all of the P.J. Pizzazz locations were closed.
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Chapter 3 - Into The Homes
With its arcade business in decline, Sega Enterprises, Ltd. president Hayao Nakayama advocated that the company leverage its hardware expertise to move into the home console market in Japan, which was in its infancy at the time. Nakayama received permission to proceed, leading to the release of Sega's first home video game system, the SG-1000.
The first model 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 as well. 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, later 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. By 1984, the Famicom's success began to outpace the SG-1000, in part because Nintendo boosted its games library by courting third-party developers, whereas Sega was less than eager to collaborate with the same companies they were competing with in arcades. Not to mention All of Nintendo's 1st Party offerings were just Better than Sega's.
And now we know Why there were so few 3rd Party games for this line of Systems.
In November 1983, Rosen announced his intention to step down as president of Sega Enterprises, Inc. on January 1, 1984, though he would remain with the company in a consulting role. His statement to Sega's board of directors indicated a need to pursue other interests and investments. Jeffrey Rochlis was announced as the new president and COO of Sega. Rosen cited Sega's new licensing deal with Bally as part of Sega "entering a new era".
Shortly after the launch of the SG-1000, Gulf and Western began to divorce itself from its non-core businesses after the death of Bluhdorn. At the time, Gulf and Western owned 91 percent of Sega Enterprises, Inc. Nakayama and Rosen arranged a management buyout of the Japanese subsidiary in 1984 with financial backing from CSK Corporation, 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, chairman of CSK, became the chairman of Sega, while Nakayama was installed as CEO of Sega Enterprises, Ltd. Following the buyout, Sega released another console, the SG-1000 II, on July 31, 1984. The SG-1000 II replaced the hardwired joystick with two detachable joypads.
Due to the lack of success of the SG-1000, II 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 version 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 in October 1985 at a price of ¥15,000. Despite being technically more powerful than the Famicom (known now in the west as the Nintendo Entertainment System), the Mark III did not prove to be successful at its launch. Difficulties arose from Nintendo's licensing practices with 3rd party developers at the time, whereby Nintendo required that games for the Famicom and NES not be published on other consoles. To overcome this, Sega developed its own games and obtained the rights to port games from other developers, but they failed to sell. .
By early 1992, Master System production ceased in North America and in 1990 in Japan. The Master System had sold between 1.5 million and 2 million units in the United States, finishing behind both Nintendo and Atari, which controlled 80 percent and 12 percent of the market, respectively. Sales in the United States were handicapped by ineffective marketing by Tonka, who marketed the console on behalf of Sega in the United States.
As late as 1993, the Master System's active installed user base in Europe was 6.25 million units and in Brazil, it was even More popular, where new variations have continued to be released in the South American Country, long after the console was discontinued. In Brazil the Master System was distributed by Sega's partner in the region, Tec Toy. By 2016, Tec Toy had sold a combined 8 million units of the original Master System and various emulation-based successors in Brazil.
During 1984, Sega opened its European division. While Sega wasn't interested in expanding to Europe, the company reconsidered after being contacted by Victor Leslie, a coin-op seller in the United Kingdom. Leslie was placed in charge of a new Sega office in London, to be named Sega Europe Ltd. Sega Europe would be the company's marketing base on the continent.
Sega re-entered the North American arcade market in 1985 with the establishment of another new division at the end of a deal with Bally. With Sega Electronics, Inc. no longer in existence, Rosen and Nakayama hired Gene Lipkin to head the new division, Sega Enterprises USA, based in San Jose, California. Lipkin had previously worked for Atari and Exidy. Lipkin's new sales team head, Tom Petit, had previously worked for Nintendo and Data East.
The new subsidiary started with 22 employees, $500,000 in start-up revenue, and operated out of Lipkin's old employer's facilities until Sega's new facility was ready in August 1985. In May 1986, Lipkin resigned for personal reasons; Petit eventually took control of the division. Sega Enterprises USA held a rivalry with Sega Europe, as the North American division quickly outgrew the European one.
In 1986, Sega of America was established to manage the company's consumer products in North America. Rosen and Nakayama hired Bruce Lowry, Nintendo of America's vice president of sales. Lowry was persuaded to change companies because Sega would allow him to start his new office in San Francisco. He chose the name "Sega of America" for his division because he had worked for Nintendo of America and liked the combination of words.
Initially, Sega of America was tasked with repackaging the Master System for a Western release, although distribution of the console would later be given to Tonka. During this time, much of Sega of America's new infrastructure was temporarily shut down.
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Chapter 4 - The Challenge Is Always There!
In 1985, Sega released Hang-On, a motorcycle racing game programmed by Yu Suzuki under the Studio 128 development group. Offering advanced pseudo-3D "Super Scaler" graphics, the game was highly successful, to the extent that Sega struggled to keep up with resultant demand. This was followed by 1986's similar OutRun, which expanded on the conventions set in place by Hang-On. Its arcade release received positive reviews and became one of the most popular arcade games of the year, also winning the Golden Joystick Award for Game of the Year.
Though both games were made available as stand-up cabinets, a significant part of their success was their deluxe forms, referred to by Sega officially as "Taikan games". Roughly translating to "bodily sensation" or "experience", the namesake referred to their eye-catching motion-based control scheme and hydraulic simulation movement, using rideable motorbike and car models.
Former Sega arcade director Akira Nagai has credited Hang-On and OutRun as the releases that helped to bring arcades out of the 1982 downturn and created new genres of games. In the following years, Sega would release multiple other successful games based on the taikan template, including Space Harrier and After Burner, as well as the first version of its popular UFO Catcher claw crane game. In 1987, Sega sold over 40,000 arcade machines worldwide.
As well as the rebound in arcade game profits caused by its high-quality creative, Sega saw success in operating its own arcades in both Japan and the US during the mid 1980s. In the former country, its first officially branded game centers opened under the "Hi-Tech Land" and "Hi-Tech Sega" chains. The openings came after the creation of the fueiho law and the amusement industry's "3K Cleanup Campaign", which attempted to dispel the "kurai, kowai, and kitanai" (dark, scary and dirty) aspects of the venues.
Similarly, Sega's Time-Out chain of arcades established through the December 1986 acquisition of the Time-Out Family Amusement Inc. company in the US followed on from previous venues opened in the 1970s.
Alongside similar branded chains by competitors like Taito, the venues in both countries followed the trajectory previously set in place to make amusement arcades cleaner and more socially acceptable, installing features such as toilets for both men and women, lighting systems, and smoking areas. Sega's success in arcades kept the company afloat whilst its home consumer endeavours struggled, though the Time-Out chain in the US would later be sold during 1990 as a result of changing conditions in the amusement industry.
And, the Biggest reason why Sega succeeded in the Arcades, was that there was no Strong Competition, as Nintendo had all but abandoned the Arcade Market in 1984. But would later return in 1990 with their Play-Choice 10 Arcade Machine.
And that's it for this part. Stay tuned for Part 2
