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Last week’s post on Sony’s downfall from the height of the video game industry drew multiple mentions of Sega’s similar collapse 30 years ago.
Related: Sony – The Fall of a Titan?
Those who fail to learn from the past are doomed to repeat it. In that vein, let’s take a look at the fall of the Blue Giant.
In the early 1990s, Sega was on top of the video game world. Riding a wave of success under the leadership of Sega of America CEO Tom Kalinske, the Blue Giant seemed unstoppable. Thanks to the Sega Genesis, they’d managed to topple then-untouchable Nintendo, seizing over 50 percent of the market and capturing the hearts of millions of gamers to this day.
Yet, just a few years later, Sega’s success unraveled. The most tragic casualty was the company’s console division; their smash hit–but not quite smash hit enough–Dreamcast would usher the storied comapny out of the video game hardware business.
So how did Sega, once poised to dominate the industry, fall so hard so fast?
To understand Sega’s downfall, you have to look at the series of strategic blunders and internal conflicts that slowly ate away at the company’s dominance, starting with the ill-fated launches of the 32X and the Sega Saturn.
Related: Console Wars
Kalinske, who had already proven himself at Mattel with the turnaround of Barbie and He-Man, joined Sega of America in 1990 and quickly transformed the company into a formidable competitor. Under Kalinske’s leadership, Sega adopted aggressive marketing strategies aimed at older gamers, a demographic Nintendo had shunned. Campaigns like “Sega does what Nintendon’t” and “Welcome to the next level” painted Sega as the edgier, cooler brand, especially with titles like Sonic the Hedgehog, which proved a breakout success.
Kalinske also worked closely with retailers and third-party developers, building strong relationships that helped secure the Genesis’ dominance. By 1992, SOA had surged ahead of Nintendo in North America, and the future seemed bright.
But looks can be deceiving …
Sega’s first major misstep came with the 32X, an add-on for the Genesis designed to extend the system’s life by providing 32-bit graphics. The concept turned out to be flawed; by the time the 32X was released in late 1994, gamers and developers were already eyeing true next-generation consoles, not stopgap solutions. The 32X lacked the third-party support and the must-have titles to justify its existence, and its rushed release only exacerbated the issue.
The rushed advent of the 32X caught retailers, many of whom had supported Sega during its rise, off guard. Sega pushed the peripheral onto shelves, only to find their customers confused. You can’t blame them. With the Sega Saturn already in development, why would anyone invest in a temporary solution? This ill timing diluted Sega’s brand and eroded consumer confidence, a huge mistake that cost them dearly.
But it did get worse.
If the 32X was a tactical error, the Sega Saturn’s launch was an outright disaster. Sega had pinned its hopes on the Saturn to cement its future in the console market, but from the beginning, the project was plagued by internal strife. Sega of Japan and Sega of America were at odds over how to position and market the console. Sega of Japan wanted the Saturn to be released as quickly as possible to get ahead of Sony’s upcoming PlayStation, while Kalinske and Sega of America felt that more time was needed to refine the system and build up a proper game library.
What followed was one of the worst console launches in gaming history. In a surprise move, Sega released the Saturn in North America four months ahead of schedule in May 1995, giving retailers only a few days’ notice. This left key outlets, including Walmart and KB Toys, furious. They refused to carry the Saturn at all, crippling Sega’s retail presence at launch.
Moreover, the system launched with only a handful of games and no Sonic title, further dampening enthusiasm. The PlayStation, released a few months later, was not only more powerful and easier to program for but also better supported by third-party developers. Sega’s once-strong relationships with game studios began to sour, and many jumped ship to Sony.
Yet perhaps the biggest issue Sega faced was the growing rift between Sega of America and Sega of Japan. Kalinske’s success with the Genesis had created friction with Sega’s Japanese leadership, who resented the American branch’s growing autonomy and influence. SOJ increasingly handed down important decisions without input from SOA, contrary to assurances they’d given Kalinske.
For example, it was Sega of Japan that insisted on launching the 32X, even though Kalinske opposed it. The Saturn’s rushed North American launch was another example of SOJ ignoring SOA’s concerns. This disjointed approach led to a string of poor decisions that hindered Sega’s ability to compete against Sony and Nintendo.
That brings us back to all those pissed-off retailers. As Sega’s consoles rotted on shelves, stores were left with excess inventory. According to the boilerplate consignemnt contracts between retailers and suppliers, those retailers were able to return unsold merchandise to Sega for a full refund. In a catastophe reminiscent of foundational TTRPG publisher TSR’s demise, those returns wiped out nearly all the profits Sega had made in the first half of the 90s.
YouTube gaming channel PandaMonium did a deep dive into an internal Sega marketing document that was leaked just a couple of years ago. Titled simply “Sega FY 1997” (there’s that year again), the report paints an even more devastating picture of Sega’s finances than gamers’ worst fears at the time.
Watch here:
But the crowning tragedy was still to come. When the Saturn floundered, retailers adopted a “Twice bitten, scew you!” bias toward Sega’s next console, the Dreamcast.
On paper, the Dreamcast had everything going for it. Technically impressive with state-of-the-art graphics, integrated online connectivity, and a respectable game library that finally filled the lack of Sega’s bread-and-butter sports titles, it was just too little, too late. Despite one of the biggest launches in gaming history, the Dreamcast simply didn’t sell fast enough to lift Sega out of the deep hole they’d dug themselves into. And Sony’s capture of the market with the PlayStation led many gamers to skip the Dreamcast and wait for the launch of the PS2–a final rebuke to Sega’s mistaken belief that striking first is always best.
Sega’s late 90s downfall can’t be traced to any one bad decision. Rather, it took a combination of repeated miscalculations, poor planning, and internal conflict. The 32X confused consumers, the Saturn’s botched launch alienated retailers, and the widening rift between Sega of America and Sega of Japan crippled the company’s ability to compete in an increasingly crowded market.
And although the Dreamcast showed that Sega had learned the right lessons from their mistakes, that new leaf was turned over too late for Sega to recover from the damage they sustained during Cultural Ground Zero.
What could have been the Cinderella story of gaming instead became a cautionary tale in corporate mismanagement. The tragedy of the Blue Giant’s downfall remains a sharp lesson in the importance of market research, open and frank communication, and self-awareness.
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Once read a comment on YouTube which suggested that SOA launched the 32X without even knowing about the Saturn, as it was apparently an internal secret within SOJ. They only ended up learning about the Saturn after it being mentioned in a Japanese game journal, which was right before the launch of the 32X.
But it’s interesting to see how there’s definitely a pattern of Japanese game companies wreaking havoc amongst their Western divisions/subsidiaries through micromanagement, and causing some serious damage in the process. The way Square Enix treated Eidos Montreal for example, which led to the disaster that was Thief 4.
In the grand scheme of things, it really goes to show how much of an aberration the modern game industry actually is. The emergence of all these ‘graphics first, gameplay second’ console generations only came about because of Sega’s corporate mismanagement creating a hole which ended up being filled by Sony and later Microsoft. I think ‘movie-esque’ games would’ve been more of an industry niche rather than the AAA standard if Sega managed to fix its internal issues. None of this has anything to do with the industry ‘growing up’ or ‘maturing’.
Much like your ‘Defusing the Pop Bomb’-post showed, it’s fascinating to see how unrecognizable gaming today could’ve been if only a few things had gone differently…
Speaking of Thief 4, there’s a developer video where the developers talk about how long and hard they fought for it to be in first person rather than third person. Just that deviation from the mud genre was enough for the devs to push back. It is no wonder that everything else about the game is so far away from the old games (ex. no importance put on sound design, level up system, linear levels driven by small hubs connected by cinematic events, mini-maps with markers instead of in-universe maps, etc.) How could they even begin to design those things when even moving to FPS was controversial?
That’s sort of a microcosm of the field of AAA gaming as a whole. While games are always pitched as having more options than ever (because they have better presentation or larger worlds), in reality every game is drawn from the same narrow template with only extremely minor variations.
It’s easy to forget just how foreign certain types of games are from the standard experience. Take someone used to modern AAA games and have them play a bullet hell shmup. Something you can beat in an hour if you are good, but which you very well may never be good enough to fully clear. How can you even process that experience if you’re used to simply being able to grind out your way to a predetermined ending, with the value of the content being in loads of cinematic? I don’t know if it even really makes sense to talk about “video gaming” as one coherent thing, to be honest.
What I wouldn’t give for a 5-hour game with high replay value that you can beat in an afternoon and keep coming back to.
I don’t know if they’re exactly what you’re looking for, but Dome Keeper, Into the Breach, and Against the Storm might be of interest to you, if that’s what you’re interested in.
Thank you for the recommendations.
“That’s sort of a microcosm of the field of AAA gaming as a whole. While games are always pitched as having more options than ever (because they have better presentation or larger worlds), in reality every game is drawn from the same narrow template with only extremely minor variations.”
The main issue I see (as someone with game development experience), is that most of the time, they’re simply throwing game mechanics together without understanding what you need to implement for those mechanics to function properly. Instead of designing the mechanics around the experience/concept they’ve developed, they’re simply throwing mechanics together with the experience essentially designed around it.
I personally think Looking Glass Studios were the absolute best with this. What impresses me most about games like Thief & System Shock 2 is how each aspect of the game hangs together so perfectly, such that I’m immersed right from the moment I hit the main menu. Simply put, these games were developed around a strongly focused concept, which allowed them to flesh out those things they wanted to focus on and avoid issues such as scope creep.
When I was first taught how to develop games, they basically told you that the mechanics of the game came first, followed by everything else. However, such an attitude only makes sense from a developer perspective. It’s not most people’s primary focus at all when they assess a game, and it does explain this idea of many modern games being glorified tech demo’s. If you adopt such a focus, you’ll end with what’s basically the skeleton of the game, without any of the meat & skin on top…
For Thief 1-3 sound design was paramount. They created an engine where both player and enemy sounds would propagate in the same way. This meant both that the player could intuitively understand when he was being too noisy and thus should expect guards to hear, but also that the player could himself use sounds to determine where the guards are. If you watch someone play one of those games a good chunk of the game will be spent sitting in a corner and simply listening until the sounds indicate that the time is right to proceed.
Since Thief 4 was designed as a mud game with some Thief trappings, they couldn’t do this. Sound is hardly ever important in modern games so their engine didn’t give them good tools to do the same things that Thief 1-3 did. They ended up trying to make do by giving you upgrades that would VISUALLY indicate when there were important sounds rather than just, you know, letting you hear them properly.
Of course, this lazy design only applies to AAA games and the indie games that ape them. There are plenty of indie games that are willing to build the game around some weird concept from the ground up.
When I was in maybe second grade, I went to my friend’s house, and played his Genesis. What I remember the most was that it had six buttons on the face of the controller, rather than Nintendo’s four, and I thought, “Maybe Sega is better than Nintendo.”
Great post, at the time I didn’t know about the troubled history of the 32X and Saturn, being just a kid and all that, so I was rather surprised when the Dreamcast came out, it was a big deal and everyone loved it, and then it just fizzled out for little apparent reason. Turns out there was a lot going on behind the scenes.
With the current mess Big Gaming is in, it sure seems like we’re due for a big disruption of the sort that happened when Sony and Microsoft first threw their hats into the arena.
The story goes that when the Dreamcast broke not just video game, but entertainment industry, launch records, execs at SOA were popping the champaign. Then the bean counters came in and said, “You’re moving 300,000 units a month. That’s great. But you’ll have to double that just to get out of the red.”
You read that right. Even if Sega had kept selling 300K consoles every month, they’d still have gone broke in a couple of years.
A serious discussion was had among the SOA brass, who did consider riding the Dreamcast all the way down to go out in a blaze of glory. In the end, more practical heads prevailed, and they left the hardware business.