The Rise and Fall -- and Rise Again -- of Sega

 Editorial credit: Savvapanf Photo / Shutterstock.com

Editorial credit: Savvapanf Photo / Shutterstock.com

Tom Kalinske has a rare propensity for risk. He isn’t simply inclined toward it: He is risk-gifted, risk-adept. Kalinske was the President and CEO of Sega of America during the era of the legendary Genesis, the home console that defined the manufacturer after its launch 30 years ago. Most of his success in that role can be traced back to some audacious plan or reckless strategy — some way of doing business that defied convention. Today Kalinske is widely credited with having made Sega a phenomenon in the United States. But when you learn how he did it — when you discover how unlikely Sega’s success really was — you realize how easily it might not have been.

Kalinske arrived at Sega of America in 1990, recruited by Hayao Nakayama, then the President of Sega of Japan. In the 1980s Kalinske had been a darling of the toy industry: As co-CEO of Mattel he’d repopularized Barbie dolls and the Hot Wheels line of diecast cars, and helped create He-Man and the Masters of the Universe, an enormously lucrative franchise. Nakayama hoped he could bring the same talent for rejuvenation to bear on Sega’s unprosperous American arm. But what Kalinske was implicitly hired to do seemed at the time quite unthinkable. He was there to beat Nintendo.

The video game industry circa 1990 is unrecognizable from the present vantage. Today it’s diversified and vigorously competitive. Back then it was a monopoly — a Nintendo monopoly. Thirty million Nintendo Entertainment Systems had been sold in the United States since the console’s launch five years earlier: there was one in every third American home. The company was selling tens of millions of game cartridges annually. They were poised to unveil a new console, the Super Nintendo, the following year. Already in its infancy the video game industry was worth $5 billion. More than 90% of that market belonged to Nintendo — and it was Kalinske’s job to take some of it away.

So he took the offensive. Sega, Kalinske reasoned, could never replace Nintendo in the popular imagination. But perhaps there was an advantage in emphasizing the distinctions. Kalinske remodeled Sega of America as not only a competitor of Nintendo’s, but its antithesis — its obverse in style and manner. He introduced a company mascot, Sonic the Hedgehog, whose mischievous attitude soon became synonymous with the Sega brand. He positioned the Genesis, Sega’s elegant black console, as fashionably edgy, and used the family-friendly image Nintendo had actively cultivated for years as a cudgel: he’d make Nintendo seem old-fashioned and hopelessly uncool.

Kalinske scouted college campuses across the country for hip-looking young men and gave them consoles and games for free, in order to build word-of-mouth. He commissioned a super-modern ad campaign keyed-up with MTV verve. He aroused controversy by publishing lurid and violent games, such as “Night Trap” and “Mortal Kombat”. The Super Nintendo was a more sophisticated piece of hardware than the Genesis, but Kalinske even devised a way around that: His marketing team coined the largely meaningless phrase “blast processing” and then proceeded to boast that Nintendo didn’t have it. Kalinske so encouraged risk among his staff that every quarter he handed out the Rubber Chicken Award for Best Failure — an honor in praise of a noteworthy risk that was remarkable even though it didn’t pan out.

After two years with Sega of America, Kalinske had quadrupled the company’s sales (to $500 million), and exponentially expanded the local staff (from 50 to more than 1000). More astonishing still were Kalinske’s gains in his war against Nintendo: by the end of the fiscal year 1994, Sega had managed to claim more than 50% of the video game market. Kalinske’s precarious efforts were paying off; Nintendo’s control was eroding more every year. For one brief moment, it seemed Sega was actually winning.

But while Sega had ascended to ubiquity in North America, in Japan it remained curiously obscure. The reason is that Japan didn’t have Tom Kalinske — and they felt they couldn’t take his lead. “They weren’t able to make the decisions I made here over there,” Kalinske explains. To him the “natural conservatism” of Japanese corporate culture is to blame. “It’s not in their DNA to be aggressive in marketing. They had a low regard for marketing to start with. They just weren’t able to do the things we did in the United States.”

Kalinske had long been accustomed to the sort of mild conflict you’d expect of an American subsidiary answering to Japan — mainly confusion arising from cultural differences. (“I remember having to explain once why you couldn’t put swastikas in a game,” he says.) But for several years Sega of America maintained what Kalinske describes as a “wonderful relationship” with Sega of Japan. Only later did the implications of his success dawn on him. “Imagine Nakayama walking into the Monday morning decision meeting beating the hell out of the marketing guys. Why can’t you do better? Why can’t you do what Tom is doing? After a while they started to hate this guy Tom.”

It was always understood that Kalinske would have the autonomy to lead Sega of America the way he felt it ought to be lead. But soon Japan began to reassert its control. Over Kalinske’s objections they rushed to market two costly peripheral units, the 32x and the Sega CD, meant as transitional hardware between the Genesis and a forthcoming console. In both cases sales were low, reviews were dire, and Kalinske was displeased: “We were sabotaged by Japan,” he says.


 Editorial credit: / Shutterstock.com

Editorial credit: / Shutterstock.com


Then came the Saturn — Sega’s next generation of technology and one of the most notorious failures in video game history. “The Saturn, in my opinion, was an inferior machine,” Kalinske says. And even worse than the machine was the strategy: The Saturn was set to launch in the fall of 1995, but Japan insisted that the console be released months early, by surprise, in June. “We had no software available and no hardware available,” Kalinske recalls. “It wouldn’t be so bad to do a surprise launch if you actually had enough product to ship to the retailers and if you had nine or ten great titles. We had three. It was really a mess. It was a big mistake.”

It would also prove the end of Kalinske’s time with the company. He soon left Sega of America. So too did most of his American team. He still speaks about all this with baffled regret: “I think they were definitely jealous of us. Maybe that’s too simple. It was certainly hard for me to understand.”

Peter Moore knew hardly anything about video games when he started work at Sega of America on the first of February, 1999. Like Kalinske, Moore had been a luminary of another field — in his case sporting goods. “I had bought my son a Sega Saturn,” Moore told me. “That was the sum total of my knowledge.” Seven months and one week later Sega of America would be launching its latest console, the Sega Dreamcast, with a special presentation at the MTV Video Music Awards. Peter Moore would be the company’s President and COO.

The Saturn was a failure. But Moore — oddly, it seems to me — speaks of it as if it were some trivial footnote in the company’s history, aeons before his time. “I was blissfully unaware of what the Saturn was,” he says. Did he study it ? Ask around? No. “I didn’t go back and look at the issues. I did know that the brand equity had been tarnished. But I had the benefit of being unscarred by the previous launch. I was in the sporting goods business during that period. I came in bright eyed and bushy tailed.”

What Moore did learn, he says, was that while the brand “had taken a hit,” Sega was still very much “beloved by gamers around the world.” “There was a lot of brand equity that I believed was salvageable, given the right marketing campaign and the right hardware that would deliver the experiences we promised. There was a lot to work with.” His job was resuscitation — post-Saturn damage control. And he felt it could certainly be done. “There was a tremendous opportunity, I thought, to rekindle a great brand.”

Was risk, so central to Tom Kalinske’s business philosophy, important to Moore’s vision for Sega of America too? Yes, he told me. I asked in what way, specifically. “We did a very expensive TV commercial involving 747s and motorbikes,” he said. “That was a risk, because it was a lot of money.” And how did he get on with Japan? “I wouldn’t be as critical as Tom,” he explained diplomatically. “I still work in the industry.”

Heather Hawkins, manager of enthusiast-press relations at Sega of America during this time, remembers the relationship somewhat differently. When I asked her whether Moore had any difficulties with Sega of Japan she simply laughed. “I remember when Japan came up with the name ‘Dreamcast’,” she told me. “There was some trepidation in the US about the name. We sort of softly suggested that there may be some better names. They wrote back and said: ‘We feel as though you have dragged our daughters into the streets and raped them in front of the entire village.’ It wasn’t just that they disliked that we questioned their business choice. It was like a soul-piercing family affront.”

Moore made it work, however difficult it may have been. And by any measure the release of the Sega Dreamcast in America was a success. “I thought we had one of the best launches in video game history,” Moore says, with justifiable immodesty. The Dreamcast earned just shy of $100 million on its first day: “The biggest 24 hours in retail entertainment history,” he points out. (“I think we got that into the Guinness Book of Records.”) “We made it a big deal. We sold every piece of hardware that we could get delivered from the factories — and we continued to do so, through the next twelve months.”

The success was short-lived — inexplicably so, to the casual observer. The Dreamcast launched on September 9th, 1999. By January of 2001 it had been discontinued. What happened? How could such an overwhelming triumph crash and burn so fast? To understand why, you have to understand the very peculiar business model of console sales.

 Editorial credit: MAHATHIR MOHD YASIN / Shutterstock.com

Editorial credit: MAHATHIR MOHD YASIN / Shutterstock.com

A company like Sega sells its game consoles at a loss or for very little profit. Every time a third-party publisher — like, say, Ubisoft or Activision — sells a game designed to be played on a particular console, they pay a small royalty to the manufacturer of the hardware. Publishers tend to favor the console with the largest audience — because they stand to sell more copies of each game — and the hardware manufacturers only make money if publishers are delivering them a lot of games. If you’re not selling enough hardware to seem attractive to publishers, in other words, you’re doomed.

“The numbers were coming through, and as we shared them with the various third parties, it was very clear that they were underwhelmed,” Moore recalls. Sega had already disappointed them with the Saturn; Sony, meanwhile, was imploring them to wait for their forthcoming console, the Playstation 2. “We looked into the future and just couldn’t see any third parties willing to make a real commitment to our box.”

Electronic Arts, one of the largest third-party publishers in the industry, refused to produce games for the Dreamcast, and many have called their absence from the roster a critical loss. (Incidentally, Moore now serves as E.A.’s Chief Operating Officer.) Chase, a publicist who worked on the Dreamcast, likens it to Braveheart: “You know that scene where they’re fighting the English, and all those guys are supposed to rush in and help Mel Gibson but they turn their backs at the last moment, because they were bought off by the English? The English were Sony, and those guys were E.A.”

Sega, in any case, “was quite frankly unable to sustain its losses,” as Moore explains. So in January Sega of Japan decided that the Dreamcast was done. Moore, as the face of the company in America, was invited to make the announcement: Sega would be retreating from the hardware market and would henceforth be a publisher of games. “I had to walk out close to 50% of the company,” Moore remembers. “It was a very, very sad day.” Sega would never make a console again.

Haruki Satomi knows how much Sega has changed over the last two decades. He’s proud, he says, of what the company has done in the past — and, as current President and CEO of Sega Games, he aspires to lead his team to “create a new history of Sega which we can be proud of in the future.” He took charge of the company in early 2015, and he’s spent his first years effecting change: reorganizing, switching up the staff, developing a new corporate ethos. Satomi, in short, wants to make Sega great again.

“In the 90s Sega was seen as a very innovative company,” he explains on a late-night video call from Tokyo. “We made new genres of games, new consoles, new technologies. We made a virtual reality headset. We had a deal with Swatch to make a smartwatch — way back in the 90s. It was too early to introduce those,” he laughs. “But the point is we took on big challenges of creativity back then. My thinking is, why don’t we be the same kind of Sega in the future?”

This is not how Sega is right now. Since exiting the console market in 2001 -- it never tried again after the Dreamcast crashed -- Sega has struggled largely in vain to remain relevant; the company hasn’t enjoyed much success as a third-party software publisher, making most of its money instead in ancillary markets. In 2004 they were purchased by Sammy, a manufacturer of Japanese pachinko gambling machines. Today they produce inexpensive mobile games for the smartphone market, as well as arcade machines and interactive photo booths, still quite popular in Asia.

What traditional video games they have released of late — including the occasional Sonic the Hedgehog title — have been badly received and little discussed. Only one or two have earned anything like acclaim.

“I think they’re in a really bad situation now,” says Blake J. Harris, a writer and filmmaker. Harris wrote a very good book called Console Wars: Sega, Nintendo, and the Battle That Defined a Generation, about Sega’s Genesis era and the brilliance of Tom Kalinske. “They seem to be a company that’s lost. People want to love Sega. The name, the brand, occupies a special place in our hearts. I don’t think anybody is happy with how things have turned out.”

 Editorial credit: JStone / Shutterstock.com

Editorial credit: JStone / Shutterstock.com

I spoke with many other people who shared this sentiment. “Sega is still trying to find their way as a third party,” says George Perez, co-administrator of the fan site Segabits.com. “I think they should focus on releasing quality games as a third party and gamers will come and respond to that.” “I know they’re doing well in the mobile market,” concedes David Frisk, an administrator of the Sonic the Hedgehog fan site Sonicretro.com. “But I think of Sega as a company that’s supposed to take risks — that’s supposed to make games nobody else is releasing. I’d like to see them experiment a little more.”

Tom Kalinske believes “it’s still possible for Sega to do better than they’re doing.” Despite the setbacks, “the brand is still so beloved.” (A fact that “shows how hard it is to destroy a strong brand,” he says.) Peter Moore agrees: “As a spectator I look back fondly to the days I was there. It’s been a rocky road ever since.” Nevertheless, “the company is still there” — and has the money to endure. “It seems they enjoy the benefit of being taken over by a pachinko company.”

Sega conducted a study not long ago comparing affection for Sonic the Hedgehog to Mario among young gamers. Until the age of 12 they rate very similarly. But then it plummets: teenagers, shockingly, think of Sonic as a game for children. That’s the opposite of how things were in Tom Kalinske’s day, I point out to Satomi. He nods sadly. “Yes, that is a quality issue.” What he means is that the Mario games are still good enough for teenagers to carry on liking them. The Sonic games will only do for kids.

I asked Aaron Webber, head of PR for the Sonic the Hedgehog brand, about some of the recent Sonic titles and their less than enthusiastic reviews. I expected a noncommittal answer. But Webber seemed genuinely interested in addressing the concern. “That’s something we are very aware of,” he told me. “Sega is very focused right now on getting back to quality. We had a game scheduled to come out and we decided to completely delay it — we wanted to take the time to ensure that the game is as good as it can be. That’s our first step to demonstrating our commitment to quality.”

Quality is Sega’s new watchword, it seems. Even Satomi is ready to admit that it’s time to improve. “Simply put, the quality was not great,” he told me, when I asked about some of the company’s latest efforts. “But we have to listen to fans and their feedback. We can be a top brand again. If we want to rebuild the Sega brand, the quality has to come first.”

What Satomi has come to understand, he says, is that it makes more sense to bring high-quality Japanese games to North America than to rush out poor product tailored to the Western market. “We have made Western titles which are mediocre and didn’t sell well. But if we’re very proud of the quality of the titles we made for the Japanese market, why don’t we simply localize them carefully and target them to fans in the West who love Japanese games?” In the past, Satomi says, Sega “tried to compete against Western publishers.” Now they’d prefer to be honest about what they are: “We’re a Japanese publisher. We should be a Japanese publisher in the Western world too.”

Sega has lately seemed a company too complacent to be great. And indeed that strikes me as their most considerable obstacle moving forward. The mobile market, where Sonic Dash has been downloaded hundreds of millions of times, may well be lucrative. But as Satomi admits, “the depth of attachment between fans and mobile games is weak” — “maybe because they’re free,” he adds. A 99 cent smartphone game doesn’t inspire affection on the order of Genesis reveries. Nobody will be nostalgic for a pachinko machine.

Satomi really does seem to want to do better. And like any young man who grew up a partisan of Sonic and the Genesis, I want him to do better, too. I ask him a simple question: Where do you see Sega in ten years? He shuffles the papers in front of him a moment while thinking of a reply. Then he begins:

“I asked the people who work for me: ‘If you speak with your friends and tell them you work for Sega, what do they tell you?’ Most people talk about their good memories of Sega. Nostalgia. ‘Oh, I loved to play the Genesis.’ Very few people say they love a game currently on the market. Many people have good memories of Sega. That’s a great asset. But it’s now our responsibility to make a new history — to make new good memories. I would like people to talk about Sega as it is right now. Not the past.”

Since that call, incidentally, Sega has released two new popular titles — both excellent, and both universally well-received. One of them is Sonic Mania, a retro throwback modeled after the Genesis Sonic games. The other is Sega Genesis Classics, a collection of the old console titles repackaged and remastered for the Playstation 4.