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Sega Games Co., Ltd.
Native name
株式会社セガゲームス
Kabushiki gaisha sega gēmusu
Formerly
  • Sega Enterprises, Ltd.
  • Sega Corporation
Subsidiary
IndustryVideo games
PredecessorService Games of Japan
FoundedJune 3, 1960; 58 years ago (June 3, 1960)
Founders
  • Martin Bromley
  • Irving Bromberg
  • Richard Stewart
Headquarters1-1-1 Nishishinagawa, Shinagawa-ku, Tokyo, Japan
Area served
Worldwide
Key people
  • Haruki Satomi
  • (Chairman and CEO)
  • Kenji Matsubara
  • (President and COO)
  • Ian Curran
  • (President, Sega of America)
  • Chris Bergstresser
  • (President, Sega Europe)
Products
RevenueJP¥208 billion (2018)
JP¥14.8 billion (2018)
OwnerSega Sammy Holdings
Number of employees
5,349
(Sega Sammy Holdings "Entertainment Contents Business")
ParentSega Holdings Co., Ltd.
DivisionsSega development studios
Subsidiaries
Websitesega.com
Footnotes / references
"Sega Sammy Holdings Integrated Report 2018" (PDF). Sega Sammy Holdings. 2018. Retrieved October 19, 2018.

Sega Games Co., Ltd. (/ˈsɛɡə/; stylized as SEGA)[a] is a Japanese multinational video game developer and publisher headquartered in Tokyo, Japan. The company, previously known as both Sega Enterprises Ltd. and Sega Corporation, is a subsidiary of Sega Holdings Co., Ltd., which itself is part of Sega Sammy Holdings. Sega's North American division, Sega of America, is headquartered in Irvine, California, while its European division, Sega of Europe, is headquartered in London.

The formation of Sega is traced back to the founding of Nihon Goraku Bussan in 1960 to take over the distribution activities of Service Games of Japan. After acquiring Rosen Enterprises in 1965, the company became known as Sega Enterprises, Ltd. Sega began developing coin-operated games in 1966 with Periscope, an arcade game. In 1969, Sega was sold to Gulf and Western Industries, and continued its successful arcade game business. In response to a downturn in the arcade game business in the early 1980s, Sega began to develop video game consoles—starting with the SG-1000 and Master System—but they struggled against competitors like the Nintendo Entertainment System.

Sega's next console, the Sega Genesis (also known as the Mega Drive outside of North America) was released in 1988. Although it initially struggled, the Genesis became a resounding commercial success after the release of Sonic the Hedgehog in 1991 and outsold its main competitor, the Super Nintendo Entertainment System, throughout the first half of the 1990s. However, Sega's second half of the decade was characterized by commercial failures such as the 32X, Sega Saturn, and Dreamcast. In 2001, Sega stopped manufacturing consoles to become a third-party developer and publisher, and was acquired by Sammy Corporation in 2004.

Sega is known for publishing several multi-million selling game franchises, notably Sonic the Hedgehog, Total War, and Yakuza. In addition to console video games, Sega is the world's most prolific arcade game producer. Sega also has several divisions and subsidiaries that produce other entertainment products, including Sega Toys as well as operation of arcade centers. Today, Sega is a subsidiary of Sega Sammy Holdings, a corporate conglomerate with over 60 individual subsidiaries.

History

Company origins and arcade success (1940–1982)

SEGA Diamond 3 Star

In 1940, American businessmen Martin Bromley, Irving Bromberg, 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 of Japan by 1953.[1][2][3][4] Service Games' first use of the name Sega occurred in 1954 on slot machines, in particular on one model called the Diamond Star Machine.[5]

On May 31, 1960, Service Games of Japan was formally dissolved.[5] A few days later, on June 3, two new companies were established to take over its business activities: Nihon Goraku Bussan and Nihon Kikai Seizo.[6] Kikai Seizo focused on manufacturing Sega machines, while Goraku Bussan served as a distributor and operator of coin-operated machines, particularly jukeboxes. The two companies were merged in 1964.[5]

David Rosen, an American officer in the United States Air Force stationed in Japan, launched a two-minute photo booth business in Tokyo in 1954.[1] This company eventually became Rosen Enterprises, and in 1957, began importing coin-operated games to Japan. In 1965, Nihon Goraku Bussan acquired Rosen's company to form Sega Enterprises, Ltd. 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.[7] Products imported included Rock-Ola jukeboxes and pinball games by Williams, as well as pinball and gun games by Midway Games.[8]

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.[8] 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.[9]

After dealing with financial struggles and rampant piracy, in 1969, Sega was sold to American conglomerate Gulf and Western Industries, although he remained as CEO following the sale. Rosen continued to develop his relationship with Gulf and Western chairman Charles Bluhdorn, and in 1974, Gulf and Western made Sega Enterprises, Ltd. a subsidiary of an American company renamed Sega Enterprises, Inc. During 1973, Sega would release Pong-Tron, its first video-based game.[10]

Despite late competition from Taito's hit arcade game Space Invaders in 1978,[8] Sega prospered heavily from the arcade gaming boom of the late 1970s, with revenues climbing to over US$100 million by 1979. During this period, Sega acquired Gremlin Industries, a manufacturer of microprocessor-based arcade games.[11] 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.[12] 1979 saw the release of Head On, which would introduce the "eat the dots" gameplay Namco would later use in Pac-Man.[13] During 1981, Sega licensed and released Frogger, its most successful title up until then.[14] In 1982, Sega introduced the first game with isometric graphics, Zaxxon.[15]

Entry into the home console market (1982–1989)

Sega's first video game console, the SG-1000

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 Manufacturing.[16][17] The company retained Sega's North American R&D operation, as well as its Japanese subsidiary, Sega Enterprises, Ltd. With its arcade business in decline, Gulf and Western executives turned to Sega Enterprises, Ltd.'s president, Hayao Nakayama,[18] a Japanese businessman who owned Esco Boueki (Esco Trading) which had been acquired by Rosen in 1979,[19] 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 at the time.[18] Nakayama received permission to proceed, leading to the release of Sega's first home video game system, the SG-1000.[20] Though Sega only released the SG-1000 in Japan, rebranded versions were released in several other markets worldwide.[20][21][22][23] The SG-1000's launch did not prove to be successful.[24] Due in part to the SG-1000's steadier stream of releases, and in part to a recall on Famicom units by primary competitor Nintendo, the SG-1000 chalked up 160,000 units in sales in 1983, far exceeding Sega's projection of 50,000 units.[21] 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.[21]

Shortly after the launch of the SG-1000, Gulf and Western began to divest itself of its non-core businesses after the death of company founder Charles Bluhdorn,[25] so Nakayama and Rosen arranged a management buyout of the Japanese subsidiary in 1984 with financial backing from CSK Corporation, a prominent Japanese software company.[26] 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,[19] while Nakayama was installed as CEO of Sega Enterprises, Ltd.[26]

The Master System, released in North America in 1986 and Europe in 1987

As a result of the lack of success of the SG-1000, Sega began working on the Mark III in Japan in 1985.[24] Engineered by the same internal Sega team that had created the SG-1000,[27] the Mark III was a redesigned iteration of the previous console.[28] For the console's North America release, Sega restyled and rebranded the Mark III under the name "Master System".[29] The futuristic final design for the Master System was intended to appeal to Western tastes.[30] The Sega Mark III was released in Japan in October 1985 at a price of ¥15,000.[31] 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.[24] By early 1992, Master System production ceased in North America. By the time of its discontinuation, Master System had sold between 1.5 million and 2 million units in the United States,[32][33] finishing behind both Nintendo and Atari, which controlled 80 percent and 12 percent of the market, respectively.[34] Sales in the United States were handicapped by ineffective marketing by Tonka, who marketed the console on behalf of Sega in the United States.[35] Contrary to its performance in Japan and North America, the Master System was eventually a success in Europe, where it outsold the NES by a considerable margin.[36][37] As late as 1993, the Master System's active installed user base in Europe was 6.25 million units.[36] 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 Sega's partner in the region, Tectoy.[38] By 2016, the Master System had sold 8 million units in Brazil.[39] Because Tectoy continued to produce the Master System years after its cancellation, the console is considered the longest-lived in the history of video game consoles.[40]

Sega Genesis/Mega Drive and mainstream success (1989–1994)

Sega released the Master System's successor, the Mega Drive, in Japan on October 29, 1988, though the launch was overshadowed by Nintendo's release of Super Mario Bros. 3 a week 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.[41] The Mega Drive was unable to overtake the venerable Famicom[42] and remained a distant third in Japan behind Nintendo's Super Famicom and NEC's PC Engine throughout the 16-bit era.[43] Sega announced a North American release date for the system on January 9, 1989.[44] At the time, Sega did not possess a North American sales and marketing organization, but ultimately decided to launch the console through its own Sega of America subsidiary, which launched later that year.[45]

For the North American market, where 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,[45][46] summarized by slogans including "Genesis does what Nintendon't".[41] 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.[1][47] Nonetheless, it had a hard time overcoming Nintendo's ubiquitous presence in consumers' homes.[48] Tasked by Nakayama to sell one million units within the first year, Katz and Sega of America managed to sell only 500,000 units.[41]

Sonic the Hedgehog has been Sega's mascot since the character's introduction in 1991

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."[49] This character won the contest and was renamed Sonic the Hedgehog, spawning one of the best-selling video game franchises in history.[49][50] 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.[51] 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.[52][53][54]

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,[48] 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."[41] Magazines praised Sonic as one of the greatest games yet made, and Sega's console finally became successful.[48] 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.[55] Sega was able to outsell Nintendo four Christmas seasons in a row[56] 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.[57]

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 Master System, and featured more powerful systems than the Game Boy, including a full-color screen, in contrast to the monochromatic screen of its rival.[58] However, 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.[59] Sega launched the Mega-CD in Japan on December 1, 1991, initially retailing at JP¥49,800.[60] The CD add-on was launched in North America on October 15, 1992, as the Sega CD, with a retail price of US$299;[61] it was released in Europe as the Mega-CD in 1993.[60] 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.[61][62] The Mega-CD sold only 100,000 units during its first year in Japan, falling well below expectations.[60] Sega also experienced success with arcade games. In 1992 and 1993, the new Sega Model 1 arcade system board showcased Sega AM2's Virtua Racing and Virtua Fighter (the first 3D fighting game), which played a crucial role in popularizing 3D polygonal graphics.[63][64][65]

Sega Saturn, 32X, and sales difficulties (1994–1999)

In January 1994, Sega began to develop an add-on for the Genesis, the 32X, which would serve as a less expensive entry into the 32-bit era. The decision to create the add-on was made by Nakayama and widely supported by Sega of America employees.[66] The 32X would not be compatible with the Saturn, but Sega executive Richard Brudvik-Lindner pointed out that the 32X would play Genesis games, and had the same system architecture as the Saturn.[67] Sega released the 32X on November 21, 1994 in North America, December 3, 1994 in Japan, and January 1995 in PAL territories, and was sold at less than half of the Saturn's launch price.[68][69] After the holiday season, however, interest in the 32X rapidly declined.[66][70]

The Sega Saturn was not as successful as its predecessor, the Genesis

Sega released the Sega Saturn in Japan on November 22, 1994, at a price of ¥44,800.[71] 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.[72][73][74] Fueled by the popularity of Virtua Fighter, Sega's initial shipment of 200,000 Saturn units sold out on the first day,[1][74][75] and was more popular than the PlayStation in Japan.[74][76] 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.[77][78] However, Sega of Japan mandated an early launch to give the Saturn an advantage over the PlayStation.[79] At the first Electronic Entertainment Expo (E3) in Los Angeles on May 11, 1995, Kalinske gave a keynote presentation in which he revealed the release price of US$399 (including a copy of Virtua Fighter[80]), and described the features of the console. Kalinske also revealed that, due to "high consumer demand",[81] Sega had already shipped 30,000 Saturns to Toys "R" Us, Babbage's, Electronics Boutique, and Software Etc. for immediate release.[77] The Saturn's release in Europe also came before the previously announced North American date, on July 8, 1995, at a price of 399.99.[82] Within two days of its September 9, 1995 launch in North America, the PlayStation sold more units than the Saturn had in the five months following its surprise launch, with almost all of the initial shipment of 100,000 units being sold in advance, and the rest selling out across the U.S.[83][84] Within its first year, the PlayStation secured over 20% of the entire U.S. video game market.[85] In spite of the launch of the PlayStation and the Saturn, sales of 16-bit hardware/software continued to account for 64% of the video game market in 1995.[86][87] Sega underestimated the continued popularity of the Genesis, and did not have the inventory to meet demand for the product.[88][86] Sega was able to capture 43% of the dollar share of the U.S. video game market and sell more than 2 million Genesis units in 1995, but Kalinske estimated that "we could have sold another 300,000 Genesis systems in the November/December timeframe."[88]

Due to long-standing disagreements with Sega of Japan,[1][89] Kalinske lost most of his interest in his work as CEO of Sega of America.[90] On July 16, 1996, Sega announced that Shoichiro Irimajiri had been appointed chairman and CEO of Sega of America, while Kalinske would be leaving Sega after September 30 of that year.[91][92] A former Honda executive,[93][94] Irimajiri had been actively involved with Sega of America since joining Sega in 1993.[91][95] Sega also announced that David Rosen and Nakayama had resigned from their positions as chairman and co-chairman of Sega of America, though both men remained with the company.[91][96] Bernie Stolar, a former executive at Sony Computer Entertainment of America,[97][98] was named Sega of America's executive vice president in charge of product development and third-party relations.[91][92] Stolar was not supportive of the Saturn due to his belief that the hardware was poorly designed, and publicly announced at E3 1997 that "The Saturn is not our future."[1] While Stolar had "no interest in lying to people" about the Saturn's prospects, he continued to emphasize quality games for the system,[1] and subsequently reflected that "we tried to wind it down as cleanly as we could for the consumer."[98] At Sony, Stolar opposed the localization of certain Japanese PlayStation games that he felt would not represent the system well in North America, and advocated a similar policy for the Saturn during his time at Sega, although he later sought to distance himself from this perception.[1][99][100] These changes were accompanied by a softer image that Sega was beginning to portray in its advertising, including removing the "Sega!" scream and holding press events for the education industry.[101] As a result of the company's deteriorating financial situation, Nakayama resigned as president of Sega in January 1998 in favor of Irimajiri.[93] Stolar would subsequently accede to become CEO and president of Sega of America.[98][102]

The Saturn failed to take the lead in the market as its predecessor had. After the launch of the Nintendo 64 in 1996, sales of the Saturn and its games were sharply reduced,[98] while the PlayStation outsold the Saturn by three-to-one in the U.S. in 1997.[85] Following five years of generally declining profits,[103] in the fiscal year ending March 31, 1998 Sega suffered its first parent and consolidated financial losses since its 1988 listing on the Tokyo Stock Exchange.[104] Shortly before announcing its financial losses, Sega announced that it was discontinuing the Saturn in North America to prepare for the launch of its successor.[93][98] The Saturn would last longer in Japan and Europe.[94] The decision to abandon the Saturn effectively left the Western market without Sega games for over one year.[105] Sega suffered an additional ¥42.881 billion consolidated net loss in the fiscal year ending March 1999, and announced plans to eliminate 1,000 jobs, nearly a quarter of its workforce.[106][107] With lifetime sales of 9.26 million units,[108] the Saturn is considered a commercial failure,[109] although its install base in Japan surpassed the Nintendo 64's 5.54 million.[110]

Dreamcast and continuing struggles (1999-2001)

Sega's Dreamcast was the company's last video game console

Despite taking massive losses on the Saturn, including a 75 percent drop in half-year profits just before the Japanese launch of the Dreamcast, Sega felt confident about its new system. The Dreamcast attracted significant interest and drew many pre-orders.[111] 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.[112][113][114] 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.[111][115] 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.[116] Sega estimated that an additional 200,000-300,000 Dreamcast units could have been sold with sufficient supply.[116] 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.[117] Prior to the Western launch, Sega reduced the price of the Dreamcast to JP¥19,900, effectively making the hardware unprofitable but increasing sales.[111]

On August 11, Sega of America confirmed[118] that Stolar had been fired, leaving Moore to direct the launch.[119][120][121] The Dreamcast launched in North America on September 9, 1999 at a price of $199—which Sega's marketing dubbed "9/9/99 for $199".[105][117][122] Eighteen launch games were available for the Dreamcast in the U.S.[122][123][124] Sega set a new sales record by selling more than 225,132 Dreamcast units in 24 hours, earning the company $98.4 million in what Moore called "the biggest 24 hours in entertainment retail history".[125] Within two weeks, U.S. Dreamcast sales exceeded 500,000.[125] By Christmas, Sega held 31 percent of the North American video game marketshare.[126] On November 4, Sega announced it had sold over one million Dreamcast units.[127] Nevertheless, the launch was marred by a glitch at one of Sega's manufacturing plants, which produced defective GD-ROMs.[128] Sega released the Dreamcast in Europe on October 14, 1999,[127] at a price of GB₤200.[111] While Sega sold 500,000 units in Europe by Christmas 1999,[111] sales did not continue at this pace, and by October 2000, Sega had sold only about 1 million units in Europe.[129]

Though the Dreamcast launch had been successful, Sony still held 60 percent of the overall video game market share in North America with the PlayStation at the end of 1999.[127] On March 2, 1999, in what one report called a "highly publicized, vaporware-like announcement"[130] Sony revealed the first details of its "next generation PlayStation", which Ken Kutaragi claimed would allow video games to convey unprecedented emotions.[131][132] The same year, Nintendo announced that its next generation console would meet or exceed anything on the market, and Microsoft began development of its own console.[133][134][135] Sega's initial momentum proved fleeting as U.S. Dreamcast sales—which exceeded 1.5 million by the end of 1999[136]—began to decline as early as January 2000.[137] 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.[138][139] Although Sega's overall sales for the term increased 27.4%, and Dreamcast sales in North America and Europe 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.[138] At the same time, increasingly poor market conditions reduced the profitability of Sega's Japanese arcade business, prompting the company to close 246 locations.[138][140]

Moore stated that the Dreamcast would need to sell 5 million units in the U.S. by the end of 2000 in order to remain a viable platform, but Sega ultimately fell short of this goal with some 3 million units sold.[126][141] Moreover, Sega's attempts to spur increased Dreamcast sales through lower prices and cash rebates caused escalating financial losses.[142] In March 2001, Sega posted a consolidated net loss of ¥51.7 billion ($417.5 million).[143] While the PS2's October 26 U.S. launch was marred by shortages, this did not benefit the Dreamcast as much as expected, as many disappointed consumers continued to wait for a PS2—while the PSone, a remodeled version of the original PlayStation, was the best-selling console in the U.S. at the start of the 2000 holiday season.[126][144][145] Eventually, Sony and Nintendo held 50 and 35 percent of the US video game market, respectively, while Sega held only 15 percent.[111]

Shift to third-party software development (2001–2003)

Sega's financial trouble in the 1998–2002 period[146][147][148][149]

In late 1999, Sega Enterprises chairman Isao Okawa spoke at an Okawa Foundation meeting, saying that Sega's focus in the future would shift from hardware to software, but adding that they were still fully behind the Dreamcast. On November 1, 2000, Sega changed its company name from Sega Enterprises to Sega Corporation.[150]

On May 22, 2000, Okawa replaced Irimajiri as president of Sega.[151] Okawa had long advocated that Sega abandon the console business.[152] 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.[1][153] 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.[125]

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.[154] 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".[155] 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.[156][157] The decision was Moore's. 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.[158][159] After a further reduction to $79, the Dreamcast was cleared out of stores at $49.95.[160][161] 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.[162] 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.[163][164][165] He also talked to Microsoft about a sale or merger with their Xbox division, but those talks failed.[166] As part of this restructuring, nearly one-third of Sega's Tokyo workforce was laid off in 2001.[167] By March 31, 2002, Sega had five consecutive fiscal years of net losses.[168]

Sammy takeover and business expansion (2003–2015)

Sega Sammy Holdings (current logo pictured) was founded in 2004 with pachinko and pachislot manufacturer Sammy Corporation's purchase of Sega

In August 2003, Sammy, one of the biggest pachinko and pachislot manufacturing companies, bought 22.4% of Sega's shares from CSK.[169] In the same year, Sammy primary owner Hajime Satomi stated that Sega's activity will focus on their profitable arcade business as opposed to their loss-incurring home software development sector.[170] During mid-2004, Sammy bought a controlling share in Sega Corporation at a cost of $1.1 billion, creating the new company Sega Sammy Holdings, an entertainment conglomerate. Since then, Sega and Sammy became subsidiaries of the aforementioned holding company, with both companies operating independently, while the executive departments merged. According to the first Sega Sammy Annual Report, the merger of the two companies happened due to the companies facing difficulties. Satomi stated that Sega had been operating at a loss for nearly 10 years,[171] while Sammy feared stagnation and overreliance of its highly profitable pachislot and pachinko machine business, and wanted to diversify its business in new fields.[172] Sega Sammy Holdings was structured into four parts, three of which were Sega: Consumer Business (video games), Amusement Machine Business (arcade games), Amusement Center Business (Sega's theme parks and arcades) and Pachislot and Pachinko Business (Sammy's pachinko and pachislot business).[173]

In the console and handheld business, Sega found success in Japan with the Yakuza and Hatsune Miku: Project DIVA series of games, amongst others primarily aimed at the Japanese market. In Japan, Sega distributes games from smaller Japanese game developers and localizations of Western games.[174][175] In 2013, Index Corporation was purchased by Sega Sammy after going bankrupt.[176] After the buyout, Sega implemented a corporate spin-off with Index, and re-branded the video game assets of the company as Atlus, a wholly owned subsidiary of Sega.[177] For amusement arcades, Sega's most successful games continued to be based on network and card systems. Games of this type include Sangokushi Taisen and Border Break. Arcade machine sales incurred higher profits than their console, portable, and PC games on a year-to-year basis until 2010s.[178] In 2004, the GameWorks chain of arcades became owned by Sega, until the chain was sold off in 2011. In 2009, Sega Republic, an indoor theme park in Dubai, opened to the public. In 2010, Sega began providing the 3D imaging for Hatsune Miku's holographic concerts.[179]

Due to the decline of packaged game sales both domestically and outside Japan in the 2010s,[180] Sega began layoffs and reduction of their Western businesses, such as Sega shutting down five offices based in Europe and Australia on July 1, 2012.[181] This was done in order to focus on the digital game market, such as PC and mobile devices.[182][183] The amount of SKU gradually shrunk from 84 in 2005 to 32 in 2014. Because of the shrinking arcade business in Japan,[184] development personnel would also be relocated to the digital game area.[185] Sega gradually reduced its arcade centers from 450 facilities in 2005,[186] to around 200 in 2015.[187] In the mobile market, Sega released its first app on the iTunes Store with a version of Super Monkey Ball in 2008. Since then, the strategies for Asian and Western markets have become independent. The Western line-up consisted of emulations of games and pay-to-play apps, which were eventually overshadowed by more social and free-to-play games, eventually leading to 19 of the older mobile games being pulled due to quality concerns in May 2015.[188][189] Beginning in 2012, Sega also began acquiring studios for mobile development, with studios such as Hardlight, Three Rings Design, and Demiurge Studios becoming fully owned subsidiaries.[190][191][192]

In the 2010s, Sega established operational firms for each of their businesses, in order to streamline operations. In 2012, Sega established Sega Networks for its mobile games; and although separate at first, it merged with Sega Corporation in 2015. Sega Games was structured as a "Consumer Online Company" , while Sega Networks focused on developing games for mobile devices.[193] In 2012, Sega Entertainment was established for Sega's amusement facility business, and in 2015, Sega Interactive was established for the arcade game business.[194] In January 2015, Sega of America announced their relocation from San Francisco to Atlus USA's headquarters in Irvine, California, which was completed later that year.[195]

Over the course of the existence of Sega Sammy Holdings to 2015, Sega's operating income generally saw improvements compared to Sega's past financial difficulties, but was not profitable every year of operation.[196]

Sega operating income 2005-2015, Japanese yen in millions
Business year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Amusement Machine Sales[196] 7,423 12,176 11,682 7,152 6,890 7,094 7,317 7,415 1,902 -1,264 -2,356
Amusement Center Operations[196] 5,472 9,244 132 -9,807 -7,520 -1,338 342 355 1,194 60 -946
Consumer Business[196] -8,809 9,244 1,748 -5,989 -941 6,332 1,969 -15,182 -732 2,089 4033

Sega Group restructuring (2015–present)

Club Sega game center in Akihabara, Tokyo

In April 2015, Sega Corporation was reorganized into Sega Group, one of three groups of Sega Sammy Holdings. Sega Holdings Co., Ltd. was established, with four business sectors under its organization. Haruki Satomi, son of Hajime Satomi, took office as president and CEO of the company in April 2015.[197][198]

Sega announced at the Tokyo Game Show in September 2016 that they acquired the intellectual property and development rights to all the games developed and published by Technosoft from Kazue Matsuoka.[199] Factors that influenced the acquisition included the former Technosoft president stating that they did not want the Technosoft brand to desist, and so handing over the intellectual properties to Sega was the only other option. Sega and Technosoft also had an established collaboration during the Genesis/Mega Drive era and so this pre-established relationship was also a factor when acquiring the brand rights to Technosoft games.[200]

In April 2017, Sega Sammy Holdings announced a relocation of head office functions of the Sega Sammy Group and its major domestic subsidiaries located in the Tokyo metropolitan area to Shinagawa-ku by January 2018. Their stated reasoning was to promote cooperation among companies and creation of more active interaction of personnel, while pursuing efficient group management by consolidating scattered head office functions of the group, including Sega Sammy Holdings, Sammy Corporation, Sega Holdings, Sega Games, Atlus, Sammy Network, and Dartslive.[201] In October 2017, Sega of America announced its own online store, known as the Sega Shop.[202] Ian Curran, a former executive at THQ and Acclaim Entertainment, replaced John Cheng as president and COO of Sega of America in August 2018.[203]

Corporate structure

Sega's main headquarters is located in Shinagawa-ku, Tokyo, Japan, and the group operating from its headquarters is referred to as Sega of Japan. Additionally, Sega has offices in Irvine, California as Sega of America, and in London as Sega of Europe.[204] In 2007, Sega announced the establishment of an office in Australia, replacing former distributors Ozisoft and THQ in the region.[205] In other regions, Sega has contracted distributors for its games and consoles, such as Tectoy in Brazil.[24]

Relations between the different regional offices of Sega have not always been smooth.[206] In the 1990s, some of this conflict may have been caused by Sega president Nakayama and his admiration for Sega of America; according to Kalinske, "There were some guys in the executive suites who really didn't like that Nakayama in particular appeared to favor the US executives. A lot of the Japanese executives were maybe a little jealous, and I think some of that played into the decisions that were made."[1] By contrast, author Steven L. Kent wrote that Nakayama bullied American executives and that Nakayama believed the Japanese executives made the best decisions. He also stated that Kalinske, Stolar, and Moore dreaded meeting with Sega of Japan executives during their times as CEO of Sega of America.[207]

Subsidiaries of Sega Holdings Co., Ltd.

Since the establishment of the Sega Group structure in 2015, Sega Games Co., Ltd., is responsible for the home video game market and consumer development.[208] Sega Games also includes Sega Networks, which handles game development for smartphones.[197] Sega currently develops and publishes games for major video game consoles, and has not expressed interest in re-entering the console market. According to former Sega of Europe CEO Mike Brogan, "There is no future in selling hardware. In any market, through competition, the hardware eventually becomes a commodity. The future is in software. Sega's fault was to think that its core business was selling consoles, but consoles tend to be a one-time buy for most consumers, until the next version comes along. Software is a repeat purchase, so there's far more profit in it. If a company has to sell hardware then it should only be to leverage software, even if that means taking a hit on the hardware. I think some of the senior people in Sega never really understood that."[209]

Sega Interactive Co., Ltd. is the current company responsible for Sega's arcade game business.[208] Since beginning production of arcade games, Sega remains the world's most prolific arcade producer, with over 500 games in over 70 franchises on more than 20 different arcade system boards since 1981.[210] Sega Toys Co., Ltd. serves as a producer of toys. Sega Toys have created toys for children's franchises such as Oshare Majo: Love and Berry, Mushiking: King of the Beetles, Lilpri, Bakugan, Jewelpet, Rilu Rilu Fairilu, Dinosaur King and Hero Bank. Products by Sega Toys released in the West include the Homestar and the iDog. Sega Toys also inherited the Sega Pico handheld system and produced software for the console.[211] Sega has operations of bowling alleys and arcades through its Sega Entertainment Co., Ltd. subsidiary. The company's DartsLive subsidiary is involved with the manufacture of electronic darts games, while Sega Logistics Service is focused on the distribution and repair of arcade games.[208] On December 22, 2010, Sega Sammy Holdings acquired the remaining outstanding shares of TMS Entertainment, thus making TMS Entertainment a wholly owned subsidiary of Sega Sammy Holdings.[212] In April 2017, Marza Animation Planet, Sega's re-branded CG production division was restructured into TMS Entertainment.[213] In 2003, Sega had plans of broadening its franchises to Hollywood co-operating with John Woo,[214] but plans fell through.[215] In 2015, Sega and the Japanese advertising agency Hakuhodo, formed a joint venture called Stories LLC with the purpose of creating branded entertainment for film and TV. Stories LLC has exclusive licensing rights to adapt Sega properties into film and television.[216][217] Properties in production reportedly include Shinobi, Golden Axe, Virtua Fighter, The House of the Dead, and Crazy Taxi.[218][219]

Research and development

As a games publisher, Sega has produced a high number of games through its research and development teams. The Sonic the Hedgehog franchise, maintained through Sega's Sonic Team division, has become one of the best-selling franchises in the history of video games.[220] Some historical titles produced by Sega, such as those from Sega Technical Institute from 1991 to 1996, and titles produced by Sega's subsidiary companies in the Dreamcast era, have been considered notable for their creativity.[105] Sega has also acquired third-party studios that are now owned by the company, including Amplitude Studios,[221] Atlus,[177] Creative Assembly,[222] Demiurge Studios,[190] Hardlight,[192] Relic Entertainment,[223] and Sports Interactive.[224]

Sega's software research and development teams originated with one development division operating under Sega's head of R&D, Hisashi Suzuki. As the market increased for home video game consoles, Sega expanded with three Consumer Development (CS) divisions, while after October of 1983, arcade development expanded to three teams: Sega DD#1, 2, and 3. Sometime after the release of Power Drift, the company restructured its teams again as the Sega Amusement Machine Research and Development Teams, or AM teams. Each of the arcade divisions was segregated from one another, and a rivalry existed between the arcade and consumer development divisions.[225] In what has been called "a brief moment of remarkable creativity",[105] in 2000, Sega restructured its arcade and console development teams into nine semi-autonomous studios headed by the company's top designers.[1][226][227] Studios included United Game Artists (UGA), Hitmaker, Smilebit, Overworks, Sega AM2, and Sonic Team.[105] Sega's design houses were encouraged to experiment and benefited from a relatively lax approval process.[228] Early in 2003, Sega president Hideki Sato and COO Tetsu Kamaya announced they were stepping down from their roles, with Sato being replaced by Hisao Oguchi, the head of Hitmaker. As part of Oguchi's plan, he announced his intention to consolidate Sega's studios into "four or five core operations."[229] Prior to the acquisition by Sammy, Sega began the process of re-integrating its subsidiaries into the main company.[230] Sega still operates first-party studios as departments of its research and development division. Sonic Team exists as Sega's CS2 research and development department,[231] while Sega's CS3 department has developed titles such as Phantasy Star Online 2,[232] and the AM2 department has more recently worked on projects such as smartphone game Soul Reverse Zero.[233] Toshihiro Nagoshi, formerly the head of Amusement Vision, continues to be involved with research and development, with more recent work on the Yakuza series while he serves as Sega's chief creative officer.[234]

Legacy

Sega's Genesis console (European Mega Drive pictured) is considered one of the best consoles in the history of video games

Of Sega's consoles and games, the Sega Genesis has often ranked among the best video game consoles.[235][236][237] In 2014, USgamer's Jeremy Parish wrote that the system served as "the key incubator for modern sports franchises," made "consoles truly international" by providing Western third-parties previously put at a disadvantage by Nintendo's restrictive licensing policies with a more profitable alternative, created "an online subscription service" that foreshadowed "PlayStation Plus more than 15 years early" with the Sega Channel, and "played a key role in ensuring the vitality and future of the games industry by breaking Nintendo's near-monopolistic hold on the U.S. and awakening the U.K. to the merits of television gaming."[238] For his part, Kalinske highlighted Sega's role in developing games for an older demographic and pioneering "the concept of the 'street date'" with the simultaneous North American and European release of Sonic the Hedgehog 2.[239] Sega of America's marketing campaign for the Genesis was widely emulated, influencing marketing in the subsequent generation of consoles.[240] While the Genesis was well-received and carries a positive legacy, its Sega CD and 32X add-ons have been more negatively remembered.[241][242][243][244] The Saturn, despite being a commercial failure, has a positive legacy for its game library,[82][245][246] despite some criticism for not having enough high-profile franchise releases.[1] Criticism has befallen Sega's management regarding both the creation and handling of the Saturn.[1][82] As a console, the Dreamcast is remembered positively for being ahead of its time in its innovations.[247][248][249]

Some criticism has been given to Sega for their decision making and changes in game development in more recent years. Writing for Eurogamer, Damien McFerran called Sega's decision making in the later 1990s "a tragic spectacle of overconfidence and woefully misguided business practice."[42] Travis Fahs of IGN noted that since the Sammy takeover, Sega has produced less games internally and given out more assignments to studios in the West, even when the original creators of Sega's franchises are still on staff and are not given creative freedom. Fahs also pointed out that Sega's arcade operations had also been significantly reduced. Of Sega's future, Fahs stated in 2009 that "not all stories have a happy ending", and that "either way, we know it will never be the same. Whatever we have to look forward to, it will be different than what it was." Fahs praised what Sega was before the Sammy takeover, stating, "SEGA was one of the most active, creative, and productive developers the industry has ever known, and nothing that can happen to their name since will change that."[1] Ken Horowitz, in his 2018 book The Sega Arcade Revolution connected Sega's decline in arcades after 1995 with the changes in the video game industry overall, and that the company's most serious challenges in more recent years came from the loss of its creative talent, particularly Yuji Naka and Yu Suzuki, after the Sammy takeover. Horowitz did note, however that "as of this writing, Sega is in its best financial shape of the past two decades. The company has endured."[250]

In 2015, Sega Games Co., Ltd. president and CEO Haruki Satomi stated in an interview with Famitsu that he would shift Sega's focus to quality of releases over making schedules. Satomi acknowledged that, in the ten years previous, some of Sega's games had "partially betrayed" the trust of Sega's older fans and that he hoped to re-establish Sega as a "brand", whereas he felt the loss of trust with fans had left Sega only with "reputation".[251]

See also

Notes

  1. ^ Originally short for Service Games

References

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