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Counter Attack #3: The Rise and Fall of SEGA



Counter Attack is a weekly feature here on Goomba Stomp in which John Cal McCormick casts a bemused eye over the gaming news, the niggling issues plaguing the industry, important moments from gaming’s past, or whatever it is that’s annoying him this week. Today we’ll be looking at how SEGA became a major player in the video game console business, but then accidentally destroyed their own product.

Today’s console war has reached the point where a shaky cease-fire is in effect. Sony has already won the generation, a resolution that looked all but certain within mere months of the launch of both the PlayStation 4 and the Xbox One, with Nintendo’s Wii U having already shot itself in the foot back at the barracks and gotten a medical discharge before the bombs even started dropping. The PlayStation 4 continues to handsomely outsell Microsoft’s Xbox One week on week, and it’s not a question of who’s going to sell the most consoles, but just how many units Sony will shift over their chief rival in the video game console racket by the time the dust settles.

In 2018, Sony and Microsoft – with little left to play for – exchange pleasantries and appear to be on good terms in the public eye, or certainly, as good as direct competitors can be. Every time a new Sony exclusive is released and is well received by critics, Xbox head Phil Spencer congratulates team PlayStation for the achievement on Twitter, and if Xbox One ever gets a good exclusive then maybe someone from Sony will reciprocate the gesture. Everybody’s smiling, everybody’s happy, everybody’s friends.

As far as console wars go, it’s been rather tame for a few years now. It’s not exactly ‘Nam, is it? Nobody is going to be making movies about this war, and if they do it’ll be a straight to streaming farcical comedy about how Microsoft fucked up their own console launch, probably starring Adam Sandler as Don Mattrick. But the console wars of the ’90s? They were an altogether bloodier affair, particularly during the height of the conflict between SEGA and Nintendo as each strived to be the #1 name in home console gaming, itself a relatively new industry at the time. It’s practically inconceivable today that there was a time in real life when it looked like SEGA might actually become the biggest name in gaming, but that was genuinely a possibility. That is, right up until SEGA accidentally destroyed their own console business forever. Wuh oh.

The End of Video Games

Atari were the kings of the early days of gaming. Just look at those haircuts.

In the early ’80s the emergent, booming video game industry suffered a disastrous and almost fatal crash thanks to a combination of an over-saturated market and an influx of poor quality software rushed to release. Most of the big name companies at the time were either lost in the ensuing chaos, quickly folding as they simply didn’t have enough capital in reserve to combat such a calamity, or they barely made it out with the skin of their teeth, never again rising to the prominence that they held back in the early days of the industry. Before the crash, there were two different Atari home consoles on the market, as well as Odyssey², ColecoVision, Fairchild II, devices from Mattel and Coleco that played Atari 2600 titles so you didn’t need to buy an Atari console at all to play their games, and a variety of home personal computers offering gaming experiences, like the Commodore 64 and the ZX81.

Everyone wanted a piece of the video game pie, but since it was a relatively new industry, most of the major players had no idea how to play ball yet. In 1979, a bunch of programmers jumped ship from Atari as they were unhappy that they weren’t receiving credits for any of their games, forming the first ever third party video game development studio: Activision. Yes, that one. Atari responded with a lawsuit to try and stop Activision from selling their wares to be played on Atari’s consoles, but in a landmark moment for the industry they failed to stop the fledgling video game developer, making third party game development an industry all of its own.

Soon, there were countless third party developers all making video games, all trying to capitalise on the popularity of the medium, but since most of these devs were simply trying to cash in on the popular trend – Quaker Oats had a video games division for Christ’s sake – the quality of the majority of games at the time was poor. Volume was an issue, too, as so many games were being made so quickly that there wasn’t enough space on store shelves to hold everything, resulting in major surpluses of stock. With so few good games being on the market, swallowed up by rush jobs made by inexperienced developers, consumers stopped buying games as readily, exacerbating the problem of real estate on game shop shelves. Nobody had enough money in the bank to reimburse stores for the extra, unsellable stock they were holding, and so many of these games wound up in bargain bins, never recouping their investment costs. It was, frankly, a shitshow.

It was actually cheaper for Atari to dump some of their unwanted stock in landfills than it was to store it in the hope of one day selling it.

Atari, once the biggest name in gaming, suffered tremendously as the market they helped popularise collapsed around them, and despite their insistence that everything was going to be okay and they’d recover soon enough, some analysts were already predicting that gaming was over, little more than another ’80s fad destined to be forgotten about like the Rubik’s Cube. Atari survived, barely, but their role as market leader was over. There was about to be a new hero for the industry, one that would shape the future of gaming as we knew it, and revitalise a dying market by learning from many of the mistakes of the past rather than repeating them.

Nintendo to the Rescue

The 1983 crash of the American video game market meant that companies in the United States were less inclined to invest in the struggling industry going forward. Nintendo had released their Famicom – or NES, as we know it – in Japan during the same year that the American market collapsed, and the popularity of the system in their home country led to them making the decision to the export to the US, taking advantage of the obliterated potential competition that had almost entirely destroyed themselves. In 1985, the NES was released in America, and it would arrive in Europe a couple of years later. Analysts weren’t bullish about Nintendo’s chances of selling the NES to consumers so soon after the American industry had fallen apart, but Nintendo had other ideas.

Nintendo’s strategy with the NES was simple. They allowed third party developers to make games for their system, but only using Nintendo’s proprietary cartridges, and each publisher would only be allowed to release fewer than five games a year. This meant that publishers would have to make sure that they were making the most of their allotment. Previously the video game industry had briefly thrived – and ultimately imploded – because it was easy to throw anything at consumers hoping that something would stick through sheer volume. Nintendo flipped the script, forcing publishers to move away from frivolous shovelware and towards high quality titles, knowing that they’d only have five games per year to make all of their money back, so they’d have to choose wisely.

Nintendo artwork proudly displaying their seal of approval in the bottom right.

This system would – eventually – partly contribute to Nintendo’s undoing, but it was just what the industry needed after the glut of low quality games that led to the collapse of the American market. The NES was a console that had a robust line-up of high quality games coming both from Nintendo’s internal development studios and their third party partners, and Nintendo’s official seal of quality – a stamp present on the boxes NES games came in – became a symbol that could actually be trusted. After having their fingers burned, consumers were again ready to trust – and spend – thanks almost entirely to Nintendo, and by the end of the ’80s the Japanese company had a near monopoly on the industry, their NES having easily outsold all competitors on the market in a short space of time.

Here Comes a New Challenger

While Nintendo were reigniting Western interest in video games, another Japanese company, SEGA, decided to go after a piece of the pie for themselves. SEGA’s equivalent of the NES – the Master System – didn’t make much of a splash in their native Japan or in North America, but it did sell well in Europe, even outselling the NES there. Gaining confidence from their modest success in the West, SEGA quickly transitioned to their next home console – the Mega Drive, also known as the Genesis in America – before Nintendo would release their follow up to the NES. Mega Drive sales in Japan were sluggish, with the home market favouring Nintendo’s console, but in the West SEGA’s 16-bit games machine found considerable success.

Releasing the Mega Drive a year before the SNES proved an incredibly wise decision for SEGA, as it meant that the 16-bit SEGA console was seen as being a direct competitor to the 8-bit NES, and graphically at least, the games on the SEGA system blew away what Nintendo had on offer. It didn’t help matters that Nintendo was (and often still are) a stubbornly conservative company, one that firmly believed in making video games a family friendly entertainment medium and prohibiting any adult oriented content from appearing on their systems. While in the NES days this had amounted to little more than not allowing Maniac Mansion on the platform without substantial editing, when the ’90s rolled around and video games started becoming more violent, it meant that titles that were in the Zeitgeist like Mortal Kombat were effectively neutered on SNES.

Mortal Kombat’s signature blood was replaced by indiscriminate grey squiggles on SNES.

Nintendo’s family friendly image starkly contrasted with SEGA’s more edgy, and frankly, more ’90s marketing strategy, leading to the Mega Drive being seen by many as the cooler option. Sure, it didn’t have Mario, or Zelda, or Donkey Kong Country, but it had shit loads of blood and guts, and that whole “Nintendon’t” marketing campaign that was absolutely savage. It was rare, and it still is, for competing companies to call each other out by name during marketing, but SEGA relished it, sticking a middle finger up to Nintendo’s toys and letting players know that their gaming box had attitude. Honestly, we were all about attitude in the ’90s. That and saving the environment. I guess that’s how Captain Planet happened.

Anyway, Mega Drive sales were strong, and only got stronger once Sonic the Hedgehog arrived on the scene. Up until then, SEGA had been trying to make Alex Kidd their mascot, and I like Alex Kidd as much as the next man but a dude with a bowl hair cut playing rock, paper, scissors with people wasn’t quite as instantly appealing as what the Mario brothers were up to. Sonic, though, was perfect to be SEGA’s mascot – he was cool, he had attitude, and his game was faster and flashier than Nintendo’s marquee platformer.

The Mega Drive was outselling SNES but the seeds were planted for a heroic comeback for Nintendo. For all of the talk of the Mega Drive being a cooler console than the SNES, gaming was still very much seen as something for dorks at the time, and so being cool wasn’t necessarily a high priority for many gamers. What was a high priority was the quality of the games themselves, and this is where Nintendo was the clear winner. SNES had Super Mario World, Donkey Kong Country, Mario Kart, The Legend of Zelda: Link To The Past, and Starfox which were all acclaimed games that moved big numbers of units, as well as more niche titles that critics loved, like Final Fantasy VI and Super Metroid. Fighting games were big in the ’90s, and while the Mega Drive had the bloody version of Mortal Kombat, SNES had the definitive version of Street Fighter II since SEGA’s controller featured only three face buttons, resulting in an unwieldy control scheme that hobbled the game. And we all know Street Fighter is better than Mortal Kombat, don’t we?

The Cracks Begin To Show

Nintendo had entered into talks with Sony to produce a CD-ROM add-on for the SNES, and they were prepared to announce the joint tech on stage at the 1991 Consumer Electronics Show. Unbeknown to Sony, Nintendo had decided that they weren’t happy surrendering so much control to Sony as per the terms of the contract of their partnership, and so, and this is when it gets really silly by the way, they secretly negotiated a new deal with Philips – Sony’s rival – and announced that on stage instead. While the stories of exactly how all this came to be fall into “he said, she said” territory, it’s generally accepted that Sony had no idea that Nintendo had backed out of their deal and partnered with Philips until the moment it was announced on stage, which is absolutely mind boggling even seventeen years later. Of course, this, too, would contribute to Nintendo’s eventual undoing, but more on that later. The Nintendo and Philips joint venture – the CDi – was a bust, costing Philips over a billion dollars in losses, and resulting in the shittest Mario game ever made.

The Nintendo PlayStation. I’d give anything to see an alternate reality where this thing made it to market. Maybe Nathan Drake would be in Smash Bros. And Mario would be in PlayStation Allstars Bat

Sony had spent time and money developing CD based gaming technology that was now going to waste, and so, still stinging from their partnership turned sour with Nintendo, they went to SEGA to investigate a potential tag-team effort to tear down the House of Mario. The American branch of SEGA were interested in the idea and pitched it to the big-wigs back in Tokyo, who promptly nixed the entire thing, unimpressed with Sony’s lack of pedigree within the industry. Some within Sony and Nintendo wanted to patch things up and give their relationship another go, but it all came to nought, and without anyone left to partner with, Sony decided to use what they’d learned to make their own console, dubbed the PlayStation.

SEGA’s follow up to the Mega Drive – named the Saturn – was taking shape, and by the end of 1993 they’d almost finalised the specs of the system. But before long the proposed specs of Sony’s PlayStation became common knowledge, and SEGA started worrying that the inner workings of their Saturn wouldn’t be able to compete with Sony’s system when it came to rendering three dimensional spaces. SEGA needed to do something, and what they decided to do was to add in another processor, which would make their console more complicated to program for, but could, theoretically, give it more power.

As Nintendo concentrated on releasing a steady stream of high quality titles for the SNES while also working on their next console, SEGA decided to go another route, attempting to extract more power from their Mega Drive by releasing add-ons like the SEGA CD, and later, the 32X, both of which failed to attract consumers and effectively split the market. The idea was to give gamers a cheap gateway into the 32-bit era using the console they already had prior to the launch of the next generation of SEGA hardware, but it confused consumers, and flopped. The SNES eventually overtook the Mega Drive in sales in America thanks in large part to the high number of well received games available for the system, and the generation was lost for SEGA, despite impressive gains in market share.

The sales disparity between the NES and the Master System had been huge, with Nintendo selling over 60 million of their NES through to consumers, and SEGA managing a paltry 13 million for Master System, but console sales of the SNES and Mega Drive were much closer – 49 million and nearly 30 million respectively. SEGA had taken a massive chunk of market share from Nintendo, and they needed to capitalise on that.

Gaming Grows Up

SEGA of Japan was extremely concerned that their Saturn console was going to be overshadowed and ultimately beaten in sales by a brand new, exciting video game console that would surely be a huge hit. Yes, that’s right, the Atari Jaguar. No, they weren’t worried about PlayStation, and why would they be, because Sony had never even made a games console before, and they knew nothing about software development. Atari, though, they were the real threat.

Sony’s marketing for PlayStation was unlike anything seen in gaming before, demonstrated here by this ad for Wipeout, featuring a couple of bloody young adults, and absolutely no footage of Wipeout.

While SEGA was preparing for how their Saturn could combat the Jaguar, Sony was plotting a coup right in front of the entire industry’s eyes. Their strategy was incredibly savvy, and would ultimately revolutionise the games industry in ways not seen since the release of the NES. Gamers had grown up. Those who’d been playing the first Zelda game on NES as children would be teenagers by the mid-nineties, but Nintendo was still trying to appeal to kids, treating video games more like toys than as a serious entertainment medium in its formative years. Sony recognised that and saw a huge, untapped demographic – namely everyone who’d ever been a gamer but had aged out of the current target audience for most games on the market.

The biggest issue that Sony faced was the public perception of video games – that they were for children and nerds with no social skills. They had to rectify that, and so they set out on a huge marketing campaign that included sponsorship deals with cool venues and young adult celebrities, as well as creating striking advertisements that rarely featured children at all, often relying on shocking imagery, and portraying video games as something to be enjoyed by grown ups having a few drinks on a Saturday night. They also made incredibly shrewd deals with third party publishers in order to secure a strong line-up of games would be available for their first console, and rightly believing that three dimensional games were the future, the PlayStation was built with that future in mind.

That Time SEGA Accidentally Destroyed Their Own Console Business

Saturn and PlayStation were launched in Japan within months of each other in late 1994, and while Saturn was doing well and initially selling better than the Sony console, PlayStation was doing much better than many people expected, and rapidly catching up. SEGA of Japan was concerned about how well PlayStation was being received, and knowing that both Saturn and the new Sony console were due to launch in America in Fall of ’95, they were worried that they might lose some of their American audience to Sony since PlayStation was now seen as the cool brand in gaming.

SEGA of Japan knew they needed to do something to combat Sony’s PlayStation in the States, and if they could just quash that threat, then by the time Nintendo’s next console arrived they’d already be the new market leader. Drastic times call for drastic measures. And so at E3 in 1995, SEGA of America CEO Tom Kalinske, under orders from the Tokyo branch, took to the stage to announce that the SEGA Saturn wouldn’t be released in Fall as originally announced, but it was already on store shelves as he spoke, ready to be picked up for $399. Surprise announcements at E3 are part and parcel of the event, but surprise launching an entire console? The plan was that if they could get out before PlayStation by five months, and market the console as an adult games system, SEGA could beat Sony at their own game and have a stranglehold on the market before PlayStation had chance to make a dent.

Of course, it didn’t go as quite well as they’d hoped. SEGA was so committed to the surprise announcement that only a handful of retailers were allocated consoles, which promptly pissed off all of the ones that weren’t, and some of them even pulled SEGA products from their shelves as a result. Developers were similarly in the dark about the new release date for Saturn, and so all of their launch titles were being prepared for a Fall release, meaning that when Saturn arrived it had only six games, all of which were published by SEGA, and precious little else on the horizon until later in the year. These were problems for SEGA, to be sure, but perhaps they could have been weathered had it not been for Sony’s surprise announcement at the very same E3.

People at E3 hadn’t even been to bed yet, still reeling from the announcement that the Saturn would be launching early in the States, when Sony of America’s Steve Race walked on stage during Sony’s conference to make a brief statement. Brief, was perhaps understating it. In the most important mic drop moment in E3 history, and Sony’s most savage conference beat down until E3 2013, Steve Race simply said, “$299” and walked off the stage like a rock star to the sounds of rapturous applause. SEGA’s new console might be launching early, but Sony’s would be $100 cheaper. Without a robust line-up of games to lure consumers in, and with a bunch of retailers boycotting their products, and at a much higher price point, SEGA was sunk.

Within two days of PlayStation’s launch in the US it had outsold the Saturn despite the SEGA console having been on the market for five months. Whatever SEGA’s initial intentions, their plan had backfired spectacularly, and they’d unwittingly started a series of events that would destroy their own console business.

The Aftermath

The new generation was still in the early days, and continued interest in the Mega Drive meant that SEGA still had the biggest market share in the United States over Nintendo and Sony. But factors both in and out of SEGA’s control would spell doom for the Saturn, and hand Sony the throne without much of a fight.

Nintendo was taking forever to get their follow up to the SNES to market, and that, along with their decision to stick with cartridges as the storage medium for what would ultimately become their N64 turned off a number of developers who once partnered with Nintendo. The biggest, and by far the most important of these, was Squaresoft who had previously developed their niche Final Fantasy series exclusively for Nintendo consoles, but partnered with PlayStation for the upcoming Final Fantasy VII. The release of Final Fantasy VII in Japan increased PlayStation sales dramatically, and impressive word of mouth, savvy marketing, and strong critical reception made FFVII a surprise smash hit in the West. Now considered one of the greatest and most important games of all time, it can’t be overstated just how much Final Fantasy VII helped Sony to establish PlayStation as a serious brand in the video game industry.

Final Fantasy VII’s marketing focused mainly on the – for the time – revolutionary graphics during cut-scenes, and not so much on the turn based JRPG combat.

SEGA meanwhile had nothing but problems. The first truly 3D Sonic game was in development hell. The popularity of Sonic the Hedgehog could, conceivably, have been responsible for altering the course of the console war, but we’d never find out because in 1997, Sonic X-Treme was cancelled, and the carcass of the game was pulled apart, revamped, and rebuilt, later appearing on SEGA’s next console, the Dreamcast, as Sonic Adventure. With a lack of high profile titles available for Saturn, and struggling sales compared to Sony’s PlayStation, SEGA announced that the Saturn would be discontinued in America in 1998, with the aforementioned Dreamcast slated to replace it later that year.

When all was said and done, SEGA Saturn sold just under 10 million units worldwide, becoming a massive commercial failure for the console manufacturer, and forcing SEGA to cut around 25% of their workers.

By the time that Dreamcast launched in late ’98, PlayStation was marching ahead of both the N64 and Saturn in sales, ultimately becoming the first games console ever to breach the 100 million units sold barrier. Because of the success of PlayStation, excitement for the PlayStation 2 was high, but Dreamcast still managed to have a strong launch. However, as Sony ramped up marketing for their upcoming PS2, interest in the Dreamcast steadily declined, support stagnated, and the writing was on the wall. It didn’t help that EA and Squaresoft both publicly announced that they wouldn’t support the system, dealing a huge blow to SEGA as they were two of the biggest third party publishers in the business at the time.

Sales of the Dreamcast in Japan were weak, and in the States they’d dropped significantly as gamers were desperate to get their hands on the next PlayStation console. The PS2 had been hyped to a ridiculous degree by Sony, including rumors that it was comparable to a supercomputer that could control guided missiles, and was so powerful that it could allow users to “jack into the Matrix.” Honestly, that last one was an actual quote from Ken Kutaragi.

Dreamcast might sound like the name of a Scandinavian power metal band, but it had a number of futuristic features, including a screen in the controller, and the ability to connect to the internet.

When PS2 launched in 2000 it quickly became a hit despite a frankly rubbish launch line-up of games, and by the end of the year, the situation looked dire for SEGA. Sony ran out of PS2s to sell, which briefly gave SEGA cause to be optimistic, but in reality people just waited for PlayStations to become available rather than buying a Dreamcast instead. SEGA had hoped to shift 5 million Dreamcasts before 2001, but had only managed 3 million sales, and while aggressive price-cuts had helped sell the console it was at a much-reduced profit margin. SEGA had expected to turn a profit by September of 2000, but had actually lost $163 million in the six month period leading up to that. Internal projections said that SEGA were on course to lose even more money by year end, and then those projections were doubled when their perilous financial situation became more clear. At the end of the financial year in March 2001, SEGA reported losses of over $400 million.

Dreamcast was being battered in sales, and with a new Nintendo console on the horizon, and Microsoft about to join the console business, too, the sharks could smell blood. Some at SEGA HQ were openly advocating that the company abandon hardware manufacturing altogether and concentrate on making games only as a matter of survival, including their president, Isao Okawa, as well as future head of EA and current CEO of Liverpool FC, Peter Moore, who worked for SEGA of America at the time. SEGA simply couldn’t absorb another enormous loss after the failure of the Saturn, and with even the most optimistic projections for Dreamcast looking fairly dire, something needed to be done.

In March of 2001, a mere eighteen months after launching in America, SEGA discontinued the Dreamcast following disappointing sales, and left console manufacturing entirely in order to focus on software only. With Dreamcast dead, Sony’s PlayStation 2 was the only sixth generation console on the market for over six months, racking up impressive sales before Nintendo’s GameCube and Microsoft’s Xbox even hit the shelves. Despite being the weakest console in the sixth generation following the discontinuation of the Dreamcast, the PS2’s built in DVD player, attractive price, and increasingly robust games line-up won over gamers, and the console ultimately went on to become the best selling console of all time at over 150 million units sold – more than double GameCube, Xbox, and Dreamcast combined. Dreamcast, for it’s part, sold less than 10 million units altogether.

Today, Sony are still market leaders in the video game industry, commanding an impressive lead over their competition. PlayStation 4 is the most popular video game console in the world, looking to be well on track to be one of only four consoles – the third by Sony – to sell over 100 million units. Nintendo console sales declined with each successive generation until their Wii became a cultural phenomenon in the late 2000s. Their follow up – the Wii U – crashed and burned upon release, but their current console – Switch – is proving very successful. Microsoft joined the console wars months after SEGA surrendered, and while their first console – the Xbox – struggled to make much of an impact, their follow up – the Xbox 360 – proved surprisingly popular in the States. Their current console – the Xbox One – is languishing in sales, having never recovered from a botched launch.

Last week, seventeen years after abandoning hardware, SEGA released a collection of fifty of their Mega Drive games for a budget price on Sony, Nintendo, and Microsoft consoles. The SEGA of today has found renewed success as a publisher of popular series’ like Yakuza, Bayonetta, Football Manager, Total War, Hatsune Miku, and Valkyria Chronicles. As I was playing the SEGA Mega Drive Classics collection – titles like Streets of Rage, Toejam and Earl, and Sonic the Hedgehog 2 –  I couldn’t help but reminisce. I couldn’t help but look back on their time as a console manufacturer and just how close SEGA once were to the top, and how gaming could be very different today if they’d just done one or two things differently.

Feel free to leave a comment about this week’s Counter Attack in the comments section below. And if you want to see more from Counter Attack, check out #1 Remembering The Xbox One Reveal, or #2 E3’s Ten Most Embarrassing Moments.

John can generally be found wearing Cookie Monster pyjamas with a PlayStation controller in his hands, operating on a diet that consists largely of gin and pizza. His favourite things are Back to the Future, Persona 4 Golden, the soundtrack to Rocky IV, and imagining scenarios in which he's drinking space cocktails with Commander Shepard. You can follow John on Twitter at

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1 Comment

1 Comment

  1. Ecneralc

    June 22, 2018 at 11:00 am

    Donkey Kong Country didn’t arrive till late November 1994. It would be by then that Nintendo managed to level the playing field against SEGA, and things only got antsy for SEGA by 1995.
    Nintendo kept rolling out exclusives you couldn’t play on anything else.
    Killer Instinct being one game to mention.

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