Sega Of America, Inc. Business Information, Profile, and History

History of Sega Of America, Inc.

Sega of America, Inc. is a wholly owned subsidiary of publicly-held, Japan-based Sega Enterprises, Ltd. and a leading manufacturer and distributor of video games and accessories in the American marketplace. The company oversees Sega Enterprises' operations in Canada, Mexico, and the United States. Sega of America markets and distributes trademarked Genesis home video game systems, Game Gear hand-held portable video game systems, and Sega CD systems through its consumer products division. It also manufactures half of all the software it distributes domestically in addition to supplying 70 percent of the parent company's branded software worldwide.

Sega of America traces its roots to two companies--Service Games Company and Rosen Enterprises, Ltd.--both founded in Japan by Americans during the 1950s. In 1951, Raymond Lemaire and Richard Stewart started Service Games to develop and market amusement-type games and machines, and within a few years the company was importing jukeboxes and slot machines to supply American military bases in Japan. In 1954, David Rosen, who had been stationed in Japan with the Air Force, returned to Tokyo and launched a two-minute photo booth business which quickly grew into a nationwide chain in Japan, where residents needed numerous identification pictures.

While developing his instant photo booth business, Rosen made invaluable contacts in theaters and departments stores where his booths were located. In 1957, Rosen started tapping those contacts again after he began importing mechanical coin-operated arcade games which were popular on U.S. military bases in Japan but largely unfamiliar to the Japanese public. Within a few years, Rosen Enterprises had a nationwide chain of 200 arcades and only one principal competitor, Service Games.

Rosen, not satisfied with the mechanical games he was importing from Chicago's leading manufacturers in 1965, orchestrated a merger with Service Games, which by that time had its own factory. Rosen became chief executive of the new firm, Sega Enterprises, which derived its name from the first two letters of the words "Service" and "Games." Sega began its transformation from an importer to a manufacturer the following year, after Rosen designed a game called Periscope--with then-innovative sound and light effects--in which players lined up chain-mounted cardboard ships through periscope sights and then torpedoed the targets by pressing a button. Periscope became a quick hit in Japan and was soon exported to Europe and the United States, where it became the first 25-cent game and helped revitalize a sinking arcade game industry.

In 1969 Rosen, by then the sole owner of Sega, sold his company to the U.S.-based Gulf & Western Industries (G&W), becoming a millionaire in the deal while remaining with Sega as chief executive. Two years after Atari Inc. had launched a new era in video games with its 1972 release of Pong, a version of table tennis played on a video screen, G&W made Sega Enterprises a subsidiary and took the arcade game manufacturer public.

Sega rode the wave of a booming arcade industry during the late-1970s--facilitated in part by Atari's Space Invaders video game and home video-game system--and in 1979 Sega's annual sales skyrocketed from $37 million to more than $100 million. Sega joined other game manufacturers in the move into electronics and then microprocessors as its sales climbed to $150 million in 1981, and nearly $215 million by 1982, the year it introduced the industry's first three-dimensional (3-D) video game, SubRoc 3-D, in Japan. By 1983, when a surplus of mediocre games caused a crash in the arcade business that reduced Sega's revenues to $136 million, Sega had pioneered the use of laser disks in its "Astronbelt" video game and developed its first video game console, the SG-1000.

After spinning off part of its arcade game subsidiary, G&W bought back the part of Sega it did not own in 1983 and then sold Sega's U.S. manufacturing operations to Bally Manufacturing Company, an electronic game, casino, and amusement park company. In January of 1984, Rosen resigned his post as president of Sega Enterprises and was replaced by Hayao Nakayama, who had been heading up Sega's Japanese operations since Nakayama's arcade game distribution company, Esco Trading, had been acquired by Sega five years earlier.

In May of 1984, Rosen became re-involved in the company he founded after G&W sold the research and software design remains of Sega Enterprises for $38 million to a partnership which included Rosen, Nakayama, and CSK, a large Japanese software company which helped finance the buyout. CSK became owner of 20 percent of Sega while CSK's chairman, Isao Ohkawa, became chairman of the new Japanese firm, renamed Sega Enterprises, Ltd.

In 1986, Sega Enterprises went public in Japan and established Sega of America, Inc. as a wholly owned subsidiary to adapt Sega's video game products to the American marketplace. Nakayama was named chairman and Rosen president and chief executive of Sega of America, which entered the home video game business that same year with the introduction of its first home video system, the 8-bit color Master System. (The machine was called an 8-bit system because its computer chips processed data in chunks of eight bits of electronic instructions.) Sega's Master System immediately faced stiff competition from another Japanese-based company, Nintendo, which had single-handedly revitalized and gained control of the U.S. home video-game industry in 1985 after introducing its 8-bit Entertainment System.

In 1987, Sega of America signed a distribution agreement with Tonka Corp. that boosted the presence of Sega's Master System, which came to be supported by more than 100 software video game titles (which were sold on cartridges that plugged into a game player, with that system in turn plugged into a television on which the game was viewed and played). For Sega's 1988 autumn battle with Nintendo, Tonka helped roll out 22 new titles for Master System, including adventure games based on the popular arcade titles "Double Dragon, Shinobi" and "Thunderblade" as well as a sports games promoted by baseball great Reggie Jackson and Chicago Bears running back Walter Payton, whose pictures were featured in store displays.

Sega's strategy took a major shift in 1989 after the company developed the industry's first 16-bit color video-game home entertainment system, named Sega Genesis in the United States. Aimed at breaking Nintendo's hold on 80 percent of the then-$3 billion American video game market, Genesis offered better sound and graphics, faster action, and more difficult challenges than 8-bit game players. With games more three-dimensional and characters appearing more human and less robotic, the Genesis 16-bit system quickly changed the landscape of the video game industry while establishing Sega as a technological leader and the second largest vendor of consumer game products. Targeting the market niche of older teenagers, young adults, and Nintendo players looking for a tougher game challenge, Sega utilized popular arcade titles such as "Altered Beast" and sports games featuring the names of Arnold Palmer and Tommy Lasorda to sell Genesis. Genesis was launched with a $10 million advertising and promotional blitz that included commercials on MTV and shopping mall tours.

Sega entered the 1990s using its 16-bit technology to deliver games that simulate race car driving, flying, and submarine navigation, as well as the dance steps of Michael Jackson, who was featured in a new game called "Moon Walker." Sega of America began developing its own software products specifically for the American market in 1990. That same year, Thomas Kalinske, a former executive with toy makers Mattel and Matchbook International, became president of the American subsidiary after Rosen was named co-chairman.

In the summer of 1991, Sega entered the two-year-old hand-held video game system market and debuted its 8-bit portable video-game system, Game Gear, which featured a color screen designed to better Nintendo's monochrome Game Boy. In August 1991--anticipating a new Nintendo product to compete with Sega's 16-bit machine--Sega launched an aggressive comparative advertising campaign, describing itself as the developer of the "fastest game in the world" while branding Nintendo as a children's toy maker.

While Sega's Genesis soon attracted older teenagers and advanced game players, it also caught the attention of retailers and third-party software game developers alienated by Nintendo's higher licensing fees. By the time Nintendo jumped into the 16-bit market with its Super NES system in the fall of 1991--18 months after Sega rolled out Genesis--Sega already had 150 16-bit software titles on the market and had come up with a character to rival Nintendo's well-known Super Mario: Sonic, a blue hedgehog who rescued his friends from an evil scientist by maneuvering his way through a 3-D obstacle course. Nintendo suffered from its late debut in the 16-bit market, its failure to follow Sega's lead and have its 16-bit machine support 8-bit titles, its pricing of Super NES 25 percent more than Genesis, and its failure to respond to Sega's comparative ads.

While Nintendo was launching its 16-bit machine, Sega was readying itself for the development of its next round of hardware and by mid 1991 Sega had reached an agreement with Victor Company of Japan--a major audio-video company manufacturing products under the JVC label&mdashø develop a home entertainment system which would read video-game software from a compact disk. To develop such software, Sega Studios was founded and began to develop, film, and produce CD-ROM-based interactive games in October 1991.

By the end of 1991, Sega had sold 1.6 million copies of Genesis and emerged from the Christmas season as the leader in the 16-bit market, outselling Super NES in most stores. Sega had doubled its 1990 share of total video game market sales to 20 percent, primarily as a result of an expanding library of software titles and the growing popularity of Sonic the Hedgehog.

Nintendo responded to Sega's gains by cutting the prices of its 16-bit player by 10 percent in a move industry analysts labeled as a retreat for Nintendo, which had built its marketing edge largely by limiting the supply of its products while keeping prices relatively high. As the market for video games softened, Nintendo reduced the price of Super NES three times since 1992, and Sega soon matched its rival's hardware price of $99.

Sega helped launch a new era of video games in the fall of 1992 when it released Sega CD, a $299 compact disk multimedia peripheral for Genesis that could play standard music CDs or live-action video-game software. With 100 times more memory than 16-bit cartridges, Sega CD carried the ability to play to both Genesis cartridges and new Sega CD games, which were displayed in movie-like images rather than simple cartoon-like graphics.

Sega's first CD games, such as "Night Trap," featured human actors, compressed full-motion video, special effects, and high-fidelity sound, with players having the ability to alter the action and effect the outcome of real B-grade movies. Sega's new CD software library also included a game in which players could make their own video to the soundtrack of popular songs by selecting video cuts and special effects and then overlaying lyrics. Despite complaints that Sega CD was too costly for the consumer masses and the quality of games too inconsistent, the new peripheral helped to continue Sega's position as a technological leader in the eyes of consumers.

To boost sales of its CD peripheral and bolster its image as the hip game maker, in the fall of 1992 Sega hired a new advertising firm, Goodby, Berlin & Silverstein, and released a new group of games, including "Sonic 2" and Sega's in-house-developed "Streets of Rage II." In less than four months, the company aired 35 variations of a commercial aimed at branding Sega's name into the mind of consumers by flouting conventionality; the advertising spots utilized rock soundtracks and concluded by having people with a crazed looks in their eyes shout "Sega" into the camera.

Between 1989 and 1992, Sega of America's pre-tax profits rose 50 to 70 percent a year while its staff grew from 35 to several hundred as the American subsidiary became the dominant arm of Sega Enterprises. In 1993, Sega of America began overseeing the newly-established Sega of Canada, Inc., formed to market Sega products in the growing $340 million Canadian video game marketplace, and Sega of Mexico, a Latin American marketing and distribution wing.

By 1993, competition in the video-game industry had broadened to include such newcomers as 3DO, which developed the industry's first 32-bit game player, a $700 CD-ROM based game machine displaying near 3-D images that doubled as an compact disk audio system. Atari Corporation followed suit with the development of a low-cost, $200 32-bit machine, with both companies debuting the new game players later that Christmas season. In an effort to enhance the technology of its products, in 1993 Sega formed a number of strategic alliances designed to&mdash the company advertised--take video gaming to "the next level."

Sega joined with Time Warner Inc. and Tele-Communications Inc. in 1993 to offer Sega's video games through cable systems under a premium channel system called Sega Channel. Planned to debut in mid-1994, the Sega Channel was expected to allow subscribers to download video games from the cable channel into their game machines while also offering new game previews and game play tips. The channel was additionally viewed by Sega as a chance to test its potential in the undeveloped interactive television market.

Sega expanded its group of strategic allies in June 1993 when AT&T agreed to help Sega create a low-priced hardware product. Dubbed Edge 16, the product would serve as a Genesis peripheral device and allow for multi-person gameplay over normal phone lines. Plans for Edge 16 also included special ports on the peripheral, which would provide for the addition of a computer keyboard and expansion upgrades.

In another diversification move designed to give Sega a difficult-to-duplicate edge, the company announced plans to build as many as 50 Virtual Reality (VR) theme parks in the United States. The parks would feature VR "rides" and games--simulating such "worlds" as the Wild West and outer space--within the small confines of windowless capsules. To perfect some of those games, Sega signed an agreement with Martin Marietta Corporation allowing Sega to tap the expertise of the defense contractor by using its tank-simulation technology to develop a battlefield game with realistic action.

In the fall of 1993, Sega opened Sega VirtuaLand, an experimental arcade and forerunner of Sega's VR parks in the new Luxor, a Las Vegas entertainment complex/hotel. By the time VirtuaLand had opened Sega had also lined up a team of major players to help develop its next home video-game player, a 32-bit machine code-named Saturn. Included in Sega's group of Saturn allies were Hitachi Ltd., a micro chip maker; Victor Company, a manufacturer of video image circuitry; and Yamaha Corporation, a sound chip builder.

Sega entered the 1993 Christmas season with an edge in the crucial 16-bit market of the $6 billion American home video-game industry, holding 43 percent of total cartridge-based video-game sales, compared to Nintendo's 55 percent share. Sega's greatest yuletide sales came from "Sonic the Hedgehog" games and its best-selling "Mortal Kombat," an explicitly violent game that Nintendo also sold in a censored version.

In response to growing criticism and concern over Sega's "Mortal Kombat" game, in which heads were cut off and hearts torn out, and Sega's "Night Trap" game, which featured vampires who drilled holes in the necks of scantily-clad sorority sisters, a Sega-led group of video game companies--which Nintendo declined to join--went before an unsympathetic Congressional committee to announce it would police itself in 1993. Within a week after the Congressional hearings and a subsequent increase in publicity over violent video games that followed, Toys R Us, America's largest toy retailer, decided to pull "Night Trap" from its shelves. Soon, Sega itself pulled the game from all stores.

After reaching distribution agreements in mid-1993 with Kmart and Wal-Mart, which put Sega's distribution on par with Nintendo, Sega's sales began to soar and the company ended the year claiming to have beaten Nintendo in total sales, capturing a 51 percent share for the six months leading up to Christmas. For the Christmas-buying season, Sega claimed a sales advantage in the 16-bit, CD-ROM, and portable game categories while Nintendo held a slight overall sales lead, largely on the strength of its edge in the hand-held market and its virtual lock on the declining 8-bit game segment.

In January 1994, Sega signed a pact with the world's largest computer software company, Microsoft Corp., which agreed to develop an original operating system for Sega's forthcoming Saturn system which would make it easier for game developers to design compatible software for the 32-bit machine. Sega's alliance with Microsoft opened the door to Sega's possible entrance into the much-heralded realm of "convergence" of personal computers, communications, and entertainment and offered the additional prospect of Saturn becoming a "set-top box," or operating system that could serve as an "on-ramp" to the so-called "information superhighway" by allowing owners access to multimedia realms such as interactive television.

With its new generation of games relying increasingly on human characters, in January 1994 Sega expanded the role of its Hollywood production office, adding script evaluation, casting, and production functions to the office's licensing and character development activities. Sega also expanded its hand-held offerings to include a new Sports Game Gear unit, announced the addition of video games for three-to-six-year-olds, and introduced its first line of toys, including the $160 educational game called Pico, which utilized an electronic pen that enabled a picture children touched on a cardboard book to appear on their television screen.

In one of the largest marketing campaigns in video game history, Sega launched a $20 million promotion of its new "Sonic The Hedgehog 3" for Genesis, tapping corporate promotions involving McDonald's, Betty Crocker, LifeSavers, and Cracker Jack in 1994. In addition, Sega expanded its market by targeting serious game players and older, more affluent game enthusiasts, when it debuted its Genesis CDX, the first integrated 16-bit cartridge and CD-ROM multimedia gaming system. At a price of $395, Genesis CDX offered players access to nearly 500 Genesis games and dozens of Sega CD titles while doubling as a portable CD music system.

Sega moved toward mid-1994 with several new trend-setting hardware releases planned before year's end, including Edge 16, the 32-bit compact-disk Saturn system, and Sega VR, which was billed as the first full-color virtual reality home game unit offered on a mass-market price level. Expected to be available as an adjunct of the 16-bit Genesis system, the planned features of Sega VR included a 3-D head-mounted display helmet and tracking system with built-in headphones for stereo surround sound.

Looking beyond 1994, Sega's plans for the future included becoming one of the first international video game companies to successfully move consumers onto the information superhighway by offering a wide range of entertainment opportunities, including VR parks, electronic toys, and interactive entertainment games. To get to the "next level," the game maker was banking on the expertise of such companies as Time Warner and Tele-Communications to help it in its move into cable television. To keep its customers playing Sega games, the company was looking to alliances with such firms as AT&T, Hitachi, Yamaha, JVC, Microsoft, and Martin Marietta to help Sega expand its technology base.

Standing in Sega's way of becoming the clear sales leader in home video-games and accessories, which most market analysts and numerous industry insiders predicted would occur by 1995, was Nintendo, which promised a 1995 release of a 64-bit machine. Additionally, Sega faced competition in the 32-bit machine arena from 3DO and Atari, as well as competition in the CD-ROM market from Commodore International, Phillips, and Sony, which had access to the expertise of its Hollywood movie studio.

As it moved towards 1995, Sega's plans for dominance in the video-game market were grounded in its evolving process of diversifying and reinventing itself as the company which would provide on-ramps to the information superhighway, as well as various means to traverse through the worlds of entertainment and information. Or, as Sega of America's senior vice-president, Joseph B. Miller III told Business Week, Sega was not just along for the video-game industry's ride, it had placed itself "in position to help design the look and feel of the [information super] highway."