Dreamcast

• 1. Introduction

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  The Dreamcast launched in Japan on the 27th of November 1998, and within a single day every unit on store shelves was gone. Sega estimated that an additional 200,000 consoles could have been sold that day if the supply had been there. It was the first console of the sixth generation of video game hardware, beating Sony, Nintendo, and Microsoft to market by more than a year. It was also the last console Sega would ever make. How did a machine that sold out on launch day, that broke US sales records, that pioneered online gaming, and that produced some of the most celebrated games in the medium's history end up discontinued in fewer than three years? The answer involves a power struggle inside Sega, a brutal war of expectations with Sony, a catastrophic chain of failed platforms, and one chairman who ultimately gave away his fortune to keep the company alive.

• 2. A Company on the Brink

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  Sega's Genesis, released in 1988, was the most successful console the company ever made, moving 30.75 million units. Its successor, the Saturn, released in Japan in 1994, squandered that goodwill. The Saturn's dual-CPU architecture was notoriously difficult for developers to work with, and its surprise US launch was limited to just four retailers because supply was so thin. Developers found Sony's PlayStation easier to program, and they drifted away. By August 1997, Sony held 47 percent of the console market, Nintendo held 40 percent, and Sega was down to 12 percent. Price cuts and high-profile games could not move the needle.

  Hayao Nakayama resigned as Sega's president in January 1998, ceding the role to Shoichiro Irimajiri. For the fiscal year ending the 31st of March 1998, Sega posted its first parent and consolidated financial losses since its 1988 listing on the Tokyo Stock Exchange. The company discontinued the Saturn in North America before the last Saturn games had even reached shelves, leaving the Western market without Sega products for more than a year. Rumors about the upcoming Dreamcast, spread largely by Sega itself, were already leaking to the public as the Saturn's final titles arrived in stores.

• 3. Building the Machine

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  In 1997, Irimajiri enlisted IBM's Tatsuo Yamamoto to lead an eleven-person team on a secret US project codenamed Blackbelt, bypassing Sega's internal hardware division. Separately, Hideki Sato started his own team, which chose the Hitachi SH-4 processor and the VideoLogic PowerVR2 graphics chip manufactured by NEC. That project was initially codenamed Whitebelt, then Dural, after the metallic female fighter from Sega's Virtua Fighter series. Yamamoto's group favored 3dfx Voodoo graphics and a Motorola PowerPC CPU, but Sega's Japanese leadership pushed for the SH-4 chip. Former NEC brand manager Charles Bellfield said the NEC solution demonstrated strong performance at low cost, and that Sega's relationship with a Japanese company also influenced the choice. Stolar, then head of Sega of America, believed the US architecture should have won, but as he put it, "Japan wanted the Japanese version, and Japan won." The 3dfx company later sued Sega and NEC for breach of contract, settling out of court.

  The choice of the PowerVR architecture alarmed Electronic Arts, which had invested in 3dfx and was unfamiliar with the new chip. EA's hesitation would prove consequential. By February 1998, the project had been renamed Katana, after the Japanese sword. Chinese economist Brad Huang persuaded Sega chairman Isao Okawa to include a modem with every Dreamcast over objections from Okawa's staff about the per-unit cost. Sega designed the modem to be modular, anticipating rapid changes in home internet delivery. The GD-ROM disc format was jointly developed with Yamaha and could be mass-produced at roughly the cost of a standard CD-ROM, avoiding the more expensive DVD-ROM technology Sony would use.

  Microsoft built a custom version of Windows CE for the console, making it easier to port PC games to the platform. A member of the Katana team said anonymously that developers would ultimately prefer Sega's own tools for the greater performance they offered. The Dreamcast was formally revealed on the 21st of May 1998 in Tokyo. To name the system, Sega held a public competition drawing more than 5,000 entries. According to Katsutoshi Eguchi, Japanese developer Kenji Eno submitted the winning portmanteau of "dream" and "broadcast" and created the spiral logo, though Sega never officially confirmed this. Former executive Kunihisa Ueno confirmed in his biography that branding agency Interbrand created the logo, with Eno volunteering the name and signing a non-disclosure agreement. The Dreamcast's startup sound was composed by Japanese musician Ryuichi Sakamoto.

• 4. Record Launch, Hidden Cracks

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  The US launch on the 9th of September 1999 was engineered by Sega of America's senior vice president of marketing, Peter Moore. Working with Foote, Cone and Belding and Access Communications, Moore developed the "It's Thinking" campaign of 15-second television commercials emphasizing the console's raw power. He had repaired relationships with major US retailers damaged by the Saturn's chaotic rollout, preselling 300,000 units before launch day. Starting July 14, consumers could rent a Dreamcast from Hollywood Video. Nineteen games were available at launch, including Sonic Adventure, Soulcalibur, and Visual Concepts' NFL 2K. Sega sold more than 225,132 units in the first 24 hours, which Moore called "the biggest 24 hours in entertainment retail history." Within two weeks, US sales had crossed 500,000 units, and by Christmas, Sega held 31 percent of the North American video game market.

  Before the launch, Electronic Arts, then the largest third-party publisher in the industry, had announced it would not develop games for the Dreamcast. EA's chief creative officer Bing Gordon said Sega had "flip-flopped" on the hardware configuration and was "not acting like a competent hardware company." According to Stolar, EA's president Larry Probst wanted exclusive rights as the only sports publisher on the platform, which Sega could not grant given its recent purchase of sports developer Visual Concepts. Visual Concepts' NFL 2K franchise stepped in to cover ground EA vacated, and Moore regarded NFL 2K as superior to Madden. But EA's absence was a wound that would not close.

  The European launch on the 14th of October 1999 at £200 moved 400,000 units by November 24, and 500,000 by Christmas, six months ahead of schedule. In Australia and New Zealand, where the console went on sale on November 30 through regional distributor Ozisoft, Australian Customs impounded virtually all the launch software due to insufficient labeling of country of origin. Two large retail chains in Australia reported a combined total of just 13 console sales over the first days after launch. Sega's Japan launch had already suffered from a shortage of PowerVR chipsets caused by manufacturing failures, and Irimajiri had hoped to surpass one million units in Japan by February 1999 but fell short of 900,000, leaving the installed base exposed when competition arrived.

• 5. The PlayStation 2 Effect

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  On the 2nd of March 1999, Sony revealed the PlayStation 2. Ken Kutaragi said it would allow games to convey unprecedented emotions. Sony estimated the PS2 could render between 7.5 million and 16 million polygons per second; independent estimates ranged from 3 million to 20 million, against Sega's figure of 3 million to 6 million for the Dreamcast. The PS2 also supported DVD-ROM, which held substantially more data than the GD-ROM, and would play the PlayStation back catalog. Moore later described the dynamic: "The PlayStation 2 effect that we were relying upon did not work for us. People will hang on for as long as possible. What effectively happened is the PlayStation 2 lack of availability froze the marketplace."

  US Dreamcast sales that had exceeded 1.5 million by the end of 1999 began declining as early as January 2000. Poor Japanese sales fed into a consolidated net loss of 42.88 billion yen for the fiscal year ending March 2000, Sega's third consecutive annual loss. Moore became president and chief operating officer of Sega of America on the 8th of May 2000. To respond to the PS2, Sega of America launched its own internet service, SegaNet, on the 7th of September 2000, at $21.95 per month. The launch was accompanied by advertising on the MTV Video Music Awards, which Sega sponsored for the second consecutive year. Sega dropped the Dreamcast's price in the US and offered a full rebate for the hardware with an 18-month SegaNet subscription. In Japan, Okawa personally paid for every Dreamcast sold to include a free year of internet access.

  Moore said the Dreamcast needed to sell 5 million units in the US by the end of 2000 to remain viable. Sega reached only about 3 million. While the PS2's US launch on October 26 was also marred by shortages, consumers waited rather than switching to Dreamcast. The PSone, a remodeled original PlayStation, became the bestselling console in the US at the start of the 2000 holiday season. Eventually Sony and Nintendo held 50 and 35 percent of the US market respectively. Sega was left with 15 percent.

• 6. The End and What Followed

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  On the 22nd of May 2000, Isao Okawa replaced Irimajiri as Sega's president. Okawa had long argued that Sega should abandon the console business. In September 2000, Moore and Bellfield met with Sega's Japanese executives and the heads of the company's major development studios to recommend exactly that. The studio heads walked out of the meeting. On the 31st of January 2001, Sega announced the Dreamcast would be discontinued after March 31 and the company would restructure as a "platform-agnostic" third-party developer. An estimated 930,000 unsold units remained in inventory as of April 2001. The final Dreamcast unit manufactured was autographed by the heads of all nine of Sega's internal studios, plus the heads of Visual Concepts and sound studio Wave Master, and given away with all 55 first-party Dreamcast games through a competition organized by GamePro.

  Okawa died on the 16th of March 2001. Shortly before his death, he forgave the loans he had made to Sega in 1999 and returned his Sega and CSK stock, helping the company survive the transition. Nearly one third of Sega's Tokyo workforce was laid off in 2001. Official game releases in the US continued through the first half of 2002. Sega continued to repair Dreamcast units until September 2007. In the fiscal year ending March 2003, after five consecutive years of financial losses, Sega posted a profit. Many hardware engineers who had worked on the Dreamcast joined Sammy Corporation, which later merged with Sega; Hideki Sato pushed for leftover Dreamcast parts to be used as displays in Sammy's pachinko machines, including the successful Fist of the North Star machines.

• 7. Games That Outlasted the Hardware

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  In 2000, as the Dreamcast's commercial situation worsened, Sega reorganized its arcade and console teams into nine semi-autonomous studios led by their top designers. The list included United Game Artists, Hitmaker, Smilebit, Overworks, WOW Entertainment, Amusement Vision, Sega Rosso, Wave Master, and Sonic Team. Studios were encouraged to experiment under a relatively relaxed approval process. United Game Artists created Rez, a rail shooter designed to simulate synesthesia. WOW Entertainment made The Typing of the Dead, a version of The House of the Dead 2 rebuilt as a touch-typing trainer. Hitmaker produced Segagaga, a Japan-exclusive role-playing game in which the player's goal is to prevent Sega from going out of business.

  Sonic Team's Sonic Adventure, the first fully three-dimensional platform game featuring Sonic the Hedgehog, sold 2.5 million copies and became the best-selling Dreamcast game. Sonic Team also made ChuChu Rocket!, the Dreamcast's first online game, and Phantasy Star Online, considered the first online console role-playing game. AM2 developed Shenmue, described as "a revenge epic in the tradition of Chinese cinema," incorporating a simulated day-and-night cycle, non-player characters with regular schedules, and the quick-time event in its modern form. The game was rumored to have cost over $50 million. Moore said it sold extremely well but had no chance of recouping costs given the Dreamcast's limited installed base.

  Smilebit's Jet Set Radio cast players as Tokyo inline skaters and popularized cel-shaded graphics. Hitmaker's Crazy Taxi sold more than one million copies. Overworks' Skies of Arcadia, produced by Rieko Kodama, was praised for its Jules Verne-inspired world of floating islands and sky pirates. Visual Concepts' NBA 2K series eventually sold to publisher Take-Two Interactive after Sega sold Visual Concepts for $24 million in 2005, where it continues today. The Dreamcast library ultimately exceeded 600 games across all regions. Hobbyists have since restored online functions for more than 50 Dreamcast games, keeping the network play the console pioneered alive decades after Sega shut down its official servers.

• 8. Legacy and Reputation

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  In 2009, IGN ranked the Dreamcast the eighth-greatest video game console, citing its software and online innovations. In 2010, PC Magazine's Jeffrey L. Wilson called it the greatest console ever made and said it was "gone too soon." Edge named it the tenth-best console of the previous 20 years in 2013, highlighting in-game voice chat, downloadable content, and second-screen technology via the VMU as innovations the industry only caught up to much later. Edge concluded that "Sega's console was undoubtedly ahead of its time, and it suffered at retail for that reason... but its influence can still be felt today."

  Retrospectives on why it failed point to overlapping causes: the excitement Sony generated around the PS2, the loss of EA and Squaresoft support, internal disagreements about Sega's future, inadequate advertising, and the accumulated damage to Sega's brand from the 32X, the Sega CD, and the Saturn. Eurogamer's Dan Whitehead concluded that "Sega's misadventures during the 1990s had left both gamers and publishers wary of any new platform bearing its name." Sega's own head of product implementation, Tadashi Takezaki, said in 2013 that the Dreamcast would have been the company's last console regardless of sales figures, given changes in the market and the rise of personal computers. His assessment of what the machine had planted was direct: "The seeds we sowed with the Dreamcast are finally bearing fruit at this point in time."