Sega

• 1. Introduction

  ›

  Sega is a Japanese video game company whose history reads like a map of the entire industry's evolution. It began not with video games at all, but with slot machines supplied to American military bases in Hawaii in 1940. From that coin-operated origin, it would go on to build Sonic the Hedgehog, wage a console war that briefly toppled Nintendo, and then walk away from hardware entirely after a string of commercial losses that nearly destroyed it. How does a company go from slot machines to Virtua Fighter to a union election in California? And what does it mean that Sega, after all those swings, is still here? Those are the questions this documentary sets out to answer.

• 2. Slots, Services, and a Name

  ›

  In May 1940, Martin Bromley, Irving Bromberg, and James Humpert founded Standard Games in Honolulu, Hawaii. Their calculation was straightforward: the buildup of military personnel ahead of World War II would create demand for entertainment at the bases, and coin-operated amusement machines could fill that gap. After the war ended in 1945, the founders sold Standard Games and started a new outfit called Service Games, named for its military clientele.

  The arrangement unraveled when the US government banned slot machines in its territories in 1952. Bromley responded by sending employees Richard Stewart and Ray LeMaire to Tokyo to establish Service Games of Japan, supplying coin-operated slot machines to American bases there. Within a year, all five original founders had set up a Panama entity to oversee the global network, which expanded over the next seven years into South Korea, the Philippines, and South Vietnam.

  The name Sega, a contraction of Service Games, appeared for the first time in 1954 on a slot machine called the Diamond Star. Government investigations into criminal business practices forced Service Games of Japan to dissolve on the 31st of May 1960. Two days later, on the 3rd of June, Bromley established two successor companies: Nihon Goraku Bussan and a manufacturing arm doing business as Sega, Inc., focused on slot machines. The two companies merged in 1964 under the Nihon Goraku Bussan name.

  Around the same time, an American Air Force officer named David Rosen had launched a photo booth business in Tokyo in 1954. His company, Rosen Enterprises, began importing coin-operated games into Japan in 1957. When Nihon Goraku Bussan acquired Rosen Enterprises in 1965, the merged entity took the name Sega Enterprises, Ltd. Rosen became CEO and managing director, Stewart was named president, and LeMaire became director of planning. The slot machine era was over; the amusement machine era had begun.

• 3. Periscope and the Arcade World

  ›

  Sega's move into amusement machines was partly an accident of necessity. Because the company imported second-hand machines that broke down constantly, it began manufacturing replacement parts. According to former Sega director Akira Nagai, that maintenance habit is what led the company to start making its own games.

  The first game Sega built from scratch was Periscope, a submarine simulator released worldwide in the late 1960s. It used light and sound effects that were considered innovative at the time. After its success in Japan, Sega exported it to malls and department stores in Europe and the United States. Periscope helped establish the 25-cent-per-play standard for American arcades, a pricing convention that lasted for years.

  Sega was surprised by Periscope's reception and for the next two years produced between eight and ten games per year. Former director Nagai credited Periscope with triggering what he called a "technological renaissance" in the arcade industry, setting off a wave of audio-visual novelty machines in the late 1960s and early 1970s. Widespread piracy eventually forced Sega to stop exporting its games around 1970.

  In 1969, the American conglomerate Gulf and Western Industries bought Sega, though Rosen remained CEO. The company released Pong-Tron, its first video-based game, in 1973. Despite competition from Taito's Space Invaders in 1978, Sega thrived during the arcade video game boom of the late 1970s, with revenues climbing to over one hundred million dollars by 1979. By the early 1980s, Sega was one of the five biggest arcade game manufacturers in the United States, with revenues reaching $214 million. In 1979, Head On introduced the eat-the-dots gameplay that Namco would later use in Pac-Man. In 1982, Zaxxon became the first game to use isometric graphics. Those two releases alone show how much Sega was shaping the vocabulary of the medium.

• 4. Into the Living Room

  ›

  The arcade downturn that began in 1982 forced a strategic rethink. Sega Enterprises, Ltd. president Hayao Nakayama pushed the company toward the home consumer market. Sega developed the SG-1000 home console alongside a home computer, the SC-3000, launching both in 1983. The SG-1000 sold 160,000 units in its first year, more than triple Sega's own projection of 50,000, but it was still outpaced by Nintendo's Famicom.

  Part of the gap came down to strategy. Nintendo built its game library by courting third-party developers. Sega was reluctant to collaborate with companies it was competing against in the arcades, and that hesitation cost it shelf space. A management buyout in 1984, backed by Nakayama and David Rosen with financial support from CSK Corporation, purchased Sega's Japanese assets for $38 million. CSK head Isao Okawa became chairman, and Nakayama took the CEO role.

  Sega responded to the Famicom's success by redesigning the SG-1000 into the Mark III. For North America, it was rebranded as the Master System, with a futuristic visual style aimed at Western tastes. Despite carrying more powerful hardware than the Famicom in some respects, the Mark III failed at launch in Japan. In North America, Sega partnered with toy company Tonka to market the Master System, but Tonka's handling of the campaign was judged ineffective. By early 1992, production had ceased in North America, where the Master System sold between 1.5 and 2 million units.

  The Master System had a very different story in Europe, where its active installed base reached 6.25 million units as late as 1993. In Brazil, where Sega partnered with local company Tectoy, the console has never really stopped. New versions continued to be released there, and by 2016 the Master System had sold 8 million units in Brazil, a number that rivals the system's entire North American and European history combined.

• 5. The Genesis and Sonic's Arrival

  ›

  Sega released the Mega Drive in Japan on the 29th of October 1988, only to have the launch overshadowed by Nintendo's release of Super Mario Bros. 3 a week earlier. Coverage from magazines Famitsu and Beep! helped build an early following, with Beep! launching an entirely new publication dedicated to the console. Even so, Sega shipped only 400,000 units in the first year, and the console lagged behind Nintendo's Super Famicom throughout the 16-bit era in Japan.

  North America was a different story. The console was renamed Genesis and launched on the 14th of August 1989 in New York City and Los Angeles. Former Atari executive Michael Katz, brought in as Sega of America president, built a marketing campaign around the slogan "Genesis does what Nintendon't", positioning the hardware as the more arcade-authentic experience. A second part of his strategy involved filling the library with games using celebrity names and likenesses, including Michael Jackson's Moonwalker and Joe Montana Football. Sega still sold only 500,000 Genesis units in its first year in North America, half of Nakayama's target.

  Nakayama then hired Tom Kalinske, who knew little about the video game business but trusted industry advisors. Kalinske believed in the razor-and-blades model and drew up a four-point plan: cut the Genesis price, create a US development team, expand aggressive advertising, and swap the bundled game Altered Beast for a new character called Sonic the Hedgehog. The Japanese board rejected the plan. Nakayama overruled them, telling Kalinske, "I hired you to make the decisions for Europe and the Americas, so go ahead and do it."

  Sonic the Hedgehog had started as a tech demo by programmer Yuji Naka, featuring a fast-moving character rolling through a tube. Character designer Naoto Ohshima and level designer Hirokazu Yasuhara fleshed it out into a full game. Sonic's cobalt blue color was chosen to match Sega's own logo; his shoes were inspired by Michael Jackson's boots, and his personality was drawn from Bill Clinton's can-do image. When Sonic shipped in 1991, the Genesis outsold the Super Nintendo nearly two to one during the holiday season. By January 1992, Sega controlled 65 percent of the 16-bit console market in the United States.

• 6. Saturn, Dreamcast, and the End of Hardware

  ›

  Sega began work on the Saturn well over two years before showing it at the Tokyo Toy Show in June 1994. Then Nakayama grew nervous about the Atari Jaguar's 1994 arrival and ordered a second, cheaper product in parallel. That product was the 32X, a Genesis add-on priced below the Saturn that was incompatible with the Saturn but could play Genesis games. The 32X launched on the 21st of November 1994 in North America, and interest collapsed after the holiday season.

  The Saturn launched in Japan on the 22nd of November 1994. Its initial shipment of 200,000 units sold out on the first day, driven largely by a port of Virtua Fighter that sold at nearly a one-to-one ratio with the hardware. At E3 on the 11th of May 1995, Sega of America CEO Tom Kalinske surprised the industry by announcing a retail price and revealing that 30,000 Saturns were already on shelves at four retail chains. The surprise launch provoked retaliation; KB Toys decided to stop stocking Sega products entirely in response. Within two days of the PlayStation's American launch on the 9th of September 1995, Sony's new console outsold the Saturn, and within its first year the PlayStation took over twenty percent of the US market.

  Sega lost Kalinske in late 1996, and its executive vice president for product development, Bernie Stolar, had gone on record at E3 1997 saying "the Saturn is not our future". With lifetime sales of 9.26 million units, the Saturn is considered a commercial failure. Nakayama resigned as Sega president in January 1998.

  CSK chairman Isao Okawa, who had loaned Sega $500 million in 1999, died on the 16th of March 2001. Before his death, he forgave all of Sega's debts to him and returned his $695 million worth of Sega and CSK stock, an act widely credited with allowing the company to survive the transition. Sammy Corporation acquired Sega in 2004, completing a stock swap deal that valued Sega between $1.45 billion and $1.8 billion.

• 7. Reinvention and Recent Moves

  ›

  After the Sammy acquisition, Sega shifted toward building a stable portfolio of franchise games rather than chasing console dominance. Successful releases came from the Sonic the Hedgehog, Yakuza, Phantasy Star, Puyo Puyo, and Sakura Wars series. Sega also expanded through acquisitions: Creative Assembly, known for the Total War series, and Sports Interactive, known for Football Manager, both joined Sega Europe. In 2013, Index Corporation's game assets were absorbed and rebranded as Atlus, whose Persona and Megami Tensei series became significant earners. In 2023, Sega paid $776 million to acquire Finnish developer Rovio Entertainment, the company behind Angry Birds.

  In the arcades, Sega had developed more than 500 games, 70 franchises, and 20 arcade system boards since 1981, a record recognized by Guinness World Records. But the arcade business contracted sharply. Sega reduced its arcades from around 450 in 2005 to around 200 in 2015. During the COVID-19 pandemic, Sega sold 85.1 percent of its Japanese arcade operations to Genda Inc. in November 2020, and sold the remainder in January 2022.

  On the 24th of April 2023, 144 Sega of America employees announced plans to form a union called Allied Employees Guild Improving Sega, or AEGIS, affiliated with the Communication Workers of America. Workers voted 91-26 in favor on the 10th of July 2023, making it the first video game industry union of its kind in the United States. At the Game Awards in 2023, co-CEO Shuji Utsumi announced plans to revive dormant Sega properties including Crazy Taxi, Golden Axe, Jet Set Radio, Shinobi, and Streets of Rage. Utsumi said Sega wanted to "show edginess and a rebellious mindset", a phrase that echoed the defiant marketing of the Genesis era. Metacritic had already named Sega the best publisher of 2020, the year Persona 5 Royal and Yakuza 0 both scored above 90 out of 100. The Sonic the Hedgehog film franchise crossed one billion dollars at the box office, a milestone no one could have predicted from a rolling ball in a tech demo.