A Brief History of Sega: Part 2


Welcome to part two of Power Up Gaming’s in-depth retrospective on the rise and fall of one of gaming’s former powerhouses, Sega. In part one, we discussed the company’s origins as Service Games, all the way through to the discontination of the failed Mega Drive add-on, the 32X. We pick up as the seeds of Sega’s demise as a console manufacturer were being sewn, with the conception and release of the ill-fated Saturn console.

The Saturn

Having just experienced the largest period of growth in the company’s history, largely thanks to Sonic the Hedgehog and the Mega Drive, Sega’s new console was eagerly anticipated by consumers. Despite the upstanding reputation the company had with the public, behind closed doors a different story was emerging. With two failed peripherals and a poorly supported handheld console, Sega had unintentionally upset many third-party developers with its tendency to cut support early for its technology. Game creators and publishers were understandably uneasy about releasing their IPs on Sega consoles since they couldn’t be sure how long the hardware would be around for.

Being the first out of the gate meant that the Saturn was
quickly surpassed by its rivals technologically.

Despite this, Sega pushed ahead with its new console, the Saturn. This was a powerful machine which ushered in the 32-bit era with its launch in late 1994, featuring an in-built CD drive and its own dedicated video processor. While the console launched in Japan first (as was usual practice), businesses and consumers alike were left wondering when it would be released in the West. Sega made a surprise announcement at E3 in 1995 by releasing the console straight away in North America, having secretly shipped consoles to a number of retailers. While this marketing move was meant to generate excitement over the Saturn, this put a lot of noses out of joint with those retailers who were not informed, causing some stores to drop support for Sega consoles entirely.

Because of the early launch, the Saturn had only six games available on day one, meaning that the company never did benefit from the early start it had over the Sony Playstation, which was just around the corner. Sega cut the price of its console by the end of the year, but it wasn’t enough to turn the tide against Sony, who were already gathering steam with their arcade-style games such as Ridge Racer, and the upcoming Wipeout.

Meanwhile, divisions were mounting between Sega of America and Sega of Japan. The Saturn was experiencing decent sales in Japan, but this wasn’t translating to North America due to there still being a demand for the previous generation’s 16-bit consoles. The Japanese division sought to cut support for the Mega Drive and its peripherals, while the American arm of the company fought to keep it alive. Furthermore, the new Sonic game for the Saturn was starting to enter development hell.

Originally planned for release on the Mega Drive as a direct sequel to the initial trilogy, Sonic X-treme was soon shifted to the ill-fated 32X when it became clear the console was nearing the end of its days. At this stage, designs for the game rapidly evolved from a traditional 2D side-scroller, to isometric and 2.5D platformers; eventually, the team decided on a 3D environment for Sonic.

One of the many prototypes considered for Sonic X-treme.

However, it soon became apparent that Sonic X-treme was far too ambitious a project for the 32X, and development was shifted yet again; this time to the Saturn. Beginning in late 1995, two separate in-house Sega Technical Institute teams began development work on the game.

Unfortunately, the project fell victim to strained Sega US-Japan relations when, during a briefing in March 1996, Sega of Japan executives demanded that the whole game engine be reworked. As a result of time constraints and politicking, it soon became clear that X-treme would not be ready for release in time for the 1996 holiday season, and Sega instead decided to rush through a port of isometric Mega Drive title, Sonic 3D Flickies’ Island, for the Saturn instead. X-treme was subsequently shelved, and a whole lot of potential went to waste. Without a killer Sonic title for the console, Saturn adopters had to settle for poor ports of Playstation titles with few decent console exclusives, outside of Virtua Fighter and Nights: Into Dreams.


With Sega’s reputation in tatters following the failures of the Saturn and Mega Drive peripherals, as 1997 came into view, the company knew it was time for a massive shake-up at the top if their fortunes were to be reversed. Bernie Stolar, the former Sony executive who oversaw the launch of the original Playstation, was appointed president of the corporation’s American division. Heavily pushing for the discontinuation of the Saturn in favour of a brand new console, the Dreamcast was eventually born after two dueling designs were considered by Sega’s top brass.

With Stolar orchestrating an innovative advertising campaign – which largely forewent mentions to Sega by name – re-building bridges with retailers to show off the technical prowess of the Dreamcast and promote pre-orders, the hype created for the 9/9/99 release date (which itself featured heavily in promotional material) was enormous.

One last hurrah for Sega.

With gamers clearly sold on the Dreamcast’s potential and launch titles – which included Soul Calibur, Power Stone, The House of the Dead 2 and Sonic the Hedgehog’s long-overdue initial foray in full 3D, Sonic Adventure – pre-orders for the console topped an impressive 300,000 units in the US; with a record-breaking 225,000 sold on launch day alone.

Boasting far better technical specs and graphics than the PS1 and N64 – with Sony’s Playstation 2 a year away from release – Sega seemingly couldn’t have timed their launch better with the Dreamcast. By November 1999, the Dreamcast had surpassed one million units sold, and was named one of the best products of the year by Businessweek.

However, the long-term outlook was not as rosy as it first appeared to be. The truth of the matter was that despite innovating video gaming in a number of areas, outside of its impressive initial launch, sales of Dreamcast hardware and software hadn’t been as strong as hoped. By late 2000 – with the impending release of the Playstation 2 – console sales had slowed significantly, with only 2.6 million units being shifted, well below initial projections of five million-plus.

With Sony holding such a strong position in the market due to the success of the PS1, the public at large had resisted splashing out on the Dreamcast with the promise of a more established brand and stunning graphics soon to hit stores worldwide. Similarly, many third-party publishers held back from releasing triple-A franchises on the Dreamcast, then abandoned Sega in droves when it became clear the Playstation 2 would prevail.

Although the Dreamcast trumped the PS2 in a number of areas, including its native VGA capabilities, innovative VMU memory card peripheral and online connectivity; gamers seemed far more excited at the prospect of the Playstation’s built-in DVD player (which Sega had rejected in a cost-cutting measure, favouring instead CDs/GD-ROMs) and promises of major PS1 franchises being brought into the 21st century.

Piracy also had an adverse impact on the sales performance of Dreamcast titles, with the system’s proprietary GD-ROM format providing little-to-no protection from hackers. Indeed, most copied games were able to be played without the need for a modchip.

Sega was also haemorrhaging its creative talent. In 1999, Sonic creator Naoto Ohshima left Sega due to disagreements over the future of the franchise, taking many employees from the Sonic Team with him to create a new development studio. Desperate for new ideas, Sega began green-lighting many bizarre projects, with titles such as Segagaga (an RPG that parodies the console’s faults and tasks the player with saving the Sega corporation) coming to define the console’s output in those dying years.

A translated screen of Segagaga.

Despite its impressive back catalogue of first- and third-party exclusive titles, by March 2001 – only 18 months after its release – the Dreamcast was effectively dead, with a huge number of projects being cancelled and no more units being manufactured. New Sega of America president, Peter Moore, took the decision to cease production of the console; citing Sega’s poor financial position and inability to compete with Sony’s PS2 as the primary reasons for doing so.

With Sega losing upwards of $160 million, the cessation of the Dreamcast’s production also signalled the end of the corporation’s hardware manufacturing altogether, with the company restructuring to concentrate its efforts on being a third-party software developer and publisher only.

Although a monumental failure in commercial terms, the Dreamcast was different to Sega’s other ill-fated hardware projects. The console had a massively successful launch, and brought many innovations with it which are still prevalent in gaming today.

Crucially, however, the timing of its release proved to be misjudged as it peaked far too soon, with Sega’s previous failures and Sony’s massive launch of the Playstation 2 giving the Dreamcast little chance of being a long-term success.

Third-Party Developer

On January 31, 2001, Sega finally succumbed to the financial pressure they were under and officially announced they were becoming a third-party software publisher. This decision was reached after merger deals with Namco, Bandai, Electronic Arts and even Microsoft (who was about to launch its own console, the Xbox) fell through. Sega announced that they would cease support for the Dreamcast and focus solely on distributing software for other consoles. This move ultimately proved to be a shrewd financial move for the company after it returned to making a profit in 2003, but Sega still kept a foot in the hardware business with their arcade cabinets that continue to provide a generous profit in the Japanese market.

It seems strange to think that Sega would eventually go back to the arcade industry that initially made it so successful, and goes to show that business is often cyclical. Sega was a console innovator through risky hardware ventures such as the Mega CD leading the charge in optical media, and the Dreamcast’s built in modem which paved the way for the online infrastructure that we take for granted today. Nintendo aside, the loss of Sega has produced a homogenisation in the console industry that is sorely missed in this era of miniature PCs. With the 2013 release of some retro-inspired notebooks causing a a surge of interest and rumours of a return to the console market, it seems that there is a hunger out there to see Sega return to the console market. Sega could have really thrived in the online ecosystem nowadays that bypasses those traditional retailers that Sega struggled to appease, but the company is unlikely to get its fingers burned again with a traditional console. At least we’ll always have Paris.

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