I just watched PandaMonium's new documentary on Sega and their now-infamous FY 1997 business report. This video is excellent, and am I wrong to feel it cuts short and should add another hour? It does a great job of showing the heavy wounds Sega of America inflicted upon itself. We all knew about 32X, which was an interesting idea (Sega really needed some way to compete against Nintendo after Donkey Kong Country), but the price was far too high, software development was taken away from Saturn (Virtua Racing and Doom are the obvious examples), and it burned bridges with consumers so badly that the company never recovered.
But let's also note that Sega's finances were in terrible condition. Despite the success of Genesis, they were taking on huge debts, were sitting on mounds of unsold inventory, and there was an obsession with constantly selling new hardware in search of the "next big thing." Kalinske's people still operated under the assumption they were working in the toy business, while the videogame business was evolving in a different and much more stable direction. You don't need a new product every single year to compete, you need stability and consistency for software developers and consumers alike.
One key topic that this video overlooks, and it's one that has fallen down the memory hole: 3DO. Sega of America spent much of 1995 and early 1996 trying to purchase The 3DO Company in order to obtain their powerful 64-bit M2 hardware. This has been documented in newspapers and trade press, but nobody ever really connected all the dots. Namely, Kalinske and Company wanted to replace the Saturn entirely with a new console, intended to be released alongside Nintendo 64, which is when Generation 5 began to take off. These plans fell through, as Matsushita, the owners of 3DO, wanted to license out their hardware and not partner exclusively with Sega.
What kills the Saturn from a business perspective is cost: even at its most streamlined model 2, the console can't be sold for less than $300 without taking losses. At that time, the "mass market" price for videogame systems was $149. You're going against not only Nintendo, who single-handedly revived the US videogame business, but Sony, a consumer electronics giant that owns manufacturing plants, has fingers in the music and movie industries, and is worth $60 billion. All they would need to do to kill Sega was initiate a price war, and that's precisely what happened. PlayStation launched in September 1995 at $299, in June 1996 the price dropped to $199, and in March 1997, that price dropped again to $149--hitting that coveted mass market price only 18 months after launch. Needless to say, once Sega is forced to drop Saturn's price to $199, they begin hemorrhaging money and they are effectively doomed. This is why the company attempted a merger with Bandai, the failure of which cost Hayao Nakayama his job, and why Sega scrambled with software releases on PC and their SegaSoft label, which was rumored to be releasing software titles on PlayStation. They were desperate for revenue and were practically begging on the street for pocket change.
It's interesting to note that, by 1995, Nakayama, who headed Sega of Japan, was the only major executive who wanted to remain in the hardware business. Isao Okawa, the chairman of the board at CSK, Sega's holding company, wanted out, as did Sega of America, who saw the writing on the wall with rising costs of business (videogame budgets would explode during Generation 5), the introduction of Sony, and especially the arrival of Microsoft--once Windows 95 dropped, you knew in your bones that a home console was all but inevitable. Sega was now a very small fish in a very, very large ocean, competing against corporations that could just buy them out completely for the price of a sandwich.
Ultimately, the only thing that could have saved Sega was if their software titles were big hits. Unfortunately, that never happened, and the kids just weren't interested in Sega anymore. Poor relations with retailers surely helped a lot--just look at those numbers of demo kiosks in stores, ouch--and that staggered early Saturn launch was a disaster that almost equaled 32X. But they had the videogames. Virtua Fighter 2, Sega Rally, Virtua Cop, Panzer Dragoon, World Series Baseball, Worldwide Soccer--all of these deserved to sell millions. These are stone-cold classics. Yet, nothing, nada.
Bernie Stolar gets the blame from Sega diehards for that one line in an EGM interview, but how was he wrong? By May 1997, the Saturn was dead in the water. It had no future. And he was stuck with the unpleasant task of piecing together a company that had been smashed by the previous administration, had to staunch the bleeding as best he could, and rebuild the company's brand. Overall, he did an excellent job. The quality of software releases improved greatly, the Sega Sports brand was steadily rebuilt and, at long last, Sega learned to bring software developers in-house instead of outsourcing everything (buying Visual Concepts may be Stolar's greatest achievement). Most importantly, he was crucial in building software support for Dreamcast, including the 56K modem with the hardware, and selling the system for $199 in September 1999.
Another important thing to note during this time is that the US videogame industry suffered a severe decline in the mid-1990s. From 1993 to 1996, the market contracted by nearly two-thirds, and you can see this as the video documents the collapse of Genesis, Game Gear and Pico. Sony was building their PlayStation brand slowly and steadily, but it would take Nintendo, once again, to turn the tide with the arrival of Nintendo 64 and a little-known videogame known as Super Mario 64. In 1997, sales were climbing and videogames began a resurgence that continues to this day.
Anyway, just a few thoughts on this video from PandaMonium. Great work, overall. Can somebody out there give this guy a grant? He needs to be getting paid for this.
