Why Did Sega Fail? A look at the 32X, Saturn, and Dreamcast.

If there’s one talking point that seems to be an uncontested truth on the internet, it’s that the 32X failed and by merely existing caused the eventual downfall of Sega as a console manufacturer. With a number of influential online personalities pushing this narrative into what has become a defining Ecco chamber, who could argue? A console add-on fighting for market share against Sony, Nintendo, and Sega’s own approaching juggernaut certainly was the nail in the coffin…… OR was it? There are a sizable amount of thoughts and feelings with little substance to back them up. While it’s easy to take this position, this is not at all how the story lines up when looking at the facts from a historical perspective.

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So where on the grand scale does the final three systems Sega would make factor in? Where they, in reality, a failure? And how much culpability does the 32X, Saturn and Dreamcast have in Sega’s end as a console manufacturer? From the 32X to the Dreamcast, we are going to examine the lead up to Sega’s exit from the industry. This is retro impressions why did sega fail?

To really understand the logic behind the 32X, we need to go back to the beginning. Not 1899 with the birth of Irving Bromberg or 1945 with the creation of Sega as service games. I’ve already covered this in depth with a video you should probably check out after you’re done here.

I’m talking about 1983 with the release of Sega’s first home console, the SG-1000. While the SG-1000 isn’t necessarily important on its own, it’s influence on new consoles going forward was without a doubt critical as Sega utilized a design ideology that for the most part remained consistent through the development of each new flagship machine. For Sega’s core console line up from the Sg-1000 to the Genesis Sega, there was an internal designation used of Mark I though Mark V. The Sg-1000 and 1000 two, are essentially the same system on the inside with the changes being to the outer shell, the addition of a new card slot, new controller and the ability to detach it from the console being the other differences. The Mark III carried over a number of enhanced versions of critical SG-1000 chips allowing for backward compatibility with the prior system. There were a few hiccups in doing so such as Sega’s shift to a RGB color pallet that causes games prior to this era to not display the color intended. The Sg-1000 and 1000 two, are essentially the same system on the inside with the changes being to the outer shell, the addition of a new card slot, new controller and the ability to detach it from the console being the other differences.

The Mark III carried over a number of enhanced versions of critical SG-1000 chips allowing for backward compatibility with the prior system. There were a few hiccups in doing so such as Sega’s shift to a RGB color pallet that causes games prior to this era to not display the color intended. This isn’t to say you won’t run into issues with certain bios, but for the most part games from the prior generation worked as intended.

It’s also the first of two occasions Sega’s console code name was kept for release. Sega would later release the Master System which like the SG-1000 Two before it, this also was a console reshell of the Mark 3 offering an Americanized look and new controller. While updated bios kept the console from playing SG-1000 games, the hardware was still onboard to do so. The Japanese release of the Master System would offer built in FM sound which greatly improved the music in some games. The Sega Mega Drive continued the tradition of building upon existing hardware to ensure the best possible backward compatibility. The core of the US master system was the building block allowing almost universal compatibility with the prior generation.

I say almost as some games relied on the SG-1000’s TMS9918 video mode. Sg-1000 support including support for this video mode was done away meaning a very small number of Master System games including F-16 Fighting Falcon which utilized this mode won’t work. Sega had tried to find success over the course of 5 console releases and with the Mega Drive they finally achieved market dominance in a country not named Brazil. In fact, they saw market dominance in just about every country they release the console in with one exception, Japan.

It released in 1988 lagging behind the PC Engine in sales and when the Super Famicom release in 1990, it about killed the system with the PC Engine outselling it two and a half to one and the SCF outselling it nearly 5 to 1. The end total of systems sold per region would see similar sales of Mega Drive units in Japan and Brazil while the SNES saw more similar sales between Japan and North America. In late 1993 Sega started development on two new consoles. One that Sega could market as affordable access to the next generation which was intended to exist within the anticipated transitional period to 3D from existing technology.

A system designed as the true successor to the Genesis. The other would be their next flagship console meant to carry the company into the future. Similar hardware would be shared between both systems to help make the transition into 3D seamless for all studios connected to Sega. The search for the backbone of both new platforms was essentially over before it began as Sega of Japan had already signed a contract in ’92 for Hitachi’s SH-1 and upcoming SH-2 processes.

Sega of America President Tom Kalinske felt the way forward was with the cheaper Silicon Graphics chip, but the decision had already been made, and no serious consideration was given to Kalinske’s request. While Tom Kalinske couldn’t get Sega on board to build their next generation of consoles using the Silicon Graphics chip, Nintendo would soon after acquire the very chip Kalinske was after and build the N64 around it. Sega’s concept for their new 32X machine aimed to bridge several gaps in a simple fashion. It would rely on the formula that Sega had standardized using the prior generation’s chipset as the foundation. A design choice aimed at helping developers prepare for the full Jump into 3D by giving them a crutch via assistance from familiar chipsets meant to ease them into the learning process. Most important though, it would maintain full backward compatibility with the Genesis.

By utilizing the full chipset from the Genesis base to build on, prices were already established for those components and at this point, they were fairly cheap. Further affordability for the base console would be achieved by relying on the more cost efficient cartridge based hardware rather than cutting edge and expensive cd-rom technology. The last key bit was to help developers prepare for the Saturn which was built around the same two SH-2 processors driving the 32X. In effect, Continuing Sega’s hardware philosophy through to the next generation.

As with all past consoles, this was a Sega of Japan mandate but what truly defined the 32X was Japan’s invitation for Sega of America to participate in the process of bringing the system, software, and associated development tools to market. Sega’s focus was on launching the Genesis 32X in the American Market first. After all over half of all Sega Genesis units sold were in North America. Like every Sega home console before it, Hideki Sato had started the project with his team in ’93 and on January 8th, 1994 they held a meeting with Sega of America Executives to discuss this new platform. Sega of Japan would consult with Joe Miller, who was the head of research and development at Sega of America trying to get a feeling for what North American Developers would like to see.

With Sega’s main success coming from America, they felt for the first time it was important to include those responsible for that success. The meeting was to ensure everyone was on the same page, software would be ready for the system’s launch, and most important, Development tools would be fully flushed out before the Saturn saw it’s worldwide release scheduled approximately one year after the 32X. Sato’s team was already short on help and time having full responsibility for the Saturn, the Mega Drive Karaoke add on, and the hardware design of the 32X platform. So Miller and his team were made responsible for prepping development tools and making sure Japan’s Requirements for the 32X release were met on schedule. Joe Miller for his part, pitched a slightly different approach than Sega of Japan’s full console replacement. Rather than building a new standalone system as the first step, they could cut the cost by creating an add-on which would only contain the new components required giving affordable access to the next generation for the nearly thirty million Genesis owners.

The idea was well received, and Sega shifted gears away from their all in one console to focus on what would become the mushroom-shaped 32X add-on. The all in one unit wasn’t scrapped, it was merely postponed with the intention of shipping the following year as a full replacement to the base Genesis console once the cost of manufacturing could be reduced. Reception to the 32X was overwhelmingly positive, and it’s November 21st launch was declared by retailers and market analysis as a smashing success with some of the more influential publications calling it one of the hottest gifts of the ’94 holiday season. Sega had over a million preorders from retail shops but could only produce six hundred thousand before Christmas rolled around, all of which sold leaving the shelves barren of 32X units by the close of ’94. At launch, the system was considered by Sega, Retailers, and the Press to be an absolute, unquestionable success, but ’95 was on the horizon, and things would quickly fall apart. The 32X wasn’t the only new home console Sega was working on.

Sega’s next console was initially envisioned as one that could play Cartridge and CD-based games. The Jupiter would be a more cost efficient Cartridge only version while the Saturn handled both. Sega would ultimately scrap the idea of releasing games on both Cartridge and CD for retail sales though the cartridge slot remained on the final release to serve other purposes.

Though the Jupiter was scrapped, the project was moved to their arcade devision under the name Sega Titan Video Game System which was a Saturn that ran software using Carts rather than CDs. While the 32X was released in November of ’94 in the US, Japan instead received the Saturn during the same period. Like the 32X, demand outweighed supplies, and by Christmas of ’94, the Saturn was sold out with over 500,000 units moved. The console launched at approximately $450 US dollars in Japan and included the pack in game Virtua Fighter, one of the biggest arcade games in Japan at the time. Sega looked poised to finally take the top spot as generation market leader for the first time in Japan.

Nintendo wasn’t close to releasing new hardware, NEC who outsold Sega the prior generation fell flat with their new PC-FX, and the 3DO was starting to struggle as anticipation grew for their new M2 platform which would ultimately never release. Sega was on top, they however had one challenger, and that was Sony. The PlayStation released one week after the Saturn and kept decent pace with Sega’s system through the first two years though remaining in Second place. Sony possessed two massive advantages over their competition. They were first and foremost a technology company specializing in the development and manufacturing of microchips and hardware.

This allowed for them to manufacture the most expensive parts in-house without the need to source CD Roms and processors from other for-profit companies like Sega and Nintendo did. Sony’s low cost to manufacture custom components was a massive advantage. An example of this impact is that Sega launched the Saturn losing $100 on every unit sold while The Playstation Launched $70 cheaper than the Saturn in Japan and was still very profitable. “Sony had annual sales of 3 trillion yen. Among their hardware, they made their own CD-ROM drives. They have their own semiconductor factories.

Once when I was talking with Ken Kutaragi [the creator of the PlayStation], he said “Hideki-chan”—he refers to me using the “chan” diminutive—“Hideki-chan, there’s no way you can beat me. Where are you buying your processors? You’re buying them from Hitachi. You’re buying them from Yamaha. What about your CD-ROM drives?

You’re buying everything. By buying from Hitachi, Hitachi is profiting. To put it simply, you buy everything and you can’t make anything yourselves. We can make everything ourselves, including custom parts. We have our own factories.” Kutaragi said. “ Hideki Sato Sony also realized Nintendo and Sega had one thing they lacked, and that was first party games.

When designing the PSX, Virtua Fighter released in arcades in ’93 being one of the most popular releases in Japan that year. The first 3D fighting game was so influential that Sony changed the PSX focus from a 2D platform to a 3D one in hopes of netting similar games on their system via exclusive partnerships with Sega Arcade rivals such as Namco. Up to this point, Sega and Nintendo heavily pushed their hardware via first party software often times giving little care to their third party supporters. In fact, Nintendo had a notoriously poor reputation as they often strong armed game developers into unfavorable contracts. In addition, Sega and Nintendo both required rather large orders for software to be manufactured making publication very risky for smaller developers.

If the game was poorly received, the company risked losing everything, and if the title was popular enough to sell out, I took around three months for a new order to be processed killing any momentum the game might have had. Sony based their system off the very successful Sony Music business model. The minimum order required would be vastly lower than Sega or Nintendo, Sony would keep a dramatically smaller percentage, and most important, turnaround for new orders would be ten days max. Sony gave fair contracts, supplied great development kits at reasonable prices, and promises a distribution system based on their music model. Developers couldn’t sign up fast enough as many of the larger studios pulled support away from Nintendo and Sega in support of the more lucrative Playstation.

Sega of America had big plans for 1995 in what could be considered a one-two punch. They planned to release the Saturn in North America on September 2nd in order to ensure success by bolstering what was considered at the time a merger launch line up. A launch lineup that helped sell systems in Japan with Virtua Fighter, but lacked any game Sega of America thought would give people a reason to run out and buy Sega’s new system. Sega of America wasn’t ecstatic about the direction Japan had taken which resulted in an expensive system but felt confident that with the September 2nd, 1995 launch and the existing 32X and Genesis platforms, things would work out.

Around November following the Saturn’s world wide launch, the all in one Genesis 32X hybrid code named Neptune would also ship hitting shelved at a very reasonable $150.00 price point. The PlayStation was finding success giving the Saturn stiff competition in Japan, and as tension started to heat up, Sony planed the PlayStation US release one week after the Saturn. Knowing this gave Sega Executives back in Japan an Idea. Even though games weren’t ready, hardware was still unavailable due to the high demand in Japan, and no one was prepared for a new Sega System, they would shock the world by announcing at their E3 press conference that the system had Secretly been shipped to select stores and was available for purchase, immediately. Sega of America fought to change minds in Japan, but for the first time since Tom Kalinske took charge, he was overridden and told to resign or make the announcement.

The console would launch May 11th with a very limited supply and almost no notice to the four retailers who received units. Sony took stage shortly after Sega delivering what has become known as the shortest and most famous E3 press conference ever, the price heard around the world. Sony would be selling the PlayStation near their cost at $299 while Sega was still losing around $100 per unit at their $399 price point.

The short supply and rash decision to release the Saturn without warning meant Sega would need to pick winners and losers. They would not be shipping preorders to almost every retailer who long ago placed orders and anticipated the arrival of units that were for the most part presold. With so few units available for the surprise launch, the decision was made to give exclusive assess to four retailers.

Toys’R’Us, EB, Software Ect, and Babbages being the chosen ones. It’s a move that left major retailers such as KB Toys in the cold, and for many retailers including KB Toy, the damage caused was long lasting with most stores canceling all preorders and refusing to ever carry Sega’s Saturn store shelves. For many rural areas, it meant that Saturn would only be available by mail order(9) for the duration of the systems life. you know I had a lot of friends at retail I spent my whole life building retail relationships with all these guys and I was very good friends with the senior management and almost every retailer in America and I remember the very close friend at KB was so mad at me I think he still mad at me today you know we offended the retail America greatly through this strategy and it was not a smart thing to do in my opinion Retailers aren’t the only ones who Sega had created issues with. Consumers were also upset when stores were unable to fill preorders.

Some who had been saving for the September 2nd launch had yet to acquire enough funds to afford the anticipated purchase losing out on an experience they had been dreaming about, and for many supporters of other Sega Hardware the launch showed Sega’s word couldn’t be trusted. American magazines also took issue with Sega who convinced several publications to run a massive preview on the upcoming September release only to publish their May preview issues while having the system sitting on shelves for sale. This put Egg on the face of those gaming journalist and in effect soured all future coverage of the Saturn.

Sega of Japan hoped to have a smashing success with their surprise launch, but instead, the self-created disaster was beyond expectation. By August rumors were running wild that Sega had shifted nearly all resources to the Saturn and though it wasn’t publicly announced, all Sega systems except the Saturn were discontinued. The rumors were of course true, Sega of Japan felt in order to save the Saturn in America, all resources should be diverted from other projects to their flagship machine. While the market anticipated a price reduction in Saturn Hardware prior to the PlayStation hitting North American store shelves, Sega shocked the industry by not moving off their $400.00 price point for until May the following year. To make matters worse, Sega had a culture that frowned upon executives not meeting profit goals, and so self-sabotage occurred resulting untold damage as their market presence in North America all but disappeared.

As Hideki Sato puts it. “For each Saturn sold, we lost about 10,000 yen ($100). That’s how the hardware business works.

But the goal was to recoup the losses from software royalties. If there are lots of third parties, lots of games sold, and we get 2,000 yen for each, it’s possible. However, if software sales are weak, and for each console sold, we’re ultimately losing 5,000 – 6,000 yen, what’s going to happen from the business perspective?

We’re going to stop selling consoles. This later became a huge problem. Every month, or even every week in Sega’s case, we had meetings to examine the current situation. Each department would report on where it stood in relation to its goals. So, imagine if the sales goal for the end-of-year sales war is, say, 3 billion yen, and the profit goal is 300 million yen—but wait, the profit is in the red. That profit is a very important factor, so what does the business side do?

They decide that it’s not necessary to have sales of 3 billion yen. Instead, 2 billion yen will do. In other words, they stop selling 1 billion yen’s worth of hardware. That way, if each unit sold is losing 5,000 yen, and we extend that to 20,000 units, that’s 100 million yen lost.

By stopping the sales of 20,000 units, in a way that becomes 100 million yen in profit. So they slammed on the brakes in terms of unit distribution. Even though there were people that wanted to buy the console, Sega didn’t want to sell it, because the more they sold the more they went into the red.

From the perspective of the third parties, they saw that Sega was curbing the sales of the Saturn. The more consoles there were, the more games would be sold. But if console sales were being limited, then this created a serious problem. As they say, poverty dulls the wit. This led to a negative feedback loop.” While the Saturn struggled to gain a footing, the Genesis was still seeing strong sales on the back of the last contracted games to release for the hardware. But for Sega, they were only interested in closing out the systems life and remaining inventory.

Even with their struggles, the early success of the 32X, strong Genesis sales, and market dominance in Japan meant 1995 would close with Sega claiming victory over a still strong Nintendo and quickly growing Sony. 1996 Saw the Genesis screech to a halt with under twenty games released, almost all being sports games with updated rosters. The 32X would end life with approximate sales of over 1 million units while the Saturn sold just under 10 million. Analyst anticipated the Saturn to sell north of 17 million units due to its momentum in Japan, but at the start of ’98, Japan put the system to bed in anticipation of launching the Dreamcast which they hoped would return them to the top position World Wide.

What might be the most shocking detail from this time is that Sega remained profitable every year with near record sales in ’94, ’95, ’96, and ’97 before seeing their first financial loss in’ 98. This can mostly attributed to two things. First is the development cost of Sega’s upcoming Home console, the second was a dramatic slowdown in Saturn hardware and Software sales. Sega’s first party lineup is generally seen as the reason the system has so much success staying ahead of the Playstation in Japan for over two years. The lack of quality third party support and games such as Final Fantasy 7 are often sighted as the reason Sega lost its footing in Japan against the Playstation. WIth Sega losing the battle to Sony they returned to the drawing board to prepare for their next home console.

For Sega, the Saturns Success in Japan and failure in North American was confirmation that success going forward would be based the Japanese market and not America. They also had concerns of Sony’s PS2 launching in ’99 and desperately wanted to be first to market in another attempt to secure early and dominate market share. The Saturns Successor would be called the Dreamcast, and in early ’98 it was announced that the console would launch in Japan November that same year. Four Years and Five days after the releases of the Saturn, Sega would launch their next and final home console with disasters results.

Sega intended to mirror the Saturn’s Japanese launch with over 500,000 unit preorders and intended to ship on launch day. However as the date neared, NEC who was responsible for supplying the Graphical Chipset ran into production issues leaving only 150,000 units for Sega in total for all of 1998 creating similar issues with retailers and consumers in Japan as they had done prior in North American with the Saturn’s disastrous launch. Also similar to the Saturn release, many of the intended launch games were pushed back into the following year leaving consumers only four games to choose from with Virtua Fighter 3 being the only game with mass appeal. The Japanese launch was a mess and though they hoped for the same magic that had given the Saturn success in Japan, what they ended up with is a launch that more mirrored the Saturn’s in North America. (13 & 14) By the end of March 2000(15) The Dreamcast has sold 1,950.000 units in Japan, 2,500,000 in North America, and 1,000,000 in Europe. By March of 2001, the Dreamcast sold another 470,000 in Japan, 930,000 in Europe, and 1,780,000 in North America.

Sales figures that fell far short of Sega’s expectations and ones that would continue to see their profit run in the red. While the end number of Dreamcast units sold very closely mirror worldwide sales of Saturns, one number is very telling in relation as to why the Saturn years remained profitable while the Dreamcast didn’t. Software to hardware attach rates for the Saturn were Ten to One versus 6 to one for the Dreamcast. To put this in other terms, the Saturn and Dreamcast sold approximately the same amount of hardware units while the Saturn outsold the Dreamcast with software by over 60%.

This meant that advertising dollars and game development cost were not receiving their anticipated returns. This in turn signaled the end of a System that never could gain a profitable foothold. Sega would blame the Japanese economy for their failures there and it had certainly seen a downturn. However the demise of the Dreamcast there appears to closely mirror that of the Saturn in America. A lack of games, a botched launch, and the erosion of consumer confidence being the most prime factors.

There had also been influential people at Sega who had for some time been hinting at their exit from the console market. This included founder David Rosen and Sega Chairman Isao Okawa who both felt Sega’s best path forward might be focusing on games rather than hardware. I think what’s really interesting in this story is the man behind the company throughout its entire life as a home console manufacturer. In 1984 Isao Okawa purchased controlling stake in Sega and remained greatly invested in Sega’s successes his entire life.

He personally gave forty million of his own money to see the Dreamcast come to market and when the company failed, he gifted the company 85 billion yen in an effort to save Sega. Okawa would pass away just months later having saved Sega from certain bankruptcy thanks to his generous donation. As I said before, Sega remained profitable until ’98 when the Dreamcast launched and they continued to lose money in dramatic fashion until 2002. Could Sega have avoided their looming bankruptcy had they exited the console market at the end of the Saturns life?

I think it’s fair to assume that the answer is yes. So, did the Saturn or 32X kill Sega as a console manufacturer? I think the evidence is overwhelmingly against that idea. Even with the botched 32X and Saturn launch Sega remained profitable and so the Dreamcast remained a logical next step for a company that felt they could do better with all prior faults considered. I think it’s clear that a lack of proper respect of third party support along with an over-dependence for first-party software put both Sega and Nintendo in a similar position as Sony took control in the 5th generation.

Even with that aside, Sega’s marketing tactics and dishonesty with their strongest supporters derailed two potentially strong systems in America and one in Japan that looked to have substantial momentum coming into their launch. It’s a storm Nintendo had the funds to weather while Sega was never in a position to deal with the ramifications caused by what was ultimately a flawed business model, poor business decisions, and a company called Sony who had the foresight and wherewithal to capitalize on It all. I feel discontinuing 32X, and Genesis was a massive misstep.

The Saturn was not only too expensive for their average customer, but for many potential North American customers such as myself, stores refused to carry it making the system inaccessible. Sega cut off games to all their other consoles leaving zero options outside of other cheaper and readily available non-Sega systems. While Nintendo continued to support the SNES with quality titles until ’97 in North America and ’99 in Japan, Sega was wrapping things up with the Genesis coming into ’96 focusing strictly on liquidating remaining inventory. Similar to Nintendo, Sega entered the home console market in part as a way to market their vast library of games and in the nearly twenty-year timeline they maintained market presence, a lot had changed from the launch of the SG1000 to the end with their Dreamcast. Price The market became such a place that Sega didn’t necessarily need to fight the console war to find success and ultimately I think that’s the reason they have continued to succeed as a company in their post console years.