Co-Opetition - Adam M. Brandenburger [119]
Sonic the Hedgehog was the creation of Sega, a rival video game manufacturer. Unable to establish more than a toehold in the 8-bit game, Sega didn’t give up. Instead, it developed a faster, more powerful 16-bit system. It took Nintendo two years to respond with its own 16-bit machine, but by then, with the help of Sonic, Sega was already well on its way to establishing a secure and significant market position.
Was it mere luck that gave Sega such a long, uncontested period to establish itself in the 16-bit game? Was Nintendo simply asleep at the wheel? The answer is more complicated than that, and this is where the link between games comes in. The new 16-bit game and the old 8-bit game were closely linked. When Sega launched the 16-bit game, Nintendo’s 8-bit franchise was at the height of its value. That gave Sega a judo opportunity to use Nintendo’s strength against itself.
Origins: Service Games The name Sega, although it sounds quintessentially Japanese, is actually short for “Service Games.” The company was founded in Tokyo in 1951 by two ex-servicemen to import arcade games and jukeboxes to U.S. military bases in Japan. A few years later, David Rosen, another American ex-serviceman, began importing amusement machines to Japan. The two operations merged in 1965 and became Sega Enterprises. Soon afterward, Sega launched Periscope, a “torpedo” game, which turned out to be a big success in Japan. Sega brought Periscope to the United States, where it broke the dime price barrier to become the first 25-cent arcade game. Sega’s success caught the attention of conglomerate Gulf+Western, which acquired the company in 1969.
Sega used its knowledge of arcade games to move into home video games, introducing an 8-bit system, the SG-1000, in 1983. But the SG-1000 never really took off, selling fewer than 2 million units in Japan and the United States. Sega couldn’t break into Nintendo’s virtuous circle.
Gulf+Western lost interest in Sega and in 1984 sold the company to a management buyout team. David Rosen, Hayao Nakayama (president of Sega in Japan), and Japanese software house CSK joined forces to buy Sega for $38 million.
The New Beginning: Genesis In October 1988 the reborn Sega introduced its 16-bit Mega Drive home video game system. Based on Sega’s arcade machines, the 21,000-yen ($165) Mega Drive had many advantages over 8-bit systems, including better sound, more colors, and the capability to display multilayered images.
Sega adapted a number of its arcade games for the Mega Drive but found it hard to sign up third-party software developers to design games for the system. During its first year on the market, the Mega Drive chalked up sales of only 200,000 units.
Sega’s 16-bit system came to the U.S. market in September 1989. Renamed Genesis, the Sega system sold for $190, and games were priced between $40 and $70. Sega came up with some hit games but no home runs. One title, Altered Beast based on Sega’s line of arcade games, gained notoriety for its graphic violence. Pop star Michael Jackson helped Sega develop Moonwalker, a game in which Jackson used his dancing skills to overcome attackers. Sega also built up alternative distribution channels, selling through software retailers Electronics Boutique, Babbages, and Software ETC. Still, sales were slow.
Sega’s fortunes started looking up in 1990, when Nakayama hired Tom Kalinske, formerly of Matchbox, to head up Sega’s U.S. operations. Kalinske realized: “We have got to reduce the price of the Sega Genesis by $50. We’ve got to bundle in our best software—Sonic the Hedgehog—and advertise to the world that we are better than the competition.”5 In June 1991 the Genesis, together with Sonic, went on sale for $150. Promoted with the slogan “Genesis does what Nintendon’t,” the Sega system became the “cool” machine to have. Sales soared, and software developers rushed to turn out games for the system.
Super Nintendo Nintendo had been developing a 16-bit