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Sega and Sony: New Insight into the Partnership That Never Came to Be

Over the past twenty years, former Sega of America president Tom Kalinske has often said that Sega and Sony were close to forming a partnership to co-develop a 32-bit console, but that Sega’s Japanese management shot down the idea. Recent evidence translated here for the first time adds new insight into this from the Japanese perspective.

Kalinske recalls, “One of the key reasons why I left Sega is when we had the opportunity to work with Sony, when [Sony Interactive CEO] Olaf Olafsson, [Sony Corporation of America president and CEO] Mickey Schulhof and I had agreed we were going to do one platform, share the development cost of it, share the probable loss for a couple years on it, but each benefit from the software we could bring to that platform.”[i]

“I remember we had a document that Olaf and Mickey took to Sony that said they’d like to develop jointly the next hardware, the next game platform, with Sega, and here’s what we think it ought to do. Sony apparently gave the green light to that. I took it to Sega of Japan and told them that this was what we thought an ideal platform would be, at least from an U.S. perspective, based on what we’ve learned from the Sega CD, and our involvement with Sony and our own people. Sega said not a chance. Why would it want to share a platform with Sony?”[ii]

“I thought [this] was the stupidest decision ever made in the history of business. And from that moment on, I didn’t feel they were capable of making the correct decisions in Japan any longer.”[i]

It is important to note here the role that Kalinske served within Sega. He was appointed president of the daughter company Sega of America in 1990 by Sega Enterprises Ltd. president Hayao Nakayama. In this position, he was primarily responsible for the marketing and distribution of Sega’s home consoles in North America and the production of software by local developers. Matters concerning manufacturing, research and development, and the future direction of Sega were largely controlled by the parent company in Japan.  As such, it was certainly a bold move to go to Sega’s executives and propose a partnership with one of Japan’s largest electronics manufacturers.

In an interview conducted in 2018, Hideki Sato, then head of R&D at Sega, recalls that Isao Okawa, founder of CSK Holdings and chairman of Sega, first brought up the idea of a potential partnership. Sato states, “Okawa had a close friendship with [Sony president] Norio Ohga. They met together, and Okawa said to Ohga, ‘We’re doing well, but we just can’t seem to beat Nintendo. How about Sega and Sony work together?’ The suggestion was then passed along to Nakayama.”[iii] This likely occurred sometime at the end of 1992, after Sony had finally severed dealings with Nintendo over their failed partnership to develop a CD-ROM add-on for the Super Famicom.

Sato continues, “I met with [PlayStation creator] Ken Kutaragi, my counterpart at Sony on the technical side, and we talked about various things. We discussed how we might proceed if we decided to partner up and that sort of thing.”

This culminated in a meeting between the two companies. “On their side, they had Ohga, Kutaragi, and Kutaragi’s boss, Tamotsu Iba. We had Nakayama, myself, and one other guy from IBM, who we were working with on a computer at the time. We met for dinner at a Sony reception hall in Shinagawa.

“While eating, Ohga revealed to us that Paramount had almost sold Sega to Sony [in the early 80s]. It was the first time that I had ever heard of this, and I think the same was true for Nakayama. Sony was located in Shinagawa, and Sega was in Otorii, not too far away. When Sega entered the home consumer market [in 1983], Ohga became quite interested in the company. He himself said it: he was very interested. He was negotiating with a representative from Paramount to buy Sega, and they agreed that the next time the representative came to Japan, they would finalize the deal. However, on the flight back to America, the representative suffered a heart attack and died. He died, and the deal never came about. After that, Nakayama found a sponsor in Okawa and successfully negotiated with Paramount to buy Sega.

“Ohga told us this story, and Nakayama seemed surprised, but not amused. If the man from Paramount had not died, Sega would have been part of Sony before Nakayama could have acted. Well, they both start with ‘S,’ so maybe it would have been OK (laughs). When I talked with Kutaragi, we discussed how even though he was in Shinagawa and I was in Ota, both companies started with ‘S’ and our shared enemy Nintendo was on the other side of Mt. Hakone, so maybe it would be OK if we worked together…

“Nakayama was a straight-talker. He very directly asked Ohga, ‘Do you want to partner with Sega or not?’ Ohga listened, seemed about to respond, and then launched into an unrelated story. This happened over and over. He was beating around the bush, and Nakayama got very impatient. Nakayama would basically say, ‘Are we doing it or not? Give me a clear answer,’ and Ohga would reply, ‘Well, recently, I went on a trip to Sweden, and…’ Ohga started talking about seeing the aurora borealis, and then about how to conduct an orchestra.”

Ohga continued with such talk and launched into an explanation of why CDs were designed to be 74 minutes: Ohga had wanted to be sure that Beethoven’s 9th Symphony would fit on a single CD. Sato recalls, “Basically, he didn’t respond to any of Nakayama’s questions.

“The next day, Nakayama came and asked me how I thought it went. I responded, ‘Well, I don’t quite think it’s going to work.’ Nakayama liked to run things his way, and with a person like Ohga, I could see that Ohga would gain the upper hand in any partnership. At the time, Sony had sales of two or three trillion yen, while Sega only had sales of 400 billion yen. If we decided to work together, Sony was definitely going to get the upper hand. We couldn’t be sure of who was going to be responsible for what in such a partnership. So I told Nakayama that it was going to be difficult. He replied, ‘I also think it’s going to be difficult. Alright, let’s not do it then.’ And we decided not to pursue anything with Sony.”[i]

Were Sato and Nakayama right to fear that a partnership with Sony would be unbalanced against them? Some insight can be gained here from considering the situation between Nintendo and Sony. Both companies had signed a contract in 1989 for Sony to develop a CD-based add-on to the Super Famicon, as well as a stand-alone console incorporating the Super Famicon. Under Kutaragi, Sony spent the next two years developing the system. However, just as Sony was preparing to announce the console in 1991, Nintendo completely reversed directions, secretly partnered with Philips, and abandoned Sony.

Why did Nintendo back out of its deal with Sony? Historian Reiji Asakura writes, “Nintendo was concerned that its business would eventually be taken over by Sony if Sony continued to drive product development. Although Nintendo was dominant in the game-machine market, the company was fully aware that Sony had a superior research-and-development operation and thus had the potential to outstrip its competitors in the area of technological advancement.”[iv]

Norio Ohga offers more details: “What we learned later was that Yamauchi’s son-in-law, then the head of Nintendo’s U.S. operations, had apparently nixed the deal. The son-in-law, Minoru Arakawa, had witnessed firsthand the stunning growth in U.S. sales of CD-ROM drives and disks. Arakawa knew that Sony had built a strong position in CD-ROM products. And he apparently feared that Sony would get the better of Nintendo in a collaboration.”[v]

Nintendo was likely right to be concerned about Sony’s motives. Kutaragi did not hold back about his intentions in developing the PlayStation and in collaborating with Nintendo: “I wanted to start up a business that would become a new major income source for the company in the future… [Sony executives] thought it would take too long to start a new business from scratch with venture capital. So the only way to initiate change was from the outside. We could join forces with the best-performing company in the field. We would sell them our technology, establish a track record, and use that as the springboard to future success. That was my reasoning.”[iv]

Kutaragi wrote in a February 1992 business report that “The industry is at a watershed. Nintendo’s superiority is crumbling. It has become obvious that Nintendo no longer deserves to be Sony’s partner. Sony should go its own way.”[iv] By mid-1992, Sony had abandoned all plans of forcing Nintendo to honor its original contract. At a meeting of company executives, Kutaragi passionately announced that Sony must either develop a game console on its own, or abandon the idea entirely. When he revealed that his team had already developed a prototype for a much more powerful console than what they had been working on with Nintendo, Ohga gave his approval for the project to proceed.

This raises the question of what Sony might have hoped to gain from a partnership with Sega. There was certainly a strong desire from Kutaragi and others involved in the PlayStation project to be independent. Shigeo Maruyama, who would later become chairman of Sony Computer Entertainment, recalls, “I told President Ohga through President Toshio Ozawa [then president of Sony Music] that there would be trouble if we didn’t do it on our own. I said that the format shouldn’t be shared with another company, and that we had to secure it for ourselves.”[iv] Kutaragi offers a similar sentiment: “We ended up having problems because we tried to work with another company. It would be better to put the same effort into creating a 3-D world of our own.”[iv]

Sega did not have much to offer Sony in terms of hardware design and manufacturing. It had always relied on the use of off-the-shelf components for its consoles. Sony, on the other hand, had a well-established hardware R&D division and strong manufacturing capacity, coupled with Kutaragi’s clear vision of a 3D-based console at a time when most arcade games were still 2D. Sega’s primary strengths were in software development and in its long experience and brand recognition in the game industry. Although the terms of a potential partnership between the two companies were never discussed, it is possible, if not likely, that Sony would have handled hardware development while Sega focused on software. Indeed, this mirrors the partnership that Sony and Namco formed in 1993. Namco worked closely with Sony to create the software development tools for the PlayStation and shifted most of its development to PlayStation titles. In return, it received preferential treatment from Sony. Namco became, essentially, a privileged third-party developer. As Shigekazu Nakamura, senior managing director at Namco, states, “We were the ones that really built up the [software development] library. We cooperated with the library development staff by telling them what items and functions we wanted. From Sony’s point of view, we are more of a second-party than a third-party developer.”[iv]

The idea that Sony was interested in partnering with Sega only in software development might not be far off the mark. After the decision to not form a partnership, Hideki Sato continued to meet with Kutaragi: “I would have a polite dinner with Kutaragi about once every three months… Once when I was talking with [him], 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? From Hitachi. From Yamaha. What about your CD-ROM drives? You’re buying everything. By buying from Hitachi, Hitachi is profiting. You can’t make anything yourselves. We can make everything ourselves, including custom parts. We have our own factories.’ Near Nakashinden, they had a huge factory where they made audio equipment that they were using for the PlayStation. Their cost structure was completely different.

“‘That’s the way it is, Hideki-chan,’ Kutaragi told me. ‘So quit the hardware business. Why not just do software? We’ll give you favorable treatment.’ He wanted us to go third party. We had been going for so long in the hardware business, for better or worse, and to go third party now? We had been half-heartedly successful in America once, and this made it impossible to quit the hardware business. Maybe if the Mega Drive, the Genesis, had been a failure, things would have been different. But we had a strange taste of success.

“At that time, Sega’s brand image was incredible. When you powered on a Sega console, ‘SEGA’ would always appear first. Even if it was a third party game from Namco (or anybody else), Sega’s name always appeared first, followed by Namco’s. So anybody that had a Sega console, it didn’t matter what game they played, they would see Sega’s name. This helped plant the Sega brand in peoples’ minds. This was incredibly effective. To go from that to a Sony third party… Well, we had already started so it was too late.”[iii]

In hindsight, it is easy to qualify statements such as Sega not partnering with Sony being “the stupidest decision ever made in the history of business.”i However, as shown here, the reality of such a partnership was certainly more complex. Would Sega’s position have been better in the future if it gave Sony a helping hand into the market? Should Sega have abandoned hardware development and gone third-party instead of developing the Saturn? There was certainly strong pressure from within the company to do the latter. In the end, Sega took a risk that, while it did not pay off financially, did result in an extension of the company’s legacy for innovative hardware and software.

Update (June 1, 2019): Then-vice president of Sega of America, Shinobu Toyoda, recently made the following statements about the possible Sega-Sony partnership:

“There were discussions with Ken Kutaragi and the Sony engineering staff about the joint development of Sega’s next game console. Sony was first working with Nintendo, but they couldn’t reach an agreement and parted ways. After that, Sony wasn’t entirely against a partnership, but they started to consider entering the game market on their own. The president of Sony of America at that time was Mickey Schulhof, and he had a lot of influence within the company. At a Sony board meeting, he proposed, ‘Rather than developing a next generation console on our own, I think we should partner with Sega. How about giving it a try?’

“The reason was that Sony of America had worked with Sega on FMV games such as Night Trap.

“The two companies held a series of meetings to discuss the development of a next generation console, with Ken Kutaragi representing the Sony side and R&D head Hideki Sato representing the Sega side. Unfortunately, they failed to reach an agreement within half a year, and discussions ended. The Sony side argued that the next generation console should be fully focused on 3D graphics, while the Sega side argued that it should also have the capacity to do 2D sprite graphics.

“Because Sega was so familiar with the state of the game industry and Sato understood well the feelings of game developers, I think that Sega judged that a sudden, complete shift to 3D games would be too difficult. However, the neophyte Sony—well, ‘neophyte’ might be a bit impolite, but they were entering from another industry, and they were able to pursue what they considered ideal game development without any preconceived fears.” [vi]

Update 2 (January 2, 2020): Shuji Utsumi, former vice president of product acquisition for SCEA, recently told Polygon that Kutaragi himself made the call not to pursue the deal with Sega. Utsumi said that Kutaragi would return from meetings with Hideki Sato and Sega of America staff and tell coworkers that he probably would not accept the deal. Early in the process, he decided not to take Sega’s offer. [vii]

Taken together, Sato’s and Utsumi’s statements suggest that neither Sega nor Sony were that interested in a possible partnership.

[i] Sinclair, B. (2015). Is Sega the Next Atari? https://www.gamesindustry.biz/articles/2015-02-23-is-sega-the-next-atari

[ii] Horowitz, K. (2006). Interview: Tom Kalinske. http://www.sega-16.com/2006/07/interview-tom-kalinske/

[iii] Shimizu, H., Shigihara, M. and Yamaguchi, S. (2018). Hideki Sato, Oral History. Hitotsubashi University Institute of Innovation Research.

[iv] Asakura, R. (2000). Revolutionaries at Sony: The Making of the Sony PlayStation and the Visionaries Who Conquered the World of Video Games. McGraw-Hill.

[v] Ohga, N. (2008). Doing It Our Way: A Sony Memoir. International House of Japan.

[vi] Kurokawa, F. (2019). Interview with Shinobu Toyoda. https://www.4gamer.net/games/999/G999905/20190525015/

[vii] Hester, B. (2010). The history of PlayStation was almost very different. https://www.polygon.com/features/2019/12/6/20999590/the-history-of-playstation-was-almost-very-different/

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