I’ve recently gained access to some interesting data: a breakdown of Sega Enterprise’s revenues from 1991 to 1998 in six-month intervals. Perhaps most interesting is that the data also includes export revenues. This data comes from Sega and matches the published annual revenue numbers.
The data is broken down into the following categories: 1) Amusement (arcade) product revenue, 2) Consumer (home console) product revenue, 3) Amusement operations revenue, and 4) Game software royalties. Export revenue is given for each of these categories.
Let’s take a look through some of the data (if you just want access to all the data, you can find it in an image file and a .csv file at the end of this article).
First, here’s Sega’s total, worldwide revenue for the periods in question:
A few notes: The fiscal year in Japan is from April 1 to March 31. ‘FY1994’ means the period from April 1, 1993 to March 31, 1994. The above graph splits each fiscal year into two halves. Typically, the second half sees more revenue because of the holiday season.
Also, the revenue is reported in ‘millions of yen,’ which is probably not the easiest unit to work with for most people. If we assume for the sake of simplicity that ¥100 JPY = $1 USD (more on this later), then:
¥1,000 million = $10 million
On the graph, Sega’s peak revenue period was from April 1993 to September 1993. The revenue then was ¥200,645 million, which we could roughly equate with $2,006 million or, more simply, $2 billion.
You might wonder: What does revenue tell us? Revenue is different from profit or net income. Revenue shows how much money the company made overall from its sales and services. While it doesn’t show if the company is making a profit, it’s still a good indicator of the health of a company and its potential for growth.
OK, so back to the graph: As we can see, from 1991 to 1998, Sega experienced a period of strong growth followed by a slight decline / leveling off period. This isn’t really new information; Sega’s annual revenues have long been known. But let’s give it all some perspective.
Sega’s annual revenue had rapidly and consistently grown during the 1980s until it finally surpassed ¥100 billion in fiscal year 1991. Then, in the midst of a recession in Japan, the unexpected happened. In fiscal year 1992 (the year Sonic the Hedgehog was released on the Genesis), Sega’s annual revenue more than doubled to ¥213 billion.
Sega’s long-time president Hayao Nakayama, speaking in 1992 as quoted in the book Game Sensou by Eiji Ohshita, described the situation: “It’s often said that revenue of ¥100 billion represents a major barrier to cross. Sega crossed it in a flash,” Nakayama explained. “The problem is the next barrier. To go from a ¥100 billion business to a ¥200 billion business requires a lot of time for a normal company. Sega crossed that barrier in one year. And that was in the middle of a recession. Just about the only other company to show that kind of sudden growth is Nintendo, another game company.”
At Sega’s annual planning meeting in April 1992, Nakayama announced the following to a company-wide gathering of 2800 employees: “Beginning this year, we’re going to implement a five-year plan to become a ¥600 billion revenue business. The goal this year will be ¥320 billion with a profit of ¥50 billion. This is a bit above our practical target, but I believe that it is entirely possible with Sega’s current position. However, the first step to reach that will be to dominate the worldwide 16-bit market. In order to do that, we have to enrich our software lineup and create more big hits.”
As seen in the above graph, the goal of ¥320 billion was surpassed for FY1993—Sega’s revenue for FY1993 was ¥347 billion.
Things were looking even better for FY1994. The first half alone showed revenue of over ¥200 billion. Sega was on target to surpass their annual goal of ¥400 billion, but then disaster struck.
In the second half of 1993, Sega’s revenue in the North American and European markets suffered a massive decline. Here is a graph of Sega’s consumer export revenue (the revenue it made from exports of game hardware and software):
Instead of growing during the holiday season, Sega’s consumer export revenue for the second half of FY1994 was just 62% of the first half (H1: ¥130 billion, H2: ¥80 billion).
In a speech made by Sega president Hayao Nakayama on January 17, 1994 (translated here), Nakayama said:
“I’d like to begin with a review of 1993. I must unfortunately announce that Sega has suffered hardship this past year. However, as Sega is quite a tough company, I can also announce that we have achieved a great success.
“The hardship that I mentioned is that Sega had to revise downward its expected performance. There were three reasons for this. The first reason was the worsening economic environment. In particular, the situation has become quite severe in Japan and Europe, and somewhat so in America. The second reason is the appreciation of the yen, which has caused revenue from exports to drop below the break-even point. The third reason, which I think is the biggest problem, is that the arcade and home consumer markets have entered the so-called off-season. This occurred just as Sega was approaching a leveling-off period in its performance.”
During 1993, the yen gained ~10% value against the dollar. This trend would continue through 1995 (1992: $1 = ¥127; 1993: $1 = ¥111; 1994: $1 = ¥102; 1995: $1 = ¥94). This spelled serious trouble for all of Japan’s exporters. Although it cost the same to manufacture the product in Japan, less money was being earned on it overseas.
Furthermore, the 16-bit home console market was maturing. Sega was doing its best to maintain a market lead against Nintendo in North America, and at the same time, it was struggling to find another game to match the success of Sonic the Hedgehog 2 (released in November 1992) while facing stiff competition from third party publishers on the Genesis.
The timing of this revenue decline beginning at the end of 1993 might come as a surprise to some. There’s a general assumption that Sega’s financial woes first began around 1995 when the Saturn was released. However, throughout 1994 there was a strong sense of concern in the words of Nakayama and the other Japanese management. At the time, Sega’s stock was one of the highest valued in Japan, and there was clear pressure from stockholders to continue the company’s stellar growth. Sega was managing to keep itself somewhat stable overall through the growth of its arcade revenues in Japan, but the consumer situation overseas was dire.
I sometimes come across comments arguing that Sega should have followed Nintendo’s lead and waited to release the Saturn until 1996. That was, simply put, not an option given how rapidly export revenues were declining (and things didn’t turn out well for Nintendo—they ended up losing a massive part of their market share to Sony).
There’s also a common misconception that Sega cancelled (or stopped supporting) the Genesis in 1994 in favor of the Saturn. While Sega did shift some software development to the Saturn, the Genesis remained a key component of its overseas strategy until 1996 at the earliest.
The following table shows the number of games published on the Genesis by Sega of America and the two largest third party publishers in North America (EA and Acclaim):
Sega maintained its focus on Genesis software through 1995 at the least.
However, one change that began to occur in 1992 and strengthened in 1993 was the increase of third party support for the Genesis. That’s a good thing, right? Not necessarily. Although Sega profited from royalties earned from third party licenses, they profited more from sales of their own software (Sega might have earned $30 in profit from the sale of a game it published, rather than $5-8 in royalties from the sale of a third party game). Third parties were a necessary evil, required to attract buyers, but a threat to in-house title sales.
Sega offered two options to third party publishers: 1) Sega could manufacture and supply the game cartridges for a set fee that included royalties, or 2) the publisher could manufacture the cartridges on their own and simply pay the royalties to Sega. Sega benefited more from the first, since they earned profit on the manufacturing as well as the royalties. However, the biggest third party publishers in North America—EA, Acclaim, Capcom, Konami, among others—all manufactured their own cartridges.
So how much was Sega earning from third party royalties? Here is a graph showing export royalties. I’ve plotted these according to each fiscal year rather than half a year, since royalty payments were heavily weighted towards the second half of the year (presumably, third parties tended to make their royalty payments then).
Royalties started to shoot up in 1993, and by 1994, Sega was earning the equivalent of $90 million in royalties per year. This reflects the rising power that third parties had on the Genesis, as well as the increasing size of the user base.
We can also see the rise of the third parties when we look at software sales charts for North America.
Here is a sales chart from January 1993:
Five of the ten games listed, and three of the top five, were published by Sega.
By July 1994, things had changed:
Only one of the top ten games was published by Sega.
Other sales sources show similar patterns. Here’s the October 1994 ranking from the NPD group:
Sega wasn’t doing poorly, but it was sharing a much larger percent of the Genesis market than it had been two years earlier.
Despite maintaining a strong stream of releases, Sega was facing more third party competition, especially from Acclaim (Mortal Kombat, NBA Jam, etc.). Both EA and Acclaim were competing well with Sega’s in-house sports titles. Although Sonic the Hedgehog 3 and Sonic & Knuckles sold well, they failed to come close to the heights that Sonic the Hedgehog 2 reached.
Royalties, of course, were nothing to complain about. But Sega, like Nintendo, had built its platform first and foremost as a way to promote its own games (Nintendo infamously restricted third party publishers to just five releases per year on the NES). Unlike Sony, who centered their business model with the PlayStation on supporting third parties and basing profits on royalties, Sega invested heavily in development and published dozens of in-house titles per year.
Sega’s troubles beginning in late 1993 can be traced back to a variety of factors: the volatile exchange rate, competition from Nintendo as well as third party publishers on the Genesis, and a market that was buying less as it waited eagerly for the next generation of gaming hardware. Its solution was to get the Saturn to market as soon as possible—something that Sega of America resisted due to the high price of the console and the desire to maintain its large consumer base. This led to the ill-fated 32X, which I won’t go into now, but you can read my thoughts on it here.
Here is the table showing Sega’s detailed revenue breakdown for FY1992 through FY1998 (click to enlarge):
And here is a .csv file if you want to look at the data more closely.