• Legends of 16-Bit Game Development

A Second Atari Shock? The Decline of the 16-Bit Console Era

I have previously written about the sudden decline of Sega’s 16-bit business in North America and Europe beginning in 1993. Below, I translate an article from the February 29, 1996 edition of the Japanese newspaper Nikkei Sangyo Shimbun that goes into more detail about the 16-bit market crash that occurred in North America and Europe beginning in 1993 and negatively affected all of Japan’s software publishers.

Understanding this post-1993 decline is essential to understanding why Sega felt the need to rush to market its next-generation hardware. One of the more common “Sega should have” statements to be found on the internet is that Sega should have followed Nintendo’s lead and waited until 1996 to release its next-generation hardware. Nintendo, however, was also in a desperate situation due to unexpected delays with its release of the N64, and it too rushed to market a piece of hardware in 1995 that did not end well: the Virtual Boy. As noted in the below article, Sega and Nintendo were not the only companies to be losing money in North America and Europe; Capcom and Konami also suffered heavy losses.

It should be noted that Sega’s 1995 losses were not for want of trying. In 1995, Sega of America published about 20 games on the Genesis, around the same number that it published in the peak year of 1993. These included Comix Zone, Phantasy Star IV, and Vectorman, and Vectorman in particular received a huge marketing campaign. Despite still selling a decent number of now budget-priced Genesis consoles, the games were just not selling.

Enjoy the article!

Sega Clears Debts of European Subsidiary, Caused by Aggressive Price War, With No Clear Strategy or Rules in Sight for Its Overseas Businesses

Nikkei Sangyo Shimbun, February 29, 1996

Sega Enterprises is preparing to take a massive extraordinary loss brought on by the restructuring of its overseas businesses to clear debts and dispose of excess inventory. At one point, Sega’s 16-bit game console grew to surpass Nintendo’s in North America, but it is now paying the price for a rapid expansion built through the disregard for profits. Almost all Japanese game companies are reporting heavy losses in both North America and Europe due to uncontrolled underselling. Sega, which has been considered one of the favorites in the new multimedia era, is now planning drastic revisions to its home console business.

“It’s almost like a return of the 1982 Atari Shock,” said one expert in the game industry. The Atari Shock was caused when the North American company Atari undersold a huge volume of software, and within one year of reaching its peak, the entire market collapsed.

“The wave that brought us here was huge, but the tide has turned very quickly,” said Sega director Shunichi Nakamura in reference to the state of the 16-bit console market in Europe. At its peak in 1993, Sega’s revenue in Europe was about ¥60 billion, but now it has shrunk to one-third of that, around ¥20 billion.

The game industry has always been characterized as unstable, but just after a large growth phase that involved a rapid increase in the number of personnel and branch offices, the degree to which the market has now shrunk has caught everyone off guard and has left the company holding a huge quantity of unsold inventory.

Sega has not been the only company to suffer. One large software company stated, “There is not a single company that has been able to turn a profit in the European market.”

In the fiscal period ending in March 1995, Konami took an extraordinary loss of ¥11.6 billion due to clearing out unsold inventory. During the same period, Capcom took a loss of ¥7.5 billion after writing down the value of its American subsidiary, and in the mid-year period ending in September 1995, Nintendo also took a loss of ¥9.8 billion after doing the same with its American subsidiary. This fiscal year, Sega is taking an extraordinary loss of ¥26 billion due to the downsizing of its American and European subsidiaries and due to the disposal of unsold inventory.

Since 1991, Sega has been fighting in the North American and European markets to dethrone Nintendo via the aggressive marketing of its 16-bit game console, the Genesis (Mega Drive). Nintendo, in response, has conventionalized the practice of including multiple free games as pack-ins with the purchase of a console. As a result, although Sega has been able to top Nintendo in North America, the problem of underselling has become severe.

Seeing 2-3 free games included with a console has become common. There were even stores in Europe that included 10 free games. Hudson, which established a branch office in London in the hopes of expanding more into Europe, postponed their expansion with the statement, “Based on the conditions of the market, there is just no way for a software company to make a profit.”

As in Europe, the decline of the 16-bit market in North America has been very rapid. On December 26 of last year, the Wall Street Journal reported that “the previous generation of 16-bit consoles still commands the sales battle.” Nintendo and Sega’s 16-bit consoles were reported to have sold more than four times as much as Sony and Sega’s 32-bit consoles.

“It’s true that 16-bit consoles sold quite well and we were able to sell off a good portion of our inventory, but the games did not sell at all,” said Sega director Shunichi Nakamura. The best-selling game charts for the past few weeks in North America reveal that almost all of the top titles are for Sony’s PlayStation console. Games for Nintendo’s SNES console, which has sold over 30 million units—far more than the PlayStation—have disappeared from the best-selling charts.

“The market has been flooded with low-quality software,” said Nintendo president Hiroshi Yamauchi. Consumers in North America who want to buy 16-bit games are rapidly disappearing.

According to Sega’s Nakamura, “Through large-scale mass production, Sega has been able to reduce the manufacturing costs of its 16-bit console to the point where we aren’t losing money on production. However, we can’t earn a profit because the software—the most essential part—is just not selling.”

The problem now is how Sega will advance its business through its new 32-bit console, the Saturn.

As a result of downsizing its operations, Sega has reduced its personnel in Europe from 480 people in 1993 to just 120 people now, and in North America from 900 people in 1993 to just 350 people now. Furthermore, in Europe, Sega has reorganized its branches in the Netherlands, Belgium, and Austria and switched over to a proxy system. “Our business scale will shrink, but our losses will also be reduced,” said Nakamura.

Sega president Hayao Nakayama announced at the beginning of the year, “We are planning to increase our arcade game division by a factor of three to a revenue scale of ¥350 billion.” The plan is to greatly increase the relatively stable income of the arcade division in order to absorb the risk of the home console division.

By cleansing itself through the extraordinary loss, Sega’s overseas console division will be starting over from zero. Sega’s policy now is to focus on establishing the Saturn, and also on expanding into PC game software in the North American market. “The question now is how much our profits from the arcade market will be able to turn around the console market,” said Nakayama, whose words will be put to the test this year.

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