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A Cloud Appears Over Sega of America’s Rapid Progress

The following is a translation of a news article from the March 27, 1995 issue of the Nikkei Sangyo Shimbun in Japan. This article is part of a series of four articles on Sega’s operations in 1995, based on interviews with Sega president Hayao Nakayama and others.

The article connects together with this one and this one to show the difficulties Sega faced in North America in 1994 and 1995.

March 1995 Context: Sega’s revenue was declining rapidly along with the 16-bit market, and it had just taken a huge misstep with the 32X. Sega of America had all but abandoned the 32X and was now shifting its sights to the Saturn, which was scheduled to launch in September. SOA was in a bad situation, however, since it had very little Saturn software in the pipeline after investing many resources into the 32X. It would instead have to rely on Japanese software, which went against one of its guiding policies in the Genesis era.

The timing of this article is particularly interesting, since less than two months later Tom Kalinske would surprise-launch the Saturn in North America at Nakayama’s command. Kalinske has stated numerous times that this was the point where relations between SOA and Japan broke down (although Sega founder David Rosen and former SOA vice president Joe Miller have disputed this). It should be noted that Nakayama was always positive in the media about the work of Kalinske and others at SOA, as can be seen in this article translation. Within Japan, the American market was viewed as the key to Sega’s success, and Nakayama took pride in the success he was able to achieve through SOA. Interestingly, in the article, Nakayama proposes shifting more power to SOA.

This article and others give the sense, however, that the situation at SOA at the time was more dire than originally thought. Within less than a year of the article being printed, SOA would cut its staff from 860 to just 350 amid heavy losses. Shortly after that, Kalinske would resign as president of SOA and Nakayama would resign as chairman of SOA.

A Cloud Appears Over Sega of America’s Rapid Progress

Nintendo Held in Check, but Excess Inventory and Strong Yen Cause Problems

Nikkei Sangyo Shimbun, March 27, 1995, by Yoshinobu Someya

“It looks like we’re finally going to have to establish head office capabilities in America.” Hayao Nakayama, president of Sega Enterprises, has begun to consider a plan whereby Sega will operate head offices in both Japan and America. The cause is the suddenly strengthening yen, which recently passed the point where $1 was worth just ¥90. In the midst of that, Sega is preparing to launch its 32-bit home console, the Sega Saturn, in America in September, and furthermore, it is proceeding at full speed with plans to develop indoor mini amusement parks. Sega of America, which has been the leader of Sega’s incredible growth, is in the process of transforming.

The ultimate representation of Sega’s sudden growth is its come-from-behind win over Nintendo in the American market. Nintendo had firm control of the market with its 8-bit NES console, but Sega released its high-end 16-bit console, the Genesis, in 1989. Nintendo released its own 16-bit console, the SNES, in 1991, and the two companies became locked in an intense, close-fought competition that ultimately saw Sega capture a commanding lead in the 16-bit market.

The company responsible for Sega’s rapid progress in the American market is its daughter company, Sega of America (SOA; president: Thomas J. Kalinske). Two main points formed the heart of its rally. One was an aggressive marketing policy that included combative advertising, drastically lowered prices, and console software bundles. The other was its hit action game Sonic the Hedgehog, which captured the hearts of American children.

According to an American market research organization that measures the sales distribution of game consoles at major retailers, in 1994 Nintendo controlled 45% of the market share for console sales, while Sega controlled 55%. Sega has commanded the American market for two years in a row.

Tom Kalinske, the person who has led the strategy for the American market, joined the company in the summer of 1990. Prior to that, he served as president of Mattel, the American toy company famous for Barbie. When he joined SOA, it had fewer than 100 personnel. The company was able to expand through its positive results in the market, and today it employs 860 people, of whom 70% work in game development. It is now one of the largest game developers in the world.

Kalinske is supported by SOA vice president Shinobu Toyoda, who previously worked at Mitsubishi Corporation. He is a skilled businessman positioned to oppose Minoru Arakawa, the president of Nintendo of America, formerly of Marubeni Corporation. The person in charge of development at SOA is vice president Joseph B. Miller III, who Nakayama places great trust in. Miller has established a number of video and music studios in and out of the company, and he has brought on board famous comic book artists such as Ernie Chan (Conan the Barbarian) as well as musicians and other professional artists. His work has done much to fill the ranks and invigorate the company during its growth over the previous five years.

Nevertheless, the game market in North America was very harsh for Japanese software companies last year. The demand for 16-bit consoles has declined, consumers are waiting for the new 32-bit consoles to come out before buying, and poor-quality software has begun to flood the market. These problems have caused the market environment to suddenly deteriorate. Since last fall, one after the other, companies like Konami and Capcom have been unable to avoid posting losses at their American subsidiaries due to the disposal of unsold inventory, and they have been forced to take drastic measures such as replacing their presidents and restructuring their organizations. Some smaller makers have even been forced to withdraw from the market.

The general agreement is that SOA and Nintendo of America are no exceptions to the current trend. SOA vice president Toyoda explained, “For the end-of-year period, we reduced the size of our inventory by 25-30% compared with the previous year.” One executive from a major software company who visited America divulged, “One-third of Sega’s sales target for its best-selling software remained as unsold stock during the end-of-year period.” SOA has erased any profits in its competition with Nintendo, and now the strengthening yen is only making the situation worse. SOA is unable to deny that it might fall into the red this fiscal year.

1995 will become the year of a new challenge for SOA as it prepares to launch the Saturn on September 2. The company is certainly more established than when it first launched its 16-bit console, but the state of the market, which has arrived at a cooling off period, is severe. SOA launched its 32X expansion adapter in order to capitalize on its 16-bit market share, but it turned out the market was waiting for the new 32-bit consoles. SOA will therefore be starting from scratch.

How will Nakayama change SOA for its next effort? How will SOA president Tom Kalinske manage the situation? Even if SOA is not upgraded to head office status, there is the possibility it will be shuffled together with Sega Enterprises USA, which manages amusement operations.

As in Japan, Sony will soon enter the market, and Nintendo is readying its 64-bit console. The outcome of Sega’s next challenge in the American market will soon be determined.

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