Short: The Death of Sega

Okay, let's hear your best Sega scream impression.

Sega.

Is the emphasis more on the SE Sega?

They talk about it in console wars.

Yeah, the voice actor.

And he was sick. I think he had thrown up earlier in the day. And he was just in such a bad physical and mental state that he could do this. Insane scream.

It was perfect.

The cost you pay for great art? Who got the truth? is it you? is it you, is it you.

Who got the truth? Welcome to this episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

I'm David Rosenthal.

And we are your hosts. Today, we have for you our first acquired short. There are some stories that deserve three or more hours to chronicle the entire company history finish, but there are also some stories, or perhaps chapters of stories, that can be told in an hour or so.

This is gonna be really fun experiment, we get to tell this story, right? Listeners, let us know if you like this and we might do more of them.

Yep, let us know in the Slack acquired..fM slash Slack. It is the best place to discuss episodes after we release them. Tons of folks joined after the Nintendo episodes. There's a lot of great video game discussion right now.

Okay, listeners, now is a great time to thank one of our big partners here at Acquired ServiceNow.

Yes, yes. ServiceNow is the AI platform for business transformation, helping automate processes, improve service delivery, and increase efficiency. 85 of the Fortune 500 runs on them. And they have quickly joined the Microsofts at the Nvidias as one of the most important enterprise technology vendors in the world.

And just like them, ServiceNow has AI baked in everywhere in their platform. They're also a major partner of both Microsoft and Nvidia. I was at Nvidia's GTC earlier this year, and Jensen brought up ServiceNow and their partnership many times throughout the keynote. So why is ServiceNow so important to both Nvidia and Microsoft companies? We've explored deeply in the last year on the show.

Interestingly, employees can not only get answers to their questions, but they're offered actions that they can take immediately. For example, smarter self-service for changing 401K contributions directly through AI-powered chat, or developers building apps faster with AI-powered code generation. Or service agents that can use AI to notify you of a product that needs replacement before people even chat with you. With ServiceNow's platform, your business can put AI to work today.

It's pretty incredible that ServiceNow built AI directly into their platform, so all the integration work to prepare for it that otherwise would have taken you years is already done. So, if you want to learn more about the ServiceNow platform and how it can turbocharge the time to deploy AI for your business, go over to Servicenow..com. Slash acquired. And when you get in touch, just tell them Ben and David sent you.

Thanks, Servicenow. And with that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

We could technically still invest in SEGA today.

Sega Sammy Holdings.

Not quite sure we'd want to, but let's get into it.

Spoilers.

So we start our story in around call it 1992 1993.

Imagine you're a startup and you're fighting some big incumbent, and within three years you get to a basically 50-50 market share.

It's totally nuts. The genesis, I mean, it was the cool console in the 90s, it had Sonic. They've got John Madden football, they've got great sports franchises, they've got the Mortal Kombat version with the blood.

The real red blood, not the Nintendo toned down gray blood.

And they have about a 30 million total unit install base of the Sega genesis around the world, the vast majority of which about 20 million is in the United States.

Yeah, and this is basically the best video game consoles were doing at the time. Years later, the PlayStation 2 with 150 million, but no one was doing 100 million. Plus units sold game systems at this point in history. Rock solid, huge player in the market.

A great base to build on.

Yes.

Now, also at this time in Call It 1992 1993, it has become clear that compact discs are the future, not just for the video game industry, but for everything. CD album sales and CD players are on their meteoric rise at this point. It is a huge driver of business for companies like Sony in the personal computer industry, neighboring to the gaming industry, CD-ROM drives are now becoming standard in PCs.

And the trade-off with games is, of course, a cartridge doesn't really require loading time. The CD, while it has a ton more storage, does have trade-offs where it needs to load stuff onto the machine.

Yeah. And there's one other really big advantage of the CD medium for the business side of the industry, which is that CDs are much lower cost to produce than cartridges. Cartridges you gotta like, put silicon in there, they have chips. CDs are just optical discs, you can stamp these out for a tenth, a hundredth of the cost of a cartridge.

Pennies.

So it's obvious that the home video game console industry is also going to move to the CD medium as its primary distribution technology going forward. And the way right now that people in the industry are thinking that this great migration is going to happen, is not via new consoles, but via add-on peripherals to existing consoles. Looking back now, this was obviously a very, very poor path, an evolutionary branch of the gaming tree that mercifully died off. But at the time, everybody seemed to be doing it. There were other consoles, like Atari's Jaguar console came out with a CD-Rom add-on.

This is now our third episode, in addition to Sony and Nintendo, where we've talked about this.

So, of course, back to Sega, they are working on a CD-ROM add-on too for the Genesis, and just like with the Genesis. They had beat Nintendo and the Super Nintendo to market with the first 16-bit console, they want to make sure that they beat Nintendo and Sony to market with the first CD-Rom add-on. So in late 1992, they launch the Sega CD add-on for the Genesis. In North America. It comes out with this game called Night Trap, which is a full motion video game that uses like, it's basically a playable movie.

Rated E for everyone.

Yeah, exactly, so funny. You go back and look at this stuff today and you're like, Yeah, compared to Call of Duty, you're like, this is nothing.

Seriously, Grand Theft Auto?

Yep, but ultimately, despite all this hand-wringing over these games and everything coming out with these CD add-ons. There is a fundamental problem with what Sega is doing here. And that is that add-on technology for consoles is never really a good idea. Because the business model of the video game console industry, it's a razor and blades model. And the way that video game companies like Sega, like Nintendo, like Sony, in a minute make. All of their profits is from the software sales, not from hardware sales. And so you want to have as big of an install base of consoles as possible to amortize the software sales across.

But after the Sony partnership fell apart, didn't they form a new partnership with Philips to create the Nintendo CD thing?

They did, but that delayed everything enough that everybody kind of realized that this was a bad idea. And Nintendo basically also abandoned that project and let Philips come out with their own console. I think it was called the CDI, nobody supported it, it sucked.

So what does SEGA do after the SEGA Genesis CD add-on is abandoned?

Well, you would think, just like Nintendo sort of did here, you would learn your lesson. Console add-ons are a bad idea. You've got all these problems with it, it's a limited market. You cut your losses.

And it works sort of like the same way a game genie worked, right? You like, put it in where your game cartridges go, and then that way, when you put your actual game cartridge on top. It's sort of like stacked like a tower.

Yes, exactly, this whole thing is so harebrained. I think it added more colors, maybe to existing Genesis games, but then it also had its own 32x games that you bought separately for it. This thing was just an unmitigated disaster, one of the worst video game industry decisions of all time.

Huh, okay.

Yeah, so the 32X sells less than 1 million units total. And in the meantime, almost immediately thereafter, Sega also rushes out a separate brand new native 32-bit system to market, called the Saturn.

What a nightmare.

This makes no sense. What's going on here? The story goes that all of this was basically a decision. Handed down from Sega in Japan, they order Tom Kalinske, the CEO of Sega of America, to launch the Saturn. Sega of America doesn't really want to do this, but they don't have a choice.

It's like, exciting but confusing.

This makes no sense. There's no sonic game ready, there's no third party games at all, the retailers aren't prepped, they don't know to expect this.

It's really weird because it's like everyone's sort of recent hero. The David versus the Nintendo. Seems like they should be firing on all cylinders. But you have the market confusion with the 32x and the Sega Saturn, and now Sega Saturn sooner. What the heck's going on, right?

On top of this maybe forgivable Sega CD thing that happened, you know, a year or two before, like, this whole thing is just weird. So on the back of this, the Saturn flops. It sells just over 9 million units, compared to the Genesis, which sold 30 million units. And if you read the book Console Wars by Blake Harris. He spends a lot of time with Tom Kalinske, the CEO of Sega of America, and interviews him and Tom. And the other folks who were at Sega of America at this time. Like, they're somewhat diplomatic, but they just kind of lambast the Japanese management of SeGA at this point in time. They say that they had Sega of America fought against all of these decisions, that the Japanese parent company was jealous of, SeGA of America's success with the genesis.

Because the genesis sold really well in America, didn't sell as well in Japan.

No, all of the Genesis's success was in America, Europe, and South America. It basically did nothing in Japan.

And in Console wars, the author draws this great analogy of Japan as the parent and America as the child. So shouldn't the parent be proud of the child's success? But in reality, the way that it actually was going on is that Japan and America were sort of sibling markets. And the parent's favorite child used to be Japan. And as the parent showed more favoritism toward America, the Japan leadership sort of retaliated. And found ways to kick and scream and say, Hey, you need to pay more attention to me.

And Sega, at this point, of course, is a Japanese company and the board is Japanese, and at the end of the day, Japan wins here. So Tom and most of the rest of the team at Sega of America, they get super frustrated. They end up just leaving the company. Including Steve Race, who masterminded the whole aggressive marketing strategy behind the genesis, you know, the SeGA scream the welcome to the next level.

He goes to work for Sony to launch the PlayStation.

We'll talk much more about that in one minute. So Sega of Japan is kind of running the ship now at this point in time. They decide, after a couple of years, to give up on the Saturn. They launch another new, internally developed console, the Dreamcast. The Dreamcast actually had some real innovations to it.

It had the little slide out handheld thing that was like a little game boy that popped out of the controller, that was super cool.

Oh yeah, the VMU, that thing was cool.

And a bunch of the design philosophy made a lot of sense. They were using commodity components instead of special silicon for it.

Yep, but unfortunately, it launches against the PlayStation 2, which goes on to become the best selling console of all time and completely trounces it. So, the Dreamcast sells even fewer units than the Saturn, and it's really sad. After just two and a half years on the market, Sega ends up discontinuing the Dreamcast. Announcing that they're getting out of the hardware business entirely, they're going to go to just being a video game developer and publisher on other platforms, on PlayStation, on the Xbox, etc.

Exodus of all the talent, you're sort of still scratching your head a little bit about how it all fell apart so fast, you know? I started digging into why and how, and what were the corporate transactions that actually happened around here. And David, I feel like there's more to this story because I pulled up Pitchbook to look. There are a lot more transactions around this company than you've sort of mentioned so far.

Oh, are there?

There are.

Oh, if only there were a podcast that went and did really deep research on what actually happened here.

Yeah, all right, listeners. Our sponsor is one of our favorite companies, Vanta, and we have something very new from them to share. Of course, you know, Vanta enables companies to generate more revenue by getting their compliance certifications. That's SOC 2 ISO 2701..

It's kind of wild.

Yeah, and they offer a tremendous amount of customization now for more complex security needs. So if you're a larger company and in the past you showed Vanta to your compliance department, you might have heard something like, Oh, well, we've already got a compliance process in place and we can't integrate this new thing. But now, even if you already have a SOC 2, Vanta makes maintaining your compliance even more efficient and robust.

They launched vendor Risk Management. This allows your company to quickly understand the security posture of the vendors that you're choosing in a standardized way. That cuts down on security review times. This is great. And then, on the customization front, they now also enable custom frameworks built around your controls and policies. Of course, that's in addition to the fact that with Vanta, you don't just become compliant once you stay compliant with real-time data pulled from all of your systems. Now, all of your partner systems, and you get a trust report page to prove it to your customers.

So David feels like there's some big things missing from the story.

Yeah, you like that little story that I just told you, right?

It almost feels high gloss, apocryphal, and when you really stare at it, you're like, I'm not satisfied.

That can't be right.

This is insufficient.

Everything you say is exactly correct. The funny thing is, though, that, like listeners for you all listening, I bet most of you. If you knew any version of the story of the death of Sega, what we just told was the version, you probably know. But while it's not wrong, it's only one version of the story and the other version is both. Way more charitable to Sega, the parent company in Japan. And also, I think, way more interesting in terms of like lessons we can take from it.

Totally. It started as service games back in the like 40s, 50s, this merger of arcade game makers and arcade distributors. You even had this story that you were telling. I think we actually cut this from the Nintendo episode for time. But on Periscope, the SeGA very innovative SeGA game, they standardized the unit of the quarter as what you pay for an arcade video game session.

Yeah, the arcade industry, it's lost to history now, because basically it doesn't exist anymore. But it was bigger than the home console industry, and nobody was bigger in the arcade industry than Sega. They were the OGs.

Yeah, I was shocked to see this in Pitch book. I scrolled all the way down, like I normally do when I'm looking at, like, private companies who raise money to see who their seed investors were. And the first transaction for Sega is from 1969..

Yes, the company that acquires them is Gulf and Western, which is a big oil company. Oh yeah, the U.S. So like, what the hell is going on here?

Oh, I've always seen that at the little like, I don't think you see it anymore, but the little title screen, yeah, when the movie's starting, yup.

So they acquire Sega and merge it into Paramount, the operations stay separate and the like boards of Sega and Paramount stay separate. But within Gulf and Western, SeGa is part of the Paramount Empire. So much so that they take their two most talented Paramount executives and they put them on the internal SEGA board within Gulf and Western. Do you know who those two people are?

No.

Michael Eisner and Barry Diller What, right?

I had no idea.

So Michael Eisner and Barry Diller are, like, key parts of the Sega history. All of this, all we're talking about. This is before Atari, this is before there is a home console business, this is before there's a video game business, period. This is how important SEGA is in Arcades.

20 years before Michael Eisner becomes the CEO of Disney, and long before Barry Diller dreams up Interactive Corp.

Yup, this is in the 1970s. So we also talked on the Nintendo series about how Atari got acquired by Warner brothers, and this was this crazy like Atari. This video game company becomes part of this movie studio, and then it becomes the biggest part of this movie studio.

Wild.

So, part of the strategy that Sega adopts during this time, they're like a truly international company, because the Arcade business was a truly international business. They're thriving in the U.S. they're thriving in Japan, they're thriving in Europe, all over the world. They start not only building and creating these games, these arcade cabinets, they start building out their own arcade centers that they operate. They're like, we're going to make money every which way in this industry. So they're called Family Fun Centers in Japan and Sega centers in the U.S.

Whoa, okay.

So Sega's got hundreds of these arcades that they are just printing cash out of. Because they're making money from selling the cabinets to their own arcades and other arcades. And then the arcades themselves are like, hugely profitable businesses.

Yeah, I mean, there's a lot of arcades that, when you look at the side of them, have a gigantic Sega logo plastered over it. I mean, clearly a company focused not just on home consoles, but like making games.

Yeah, when you say a company focused not just on home consoles, from the parent company's perspective, they'd rather not focus on home consoles at all. So now you can start to see another perspective on things here. In 1981, Sega publishes the game Frogger that Konami had made, but Sega published it. They made hundreds of millions of dollars on that thing in 1983, right before the home video game console crash led by Atari. They do $214 million in revenue Sega does as a division within Paramount.

Yes, actually, there's a transaction in 1984, looks like the investor name is CSK Holdings.

Yes, that's it. CSK Holdings was a public Japanese company that Rosen and Nakayama knew the management of. They financed this buyout. They were like the PE shop, they were the sponsor of this transaction.

Oh, interesting.

And this is how Sega becomes an actual Japanese company, even though they were started by Americans to serve military bases back in the day.

Right, okay, so wholly bought out by Gulf and Western, then wholly spun out, yes.

They bought the whole thing for only $38 million. This is ridiculous. This company, which is legendary in the arcade industry, did $214 million in the year ended six months before this.

Why did they value it so little?

This is the thing. Because of the home video game crash in America, video games in general just became this toxic asset that nobody wanted to own, especially Paramount and Warner Brothers, was divesting Atari, the arcade business. Yeah, it got hit by the crash, but it actually was fine, and so this was just an amazing deal.

Management bought the dip because they knew that they weren't actually really affected by this.

Boy did they ever.

So then I think that was in 1984.

That makes sense, because pretty quickly after the buyout, Sega gets back to their old tricks. And they're crushing it. They're pumping out smash arcade hits like Outrun. People might've heard of very famous racing game Shinobi Afterburner, Altered Beast, which was a kind of beat them up brawler that we talked about on the Nintendo episodes.

That was the original pack-in game before Sonic with the Genesis.

So they're back to making hundreds of millions of dollars in their arcade business, both making the games and operating them in their own arcade centers. Nakayama, who was one of the two guys involved in the buyout.

And Nakayama and Rosen had to get hugely wealthy from this because of how unbelievably little they paid for the equity. That, by the time they IPO'd, it would have been very valuable.

Yes, I don't know the details, but I'm sure they did.

So it's like a diversification bet.

Exactly, Rosen, CSK. The rest of the board, they're not that supportive because they're like, we're doing great in arcades. Like, I don't really care that much, but sure, if you care about this, go do this. And that's when Nakayama goes and he recruits Tom Kalinske to come in and run North America. It's kind of like a surprising success to everyone. The genesis in North America.

And on the one hand, it's an innovator's dilemma. On the other hand, I have to imagine Arcades stayed a very good cash flow business for a long time. It's not like that was actually going away.

Well, let's get into it. So Nintendo and the NES, and the Super NES and the home console business turned out, was never really a threat to the arcade business because the way arcade technology and hardware worked was very different than the console cycle, and the types of games were different. In the arcades, it was all iterative, it was constant iteration.

So they didn't actually have to think about. We need to create a standard platform for developers to target for the next five years. Because every cabinet was its own self-contained system. So it's not really in their DNA to, like, do a once every five plus year. This is the standard thing and we promise not to change it, and we will create a bedrock platform for you developers. That's not really a thing.

Yes.

And so that means a couple of things for the market that keep the arcade market not just viable, but thriving. The Arcades are where the most technologically advanced games are during this era, because the hardware cycle is so iterative.

Right triangles.

Triangles. This is new. Sega is the one that actually brought really good games to market with this, and it was all in the Arcades. So Virtua Fighter, when it comes out in 1993, is so popular. Sega sells over 40,000 Virtua Fighter cabinets worldwide at a price of like $10,000 plus per cabinet. So that's half a billion dollars in revenue on Virtua Fighter.

And what year was this?

This was 1993, right? As Ken Kutaragi and the team over at Sony are working on their standalone PlayStation, they've broken up with Nintendo. They're going to come to market with their own console and this is pivotal. So I want to read now from the Wikipedia page for the PlayStation 1 console. After Sony witnessed the success of Sega's Virtua Fighter in 1993 in Japanese Arcades. The direction of the PlayStation became quote instantly clear, and 3D polygon graphics became the console's primary focus.

And they have the balance sheet to subsidize it so they can take a strategy of coming into the home with very, very good technology at.

Yep, so here we are now. The end of 1993 into 1994. Sony has announced that they're coming out with the PlayStation they're all in on entering the video game market. They start going around and talking to all of the non-Sega arcade manufacturers Namco, Midway in the U..S Konami. And they start convincing them to bring all of their new arcade games directly to the PlayStation.

All the other arcade manufacturers love this strategy.

Right, we can benefit from riding the Sony platform into the living room, but Sega is going to get caught in the wind here.

Because they have a home console that's making it so that they can't go align with another home console.

Namco doesn't have a home console, Konami doesn't have a home console, Midway doesn't have a home console. So, before the PlayStation launched, the arcade industry was back up to about $7 billion a year globally. And a huge portion of that was controlled by Sega. After the PlayStation launches, by the end of the decade, it's down to $2 billion.

So the PlayStation basically killed Sega's arcade business and their console business.

Yep, that's what happened. So now let's go look at this kind of original Console Wars book type narrative about what happened. We have a whole different perspective now. All this crazy hardware, schizophrenic add-ons, these are like panicked responses to the coming tsunami of Sony.

Huh.

And I have to imagine at some point, Sega of Japan lost their desire to make a great, competitive home console. Because that was the thing that was preventing them from being able to be in business with Sony now, it doesn't mean that they're going to stop making consoles right away, but it does sort of plant this seed of, huh? We have a little bit of a strategy conflict here where we either have to be all in and winning in consoles or we just need to make games. Yes, but we can't really be on a seesaw kind of trying to do both and have a foot in both worlds.

So here's what happened in September 1994, right before this crazy 32x thing comes out. Sony and Namco Now Namco was Sega's biggest rival in the arcade business. They come out with a pretty huge industry.

Whoa?

So this is just the ultimate knife in Sega's back.

They're just basically shipping PlayStations inside of these arcade cabinets.

It was the PlayStation hardware, like, there was some buffs to it and whatnot. But Namco. And now, pretty soon, all the other arcade guys, they're gonna be like, Oh, great. We're moving all of our development platform for the arcade industry to the PlayStation platform. The technological bleeding edge is now going to be, yeah, also in the Arcades powered by the PlayStation, but in the home powered by the PlayStation.

Wow, what a trojan horse.

So now Sega is like, Oh, shoot, we are screwed. We need to scramble the jets and just do anything we can to try and stave off this apocalypse. So they launched the 32X. Seems really dumb, but they got to do something like, Okay, we need to get into market right now with a 32 bit system to just try and preempt Sony here. Then they massively accelerate the Saturn launch. Why did they do that?

Yeah, makes sense.

The Barbarian is already through the gates on the arcade side of the business because Namco is shipping these system 11 arcade cabinets today. And it's right at the gates. Coming next year with the PlayStation.

It's funny how much in our Nintendo episode, the conflict was Sega versus Nintendo, but the death of Sega really is against Sony.

Yes, so that brings us to the very famous E3 Conference in May of 1995, and this is maybe the most incredible video game industry event of all time. We referenced it earlier in the show, but we're heading into the conference.

Get up there, announce the Saturn.

Just do it.

Even though the ecosystem isn't ready, the hardware is ready, so we're shipping it.

We're shipping it. So Tom does that. He dutifully goes up. He announces, Oh, forget Saturn Day. You can buy the console now.

And he's basically doing this because Japan has said, either you are doing this, or we will find a new CEO for Sega of America who can do this.

Yes.

$399.

Available today May 11th, 1995.

Right of industry announcement type things.

Yes.

All right, so that Sony PlayStation 1 299..

We will link to the video of this in the show notes. It's on YouTube. I mean, people still watch this to this day. The reaction is amazing. At first there's silence because people are like, What did he just say?

It's like that last wave is all the developers realizing, Oh my God, we are going to print money because there's going to be so many people buying this thing.

This exact moment, in the afternoon of May 11th, 1995, is the death of Sega. Because let's go back and think about the three key constituencies in the video game home console business. Kind of flywheel, you've got the consumers, why on earth would any consumer go buy a Sega Saturn? Today? On May 11th, on its launch day, that has no Sonic game, has only six games total, and it costs $399. When you now know that the PlayStation, which is far superior, is going to come out just four months later.

Now, listeners, as you can imagine, there is a tough path that they have to now traverse to get to the 2023 SEGA. That we're going to talk about and what they look like as a games business today. David I have a couple of stories that I don't think you know about how they made that transition. So I'm curious to know if I will stump you with that or not. Our sponsor for this episode is a brand new one for us. STATSIG So many of you reached out to them after hearing their CEO, Vijay on ACQ2 that we are partnering with them as a sponsor of Acquired.

Yeah, for those of you who haven't listened, Vijay's story is amazing. Before founding Statsig, Vijay spent 10 years at Facebook, where he led the development of their mobile app ad product. Which, as you all know, went on to become a huge part of their business. He also had a front row seat. To all of the incredible product engineering tools that let Facebook continuously experiment and roll out product features to billions of users around the world.

Now, Statsig is the modern version of that promise and available to all companies building great products. StatsIg is a feature management and experimentation platform that helps product teams ship faster, automate A-B testing, and see the impact every feature is having on the core business metrics, the tool gives visualizations, backed by a powerful stats engine, unlocking real-time product observability. So what does that actually mean? It lets you tie a new feature that you just shipped to a core metric in your business. And then instantly know if it made a difference or not in how your customers use your product.

It's super cool. StatsIg lets you make actual, data-driven decisions about product changes, test them with different user groups around the world, and get statistically accurate reporting on the impact.

Customers include Notion, Brex, Open.ai, Flipkart, Figma, Microsoft, and Cruise Automation.

Also, Statsig is a great platform for rolling out and testing AI product features. So for anyone who's used Notion's Awesome generative AI features and watched how fast that product has evolved, all of that was managed with Statsig.

Yep, if you're experimenting with new AI features for your product and you want to know if it's really making a difference for your KPIS, Statsig is awesome for that. They can now ingest data from data warehouses, so it works with your company's data wherever it's stored. So you can quickly get started no matter how your feature flagging is set up today.

We're pumped to be working with them. You can click the link in the show notes or go on over to statsig..com to get started. And when you do, just tell them that you heard about them from Ben and David here on Acquired.

So, David, here are a few things that I was curious, if you knew about. So, I planted the seed earlier with the idea that some people personally accumulated a lot of wealth through Sega. One of these people was Aseo Okawa.

Yes, the chairman of CSK, right?

Yes, exactly. And then ultimately became the chairman of SEGA, so in 1999 he had loaned SEGA $500 million. I believe personally in 2001, the writing was on the wall.

Yeah, because all of this r&D that was required to go into these new consoles. The Saturn, and then we just talked about how the Saturn basically got the floor wiped with it by Sony and the PlayStation 1.

They're just destroying their cash reserves, yeah.

You would think when the PlayStation comes out and basically creates a giant sucking sound. That takes all of the business and players in the arcade industry and brings them into the home console with the PlayStation. That Sega would also get decimated in the arcade side of their business, which was the golden goose they do. But they kind of get a stay of execution for a couple of years thanks to this partnership that they do with the Japanese developer Altus to launch Purikura machines. So yes, the core gaming experience of the Arcades does get totally gutted, and Sega along with it. But almost like Nintendo and Pokemon, this Purikura thing, these are photo booth like selfie booths.

It makes sense, though, it's the same distribution channel, it's kind of the same locations as Arcades.

But unlike cutting edge technology in the arcade video game business, there is nothing defensible about this.

It's a one time cash grab.

Exactly so. Once both the fad subsides and competition springs up by the end of the decade, Sega no longer can continue in the hardware business on any front.

So what do they become?

Well, they become a games publisher. You can get Sonic on Nintendo platforms and on the PlayStation and on Xbox, and that's great.

They make mobile games. I remember in 2008, the very first iPhone game that I had was Super Monkey Ball, which was a Sega game.

Yep, actually a really good game, super fun puzzle game.

Yeah, and it was perfect for the iPhone handheld device with accelerometers, like. It was this natural fit on mobile. As people were trying to explore that form factor and figure out what it should be. In fact, it was, I believe in one of the original Apple iPhone oS App Store keynotes to show off what games you could make, what types of experiences you could do on this device. And so we keep talking about the Sammy.

Yeah, so. Sammy was and is a Pachinko machine manufacturer and operator in Japan beyond the scope of this episode, but Pachinko is kind of like Pinball used to be in the U.S.

And it's like much smaller than pinball, it's like a small, vertical type thing.

Yeah, you know, on the one hand, it's sort of gaming ask, on the other hand, it's also like a slot machine. Just like Pinball was back in the day in the U..S. So that's what Sammy was. They had made some video games in the past.

Yeah, and Pitchbook's got this around 2003 for the Sega and Sammy merger, and they've just been Sega Sammy publicly traded ever since. More stats from Pitchbook. Today, they're a $4.3 billion market cap company.

Yeah, you know, this is a good spot to transition to analysis. Here. I think there's a couple of interesting things to talk about in Playbook and then we have a fun sort of way to end the episode. One of the things I want to talk about is, despite all of these machinations and mistakes, they do have some pretty great IP in the company.

I don't think so. I mean, my take on this whole thing is that Sonic was a one-trick pony and that they never really found an effective way to expand the franchise. They came out with a bunch more stuff that had Sonic on it. But I never wanted to play 3D Sonic the way that I wanted to play the original Sonic. The Hedgehog Side-scroller game. It feels to me like there's a lot of nostalgia to play with. But it didn't really create any durable, extensible IP or a gameplay, frankly.

Well, right back to the difference between Sega and Nintendo, and the Games, and the difference between Miyamoto and Sonic Team, you know, Sega's DNA. This is the whole point of this episode. It was the Arcades. The type of game you make for an arcade is very different than the type of game you make. For a $60 packaged Good home console, Sonic was the perfect arcade-style game.

Yeah.

And then you're like, okay.

I'm done.

Whereas Mario and Zelda? It's not as fun in the first five minutes, but you can play it for 50 hours and lose yourself in it.

Since we did most of the kind of analysis, commentary in the story, let's just ask the question what could have saved Sega? And this is where it's probably worth sharing the Jim Clark story. So this is a great excerpt from Console wars. And I had no idea. I mean, we have talked a few times about Netscape and Jim Clark and SGI, and how the internet almost happened on N64s with Marc Andreessen and Jim Clark together, and you may know that the N64 was based on SGI's architecture.

The best N64 games were first party and there weren't a lot of third party games.

Right, but the way that that came about is crazy. It was actually Tom Kalinske, the CEO of Sega America, who wanted to do the partnership with SGI. He saw the potential in the cutting edge chips. And after the potential Sony partnership that we referenced earlier fell apart between Sega and Sony. He came back to Sega of Japan with a pitch saying, I just met with Jim Clark.

I know it's so crazy. But again, you know, understanding what we know now from the Sega story, it's not just that Sega of Japan was being really dumb and arrogant here.

Right, that was a reasonable business decision.

Because at that very same time that Tom was calling up Japan and being like, Oh, we're going to do this thing with SGI. The Sony Apocalypse was coming in the arcade business with the System 11 and Namco and the PlayStation.

Yeah, I also think there was probably some kind of like, not invented here sentiment. Where it has to happen in Japan, within Sega's walls, in order to be a viable strategy. It is a little weird, you know? It's not like they already were thinking we should just be a software business because they did have the Dreamcast after this.

That's probably the closest thing that I can think of to. Probably still wouldn't have saved Sega, but at least the Dreamcast might have had more of a chance of success.

Maybe.

We'll never know.

Carveouts.

Carveouts Let's do quick carveouts.

I have one funny story before giving my carveout. This is a thing that also got cut from both last episode, and I'm not letting it get cut from this episode. The Sonic origin story is hilarious. In an interview years later, Naoto Oshima, who is one of the creators, I think he was the designer of Sonic.

That's right.

And I was reading that, I couldn't believe it. And you look it up and you're looking at Felix, the cat, and you're looking at his eyes and his head shape. And you're like, Oh my god, it's Felix on mickey dyed blue with sneakers.

Yes.

It's ridiculous.

To your point about Sonic while being beloved isn't really like that super deep IP.

No, Kalinsky and team gave it a good run, but man, it was thin all the way around.

It was.

All right, what do you got on carveouts?

My carveout I want to re-carveout your carveout. From a couple episodes of Daryl Morey on Invest, Like the Best, I listened to it after you recommended it, Daryl. Now the GM and president of basketball operations at the Sixers, formerly the GM of the Houston Rockets. He's just brilliant and so fun to listen to, whether you care about basketball or sports at all.

Yeah, so good. OK, I have three, they're going to be fast, one is my God. If you are not watching this season of Succession, it's the best television, just remarkable storytelling.

I haven't yet.

All right, if you like this and you like South Park, you will love that. If you like this and you like watching creativity and action. But you're not so sure on South Park, you may still love it. It is a documentary about the process of conceiving of a South Park episode. Idea on a Thursday, and then having it air the following Wednesday. And the unbelievable six day turnaround.

Nice, but we could learn some stuff for acquired.

A lot we can learn. All right, listeners, that's it. Thank you so much for joining. You can become a deeper part of what we do here at Acquired. By becoming an LP, you will gain access to our LP.

We'll see you next time.