What happened to Sega

Last Updated on October 26, 2022 by Dave Farquhar

When I was in high school, the console to have was the Sega Genesis. While Nintendo thrived, Sega carved out a niche for itself catering to a more mature audience that had outgrown Mario. And for a few years, it worked really well, until it didn’t anymore. What happened to Sega? Why did Sega stop making consoles? Does Sega even still exist?

Sega hasn’t made a game console since 2001. After the commercial disappointment of the Sega Dreamcast, Sega tried, successfully, to reinvent itself as a software publisher.

From the arcade to game consoles

what happened to Sega
Sega’s early consoles fared well enough to provide a formula for competing with Nintendo. But Sega ultimately failed as a hardware developer because the same formula didn’t work against Sony.

Sega produced arcade machines starting in the 1960s. But in the early 1980s, a downturn in the arcades caused Sega to look for other ways to make money. In hindsight, 1982 and 1983 wasn’t the best time to be trying to get into the console market, thanks to the video game crash of 1983, but Sega didn’t know that going in.

While Nintendo took a great deal of inspiration from the Coleco Vision game console with its NES, Sega seemed to take even more, using the same Zilog Z-80 CPU as Coleco, and the same Texas Instruments graphics and sound chips in its early 8-bit consoles. Sega’s consoles weren’t compatible with the Coleco Vision because Sega didn’t arrange the memory space the same way, but the systems are similar enough that it’s fairly straightforward for hobbyists to port games from one system to the other today, sometimes requiring only minor changes.

The early consoles were successful enough to encourage Sega to release the Sega Master System. Based heavily on the SG-1000 family of consoles, it contained an enhanced graphics chip that was backward compatible with TI’s chip but added a new video mode with more colors, more sprites, and hardware scrolling. Thanks to the enhancements, the Master System could hold its own against the NES.

Sega’s console didn’t flop, and it certainly surprised some people that it did as well as it did, given the state of the US console market in the mid 1980s. But Nintendo won that generation. Sega did sell somewhere between 10 and 13 million Sega Master System consoles, but Nintendo sold nearly 62 million NES consoles.

Nintendo’s heavy handedness

The Sega Master System probably could have done even better except Nintendo demanded exclusivity. And unfortunately for Sega, the NES had enough immediate success, based on the strength of its launch titles, that Nintendo could get the exclusivity it demanded, for the most part. Sega had a good bank of its own games to draw from, but its game library was much smaller than Nintendo’s. A total of 314 Sega Master System games were released, but many of them were region-specific. None of the titles were available in all regions, and half the library was only released in Europe. The Sega Master System was much more successful in Europe, where it had the larger library. In the United States, its software library was about 120 titles. There were 675 NES titles released in North America.

But it was a solid second place showing for Sega. The Master System ended up with a larger software library than the Colecovision did, and outsold it by a heavy margin as well.

The Sega Genesis/Sega Megadrive

Sega Genesis
The Sega Genesis proved to be Sega’s most successful console. Sega stopped making consoles because the Genesis was their last profitable one.

But the raging success of the NES proved a two-edge sword. It meant Nintendo dragged its feet on building a next-generation console. Sega caught Nintendo off guard, releasing its next-generation 16-bit console before Nintendo was ready. They also went after an older market. While they did create Sonic the Hedgehog to compete with the Mario franchise, they specifically went after teens and adults. For 2D fighting games and licensed sports titles, the Genesis/Megadrive was a much better console than the NES and even the Super NES, and having a head start on the market helped at first. But in the end, the SNES ended up outselling the Genesis and Megadrive almost 3 to 1. Sega didn’t win, but they were closing the gap. And finishing first or second doesn’t matter nearly as much as profitability.

The Genesis was profitable.

Sega seemed to have a formula that could work. Move onto the next generation before Nintendo was ready, position Nintendo as the console for kids, and try to sell consoles to to teenagers who were ready to replace an obsolete Nintendo console with a newer generation console with games they were old enough to play now. Be the console for people who had outgrown Nintendo in more ways than one, in other words.

Sega also wrote off the Genesis too early. The Genesis continued to sell well into 1995, selling 2 million units, but they could have sold 2.3 million units if only they’d made that many. In spite of that misstep, Sega did control 38% of the game console market for a time in the mid 90s. The Genesis was the most successful console that Sega ever made.

If you want to know why Sega stopped making consoles, the short answer is because they never repeated the Genesis’ success. But if you want to know why Sega couldn’t replicate that success, that’s a little more complicated.

The Sega Saturn

what happened to Sega
What happened to Sega was that consoles like the Dreamcast failed to replicate the success of the Genesis. That’s why Sega failed as a hardware company, ultimately, though they found success as a software company.

The Saturn tried to follow the same pattern as the Genesis/Megadrive. Sega released a 32-bit console in late 1994 in Japan, then brought it onto the market in the rest of the world the first half of 1995. Nintendo didn’t have a successor to the SNES ready until mid 1996, so Sega had a head start of more than a year once again. And it was innovative, switching from cartridge format to CDs. CDs seemed state of the art, and were cheaper to produce.

But there were two big problems this time around.

Why did Sega fail with the Saturn?The problem was the Saturn was better for 2D games than 3D, and by the time the Saturn came out, the future belonged to 3D gaming. Sega had the right strategy, but they released the wrong console. The US and Japan divisions disagreed about the direction for the Saturn. The US division wanted a 3D-oriented console. Japan thought the system they released was the right approach. Had they gone with a 3D-oriented console, the Saturn might have fared better.

The Sony juggernaut

The Saturn sold almost 100,000 units in its first five months, but the problem was it wasn’t just competing against the SNES and the still-vaporware successor in 1995. In September 1995, Sony released its original Playstation console, and it sold 100,000 units in two days. It took two days for Sony to sell as many units as Sega sold in five months.

The initial momentum slowed down a bit, but the Playstation outsold the Saturn 2 to 1 for the rest of the year, and when Nintendo released the N64 in mid 1996, it outsold the Saturn as well. By late 1997, Sega’s market share was down to 12 percent.

When Sega discontinued the Saturn, it had only sold 9.6 million units. It sold fewer units than the Master System, in spite of appearing 10 years later, when the market was much larger, not to mention more eager.

The Saturn’s legacy

Today, we remember the Saturn as a better console than it seemed when it was on the market. It had a library of titles that played to its strengths, and when you judge those games on their own merits, there’s nothing wrong with them. It’s just that retro is cool now, and in 1995, the market wanted something more forward looking than the Saturn. If Sony hadn’t delivered the Playstation when it did, things might have gone differently, at least at first.

The Saturn has a fair bit going for it to a collector today, but that doesn’t help Sega circa 1997, when it needed it.

The Dreamcast

what happened to Sega
What happened to Sega was that the Dreamcast didn’t have the sales to match the critical acclaim it achieved. It was great, but it didn’t translate into annual profits.

If you want to know why Sega stopped making consoles, look to the second half of the 90s. The handoff from the Genesis to the Saturn was bad. The handoff from the Saturn to the Dreamcast was probably worse. Sega undermined the Saturn, announcing the Dreamcast too early, and, effectively, Osborned itself.

That said, the Dreamcast formula should feel familiar by now. Release the first sixth-generation console first, and try to beat the competitors to market by a year or two. Give it a faster CPU and a 3D GPU to make it more powerful than a Playstation. And since the Saturn wasn’t profitable because of the production cost, find a way to make this one cheaper. It all sounds reasonable, right?

Why did Sega fail with the Dreamcast?

Sega succeeded in creating a sixth-generation console for a fifth-generation market. So why did Sega fail with the Dreamcast? Because they repeated some old mistakes. After effectively killing off the Saturn before the Dreamcast was ready, they didn’t have enough inventory available at launch. The Dreamcast initially sold 200,000 units, but they could have sold 500,000 units, if only they’d had sufficient supply of chips to build that many consoles.

The second problem was the launch titles. Only one of the four titles ready at launch time sold well. Two additional hits appeared a few weeks later, but without an immediate pair or trio of must-have titles at launch, the system lost momentum. Sega needed to get a million units onto the market as quickly as possible to ensure critical mass for when competing sixth-generation systems hit the market. They set a goal to accomplish this by February 1999, but at that point, sales were still short of 900,000.

The loss of EA

Arguably, another reason the Dreamcast failed to replicate the Genesis’ success was EA’s refusal to make software for it. EA’s sports titles were one of the reasons the Genesis was so successful. There was some he-said-she-said between the two companies. Sega said EA wanted exclusive rights to produce sports titles on the Dreamcast. Sega had just spent $10 million to buy a developer of sports games, so they weren’t in an ideal position to make that concession. EA said it didn’t like the 3D chipset Sega chose and that it took too long to finalize whether the hardware would include a modem for online play by default.

The Playstation 2

It also didn’t help that Sony announced the PS2 long before it was ready. A month after the Dreamcast’s launch in Japan, and several months before its debut in the rest of the world, Sony announced the PS2’s specifications. In some ways, the PS2 was three times as powerful, at least on paper. The intent of vaporware announcements is to make people wait and see, and Sony succeeded at this.

Initially the Dreamcast sold well, but after Sony’s announcement, it didn’t meet its sales goals. Sega tried selling the console at a loss to buy market share, a strategy that works as long as you sell enough software to make up for the losses. They sold enough software that the numbers would have worked if they moved enough consoles.

The result was Sega lost money three quarters in a row.

Sony had its own supply issues when the PS2 finally launched, but in Christmas 2000, a redesigned original Playstation outsold the Dreamcast. Enough consumers were willing to wait to see what the PS2 could do that Sega couldn’t capitalize.

The end of the line for the Dreamcast, and Sega consoles

Even before the 2000 Christmas season when a fifth-generation console outsold the Dreamcast, Sega executives were advocating leaving the hardware business to become a software company. And on January 31, 2001, they made it official, announcing they would discontinue the Dreamcast on March 31 to develop software for other consoles. Sales of a dead console walking were slow as expected, requiring a price cut to $49 to liquidate the remaining inventory.

The Dreamcast sold 9.13 million units. Not only did it fall short of replicating the Genesis’ success, it was less successful than the Saturn, at least in terms of sales.

Why did Sega stop making consoles?

In the end it came down to money. Developing consoles is expensive, and Sega lost money for five years in a row trying to develop a console that would replicate the success of the Genesis. While competing with companies like EA was risky, Sega didn’t have a lot of choice. After three years of financial losses and losing 80% of its market share, pursuing a software-only strategy didn’t necessarily feel as risky as it may sound. And Sega didn’t need to match EA in sales. They just needed to sell enough software to turn a profit. Letting Microsoft, Nintendo, and Sony figure out how to bring consoles to market and just develop the best software they could for all three told investors a compelling enough story.

The turnaround wasn’t immediate, but in 2003, something good happened to Sega. They started making money again.

Why did Sega stop making consoles when their consoles are so popular today?

Today it’s easy enough to find people who consider the Dreamcast and Saturn to be underrated consoles. It’s also not hard to find people who say the Dreamcast is one of the greatest consoles ever. And in hindsight, they were good consoles that deserved to sell better than they did. Sega seems to have a knack for creating cult classics that aren’t appreciated at the time for what they are.

That’s great artistry, but when you’re a publicly traded company, investors don’t want great art. They want profits.

And the way the market changed when Sega was making consoles proved another problem. When Sega started in the console business, they were competing with Nintendo and Atari. When they left, they were competing with Nintendo, Sony, and Microsoft. Sony and Microsoft are much larger companies, better able to afford the cost of developing console hardware. And they are also better able to afford to promote them. Sega didn’t always have the money to promote what they developed adequately at launch.

What happened to Sega is that the console industry outgrew it, so it had to reinvent itself to survive. And they’ve been pretty successful at that.

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