Short: The Death of Sega
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Okay, let's hear your best like .

a scream impression up is .

the emphasis is more on the sea.

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. Perfect the cost you pay for great art.

You know, easy with story. And welcome to this episode of acquired the podcast .

about great technology companies and the stories and playbooks behind them. Gilbert, David, 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, start to finish. But there are also some stories, or perhaps chapters of stories, that can be told in an hour or so. Now, in nintendo part two, I S. David question, how exactly did sea manage to go from having over half the video game council market in the U. S.

With the sea genesis to abandoning the council business entirely after dream cast in a few short years? And David, you gave us a quick short answer, but we are both sort of looking at each other afterward and thinking there is so much more to this story IT really does deserve its own episode. And Frankly, it's a nice opportunity for us here, are required to take a look at a company that didn't become hugely successful and what the lessons we can learn from that one. R, so we bring you today the death of sea.

This could be really fun experiment. We get to tell this story, right? Listeners, let us know if you like this, and we might do more than yet.

Let us know in the slack acquired D, F, M, slash slack IT is the best place to discuss episodes after we released them. Tons of folks joined after the intendo episodes is a lot of great video game discussion right now. Check out A C Q to our second show with interviews, the most recent interviews with David chew, the founder and CEO of ritual. Okay, listeners, now is a great time to tell you about long time friend of the show service now.

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We could technically still invest in segar today.

said Sammy holdings.

Not future we would want to, but let's get into spoilers. So we start our story in round call. IT nineteen ninety two, nineteen nineteen three saga and its genesis is as IT was known in north america, has battled in tando and the super N I S. To basically a tie in the U. S. Home council market, which really in practice, if you go listening in intendo series was beating the pants off of intendo like they I had no right to get to fifty percent maybe you and fifty percent plus market chair given how far behind they came from.

Imagine you're a start up and you're fighting some big in coming. And within three years you get to a basically fifty, fifty market here.

It's totally not the genesis. I mean, IT was the cool console in the unities. IT had sonic.

You've got john mad in football. They've got great sports franchises. They've ve got the mortal combat version .

with blood of the real red blood. Nothing intendo toned down gray blood.

And they have about a thirty million total unit installed base of the a genesis around the world. The vast majority of about is in the the united states.

yeah. And this is basically the best video game councils we're doing at the time. Years later, the playstation two with one hundred and fifty million, but no one was doing hundred million plus unit sold game systems at this point in history. So thirty million rocks olid. Huge player.

the market, a great base to build on. yes. Now also at this time in call IT one hundred and ninety two one thousand nine hundred ninety three IT has become clear that compact disks are the future not just for a video game industry, but for everything C, D, album sales and like CD players are on their media c rise at this point.

That is a huge driver of business for companies like SONY in the personal computer industry, neighbor to the gaming industry. C, D, ROM drives are now becoming standard in pcs. This is how software is shipping. This is how games are shipping in the P, C, industry.

And the trade off with games is, of course, a cartage doesn't really require a loading time. The C D, while that has a ton more storage, does have trade, ffs, where IT needs to load stuff onto .

the machine yeah. And there's one other really big advantage of the C D medium for the business side of the industry, which is that cvs are much lower cost to produce than car tages. You got to like put silicon in there.

They have chips. Cds are just optical desks. You can stamp these out for attend one hundred thousand of the cost of a cartage pennies. So it's obvious that the home video game council industry is also going to move to the C D 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 gonna happen is not via new consoles, but we are add on peripherals to existing councils. Looking back now, this was obviously a very, very poor path and evolutionary branch of the gaming tree that versions ly died off. But at the time, everybody seemed to be doing that.

There are other consoles like atari, jaguar console came out with A C, D. Ramat on the N, C, P, C, ended in japan in the U. S, was called the turbo graphics console that came with A C, D ad on.

And of course, famously, ninh indu is working on a major partnership that y've announced that everybody knows about with none other than SONY to make A C D. ROM. Ad on for the super intendo that would be known as the play space station, the SONY play station. Add on to the superintendent o will come back to that in a little bit that doesn't go to play.

And third episode, die and intendo, where we've talked about this.

So of course, by sega, they are working on A C D. RAM at on two for the genesis. And just like with the genesis, they had beaten intendo and the super intendo to market with the first sixteen bit council.

They want to make sure that they beat nintendo and SONY to market with the first C D RAM at on. So in late one thousand nine hundred and ninety two, they launched the saga, A C D 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.

It's a really crappy game. But people think that this is the future that C. D. RAM. Technology is going to enable. It's like a zombie slashing, like a teen hard flick that you basically play as a video game. This one of the games that gets congress all spin out about video games are corrupting the youth. That leads to the creation of the entertainment software ratings poor, the video game industry version of movie ratings that comes out .

reddy for everyone.

Yeah exactly uh so falling to go back to look at this stuff today and you like yeah compared to call of .

duty like this is something .

seriously grand auto. But ultimately, despite all this handwringing over these games and everything coming out with the city at ones, there is a fundamental problem with what saga is doing here. And that is that add on technology for councils 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 nantz deo, like SONY in a minute make all of their profits is from the software sales, not from the hardware sales. And so you wants to have as big of an install base of consoles as possible to more tize the software sales across. So when you're selling an add on console, you are limiting the target market to the thirty million people that already own a genesis IT will be smaller by definition, then the market base that you've already created.

And this creates a huge problem because then developers don't want to make their best games for a limited install base of councils. Consumers don't want to go buy a platform that only gonna have a very limited number of good games, and IT quickly becomes a death spiral. So the saga C, D sales, despite starting off relatively strong, stall out quickly, saying only cells, about three million segar C D units.

First is to thirty million, plus genesis units that dave sold. This is a flap for them now, nintendo, by either luck or skill, or maybe just being slow and intendo, they never actually come out with the C D. Add on for the tender. And the SONY partnership falls part, so they kind of avoid this disaster that say that stumbles into.

But after the SONY partnership fell apart, didn't they form a new partnership with phillips to create the nintendo CD thing they did.

but that delayed everything enough that everybody kind of realize that this was a bad idea, and intended to basically also abandon that project and let phillips come out with their own console. I think he was called the C. D.

I. Nobody supported IT. IT sucked. There wasn't part of the .

superintendent ecosystem. okay. So what does second do after the sega genesis C. D. Adon is abandoned? Well, you would .

think just like nintendo sorted did here, you would learn your lesson. Console ads are a bad idea. You've got all these problems with IT.

It's a limited market. You cut your losses. You move on. You just embrace the next generation. That's the logical thing to do here, right? Yeah, that is not what cigar does.

They're decide that they're going to follow up their failed console, add on with another failed console head on. That's right. The a infamous and inform ously terrible.

Thirty two x, which launches in the fall of one thousand ninety four. This is another hardware add on for the sake genus system that you plugged into the top of the console. And IT adds a thirty two bit processor to the jetsons.

And IT works sort like the same way a game genie worked, right? You like put IT in where your game cartridge go. And then that way when you put your actual game cartage on top and sort of like stack like a tower, yes.

exactly. This whole thing is. So hair brand, I think IT added more colors, may be two existing genocide games, but then I also had its own thirty two x 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.

Ha, okay.

yeah. So the thirty two x sells less than one million units total. And in the meantime, almost immediately there, after cigar also rushes out, a separate brand new native thirty two bid system to market called the sator.

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 saga in japan.

They order tom kin, skii, the C E O of think of amErica to launch the, say, amErica doesn't really want to do this, but they don't have a choice. So they spin up their patented brilliant saga marketing launch playbook for the satan. They announce to amErica that september second, one thousand nine hundred ninety five, is going to be saturn day.

IT is saturday, september second, and the sega saturn gna launch on that day. But then at e three in may of one hundred and ninety five, they shock the world time. Collins key comes out on stage for the sake I O and says, actually, I know we told all of you that we were gonna launch in september. Well surprise, we're launching today. The sagas atn is coming out right now depress the industry that developers here that they're .

like what 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. There's been no marketing. None of the groundwork has been laid. In fact, everybody thinks this thing is coming out in september.

It's really weird because it's like everyone's sort of recent hero that David verses. The glass of nintendo seems like they should be firing on all cylinders, but you have the market can with thirty two x and the sugata. And now segador sooner what that's going on.

right on top of this maybe forgivable saga, CD thing that happens, you know, a year two before, like this whole thing is just weird. So on the back of this, the saturn flops, IT sells just over nine million units compared to the genesis, which sold thirty million units. And if you read the book console wars by Blake Harris, he spends a lot of time with tom clinic, the C.

E. O of, say, america, and tom and the other folks who are at sake of amErica this time, like there are somewhat diplomatic, but they just kind of lab the japanese management of saga this point in time. They said that they're sake of america, fought against all of these decisions, that the japanese parent company was jealous of saga, america's success with the genesis.

because the genocide sold really well in america.

didn't sell as well in japan. No, all of the genesis success was in america, europe and south america. IT basically did nothing in japan .

in in council wars. The author draws the great analogy of japan is the parent and amErica is 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 parents favorite child used to be japan. And as the parent showed more favorite tis m 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 up.

And saga, at this point, of course, is a japanese company and the board is japanese. And at the end of the day, jan winds here. So tom and most of the rest of the team to take of america, they get super frustrated. They end up just leaving the company, including Steve erris, who master minded the aggressive marketing strategy behind the genesis, the same, even the .

welcome to the next level, he goes to work for SONY .

to launch the playstation. Oh, talk more about one minute. So sake of japan is kind of running the ship now at this point in time, they decide, after a couple years, to give up on the satan, they launch another new internally developed console, the dream cast. The dream cast actually had some real innovations to IT. Like IT was the first true online console that shipped with internet connectivity built in IT.

Had a little slide out handhold thing that was like a little game boy that popped out the controller.

That was super cool. 哦， yeah, the V, M U. That thing was cool.

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

But unfortunately, IT launches against the playstation two, which goes on to become the best selling council of all time and completely transit. So the dream cast sells even fewer units than the, and it's really sad, after just two and a half years on the market, saga ends up discontinuing the dream cast, announcing that they are getting out of the hardware business entirely.

They're gonna go to just being a video game developer and publisher on other platforms on police station, on the x box, IT said a the company really just becomes a shadow of its former self IT limps along. And then finally, after a couple years from kind of two thousand, one, two thousand and two in to two thousand, three of 这个 just making games for other platforms， the company gets sold off to another japanese public company company called sami that was a manufacturer r of pechina o machines, which is kind like the japanese equivalent of pinball machines. It's this sort of sad ending with a winter for this once legendary cigar company, right?

You've got the existence 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 if is more of this story because I pull up pitch book to look, there are a lot more transactions around this company then you've sort of mentioned .

so far are there there are ah if already there were a fight cast that went to really deep research on what actually happened here.

Yeah all .

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Yeah, you like the old story that I just told you, right?

IT almost feels high gloss a power for. And if you really stare at IT, you're like, i'm not satisfied .

that can be right. This is insufficient. Everything you say is exactly create thing like you living.

I bet most of you, if you knew any version of the story of the death of sea, what we just told was the version you probably know. But well, it's not wrong. It's only one version of the story.

The other version is both way more charitable to say, a the parent company pain and also, I think way more interesting in terms of legal lessons we can take from IT. So let's tell you, if you go to listen to our two part intendo saga, we talked quite a bit about sega along the way. And especially in our first intendo episode when we talked about sega, we talk to about them as this, our cab company, and that's actually what sago was, the home console business, the genesis, the master system, before IT. These were lake side project offshoots from what was otherwise an enormous and very successful arced business based back in japan.

Totally IT started as service games back in the like, forties, fifties. This merger of R K. Game's kers and our cae distributors. You even had the story that you are telling. I think we actually cut this from the intendo episode for time. But on paris scope, the a very innovative sega game, they standardize the unit of the quarter as what you pay for an arcade video game session yeah.

the arcade industry is lost to history now because basically doesn't exist anymore. But IT was bigger than the home council industry, and nobody was bigger in the arcade industry then say they were the o least and died the quarter, as you said. Now that game paris scope came out in the sixties.

This is before video games. This is what was called in electro mechanical games. So they were mechanical elements to this cabinet of submarine and ships that moved around the only plastic and cardboard.

And then you fired a gun that had, like torpedos, that traveled on a light bulb path to hit the ships. This is prety cool. But he became so successful. Sega actually gets acquired in one thousand nine sixty nine.

Yeah, I was shocked to see this in pitch, but I scrawled all the way down like I Normally do. And i'm looking at like private companies who raise money, you to see who their seed investors were. And the first transaction for sega is from nineteen sixty nine.

Yes, the company that requires them is gulf and western, which is a big oil company of the us. What the house go on here? Well, turns out at the time golf in western also owned caramel textures. The movie .

studio oh, i've always seen that at the little like, uh, I don't think you see any more but the little little screen yeah when the movie starting yes.

so they acquire saga and merge IT into paramount. The Operation stay separate, and the like boards of c and paramount stay separate, but within gulf, in western and sagas, part of the paramount pire, so much so that they take their two most talented paramount executives, and they put them on the internal sag aboard, we think, golf in western. Do you know who these two people are? No, Michael isner and barry.

dealer White, right? I had no idea.

So vehicle issuer and very dealer are like key parts of the saga history. And all of this, all we're talking about, this is before a tari. This is before there is a home council business. This is before there's a video game business period. This is how important say that is in arcades.

Twenty years before micellar becomes the CEO of disney, and long before a barry deler dreams up interactive corp.

Yep, this is in the one thousand nine hundred and seventies. So we also talked on the intended series about how a tory got acquired by Warner brothers. And this was this crazy guitar.

This video game company becomes part of this movie studio. And then IT becomes the biggest part of this movie studio. One bradley was just copy in paramount.

And what they did with sega, isn't that so funny? wild. So part of the strategy that they can adopt during this time, they 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 arced cabinet s. They start building out their own archive centres that they offer. They we're going to make money every which way in this industry.

So they're called family fund centers in japan and saga centers in the U. S. The saga centers in the U.

S. Change times a few times, go on to get rebrand and say, always stays involved. This become time out. Our kids, which is one of the biggest chain of arcades in the U. S.

wow. okay. So sick is hundreds .

of these are kids that they are just printing cash out of because they are making money from selling the cabinet to their own, our kids and other army ds. And then the arcades themself like hugely profitable businesses.

Yeah I mean, there's a lot of arcades that when you look at the side of them, have a giantlike logo plaster over IT. I mean, clearly a company focused not just on home councils but like making games. Yeah.

when you say a company focus not just on home councils from the parent company's perspective, they'd rather not focus on home councils at all. Now you can start to see another perspective on things here. In one thousand nine hundred eighty one, say, publishes the game frog that conomo had made, but say to publish hundreds of millions of dollars on that thing, huh?

In one thousand and eighty three, right before the home video game console crash LED by iti, they do two hundred and fourteen million in revenue, say IT does as a division within can apply now. Then when the video game crash happens at the end of the year, paramount, just like Warner brothers in a atari, they want out of the business, so they want to divest saga. And one of the original founders, from back in the day I named David rosen and a japanese 的 entrepreneurs， a company sagar had acquired, name hio naka ma.

They engineer a management buyout of saka for the grand total Price. Out of this is a pitch book of thirty eight million dollars. This is the steel of the century. Yes.

actually there is a transaction in one thousand and eighty four. Looks like the investor name of csk holdings.

Yes, that's IT. So C, S, K, holdings was a public japanese company that risen and nakia. A, knew the management of.

They financed this bio. They were like the P, E. shop. They were the sponsor of this transaction.

H, 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 holy bought out by golden western, then holy spun out.

They bought the whole thing for only eight million. This is ridiculous. This company, which is legendary in the arcane industry, did two hundred and fourteen million dollars 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 to paramount. t.

Warner brothers was devastating tari. So the R, K business, yeah, 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.

but did they ver. So then I think that was in one thousand nine hundred eighty four, they would go on to take IT public, I think in nineteen eighty eight on the tokyo stock exchange. So now it's a publicly traded company.

Yep, that make sense because pretty quickly, after the pyo saga gets back to their old tricks and they are rushing IT, they're pumping out smash IT hits like run people might heard of very famous racing game should oby after burner altered beast IT was a kind of beat him up browsing that we talked about epa.

that was the original packing game before sonic with the genesis.

So they're back to making hundreds, millions of dollars in the array ade business, both making the games and Operating them in their own arced centers. Nokia, who was one of the two guys involved in the bio.

and nokia and rosen had to get hugely wealthy from this because of how unbelievably little they paid for the equity that by the time the IPO, that would have been valuable.

Yes, I don't know the details, but i'm sure they did. Knocking yma, he started pushing the company. He gets worried about what intend is doing and what he sees, what the us. And so we should also enter the home .

council business to take .

a diversification that exactly rosing C S, K. The rest of the board, they're not that supportive because they like we're doing great in our kids like I don't really care that much. But sure, if you care about this, you'll do this.

And that's when nci ama goes and he recruits time Colin sky to come in and run north america. It's kind of like a surprising success to everyone. The genesis in north america, you know, there's the scene that we talked about in intendo where tom comes over and presents his four point plan for dethroning nintendo to the board in japan.

And the jeffy ese board is like, I don't know, like I don't really like this now IT all makes sense. They're not dumb. They just like, why would we risk pouring all this capital into the home council business when we're killing IT in the archives?

And on the one hand, it's an innovators dilema. On the other hand, I have to imagine arcades stay they very good cash flow business for a time. It's not like that was actually .

going away. Well, let's get into IT. So intendo in the N S. And the super N E S.

In the home council business turned out was never really a threat to the rk business because the way arcade technology and hardware worked was very different than the, and the types games were different in the arcades. IT was all iterative. IT was constant iteration.

Every game that came out was its own proprietary hardware cabinet. And they were based on designs are called boards. There are boards, but you could tweet each time.

Think you think about what sake is pushing with all their ads to the home console, of course, that we would make sense to them. That's the way the R. D.

T. work. They would have like a core base call IT, the system sixteen, which was sagas kind of base sixteen bit arcade platform that they based the genesis on.

Yeah, all these games I was just talking about to oby out run at that. They ran on that. But each new game, like they tweak the hardware a little bit, was interactive.

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 contain system. So it's not really in their DNA to like do a once every five plus year. This is the standard thing that we promise not to change IT, and we will create a bedrock platform for you. Developers is not really a thing.

yes. And so that means couple things for the market that keep the arcade market not as viable but thriving. The arcades are where the most technologically advanced games are during this era because the hardware cycle is so iterative, the home systems, even the end, yes, as amazingly ground breaking as IT was because the console cycles have to be designed to last so long.

That's not where the latest cutting aid stuff is. And so those games, the intendo games that they're making, you know the way, say, a counter position against them with the genesis. They are slow, they're not exciting.

But that's what home council games became. They became these long adventures, these fantasy lands, the very different thing that you would do in the arcades make sense. So coming out of this era and then into the early and mid nineties sagas, our kid unit is just killing IT.

They'd had those hits in the eighties, everybody got super wealthy, and then they start really pushing the envelope on technology. There was a ton of innovation coming at a sega. They developed the first real, modern, great three d games.

We all think now of super mario sixty four as being the first three d video game that consumers used in love. Actually, years before saga put out the virtual series in the arcane, so this was virtual racing, virtual cop, and most importantly, virtual fighter. Now this game, virtual fighter, which is a fighting game, IT, used 3d political technology。

If you think back to sixteen bit super intendo games, their flat, their two d three games like think mario sixty four, you're running around in a third world. All of the environments and characters are built using lial math. We talked about this a lot .

on the in video episode triangles.

triangles. This is new. Saga is the one that actually brought really good games to market with this, and that was all in the archives. So a virtual fighter, when IT comes out in one thousand nine hundred and ninety three, is so popular.

Saga cells, over forty thousand virtual fighter cabinets worldwide at a Price sively ten thousand dollars plus per cabinet, about half a billion dollars in revenue on virtual fighter. wow. So it's a huge win financially for the company.

Even more so, though it's so impacts on the video game industry. Once virtual fighter comes out, everybody realizes, hey, three d poligny games are the future. And what year was this? This was one thousand nine hundred and ninety three, right? Has can cuter argue? And the team over at SONY are working on, they are stand alone in playstation.

They've broken up with an intendo. 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 one council.

After SONY witnessed the success of sakai virtual fighter in one thousand nine hundred ninety three in japanese archives, the direction of the playstation became, quote, instantly clear, and 3d polygon graphics became the council's primary focus。 So ni computer entertainment president expressed gratitude for sagas timely release a virtual fighter, as IT proved, quote, just at the right time, that making games with 3d imagery was possible， and that this was the direction in the playstation should focus. So the impact of this is huge.

Our kids remained viable through the nineties because they had the technological edge. But now SONY is gonna come enter the market and they don't care about our kids. They're going to bring their technology and financial firepower all to the homework. And their goal now is to make a machine that can rival the R K. Technology in the home market.

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 a Price point that consumers could afford.

Yep, so here we are now the end one thousand nine hundred ninety three to one thousand nine hundred ninety four. SONY has been announced that they're coming out with the playstation. They're all in on in the video game market.

They start going around and talking to all of the non saga archive manufacturer name go midway in the U. S. komi. And they start convincing them to bring all of their new ark games directly to the playstation when if first comes out in end of one thousand nine hundred ninety four in in japan, in the ninety ninety five in the U S, it's an r cape killer.

That's what IT is built as IT becomes so much more than that over time is is it's final fantasy y it's all that. But in the beginning, the vision for the playstation was we are going na take the technological firepower of the archives, and we are going to bring that in a way that nintendo do, can't and say I won't, into the home market. And of course.

all the other arcade manufacturer love this strategy, right?

We can benefit from writing the Sunny platform into the living room, but say, is get caught in the wind here because they .

have a home council that's making IT so that they can go a line with another home council.

Doesn't have a home council. He does not have a home council. Midway doesn't have a home council.

So before the playstation launched, the arcade industry was back up to about seven billion dollars a year globally, and a huge portion of that was controlled by saga after the playstation launches by the end of the decade is down to two billion dollars. So IT drops by sixty percent in just a few short years. And it's all .

due to the playstation. So the playstation basically killed sega arcade business and their console business.

That's what. wow. So now lets go look at this kind of original console words, book type narrative about what happened. We have a whole different perspective now, all this crazy hardware schizophrenic atos, these like panic responses to the coming tsunami of SONY, not just worrying about the homework, but worried about there are kid dominance as well.

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 are gona stop making councils 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 sea saw. I kind of trying to do both and have a foot.

both worlds. So here's what happens in september one thousand nine hundred ninety four, right before this crazy thirty two x thing comes out, SONY and name co. When no name o was seek as biggest rival in the ark business, they come out with a pretty huge industry changing announcement.

They're going to partner together to release a quinte virtual fighter killer arcade game called text. Folks might recognized the tech series. Well, no idea tech is so much more than text.

The game is going to come to the playstation when IT watches is not out. Yes, but like great OK, we all remember taking played on the playstation. I think IT was an exclusive a but it's also coming out right now in a pember one thousand nine hundred and ninety four in the archives.

And in fact, it's going to be running on name cos awesome new system leve in arcade board platform that they have developed together with SONY. And guess what further surprises this system eleven arcade board developed with SONY? This is the police station. wow. So this is just the ultimate knife in the back.

They're just basically shipping playstation .

inside of these archie cabinet. Ts, yeah. IT, was the playstation hard? Like there are some.

We're moving all of our development platform for the arcade industry to the playstation platform. The technological bleeding edge is now gonna. Yeah, also in the arcades powdered by the police station, but in the home powered .

by the police station. Wow, what a trojan horse.

So now saga is like, oh, shoot, we are school de. We need to scramble the jets and just do anything we can to try and stave off this apocalypse. So they launched the thirty two x seems really done, but they ve got to do something like, okay, we need to get into market right now with a thirty two bid system to just try and preempt SONY here in the playstation launch.

Then they massively accelerate the sad and launch. Why did they do that the same thing? They're just trying to do anything they can think of to steal some of SONY thunder here.

Yeah.

make sense. The barran is already through the gates on the parade side of the business, these system, even cade cints. And it's right at the gates coming next year with the playstation.

It's funny how much in order intendo episode the conflict was sag adversus intendo, but the death of sega really is against SONY.

yes. So that brings us to the very famous e three conference in may of nineteen ninety five. And this is maybe the most incredible video game industry event of all time we referenced earlier in the show.

But we're heading into the conference. SONY is expected to announce the U. S. Release state and pricing of the playstation at this conference.

People expect it's gonna in the fall, you know kind of know what's gonna en sagar. They need to do something. And so this is when they go to pay, tells kinski and save america. Do the surprise launch.

get up there.

announced that or just do IT .

even though the ecosystem isn't ready, the hardware is ready. So worship IT, worship IT.

So tom does that. He beautiful ly goes up. He announced so forgets saturn day. You can buy the console now. It's in limited quantities at select retailers for a Price of three ninety nine.

And he's basically doing this because japan has said, either you are doing this or we will find a new C. E, O for sega of amErica who can do this? Yes, three ninety nine. That is the segador .

prays point available today, may eleven, nineteen and ninety five. So kinski finishes his speech. He walks off stage.

They usher everybody out of the room. They turned IT over. They get ready for the next key.

Note that the day which is going to be SONY SONY KO starts a couple hours later. All of olifant, who's the president ahead of all of SONY america. So like not just the playstation, all of SONY businesses he gets on stage.

He starts giving his presentation. He says that the playstation will release in the U. S.

On september nth one hundred ninety five. So like few great, they're not move in and up. We're gonna beat them to the punch word live today. We got a four month head start. Let's go.

And then all of invites the new head of SONY computer entertainment america, one Steve race, formally of saga america, up to the podium to give a quote, quote, brief presentation. He walks slowly up to the podium. He's got a large stack notes.

He places them down on the left turn. He shuffles them around. He wait a beat.

He's ready to give his big speech. He looks up. He looks at the audience and he says, two ninety nine. And then he picks up his notes and he walks off stage. This is, I think, most people in the industry, I think, would agree that this is the greatest moment in all of video game industry history.

right? Of industry announcement type things. Alright, so that SONY playstation one to ninety nine for by far the most sophisticated system on the market.

We will link to the video of this in the show, notes design, youtube. I mean, people still watch this to this day. The reaction is amazing.

At first, there's silence because people like, what did you to say? What does this mean? What's going on and then the crowd starts cheering.

And then you can hear after about like twenty seconds or so, when this really thinks in of what this means, people go nuts. There's like another wave of cheering. It's unbelievable.

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

This exact moment, the afternoon of male eleven thousand ninety five, is the death of saga. Because let's go back and think about the three key constituencies in the video game home council business can fly. You've got the consumers. Why on earth would any consumer go buy a sak assn. Today on may eleven, on its launch day that has no sonic game, has only six games total, and IT costs three ninety nine.

When you now know that the playstation, which is far superior, is gonna come out just four months later, they're going to have perfect ports of all the latest and greatest arcade technology video games and it's gonna cost less. Ow, you're not to a so that's the consumers then the retailers. The retailers are so mad at sag saga just completely ruined all of their holiday season planning because for retailers, q four is everything.

And why are these councils launching in the fall in the U. S. So that can be ready for the holidays. So just screw all this up.

And now more importantly, they've got units on trucks on root to their stores that they know they're not going to be able to sell now. So they are so mad at sega. I think that was K, B.

Toys, which then was a big frantick in america. They drop entirely when I Carry your stuff and goodnight you. And then you've got the most important peace to developers, all the third party developers who are sitting the city, three, watching these keynotes.

They like, wow, we're going to make a ton of money on SONY. And saturn has no chance of building a meaningful in style base. So if I was planning on developing games for the satan, I am now cancelling those plans. This is just the worst thing that could possibly happen to saga and the saturn and the arcade business.

Now listeners, as you can imagine, there is a tough path that they have to now traverse to get to the twenty twenty three sega that we're going to talk about and what they look like as a gams business today. David, I have a couple of stories that I don't think you know about how they made that transitions. I'm curious to know if I will stuff you with that or not.

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Venta come slash acquired. okay. So David, here are a few things that I was curious if you knew about. So I planned at the seed earlier with the idea that some people personally accumulated a lot of wealth through sega. One of these people was, I saw oka.

yes. The chairman of C. S. K.

right? Yes, exactly. And then ultimately became the terminal sea. So in nineteen ninety nine, he had loan sega five hundred million dollars, I believe, personally. In two thousand and one, the writing was on the wall. He was coming to the end of his life. He actually forgave sega s debts to him ahead of his death and returned six hundred and ninety five million dollars worth of sega and C S, K stock, which basically was the bridge that sea needed to transition. A massive shift from the second that we've been talking about this whole episode to just being the game creator that they are today.

Yeah, because all of this R N D that was required to go into these new councils, the SATA that we just talked about, how to sattle, basically got the floor wiped with IT by. So in the playstation one, sago would then turn around and poor a bunch of effort into the dream cast. The same story would happen.

But even worse, the dream has sold less than the satan. And the P. S. Two, of course, goes on to become the best selling council of all time. IT takes hundreds of millions of, not billions of dollars in R, N, D.

To create these consoles, right? 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 R K. Industry and brings them into the home console with the playstation, that saga would also get decimated in the arcades of their business, which was the golden guse they do, but they kind of get a stay of execution for a couple of years, thanks to partnership that they do with the japanese developer altis, to launch peer acura machines. So yes, the core gaming experience of the arcades does get totally gutted and saw, along with IT, but almost like nintendo do in pokey, this peer accurate thing. These are photo booth, like self e booth.

哦， i did read about this. I didn't know what I was called.

Yeah, this kind of become sort of the origin of the e phenomenon of court started in asia. And like, move to the rest of the world. Sago was right there at the beginning of this. So the photo booths in the late nineties make over a billion dollars in revenue that take a plugs into their arcade business division. Now this is not the arcade by any stretch of .

the imagination. IT makes sense though. It's the same distribution channel. It's kind of the .

same location as arcade actly. Unlike cutting edge technology in the arcade video game business, there is nothing defensible about .

it's a one time cash grab.

exactly. So once both the fed subsides and competition springs up by the end of the decade, saga no longer continue in the hardware business on any front.

So what do they become?

Well, they become a games publisher. You can get some icon intendo platforms and on the playstation and on x.

that's great. They make mobile games. I remember in two thousand and eight, the very first iphone game that I had, a super monkey ball, which was a saga game.

yeah. Actually a really good game. Super refund. Zz le, game.

yeah. And IT was perfect for the iphone hand held device with accelerometers. Like IT was this natural fit on mobile, as people were trying to explore that foreign tor and figure out what I should be.

In fact, IT was, I believe, in one of the original apple iphone O S. APP store keynotes to show off what games you could make, what type of experiences you could do on the device. And so we keep talking about the same I, what was the same I transaction? And what was sam before sega? Sai.

yes. So sami was in as a petitio machine manufacturer and Operator in japan beyond the scope of this episode. But peaching goo is kind pinball used to be in the us.

It's like gambling meets pinball and it's like much smaller than pinball, a smaller ticket type thing .

yeah you know, on the one hand, it's sort of gaming ask. On the other hand, it's also like a slap machine just like pink bow was back in the day in the U. S.

So that's what sami was. They had made some video games in the past. There a small video game division.

And so they acquire saga and emerge that into their video game division. And it's fine. It's still a public company. You could say maybe at the bottom of the majors or the top end of the solid mid level game publishers out there, it's fine.

Yeah and pitch books got this around two thousand and three for the saga and C. M. E. merger. They've been semi publicly traded.

Ever sense more stats from pitch book today? There are four point three billion dollar market cap company. If you back out their cash, they have an enterprise value about three point six billion.

Last year, they did two point seven billion in revenue. So clearly, the market doesn't think much of them with a revenue multiple of one point three. It's a little bit of like a sb company.

Yeah you 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 I in the company.

The sonic movie is no mario movie, but I did pretty well. People still love sonic, the head tag, the accused of franchise strong. There's lots of other franchise within sah.

Is there almost i'm wondering, like a uh L V H berna no style take over opportunity here. I could you come. And acquire either the whole saga C M I company or the saga I P out of IT.

And I do IT right. You know, there's so much that be done with stuff. I don't think so.

I am. I take on this whole thing is that sonic c was a one trick pony and that they never really funded 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 hedge hog side scholar game IT feels to me like there's a lot of nostalgic a to play with. But I didn't really create any durable extensible IP or a game play, Frankly.

well, right back to the difference between cigar and intend to, and the games and the difference between me to and saic team, you say is D. N. A.

This is the whole point of this episode, was the archives. The type of game you make for an arkite is very different than the type of game you make for a sixty dollar packaged good home console. Sonic was the perfect arcade style game.

The first level in the first 3 ic was so good， and even the subsequent three d stuff like sonic adventure and beyond, the first level of sonic adventure for the dream cast is so good. IT really is like, you play IT and you're like, wow, this is 3d sonic。 This is everything I remember.

The first level is in like a island setting. And you're like chasing a whale, like running around its sonic speed and doing three d loop lives. Its super fun.

But the problem with these games and wison ic is its super fun for five minutes yeah and then you're like, okay, i'm done. Where's mario and alta? It's not as fun in the first five minutes, but you can play IT for fifty 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 gym Clark story?

yes.

So this is a great excerpt from council wars, and I had no idea. I mean, we have talked a few times about nets, cape and jim Clark and S G I, and how the internet almost happened on in sixty four years with mark in rison and jim Clark together. And you may know that the n sixty four was based on S G, S. Architecture, you needed an expensive sti workstation to create the amazing graphics games.

A big reason why the best sixty four games were first party, and they were N A lot of third party games.

right? But the way that that came about is crazy. IT was actually tom kinsky, the C E.

O of sega america, who wanted to do the partnership with S. G. I. He saw the potential in the cutting edge chips.

And after the potential SONY partnership that we reference earlier fell apart between sega and SONY, he came back to sega of japan with a pitch saying, I just met with tim Clark. I really think we should do something with S. G.

I. I think our next generation council should be powered by S. G. I. And sega of japan got back to Collins's and said, no.

And when Colin sky press them and said, why it's a no brainer, they said, the chip is too big. And Colin sq. Is like, what? This doesn't make any sense.

And they were like, that's our decision. And so he had to have this really hard phone call with jim Clark saying, i'm sorry, men. I actually don't have a deal for you here. Japan is against IT.

And so jim Clark s, what do I to do now? And kinski in this incredible moment of frustration where he seems half a foot out the door, looks in the phone book, looks up. Howard linked ts phone number and says you should call the intendo of america, which I can't believe that actually happened.

I know it's so crazy, but again, you know, understanding what we know now from the saga story, it's not just the sake of japan was being really dominate ant here.

right? That was a reasonable business decision .

because at the very same time that tom was calling up japan and being like h, we're going to do this thing with I the SONY apocalypse was coming in the arcade business with the system eleven in nam co. In the police station and I can tell me, understand, think of japan being like, look, doing this S G. I think that's not what we have time for right now.

yeah. I also think there was probably some kind of like not invented here sentiment where IT has to happen in japan and within seg as walls in order to be a viable strategy. IT is a little weird.

You know, it's not like they already we're thinking we should just be a software business because they did have the dream cast after this. To me, IT feels more like a lack of willing to partner than he does. Yes, a sort of business model conflict.

Had IT happened a couple years later, you would have been like, okay, clearly, you should get out of the council business and so don't invest in new hardware partnerships. But I think this is just we don't know those guys, we don't trust those guys, so are not working with anything. Who knows if I could have saved sega, but maybe that's probably .

the closest thing that I can think of to like had that happened ably still when they have saved saga. But at least the dream cast might have ve had more of a chance of success, maybe will never know.

Car outs.

car outs.

Lets do quick carrots. I have one funny story before giving my car outs.

This is a thing that also got cut from both last episode, and i'm not letting a kick from this episode, the sonic origin story as hilarious in an interview years later, naoto oshima, who is one of the creators, and he was the designer of sonic, he was asked, how did you come up with sonic this blue head hogue? Why does he look like that? And the his answer, he just says, what I put felix the cat on the body of Mickey mouse that's and I I was reading that I couldn't believe IT and you look at up and you're looking at feels the cat and you're looking at his eyes and his head shape you like all my god, it's felix s. On Mickey died blue with sneakers. Yeah, it's ridiculous.

A tear point about sonic while being beloved isn't really like the super deep I P. No.

clinkin team gave IT a good run. But man, that was thin all .

the way around, right?

What do you got on car outs?

My car out. I want a rec AR. Vw, oh, your car. Val, from a couple episodes of deal.

Murray on invest like the best I listen to you after you recommended ded IT darl. Now the G, M, and president of basketball Operations at the six year is formally the G, M. Of the histon rockets.

He's just brilliant and so fun to listen to whether you care about basketball sports at all. I think he is a computer science major like he's very, very interesting. And Patrick is to such a good interviewer, really is a master class in how to conduct a truly interesting exploration, discovery based interview. And I learned so much from that I really enjoyed.

yep, so good. Okay, have three. Forget me fast. One is, my god, if you are not watching, the season of succession is the best television i've ever seen, just remarkable storytelling.

Two, i'm keeping a close eye, and I suspect many of you are as well. In the next month, starship is scheduled to launch. And so, so nice space x launch is always sort of our who knows on the date and you on things always slip.

But IT is on the launch pad. They're doing lots of prelaunch inspections and tests. And IT is going to be so freaky cool to watch that thing do its first launch. And then three, I said this to David. I don't know, David, you watched IT yet.

Six days to air.

I haven't yet, 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. There's just nothing more special than watching creativity and action and the good documentary like ten years old at this point, but a pretty special view into their process.

nice. We can learn some stuff for acquired lot.

We can learn all right listeners. That's IT. Thank you so much for joining.

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