The Japanese Mega Drive logo
In the early 1980s, Sega Enterprises, Inc. – then a subsidiary of Gulf+Western – was one of the top five arcade game manufacturers active in the United States, as company revenues surpassed $200 million between July 1981 and June 1982. A downturn in the arcade business starting in 1982 seriously hurt the company, leading Gulf+Western to sell its North American arcade manufacturing organization and the licensing rights for its arcade games to Bally Manufacturing. The company retained Sega's North American R&D operation, as well as its Japanese subsidiary, Sega Enterprises, Ltd. With its arcade business in decline, Sega Enterprises, Ltd. president Hayao Nakayama advocated that the company leverage its hardware expertise to move into the home console market in Japan, which was in its infancy at the time.
Nakayama received permission to proceed with this project, leading to the release of Sega's first home video game system, the SG-1000, in July 1983. While it had sold 160,000 units in Japan, far exceeding Sega's expectations, sales at stores were dominated by Nintendo's Famicom which had been released the same day. Sega estimated that the Famicom outsold the SG-1000 by a 10-to-1 margin. The SG-1000 was replaced by the Sega Mark III within two years. In the meantime, Gulf+Western began to divest itself of its non-core businesses after the death of company founder Charles Bluhdorn, so Nakayama and former Sega CEO David Rosen arranged a management buyout of the Japanese subsidiary in 1984 with financial backing from CSK Corporation, a prominent Japanese software company. Nakayama was then installed as CEO of Sega Enterprises, Ltd.
In 1986, Sega redesigned the Mark III for release in North America as the Master System. This was followed by a European release the next year. Although the Master System was a success in Europe, and later in Brazil, it failed to ignite significant interest in the Japanese or North American markets, which, by the mid-to-late 1980s, were both dominated by Nintendo. With Sega continuing to have difficulty penetrating the home market, Sega's console R&D team, led by Masami Ishikawa and supervised by Hideki Sato, began work on a successor to the Master System almost immediately after that console launched.
In 1987, Sega faced another threat to its console business when Japanese computer giant NEC released the PC Engine amid great publicity. To remain competitive against the two more established consumer electronics companies, Ishikawa and his team decided they needed to incorporate a 16-bit microprocessor into their new system to make an impact in the marketplace and once again turned to Sega's strengths in the arcade industry to adapt the successful Sega System 16 arcade board into architecture for a home console. The decision to use a Motorola 68000 as the system's main CPU was made late in development, while a Zilog Z80 was used as a secondary CPU to handle the sound due to fears that the load to the main CPU would be too great if it handled both the visuals and the audio. The 68000 chip was expensive and would have driven the retail price of the console up greatly, but Sega was able to negotiate with a distributor for a tenth of its price on an up-front volume order with the promise of more orders pending the console's future success.
The appearance of the Mega Drive was designed by a team led by Mitsushige Shiraiwa that drew inspiration from audiophile equipment and automobiles. Shiraiwa said this more mature look helped to target the Mega Drive to all ages, unlike the Famicom, which was aimed primarily at children. According to Sato, the Japanese design for the Mega Drive was based on the appearance of an audio player, and presents the text "16-bit" embossed in a golden metallic veneer to give the impression of power.
First announced in the June 1988 issue of Japanese gaming magazine Beep!, the developing console was initially called the "Mark V", but Sega management wanted a stronger name. After reviewing more than 300 proposals, the company settled on "Mega Drive". In North America, the name of the console was changed to "Genesis". The reason for this change is not known, but it may have been due to a trademark dispute. Sato stated that some design aesthetics had to change, such as the gold-colored "16-bit" wording, because it was believed that the color would be mistaken for yellow. He believes that the changes in design are representative of the differences in values between Japanese and American culture.
The European PAL version of the Mega Drive launched in 1990, later becoming the highest-selling fourth-gen
console in Europe.
Sega released the Mega Drive in Japan on October 29, 1988, though the launch was overshadowed by Nintendo's release of Super Mario Bros. 3 a week earlier. Positive coverage from magazines Famitsu and Beep! helped to establish a following, but Sega only managed to ship 400,000 units in the first year. In order to increase sales, Sega released various peripherals and games, including an online banking system and answering machine called the Sega Mega Anser. Nevertheless, the Mega Drive was unable to overtake the venerable Famicom and remained a distant third in Japan behind Nintendo's Super Famicom and NEC's PC Engine throughout the 16-bit era.
Sega announced a North American release date for the system on January 9, 1989. At the time, Sega did not possess a North American sales and marketing organization and was distributing its Master System through Tonka. Dissatisfied with Tonka's performance, Sega looked for a new partner to market the Genesis in North America and offered the rights to Atari Corporation, which did not yet have a 16-bit system. David Rosen made the proposal to Atari CEO Jack Tramiel and the president of Atari's Entertainment Electronics Division, Michael Katz. Tramiel declined to acquire the new console, deeming it too expensive, and instead opted to focus on the Atari ST. Sega decided to launch the console through its own Sega of America subsidiary, which executed a limited launch on August 14, 1989, in New York City and Los Angeles. The Genesis was released in the rest of North America later that year.
The European version was released in September 1990, at a price of GB£189.99. The release was handled by Virgin Mastertronic, which was later purchased by Sega in 1991 and became Sega of Europe. Games like Space Harrier II, Ghouls 'n Ghosts, Golden Axe, Super Thunder Blade, and The Revenge of Shinobi were available in stores at launch. The console was also bundled with Altered Beast. The Mega Drive and its first batch of games were shown at the 1990 European Computer Entertainment Show (ECES) in Earl's Court. Between July and August 1990, Virgin initially placed their order for 20,000 Mega Drive units. However, the company increased the order by 10,000 units when advanced orders had exceeded expectations, and another 10,000 units was later added following the console's success at the ECES event. The projected number of units to be sold between September and December 1990 had eventually increased to 40,000 units in the United Kingdom alone.
Other companies assisted in distributing the console to various countries worldwide. Ozisoft handled the Mega Drive's launch and marketing in Australia, as it had done before with the Master System. In Brazil, the Mega Drive was released by Tectoy in 1990, only a year after the Brazilian release of the Master System. Tectoy produced games exclusively for the Brazilian market, and brought the Sega Meganet online service there in 1995. In India, Sega entered a distribution deal with Shaw Wallace in the spring of 1995 in order to circumvent an 80% import tariff, with each unit selling for INR₹18,000. Samsung handled sales and distribution in Korea, where it was named Super Gam*Boy and retained the Mega Drive logo alongside the Samsung name. It was later renamed Super Aladdin Boy.
North American sales and marketing
For the North American market, former Atari Corporation Entertainment Electronics Division president and new Sega of America CEO Michael Katz instituted a two-part approach to build sales in the region. The first part involved a marketing campaign to challenge Nintendo head-on and emphasize the more arcade-like experience available on the Genesis, summarized by slogans including "Genesis does what Nintendon't". Since Nintendo owned the console rights to most arcade games of the time, the second part involved creating a library of instantly recognizable games which used the names and likenesses of celebrities and athletes such as Pat Riley Basketball, Arnold Palmer Tournament Golf, James 'Buster' Douglas Knockout Boxing, , Tommy Lasorda Baseball, Mario Lemieux Hockey, and Michael Jackson's Moonwalker. Nonetheless, it had a hard time overcoming Nintendo's ubiquitous presence in consumers' homes. Tasked by Nakayama to sell one million units within the first year, Katz and Sega of America managed to sell only 500,000 units.
In mid-1990, Nakayama hired Tom Kalinske to replace Katz as CEO of Sega of America. Although Kalinske initially knew little about the video game market, he surrounded himself with industry-savvy advisors. A believer in the razor and blades business model, he developed a four-point plan: cut the price of the console, create a U.S.-based team to develop games targeted at the American market, continue and expand the aggressive advertising campaigns, and replace the bundled game Altered Beast with a new game, Sonic the Hedgehog. The Japanese board of directors initially disapproved of the plan, but all four points were approved by Nakayama, who told Kalinske, "I hired you to make the decisions for Europe and the Americas, so go ahead and do it." Magazines praised Sonic as one of the greatest games yet made, and Sega's console finally took off as customers who had been waiting for the release of the international version of Nintendo's Super Famicom, the Super Nintendo Entertainment System (SNES), decided to purchase a Genesis instead. Nintendo's console debuted against an established competitor, while NEC's TurboGrafx-16 failed to gain traction, and NEC soon pulled out of the market. In large part due to the popularity of Sonic the Hedgehog, the Genesis outsold the SNES in the United States nearly two to one during the 1991 holiday season. This success led to Sega having control of 65% of the 16-bit console market in January 1992, making it the first time Nintendo was not the console leader since December 1985.
To compete with Nintendo, Sega was more open to new types of games than its rival, but still tightly controlled the approval process for third-party games and charged high prices for cartridge manufacturing. Technicians from American third-party video game publisher Electronic Arts (EA) reverse engineered the Genesis in 1989, following nearly one year of negotiations with Sega in which EA requested a more liberal licensing agreement than was standard in the industry before releasing its games for the system. The clean room reverse engineering was led by Steve Hayes and Jim Nitchals, lasting several months before EA secretly began game development. EA founder Trip Hawkins confronted Nakayama with this information one day prior to the 1990 Consumer Electronics Show (CES), noting that EA had the ability to run its own licensing program if Sega refused to meet its demands. Sega relented, and the next day EA's upcoming Genesis games were showcased at CES. EA signed what Hawkins described as "a very unusual and much more enlightened license agreement" with Sega in June 1990: "Among other things, we had the right to make as many titles as we wanted. We could approve our own titles ... the royalty rates were a lot more reasonable. We also had more direct control over manufacturing." After the deal was in place, EA chief creative officer Bing Gordon learned that "we hadn't figured out all the workarounds" and "Sega still had the ability to lock us out," noting "It just would have been a public relations fiasco." EA released its first two Genesis games, Populous and Budokan: The Martial Spirit, within the month. The first Genesis version of EA's arrived before the end of 1990, and became what Gordon called a "killer app" for the system. Taking advantage of the licensing agreement, Gordon and EA's vice president of marketing services Nancy Fong created a visual identifier for EA's Genesis cartridges: A yellow stripe on their left side added during manufacturing.
Sega was able to outsell Nintendo four Christmas seasons in a row due to the Genesis having a two-year lead, a lower price point, and a larger game library compared to the SNES at its release. Sega had ten games for every game on SNES, and while the SNES had an exclusive version of Final Fight, one of Sega's internal development teams created Streets of Rage, which had bigger levels, tougher enemies, and a well-regarded soundtrack. ASCII Entertainment reported in early 1993 that Genesis had 250 games versus 75 for the SNES, but limited shelf space meant that stores typically offered 100 Genesis and 50 SNES games. The NES was still the leader, with 300 games and 100 on shelves.
Sega's advertising positioned the Genesis as the cooler console, and as its advertising evolved, the company coined the term "blast processing" (an obscure and unutilized programming trick on the graphics hardware) to suggest that its processing capabilities were far greater than those of the SNES. A Sony focus group found that teenage boys would not admit to owning an SNES rather than a Genesis. With the Genesis often outselling the SNES at a ratio of 2:1, Nintendo and Sega both focused heavily on impression management of the market, even going to the point of deception, with Nintendo claiming it had sold more consoles in 1991 than it actually had, and forecasting it would sell 6 million consoles by the end of 1992, while its actual U.S. install base at the end of 1992 was only just more than 4 million units. Due to these tactics, it was difficult to ascertain a clear leader in market share for several years at a time, with Nintendo's dollar share of the U.S. 16-bit market dipping down from 60% at the end of 1992 to 37% at the end of 1993, Sega claiming 55% of all 16-bit hardware sales during 1994, and Donkey Kong Country helping the SNES to outsell the Genesis from 1995 through 1997. According to a 2004 study of NPD sales data, the Genesis was able to maintain its lead over the Super NES in the American 16-bit console market. However, according to a 2014 Wedbush Securities report based on revised NPD sales data, the SNES outsold the Genesis in the U.S. market.
Sonic the Hedgehog
Sega held a company-wide contest to create a mascot character to compete with Nintendo's Mario series. The winning submission was a blue hedgehog with red shoes, Sonic, created by Naoto Ohshima, spawning one of the best-selling video game franchises in history. The gameplay of Sonic the Hedgehog originated with a tech demo created by Yuji Naka, who had developed a prototype platform game that involved a fast-moving character rolling in a ball through a long winding tube. This concept was developed with Ohshima's character design and levels conceived by designer Hirokazu Yasuhara.
Although Katz and Sega of America's marketing experts disliked Sonic, certain that it would not catch on with most American kids, Kalinske's strategy to place Sonic the Hedgehog as the pack-in game paid off. Sonic the Hedgehog greatly increased the popularity of the Genesis in North America, and the bundle is credited with helping Sega gain 65% of the market share against Nintendo.
Trademark Security System and Sega v. Accolade
After the release of the Genesis in 1989, video game publisher Accolade began exploring options to release some of their PC games on the console. At the time, Sega had a licensing deal in place for third-party developers that increased the costs to the developer. According to Accolade co-founder Alan Miller, "One pays them between $10 and $15 per cartridge on top of the real hardware manufacturing costs, so it about doubles the cost of goods to the independent publisher." To get around licensing, Accolade chose to seek an alternative way to bring their games to the Genesis. It did so by purchasing one in order to decompile the executable code of three Genesis games. Such information was used to program their new Genesis cartridges in a way that would allow them to disable the security lockouts on the Genesis that prevented unlicensed games from being played. This strategy was used successfully to bring Ishido: The Way of Stones to the Genesis in 1990. To do so, Accolade had copied Sega's copyrighted game code multiple times in order to reverse engineer the software of Sega's licensed Genesis games.
An edition of the original model of the Genesis, known as the Genesis III, was the model at the center of Sega v. Accolade
for its incorporation of the Trademark Security System (TMSS).
As a result of piracy in some countries and unlicensed development issues, Sega incorporated a technical protection mechanism into a new edition of the Genesis released in 1990, referred to as the Genesis III. This new variation of the Genesis included a code known as the Trademark Security System (TMSS), which, when a game cartridge was inserted, would check for the presence of the string "SEGA" at a particular point in the memory contained in the cartridge. If the string was present, the console would run the game, and would briefly display the message: "Produced by or under license from Sega Enterprises, Ltd." This system had a twofold effect: it added extra protection against unlicensed developers and software piracy, and forced the Sega trademark to display when the game was powered up, making a lawsuit for trademark infringement possible if unlicensed software were to be developed. Accolade learned of this development at the Winter Consumer Electronics Show in January 1991, where Sega showed the new Genesis III and demonstrated it screening and rejecting an Ishido game cartridge. With more games planned for the following year, Accolade successfully identified the TMSS file. It later added this file to the games HardBall!, Star Control, Mike Ditka Power Football, and Turrican.
In response to the creation of these unlicensed games, Sega filed suit against Accolade in the United States District Court for the Northern District of California, on charges of trademark infringement, unfair competition, and copyright infringement. In response, Accolade filed a counterclaim for falsifying the source of its games by displaying the Sega trademark when the game was powered up. Although the district court initially ruled for Sega and issued an injunction preventing Accolade from continuing to reverse engineer the Genesis, Accolade appealed the verdict to the United States Court of Appeals for the Ninth Circuit.
As a result of the appeal, the Ninth Circuit overturned the district court's verdict and ruled that Accolade's decompilation of the Sega software constituted fair use. The court's written opinion followed on October 20, 1992, and noted that the use of the software was non-exploitative, although commercial. Further, the court found that the trademark infringement, being required by the TMSS for a Genesis game to run on the system, had been inadvertently triggered by a fair use act and was the fault of Sega for having caused false labeling. Ultimately, Sega and Accolade settled the case on April 30, 1993. As a part of this settlement, Accolade became an official licensee of Sega, and later developed and released Barkley Shut Up and Jam! while under license. The terms of the licensing, including whether or not any special arrangements or discounts were made to Accolade, were not released to the public. The financial terms of the settlement were also not disclosed, although both companies agreed to pay their own legal costs.
Congressional hearings on video game violence
VRC MA-13 rating, as applied to Mortal Kombat
for the Genesis
In 1993, the American media began to focus on the mature content of certain video games. Games such as Night Trap for the Sega CD, an add-on, received unprecedented scrutiny. Issues about Night Trap were brought up in the United Kingdom, with former Sega of Europe development director Mike Brogan noting that "Night Trap got Sega an awful lot of publicity ... it was also cited in UK Parliament for being classified as '15' due to its use of real actors." This came at a time when Sega was capitalizing on its image as an edgy company with attitude, and this only reinforced that image. By far the year's most controversial game was Midway's Mortal Kombat, ported to the Genesis and SNES by Acclaim Entertainment. In response to public outcry over the game's graphic violence, Nintendo decided to replace the blood in the game with "sweat" and the arcade's gruesome "fatalities" with less violent finishing moves. Sega took a different approach, instituting America's first video game ratings system, the Videogame Rating Council (VRC), for all its current systems. Ratings ranged from the family-friendly GA rating to the more mature rating of MA-13, and the adults-only rating of MA-17. With the rating system in place, Sega released its version of Mortal Kombat, appearing to have removed all the blood and sweat effects and toning down the finishing moves even more than in the SNES version. However, all the arcade's blood and uncensored finishing moves could be enabled by entering a "Blood Code". This technicality allowed Sega to release the game with a relatively low MA-13 rating. Meanwhile, the tamer SNES version shipped without a rating.
The Genesis version of Mortal Kombat was well-received by gaming press, as well as fans, outselling the SNES version three- or four-to-one, while Nintendo was criticized for censoring the SNES version of the game. Executive vice president of Nintendo of America Howard Lincoln was quick to point out at the hearings that Night Trap had no such rating, saying to Senator Joe Lieberman:
Furthermore, I can't let you sit here and buy this nonsense that this Sega Night Trap game was somehow only meant for adults. The fact of the matter is this is a copy of the packaging. There was no rating on this game at all when the game was introduced. Small children bought this at Toys "R" Us, and he knows that as well as I do. When they started getting heat about this game, then they adopted the rating system and put ratings on it.
In response, Sega of America vice president Bill White showed a videotape of violent video games on the SNES and stressed the importance of rating video games. At the end of the hearing, Lieberman called for another hearing in February 1994 to check on progress toward a rating system for video game violence.
As a result of the congressional hearings, Night Trap started to generate more sales and released ports to the PC, Sega 32X, and 3DO. According to Digital Pictures founder Tom Zito, "You know, I sold 50,000 units of Night Trap a week after those hearings." Although experiencing increased sales, Sega decided to recall Night Trap and re-release it with revisions in 1994 due to the congressional hearings. After the close of these hearings, video game manufacturers came together to establish the rating system that Lieberman had called for. Initially, Sega proposed the universal adoption of its system, but after objections by Nintendo and others, Sega took a role in forming a new one. This became the Entertainment Software Rating Board, an independent organization that received praise from Lieberman. With this new rating system in place for the 1994 holiday season, Nintendo decided its censorship policies were no longer needed, and the SNES port of Mortal Kombat II was released uncensored.
32-bit era and beyond
In order to extend the life of the Genesis, Sega released two add-ons to increase its capabilities: a CD-based peripheral known as the Sega CD (Mega-CD outside North America), and a 32-bit peripheral known as the Sega 32X. Worldwide 2.24 million Sega CD units were sold, and 800,000 32X units.
Following the launch of the next-generation 32-bit Sony PlayStation and Sega Saturn, sales of 16-bit hardware and software continued to account for 64% of the video game market in 1995. Sega underestimated the continued popularity of the Genesis and did not have the inventory to meet the demand for the product. Sega was able to capture 43% of the dollar share of the U.S. video game market and claimed to have sold more than two million Genesis units in 1995, while Genesis software such as Vectorman remained highly successful, but Kalinske estimated that "we could have sold another 300,000 Genesis systems in the November/December timeframe." Nakayama's decision to focus on the Saturn over the Genesis, based on the systems' relative performance in Japan, has been cited as the major contributing factor in this miscalculation. By contrast, Nintendo concentrated on the 16-bit home console market, as well as its successful handheld, the Game Boy. As a result, Nintendo took in 42% of the video game market dollar share, without launching a 32-bit console to compete directly with the PlayStation or the Saturn. Following tensions with Sega Enterprises, Ltd. over its focus on the Saturn, Kalinske, who oversaw the rise of the Genesis in 1991, grew uninterested in the business and resigned in mid-1996.
Sega sold 30.75 million Genesis units worldwide. Of these, 3.58 million were sold in Japan, and sales in Europe and the U.S. are roughly estimated at 8 million and 18–18.5 million as of June 1997 (at which time Sega was no longer manufacturing the system) respectively. In 1998, Sega licensed the Genesis to Majesco Entertainment in North America so it could re-release the console. Majesco began reselling millions of formerly unsold cartridges at a budget price, together with 150,000 units of the second model of the Genesis. It released the Genesis 3, projecting to sell 1.5 million units of the console by the end of 1998. An estimated 3 million Genesis units were sold by Tectoy in Brazil.