by Steven Kent
The Return of Sega
One of my first jobs here was to take the Master System back from Tonka and bring it over to Sega. Then we closed down a lot of the development. We did not have the money to do anything big; our main focus of 1989 and 1990 was obviously Genesis.
—Paul Rioux, former executive vice president of finance, Sega of America
Sega’s alliance with Tonka did not prove completely satisfactory for either company. Despite its strong toy distribution network and a very generous advertising campaign, the Minnesota toy truck company sold considerably less than one million Master System game consoles in two years. When the con tract expired, Sega quietly took back the system and inherited large inventories of unsold game consoles and cartridges. Clearing out Master System inventory, however, was not a major priority at the time. Sega had spent the last two years developing a powerful new game console that had twice the processing power of the NES/Famicom, and the product was finally ready for release in Japan.
Sega’s new system, called the Mega-Drive, featured an impressive array of hardware. It was built around the 16-bit Motorola 68000 processing chip, the same chip that Apple used to power the Macintosh computer. This chip could process twice as much data per cycle as the 8-bit MOS Technologies 6502 chip Nintendo used in the Famicom. The Mega-Drive had a 512-color palette and could display as many as 64 colors on screen at any one time, compared to the NES’s 52-color palette. The Mega-Drive even had a separate 8-bit processor for sound. All of that power translated into games with larger and more detailed characters, more complex graphics, faster action, and a game console that could compete with coin-operated game machines in the arcades.
With its headquarters in Tokyo, Sega Enterprises had the infrastructure needed to market the Mega-Drive in Japan. Bringing the system to the United States was another story. Hayao Nakayama, CEO of Sega Enterprises, and David Rosen, the chairman, had already experienced the problems of launching a game console through a small start-up operation. Nintendo, a company that had only recently entered the home video game market in the United States, had completely smothered the Master System out of the market by 1988. Attaching itself to Tonka, a strong company that knew little about the game business, also failed. In an interesting twist, Rosen decided to enlist the same company that Nintendo had tried to enlist before launching the NES—Atari Corporation.
Dave Rosen came to Atari and asked if we’d be interested in taking over the manufacturing, marketing, and distribution of Genesis. We came very close to making a hefty licensing deal so that Atari could jump into the 16-bit fray before Nintendo. The negotiations went pretty far down the stream, and as I recall, they fell apart when Jack [Tramiel] and Dave Rosen couldn’t agree to the terms. Then Sega decided to do it themselves.
—Michael Katz, president, Video Game Division, Atari Corporation
Everybody’s Expert
Video game companies have a certain incestuous relationship, and it is not uncommon for top employees to take jobs with their competitors. Bruce Lowry, for instance, resigned his job as Nintendo vice president of sales to become the president of Sega of America. When he left Sega, he moved to Europe to help Ron Judy run Nintendo of Europe. But of the many job shifters in the industry, few have had as illustrious a career as Michael Katz.
In the late 1970s, Katz, as marketing director at Mattel, oversaw the creation of the first handheld video games. From there, he moved to Connecticut to become vice president of marketing at Coleco. After five years at Coleco, he received an intriguing telephone call.
I was contacted by headhunters representing some venture capitalists and told about a company named Epyx, which they described as a $1.5 million computer game company losing $400,000 a year in Sunnyvale. I was anxious to get back to California, where my two kids lived. I hadn’t lived in San Francisco for about seven or eight years, and my goal was to get back there.
I didn’t know anything about Epyx and I had never heard of a venture capitalist. I liked the fact that I was being offered a CEO slot and some stock in a start-up, but I wasn’t quite sure whether I wanted to do something risky like that. I had to make the decision on a January night in Connecticut. I was trying to get a fire started in my fireplace and it wouldn’t start. As I was leafing through a computer gaming magazine, I came upon an Epyx ad. Just as I turned the page and discovered it, this flame burst in the fireplace. It was a complete coincidence. The fire that I’d been trying to start burst into a flame, so I considered that a divine message that Epyx was where I should go.
—Michael Katz, former president, Epyx
Katz became the president of Epyx in February 1983 and changed the company’s entire focus. The company had severe financial problems and only had enough cash to maintain operations for approximately six months. Under Katz’s direction, the company created three new product lines and hired Chiat Day, the same advertising agency that handled Apple Computer. Another of Epyx’s new directions was the acquisition of outside software developer StarPath, which was led by Bob Brown, one of the engineers involved in the creation of the Atari 2600. StarPath had abandoned a project based on the Olympic games. With the real Olympics only a year away, Katz had the company finish the project, which was released for the Commodore 64. Summer Games was released in 1984 and was followed up in 1985 with a sequel, Winter Games. Over the following years, these thematic “Games” titles became Epyx’s signature series and included a tremendously popular product called California Games.
Katz’s biggest interest, however, was in marketing hardware, not software. When two inventors named RJ Mical and Dave Needle approached Epyx in 1986 with a design for a color handheld video game system, Katz urged the board to adopt the project (which later became the Atari Lynx). Epyx eventually did work with Mical and Needle, but by that time Jack and Sam Tramiel had already lured Katz to accept a position at Atari Corporation.
I had lunch with Jack and Sam Tramiel one day, and they said, “What do you want to do?”
I said, “I want to form an Entertainment/Electronics division at Atari. I want to bring back video games, and that can help fund the new division. It can also fund the ST computer,” which was what Jack and Sam were all excited about.
So they said, “You can become president of the entertainment electronics division if you also become president of the video game division and become head of sales and marketing for the computer division.” I said that sounded fair. So in one lunch, which is what Jack and Sam are like, we made a deal. I got a new job and became head of the video game division, which, in Jack’s mind, had the main objective of getting a lot of profits so that the company could develop the ST computer.
—Michael Katz
Katz moved to Atari in 1986 and oversaw the rerelease of the Atari 7800 game console. Unlike the Master System, the 7800 was not meant to compete with the Nintendo Entertainment System head-on. Atari introduced it as a low-end alternative system that sold for $30 less than its competitors. The 7800 barely dented Nintendo’s billion-dollar market, but it contributed to Atari’s best year since the fall of 1982. In 1988, Atari reached $452 million in revenues.
We brought back Atari video games as the low price spread for three or four years and made a hell of a lot of profit. As I recall, we made about $80 million of profit over that period. We brought back the 7800. We needed software for it, but, of course, this was the period when Nintendo created the market again in the U.S. and Nintendo had a lock on all the hot arcade titles. Nobody else, whether it be Atari or Sega or anyone, could get the hot arcade titles because Nintendo had exclusives.
It occurred to me that the standard for the last few years had not been arcade games. There was a core group of computer gamers who knew all the hot computer games, so I went to those companies who were just doing computer format. I went to Doug Carlstom at Broderbund, to Ken Williams at Sierra, to Gilman Louie at Spectrum Holobyte, and to Alan Miller at Accolade, and asked if we could license games like Hardball and Lode Runner.
; —Michael Katz
By the beginning of 1989, Katz needed a break from work. He had not taken a two-week vacation since graduating from college in 1967, and the Tramiels were notorious for placing high expectations on their executives. Tired and needing time to decide what he wanted to do with the rest of his life, Katz left Atari Corporation and spent the next three months traveling around the world. While he was gone, Sega released the American version of the Mega-Drive. It was called Genesis.
Genesis
Sega of America launched Genesis in two markets, Los Angeles and New York, on August 14, 1989. The console sold for $189 and came with a single controller and the game Altered Beast. There were five additional games available at launch: Thunder Force, Tommy Lasorda Baseball, Super Thunder Blade, Space Harrier II, and Last Battle. A second wave of games arrived one month later.
As the game that came with the console, Altered Beast played an important role in convincing consumers about the power of Genesis’s 16-bit processor. NES games generally had small characters occupying only a limited area on any game screen. The shape-shifting hero of Altered Beast was nearly half as tall as the screen and had recognizable facial features. The snakes, wolves, enemy sorcerers, and other creatures that attacked him were also large and clearly drawn. In size, game play, and graphics, the Genesis version of Altered Beast was amazingly similar to the arcade game on which it was based.
In October, as the Genesis market expanded from New York and Los Angeles to a nationwide campaign, Sega of America announced the hiring of a new president and CEO, Michael Katz.
Dave Rosen asked me if I wanted to come to Sega and become president, so I joined Sega in October of 1989 and spent a year. And every day, the chant that I was supposed to be saying and our troops were supposed to be saying was “Hyakumandai,” which means a million units in Japanese because Nakayama felt we should be selling a million units.
We had to differentiate ourselves from Nintendo, and once again we couldn’t get hot properties from the arcades other than Sega’s own arcade titles. Just like it was at Atari, it became a matter of figuring out a way to position ourselves strongly when we couldn’t get the hottest arcade titles. So we decided to get the hottest personalities instead.
—Michael Katz
As the head of Sega, Katz’s first goal was to establish an identity for Genesis. The marketing team came up with a two-part approach. On one hand, team members needed to demonstrate the superiority of Genesis over the NES. They needed to show that Genesis games had better graphics and sound and looked more like arcade games. Realizing that most consumers were more interested in games than technology, Katz’s team members did not want to focus too heavily on the 16-bit processor. Instead of reciting technological achievements, they developed an advertising campaign that challenged Nintendo head-on. Sega’s new marketing mantra was, “Genesis does what Nintendon’t.”
Sega came out slamming us in their commercials. They were naming us by name, and that was really a big deal. It’s like somebody calling your team “crap.” We took it good-naturedly and competed the best we could.
—Don James, vice president of design, Nintendo of America
The second part of Katz’s marketing rollout was to circumvent the lack of arcade properties by creating a library of instantly recognizable titles. Nintendo could dominate the arcade translation business; Sega, meanwhile, would contract athletes and celebrities and create games with their names and images. Under Katz’s direction, Sega created Pat Riley’s Basketball, Arnold Palmer Golf, Buster Douglas Boxing, and Joe Montana Football.
Joe Montana became the ultimate example. We paid $1.7 million up front. I fought to convince Nakayama and the Japanese that we needed Montana, and I gave Joe Montana the check. We also had Michael Jackson, we had Pat Riley, and we had Tommy Lasorda. Buster Douglas was my selection, too. He got knocked down in his first challenge after he won the championship, but that was okay because the royalty was on a sliding scale and that meant we didn’t have to pay as much. He gave up the title right after he had gotten it.
—Michael Katz
Shortly after starting at Sega, Katz convinced Nakayama to sign a five-year agreement with 49er quarterback Joe Montana. The deal enabled Sega to use Montana’s name and image in a football game. Once the licensing deal was signed, the next problem was finding the game itself. Sega did not have a large U.S. game production facility at that time, and Sega of Japan had not designed a football game. By coincidence, a small software company, Mediagenic,* had a game under development. According to the team that had worked on the project, the game was approximately 30 percent finished, but Mediagenic executives said that it could be finished by October, or November at the very latest, so Katz decided to purchase the game.
We didn’t know about all the internal turmoil that was going on at Mediagenic. Basically, they deceived us over a period of four or five months that the game was proceeding on schedule. We—Sega—were naive and irresponsible. We should have known.
The game wasn’t very far along at all, but we didn’t discover that till about September or October. By the time we found out, the only way we were gonna get a game out near Christmas would be to find another game that was either mostly finished or completely finished, and convert it.
—Michael Katz
In desperation, Sega turned to Electronic Arts, one of its first American licensees. Well known for its sports games, Electronic Arts had been publishing the John Madden Football series for four years. The first Madden Football, released for the Apple II computer in 1986, was so successful that Electronic Arts began updating its team rosters and playbook and rereleasing it on an annual basis. Electronic Arts president Trip Hawkins agreed to help, and his designers put together a game that Sega could name Joe Montana Football and publish under its first-party label. The game was released in January 1990. Electronic Arts released a Genesis-compatible version of John Madden Football later that year.
The finished versions of Joe Montana Football and John Madden Football were so completely different that few people would have guessed that the same company had made them. John Madden Football featured a playbook partially designed by Madden himself. As an NFL broadcaster and former Raiders coach, Madden helped Electronic Arts’ designers create a game realistic enough to appeal to football purists.
Joe Montana Football, on the other hand, was an arcade-style game that emphasized fast action over realism. Unlike John Madden Football, which had all 28 NFL teams, Joe Montana Football had a 16-team roster and a simplified playbook built around a passing-intensive offense that discouraged running plays.
Although the Joe Montana series did not last as long as the Madden games, it helped establish Sega’s reputation among sports fans and Genesis as the leading video game platform for sports simulation. Electronic Arts developed only the first Joe Montana football game. Blue Sky, an independent development company, created Sega’s later football games. Founded by George Kiss, who worked with Michael Katz at Coleco, Blue Sky went on to make several important Genesis hits, including World Series Baseball and Vectorman.
I think Joe Montana earned something like a $2.5 million or a $3.5 million royalty over the course of the five years of our agreement. The Japanese were originally concerned that he wouldn’t even earn the money that we paid him [in advance], so I was gratified to hear that.
—Michael Katz
Of all the games that Sega released in 1989, Michael Jackson’s Moonwalker made the biggest impression on the media. Not only did the game contain synthesized versions of such hits as “Smooth Criminal,” “Bad,” “Billie Jean,” “Beat It,” and “Thriller,” it also had Jackson and chorus lines of villains dancing to choreographed moves that looked like they belonged on MTV. Loosely based on Jackson’s Moonwalker video, the game followed Jackson as he explored pool halls, graveyards, and other secret hideouts in search of kidnapped children. Just like the video, the game ended with Jackson turning into a robotic alter ego as he battled a nefarious crimi
nal named Mr. Big.*
Sega’s marketing team was led by Al Nilsen,** who constantly reminded the press that Jackson had added his own creative suggestions during the development of the game. Jackson even released a statement saying that Genesis was the first game console that had enough power to handle his music. In this, however, the pop star was wrong. The first system powerful enough to handle his music was the Master System. Sega published an eight-bit version of Michael Jackson’s Moonwalker as well.
Sega of America may have slowed down its Master System marketing effort with the launch of Genesis, but it did not abandon the retailers in the video game channel. Sega released Master System versions of such Genesis hits as Michael Jackson’s Moonwalker, Ghouls ’N Ghosts, Golden Axe, Columns, and even Sonic The Hedgehog. It also released the Power Base Converter, a pricey adapter that allowed consumers to play Master System cartridges on their Genesis consoles.
Electronic Arts Does
When we announced the Nintendo deal, the stock went up. When we announced the Sega deal, the stock went down because the market was so ignorant about what was going to happen. Of course, by the end of that year, everybody realized that the wheels were falling off the 8-bit market, and we were getting punished for that. They still didn’t appreciate the 16-bit [systems]. A lot of people in the period from 1989 to 1990 just assumed that Sega was not going to do anything.