by Steven Kent
Sony and Nintendo may have created unique machines with proprietary operating systems, but Microsoft’s renegade gamers built their console around basic PC architecture. Their machine would have a customized operating system with a stripped down version of Windows, would use Microsoft’s DirectX software, and would feature both a built-in hard drive and an EtherNet card for broadband communications. Although the final specifications for the console would not be ready for another year, the Microsoft board approved the project in March 1999.
Over the next ten months, the Xbox team remained a moving target for analysts and journalists alike. Microsoft neither confirmed nor denied work on the project, which most people recognized as a fairly reliable confirmation.*
Word about the Xbox often slipped out when Microsoft quietly discussed versions of its hardware with analysts and software makers. When Microsoft confirmed rumors that the console would include a graphics chip from a pioneering company called Nvidia Corporation, many analysts and game enthusiasts suddenly began praising the console.
As Bill Gates stood before the enthusiastic crowd at the Game Developers Conference, he unveiled a list of nearly final specifications that were guaranteed to dazzle a technically literate crowd. Analysts had already pronounced Xbox’s Nvidia chip superior to the graphics processing unit in PlayStation 2. Coupled with an 8-gigabyte hard drive, twice as much memory as PlayStation 2, and an EtherNet card, Xbox appeared to be unstoppable.
That night, twenty-seven members of Microsoft’s Xbox team ate a celebratory dinner together in a San Jose hotel. Other Microsoft employees saw them and sent bottles of champagne to their table in congratulations. Feeling like they had conquered the world, the team members joked and drank for hours. According to all reports, most team members were fairly drunk when they finally left the restaurant.
Rather than separate into groups when they reached the hotel elevator, the team decided to cram in together, far exceeding capacity. The last person in was Seamus Blackley. Well over six feet tall and quite sturdily built, Blackley saw that he could not cram through the elevator door; so he launched himself in horizontally, on top of the crowd. When the doors of the elevator slid shut, the elevator dropped three stories before coming to a safe stop.
Asked about this event later, Blackley, the college-trained physicist who once worked on the Fermilab Super Collider, commented, “Let’s just say that when you cram twenty-seven celebrating people into an elevator with a seven-person limit, gravity happens quickly.”
Fall of the House of Sega
Or better yet a terminator,
Like Arnold Schwarzenegger,
Try’n to play me out like as if my name was Sega.3
—Eric Shroddy, Larry Muggerud, Lou Donaldson, Jump Around, House of Pain
When Sega first announced Dreamcast, former Nintendo of America chairman Howard Lincoln sniped that considering Sega’s faltering financial situation, the project was “completely irresponsible.” According to Sega Enterprises cofounder David Rosen, both he and company chairman Isao Okawa had wanted to leave the hardware business after Genesis.*
The launch of PlayStation 2 broke huge holes in Sega’s armor. While publicly remaining loyal to Dreamcast, several of Sega’s top designers privately began admitting that they hoped to see their games on PlayStation 2. Yute Saito, the independent developer who created Seaman—the best-selling Dreamcast game in Japan, openly talked about releasing a PlayStation 2 version of his talking fish simulation.
Rather than keep its designer groups entirely in-house, Sega had spun them off into nine semi-autonomous organizations, naming its top designers as the heads of each independent studio. Within the industry, people quietly began speculating that this new corporate structure would open the door for supporting other platforms. When asked if his AM2 team—designers of such games as Out Run and Space Harrier—might investigate other platforms, Sega’s Yu Suzuki commented, “I think so. Of course, we still have a relationship with Sega, so we cannot just move out right away. Maybe gradually.”
They have spun off from Sega and they are 100 percent owned by Sega. If they are successful, they will have an IPO. Theoretically, they can do any thing [they want], but they are owned 100 percent by Sega—there is very, very little chance that they will make games for PlayStation 2.
—Shoichiro Irimajiri, former president and COO, Sega Enterprises
Under this new system, Suzuki’s AM2 team, which had long had its own identity, remained largely unchanged but gained more independence, as did Yuji Naka’s (Sonic The Hedgehog, NiGHTS) Sonic Team. Under this new structure, however, designers such as Hisao Oguchi (Top Skater, Virtua Tennis, Crazy Taxi) and Tetsuya Mizuguchi (Sega Rally, Space Channel 5) were able to expand their activities. Dreamcast needed an expanded library to survive, and between its independent studios and American publishing partners such as Visual Concepts (NFL 2K, NBA 2K), Sega became the most prolific publisher in the business.
Long known for publishing innovative games, Sega also gave its design houses latitude to experiment. Temporarily abandoning his arcade roots, Yu Suzuki began work on a Dreamcast game called Shenmue—basically, an interactive sixteen-chapter novel. The first installment of Shenmue, which contained only one chapter, was rumored to have cost upward of $50 million to make. (Later chapters would cost less to make, since much of the money spent on the game went into developing new technologies.) With less than 3 million Dreamcasts sold worldwide, Sega could not possibly hope to make a profit on the game. In Japan, where role-playing games are especially popular and Yu Suzuki’s notoriety as a game maker is second only to Nintendo’s Shigeru Miyamoto, Sega sold 200,000 copies of Shenmue—a 20 percent penetration into the Dreamcast market.
If we think of just the software business, very honestly speaking, we have not recouped yet. But when I think of the development advances we learned that can be applied to other games, that investment will someday be recouped.
—Hideki Sato, president, Sega Enterprises
With approximately one million Dreamcast consoles sold in Japan and well over two million sold in the United States, Sega focused more of its attention on the U.S. market. “The developers are starting to realize that they have to fish where the fish are biting,” became a slogan that Sega of America president and COO Peter Moore repeated in many interviews during the eight months between PlayStation 2’s Japanese launch and its U.S. debut.
Under Moore’s leadership, Sega of America looked for ways to shore its base. One of its more dramatic moves was the formation of SegaNet, an Internet service provider created specifically for handling Dreamcast business. Slated for an official launch on September 7, 2000, the day of the MTV Video Music Awards, SegaNet was designed to reflect the aggressive new stance Sega was taking toward online games.
Up until the launch of SegaNet, Sega seemed to pay little attention to Dreamcast’s 56K modem. (The only Dreamcast game with an online component available in the U.S. market was Chu Chu Rocket, a strategy game from Yuji Naka’s Sonic Team.) Moore’s stated purpose for initiating SegaNet was to beef up the American market. At $21.95 per month, Sega’s new service was competitively priced, and subscribers who signed up for a two-year contract received a free Dreamcast and keyboard. If all things went according to plan, a plurality of future Dreamcast games would also feature online components.
E3 2000
As May approached, the industry looked toward the 2000 Electronic Entertainment Expo (E3) in Los Angeles for details about how Sony would launch PlayStation 2 in the United States and how Sega would respond. In the days before the show began, Sony, Sega, and Nintendo wrangled for position.
Sony announced that it would hold its pre-E3 press conference on Wednesday, May 10—during the noon time slot generally reserved for Nintendo’s conference. Though members of Nintendo’s PR team considered sticking to their original plans, they realized they could not compete. Sony would announce the price and launch date of PlayStation 2—the only big announcements Nintendo had would b
e new games. Nintendo gave up the slot.
Sony held its press conference in a Los Angeles sound stage not far from the convention center. Thousands of journalists and industry insiders crammed into the studio grounds and were fed a lunch of pasta and salad, as Sony executives prepared and made last-minute changes to presentations. When the doors opened, the excited crowd pushed in as if fighting its way into a rock concert. Sony’s announcements proved worth the wait.
Sony Computer Entertainment America chairman Kazuo “Kaz” Hirai began the event by describing differences between the Japanese PlayStation 2 and the one Sony would introduce into the North American market. The American version would have its DVD drivers programmed into its circuits as firmware, avoiding some of the bugs that plagued the Japanese version. Also, the U.S. version had a built-in bay for a hard drive/Ethernet card peripheral that Sony had under development.
As for price and launch date, while Sony had to abandon its traditional September launch date, PlayStation 2 would be released in the United States on Thursday, October 26, making it to market in time for the 2000 Christmas season. Like the original PlayStation, this new and powerful machine that played movies on DVD as well as games would launch with a modest $299 price tag. But Sony was not just releasing a new game machine. PlayStation 2 would become the hub of the living room.
The PlayStation 2 computer entertainment system is not the future of video game entertainment, it is the future of entertainment period.
—Kazuo “Kaz” Hirai, president and COO, Sony Computer Entertainment America
Sony also addressed concerns about the lack of software during the Japanese launch. According to Hirai, PlayStation would launch with more than twenty games. To ensure this, Sony Computer Entertainment America paired up with Electronic Arts, a powerful ally that could provide the game content that was so obviously missing at the March launch. Electronic Arts showed clips of Madden NFL 2001, NASCAR, and SSX for PlayStation 2. While Sony demonstrated Gran Turismo 2000,* the third installment in a hugely successful series of realistic driving simulations, the only Sony-published game that would be ready for the launch of PlayStation 2 was Fantavision, a strategy game in which players grouped and exploded skyrockets streaming across gorgeously rendered night skies.
Due largely to the overall disappointing quality of the PlayStation 2 library, it took fifteen months for the first million copy–selling game to appear on the system. That game, Capcom’s Onimusha: Warlords, was followed closely by the Japanese release of Gran Turismo 3, which was an instant million-seller.
Like Nintendo, Sega was forced to compete against hardware by announcing new software. Sega held an all-but-ignored barbecue outside Sony’s conference. Sega executives gave endless interviews about their plans for SegaNet, but as the preshow events finished up, most people were still talking about PlayStation 2.
And people continued to discuss PlayStation 2 throughout the show but in an increasingly poor light. As E3 2000 continued, it became abundantly clear that while more games would be available at the American launch, only a few of them lived up to expectation. Sega, on the other hand, left many attendees very impressed.
Visual Concepts, the Sega-owned U.S. game developer making most of Sega’s sports games, completed NFL 2K1—a football game with a robust online component. Not having to compensate for such variables as processor speeds, modem speeds, and graphics cards as PC game publishers did, Visual Concepts was able to concentrate all of its efforts into optimizing the game for Dreamcast and its 56K modem. The end result was a game that ran nearly as smoothly online as it did offline.
Sega had other surprises, too. Sega showed Seaman—a game in which players used a microphone to communicate with an extremely ugly talking fish, NBA 2K1, Shenmue, and Space Channel 5 (a game in which players helped a sexy news anchor with bright pink pigtails rescue a space station from aliens by dancing), and more. An air of desperation hung over the Sega booth and many attendees knew that the company was fighting for its life, but watching the go-go dancers and other trappings around the Sega booth, many people gained confidence that Dreamcast might survive. All Sega of America needed, according to COO Peter Moore, would be to somehow reach the 5 million consoles–sold mark—to double its install base—by the end of the year. Now that Sega was “giving” away Dreamcasts as a premium for joining SegaNet, and with a line of good games on the way, Moore believed he could reach his goal.
But the noose continued to close around Sega. On May 22, nine days after E3, Isao Okawa, the chairman of CSK, Sega’s parent company, removed Shoichiro Irimajiri as president of Sega and took control of the company.
People who were unfamiliar with Okawa feared that he might close Sega. He openly advocated Sega’s abandoning the hardware business, once publicly stated that there would be no follow-up console to Dreamcast, and felt that the futures of Sega and Internet games were inseparably connected. One thing no one could challenge, however, was Okawa’s commitment to Sega. In the summer of 1999, he personally loaned the company nearly $500 million of his own money to help cover debts.
Rumblings in Japan
The fact of the matter is that people are going to look for their entertainment to come from somewhere, and it does not necessarily have to come from games.
—Satoru Iwata, director and general manager of corporate planning, Nintendo Co., Ltd.
The drop in the Japanese game market started so slowly that few people saw the shift take place. Just as the American arcade business started drying up in 1982, Japanese arcades showed signs of distress in 1998. Sega, Japan’s largest and strongest arcade company, began closing locations in 1999. By the following year, the closures even included some of its flagship Joypolis virtual theme parks. In 2001, Namco and Taito, the other titans of the Japanese arcade industry, followed Sega’s lead.
We have closed many of our centers, which was hard business. We have almost finished for now, and we will begin looking into opening new amusement centers again. Of course, in the future, we will begin to build again. Fortunately, in the arcade business, Sega is dominant and is the main manufacturer of the machines. So, we will try to improve our position for the arcade business area.
I think Sega is the only company making profits from the arcade business right now. Namco is losing money because they have not done the restructuring that Sega has done to this business center. Sega scrapped the bad amusement centers. Namco recently announced that they will close a couple of hundred amusement centers.
—Hideki Sato, president, Sega Enterprises
But drops in the Japanese game industry did not stop with arcades. With Japanese consumers purchasing more games per console than other consumers, the Japanese market had long been the most lucrative of the three major video game markets—Japan, Europe, and North America. In 1997, Japanese consumers spent 750 billion yen (approximately $6.8 billion) on video game software and hardware. By 1999, overall game spending dropped to 600 billion yen, approximately $5 billion.4
Some of this was bound to happen. Having shipped approximately 18.5 million PlayStations into a country with an entire population of 127 million, Sony had saturated the market. By 2000, with the original PlayStation now six years old and PlayStation 2 only available in limited quantities, Sony’s sales were bound to drop.
The reason for the decline [in sales] is because the Japanese video game industry is experiencing a change in generations of hardware with Sony Computer Entertainment’s launch of PlayStation 2, as well as Microsoft’s announcement of Xbox and Nintendo’s announcement of Game Cube.
Throughout changes in hardware generations, consumers tend to refrain from purchasing old-generation products, and developers tend to lack the necessary skills to support the developments of quality products that fully benefit from the high-powered new generation hardware. These circumstances sometimes create a downward spiral. That is exactly what affected the sales of video games in Japan last year.
—Keiji Honda, president and COO, ENIX Corporation
The same week that Dragon Quest VII temporarily ignited the Japanese market, Nintendo unveiled its long-awaited next-generation game console at its annual Spaceworld trade show. Held in Makuhari Messe, the same convention center in which Nintendo 64 had been revealed in 1995, the show drew press from around the world.
First unveiled by Genyo Takeda, the man who succeeded Gumpei Yokoi as Nintendo’s dean of engineering, the new system was called GameCube. Built around a 64-bit PowerPC processor, GameCube was the shape and size of a small Kleenex box—an approximately five-inch cube that would be manufactured in a number of bright colors and would use 2.9-inch mini DVD-ROMs. Unlike Xbox and PlayStation 2, GameCube would be a dedicated game machine with no ambitions of playing DVD movies.
The show closed with a lengthy presentation by star game designer Shigeru Miyamoto discussing the features he had requested in the new console and demonstrating the level of graphics it could achieve. The audience applauded wildly. Game enthusiast audiences always applauded wildly whenever Miyamoto spoke.