by Steven Kent
The Cataclysmic Christmas
I shouldn’t criticize; old habits die hard. But the real metric is how many Americans have got a PlayStation 2 in their home, plugged in, and are actively purchasing software. How many [PlayStation 2s] have left the factory is meaningless.
—Peter Moore
Dreamcast started with a bang, then found itself adrift in the U.S. market. Sega crossed the one million units–sold mark after only a few weeks following its September 1999 launch, but sales ground to a halt by the first of 2000. Price drops and hot new games brought short spikes in hardware sales, and with an 8-to-1 software-to-hardware tie ratio, Dreamcast owners were clearly happy with their system and buying lots of software. But Sega needed to increase its install base; otherwise, the onslaught of PlayStation 2 would wipe Dreamcast out in the United States as it had in Japan. Yet nothing seemed to work. Sega dropped the price of Dreamcast to $149—half the price of PlayStation 2. Sales jumped briefly, then dropped. Even offering free Dreamcasts with SegaNet did not move the quantity of units Sega needed to sell.
Sega failed to reach the targets we wanted to in terms of hardware sell-through. Therefore, our software, in the same time frame, didn’t reach the levels that we had forecasted or expected. Although our tie ratio for the year 2000 was 8 to 1 … But 8 to 1 on a small install base didn’t give us the revenue or the profit from that software that we needed for our business model to keep this platform viable in the medium to long term.
—Charles Bellfield, vice president marketing and corporate communications, Sega of America
In mid-September, Sega received a stay of execution from the most unlikely of sources—Sony Computer Entertainment America. With the launch of PlayStation 2 just one month away, stories began surfacing that Sony did not have enough PlayStation 2 consoles to meet its promises. Rumor had it that Sony had somewhere between 300,000 and 500,000 U.S. consoles ready for shipment and that the company would either send half-shipments to retailers or postpone the entire launch. But if there was any truth to the rumor, Sony refused to comment.
Then a reporter working for USA Today contacted executives at two top electronic game specialty stores. Neither executive had heard about the shortages, but both took the rumors seriously and called Sony for an explanation.
(Reporter): What do you think of shortages of PlayStation 2?
(Unnamed executive): Well, you know, 1 million units is a lot less than we would have wanted for such an important product; but we will have to work with what we get.
(Reporter): What about 300,000 units? My sources say Sony only has 300,000 to 500,000 consoles to ship in.
(Unnamed Executive): Three hundred thousand? I haven’t heard that? Where did you hear that? How good is your information? I don’t have any comment.*
On September 20, Sony Computer Entertainment America president Kazuo Hirai held a press conference, in which he announced cutbacks in PlayStation 2 shipments due to parts shortages in Japan. Instead of shipping 1 million consoles, Sony could only ship 500,000 for the October 26 launch date, with an additional 100,000 consoles being shipped into the United States every week for the remainder of the year. In an industry rife with rumors and conspiracy theories, Sony’s announcement led to wild speculation. People speculated that Sony was withholding shipments to build demand for the system, because there were no good games in the launch library, or because it did not want a major rollout until it had more first-party games available. Several publications sent reporters to visit electronics stores along Akihabara that October, where they discovered a small but steady supply of PlayStation 2 inventory. What few people knew was that the Graphics Synthesizer used in the U.S. version of PlayStation 2 was different than the one used in Japan. As Sony optimized its manufacturing, the company created a smaller version of its custom graphics chip for the United States, and glitches in manufacturing the smaller chip had caused the parts shortage.
Whatever had caused the shortage, the end result was that many retailers had allowed customers to reserve PlayStation 2 consoles based on twice the allocations they eventually received. When they learned that supplies were only half of what they expected, managers at stores such as Babbages, Software Etc., and Electronics Boutique were forced to inform customers that they would not receive the consoles they had reserved months in advance. Intended or not, Sony received a flood of positive publicity from stories of shoppers camping outside stores in the slim hope of finding a PlayStation 2.
The oddest story, however, dealt with Iraq. A persistent story surfaced that Iraqi leader Saddam Hussein was scouring the United States in the hope of purchasing a few thousand PlayStation 2s. News analysts immediately remembered the limitation that the Japanese government had placed on the exportation of PlayStation 2s and began speculating that Hussein might use them for launching guided missiles.* Of course, it would have been nearly impossible to find several thousand PlayStation 2s at regular retail prices. You could occasionally find them selling in toy stores in packages—finding the console, an additional controller, a memory card, and two games selling for $599 was not uncommon. You could also find PlayStation 2s selling through online auctions and in classified ads for anywhere from $600 to $800. According to news stories, Hussein ended up purchasing several hundred PSOnes—a new and smaller configuration of the original PlayStation.
In truth, Sony’s hardware shortage was not as significant as many people said. Had Sony shipped two million PlayStation 2s in October, the supplies would still have been short.
Lack of adequate software was a more lasting problem carried over from Japan. A few PlayStation 2 games stood out as fairly strong. Madden NFL 2001 and SSX, both from Electronic Arts, were the stars of the launch lineup. Rockstar Games, a tiny company that might normally have gone unnoticed, had two driving games—Midnight Club and Smuggler’s Run—that did fairly well; and a company called THQ, best-known for its WWF wrestling games, received fair reviews for a role-playing game called Summoner.
This was Sega’s golden opportunity. Sony did not have enough inventory, it did not have many good games, and its console cost twice as much as Dreamcast. Beyond that, with NFL 2K1, Sega scored a critical hit, and NBA 2K1 and Shenmue followed closely.
I think Shenmue did extremely well. NBA 2K1 did very, very well. Jet Grind Radio was a little bit of a disappointment. We still believe it was a great game that somehow didn’t catch the imagination of the gamer; but Shenmue hit its quota. NBA 2K1 hit its quota. NFL 2K1, which was an earlier launch, clearly hit its quota.
—Peter Moore
Retailers clamored to bump up their orders of Dreamcast on the theory that disappointed shoppers would purchase the Sega console rather than head home empty-handed. As Thanksgiving rolled past, Dreamcast sales surged and it looked as if Sega had been given a reprieve.
We came out the day after Thanksgiving and had a huge day; but then the following week, U.S. retail went into the toilet. If you go back and check the news, you’ll see that overall retail, and consumer electronics in particular, really fell flat. I think the PlayStation 2 effect that we were relying upon did not work for us. We had thought that we would get a spill-over effect.
I think that we discounted what human nature really is [about], that people will hang on for as long as possible, working on the theory that they’re going to get something in the second week of December. So they’re hanging on to your video game dollars. What effectively happened is the PlayStation 2 lack of availability froze the marketplace within the video game sector. People were willing to wait to see what they could get their hands on or invest their dollars in different things—DVDs and other consumer electronics such as Poo-Chi.*
—Peter Moore
Sega stumbled into the new year, having fallen far short of Moore’s stated goal of 5 million Dreamcasts. Even giving Dreamcasts away as a premium to SegaNet subscribers, Sega had not been able to lift its U.S. install base beyond 3 million units, and the worldwide install base was only at 6.5 million.
&n
bsp; In January 2001, stories started circulating about executives from Microsoft and Nintendo visiting Sega to evaluate the prospect of purchasing the company. As early as December 27, the New York Times reported that Nintendo had entered into a discussion about purchasing Sega. Sega denied the story, but the rumors persisted. Then, in the last week of January, a small Japanese news service published a wire story claiming that Dreamcast had been discontinued. At this point, Sega admitted that while Dreamcast had not been discontinued, the manufacturing plant was no longer in operation because of inventory concerns. On January 24, Sega released a press release announcing the discontinuation of Dreamcast, and company executives Charles Bellfield and Peter Moore personally explained the situation to the press.
Sega will adopt a multi-platform or platform-agnostic role or view of the video game hardware industry. We will develop content for multiple devices from cell phones right through and including video game systems—including those from our competitors.
Secondly, Sega is confirming effective immediately a cease of the manufacture of the Sega Dreamcast system. And effective as of April 1, 2001, we will have completed a management reorganization and a restructuring of Sega as a company to purely be focusing on a multiplatform strategy as a third-party publisher to multiple platforms.
—Charles Bellfield
It took Sega 22 months to sell 6.5 million Dreamcasts worldwide. By comparison, Sony shipped 10 million PlayStation 2s in under 15 months, and its sales kept accelerating. With Sony squeezing Dreamcast out of the market and Nintendo and Microsoft preparing to launch new consoles of their own, Sega chairman Isao Okawa pulled his company out of the hardware business.
But Sega’s dark times were only beginning. Okawa was losing a personal battle with cancer. Even as he struggled to find a new direction for his company, Okawa’s body was failing him and he had to check into Tokyo University Medical Hospital. In his absence, Hideki Sato, the former head of Sega’s software engineering, temporarily took the helm. Though Sato bravely maintained that Okawa was recovering,* that simply was not the case. In his last days, Okawa forgave Sega’s debts to him and returned all of his shares of Sega and CSK stock as a gift—in Sega’s case, a $695 million gift that would help the company survive the transition of becoming a multiplatform software manufacturer. On March 16, at 3:47 P.M., 74-year-old Isao Okawa died of congestive heart failure.
Upon learning of his friend’s death, Sega cofounder David Rosen sent the following telegram:
To the Family of Mr. Isao Okawa:
I am very saddened to learn of the passing of my friend and business associate, Mr. Isao Okawa. He was a man of great vision, who dedicated his energy and his many abilities to whatever task he undertook. He always maintained a very strong sense of responsibility.
Mr. Okawa was always ready to listen and explore new ideas. He was an inspiration to the younger staff as well as management of Sega.
He was a man with charisma, who loved music and good conversation.
My wife and I always found Okawa-san to be gracious and kind. We will miss him and retain fond memories of our past times together.
Sincerely,
David & Masako Rosen
When Sega and CSK held a special memorial service for Okawa a few months later, more than 6,000 people arrived to pay their respects to the man who had become a citizen of the world. Okawa, who started his career as an engineer before opening CSK and making the calculating investments that eventually made him a billionaire, was better known for his charitable foundations than for the companies he owned.
As one would expect, if you’ve met him or sat across a conference table from him, he did everything, even his passing away, in a very organized and dignified manner. Over a number of months prior to his passing, it was one of the better getting your affairs in order before you leave type situations that I’ve ever seen in my life.
I was privileged enough to go over two weeks ago to Japan to take part in the corporate funeral, which was attended by over 6,000 people, including Idei-san (chairman of Sony) and Kutaragi-san (president of Sony Computer Entertainment)…. And I was the only gaijan [Caucasian] on the corporate receiving line that welcomed and said goodbye to the guests. It was an incredible affair that laid testimony to the effect that this man has had on the industry in Japan in general and in the computer services and digital entertainment world in particular.
More than 6,000 were physically present, and it was Web cast to CSK offices in other cities.
—Peter Moore
Video games, once thought to be a fad, have worked their way into the fabric of international culture. At present, Sony has shipped more than 80 million PlayStations worldwide and Nintendo has sold more than 110 million Game Boys. With every successive generation, the video game industry keeps growing.
And what of the people who built the industry? Odyssey designer Ralph Baer is retired; Nolan Bushnell, founder of Atari, is still a rogue entrepreneur looking for his next big Chuck E. Cheese; Howard Lincoln, who rose from corporate counsel to chairman of Nintendo, celebrated his sixtieth birthday by retiring from Nintendo to become the CEO of the Seattle Mariners; Vice President Al Gore selected Senator Joseph Lieberman as his running mate in his bid for the presidency; and Trip Hawkins, unwilling to give up after the demise of his hardware system, converted 3DO into a highly successful software publisher. On January 8, 2002, 55-year-old Minoru Arakawa shocked the industry by announcing his decision to retire effective immediately. At one time, Arakawa looked like the heir apparent to take over the company when Nintendo Co., Ltd. president Hiroshi Yamauchi retired. But Yoko Arakawa, Minoru’s wife and Yamauchi’s daughter, did not want to return to Japan.
That’s the End?
In many ways, this book has become the project that never ends. I had hoped to finish the book in 1995, then 1996. In 2000, I finally published the damned thing myself. How could I have known that the next six months would become some of the most eventful months in the history of gaming—Midway Games finally abandoned the floundering coin-op video game business, Bill Gates introduced Xbox, Nintendo unveiled GameCube and launched Game Boy Advance, PlayStation 2 launched in the United States, Sega discontinued Dreamcast, and Isao Okawa passed away.
I am grateful that Prima Publishing has bought this book, but the deadline my editors set came up before the early November launches of GameCube and Xbox. And bigger battles are brewing. A recent study published in England predicts that the interactive entertainment market will double in size and could be as big as $49 billion worldwide.
To put it another way, the game never ends.
* The processing chip in the 2600 was named “Stella” in honor of Decuir’s bicycle.
* Several newspapers, including USA Today and the Wall Street Journal, published articles with Xbox specifications that proved incorrect when the final specs were released. (I wrote the article for USA Today.)
* Isao Okawa constantly pushed Sega to create Internet content and insisted that Dreamcast include a modem.
* Sony eventually “scrapped” Gran Turismo 2000 and released a much-improved game called Gran Turismo 3 in June 2001.
* For the record, I was the reporter covering this story for USA Today.
* I was interviewed by NBC Nightly News on this subject. My speculation was that if any truth lay behind this rumor, it meant that “Saddam’s nephews were going to get a nice surprise under the old Ramadan tree.”
* A toy robot dog created by Sega and marketed by Tiger Electronics.
* I happened to meet with Sato the day that Mr. Okawa passed away, and Sato still claimed that Okawa was getting better and would soon return to the company.
Source Notes
Chapter 2: Forgotten Fathers
1. Levy, Steven, Hackers, Heroes of the Computer Revolution (New York: Dell Publishing, 1984). The most comprehensive work that exists on this pivotal period in the history of computing. Though Steve Russell was helpful and offered much information, I found myself very dep
endent upon Steve Levy’s book and direct any reader who wishes to know more about the beginnings of the computer revolution to Mr. Levy’s book.
Chapter 6: The Jackals
1. Cohen, Scott, Zap! The Rise and Fall of Atari (New York: McGraw-Hill, 1984), p. 34.
2. Ibid., p. 42.
Chapter 7: “Could You Repeat That Two More Times?”
1. Cohen, Scott, Zap! The Rise and Fall of Atari (New York: McGraw-Hill, 1984), p. 50.
Chapter 8: Strange Bedfellows
1. Herman, Leonard, Phoenix: The Fall and Rise of Videogames (Springfield, NJ: Rolenta Press, 1994), pp. 18–21.
2. Cohen, Scott, Zap! The Rise and Fall of Atari (New York: McGraw-Hill, 1984), p. 52.
3. Herman, Leonard, Phoenix: The Fall and Rise of Videogames (Springfield, NJ: Rolenta Press, 1994), p. 20.
4. Robbins, Joe, “Arcades and Equipment Sales: Candid Thoughts,” RePlay Magazine (March 1976): 58.
5. Cohen, Scott, Zap! The Rise and Fall of Atari (New York: McGraw-Hill, 1984), p. 57.
Chapter 9: The Return of Bushnell
1. Bloom, Steven, Video Invaders (New York: Arco Publishing, 1982), p. 21.