If distribution was the lifeblood of a company, then Sega had just undergone a blood transfusion. In 1988, when Sega’s Master System proved unable to make a dent in NES sales, Sega had struck a deal with the toy manufacturer Tonka to allow them to handle distribution. But despite the weight that Tonka’s name carried in the toy world, the company had no idea how to market and sell videogames. If the Master System wasn’t already dead in the United States, Tonka’s failed attempts at distribution fired the final shots. Nakayama blamed Tonka for much of the Master System failures and wouldn’t allow such a thing to transpire again. As a result, Paul Rioux had worked tirelessly to unwind the deal with Tonka so that Sega of America would be solely responsible for their own distribution. In Nakayama’s eyes, nothing should hold back the company now. Kalinske, however, was savvy enough to know that many obstacles stood in his way: lack of brand identity, poor sales history, and, most important, Nintendo’s unbending grip over the retailers.
“The fact is, you can’t sell something if there’s no place for anyone to buy it.” Kalinske looked at his employees, who likely had to try their best to think of any response besides Well, yeah, and Duh. “Yes, I know, it’s a pretty obvious concept, but unfortunately that’s our biggest problem at the moment.” Kalinske pointed to a map on the wall, indicating which retailers were carrying the Genesis and in which regions the game systems were available. “We need to convince more stores to jump on the bandwagon. I know, I know, easier said than done, but I think instead of approaching each of them piecemeal, we’re better off using a top-down approach. If we sign up the big boys, the rest will fall into line.”
“What exactly did you have in mind?” Nilsen asked.
Kalinske narrowed his eyes and answered, “Wal-Mart.”
Getting the Genesis into Wal-Mart wasn’t as easy as sending them a free system and letting them see how much better it was than the Nintendo, though Kalinske believed it should have worked like this. Unfortunately, Wal-Mart sold Nintendo products, and they didn’t just sell, they flew off the shelves. Nintendo single-handedly accounted for about 10 percent of Wal-Mart’s profits, and the giant retailer felt an obligation to keep the game maker happy. Kalinske, however, was willing to rock the boat.
“Maybe it is best to look elsewhere first?” Toyoda suggested. “Take some time?”
“Time is a luxury we don’t have,” Kalinske explained. Nintendo had recently announced plans to release their 16-bit machine, the Super Famicom, in Japan later that year (which meant it would probably hit America one year later). Sega’s days had always felt numbered, but with this recent news the end felt even nearer. “Not with the Super Famicom knocking on our door. Can someone tell me where Katz was with Wal-Mart?”
Rioux explained that Katz had made a trip down to Wal-Mart headquarters in Bentonville, Arkansas, to pitch them on Sega and said that things went okay. Kalinske nodded. In his mind, okay was the worst possible result. Okay was worse than bad. At least bad was memorable. “Well, then,” Kalinske said, “I think it’s time that I go back down and show them that Sega is no longer in the business of being okay.”
The team vigorously prepared for weeks, leading to a combination of stress, brainstorming, and hijinks that, when laminated by Kalinske’s perpetual sheen of professionalism, created a dare-to-be-bold corporate culture. At some point, Sega started to feel less like the American outpost of a Japanese company and more like the cast of an exciting new Broadway musical with defined roles, a choreography of ideas, and ensemble numbers that brought everyone together. The pieces all seemed to be in place, and with the curtain now rising, it was finally showtime.
7.
POSTCARDS FROM ARKANSAS
Wal-Mart headquarters felt like a military compound during peacetime. It was huge, impressively segmented, and delivered the impression that things were not nearly as calm as they seemed. Kalinske entered the complex and was escorted into the office of Wal-Mart’s electronics merchant, a man whose every move called to mind the word “veteran.” The men shook hands, enjoyed some small talk about college football, and eventually meandered toward the conversation that had brought Kalinske here. “How much do you know about videogames?” Kalinske asked.
“Pretty much just whatever Nintendo tells me,” the electronics merchant replied.
“Well, then, allow me to introduce you to the future,” Kalinske said, and presented his Sega gadgets, along with the product analysis reports and market data that his ragtag team had worked so hard to prepare. He leaned forward, dropped his businessman persona, and spoke in a just-between-us tone. “I understand that Wal-Mart feels an obligation to keep Nintendo happy. I get it. But this isn’t a Tengen situation.”
Kalinske was referring to Tengen, a videogame publisher and developer created by Atari Games. Tengen owned the rights to most of Atari’s popular games from the early 1980s and wanted to license some of the company’s more popular titles for the NES. Hideyuki Nakajima, Tengen’s manager, approached Nintendo to work out the details, but he quickly found out that there was nothing to be worked out; Nintendo had a standard licensing agreement that dictated the same terms for all of its licensees. If Tengen wanted their games on the NES, they’d have to sign a very one-sided contract with Nintendo that would prohibit them from releasing their game on any other console and compel them to give Nintendo 30 percent of their revenue as a royalty. It also stipulated that they’d have to buy physical cartridges directly from Nintendo, which was not only expensive (about $10 each) but often highly frustrating, as it gave Nintendo the leverage to pick and choose which orders to fill.
Nakajima thought this was absurd, so in 1986 he arranged for a special meeting with Nintendo of America’s president, Minoru Arakawa, and senior vice president Howard Lincoln to discuss renegotiating these standard terms for what he believed was an exceptional situation. Nakajima kindly reminded Nintendo that Atari, Tengen’s parent company, had essentially created the videogame industry and deserved some special privileges, particularly the ability to publish more than the five titles per year that Nintendo’s standard agreement specified. But Arakawa and Lincoln stood their ground and reiterated that no special treatment would be offered.
After thinking over the terms of the deal, Nakajima resiliently decided to find a way around this lousy licensing agreement. So he had Tengen engineers begin by trying to find a way around the security device inside the NES. Nintendo’s console had a lockout chip containing a protocol called 10NES programming, which detected unlicensed cartridges and prevented them from working. Tengen engineers tried everything to break this code, even chemically peeling layers from the NES chips to allow for microscopic examination. Yet despite these efforts, Tengen was unable to crack the code, and in 1987 it signed a contract with Nintendo.
But after releasing a slew of successful games like Pac-Man and RBI Baseball, Nakajima was infuriated by how much Nintendo’s royalty cut into his company’s profit margins. He rationalized that the only way to get around the lockout chip was to figure out exactly what made up its 10NES programming. He needed to obtain a copy, but there were only two places where this code could be found: Nintendo headquarters and the U.S. Copyright Office. Since breaking into Nintendo was impossible, Tengen would approach the U.S. Copyright Office and claim that they were filing a copyright infringement suit against Nintendo. Despite this being entirely fictional, they went the whole nine yards to make it appear true, and even signed an affidavit legally testifying about the accuracy and urgency of this lawsuit. The Copyright Office handed over the code, and Tengen worked backward to create a program called the Rabbit, which could unlock the NES. Now, not only did Tengen possess the ability to produce as many games as they saw fit, but by learning about Nintendo’s distribution techniques (through the three games they had legally released as third-party licensees), they were equipped to contact the retailers directly. Essentially, Tengen had relegated Nintendo to middleman status, and then cut them out completely.
This was a brillia
nt plan in theory, but in practice the problem came when Nintendo gave the retailers an ultimatum: us or them. Though Nintendo couldn’t legally threaten to stop supplying retailers, they had enough strength to use the power of what-if (“What if our trucks got lost going to your stores? What if we stopped filling your orders in full?”) to make this an easy decision. The retailers bit the bullet, got rid of all Tengen products, and wrote off the losses. To further flex their muscle, Nintendo eventually took Tengen to court and got an injunction to prevent them from producing their illegally created games. Nakajima and Tengen had no choice but to bow out of the business, and soon the name Tengen served as nothing but a cautionary tale.
Now, as Kalinske sat before Wal-Mart’s electronics merchant, he tried to make it perfectly clear that this was an entirely different situation. Sega hadn’t done anything illegal, nor had they screwed over Nintendo; they were just a competitor who had the better product. “To be perfectly honest,” Kalinske said, “I think carrying our products will boost Nintendo sales. The money we spend on print and television is only going to help the industry overall, and you and I both know exactly who the industry is.”
The merchant looked through some of Sega’s materials again and smiled.
Kalinske scooted up to the edge of his seat. He didn’t need a big order, just an order. A single order. That would be enough to motivate his employees, give Sega the credibility it sorely needed, and confirm to Kalinske that maybe he wasn’t in completely over his head. Please, just a single order, especially with the Super Famicom coming.
“A little while ago I was interested in stocking an electronic handheld game,” the electronic merchant explained. “A stupid little football game, not even close to anything on the Game Boy. For fifteen bucks, maybe Mom and Dad buy it for Sonny if he makes all A’s, or hits the game-winning shot. But then a pal of mine, someone in the same line of work, he passes along a rumor to me: there was a small store struggling to keep up with the big boys, and they decided they were going to lower the price of the NES by five cents just so they had some small advantage. Well, they advertise this in the Sunday newspaper, their five-cent advantage, and another small store sees this and calls Nintendo to let them know. A week goes by, Nintendo sends out the trucks to deliver the product, and lo and behold, there’s nothing left for the store with the five-cent discount, and by sheer coincidence, the guy who passed along the tip gets a bigger allocation than normal.” The merchant tapped his fingers on the desk. “But like I said, this was just a rumor I heard. It’s probably not true. After all, that would be illegal.”
Kalinske shook his head. “Not just illegal, it’d be un-American.”
The merchant gave a gummy smile. “Perhaps one day we’ll return to a place where the streets are paved with gold and all you need to succeed is a good idea, a strong work ethic, and some kind of bootstraps. Or perhaps we’ll continue to move in the opposite direction.” The merchant pondered this for a second and then stood. “Personally, I like the place with golden streets. And believe it or not, I like you, Mr. Kalinske. But my answer is no.”
“I understand,” Kalinske said, standing to leave. “And I appreciate your ode to better, simpler times. But you know what the sad thing is? The man in your story, the one who tipped off Nintendo, I don’t really blame that guy. He was just trying to find an angle. If you ask me, the people really killing this country are the ones who realize the American dream is being crushed but don’t bother to do anything about it.” Kalinske thanked the merchant for his time, and then flew back to Sega with a 16-bit chip on his shoulder.
8.
THE BIRTH OF AN ICON
Back in the office, Kalinske stared at his phone with Wal-Mart on his mind. He knew that he had laid it on pretty thick with the electronics merchant and wasn’t sure whether he ought to call back and apologize. Before he could persuade himself in one direction or another, however, the phone rang. Kalinske quickly answered, so certain that it must be the man on his mind that he even took half a second to try to hide the excitement in his voice.
It wasn’t Wal-Mart. Of course it wasn’t Wal-Mart; the man Kalinske had met with didn’t even have his direct line. It was Nakayama, whose ominously chipper voice boomed through the phone. “Tom! How is everything? How are you adjusting?” Nakayama and Kalinske spoke just about every day, but still their conversations often began with this open-ended question.
“I had a great meeting with Wal-Mart,” Kalinske said. “I think they’re close.”
Nakayama was an intelligent man who understood many of the intricacies of the industry, but he didn’t quite grasp the distribution difficulties in the United States. “What is the holdup?” he asked. In Japan, where Nintendo also reigned supreme, Sega had still managed to get their products into all the biggest retailers. “I thought everything would be smooth after we moved on from Tonka. I was told this was the plan,” Nakayama stated. “But I have not called to discuss distribution. I am calling with good news.”
“Wonderful,” Kalinske said. “Let’s hear it.”
“The new company mascot is ready, and he is sure to be a success.”
“This is the hedgehog named Mr. Needlemouse?”
“Ah, you have heard,” Nakayama said, surprised. “We have made some changes, and his name is now Sonic.”
“Okay,” Kalinske said. “Well, when can I see him?”
“I will send him over now,” Nakayama said, and then barked orders in Japanese to someone on the other end. “He will enter through the fax. I will stay on the line to hear your reaction. You will be very pleased.” Kalinske made his way over to the fax machine as it buzzed and huffed, printing out lines of what would be the company’s savior. “My guys here have already begun work on the game engine. They showed me an early version, and it is fast like nothing else.”
The fax machine stopped sputtering, and Kalinske picked up the sketch. “Ah,” he said, trying not to sound repulsed. “Very interesting.” Kalinske stared at the drawing, trying to see in it what Nakayama saw, but it was no use. The hedgehog looked villainous and crude, complete with sharp fangs, a spiked collar, an electric guitar, and a human girlfriend whose cleavage made Barbie’s chest look flat. “I assume this is his girlfriend?”
“Yes,” Nakayama said. “That is Madonna.”
“Kind of racy, no?”
“Tom,” Nakayama said, and sighed. “This is not the reaction I expected.”
Kalinske continued to stare at the drawing. “Sorry, Nakayama-san, sometimes it just takes a little while for things to sink in for me,” he said, still shocked that this bruiser was supposed to be his messiah. “I’ll tell you one thing, though—if Sonic and Mario were alone in an alley, I have no doubt who I’d put my money on.” He had been expecting a Mario-killer, but not one that literally looked like a serial killer. Maybe this Sonic could sell in Japan, but in America he belonged inside a nightmare.
Kalinske got off the phone with Nakayama and took the fax to Madeline Schroeder’s office. “I have good news and I have scary news. Which do you want first?”
“This doesn’t sound promising.”
He handed her the artwork. “What do you think?”
She looked it over. “I think we’ll be the first videogame company whose core demographic is goths.”
“Nakayama loves it.”
“Of course he does,” she said. “It’s so weirdly Japanese. I’m surprised the girlfriend’s boobs aren’t hanging out of a schoolgirl outfit.”
Despite his sour mood, Kalinske laughed. “Her name is Madonna.”
“Of course it is,” she said. “What kind of leeway did he say we had?”
“We didn’t exactly have a Q&A session.”
Schroeder put the drawing on the desk. After a long silent inspection they both spoke at the same time, saying the exact same thing: “Can you fix it?”
Schroeder sighed. “You know, I expected something pretty terrible. I mean, the second-place winner in the contest was an egg, for God�
�s sake. This is certainly not ideal, but it’s actually not as bad as I was bracing for. We can make this work.”
Her optimism was contagious. “Great,” Kalinske said, standing up. “Then let’s turn this punk into a global icon.”
“And how exactly do you propose we begin?”
“Oh, I know of a little place where the icons all hang out together. Why don’t we grab Al and go check it out?”
Kalinske, Schroeder, and Nilsen went on a field trip to Toys “R” Us to pay a visit to some famous friends: Mickey Mouse, GI Joe, He-Man, Mr. Potato Head, and the newly popular and ever-rowdy Teenage Mutant Ninja Turtles. Kalinske walked them through the store, pointing out one billion-dollar property after another and explaining what made each character unique, likable, and timeless. There didn’t appear to be a single toy in the store that Kalinske was unfamiliar with; he knew which company had developed each toy, why they had done so, and how they had gone about marketing it. There was just no place that Kalinske felt more in his element than inside a toy store.
Toy stores were more than just a comfort zone or realm of inspiration to him. They were like a library of cultural mythology. His biggest takeaway from the toy industry had been the importance of story. A toy might be just a piece of plastic, but if you added a compelling narrative and a character mythology, you could transform that piece of plastic into the next big thing. He had proved it with Barbie and with He-Man and the Masters of the Universe, and he was starting to feel more and more confident that he could do it with Sonic as well.
They stopped in front of a Mickey and Minnie dollhouse. “He’s the ultimate friend,” Kalinske said. “No matter what, Mickey remains upbeat and encouraging. It’s like he lives to put a smile on the face of others.”
“Sounds kind of pathetic, if you ask me,” Schroeder said. “I prefer my friends to be a little more selective.”
Console Wars Page 9