The story
History
1940–1982: Origins and arcade success
In May 1940, American businessmen Martin Bromley, Irving Bromberg and James Humpert formed Standard Games in Honolulu, Hawaii. Their aim was to provide coin-operated amusement machines, including slot machines, to military bases as the increase in personnel with the onset of World War II would create demand for entertainment. After the war, the founders sold Standard Games in 1945, and established Service Games the next year, named for the military focus. After the US government outlawed slot machines in its territories in 1952, Bromley sent employees Richard Stewart and Ray LeMaire to Tokyo to establish Service Games of Japan to provide coin-operated slot machines to US bases in Japan. A year later, all five men established Service Games Panama to control the entities of Service Games worldwide. The company expanded over the next seven years to include distribution in South Korea, the Philippines, and South Vietnam. The name Sega, an abbreviation of Service Games, was first used in 1954 on a slot machine, the Diamond Star.
Due to notoriety arising from investigations by the US government into criminal business practices, Service Games of Japan was dissolved on May 31, 1960. On June 3, Bromley established two companies to take over its business activities, Nihon Goraku Bussan and Nihon Kikai Seizō. The two new companies purchased all of Service Games of Japan's assets. Kikai Seizō, doing business as Sega, Inc., focused on manufacturing slot machines. Goraku Bussan, doing business under Stewart as Utamatic, Inc., served as a distributor and operator of coin-operated machines, particularly jukeboxes. The companies merged in 1964, retaining the Nihon Goraku Bussan name.
Around the same time, David Rosen, an American officer in the United States Air Force stationed in Japan, launched a photo booth business in Tokyo in 1954. This company became Rosen Enterprises, and in 1957 began importing coin-operated games into Japan. In 1965, Nihon Goraku Bussan acquired Rosen Enterprises to form Sega Enterprises, Ltd. Rosen was installed as the CEO and managing director, while Stewart was named president and LeMaire was the director of planning. Shortly afterward, Sega stopped leasing to military bases and moved its focus from slot machines to coin-operated amusement machines. Its imports included Rock-Ola jukeboxes, pinball games by Williams, and gun games by Midway Manufacturing.
Because Sega imported second-hand machines, which required frequent maintenance, it began constructing replacement guns and flippers for its imported games. According to former Sega director Akira Nagai, this led to the company developing its own games. The first arcade electro-mechanical game (EM game) Sega manufactured was the submarine simulator Periscope, released worldwide in the late 1960s. It featured light and sound effects considered innovative and was successful in Japan. It was then exported to malls and department stores in Europe and the United States and helped standardize the 25-cent-per-play cost for arcade games in the US. Sega was surprised by the success, and for the next two years, the company produced and exported between eight and ten games per year. The worldwide success of Periscope led to a "technological renaissance" in the arcade industry, which was reinvigorated by a wave of "audio-visual" EM novelty games that followed in the wake of Periscope during the late 1960s to early 1970s. However, rampant piracy led Sega to cease exporting its games around 1970.
In 1969, Sega was sold to the American conglomerate Gulf and Western Industries, although Rosen remained CEO. In 1974, Gulf and Western made Sega Enterprises, Ltd., a subsidiary of an American company renamed Sega Enterprises, Inc. Sega released Pong-Tron, its first video-based game, in 1973. Despite late competition from Taito's hit arcade game Space Invaders in 1978, Sega prospered from the arcade video game boom of the late 1970s, with revenues climbing to over US$100 million by 1979. During this period, Sega acquired Gremlin Industries, which manufactured microprocessor-based arcade games, and Esco Boueki, a coin-op distributor founded and owned by Hayao Nakayama. Nakayama was placed in a management role of Sega's Japanese operations. In the early 1980s, Sega was one of the top five arcade game manufacturers active in the United States, as company revenues rose to $214 million. 1979 saw the release of Head On, which introduced the "eat-the-dots" gameplay Namco later used in Pac-Man. In 1981, Sega licensed Konami's Frogger, its most successful game until then. In 1982, Sega introduced the first game with isometric graphics, Zaxxon.
1982–1989: Entry into the game console market, management buyout and arcade resurgence
Following a downturn in the arcade business starting in 1982, Gulf and Western sold its North American arcade game manufacturing organization and the licensing rights for its arcade games to Bally Manufacturing in September 1983. Gulf and Western retained Sega's North American R&D operation and its Japanese subsidiary, Sega Enterprises, Ltd. With its arcade business in decline, Sega Enterprises, Ltd. president Nakayama advocated for the company to use its hardware expertise to move into the home consumer market in Japan. This led to Sega's development of a computer, the SC-3000. Learning that Nintendo was developing a games-only console, the Famicom, Sega developed its first home video game system, the SG-1000, alongside the SC-3000. Rebranded versions of the SG-1000 were released in several other markets worldwide. The SG-1000 sold 160,000 units in 1983, which far exceeded Sega's projection of 50,000 in the first year but was outpaced by the Famicom. This was in part because Nintendo expanded its game library by courting third-party developers, whereas Sega was hesitant to collaborate with companies with which it was competing in the arcades.
In November 1983, Rosen announced his intention to step down as president of Sega Enterprises, Inc. on January 1, 1984. Jeffrey Rochlis was announced as the new president and CEO of Sega. Shortly after the launch of the SG-1000, and the death of company founder Charles Bluhdorn, Gulf and Western began to sell off its secondary businesses. Nakayama and Rosen arranged a management buyout of the Japanese subsidiary in 1984 with financial backing from Computer Service, a prominent Japanese software company. Sega's Japanese assets were purchased for $38 million by a group of investors led by Rosen and Nakayama. Isao Okawa, head of CSK, became chairman, while Nakayama was installed as CEO of Sega Enterprises, Ltd.
In 1985, Sega began working on the Mark III, a redesigned SG-1000. For North America, Sega rebranded the Mark III as the Master System, with a futuristic design intended to appeal to Western tastes. The Mark III was released in Japan in October 1985. Despite featuring more powerful hardware than the Famicom in some ways, it was unsuccessful at launch. As Nintendo required third-party developers not to publish their Famicom games on other consoles, Sega developed its own games and obtained the rights to port games from other developers. To help market the console in North America, Sega planned to sell the Master System as a toy, similar to how Nintendo had done with the Nintendo Entertainment System. Sega partnered with Tonka, an American toy company, to make use of Tonka's expertise in the toy industry. Ineffective marketing by Tonka handicapped sales of the Master System. By early 1992, production had ceased in North America. The Master System sold between 1.5 million and 2 million units in the region. This was less market share in North America than both Nintendo and Atari, which controlled 80 percent and 12 percent of the market. The Master System was eventually a success in Europe, where its sales were comparable to the NES. As late as 1993, the Master System's active installed user base in Europe was 6.25 million units. The Master System has had continued success in Brazil. New versions continue to be released by Sega's partner in the region, Tectoy. By 2016, the Master System had sold 8 million units in Brazil.
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During 1984, Sega opened its European division of arcade distribution, Sega Europe. It re-entered the North American arcade market in 1985 with the establishment of Sega Enterprises USA at the end of a deal with Bally. The release of Hang-On in 1985 would prove successful in the region, becoming so popular that Sega struggled to keep up with demand for the game. UFO Catcher was introduced in 1985 and as of 2005 was Japan's most commonly installed claw machine. In 1986, Sega of America was established to manage the company's consumer products in North America, beginning with marketing the Master System. During Sega's partnership with Tonka, Sega of America relinquished marketing and distribution of the console and focused on customer support and some localization of games. Out Run, released in 1986, became Sega's best selling arcade cabinet of the 1980s. Former Sega director Akira Nagai said Hang-On and Out Run helped to pull the arcade game market out of the 1982 downturn and created new genres of video games.
1989–1994: Genesis, Sonic the Hedgehog, and mainstream success
With the arcade game market once again growing, Sega was one of the most recognized game brands at the end of the 1980s. In the arcades, the company focused on releasing games to appeal to diverse tastes, including racing games and side-scrollers. Sega released the Master System's successor, the Mega Drive, in Japan on October 29, 1988. The launch was overshadowed by Nintendo's release of Super Mario Bros. 3 a week earlier. Positive coverage from magazines Famitsu and Beep! helped establish a following, with the latter launching a new publication dedicated to the console, but Sega shipped only 400,000 units in the first year.
The Mega Drive struggled to compete against the Famicom and lagged behind Nintendo's Super Famicom and the TurboGrafx-16, made by NEC, in Japanese sales throughout the 16-bit era. For the North American launch, where the console was renamed Genesis, Sega had no sales and marketing organization. After Atari declined an offer to market the console in the region, Sega launched it through its own Sega of America subsidiary. The Genesis was launched in New York City and Los Angeles on August 14, 1989, and in the rest of North America later that year. The European version of the Mega Drive was released in September 1990.
Former Atari executive and new Sega of America president Michael Katz developed a two-part strategy to build sales in North America. The first part involved a marketing campaign to challenge Nintendo and emphasize the more arcade-like experience available on the Genesis, with 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 games which used the names and likenesses of celebrities, such as Michael Jackson's Moonwalker and Joe Montana Football. Nonetheless, Sega had difficulty overcoming Nintendo's ubiquity in homes. Sega of America sold only 500,000 Genesis units in its first year, half of Nakayama's goal.
After the launch of the Genesis, Sega sought a new flagship line of releases to compete with Nintendo's Mario series. Its new character, Sonic the Hedgehog, went on to feature in one of the best-selling video game franchises in history. Sonic the Hedgehog began with a tech demo created by Yuji Naka involving a fast-moving character rolling in a ball through a winding tube; this was fleshed out with Naoto Ohshima's character design and levels conceived by designer Hirokazu Yasuhara. Sonic's color was chosen to match Sega's cobalt blue logo; his shoes were inspired by Michael Jackson's boots, and his personality by Bill Clinton's "can-do" attitude.
Nakayama hired Tom Kalinske as CEO of Sega of America in mid-1990, and Katz departed soon after. Kalinske knew little about the video game market, but 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 Genesis, create a US team to develop games targeted at the American market, expand the aggressive advertising campaigns, and replace the bundled game Altered Beast with Sonic the Hedgehog. The Japanese board of directors disapproved, but it was approved by Nakayama, who told Kalinske, "I hired you to make the decisions for Europe and the Americas, so go ahead and do it."
In large part due to the popularity of Sonic the Hedgehog, the Genesis outsold its main competitor, the Super Nintendo Entertainment System (SNES), in the United States nearly two to one during the 1991 holiday season. By January 1992, Sega controlled 65 percent of the 16-bit console market. Sega outsold Nintendo for four consecutive Christmas seasons due to the Genesis' head start, lower price, and a larger library compared to the SNES at release. Nintendo's dollar share of the US 16-bit market dropped from 60% at the end of 1992 to 37% at the end of 1993, Sega claimed 55% of all 16-bit hardware sales during 1994, and the SNES outsold the Genesis from 1995 through 1997.
In 1990, Sega launched the Game Gear, a handheld console, to compete against Nintendo's Game Boy. The Game Gear was designed as a portable version of the Master System and featured a full-color screen, in contrast to the monochrome Game Boy screen. Due to its short battery life, lack of original games, and weak support from Sega, the Game Gear did not surpass the Game Boy, having sold approximately 11 million units. Sega launched the Mega-CD in Japan on December 1, 1991, initially retailing at JP¥49,800. The add-on uses CD-ROM technology. Further features include a second, faster processor, vastly expanded system memory, a graphics chip that performed scaling and rotation similar to the company's arcade games, and another sound chip. In North America, it was renamed the Sega CD and launched on October 15, 1992, with a retail price of US$299. It was released in Europe as the Mega-CD in 1993. The Mega-CD sold only 100,000 units during its first year in Japan, falling well below expectations.
Throughout the early 1990s, Sega largely continued its success in arcades around the world. In 1992 and 1993, the new Sega Model 1 arcade system board showcased in-house development studio Sega AM2's Virtua Racing and Virtua Fighter (the first 3D fighting game), which, though expensive, played a crucial role in popularizing 3D polygonal graphics. In addition, complex simulator equipment like the rotational R360 kept Sega competing with machines by rival arcade companies, including Taito. New official region-specific distributors and manufacturers, including the UK's Deith Leisure, allowed Sega to sell its machines outside of Japan with ease. Sega's domestic operations division also opened hundreds of family-oriented suburban Sega World amusement arcades in Japan during this period, as well as large over-18s "GiGO" facilities in the high-profile urban areas of Roppongi and Ikebukuro. In 1993, this success was mirrored in overseas territories with the openings of several large branded entertainment centers, such as Sega VirtuaLand in Luxor Las Vegas. In 1994, Sega generated a revenue of ¥354.032 billion or $3,464,000,000 (equivalent to $7,525,000,000 in 2025).
In 1993, the American media began to focus on the mature content of certain video games, such as Night Trap for the Sega CD and the Genesis version of Midway's Mortal Kombat. This came at a time when Sega was capitalizing on its image as an "edgy" company with "attitude", and this reinforced that image. To handle this, Sega instituted the United States' first video game ratings system, the Videogame Rating Council (VRC), for all its 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. Executive vice president of Nintendo of America Howard Lincoln was quick to point out in the United States congressional hearings in 1993 that Night Trap was not rated at all. Senator Joe Lieberman called for another hearing in February 1994 to check progress toward a rating system for video game violence. After the hearings, Sega proposed the universal adoption of the VRC; after objections by Nintendo and others, Sega took a role in forming the Entertainment Software Rating Board.
1994–1998: 32X, Saturn, falling console sales, and continued arcade success
Sega began work on the Genesis' successor, the Sega Saturn, more than two years before showcasing it at the Tokyo Toy Show in June 1994. According to former Sega of America producer Scot Bayless, Nakayama became concerned about the 1994 release of the Atari Jaguar, and that the Saturn would not be available until the next year. As a result, Nakayama decided to have a second console release to market by the end of 1994. Sega began to develop the 32X, a Genesis add-on which would serve as a less expensive entry into the 32-bit era. The 32X would not be compatible with the Saturn, but would play Genesis games. Sega released the 32X on November 21, 1994, in North America, December 3, 1994, in Japan, and January 1995 in PAL territories, and was sold at less than half of the Saturn's launch price. After the holiday season, interest in the 32X rapidly declined.
Sega released the Saturn in Japan on November 22, 1994. Virtua Fighter, a port of the popular arcade game, sold at a nearly one-to-one ratio with the Saturn at launch and was crucial to the system's early success in Japan. Sega's initial shipment of 200,000 Saturn units sold out on the first day, and it was more popular than the PlayStation, made by Sony, in Japan. In March 1995, Sega of America CEO Tom Kalinske announced that the Saturn would be released in the US on Saturday, September 2, 1995, advertised as "Saturn-day". Sega executives in Japan mandated an early launch to give the Saturn an advantage over the PlayStation. At the first Electronic Entertainment Expo (E3) in Los Angeles on May 11, 1995, Kalinske revealed the release price and that Sega had shipped 30,000 Saturns to Toys "R" Us, Babbage's, Electronics Boutique, and Software Etc. for immediate release. A by-product of the surprise launch was the provocation of retailers not included in Sega's rollout; KB Toys in particular decided to no longer stock its products in response.
The Saturn's release in Europe also came before the previously announced North American date, on July 8, 1995. Within two days of the PlayStation's American launch on September 9, 1995, the PlayStation sold more units than the Saturn. Within its first year, the PlayStation secured over twenty percent of the US video game market. The console's high price point, surprise launch, and difficulty handling polygonal graphics were factors in its lack of success. Sega also underestimated the continued popularity of the Genesis; 16-bit sales accounted for 64 percent of the market in 1995. Despite capturing 43 percent of the US market dollar share and selling more than 2 million Genesis units in 1995, Kalinske estimated that, if prepared for demand, another 300,000 could have been sold.
Companies founded by ex-employees
Over the years, and like with other large game companies in Japan (such as Capcom and Square), a number of staff members have left the company to start their own studios. Among the first of these was Arc System Works, founded in 1988 by programmer Minoru Kidooka.
Hiroshi Hamagaki and Tomo Kimura left in October 1990 to start Genki, which would go on to develop the popular Tokyo Xtreme Racer (Shutokō Battle) series.
After working as designer for the first two Tekken games for Namco, Virtua Fighter designer Seiichi Ishii founded DreamFactory in November 1995 as a subsidiary of Square, bringing with him many Sega (as well as Namco) employees. DreamFactory developed Tobal No. 1, its sequel, and Ehrgeiz, as well as The Bouncer. Amidst financial troubles at Square, DreamFactory split from the company in 2001 to become independent. As of 2024, Ishii (who now lives in Montreal) continues to manage the studio from his home.
Adrian Stephens and Peter Morawiec of Sega Technical Institute founded Luxoflux in January 1997 after Sega of America shuttered STI in December 1996. Luxoflux developed Vigilante 8 and the True Crime series for Activision, which acquired the studio in October 2002. Activision closed Luxoflux in February 2010. Stephens and Morawiec had already left the studio in 2006 and, the following year, established Isopod Labs, which developed Vigilante 8 Arcade.
Marvelous Entertainment was established in 1997 by Haruki Nakayama (son of then-Sega president Hayao Nakayama), who was in charge of the media mix development of Sakura Wars. In 2011, Marvelous merged with AQ Interactive and Liveware to become MarvelousAQL (now the second incarnation of Marvelous).
After a short stint at General Entertainment, where he worked on Pen Pen TriIcelon, former Sega marketer Masanobu Tsukamoto founded Land Ho! in 1999 with members of the General team who had also worked on the game.
Artoon was founded on August 27, 1999 by Sonic the Hedgehog co-creator Naoto Ohshima and executive Yoji Ishii, and was composed of Sonic Team and Team Andromeda members, such as Manabu Kusunoki (art director for the Panzer Dragoon series). Artoon developed Blinx: The Time Sweeper, as well as Yoshi's Island DS for Nintendo and working with Mistwalker on Blue Dragon. Becoming a wholly-owned subsidiary of AQ Interactive in 2005, the studio was absorbed into AQ in 2010, and Ohshima, Ishii, and key Artoon members formed a successor around the same time, Arzest.
studiofake was founded by AM2 programmer and director Keiji Okayasu on September 19, 2000, and co-developed Odama with Vivarium. In May 2022, it was renamed to FUN Corporation.
Sonic Team planner Kaya Takafumi left Sega in 2001 and founded Signal Talk the following year, developing mahjong title Maru-Jan.
Space Channel 5 and Rez creator and United Game Artists head Tetsuya Mizuguchi founded Q Entertainment in October 2003 upon leaving Sega following the merger of UGA into Sonic Team the previous month, alongside senior vice-president Shuji Utsumi. Q developed Lumines and Meteos, as well as Rez HD. In 2014, Mizuguchi started Enhance, Inc., which released Tetris Effect and Rez Infinite.
Sonic the Hedgehog co-creator, Sonic Team president and Sega executive officer Yuji Naka left during the development of the series' 2006 reboot and founded Prope on May 23, 2006. In 2018, he joined Square Enix, where he created Balan Wonderworld with the aforementioned Arzest, and revealed the following year that Prope had been downsized to a one-man company in April 2017. Naka would later be arrested for insider trading in 2022.
Kenji Sasaki, director of the Sega Rally series and many of the company's racing titles, left in 2005 and founded arcade developer Bitster in June 2006.
Having left the company to join Game Arts in 1996, Kotaro Hayashida founded mobile game developer Liber Entertainment ten years later in September 2006.
Grounding Inc. was founded by Space Channel 5 producer Mineko Okamura, Panzer Dragoon creator Yukio Futatsugi, and designer Noboru Hotta (a founding member of Q Entertainment) on February 7, 2007, and developed Crimson Dragon, as well as Sakura Samurai: Art of the Sword and Space Channel 5 VR: Kinda Funky News Flash!. In addition, Grounding also specializes in board games, with one of its releases being Machi Koro.
Yu Suzuki founded Ys Net in 2008, and officially departed Sega three years later in September 2011. Ys Net developed Shenmue III (a project crowdfunded through Kickstarter) and the Apple Arcade title Air Twister.
Director Takeshi Hirai, who left Sega alongside Mizuguchi to become chief technology officer at Q Entertainment, founded Neilo in 2010, developing Orgarhythm.
Segagaga and Astro Boy: Omega Factor director Tez Okano established indie studio HUGA in January 2014, a studio specializing in retro-styled side-scrolling shooters.
AM3 member Shoichiro Kanazawa founded the support studio ArAtA in June 2016.
After leaving Sega in November 2021, Toshihiro Nagoshi and Daisuke Sato joined NetEase, where they formed Nagoshi Studio alongside other former Sega staffers. The studio is currently developing Gang of Dragon.
From Wikipedia’s article on Sega, shared under CC BY-SA 4.0.6