History

 

The original Mega Drive logoIn the early 1980s, Sega Enterprises, Inc., then a subsidiary of Gulf & Western, was one of the top five arcade game manufacturers active in the United States, as company revenues rose to $214 million. A downturn in the arcade business starting in 1982 seriously hurt the company, leading Gulf & Western to sell its North American arcade manufacturing organization and the licensing rights for its arcade games to Bally Manufacturing. The company retained Sega's North American R&D operation, as well as its Japanese subsidiary, Sega of Japan. With its arcade business in decline, Gulf & Western executives turned to Sega of Japan's president, Hayao Nakayama, for advice on how to proceed. Nakayama advocated that the company leverage its hardware expertise gained through years working in the arcade industry to move into the home console market in Japan, which was in its infancy at the time. Nakayama received permission to proceed with this project, leading to the release of Sega's first home video game system, the SG-1000, in July 1983. The SG-1000 was not successful, and was replaced by the Sega Mark III within two years. In the meantime, Gulf & Western began to divest itself of its non-core businesses after the death of company founder Charles Bludhorn, so Nakayama and former Sega CEO David Rosen arranged a management buyout of the Japanese subsidiary in 1984 with financial backing from CSK Corporation, a prominent Japanese software company. Nakayama was then installed as CEO of the new Sega Enterprises, Ltd.

 

In 1986, Sega redesigned the Mark III for release in North America as the Sega Master System. This was followed by a European release the next year. Although the Master System was a success in Europe, and later also Brazil, it failed to ignite significant interest in the Japanese or North American markets, which, by the mid-to-late 1980s, were both dominated by Nintendo. With Sega continuing to have difficulty penetrating the home market, Sega's console R&D team, led by Masami Ishikawa, began work on a successor to the Master System almost immediately after that console launched. In 1987, Sega faced another threat to its console business when Japanese computer giant NEC released the PC Engine amid great publicity. To remain competitive against the two more established consumer electronics companies, Ishikawa and his team decided they needed to incorporate a 16-bit microprocessor into their new system to make an impact in the marketplace and once again turned to Sega's strengths in the arcade industry to adapt the successful Sega System 16 arcade board into a home console architecture. First announced in June 1988 in Beep!, a Japanese gaming magazine, the developing console was referred to as the "Mark V", but Sega management felt the need for a stronger name. After reviewing over 300 proposals, the company settled on "Mega Drive". In North America, the name of the console was changed to "Genesis". The reason for this change is not known, but it may have been due to a trademark dispute.

 

Launch

 

Sega released the Mega Drive in Japan on October 29, 1988, though the launch was overshadowed by Nintendo's release of Super Mario Bros. 3 a week earlier. Positive coverage from magazines Famitsu and Beep! helped to establish a following, but Sega only managed to ship 400,000 units in the first year. In order to increase sales, Sega released various peripherals and games, including an online banking system and answering machine called the Sega Mega Anser. Despite this, the Mega Drive was unable to overtake the venerable Famicom and remained a distant third in Japan behind Nintendo's Super Famicom and NEC's PC Engine throughout the 16-bit era.

 

Sega announced a North American release date for the system on January 9, 1989. At the time, Sega did not possess a North American sales and marketing organization and was distributing its Master System through Tonka. Dissatisfied with Tonka's performance, Sega looked for a new partner to market the Genesis in North America and offered the rights to Atari Corporation, which did not yet have a 16-bit system. David Rosen made the proposal to Atari CEO Jack Tramiel and the president of Atari's Entertainment Electronics Division, Michael Katz. Tramiel declined to acquire the new console, deeming it too expensive, and instead opted to focus on the Atari ST. Sega decided to launch the console through its own Sega of America subsidiary, which executed a limited launch on August 14, 1989, in New York City and Los Angeles. The Sega Genesis was released in the rest of North America later that year.

 

The European version of the console was released on November 30, 1990. Building on the success of the Master System, the Mega Drive became the most popular console in Europe. Since the Mega Drive was already two years old at the time of its release in the region, more games were available at launch compared to the launches in other regions. The ports of arcade titles like Altered Beast, Golden Axe and Ghouls 'n Ghosts, available in stores at launch, provided a strong image of the console's power to deliver an arcade-like experience.[4] The release of the Mega Drive in Europe was handled by Virgin Mastertronic, which was later purchased by Sega in 1991 and became Sega of Europe.

 

Other companies assisted in distributing the console to various countries worldwide. Ozisoft handled the Mega Drive's launch and marketing in Australia, as it had done before with the Master System. In Brazil, the Mega Drive was released by Tec Toy in 1990, only a year after the Brazilian release of the Master System. Tec Toy also produced games exclusively for the Brazilian market and began a network service for the system called Sega Meganet in 1995. In India, Sega entered a distribution deal with Shaw Wallace in Spring 1995 in order to circumvent an 80% import tariff, with each unit selling for INR₹18,000. Samsung handled sales and distribution of the console in Korea, where it was renamed the "Super Gam*Boy" and retained the Mega Drive logo alongside the Samsung name. It was later renamed "Super Aladdin Boy".

 

North American sales and marketing

 

For the North American market, former Atari Corporation Entertainment Electronics Division president and new Sega of America CEO Michael Katz instituted a two-part approach to build sales in the region. The first part involved a marketing campaign to challenge Nintendo head-on and emphasize the more arcade-like experience available on the Genesis, summarized by 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 instantly-recognizable titles which used the names and likenesses of celebrities and athletes such as Pat Riley Basketball, Arnold Palmer Tournament Golf, James 'Buster' Douglas Knockout Boxing, Joe Montana Football, Tommy Lasorda Baseball, Mario Lemieux Hockey, and Michael Jackson's Moonwalker. Nonetheless, it had a hard time overcoming Nintendo's ubiquitous presence in consumers' homes. Tasked by Nakayama to sell one million units within the first year, Katz and Sega of America managed to sell only 500,000 units.

 

In mid-1990, Nakayama hired Tom Kalinske to replace Katz as CEO of Sega of America. Although Kalinske initially knew little about the video game market, he 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 console, create a U.S.-based team to develop games targeted at the American market, continue and expand the aggressive advertising campaigns, and replace the bundled game Altered Beast with a new title, Sonic the Hedgehog. The Japanese board of directors initially disapproved of the plan, but all four points were approved by Nakayama, who told Kalinske, "I hired you to make the decisions for Europe and the Americas, so go ahead and do it." Magazines praised Sonic as one of the greatest games yet made, and Sega's console finally took off as customers who had been waiting for the SNES decided to purchase a Genesis instead. Nintendo's console debuted against an established competitor, while NEC's TurboGrafx-16 failed to gain traction, and NEC soon pulled out of the market. In large part due to the popularity of this game, the Sega Genesis outsold the Super Nintendo in the United States nearly two to one during the 1991 holiday season. This success led to Sega having control of 65% of the 16-bit console market in January 1992, making it the first time Nintendo was not the console leader since December 1985.

 

Sega was able to outsell Nintendo four Christmas seasons in a row due to the Genesis' head start, a lower price point, and a larger library of games when compared to the SNES at its release. Sega had ten games for every game on Super NES, and while the Super NES had an exclusive version of Final Fight, one of Sega's internal development teams created Streets of Rage, which had bigger levels, tougher enemies, and a well-regarded soundtrack. Sega's advertising continued to position the Genesis as the cooler console, and as Sega's advertising evolved, they coined the term "blast processing" (the origin of which is an obscure programming trick on the console's graphics hardware) to suggest that the processing capabilities of the Genesis were far greater than those of the SNES. A Sony focus group found that teenage boys would not admit to owning a Super NES rather than a Genesis. Even with the Genesis often outselling the Super NES at a ratio of 2:1, Nintendo and Sega both focused heavily on impression management of the market, even going to the point of deception, with Nintendo claiming they had sold more consoles in 1991 than they actually had, and forecasting they would sell 6 million consoles by the end of 1992, while their actual U.S. install base at the end of 1992 was only just over 4 million units. Due to these tactics, it was difficult to ascertain a clear leader in market share for several years at a time, with Nintendo's dollar share of the U.S. 16-bit market dipping down from 60% at the end of 1992 to 37% at the end of 1993, Sega claiming 55% of all 16-bit hardware sales during 1994, and Donkey Kong Country paving the way for the Super NES to outsell the Genesis from 1995 through 1997. According to a 2004 study of NPD sales data, the Sega Genesis was able to maintain its lead over the Super NES in the American 16-bit console market.

 

Sonic the Hedgehog

 

While Sega was seeking a flagship series to compete with Nintendo's Mario series along with a character to serve as a company mascot, several character designs were submitted by its Sega AM8 research and development department. Many results came forth from their experiments with character design, including an armadillo (who later developed into Mighty the Armadillo), a dog, a Theodore Roosevelt look-alike in pajamas (who would later be the basis of Dr. Robotnik/Eggman's design), and a rabbit (who would use its extendible ears to collect objects, an aspect later incorporated in Ristar). Eventually, Naoto Ōshima's spiky teal hedgehog, initially codenamed "Mr. Needlemouse", was chosen as the new mascot.

 

Sonic's blue pigmentation was chosen to match Sega's cobalt blue logo, and his shoes were a concept evolved from a design inspired by Michael Jackson's boots with the addition of the color red, which was inspired by both Santa Claus and the contrast of those colors on Jackson's 1987 album Bad; his personality was based on Bill Clinton's "can do" attitude. A group of fifteen people started working on the first Sonic the Hedgehog game, and renamed themselves Sonic Team.

 

Though Katz disliked the idea of Sonic, certain that it would not catch on with most American kids, Kalinske's strategy to place Sonic the Hedgehog as the pack-in title paid off. Featuring speedy gameplay, Sonic the Hedgehog greatly increased the popularity of the Sega Genesis in North America. Bundling Sonic the Hedgehog with the Sega Genesis is credited with helping Sega gain 65% of the market share against Nintendo.

 

Trademark Security System and Sega v. Accolade

 

After the release of the Sega Genesis in 1989, video game publisher Accolade began exploring options to release some of their PC game titles onto the console. At the time, Sega had a licensing deal in place for third-party developers that increased the costs to the developer. According to Accolade co-founder Alan Miller, "One pays them between $10 and $15 per cartridge on top of the real hardware manufacturing costs, so it about doubles the cost of goods to the independent publisher." To get around licensing, Accolade chose to seek an alternative way to bring their games to the Genesis. They did so by purchasing one in order to decompile the executable code of three Genesis games. Such information was used to program their new Genesis cartridges in a way that would allow them to disable the security lockouts on the Genesis that prevented unlicensed games from being able to be played. This strategy was used successfully to bring Ishido: The Way of Stones to the Genesis in 1990. To do so, Accolade had also copied Sega's copyrighted game code multiple times in order to reverse engineer the software of Sega's licensed Genesis games.

 

An edition of the original model of Genesis, known as the Genesis III, was the model at the center of Sega v. Accolade for its incorporation of the Trademark Security System (TMSS)As a result of piracy from foreign countries and unlicensed development issues, Sega incorporated a technical protection mechanism into a new edition of the Genesis released in 1990, referred to as the Genesis III. This new variation of the Genesis included a code known as the Trademark Security System (TMSS), which, when a game cartridge was inserted into the console, would check for the presence of the string "SEGA" at a particular point in the memory contained in the cartridge. If and only if the string was present, the console would run the game, and would briefly display the message: "Produced by or under license from Sega Enterprises, Ltd." This system had a twofold effect: it added extra protection against unlicensed developers and software piracy, and it forced the Sega trademark to display when the game was powered up, making a lawsuit for trademark infringement possible if unlicensed software were to be developed. Accolade learned of this development at the Winter Consumer Electronics Show in January 1991, where Sega showed the new Genesis III and demonstrated it screening and rejecting an Ishido game cartridge. With more games planned for the following year, Accolade successfully identified the TMSS file. They later added this file to the games HardBall!, Star Control, Mike Ditka Power Football, and Turrican.

 

In response to the creation of these unlicensed games, Sega filed suit against Accolade in the United States District Court for the Northern District of California, on charges of trademark infringement, unfair competition, and copyright infringement. In response, Accolade filed a counterclaim for falsifying the source of its games by displaying the Sega trademark when the game was powered up. Although the district court initially ruled for Sega and issued an injunction preventing Accolade from continuing to reverse engineer the Genesis, Accolade appealed the verdict to the United States Court of Appeals for the Ninth Circuit. As a result of the appeal, the Ninth Circuit overturned the district court's verdict and ruled that Accolade's decompilation of the Sega software constituted fair use. The court's written opinion followed on October 20, 1992, and noted that the use of the software was non-exploitative, despite being commercial, and that the trademark infringement, being required by the TMSS for a Genesis game to run on the system, was inadvertently triggered by a fair use act and the fault of Sega for causing false labeling. Ultimately, Sega and Accolade settled the case on April 30, 1993. As a part of this settlement, Accolade became an official licensee of Sega, and later developed and released Barkley Shut Up and Jam! while under license. The terms of the licensing, including whether or not any special arrangements or discounts were made to Accolade, were not released to the public.[68] The financial terms of the settlement were also not disclosed, although both companies agreed to pay their own legal costs.

 

Videogame Rating Council and Congressional hearings on video game violence

 

In 1993, American media began to focus on the mature content of some video games, with games like Night Trap for the Sega CD, an add-on for the Genesis, receiving unprecedented scrutiny. Issues about Night Trap were also brought up in the United Kingdom, with former Sega of Europe development director Mike Brogan noting that "Night Trap got Sega an awful lot of publicity ... it was also cited in UK Parliament for being classified as "15" due to its use of real actors. This came at a time when Sega was capitalizing on its image as an edgy company with attitude, and this only served to reinforce that image." The most controversial title of the year by far was Midway's Mortal Kombat, ported to the Genesis and SNES by Acclaim. In response to public outcry over the game's graphic violence, Nintendo decided to replace the blood in the game with "sweat" and the arcade's gruesome "fatalities" with less violent finishing moves. Sega took a different approach, instituting America's first video game ratings system, the Videogame Rating Council(VRC), for all of its current 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. With the rating system in place, Sega released its version of Mortal Kombat, appearing to have removed all of the blood and sweat effects and toning down the finishing moves even more than in the SNES version. However, all of the arcade's blood and uncensored finishing moves could be enabled by entering a "Blood Code". This technicality allowed Sega to release the game with a relatively low MA-13 rating. Meanwhile, the tamer SNES version shipped without a rating at all.

 

Despite the ratings system, or perhaps because of it, the Genesis version of Mortal Kombat was well received by gaming press, as well as fans, outselling the SNES version three or four-to-one, while Nintendo was criticized for censoring the SNES version of the game. Executive vice president of Nintendo of America Howard Lincoln was quick to point out at the hearings that Night Trap had no such rating, saying to Senator Joseph Lieberman:“Furthermore, I can't let you sit here and buy this nonsense that this Sega Night Trap game was somehow only meant for adults. The fact of the matter is this is a copy of the packaging. There was no rating on this game at all when the game was introduced. Small children bought this at Toys "R" Us, and he knows that as well as I do. When they started getting heat about this game, then they adopted the rating system and put ratings on it.

 

”In response, Sega of America vice president Bill White showed a videotape of violent video games on the SNES and stressed the importance of rating video games. At the end of the hearing, Lieberman called for another hearing in February 1994 to check on progress toward a rating system for video game violence. As a result of the Congressional hearings, Night Trap started to generate more sales and released ports to the PC, Sega 32X, and 3DO. According to Digital Pictures founder Tom Zito, "You know, I sold 50,000 units of Night Trap a week after those hearings." Despite the increased sales, Sega decided to recall Night Trap and rerelease it with revisions in 1994, due to the Congressional hearings. After the close of these hearings, video game manufacturers came together to establish the rating system that Lieberman had called for. Initially, Sega proposed the universal adoption of its own system, but after objections by Nintendo and others, Sega took a role in forming a new system. This became the Entertainment Software Ratings Board, an independent organization that received praise from Lieberman. With this new rating system in place, Nintendo decided its censorship policies were no longer needed, and the SNES port of Mortal Kombat II was released uncensored.

 

32-bit era and beyond

 

In order to extend the life of the Genesis, Sega released two add-ons to increase the capabilities of the system: a CD-based peripheral known as the Sega CD (Mega-CD outside North America), as well as a 32-bit peripheral known as the Sega 32X. By the end of 1994, the Genesis had sold 29 million units worldwide, including 14 million in the United States, 3.5 million in Japan, 2.1 million in the United Kingdom, and 800,000 in Germany. Its add-ons were less successful, with the Sega CD selling 2.7 million units worldwide by this time, and the 32X selling 665,000 units.

 

By the end of 1995, Sega was supporting five different consoles—Saturn, Genesis/Mega Drive, Game Gear, Pico, and the Master System—as well as the Sega CD and Sega 32X add-ons. In Japan the Mega Drive had never been successful, and the Saturn was beating Sony's PlayStation, so Sega Enterprises CEO Hayao Nakayama decided to force Sega of America to focus on the Saturn, executing a surprise early launch of the Saturn in early summer of 1995. While this made perfect sense for the Japanese market and also beat Sony's 32-bit console launch in North America, it proved to be a disastrous move in the latter territory: the market for Genesis games was much larger than for the Saturn, but Sega was left without the inventory or software to meet demand.

 

By contrast, Nintendo concentrated on the 16-bit home console market, as well as its successful handheld, the Game Boy, and as a result Nintendo took in 42 percent of the video game market dollar share, despite not launching a 32-bit console to compete directly with Sony's PlayStation and Sega's Saturn. Due to Sega's decision to cut support to its 16-bit business to focus on the Saturn, Nintendo was able to capitalize by its continued focus on the SNES and the Game Boy from 1995 onward. The 1995 release of a Genesis-based handheld, the Sega Nomad, suffered from a poorly timed launch after the release of the Saturn and near the release of Pokémon, a Game Boy game that would become very popular. Further new releases for the SNES, such as Donkey Kong Country 3 and Super Mario RPG, also proved to be successful for Nintendo.[78] While Sega was still able to capture 43 percent of the dollar share of the U.S. video game market as a whole, Nakayama's decision undercut the Sega of America executives. CEO Tom Kalinske, who oversaw the rise of the Genesis in 1991, grew uninterested in the business and resigned in mid-1996.

 

Sega continued to sell the Genesis worldwide through 1997, selling 20 million units in the United States through that time. In 1998, Sega licensed the Genesis to Majesco in North America so that it could rerelease the console. Majesco began re-selling millions of formerly unsold cartridges at a budget price, together with 150,000 units of the second model of the Genesis. It later released the Sega Genesis 3, projecting to sell 1.5 million units of the console by the end of 1998. Final sales estimates for the Genesis stand at approximately 40 million units sold; of these, approximately 3.58 million were sold in Japan, 8 million in Europe, and 3 million in Brazil. While the system sold 9 million less units than the SNES overall, this gap was less than the 47 million unit gap that separated the sales of Sega's Master System and Nintendo's NES in the 8-bit era.