The Dreamcast Effect [pt. 1]
Microsoft, Sega, and how history will always repeat itself.
9.9.1999. A date those super cool blue blur nerds will remember well, and the beginning of the end. For those who don’t remember (or perhaps were not around for it) this was the US release of the Sega Dreamcast. The Dreamcast was the final Sega home console. Yes, that company who makes all of those games with Kiryu in them, where you will be going through the most explosive story set in the crime underworld of Japan (or now Hawaii?) to then playing Virtua Fighter in an arcade, or fist-fighting patriarch’s in baby diapers. This is also the developer behind the Sonic franchise - which, uh, could be doing better at the current moment. (Side note, should I play Frontier?..)
Once upon a time, Sega actually released consoles, much like Nintendo, PlayStation and Xbox! Their most popular system was the Sega Gensis, where Sonic cemented itself as a worthy rival of that freakin’ plumber over on the ol’ Nintendo all of your friends had. They actually did quite well! In pure numbers, the Gensis sold more units than some of your favorite consoles did in their respective lifespans, including the Nintendo Gamecube and the original Microsoft Xbox. How is it, then, that The Sega Dreamcast only sold for 3 YEARS before its untimely demise, being the final nail in the coffin for Sega’s hardware division, and nearly the company as a whole, you ask? Also, how does that relate to the Xbox brand, Finn? Strap in, because we are in for a rocky ride (or read?)
We could start at the beginning of the Sega hardware timeline, speaking about their first home console, the SG-1000, which was relatively unremarkable. There isn’t much to talk about there (it released the same day as the freaking Famicom/NES in Japan…….) aside from the fact that this was the beginning of what I think is a very, very real problem and in my opinion, the ethos that carried their hardware division to its grave - Reactionary business. See, when Sega saw the obscene success of the NES(I am American, so, we are gonna go with NA naming conventions moving forward), they decided they needed to REACT rather than create something and be innovative. So, where does this take us?
The Master System. This was Sega’s answer to the NES at the time, and boy, did they give it the old college try. Even though this was significantly more popular than the SG-1000, Sega still couldn’t outperform the NES here. It was relatively unsuccessful everywhere aside from Europe, where it was deemed a commercial success. This glimmer of hope, and Sega feeling the need to react to everyone who looks at them strangely (no surprise this is who created Kiryu Kazama), this moves us to their new weapon to battle Nintendo with.
The Sega Genesis, their highest selling piece of hardware they ever created, and what carried them forward to create new consoles (and maybe, due to the franchises started here, what has carried them to where they are now) was Sega’s response to their original response to the NES. Take THAT old, side-scrolling Mario! The Genesis was a bit of a marvel at the time, it was more powerful than the NES, featured WAY more buttons on the controller, was an arcade-port phenom, and was where Sonic began. Sonic The Hedgehog, Phantasy Star II, EA games(remember when EA was respected at all?), Streets of Rage, and tons, and tons of arcade ports. Finally, you can pay with tons of coins up front, rather than every time you want to smoke-check your friends - and you got Sonic to boot! This console also saw they gain a large following in the USA, and expand their EU market greatly. With a high this high, and looking like they could actually COMPETE with Nintendo, what possibly went wrong?
The Super Nintendo Entertainment System has entered the chat….
Man, just when Sega was looking good, Nintendo decided to release the follow up to the NES, and this is when the original Console Wars truly ignited. I don’t need to tell you about the SNES - this console created ripples that are still felt to this day. It is one of the most iconic consoles of all time. Nintendo was back with a force that Sega truly did not know how to deal with, but as always, they needed to react to this. Their market share they just won was dwindling, as were their sales they JUST started to get. So, what did Sega do?
Well, instead of releasing a new console, Sega decided that since the Genesis was the almighty, all-powerful system that held them up when they needed it most, instead of releasing a follow up to the console, they would release….. add-ons…….
HUH? Yep….
This is where the decline of Sega really starts to show. Sega decided, to react to the marginally growing popularity of disc based games, they would create an Add-On for the Genesis, rather than an entire console. They created the Sega CD attachment for the Genesis, allowing it to play disc based games. There were some hitters here, like Sonic CD, a few titles from the Lunar series, and more arcade ports. However, Sega wanted to show their muscle, or at least attempt that, and released PLENTY of poorly received FMV based video games that felt like half-baked tech demos and nothing more, with some of the most horrific sounds and visuals you will ever see in your entire life if you decide to look them up. Due to the clunky nature of attachments, and the fact that the price point was THREE HUNDRED US DOLLARS IN AMERICA, it was mostly a dud. Sega shifted weight into the decision to work on their next console from there, the Sega Saturn - However, there was a snag on the road to get there. The ALMIGHTY and HIGHLY memorable console, the Atari Jaguar was slated to come out during development of the Saturn, and boy-oh-boy Sega just couldn’t have them taking over precious market share! They could see the future, and the future definitely was the Jaguar, who would go on to dominate the console space for years to come, pushing out both Sony and Nintendo before they could really take over…….. Oh wait, that didn’t happen. Hell, chances are, you’ve never even heard of that console. So, Sega released another add-on to compete with an ATARI console, titled the Sega 32X.
The Sega 32X was a cartridge attachment that was meant to super charge the Genesis, and be used as a transitional console for the 32-Bit era until the Saturn came out in the USA, their proposed SNES crusher and hopeful contender against Sony’s upcoming console. The 32X was one of the biggest “console” failures of all time. What a shot that one was. They were worried that while developing the Saturn, it would not come out in time to compete against the Atari Jaguar, so they released this. They did learn from their mistake of the CD attachment, and this one was nearly half the price of the Sega CD. However, something Sega failed to realize, attachments mostly target your current user base - It typically will not add on to your market share. Most people purchasing an add-on already has the console in the first place, so really, what are you doing by dropping these add-on’s? In hindsight, this is oddly similar to the PS4 Pro Xbox One X, a power-boost meant to be used as a transitional upgrade, so, kudos to Sega for planting that seed. But, it really didn’t serve them back then.
After the Sega CD, and the fact that they were hard into the development of the Saturn, they didn’t really make plan out the 32X very well. Obviously, their current user base WANTED it, so you needed the quantity there for them. Well, they sold about a million units around launch, but only had just over half of that ready to be shipped. This, plus the fact it was an add-on, plus the fact that people were just ready for whatever came next, and the mixed bag that the Sega CD was, led to the downfall of this attachment, and boy-oh-boy it happened FAST. The fact that third party developers knew the PlayStation, Saturn and N64 were coming soon across all territories, they didn’t want to develop games for the 32X, plus, the development kits for the dang thing rolled out later than needed for most game devs, leaving most of them to skip making games for it. Oh, did I mention this thing launched just a year before the Saturn in the US and one day before the Saturn in Japan? Oh, and WAY bigger bombshell here - ONE MONTH BEFORE THE SONY PLAYSTATION in Japan. Poor, reactionary timing. The focus probably should have been marketing the Saturn in NA and other territories, and sending full development power to it.
The Sega Saturn. What an odd fifth generation console this was. On one hand, it was a relatively solid system performance wise, and had ports of Virtua Fighter, as well as had games like Nights Into Dreams and Panzer Dragoon. It also sold very, very well in Japan at its launch (even with the weirdly timed 32X attachment for the Genesis) selling half a million units to Sony’s 300,000 PlayStation units. However, it was rumored that this was due to a higher sell-through rate of the PlayStation, meaning retailers were literally selling out of the PlayStation, leaving consumers to purchase the Saturn instead. The Saturn coming with Virtua Fighter was huge for Japan too, as Japan was very into Virtua Fighter during this period. However, the PlayStation began to overtake the Saturn in 1995 in Japan. Sony offered a lower licensing fee to developers, a more accessible development kit, and quicker ordering system at 7-10 days, which attracting more developers for the system, which led to more games for the PlayStation, so naturally the PlayStation would begin to overtake them in Japan.
The Saturn was slated to come out in the United States, a huge portion of their worldwide user base, in September of 1995. However, E3(rest in peace) 1995 came up, and Sega made a crucial mistake. After 50 Million or more in marketing, they decided it would be a great idea to announce at E3 that they suddenly shipped the Saturn to a few major retailers and that the console was available for purchase immediately. A surprise launch. After tons and tons of marketing for September, they release it months early. Why? To react to the PlayStation. Sega’s head decided that they NEEDED to release the Saturn before the PlayStation, and they needed to drop the announcement suddenly at E3. They announced a release price of $399.00, a bit pricey, but not outside of the norm for Sega. However, this was a massive mistake, as consumers were holding out for E3 before making decisions on what to do, most consumers who were going to purchase it already were planning for September financially, and then THIS happens:
E3 1995, Sony getting on stage to simply state the price of the PlayStation and nothing else, just to walk off stage to resounding applause. $299. The Saturn was over just as it began with this, and although the 32X could be analyzed as the nail in the coffin for Sega, but in my opinion, this was the start of the final hammer swing on their coffin’s final nail. At this point, what could Sega POSSIBLY do to compete? The PLAYSTATION, launching $100 cheaper in the USA, with better third party support, and a massive weight of excitement behind it. Sony has always just killed it with marketing decisions, like the above video. What a power move - Coming out, just KNOWING you’ve got it like that, uttering a price and nothing more. Iconic.
Sega just could not keep up anymore. The console’s surprise release hindered them, leaving some retailers to refuse to sell the Saturn later due to not being included in the original group of surprise launch retailers, plus people already being willing to hold out for the September release date. What a reactionary mishap THAT was for the Saturn. As time went on, Sony began to dominate the market, continually price cutting the unit to attract consumers further into its life, plus the N64 came out as well, both leaving the Saturn in the dust, where all Sega could do was continue to react by selling the Saturn at a lower and lower price point, shooting themselves in the foot with taking a loss on a system that was underselling to begin with. Before all was said and done for the fifth generation of consoles, Sega fell to an astoundingly low 12% market share, with Sony at 47% and Nintendo at 40%.
Sega needed to make one more move, which could very well be their final one. One more swing at the Sony and Nintendo.
It’s thinking………
And here we go. The Sega DREAMCAST. Sega’s final console, and the FIRST console of the sixth generation, coming out before the Sony PlayStation 2, Nintendo GameCube or Microsoft Xbox.
Sega decided after the absolute failures that the 32X and Saturn were, after the Genesis being their best selling console of all time, they needed a redo. They appointed a new CEO for Sega, as well as pulled Sony of America’s former executive Bernie Stolar to be the new Sega of America V.P. and head of product development and third party relations. This is all while Sega reported their largest financial loss to the Tokyo Stock Exchange in their entire lifespan, a net loss of nearly 300 Million USD. Sega, with this restructure, announced the discontinuation of the Saturn in 1998 to focus on development of the successor to that console. They had not announced officially what that console was, but rumors had already circulated. However, here is on issue with all of that - Sega only held 12% of the gaming market share at that point, and between the discontinuation of the Saturn and the release of the Dreamcast, this left Sega without any new games for over a year. This definitely did not help.
Sega as a whole, but especially Sega of America, went hard on the marketing for the Dreamcast. This was the first sixth generation console after all! They leaned heavily into a futuristic, A.I. centric marketing approach (I know that acronym is nasty in this age, but hang in here with me). The tagline of their console was “It’s thinking,” painting the picture that the unit was so advanced, it had cognitive ability. Obviously, this was just marketing, however, it wasn’t without reason. Everything about the Dreamcast left the fifth generation in the dust, including the failure that was the Saturn. They stepped up from the Saturn’s 2MB of RAM and 1.5MB of VRAM to 16MB and 8MB respectively. They used two Hitachi SH-4 CPU’s, and a PowerVR2 GPU. The biggest thing it offered, which was nuts for the time, is broadband connectivity. This thing could connect to the internet. 1999. Online gaming. What of the fifth gen could hold a candle to that?
Sega spent obscene amounts of money on the marketing for the Dreamcast in hopes to repair the Sega brand. They even considered changed the hardware division of the company to a different name, similar to Sony’s PlayStation brand, just to completely get away from the name Sega. After much deliberation, they decided not to, and titled the console the Sega Dreamcast. They went on to spend US$50–80 million on hardware development, $150–200 million on software development, and US$300 million on worldwide promotion. Keep in mind, that although this was a bold, brave move on Sega’s part, this was a financially unstable company at this point. However, this marketing did help them. On top of this, Sega’s new executives went out to repair their relations with US retailers after their surprise launch of the Saturn leaving bad tastes in a lot of their mouths. Sega also wanted to keep cost down on development as much as they could, after the Saturn was both complicated to develop for and just expensive in general, dropping the cost of hardware used in the Dreamcast, which is what led them to choose the hardware I mentioned previously, with the Dual CPU architecture being cost friendly while still being more than capable of uphold 2D and 3D worlds.
However, after flipping back and forth between a more reputable GPU and the PowerVR2, they chose the PowerVR2 due to cost. It was rumored that it would be underpowered, and EA, the juggernaut of a developer and publisher they were in the 90’s and 00’s, announced that due to the “weird” choice of GPU, they would not develop games for the Dreamcast. Ouch. Can you imagine EA just skipping over your console entirely in that time, with sports games as unbelievably popular as they were.
The initial launch of the Dreamcast in Japan did not go quite as planned. Sega overpromised and underdelivered in the JP market, due to a high failure rate on manufacturing of the PowerVR2 GPU, leaving most vendors short staffed and many shipments delayed. In the marketing for the Dreamcast, they also intended to launch Sonic Adventure with the console, something that also got delayed by Sega prior to console launch, leaving many confused and not wanting to purchase the console. Sega used to have a huge market in America, and this would be where the focus would shift.
Sega’s American launch of the Dreamcast went well above their initial expectations, with very, very successful marketing of the console, and 18 launch titles available with the console. Peter Moore, Sega of America’s Senior VP of Marketing, was very confident in the launch of the Dreamcast. Speaking to Electronic Gaming monthly about the upcoming Dreamcast launch, he had this to say:
“Let's take the conservative estimate of 250,000 Dreamcast units at presage—that's a quarter of a million units at $200. We'll have a ratio of 1.5 or two games for every Dreamcast unit sold. That's half a million units of software. We think we'll be .5 to one on VMUs and peripheral items such as extra controllers and what have you. This could be a $60 to 80 million 24-hour period. What has ever sold $60 to 80 million in the first 24 hours?”
Was he right?
Well, the Dremacast sold an unbelievable 225,132 Dreamcast units in the first 24-hour launch window on 9/9/99 at $199. This, with peripherals(like their VMU memory card) and games (like Soul Calibur, NFL 2K and Sonic Adventure) left them earning US$98.4 million in TWENTY FOUR HOURS. Maybe Peter Moore was right. Within 3-4 months, Sega went from holding a declining 12% market share to a 31% market share in North America. Prior to this launch, Sega also dropped cost of the unit in Japan, which coupled with the release of Soul Calibur, boosted their shares by 17% in Tokyo. Sega looked like they were so back. Until they weren’t.
You see, even though Sega had record high profits for the first time in a very long time, Sony still held roughly 60% of the gaming market by the end of 1999 - This was with the Dreamcast exceeding Sega's expectations by a significant margin. Sony shared the first details of the PlayStation 2, with its new Emotion Engine, in March of 1999. As marketing increased for the upcoming PlayStation 2, Dreamcast sales sharply declined. The PS2 was supposed to be tremendously more powerful than the Dreamcast, and a clear generational upgrade above the then best-selling PlayStation. Everything, all the way down to the type of disc drive the unit used made the Dreamcast seem obsolete just months after release by the time the PS2's specs came to light. Many people decided to wait until the PS2 released while its marketing was ramping up, so sales continued to drop for Sega.
Once the PlayStation 2 released, Sega did what they did best - Price cuts and rebates. They cut the price of their console that was suddenly causing them profit losses. What did this do? Cause them more profit losses, duh! Sony, as well as the newly release Nintendo Gamecube, started to take more and more market share. Sega was banking on Sony's supply shortages helping them, as they thought consumers would just buy the Dreamcast instead of wait for the PS2, but all that happened was a freeze to the marketplace while people waited for more PlayStation 2's. Sega was losing sharply, and they needed to sell around 5 Million units by end of 2000 to stay afloat. Not only did they miss this number by nearly 2 million units, the cost decreased coupled with that helped contribute to a reported loss of $417.5 million. The market shifted to Sega only holding a declining 15% share. Microsoft was also around the corner, marketing the upcoming Xbox.
Sega spent so much on the American market to promote the Dreamcast, and although this helped them early on, they just could not take on Sony, so mixed with rapidly declining sales and significantly lower than expected sales overall, Sega, after restructuring their offices, decided it be best to leave the console business and focus on being a platform-agnostic third-party developer and software publisher. One of the only things that allowed Sega to do this was a friend of the company, who had loaned them a large sum of money leading up to the Dreamcast's release, passed away, and just before he did, he forgave the debt given to Sega, as well as returned a staggering amount of shares back to the company. Sega cleared out their Dreamcast inventory, all the way down to $49.95. The Dreamcast was dead, and Sega would live on as a (very successful) video games developer and publisher. Their horribly reactionary strategies early on in the console business, with the Saturn and 32X being prime examples of this, lead to their downfall, leaving them so far in the hole by the time the Dreamcast came that they really didn't stand a chance.
Let's jump into the future a bit, before coming back to just before the fall of the Dreamcast.
The Game Awards 2023. One of the few live gaming shows left, with a huge hole still left by E3 permanently closing. (No, I am still not okay.)
Everyone on earth could see who was going to win Game of The Year, with that game being Larian Studio's Baldur's Gate III. Due to this, I was most excited to see what games were going to win in the more specific categories. One game in particular, which spurred this article in the first place, was nominated for 5 categories - Best Art Direction, Best Score & Music, Best Audio Design, Best Action Game, and Innovation in Accessibility, winning Best Audio Design of The Year. That game was Hi-Fi Rush. Hi-Fi Rush was developed by Tango Softworks, who made other critically acclaimed games including The Evil Within and Ghostwire Tokyo. It was published by parent company Microsoft. With a game this hot, winning a literal game of the year award, what is the best way to recognize this studio of yours? Shutting it down. Microsoft, just months after winning a GOTY award, shut down Tango Softworks, a studio that was beloved by many fans and founded by Shinji Mikami, a creator that was listed in IGN's 2009 article of their Top 100 Game Creators, as well as director of Resident Evil.
You see, Microsoft and Sega share many of their worst qualities, with the main one being reactionary business practices. Also, striking gold one time and falling behind the pack every time aside from that. Much like we did with Sega, lets dive a bit deeper into the Xbox brand next time, and how there are two paths laid in front of them - with one of them likely leading them to be another Sega.
It makes me wonder. Could a similar "effect" ever happen again in today's gaming landscape? With so much emphasis on live service, interconnected ecosystems, and monetization over the long haul..it feels like the kind vision the Dreamcast embodied is “almost” impossible to replicate. Perhaps that's probably why its legacy resonates. Back in its gaming era, it prioritized unique experiences over endless engagement metrics.
Looking forward to Part 2!
I enjoyed reading this and am always interested in the history of video games, it can be fascinating to look back on. I actually owned Sega consoles growing up, from the Master System, Mega Drive (UK) and then the Saturn. I did want to get the Dreamcast, and looking back it might have been good because it has a lot of fondness, but buying my Saturn did leave me with regrets and taught me that you should go where the games are.
I remember reading all the news at the time of how Sega were doing, how they were spinning it in their favour, and it was genuinely a shock when they announced they would not produce hardware anymore, it was unfathomable at the time. History now shows that things worked out, and like you said can sometimes repeat itself.