A while back, Source Gaming had its Sonic week to celebrate the 25 year history of the Sonic the Hedgehog series. Now that the party is over, the ballroom is cleaned up, and the sound is fixed, it’s time to move onto a less joyous topic. While we are celebrating Sonic’s 25th Anniversary, we have to remember that 15 years ago, he was on his own system. Once upon a time, Sega was a major player in the console market, and at one time Sega even rivaled Nintendo. But now, Sega’s time in the market is a fleeting memory. Thier last system, the Dreamcast, was launched 17 years ago today in the US on September 9, 1999. So let’s go back to see why the Dreamcast died.
The Sega Saturn
In order to understand the Dreamcast, we first must understand the Dreamcast. 1995 was the start of the 5th console generation. Sega just came off of their first major success, the Sega Genesis (Mega Drive in Europe). In 1994, Sega harreveld a third straight win for the holiday season in North America claiming 55 percent of all 16-bit hardware sales.
In Japan, the Sega Saturn took an early lead in the market over Sony’s Playstation thanks to the release of Virtua Fighter, but Sega’s fortune changed when Final Fantasy VII released on the Playstation in 1997. Overseas, the system didn’t fare well. The system was released in the US during E3 1995 for $399. It was then that Steve Race of Sony would come on stage and give the historic lines that would haunt Sega: “$299”. The early launch was a disaster for Sega as retailers didn’t have enough stock and publishers had no time to translate their games for the Western market. The move ultimately damaged the Sega Saturn and resulted in its downfall in the US. (Source)
Despite moderate success in Japan, the system was an overall failure. The system is estimated to sell 9.26 million, a far cry from the Playstation’s 100 million and the Nintendo 64’s 32.93 million. The systems failure was for a lot of reasons. The system was plagued by poor management, a higher price, being difficult to program for and the lack of any compelling game beyond Virtua Fighter.
The Launch of the Dreamcast
Sega’s goal with the Dreamcast was to address the issues with the Saturn to revitalize their console market. One of the key weaknesses of the system was the difficulty of programing. On a history of the system, IGN notes:
It’s no secret that SEGA of Japan let their pride interfere with their judgment in the 32-bit era. They passed on deals that could have landed them some version of the hardware behind both the PlayStation and the Nintendo 64, but instead went with a Frankenstein machine of mostly stock chips that was ugly to program for. They had ignored the urgings of SoA CEO Tom Kalinske and the American head of R&D Joe Miller, and they paid dearly for it.
Sega also sought to improve its software library. Sonic Team returned to the series to create Sonic Adventure. Yu Suzuki of Virtua Fighter fame would release his action-adventure game Shenmue. In the US, the system would have sports games such as NFL2K. In the end, The system launched with 18 games
Sega would go into a marketing frenzy spending $100 million. Nevertheless, the investment paid off as the system launched with high sales. As the New Yorker reports, the system sold 1 million units by November. In Europe, the system did similarly well. As of October 19, 1999, the system sold 185,000 units across the continent. It did well enough for IGN’s Matthew Langar to state “the reign of the PlayStation is about to come to an end.” In its first year, the system sold 4.65 million units worldwide. Conversely, the system ran into issues in Japan. Dreamcast sales halted to a standstill as Sony’s Playstation 2 dominated the market. As the Icons series on the Dreamcast pointed out, the PS2 was still the cheapest DVD player in Japan. Many opined that if Dreamcast had a DVD player, it would have have been able to hang on.
Sega’s Exit From The Console Business
Financially, Sega had been struggling for a while. Sales were declining from 1997 and beyond and Sega was experiencing significant losses. With the Sega Saturn, the company had positive operating income, meaning they were at least making money on the sale of their products. But with the Dreamcast, Sega reported significant operating losses.
The problem seemed to be the cost of the system. From an interview with Polygon, Tadashi Takezaki of Sega stated:
It was because we were forced into a discount war when we were already losing money on system sales. Sony [whose PlayStation 2 came out March 2000 in Japan] was part of the team that developed the DVD standard, and they could develop a system around that completely internally with their own chips. Sega, meanwhile, was buying everything from outside companies, so it was at a distinct cost disadvantage. We couldn’t easily cut costs on manufacturing, the software wasn’t selling the numbers it used to, and then we were forced to discount the system
One of the Playstation’s advantages was that Sony would leverage its assets far better than Nintendo or Sega could. As a result, Sega struggled to keep up in terms of price. The Sega Saturn also ran into a similar problem when the Playstation sold in the US for $100 less. Moreover, the discounts likely lead to the negative operating income as Sega would push systems to be sold well below cost. Sega was trying to do everything it could to revive its failing console. But it wasn’t enough.
In 2001, rumors began to circle that Sega was discontinuing the console. As Charles Bellfield, director of marketing for Sega of America Inc. stated “We totally, utterly confirm our commitment to the Dreamcast technology and platform,” Analyst didn’t buy it, and figured Sega would eventually discontinue the system. In one interview, Charles Bellfield was asked if they were still manufacturing the Dreamcast, for which he said no. Worse still, was, according to him, Sega had no plans to continue to manufacture the Dreamcast.
Why The System Failed?
So why did Sega drop out of the market while Nintendo sticks around? Why didn’t the ill fated Gamecube and the Wii U push Nintendo to leave the market and become a third party software publisher? When the Wii U reached the same age of the Dreamcast when it ended, the Wii U has sold 8.28 million to Dreamcast’s 10.6 million. Yet, Nintendo is looking towards their next console while Sega was forced out of the market.
There are some obvious answers that come to mind. Nintendo still had strong sales through the GBA, and the console market was becoming saturated with Sony, Microsoft and Nintendo all vying for dominance. Nintendo has also been a far more conservative company especially in terms of liquidity. In 2001, the year the Dreamcast ended, Nintendo reported a profit of 96,603 million yen. To truly understand Sega’s demise as a console was to understand the market.
While there are numerous factors to systems demise such as more management and piracy, Sega’s demise in the console market is due to a changing of the times. The previous generations were about playing arcade games at home. Sony entering the console market signaled a change. Sony never had an arcade presence like Nintendo and Sega had. Moreover, technology was getting cheaper and no longer did the arcade game blow the console games out of the water like was the case with the NES generation (3rd) and the SNES generation (4th). The Sega Saturn and the Sega Dreamcast were, in part, replicating the arcade experience at home. Many of Sega’s big games, like Virtua Fighter, Soul Caliber and Crazy Taxi, were arcade games. Other big hit titles were arcade-like, such as Power Stone. While Nintendo moved away from the idea of “arcade games at home,” Sega never did.
Sony was a corpate juggernaut, and had the resources and global presence in a way that Nintendo or Sega couldn’t. Sony was also able to court third-party developers away from the competition. Nintendo, thanks to its strong properties, was able to survive. They were also able to create games which succeeded in the new market like Super Mario 64 and The Legend of Zelda: Ocarina of Time. Games that helped define them in a new era. These were titles that could not be replicated in the arcades. They were longer and more involved. But Sega could never make those kinds of games. Their titles were still more “bit-sized.” Even Sonic Adventure was more focused on level after level despite having an overworld. Additionally, Sega’s IPs were never as strong as Nintendo, so they couldn’t create the same loyal fanbase Nintendo had, esspecially and Sony sucked up a lot of third-party support. In the end, Sega couldn’ keep up and they had t exit the console business.
In the end, the Dreamcast would remain an important icon and is still remembered as a hallmark of the industry. Despite the crushing failure, the system remains adored by gamers. The system has even seen 36 titles released on it since 1993. The system hay have been discontinued, but it hasn’t been forgotten.
 – The number is based on research done as part of two forum post. This is not an offical source and should be considered an estimate