Just wanted to share this with you guys. I wrote this up when I was a sophomore in university. This was part of a case study I did in cooperation with my business professor. It chronicles the early history of Dreamcast.
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As Sonys Playstation console continued to widen the gap between it and Segas competing Saturn console, rumors began to emerge as early as January 1997 concerning Segas next move. Would the company bow to pressure and leave the hardware industry to focus solely on software? Or was Sega preparing yet another video game console? The first bit of evidence emerged nearly two and a half years before Segas next console, the Dreamcast, would ever ship in the United States. On April 17, 1997, as a requirement to file for an Intent of Public Offering (IPO) with the Securities and Exchange Commission in Washington, graphic chip manufacturer 3Dfx Interactive disclosed all of its work-in-progress. One of the items listed was an agreement between 3Dfx and Sega of Japan dated February 28, 1997 that which revealed the chipmaker was to
develop for Sega a semiconductor 3-D graphics accelerator
for use
in Segas forthcoming video game console
. With Segas reputation for releasing an excessive amount of console hardware, this announcement came as little surprise to the game industry, however the timing was ambiguous. Obviously the Saturn was in much worse shape then Sega led the public to believe as their forth-generation console was already well into development.
Sega of Americas next-generation console went under the code name Black Belt. First hinted through 3Dfx Interactives IPO, Black Belt the product of U.S. engineers at SegaSoft (a subsidiary of Sega of America), Microsoft, and 3Dfx. What wouldnt be revealed until October 1997, however, was that Sega of Japan was simultaneously developing a next-generation console named after the metallic character of Segas fighting game series Virtua Fighter the system went under the alias Dural.
The U.S. developed Black Belt console was designed to be everything the Saturn wasnt. Originally conceived as a 64-Bit system to compete directly with the newly released Nintendo 64, the Voodoo chipset that 3Dfx offered was chosen for its raw horsepower, simple hardware architecture, and a quick load up time for software critical features the Saturn lacked. For the consoles internal software, the U.S. team again looked outside for help. With Sega of Japans history of implementing lousy OS (operating system) code, the Black Belt team looked to software-giant Microsoft to develop a Windows-based OS. With an emphasis on raw hardware power and programmer-friendly OS software, the Black Belt was poised to be the streamlined console that the Saturn never was.
While the gaming press was led to believe that the 3Dfx-based Black Belt system was to become Segas next console, Sega of Japan was hard at work on its own Dural system. Taking a queue from the Black Belt, Sega of Japan also turned to Microsoft to develop the OS for its Dural system, however the hardware was substantially different. With the Black Belt centered on the U.S.-based 3Dfxs graphics processor, Sega of Japan looked home as well, turning to huge Japanese electronic firms NEC, Hitachi, and Yamaha. NEC supplied the graphical innards with a chipset developed by U.K.-based VideoLogic. The chipset known as the PowerVR 2 was the big brother of the popular PowerVR chip commonly used for high-end PC games. Yamaha supplied its AICA 32-Bit sound chip and Hitachi provided the systems backbone with its 200MHz SH4 CPU. Clearly the Japanese team also developed its console with raw power and a Windows-based OS in mind.
With speed and efficiency as key factors, the Black Belt and Dural prototypes were put head-to-head* to see which would become Segas forth-generation video game console. Emphasizing quick loading times over raw horsepower, early reports indicated that the U.S. engineered Black Belt prototype chosen over Dural. However, on the heels of this announcement came news that after serious negotiations with NEC, Sega decided to go with the Japanese-built Dural prototype instead. Hardly surprising when considering Sega of Japans history of bullying its U.S. division. The news of Dural victory sent a ripple through the Black Belt development teams and prompted 3Dfx to file suit against Sega. 3Dfx Interactives stock was sent tumbling upon news that NEC was chosen as the graphic chip provider for Segas new machine. President and CEO of 3Dfx Interactive, Greg Ballard, was quick to belittle the importance of its failed partnership with Sega, but failed to reassure shareholders. Claiming 3Dfxs involvement with Segas Black Belt console would only account for 10 percent of its projected 1998 revenue, Ballard overlooked his companys IPO statement from April 17, 1997 stating otherwise; the timely development of the Sega/3Dfx Chipset and the successful introduction and sale of the new Sega game console by Sega will be critical factors affecting the companys future business. As further prove that the collapse of the partnership between Sega and 3Dfx was more substantial than Ballard led on, 3Dfx filed a class-action law suit against Sega, sending the entire Sega of America hardware development team to the front office with resignations in hand.
In October 1997, Sega was happy to announce that its forthcoming console, still code-named Dural, would be backed by Hitachis 200Mhz SH4 CPU, NEC/VideoLogics PowerVR 2 graphics chipset, and could possibly ship with an internal modem. Technically speaking, Segas next machine was off to a great start, but the firms financial outlook was much grimmer. With the Dural scheduled for release in late 1998 in Japan and a year after in North America, Segas only source of revenue would be its ill-fated Saturn console. Despite Segas reducing the price of the Saturn by $100 in May and cutting software prices drastically, sales continued to lag behind Playstations dominance in Japan, North America, and Europe. The Nintendo 64 was also making waves.
Segas next console spent much of 1997 amidst a plethora of news and rumors as the company scrambled to piece together its counterattack to Sony. 1998 began with Shoichiro Irimajiris promotion as president of Sega Enterprises, replacing Hayao Nakayama who was promoted to vice chairman of the board of directors. Following a 30-year career at Honda, Irimajiri began his employment at Sega as the chairman and CEO at Sega of America in charge of repairing Segas U.S. operations. Along with the promotion of Irimajiri, Sega announced a 30 percent layoff of its North American workforce which included marketing, public relations, and product development staff. In an attempt to muffle the woes of the company, further details were announced concerning its next-generation system now with its final code name Katana. Sega was quick to point out that the company had learned from its mistakes with the Saturn and
will do whatever it takes to make sure Katana launches at $199, half the price the Saturn launched at. Sega also revealed additional details regarding Microsofts role in the Katanas development. The consoles OS, code-named Dragon, was essentially a modified version of Microsofts Windows CE 2 operating system, commonly found in hand-held Pocket PCs. Sega also provided a smaller, less user-friendly OS code-named Atlas which allowed developers to directly manipulate the systems hardware, or get closer to the metal. Keeping with the tradition of code-naming, the graphics library went under the alias Ninja. As details concerning Katanas hardware solidified, it became clear that the systems architecture would be very much akin PC hardware, allowing for PC games to be ported to Segas new machine with relative ease.
The prospects for the future looked bright at Sega, however they could not avoid their current financial state. Posting its second consecutive year-ending loss, Sega Enterprises suffered a parent net loss of 39 billion yen ($302 million), compared to a 15 billion yen profit forecasted earlier. Although its Saturn console was quickly losing ground in the Japanese market, no one expected the Saturn to exit the North American market so quickly. Sega also posted its losses from its non-Japanese operations which totaled 47 billion yen ($363.7 million) for the year 40 billion, ($309.6 million) solely from Sega of America. The bad news continued. Japanese financial newspaper Nihon Keizai Shinbun reported that Sega would stop shipping Saturn hardware to U.S. retailers by the end of March 1998. As the Saturn console entered its third year on the market, traditionally this was the time when hardware producers like Nintendo and Sega begin to see profits as costs come down. The introduction of new hardware marks the most expensive time in a consoles lifespan, and with the Saturn failing to turn a profit and development continuing on Katana, fiscal experts soon realized Segas loses would continue to worsen for at least another two years.
As Segas morale and financial troubles worsened, Sega of America found much-needed confidence in their newly appointed president and COO Bernie Stolar. Hired to aid Sega through the transaction from the Saturn to its new machine, Stolar quickly moved up the ranks, becoming head of the companys U.S. operations in a few short months. Formally the head of third-party relations at Sonys Playstation division, Stolar was instrumental in bringing third-party publishers over to the Playstation camp. Perhaps his most renowned accomplishment at Sony was signing Williams Manufacturing publisher of the highly anticipated Mortal Kombat 3 to a six-month exclusive deal with the Playstation . Mortal Kombat 3 launched on Playstation in October 1995 with excellent sales, and by the time an updated version of the title was released for the Saturn the hype had diminished with Mortal Kombat 4 on the horizon.
Trade magazine BrandWeek interviewed the Bernie Stolar as the newly appointed president of Sega of America. Stolar revealed Segas plans to back Katanas North American launch with a $100 million marketing campaign a record for the industry. He also touted, We will recapture the 50 percent market share [versus 5 percent at the time] because we will have the third-party community back, along with competitive pricing, [and] full retail distribution. He went on to confirm that Katana would launch with 10-15 game titles and total 30-40 by years end. Lack of third-party support was accredited to the Saturns failure, and few could doubt Stolars ambition to regain market share through third-party publishers. Stolar assured the press that he had brought his contact list over from his days at Sony.
With Stolar brought on to help Sega enter a new era, his first move was to put the Saturn to rest in North America. With a user base of only 2 million and 12 percent market share by August 1997, Stolar terminated the Saturns television campaign and announced on March 14, 1998 that Sega would release three final Saturn games in the U.S. Burning Rangers, The House of the Dead, and Shining Force III. Production was rumored to be a mere 4,000 copies per game.
On May 21, 1998 in a Tokyo convention hall Sega Enterprises president Shoichiro Irimajiri officially announced the companys forth-generation game console to a small crowd of invited guests and members of the press. Behind Plexiglas casing sat Segas new hope the Dreamcast. A hybrid of the words dream and broadcast, the unorthodox name was coupled with an even more ambiguous logo, later deemed the Sega Swirl. Although most of the consoles hardware specs were known prior to the Dreamcasts unveiling, Sega offered several surprises namely the confirmation of the consoles rumored internal 33.6Kbps modem and the Visual Memory System, or VMU, that coupled a simple memory card peripheral with a 48x32 LCD screen. Irimajiri went on to demonstrate the Dreamcasts graphical capabilities with a tech demo in truly Japanese fashion. Irimajiris polygonal head was the star of the demo, not unlike the first Nintendo 64 tech demo which featured Super Marios three-dimensional head. This Virtual Irimajiri sported the Dreamcasts ability to generate real-time detailed textures and dynamic light-sourcing effects. As a hint of things to come, Segas famed mascot Sonic The Hedgehog made a cameo as he raced around Irimajiris head. The demo concluded with Irimajiri playing the part of Godzilla floating above skyscrapers and breathing fire from his mouth. By means of a pre-recorded videotape, Microsoft CEO Bill Gates expressed his excitement over Microsofts partnership with Sega and emphasized how its Windows CE-based OS will ensure easy programming for game developers. He went on to praise Sega, stating that the Dreamcast would set a new standard and would become as a huge success. Sega of America followed Japans announcement with their own press conference on the morning of the May 21 where president Bernie Stolar announced that the Dreamcast would launch in fall of 1999 in North America and, to the surprise of some members of the press, the strange Dreamcast name would not be changed for Western markets.
After thirteen months of rumors and news leaks, Segas next entry into the console industry was finally made official. The gaming presss reaction to the Dreamcast was surprisingly upbeat considering the recent fallout of the Saturn. In reaction to the Dreamcasts official unveiling, respected monthly publication Next Generation expressed laudation for Segas next console, The Dreamcast hardware clearly lives up to the claims Sega has made and is well-positioned to dominate the next generation. Not all reactions were positive, however. In ordnance with the industry trend of labeling game consoles with a recognizable logo, Segas spiral design for the Dreamcast swirl looked nothing like the Playstation and Nintendo 64 logos and game magazine editors joked that the Dreamcasts logo fit better with Cinnabons. Questions were also raised about the Dreamcasts name (for the record, Sonys Playstation brand name was also badgered when first announced). Although failing to entice the press with frivolous things such as the systems name and logo, Segas dedication to its latest console pleasantly surprised the gaming world. As the arcade market continued to soften, Sega shifted focus to the consumer level for the first time in company history. Sega could no longer rely on ports of popular arcade titles to support its consoles, and with the companys greatest strengths found in software development, the new dedication to the consumer department left few skeptical.
-rp