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Short: The Death of Sega

ACQ2 Episode

April 17, 2023
April 17, 2023

The Complete History & Strategy of Sega

Sega and the Genesis was THE underdog story of the early 90’s. In a single console generation, Sega went from ~zero to 50% US market share and dethroned Nintendo’s seemingly invincible global monopoly. But — somehow —  it all then died. Two console generations later Sega was out of the hardware game entirely, and the company was sold off for pieces to a pachinko manufacturer. How on earth did this happen??

Today we’re launching Acquired Shorts in order to tell this story and others like it: side tales from the “Acquired Cinematic Universe” that are too brief for a full episode, but too good to leave in the vault. We’d love to hear your thoughts on the format (and this episode). Please send us your feedback in Slack, email or Twitter!


Carve Outs:

We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
April 17, 2023

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
April 17, 2023


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
April 17, 2023

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
April 17, 2023

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
April 17, 2023

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
April 17, 2023

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
April 17, 2023

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
April 17, 2023

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
April 17, 2023

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to this episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

David: I'm David Rosenthal.

Ben: We are your hosts. Today, we have for you our first Acquired Short. There are some stories that deserve three or more hours to chronicle the entire company history from start to finish. But there are also some stories, or perhaps chapters of stories, that can be told in an hour or so.

In Nintendo part two, I asked David a question. How exactly did Sega manage to go from having over half the video game console market in the US with the Sega Genesis to abandoning the console business entirely after Dreamcast in a few short years? David, you gave us a quick short answer, but we were both looking at each other afterwards, thinking there is so much more to this story. It really does deserve its own episode.

Frankly, it's a nice opportunity for us here at Acquired to take a look at a company that didn't become hugely successful and what the lessons we can learn from that one are. We bring you today, the death of Sega.

David: This can be a really fun experiment. We get to tell this story right. Listeners, let us know if you like this, and we might do more of them.

Ben: Yup. Let us know in the Slack, acquired.fm/slack. It is the best place to discuss episodes after we release them. Tons of folks joined after the Nintendo episodes. There's a lot of great video game discussion right now.

Check out ACQ2, our second show with interviews. The most recent interview is with David Hsu, the founder and CEO of Retool. With that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

David: We could technically still invest in Sega today.

Ben: Sega Sammy holdings.

David: Not quite sure we'd want to, but let's get into it.

Ben: Spoilers.

David: We start our story in around 1992-1993. Sega and its Genesis, as it was known in North America, has battled Nintendo and the Super NES to basically a tie in the US home console market, which really in practice, if you go listen to our Nintendo series, was beating the pants off of Nintendo. Sega had no right to get to 50%, maybe even 50%-plus market share, given how far behind they came from.

Ben: Imagine you're a startup and you're fighting some big incumbent, and within three years, you get to a basically 50/50 market share.

David: It's totally nuts. The Genesis, it was the cool console in the 90s. It had Sonic. They've got John Madden Football. They've got great sports franchises. They've got the Mortal Kombat version with the blood.

Ben: The real red blood, not the Nintendo toned down gray blood.

David: And they have about a 30 million total unit installed base of the Sega Genesis around the world, the vast majority of which about 20 million is in the United States.

Ben: Yeah, and this is basically the best video game consoles we're doing at the time. Years later, the PlayStation 2 with 150 million, but no one was doing 100 million plus units sold game systems at this point in history, so 30 million rock solid, huge player in the market.

David: A great base to build on. Also at this time in 1992-1993, it has become clear that compact discs are the future, not just for the video game industry, but for everything. CD, album sales, and CD players are on their meteoric rise at this point. It is a huge driver of business for companies like Sony.

In the personal computer industry, neighboring to the gaming industry. CD ROM drives are now becoming standard in PCs. This is how software is shipping. This is how games are shipping in the PC industry.

Ben: The trade off with games is, of course, a cartridge doesn't really require a loading time. The CD, while it has a ton more storage, does have trade-offs, where it needs to load stuff onto the machine.

David: Yeah, and there's one other really big advantage of the CD medium for the business side of the industry, which is that CDs are much lower cost to produce than cartridges. Cartridges, you got to put silicone in there. They have chips. CDs are just optical discs. You can stamp these out for a 10th, 100th of the cost of a cartridge.

It's obvious that the home video game console industry is also going to move to the CD medium as its primary distribution technology going forward. The way right now that people in the industry are thinking that this great migration is going to happen is not via new consoles, but via add-on peripherals to existing consoles.

Looking back now, this was obviously a very, very poor path and evolutionary branch of the gaming tree that mercifully died off. But at the time, everybody seemed to be doing it. There are other consoles like Atari's Jaguar console that came out with a CD ROM add-on, the NEC PC entered in Japan. In the US, it was called the turbo graphics console, which came out with a CD add-on.

Of course, famously, Nintendo is working on a major partnership that they've announced, that everybody knows about, with none other than Sony to make a CD ROM add-on for the Super Nintendo that would be known as the Play Space Station, the Sony PlayStation add-on to the Super Nintendo. We'll come back to that in a little bit. That doesn't go as planned.

Ben: This is now our third episode in addition to Sony and Nintendo, where we've talked about this.

David: Of course back Sega, they are working on a CD ROM add-on too for the Genesis. Just like with the Genesis, they had beaten Nintendo and the Super Nintendo to market with the first 16-bit console. They want to make sure that they beat Nintendo and Sony to market with the first CD ROM add-on.

In late 1992, they launch the Sega CD add-on for the Genesis in North America. It comes out with this game called Night Trap, which is a full motion video game that's basically a playable movie. It's a really crappy game, but people think that this is the future that CD ROM technology is going to enable. It's like a zombie/teen horror flick that you basically play as a video game.

This is one of the games that gets Congress all spun up about, video games are corrupting the youth. It leads to the creation of the Entertainment Software Ratings Board, the video game industry version of movie ratings that comes out.

Ben: Rated E for everyone.

David: Yeah, exactly. It's so funny. You go back, look at this stuff today, and compared to Call of Duty, you're like, this is nothing.

Ben: Seriously, Grand Theft Auto.

David: Yup. Ultimately, despite all this hand wringing over these games and everything coming out with these CD add-ons, there is a fundamental problem with what Sega is doing here, and that is that add-on technology for consoles is never really a good idea because the business model of the video game console industry is a razor and blades model. The way that video game companies like Sega, Nintendo, and Sony in a minute, make all of their profits from the software sales, not from the hardware sales. You want to have as big of an installed base of consoles as possible to amortize the software sales across.

When you're selling an add-on console, you are limiting the target market to the 30 million people that already own a Genesis. It will be smaller by definition than the market base that you've already created. This creates a huge problem because then developers don't want to make their best games for a limited install base of consoles. Consumers don't want to go buy a platform that's only going to have a very limited number of good games, and it quickly becomes a death spiral.

The Sega CD sales, despite starting off relatively strong, stall out quickly. Sega only sells about 3 million Sega CD units versus the 30-plus million Genesis units that they've sold. This is a flop for them. Nintendo, by either luck, skill, or maybe just being slow and Nintendo, they never actually come out with the CD add-on for the Super Nintendo, and the Sony partnership falls apart. They avoid this disaster that Sega stumbles into.

Ben: After the Sony partnership fell apart, didn't they form a new partnership with Philips to create the Nintendo CD thing?

David: They did, but that delayed everything enough that everybody realized that this was a bad idea. Nintendo basically also abandoned that project and let Phillips come out with their own console. I think it was called the CDI. Nobody supported it, it sucked. It wasn't part of the Super Nintendo ecosystem.

Ben: Okay, what does Sega do after the Sega Genesis CD add-on is abandoned?

David: You would think, just like Nintendo did here, you would learn your lesson, console add-ons are a bad idea, you've got all these problems with it, it's a limited market. You cut your losses, you move on, and you just embrace the next generation. That's the logical thing to do here, right?

Ben: Yup.

David: That is not what Sega does. They decide that they are going to follow up their failed console add-on with another failed console add-on. That's right. The infamous and infamously terrible 32X, which launches in the fall of 1994. This is another hardware add-on for the Sega Genesis System that you plug into the top of the console, and it adds a 32-bit processor to the Genesis.

Ben: It works the same way a Game Genie works. You put it in where your game cartridges go, and then that way, when you put your actual game cartridge on top, it's stacked like a tower?

David: Yes, exactly. This whole thing is so harebrained, I think it added more colors maybe to existing Genesis games, but then it also had its own 32X games that you bought separately for it. This thing was just an unmitigated disaster, one of the worst video game industry decisions of all time.

The 32X sells less than 1 million units, total. In the meantime, almost immediately thereafter, Sega also rushes out a separate brand new, native 32-bit system to market called the Saturn.

Ben: What a nightmare.

David: This makes no sense, what's going on here. The story goes that all of this was basically a decision handed down from Sega in Japan. They order Tom Kalinske, the CEO of Sega of America, to launch the Saturn. Sega of America doesn't really want to do this, but they don't have a choice. They spin up their patented brilliant Sega marketing launch playbook for the Saturn.

They announce to America that September 2nd, 1995 is going to be Saturn Day. It is Saturday, September 2nd, and the Sega Saturn is going to launch on that day. But then, at E3 in May of 1995, they shocked the world.

Tom Kalinske comes out on stage for the Sega keynote and says, actually, I know we told all of you that we were going to launch in September. Surprise, we're launching today. The Sega Saturn is coming out right now. The press, the industry, the developers here and there, they're all like, what?

Ben: It's exciting, but confusing.

David: This makes no sense. There's no Sonic game ready. There's no third-party games at all. The retailers aren't prepped. They don't know what to expect. There's been no marketing. None of the groundwork has been laid. In fact, everybody thinks this thing is coming out in September.

Ben: It's really weird because everyone's recent hero, the David versus Goliath of Nintendo, seems like they should be firing on all cylinders, but you have the market confusion with a 32X and the Sega Saturn, and now Sega Saturn sooner? What the heck is going on?

David: Right. On top of this maybe forgivable Sega CD thing that happened a year or two before, this whole thing is just weird. On the back of this, the Saturn flops. It sells just over 9 million units compared to the Genesis, which sold 30 million units.

If you read the book Console Wars by Blake Harris, he spends a lot of time with Tom Kalinske, the CEO of Sega of America, and interviews him. Tom and the other folks who were at Sega of America this time were somewhat diplomatic, but they just lambasted the Japanese management of Sega at this point in time. They say that they had Sega of America fought against all of these decisions, that the Japanese parent company was jealous of Sega of America's success with the Genesis.

Ben: Because the Genesis sold really well in America, but didn't sell as well in Japan.

David: No, all of Genesis' success was in America, Europe, and South America. It basically did nothing in Japan.

Ben: In Console Wars, the author draws this great analogy of Japan being the parent and America's the child, so shouldn't the parent be proud of the child's success? But in reality, the way that it actually was going on is that Japan and America were sibling markets. The parents' favorite child used to be Japan. As the parent showed more favoritism toward America, the Japan leadership retaliated, found ways to kick and scream, and said, hey, you need to pay more attention to me.

David: Yup. Sega, at this point, of course, is a Japanese company, and the board is Japanese. At the end of the day, Japan wins here. Tom and most of the rest of the team at Sega of America get super frustrated. They end up just leaving the company, including Steve Race, who masterminded the whole aggressive marketing strategy behind the Genesis, the Sega scream, the welcome to the next level.

Ben: He goes to work for Sony to launch the PlayStation.

David: Yes, we will talk much more about that in one minute. Sega of Japan is running the ship now at this point in time. They decide after a couple of years to give up on the Saturn. They launched another new internally developed console, the Dreamcast. The Dreamcast actually had some real innovations to it. It was the first true online console that shipped with internet connectivity built-in.

Ben: It had the little slide out handheld thing that was a little Gameboy that popped out of the controller. That was super cool.

David: Yeah, the VMU. That thing was cool.

Ben: A bunch of the design philosophy made a lot of sense. They were using commodity components instead of special silicon for it.

David: Yup. But unfortunately, it launches against the PlayStation 2, which goes on to become the best selling console of all time and completely trounces it. The Dreamcast sells even fewer units than the Saturn. It's really sad.

After just two and a half years on the market, Sega ends up discontinuing the Dreamcast, announcing that they're getting out of the hardware business entirely. They're going to go to just being a video game developer and publisher on other platforms, on PlayStation, on the Xbox, et cetera. The company really just becomes a shadow of its former self. It limps along.

Finally, after a couple of years from 2001, 2002, and 2003 of Sega just making games for other platforms, the company got sold off to another Japanese public company, a company called Sammy that was a manufacturer of Pachinko machines, which is the Japanese equivalent of pinball machines. It's just a sad ending with a whimper for this once legendary Sega scream company.

Ben: Right, you've got the exodus of all the talent. You're still scratching your head a little bit about how it all fell apart so fast. I started digging into why, how, and what were the corporate transactions that actually happened around here. David, I feel like there's more to this story because I pulled up PitchBook to look. There are a lot more transactions around this company than you've mentioned so far.

David: Are there?

Ben: There are.

David: If only there were a podcast that went and did really deep research on what actually happened here.

Ben: Yeah. While we're talking about PitchBook, this is a great time to thank them as our sponsor for this episode. I'm going to keep this segment very short and sweet this time because you will be able to get a sense of all the great info in PitchBook as a source for this episode, as we go through it later on.

PitchBook is, of course, the platform you can log into and get great access to an insane amount of private and public company data like what companies raised money, when, at what prices, number of employees, and the board composition. Basically, every VC and PE firm I know has a PitchBook account, and it's essentially a competitive disadvantage at this point if you don't have one.

If you want to sign up for PitchBook, you can go to pitchbook.com/acquired. Just tell them that you heard about them from Ben and David at Acquired. Our thanks to PitchBook for powering many of the insights and stats throughout this episode. David, it feels like there are some big things missing from the story here.

David: Yeah, you like that little story that I just told you, right?

Ben: It almost feels high gloss, apocryphal. If you really stare at it, you're like, I'm not satisfied.

David: That can't be right.

Ben: This is insufficient.

David: Everything you say is exactly correct. The funny thing is, though, that listeners, for you all listening, I bet most of you, if you knew any version of the story of the death of Sega, what we just told was the version you probably know. While it's not wrong, it's only one version of the story. The other version is both way more charitable to Sega, the parent company in Japan, and also I think way more interesting in terms of lessons we can take from it, so let's tell it.

If you go listen to our two-part Nintendo saga, we talked quite a bit about Sega along the way, and especially in our first Nintendo episode. When we talked about Sega, we talked about them as this arcade company. That's actually what Sega was. The home console business, the Genesis, the Master System before it, these were side project offshoots from what was otherwise an enormous and very successful arcade business based back in Japan.

Ben: Totally. It started as service games back in the 40s, 50s, this merger of arcade game makers and arcade distributors. You even had the story that you were telling. I think we actually cut this from the Nintendo episode for a time. But on Periscope, the very innovative Sega game, they standardized the unit of the quarter as what you pay for an arcade video game session.

David: Yeah. The arcade industry is lost to history now because, basically, it doesn't exist anymore, but it was bigger than the home console industry. Nobody was bigger in the arcade industry than Sega. They were the OGs. They literally standardized the quarter, as you said.

That game, Periscope, came out in the 60s. This is before video games. This is what was called an electromechanical game. There were mechanical elements to this cabinet of submarines and ships that moved around. They were plastic and cardboard, and then you fired the gun that had torpedoes that traveled on a light bulb path to hit the ships. It was pretty cool. It became so successful. Sega actually gets acquired in 1969.

Ben: Yeah, I was shocked to see this in PitchBook. I scrolled all the way down like I normally do when I'm looking at private companies who raised money to see who their seed investors were. The first transaction for Sega is from 1969.

David: Yes. The company that acquires them is Gulf and Western, which is a big oil company based in the US. They're like, what the hell is going on here? It turns out at the time, Gulf and Western also owned Paramount Pictures, the movie studio.

Ben: I've always seen that. I don't think you see it anymore, but the little title screen when the movie is starting.

David: Yup. They acquire Sega and merge it into Paramount. The operations stay separate. The boards of Sega and Paramount stay separate, but within Gulf and Western, Sega's part of the Paramount empire, so much so that they take their two most talented Paramount executives, and they put them on the internal Sega board within Gulf and Western. Do you know who those two people are?

Ben: No.

David: Michael Eisner and Barry Diller.

Ben: What? I had no idea.

David: Michael Eisner and Barry Diller are key parts of the Sega history and all of this, all we're talking about. This is before Atari. This is before there is a home console business. This is before there's a video game business, period. This is how important Sega is in arcades.

Ben: Twenty years before Michael Eisner becomes the CEO of Disney and long before Barry Diller dreams up InterActiveCorp.

David: Yup, this is in the 1970s. We also talked on the Nintendo series about how Atari got acquired by Warner Brothers. This was just crazy. Atari, this video game company becomes part of this movie studio, and then it becomes the biggest part of this movie studio. Warner Brothers was just copying Paramount and what they did with Sega. Isn't that so funny?

Ben: Wild.

David: Part of the strategy that Sega adopted during this time, they're like a truly international company because the arcade business was a truly international business. They're thriving in the US, they're thriving in Japan, they're thriving in Europe, all over the world. They start not only building and creating these games, these arcade cabinets, but they start building out their own arcade centers that they operate. They're like, we're going to make money every which way in this industry.

They're called Family Fun centers in Japan and Sega centers in the US. The Sega centers in the US changed hands a few times, went on to get rebranded, and Sega always stays involved. These become timeout arcades, which is one of the biggest chains of arcades in the US. Sega has got hundreds of these arcades that they are just printing cash out of because they're making money from selling the cabinets to their own arcades, other arcades, and then the arcades themselves are hugely profitable businesses.

Ben: Yeah. There's a lot of arcades that when you look at the side of them have a gigantic Sega logo plastered over it. It's clearly a company-focused not just on home consoles, but making games.

David: When you say a company-focused not just on home consoles, from the parent company's perspective, they'd rather not focus on home consoles at all. Now you can start to see another perspective on things here. In 1981, Sega publishes the game Frogger that Konami had made, but Sega published it. They made hundreds of millions of dollars on that thing.

In 1983, right before the home video game console crash led by Atari, they do $214 million in revenue, Sega does, as a division within Paramount. Then when the video game crash happens at the end of that year, Paramount, just like Warner Brothers and Atari, want out of the business. They want to divest Sega.

One of the original founders from back in the day, a guy named David Rosen, and a Japanese entrepreneur of a company Sega had acquired named Hayao Nakayama, engineer a management buyout of Sega for the grand total price—I don't know if this is in PitchBook—of $38 million. This is the steal of the century.

Ben: Yes, actually. There's a transaction in 1984. It looks like the investor name is CSK Holdings.

David: Yes, that's it. CSK Holdings was a public Japanese company that Rosen and Nakayama knew the management of. They financed this buy-out. They were like the PE shop. They were the sponsor of this transaction. This is how Sega became an actual Japanese company, even though they were started by Americans to serve military bases back in the day.

Ben: Right. Okay, wholly bought out by Gulf and Western, then wholly spun out.

David: Yes. They bought the whole thing for only $38 million. This is ridiculous. This company, which is legendary in the arcade industry, did $214 million in the year ended six months before this.

Ben: Why did they value it so little?

David: This is the thing. Because of the home video game crash in America, video games in general just became this toxic asset that nobody wanted to own, especially Paramount and Warner Brothers was divesting Atari. The arcade business got hit by the crash, but it actually was fine. This was just an amazing deal.

Ben: The management bought the dip because they knew that they weren't actually really affected by this.

David: Boy, did they ever.

Ben: I think that was in 1984. They would go on to take it public, I think, in 1988 on the Tokyo Stock Exchange. Now it's a publicly traded company.

David: Yup. That makes sense because pretty quickly after the buy-out, Sega gets back to their old tricks, and they're crushing it. They're pumping out smash arcade hits like Out Run that people might have heard of, a very famous racing game, Shinobi, Afterburner, Altered Beast, which was a beat-him-up brawler that we talked about on the Nintendo episodes.

Ben: That was the original pack-in game before Sonic with the Genesis.

David: They're back to making hundreds of millions of dollars in their arcade business, both making the games and operating them in their own arcade centers. Nakayama, who was one of the two guys involved in the buy-out...

Ben: Nakayama and Rosen had to get hugely wealthy from this, because of how unbelievably little they paid for the equity that, by the time they IPO'd it, would have been very valuable.

David: Yes. I don't know the details, but I'm sure they did. Nakayama starts pushing the company. He gets worried about what Nintendo is doing and what he sees with the NES. He says we should also enter the home console business.

Ben: It sounds like a diversification bet.

David: Exactly. Rosen, CSK, the rest of the board, were not that supportive because they're like, we're doing great in arcades, I don't really care that much. Sure, if you care about this, go do this. That's when Nakayama goes and he recruits Tom Kalinske to come in and run North America. That's a surprising success to everyone, the Genesis in North America.

There's the scene that we talked about in Nintendo part two, where Tom comes over and presents his four-point plan for dethroning Nintendo to the board in Japan, and the Japanese board is like, I don't know, I don't really like this. Now it all makes sense. They're not dumb. They're just like, why would we risk pouring all this capital into the home console business when we're killing it in the arcades?

Ben: On the one hand, it's an innovator's dilemma. On the other hand, I have to imagine the arcade stayed a very good cash flow business for a long time. It's not like that was actually going away.

David: Let's get into it. Nintendo, the NES, the Super NES, and the home console business, turned out was never really a threat to the arcade business. The way arcade technology and hardware worked was very different from the console cycle, and the types of games were different. In the arcades, it was all iterative, it was constant iteration. Every game that came out was its own proprietary hardware cabinet.

They were based on designs. They're called boards, they're arcade boards, but you could tweak it each time. When you think about what Sega's pushing with all their add-ons to the home console, of course that would make sense to them. That's the way their R&D team worked.

They'd have a core base System 16, which was Sega's base 16-bit arcade platform that they based the Genesis on. All these games I was just talking about, Shinobi, Out Run, et cetera, ran on that. But each new game, they tweaked the hardware a little bit. It was iterative.

Ben: They didn't actually have to think about whether we need to create a standard platform for developers to target for the next five years because every cabinet has its own self-contained -system. It's not really in their DNA to do a once-every-five-plus-year. This is the standard thing, we promise not to change it, and we will create a bedrock platform for you developers. That's not really a thing.

David: Yes. That means a couple things for the market that keep the arcade market not just viable, but thriving. The arcades are where the most technologically advanced games are during this era because the hardware cycle is so iterative. The home systems, even the NES, as amazingly groundbreaking as it was, because the console cycles have to be designed to last so long, that's not where the latest cutting edge stuff is.

Those games, the Nintendo games that they're making, the way Sega counter positioned against them with the Genesis, they're slow, they're not exciting, but that's what home console games became. They became these long adventures, these fantasy lands. It's a very different thing than you would do in the arcades.

Coming out of this era and then into the early and mid 90s, Sega's arcade unit is just killing it. They had those hits in the 80s, everybody got super wealthy, and then they started really pushing the envelope on technology. There was a ton of innovation coming out of Sega.

They developed the first real modern, great 3D games. We all think now of Super Mario 64 as being the first 3D video game that consumers used and loved. Actually, years before, Sega put out the Virtual series in the arcades. This was Virtual Racing, Virtua Cop, and most importantly, Virtua Fighter.

This game, Virtua Fighter, which was a fighting game, used 3D polygonal technology. If you think back to 16-bit Super Nintendo games, they're flat, they're 2D. 3D games, think Mario 64, you're running around in a 3D world, all of the environments and characters are built using polygonal math. We talked about this a lot on the NVIDIA episode.

Ben: Right, triangles.

David: Triangles. This is new. Sega is the one that actually brought really good games to market with this, and it was all in the arcades. Virtua Fighter, when it comes out in 1993, is so popular. Sega sells over 40,000 Virtua Fighter cabinets worldwide at a price of $10,000 plus per cabinet. That's half a billion dollars in revenue on Virtua Fighter.

It's a huge win financially for the company. Even more so, though, it's so impactful on the video game industry. Once Virtua Fighter comes out, everybody realizes, hey, 3D polygonal games are the future.

Ben: What year was this?

David: This was 1993, right as Ken Kutaragi and the team over at Sony are working on their standalone PlayStation. They've broken up with Nintendo, they're going to come to market with their own console, and this is pivotal.

I want to read now from the Wikipedia page for the PlayStation 1 console. After Sony witnessed the success of Sega’s Virtua Fighter in 1993 in Japanese arcades, the direction of the PlayStation became "instantly clear" and 3D polygon graphics became the console's primary focus. Sony Computer Entertainment President expressed gratitude for Sega's timely release of Virtua Fighter as it proved "just at the right time" that making games with 3D imagery was possible, and that this was the direction the PlayStation should focus.

The impact of this is huge. Arcades remained viable through the 90s because they had the technological edge. But now that Sony is going to enter the market, and they don't care about arcades, they're going to bring their technology and financial firepower all to the home market. Their goal now is to make a machine that can rival the arcade technology in the home market.

Ben: They have the balance sheet to subsidize it, so they can take a strategy of coming into the home with very, very good technology at a price point that consumers could afford.

David: Yup. Here we are now at the end of 1993 into 1994. Sony has announced that they're coming out with the PlayStation. They're all in on entering the video game market. They start going around and talking to all of the non Sega arcade manufacturers, Namco, Midway in the US, Konami, and they start convincing them to bring all of their new arcade games directly to the PlayStation.

When it first comes out in the end of 1994 in Japan and then 1995 in the US, it's an arcade killer. That's what it is built as. It becomes so much more than that over time. It's Grand Theft Auto, it's Final Fantasy, it's all that. But in the beginning, the vision for the PlayStation was, we're going to take the technological firepower of the arcades, and we're going to bring that in a way that Nintendo can't and Sega won't into the home market.

Ben: Of course, all the other arcade manufacturers love this strategy.

David: Right. We can benefit from writing the Sony platform into the living room, but Sega is going to get caught in the wind here.

Ben: Because they have a home console that's making it so that they can't go in line with another home console.

David: Namco doesn't have a home console, Konami doesn't have a home console, Midway doesn't have a home console. Before the PlayStation launched, the arcade industry was back up to about $7 billion a year globally, and a huge portion of that was controlled by Sega. After the PlayStation launches, by the end of the decade, it's down to $2 billion. It drops by 60% in just a few short years, and it's all due to the PlayStation.

Ben: The PlayStation basically killed Sega's arcade business and their console business.

David: Yup, that's what happened. Now, let's go look at this original Console Wars book type narrative about what happened. We have a whole different perspective now. All these crazy hardware schizophrenic add-ons, are panicked responses to the coming tsunami of Sony, not just worrying about the home market, but worried about their arcade dominance as well.

Ben: I have to imagine at some point, Sega of Japan lost their desire to make a great competitive home console because that was the thing that was preventing them from being able to be in business with Sony. It doesn't mean that they're going to stop making consoles right away, but it does plant this seed of, we have a little bit of a strategy conflict here, where we either have to be all in and winning in consoles, or we just need to make games. But we can't really be on a seesaw trying to do both and have a foot in both worlds.

David: Here's what happens. In September 1994, right before this crazy 32X thing comes out, Sony and Namco, now Namco was Sega's biggest rival in the arcade business, come out with a pretty huge industry changing announcement. They're going to partner together to release a "Virtua Fighter killer" arcade game called Tekken. Folks might recognize the Tekken series. I had no idea, Tekken is so much more than Tekken.

The game is going to come to the PlayStation when it launches. It's not out yet, but great. Okay, we all remember Tekken you played on the PlayStation. I think it was exclusive et cetera.

It's also coming out right now, in September 1994, in the arcades. In fact, it's going to be running on Namco's awesome, new System 11 arcade board platform that they have developed together with Sony. Guess what, further surprise. This System 11 arcade board developed with Sony is the PlayStation. This is just the ultimate knife in Sega's back.

Ben: They're just basically shipping Playstations inside of these arcade cabinets?

David: Yeah, it was the PlayStation hardware. There were some buffs to it and whatnot, but Namco and now pretty soon, all the other arcade guys are going to be like, oh, great, we're moving all of our development platform for the arcade industry to the PlayStation platform. The technological bleeding edge is now going to be, yeah, also in the arcades powered by the PlayStation, but in the home powered by the PlayStation.

Ben: Wow, what a Trojan horse.

David: Now, Sega is like, oh, shoot, we are screwed. We need to scramble the jets and just do anything we can to try and stave off this apocalypse. They launched the 32X. Seems really dumb, but they got to do something like, okay, we need to get into the market right now with a 32-bit system to just try and preempt Sony here and the PlayStation launch. Then they massively accelerate the Saturn launch. Why did they do that? The same thing. They're just trying to do anything they can think of to steal some of Sony's thunder here.

Ben: Yeah, makes sense.

David: The Barbarian is already through the gates on the arcade side of the business because Namco's shipping these System 11 arcade cabinets today. It's right at the gates coming next year with the PlayStation.

Ben: It's funny how in our Nintendo episode, the conflict was Sega versus Nintendo, but the death of Sega really is against Sony.

David: Yes. That brings us to the very famous E3 conference in May of 1995. This is maybe the most incredible video game industry event of all time. We referenced it earlier in the show, but we're heading into the conference.

Sony is expected to announce the US release date and pricing of the PlayStation at this conference. People expect it's going to be in the fall to know what's going to happen. Sega needs to do something. This is when Sega of Japan tells Kalinske and Sega of America, do the surprise launch.

Ben: Get up there, announce Saturn.

David: Just do it.

Ben: Even though the ecosystem isn't ready, the hardware is ready, so we're shipping it.

David: Tom does that. He dutifully goes up. He announces, oh, forget Saturn day, you can buy the console now. It's in limited quantities at select retailers for a price of $399.

Ben: He's basically doing this because Japan has said, either you are doing this, or we will find a new CEO for Sega of America who can do this.

David: Yes.

Ben: $399, that is the Sega Saturn price point.

David: Available today, May 11th, 1995. Kalinske finishes his speech. He walks off stage, they usher everybody out of the room, they turn it over, and they get ready for the next keynote of the day, which is going to be Sony. Sony keynote starts a couple hours later, Olaf Olafsson, who's the president and head of all of Sony America, not just the PlayStation, all of Sony's businesses, gets on stage, and he starts giving his presentation.

He says that the PlayStation will be released in the US on September 9th, 1995. Sega's like, great, they're not moving it up, we're going to beat them to the punch, we're live today, we got a four-month head start, let's go. Then Olaf invites the new head of Sony Computer Entertainment America, one Steve Race formerly of Sega of America, up to the podium to give a "brief presentation".

He walks slowly up to the podium. He's got a large stack of notes. He places them down on the lectern, shuffles them around, waits a beat, he's ready to give his big speech. He looks up, he looks at the audience, and he says, $299. Then he picks up his notes, and he walks off stage. Most people in the industry, I think, would agree that this is the greatest moment in all of video game industry history.

Ben: Right, industry announcement type things.

David: Yes.

Ben: All right. That's Sony PlayStation 1, $299 for by far the most sophisticated system on the market.

David: We will link to the video of this in the show notes. It's on YouTube. People still watch this to this day. The reaction is amazing. At first, there's silence because people are like, what did he just say? What does this mean? What's going on? Then the crowd starts cheering, and then you can hear after about 20 seconds or so, when this really sinks in of what this means, people go nuts. There's another wave of cheering. It's unbelievable.

Ben: That last wave is all the developers realizing, oh, my God, we are going to print money because there's going to be so many people buying this thing.

David: This exact moment in the afternoon of May 11th, 1995 is the death of Sega. Let's go back and think about the three key constituencies in the video game home console business flywheel.

You've got the consumers. Why on earth would any consumer go buy a Sega Saturn today on May 11th, on its launch day, that has no Sonic game, has only six games total, and it costs 399, when you now know that the PlayStation which is far superior, is going to come out just four months later, they're going to have perfect ports of all the latest and greatest arcade technology video games, and it's going to cost less? You're not going to buy a Saturn.

That's the consumers, then the retailers. The retailers are so mad at Sega. Sega just completely ruined all of their holiday season planning because for retailers, Q4 is everything. Why are these consoles launching in the fall in the US so that it can be ready for the holidays? Sega just screwed all this up.

Now, more importantly, they've got units on trucks on route to their stores that they know they're not going to be able to sell now. They are so mad at Sega. I think it was KB Toys, which then was a big franchise in America. They dropped Sega entirely. They're like, we're not carrying your stuff anymore. Goodbye, you're gone.

You've got the most important piece, the developers. All the third-party developers who are sitting there at E3 watching these keynotes, they're like, wow, we're going to make a ton of money on Sony, and Saturn has no chance of building a meaningful install base. If I was planning on developing games for the Saturn, I am now canceling those plans. This is just the worst thing that could possibly happen to Sega, the Saturn, and the arcade business.

Ben: Listeners, as you can imagine, there is a tough path that they have to now traverse to get to the 2023 Sega that we're going to talk about and what they look like as a games business today. David, I have a couple of stories that I don't think you know about how they made that transition. I'm curious to know if I will stump you with that or not.

First, we want to thank our other sponsor for this episode, it's our good friends at Vouch, the insurance of tech. Vouch, as you know from previous years, is the best way to ensure your startup as you're getting started, but they have really grown into a fantastic way to ensure your company even as you scale much larger so This season, we're talking about real-life examples of startups buying insurance. We're going to meet Josh, the founder of Inspectify.

Inspectify is digitizing the entire home inspection process. Traditional home inspections are old school, fragmented, phone calls, paper forms. It's a mess. Josh envisioned a world, where customers could order an inspection on any property anywhere with a click of a button. Funny story that the Vouch folks don't know, I am an Inspectify customer myself.

David: No way, that's awesome.

Ben: I've actually used this service when I bought my house. Inspectify went through YC in summer 2020. They quickly built the world's largest network of inspectors. They, at this point, realized, we need business insurance to meet many of the requirements spelled out in the contracts they were signing. They turned to vouch as many YC startups do because vouchers and fellow YC companies.

Inspectify went to vouch.us. They cruised through the application, they bought a Europe basic coverage, and they did the lightning fast thing when you're trying to get a company off the ground.

In 2021, as many of you know in the real estate industry, things really took off. Inspectify achieved product market fit with big institutional real estate buyers like REITs, who need to run a ton of inspections. As many of you running startups know, when your vision expands, and you're scaling a company, a lot of the things that you started with aren't necessarily the way that you continue.

Vouch is the complete opposite of this. They are awesome as you are scaling. They're cranking out certificates of insurance for Inspectify in 40-plus states to onboard all these inspectors. There's a great client services team who's anticipating risks and helping them put together a really robust program that will support them as they grow.

Obviously, if you are looking for insurance today for your startup, you can go to vouch.us/acquired. Save 10% on your first policy when you come in through the Acquired channel. Also, email Josh at inspectify.com if you are interested in Inspectify either as a real estate professional, as a potential employee, or frankly, as a customer. I can vouch. See what I did there, David?

David: There you go.

Ben: It was a great, great experience. Our thanks to Vouch.

David: Thank you, Vouch.

Ben: Okay, David, here are a few things that I was curious if you knew about. I planted the seed earlier with the idea that some people personally accumulated a lot of wealth through Sega. One of these people was Isao Okawa.

David: Yes, the chairman of CSK, right?

Ben: Yes, exactly, and then ultimately became the chairman of Sega. In 1999, he had loaned Sega $500 million. I believe, personally, in 2001, the writing was on the wall, he was coming to the end of his life, he actually forgave Sega’s debts to him ahead of his death, and returned $695 million worth of Sega and CSK stock, which basically was the bridge that Sega needed to transition a massive shift from the Sega that we've been talking about this whole episode to just being the game creator that they are today.

David: Yeah, because all of this R&D that was required to go into these new consoles, the Saturn, and we just talked about how the Saturn basically got the floor wiped with it by Sony and the PlayStation 1, Sega would then turn around and pour a bunch of effort into the Dreamcast, the same story would happen. But even worse, the Dreamcast sold less than the Saturn. The PS2, of course, goes on to become the best selling console of all time. It takes hundreds of millions, if not billions of dollars in R&D to create these consoles.

Ben: Right, they're just destroying their cash reserves.

David: Yeah. You would think when the PlayStation comes out, basically creates a giant sucking sound that takes all of the business and players in the arcade industry, and brings them into the home console with the PlayStation, that Sega would also get decimated in the arcade side of their business, which was the golden goose. They do, but they get a stay of execution for a couple of years.

Thanks to this partnership that they do with the Japanese developer Atlus to launch Purikura machines. Yes, the core gaming experience of the arcades does get totally gutted and Sega along with it. But almost like Nintendo and Pokemon, this Purikua thing are photo booths like selfie booths.

Ben: I did read about this. I just didn't know what it was called.

David: This becomes the origin of the selfie phenomenon that, of course, started in Asia and then moved to the rest of the world. Sega was right there at the beginning of this. The photo booths in the late 90s make over a billion dollars in revenue that Sega plugs into their "arcade business division" Now this is not the arcades by any stretch of the imagination.

Ben: It makes sense, though. It's the same distribution channel. It's the same location as arcades.

David: Exactly. But unlike cutting edge technology in the arcade video game business, there is nothing defensible about this.

Ben: It's a one time cash grab.

David: Exactly. Once both the fad subsides and competition springs up, by the end of the decade, Sega can no longer continue in the hardware business on any front.

Ben: What did they become?

David: They become a games publisher. You can get Sonic on Nintendo platforms on the PlayStation and Xbox. That's great.

Ben: They make mobile games. I remember in 2008, the very first iPhone game that I had was Super Monkey Ball, which was a Sega game.

David: Yup, actually a really good game, a super fun puzzle game.

Ben: Yeah, and it was perfect for the iPhone handheld device with accelerometers. It was this natural fit on mobile as people were trying to explore that form factor and figure out what it should be. In fact, it was, I believe, in one of the original Apple iPhone OS App Store keynotes to show off what games you could make and what types of experiences you could do on this device. We keep talking about the Sammy. What was the Sammy transaction? And what was Sammy before Sega Sammy?

David: Sammy was and is a Pachinko machine manufacturer and operator in Japan beyond the scope of this episode, but Pachinko is like pinball used to be in the US.

Ben: It's like gambling meets pinball. It's much smaller than a pinball. It's a small vertical type thing.

David: On the one hand, it's gaming-esque. On the other hand, it's also like a slot machine, just like pinball was back in the day in the US. That's what Sammy was. They had made some video games in the past. They had a small video game division.

They acquire Sega and merge that into their video game division. It's fine. It's still a public company. You could say maybe at the bottom end of the majors or the top end of this mid level game publishers out there, it's fine.

Ben: PitchBook's got this around 2003 for the Sega and Sammy merger, and they've just been Sega Sammy publicly traded ever since. More stats from PitchBook today, they're a $4.3 billion market cap company. If you back out their cash, they have an enterprise value of about $3.6 billion. Last year, they did $2.7 billion in revenue. Clearly, the market doesn't think much of them. With a revenue multiple of 1.3, it's a little bit of a zombie company.

David: Yeah. This is a good spot to transition to analysis here. I think there's a couple of interesting things to talk about in the playbook, and then we have a fun way to end the episode. One of the things I want to talk about is, despite all of these machinations and mistakes, they do have some pretty great IP in the company. The Sonic movie, it's no Mario movie, but it did pretty well. People still love Sonic the Hedgehog.

The Yakuza franchise is strong. There are lots of other franchises within Sega. Is there almost, I'm wondering, an LVMH, Bernard Arnault style takeover opportunity here? Could you come and acquire either the whole Sega Sammy company or the Sega IP out of it and do it right? There's so much more that could be done with this stuff.

Ben: I don't think so. My take on this whole thing is that Sonic was a one trick pony, and that they never really found an effective way to expand the franchise. They came out with a bunch more stuff that had Sonic on it, but I never wanted to play 3D Sonic the way that I wanted to play the original Sonic the Hedgehog side scroller game. It feels to me like there's a lot of nostalgia to play with, but it didn't really create any durable extensible IP or gameplay, frankly.

David: Right. Back to the difference between Sega, Nintendo, the games, and the difference between Miyamoto and Sonic Team. Sega's DNA—this is the whole point of this episode—it was the arcades. The type of game you make for an arcade is very different from the type of game you make for a $60 packaged good home console.

Sonic was the perfect arcade style game. That first level in the first Sonic was so good. Even the subsequent 3D stuff like Sonic Adventure and beyond, the first level of Sonic Adventure for the Dreamcast is so good. It really is. You play it and you're like, wow, this is 3D Sonic, this is everything I remember.

The first level is in an island setting, and you're chasing a whale, running around at sonic speed, and doing 3D loop-the-loops. It's super fun. But the problem with these games and with Sonic is, it's super fun for five minutes, and then you're like, okay, I'm done. Whereas Mario and Zelda, it's not as fun in the first five minutes, but you can play it for 50 hours and lose yourself in it.

Ben: Since we did most of the analysis commentary in the story, let's just ask the question, what could have saved Sega? This is where it's probably worth sharing the Jim Clark story.

This is a great excerpt from Console Wars. I had no idea. We've talked a few times about Netscape, Jim Clark, and SGI, and how the internet almost happened on N64s with Marc Andreessen and Jim Clark together. You may know that the N64 was based on SGI's architecture. You needed an expensive SGI workstation to create the amazing graphics games.

David: A big reason why the best N64 games were first-party and there weren't a lot of third-party games.

Ben: Right, but the way that that came about is crazy. It was actually Tom Kalinske, the CEO of Sega America, who wanted to do the partnership with SGI. He saw the potential in the cutting edge chips.

After the potential Sony partnership that we referenced earlier fell apart between Sega and Sony, he came back to Sega of Japan with a pitch saying, I just met with Jim Clark, I really think we should do something with SGI, I think our next generation console should be powered by SGI. Sega of Japan got back to Kalinske and said, no. When Kalinske pressed them and said, why, it's a no brainer, they said, the chip is too big. Kalinske was like, what, this doesn't make any sense. And they were like, that's our decision.

He had to have this really hard phone call with Jim Clark saying, I'm sorry, man, I actually don't have a deal for you here. Japan is against it. Jim Clark goes, what am I supposed to do now? Kalinske, in this incredible moment of frustration, where he seems half a foot out the door, looks in the phonebook, looks up Howard Lincoln's phone number, and says, you should call Nintendo of America, which I can't believe that actually happened.

David: I know. It's so crazy. Again, understanding what we know now from the Sega story, it's not just that Sega of Japan was being really dumb and arrogant here.

Ben: Right, that was a reasonable business decision.

David: Because at that very same time that Tom was calling up Japan and being like, oh, we're going to do this thing with SGI, the Sony apocalypse was coming in the arcade business with the System 11, Namco, and the PlayStation. I can totally understand Sega of Japan being like, look, doing this SGI thing, that's not what we have time for right now.

Ben: Yeah, I also think there was probably some kind of not invented here sentiment, where it has to happen in Japan within Sega's walls in order to be a viable strategy. It is a little weird. It's not like they already were thinking, we should just be a software business, because they did have the Dreamcast after this.

To me, it feels more like a lack of willingness to partner than it does a business model conflict. Had that happened a couple years later, you would have been like, okay, clearly you should get out of the console business, so don't invest in new hardware partnerships. I think this is just, we don't know those guys, we don't trust those guys, so we're not working with them. Who knows if it could have saved Sega, but maybe.

David: That's probably the closest thing that I can think of too. Had that happened, probably it still wouldn't have saved Sega, but at least the Dreamcast might have had more of a chance of success.

Ben: Maybe.

David: We'll never know.

Ben: Carve outs?

David: Carve outs, let's do quick carve outs.

Ben: I have one funny story before giving my carve out. This is a thing that also got cut from both the last episode, and I'm not letting it get cut from this episode. The Sonic origin story is hilarious. In an interview years later, Naoto Ohshima, who was one of the creators—I think he was the designer of Sonic—was asked, how did you come up with Sonic? This blue hedgehog, why does he look like that? He just says, I put Felix the Cat on the body of Mickey Mouse.

I was reading that, and I couldn't believe it. You look it up and you're looking at Felix the Cat, you're looking at his eyes, his head shape, and you're like, oh, my God, it's Felix on Mickey dyed blue with sneakers. It's ridiculous.

David: To your point about Sonic being beloved isn't really the super deep IP.

Ben: No. Kalinske and team gave it a good run, but man, it was thin all the way around.

David: It was.

Ben: All right, what do you got on carve outs?

David: I want to re-carveout your carve out from a couple episodes of Daryl Morey on Invest Like the Best. I listened to it after you recommended it. Daryl, now the GM and president of basketball operations at the Sixers, formerly the GM of the Houston Rockets, he's just brilliant and so fun to listen to, whether you care about basketball or sports at all. He was a computer science major. He's very, very interesting.

Patrick is just such a good interviewer. He really is a masterclass in how to conduct a truly interesting explorative discovery based interview. I learned so much from it. I really enjoyed it.

Ben: Yeah, it's so good. Okay, I have three. They're going to be fast. (1) My God, if you are not watching this season of Succession, it's the best television I've ever seen. Just remarkable storytelling.

(2) I'm keeping a close eye, and I suspect many of you are as well. In the next month, Starship is scheduled to launch. SpaceX launch is always our who knows on the date, and Elon things always slipped, but it is on the launch pad. They're doing lots of pre-launch inspections and tests. It is going to be so freaking cool to watch that thing do its first launch.

(3) I said this to David. David, have you watched it yet, Six Days to Air?

David: I haven't yet.

Ben: All right. If you like this and you like South Park, you will love that. If you like this and you like watching creativity and action, but you're not so sure on South Park, you may still love it. It is a documentary about the process of conceiving of a South Park episode idea on a Thursday and then having it air the following Wednesday, and the unbelievable six-day turnaround. There's just nothing more special than watching creativity in action. I think the documentary is 10 years old at this point, but a pretty special view into their process.

David: Nice. We can learn some stuff for Acquired.

Ben: A lot we can learn. All right, listeners, that's it. Thank you so much for joining. Our huge thanks to PitchBook and Vouch. You can click the link in the show notes.

To learn more, you can become a deeper part of what we do here at Acquired by becoming an LP. You will gain access to our LP-only Zoom calls every couple of months or so. You will help us pick at least one episode per season. Our next episode is actually LPs selected. If you join now, you will get in on the next one. You can join at acquire.fm/lp.

Check out our interview show, ACQ2, available in the podcast player of your choice, free and public. Join the Slack. Slack has been a critical part of our research recently since many of you are experts in the topics that we are covering. Lots of great gaming discussion going on there. If we missed anything in this episode, let us know at acquired.fm/slack. With that, listeners, we will see you next time.

David: We'll see you next time.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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