“Console Wars,” tells the story of the video game industry and how it has undergone a revolution in the last few decades. In the beginning, Nintendo dominated the market and dictated all the trends and everything that happened. With the emergence of Sega, things have changed, and a revolution has begun to happen. Investments in innovation and technology have grown, and new players in the market wanted to position themselves as the best. This increased competitiveness has brought great benefits to industry and gamers and has launched a war to win consumer preference. If you want to understand more about what happened and find out how a small company has managed to outperform a giant and revolutionize the industry, this microbook is for you!
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NINTENDO: THE FIRST GIANT
Nowadays gamers have quick and easy access to their favorite games. If you want to play a video game, there are plenty of options at your fingertips, you can choose between first-person shooter games or fantasy games, between dedicated console, PC or handheld devices.
If you had a console in 1990, it probably would have been developed and manufactured by Nintendo. Nintendo is a Japanese electronics company and completely dominated the video game market. In the United States, the company owned almost 90% of the Market Share of the time.
This dominance of the market happened because Nintendo decided and controlled with iron hands which companies could create the games for their consoles. And to ensure that the quality of Nintendo’s games was always higher, no partner could develop more than five games a year. Also, Nintendo defined that the minimum price of a game should be 10 dollars.
This policy ensured that Nintendo received a lot of profits in its famous games like Street Fighter II, developed by Capcom; and also allowed him to closely monitor which companies would produce the games for their consoles.
Obviously, Nintendo was protected by its influence in the market. When a group of developers tried to create games for the console without Nintendo’s approval, they were prosecuted. For many developers, the threat of losing Nintendo’s permission could result in a total ban on the market, and this would keep them loyal to the company’s impositions.
However, being a market leader has its downside. Nintendo needed to continue selling new products and took big risks to maintain its position in the market. This has caused many products created by Nintendo to be of poor quality and, in a hurry to launch new products, the company has made some mistakes. For example, when the company launched its 16-bit console in 1991, the Super Nintendo, which was not compatible with the games of the previous consoles. This made many customers furious because they were forced to buy their favorite games again.
This kind of mistake, combined with the ire of Nintendo’s game makers, has created a market opening for a new competitor. This competitor was Sega, who was ready to take advantage of Nintendo’s weaknesses.
SEGA: A CHALLENGER RISES
When Sega entered the video game market, no one expected that the company could take over the dominant Nintendo market, but that’s exactly what happened. But how could a small company like Sega manage to conquer its space and impose itself against a large company that dominated 90% of the market?
Sega has identified the perfect niche market. By pointing out all the flaws of Nintendo, Sega was able to create a market image that was exactly the opposite. One of the weaknesses of Nintendo was that it was seen as a super-controlling company. Many gamers also felt that Nintendo was very focused on children’s games.
Sega, in turn, has decided to offer more freedom to game developers and has encouraged the development of more adult titles. As a result, a portion of the Sega games was much more diverse, as developers were free to create whatever they wanted.
Also, Sega considered it very important that the brand of the company was contrary to the childish image of Nintendo. She wanted to be seen as radical and even rebellious. Even ‘Sonic the Hedgehog,’ the mascot of Sega, was designed to be a contrast to Nintendo’s main character, Mario. When Sega released its 16-bit console, Genesis, also called Mega Drive in Europe, Asia and here in Brazil, the company included the Sonic game for free.
While Mario was simple, a familiar and friendly cartoon with a mustache, Sonic was prickly, brilliant, did not follow the rules and moved very fast – just like Sega. The Sonic character was an instant success and quickly became a pop icon, as many people, not just gamers, believed that Sonic’s attitude captured the speed and rebellion of the decade.
THE SEGA MARKETING STRATEGY
Many companies pit themselves against their top competitors in their marketing campaigns. They take advantage of advertising to win over new customers by using boldness and courage in their commercials. An example of this is the classic Pepsi commercial where she challenges Coca-Cola over who has the best taste.
Sega also used comparative marketing to gain an advantage over Nintendo about the company’s image but did not stop there. His sales strategy also sought to capitalize on the difference between the two companies.
When Nintendo launched its 16-bit console, Super Nintendo or SNES, Sega toured the largest malls in the United States, featuring their product, Genesis, calling the Sega World Tour event. The strategy was to look for customers who were about to buy Nintendo’s SNES. The tour featured the excitement of Sonic the Hedgehog, in contrast to Nintendo’s old Mario and was a great success. Genesis continued to sell a lot despite the launch of SNES.
Another challenge came when both companies released a version of Mortal Kombat, a very popular fighting game. Nintendo tried to make its version less realistic, causing its fighters to bleed with the color gray, instead of red.
Sega offered an uncensored version with red blood and an option to enter a special code and make the game even more bloody. The Sega version was much more popular. Although Nintendo had a very May marketing budget, Sega revolutionized the game launches, with a much noisiest approach.
Previously, to buy a game you had to go to a vendor and look for the news. Sega has completely changed this process, making the launch of its new titles a major event in the media. When Sega released Sonic 2, the company declared “Sonic 2 Day” and hosted an event around the world to coincide the release. This worked very well: the game, the console and the company got a lot of publicity. So, Sega quickly established itself as an unconventional, creative and radical gaming company.
SEGA’S NEW LEADERSHIP
Even the most creative and original companies need a structure and talented employees to function. Sega’s success in the United States began when Sega of America (SOA) hired a new director, named Tom Kalinske.
Kalinske had worked at Mattel, where he helped create the famous character He-Man and also resurrect the popularity of Barbie. When Kalinske took over Sega, he had first to gain the trust of the company’s employees. There was a big problem with one employee, in particular, Shinobu Toyoda. Many of Toyoda’s colleagues believed he was a spy for the Japanese branch of the company.
Kalinske had to put an end to this and openly declared his trust in Toyoda and encouraged others to do likewise. Kalinske unified the company, created a team spirit and developed a positive and creative atmosphere. Sega needed that. The company could only overcome one of its biggest obstacles, the distribution of its employees working together.
Many resellers were afraid of losing their Nintendo customers if they stocked Sega products. So the Sega team had to work to persuade dealers that this was not a problem.
For example, Sega needed to work hard to persuade Wal-Mart to stock its products. Sega’s directors needed to meet regularly with Wal-Mart executives while the marketing department worked for hours to set up effective advertising strategies. The company’s efforts toward Wal-Mart have worked.
Getting things done at the right time was also a skill of the Sega executives. They were experts at figuring out when to launch ad campaigns or new products, and the company continued to grow.
Sega also needed to anticipate and act on Nintendo’s price changes. On one occasion, executives discovered that Nintendo would reduce the price of their consoles one night before the public announcement. The Sega team worked all night and managed to lower the price of their console first. So consumers thought that Nintendo was copying Sega.
When Mortal Kombat was released, Sega surpassed Nintendo as the market leader, and that was the company’s pinnacle. Today the Sega consoles are only in our memories.
SEGA’S CHOICES CHANGED DIRECTION
There are two main avenues for gaming companies like Nintendo and Sega regarding growth. You could create new software by developing games or creating new hardware by developing consoles.
Making this strategic decision is complicated. You need to consider which of the strategies will require the most time and effort, and which choices will increase sales. However, Sega knew what she wanted: she chose the hardware route, which was a risky decision.
When Genesis and SNES needed to be updated, Nintendo and Sega used very different strategies. Nintendo did not a risk and developed the Super FX chip, which offered a simple upgrade to its console. Sega, on the other hand, tried to revolutionize and created the Sega CD, which had superior technology to the Nintendo update, but also a much higher development cost and therefore was much more expensive for customers. Although its technology was innovative, the cost was excessive, and few people bought the product.
Sega also hesitated with the console that replaced the Genesis, the Sega Saturn. The company was unable to offer new and high-quality games to Saturn, which did not leave its customers happy. Sega had become slow and could not respond to the market by offering many different devices to its customers. In addition to Genesis and Saturn, the company also had Game Gear. With three platforms, game developers did not know where to start and could not develop titles for so many different technologies.
Also, Sega could not cover all the demand for Saturn. It was struggling to manufacture and distribute consoles to fans, causing many of them to turn against the company, slowing its rapid growth. The last straw came when Nintendo released its Donkey Kong Country game in 1994. Thus, Sega’s brief moment at the top of the gaming world ended, and Nintendo regained its position, surpassing Sega in sales.
SEGA’S EXCESSIVE CONTROL JAPAN TRAPPED ITS GROWTH IN THE UNITED STATES
We usually think of companies as a large entity. There is a General Motors (GM), a General Electric (GE), a Nintendo and a Sega. However, business structures are much more complex.
The Sega of Japan (SOJ) was the original Sega, located in Japan. There was the subsidiary Sega of America (SOA) that was in the United States and was commanded by Tom Kalinske. Interestingly, Sega Americana was much more successful than Sega Japan. In the United States, Sega was a market leader, but its parent company never achieved the same status in Japan. Sega Americana’s market strategies were more profitable, but also very different. Sega Japan was not ready to take the risks Sega Americana took. Al Nilsen, the global marketing director of Sega Americana, realized this when he traveled to Japan and dined with his colleagues at the headquarters.
His Japanese colleagues ordered a dish for him called fugu, a fish that, if not prepared properly, can be poisonous. Nilsen experimented and then offered a little to his colleagues, who did not accept. With that, Nilsen realized that Sega Japan and its employees liked safety, unlike the Sega Americana team. Sega Japan only allowed the American Sega to have independence at the beginning because of Hayao Nakayama, the director of Sega Japan, trusted Kalinske. However, Sega Japan gradually began to take away this freedom from the American Sega. The matrix listened less and less to Sega Americana’s comments or simply ignored them all.
Another important point of the story happened when Sega Japan ignored the American Sega on the Genesis console life cycle issue. Sega Americana had calculated what it believed to be the ideal life for the console, but Sega Japan developed completely different calculations. Sega Japan decided to follow its calculations and took the device off the shelves when it still sold well. That decision eventually cost the company its position as the leader in the US console market.
NOT PARTNERING MAY HAVE BEEN SEGA’S ULTIMATE ERROR
In a fast-paced, creative market like video games, it’s not uncommon for different companies to work together, especially if they have compatible skills. However, unfortunately for Sega, this was not the philosophy of its parent company.
Sega Japan refused to cooperate with other companies because it did not want to lose control of its own business. One of the rejected joint ventures was a potentially lucrative business with Japanese electronics company Sony.
Sony was interested in getting into the video game business but was more interested in developing the software than the hardware. This was a great opportunity for Sega, especially since Sony had experience with CD-ROMs. However, Sega Japan declined the offer, even after extensive negotiations between the companies. This mistake ended up hurting Sega a lot.
As Sony could not collaborate with Sega, it decided to develop its console, the PlayStation. When the PlayStation was released, it outperformed Sega Saturn in every possible way regarding competitive advantage.
Sega’s refusal to collaborate with other companies was not just with Sony. The company also started talking to Silicon Graphics (SGI) to produce 3D games, but gave up and declined the partnership. Kalinske was so frustrated for being forced to refuse another partnership; he gave the phone from Nintendo to SGI!
Even internally, Sega Japan did not want to make deals with the American Sega. Initially, the US spin-offs of Nintendo and Sega could only produce games with the approval of Japanese parent companies. But Nintendo has decided to give the US subsidiary more freedom to develop its games.
With that, Nintendo’s American arm worked with a British company to develop Donkey Kong Country, the game that took Sega away from the market leadership. Kalinske then realized that the battle was not against Nintendo but the Japanese matrix.
THE GROWTH OF THE CONSOLES MARKET AND THE SECTOR’S TECHNOLOGICAL REVOLUTION
When Tom Kalinske took over Sega, it seemed the company had little chance of survival. Nintendo not only dominated the gaming market, but also the market itself was new and uncertain. A few years later, Sega not only became a successful company but also revolutionized the video game industry. His aggressive marketing philosophy has forever changed the development of games, their releases, and consumptions.
In 1990, the video game market was valued at $ 3 billion worldwide, with Nintendo controlling 90 percent of the market in the United States alone. As early as 1994, the market was expanding and was valued at $ 15 billion worldwide and $ 6 billion in the United States, with Sega leading the way.
This rapid growth has also inspired social change. For the first time, politicians have come to see the need for regulation in the video game industry. After Sega launched Mortal Kombat, the US Congress organized hearings on violence and video games. These hearings led to the creation of a regulatory group that imposed age limits and ratings on games that were considered too violent for minors.
The games have also changed a lot. In the short period from 1990 to 1994, the technological improvements of the games were evident. While old games were slow, with poor graphics and limited scopes, games after 94 were more colorful, responsive and offered more action and speed. Although Sega’s success has been short, its influence has changed the industry forever. Video games as we know them today exist only because of the rivalry between Sega and Nintendo.
Although Sega’s success has been short, the company’s influence and innovation have changed the industry significantly. In the early 1990s, it managed to overthrow Nintendo and take the lead in the market, setting new standards in game production and marketing. Although the battle between Nintendo and Sega has been brief, the current game environment has been heavily influenced by this historic competition.