To an outsider, it might have looked like the real-world version of a boss battle.
Twenty-five years ago this month, Sega was more than some pixelated challenger squaring off against a daunting foe at the end of a video game level. The August 1989 U.S. release of the company’s 16-bit Sega Genesis game console was a seminal moment for the industry, one that would serve to directly pit the upstart company against a deep-pocketed video game Goliath called Nintendo.
In 1990 Nintendo had a 95% market share and a solid lock on young male gamers. Game makers signed ironclad exclusivity agreements with Nintendo, and for the privilege of peddling Nintendo content in its stores, retailers had to agree to a strict list of requirements.
Sega, by comparison, was a bit player with barely a toehold in the U.S.
Sega's Genesis release ushered in a showdown between the two companies during the 1990s that journalists came to describe as the "console wars."
Feeding that competition was the race to attract new players to either platform, and to keep them hooked with games that were both addictive and worth telling their friends about.
Nintendo’s Apple-like insistence on quality control, served to help an industry that in the 1980s had become flooded with low-quality games. And Sega, a scrappy underdog, was beset behind the scenes with clashes over culture and vision between its American and Japanese offices.
At its core, it’s a story about the nature of competition and market leadership—how business leaders can achieve it, and how it can be snatched away.
Blake Harris, the author of Console Wars, says the clash between Sega and Nintendo was a result of leaders with vastly different philosophies and objectives who created distinct company cultures.
"Nintendo was very committed to long-term planning through all this and never really hit the panic button," said Harris, whose book is being turned into a movie by actor Seth Rogen and director-screenwriter Evan Goldberg. "Sega tended to be flashy and marketing focused, but in the end they didn’t have the leadership to sustain their success, mostly because of a lack of concentrated decision making between Japan and America."
To improve the company’s fortunes, Sega chose Mattel veteran Tom Kalinske to be the CEO of its American subsidiary. He set about focusing on a few key tasks, including product differentiation and aggressive marketing.
"Looking at the competitive landscape, we said there’s no way we can go after Nintendo because of how strong a brand they had," says Sega’s former head of marketing Al Nilsen. "They had a phenomenal brand image. They’d become the de facto video game standard. And they could come after us with a ton of money. So where’s the opportunity?
"Our research ended up showing that Nintendo was a product basically for boys ages 6 to 12. When you became a teenager, though, you played it less. You went to the arcade. You got interested in girls."
So there it was, he continues. The company would leave the youngsters to Nintendo, and make a grab for older kids.
What’s more, there’s also a straight line running between that decision and Sega’s advertising strategy, which saw the company attempt to basically define Nintendo as a toymaker in an appeal to gamers who wanted something more.
The company promoted its Genesis console with ad copy like "Genesis does what Nintendon’t." The advertising was edgy, poking fun at Nintendo with an us-versus-them mentality.
"What Sega of America did was very American, in a business sense," Harris said, referring to the company’s U.S. arm that did most of the work toward raising the company’s profile among gamers.
"It was loud, in-your-face, talking about yourself. In Japan, they viewed strategies like that as shameful. You’re not supposed to stand out or make waves, and that’s exactly what Sega of America did. But the thing of it is—when you’re the underdog, your only option is to make waves if you want to succeed."
Kalinske’s plan for making the Genesis a viable competitor against Nintendo included bundling Sega’s best game with it for free and undercutting Nintendo on price. The goal was to get the console into homes that might have been predisposed to Nintendo by making investments on the front end, like giving away a flagship game along with it.
For that that game, Sega came up with the character of a spiky-haired blue hedgehog named Sonic. It was a character the company would go on to successfully implant into the cultural zeitgeist, and Sonic’s speed, cheeky look and rebellious attitude also embodied everything about the company that created him.
"What Sonic ended up enabling us to do is to totally differentiate ourselves from Nintendo," Nilsen said.
Now, there was a flagship brand within Sega, something that would become ubiquitous enough to stand alongside Mario and the rest of the Nintendo lineup.
Settling on details of Sonic’s physical appearance, though, was the result of one of the many confrontations over substance between Sega’s U.S. and Japanese executives. The Japan team wanted him to be scary looking. The U.S. team wanted a friendlier character.
It was the kind of thing that, over time, saw key U.S. executives eventually leave the company in frustration. In his book, Harris notes how one U.S. Sega executive questioned whether to leave the company over the fact that it wasn’t uncommon to discover Sega’s headquarters had "made a decision in the middle of the night that cancels out everything I did yesterday."
That leads to perhaps the most important takeaway from the console wars: innovative thinking can take a company far, but it can’t make up for persistent squabbles that keep a company’s focus on things besides moving forward.
Nilsen said his job, for example, got to where a large part of it involved writing detailed faxes to Japan to explain his plans and the reasons behind them. They’d respond with suggestions—some good, some not so good.
"It definitely added an extra layer to what we did," he recalls.
Over time, executives like Kalinske and Nilsen moved on. Eventually, Sega withdrew from the hardware business altogether.
Today, Nilsen insists that if Sega had not taken a run at Nintendo, the industry might still be the province of youngsters. Because of the business dynamics involved, the console wars also have provided fodder for at least one Harvard Business School case study titled "Power Play."
And Sega’s influence continues to be felt in other ways. Nilsen admits to being impressed that gamers still dress up as Sonic at comic conventions, proving the resilience of the character he still refers to as "my little blue friend."
He and Kalinske also still get together every now and then to break out an old Sega console and play a few rounds with the blue hedgehog, the character they once relied on to help them step into the ring with a giant.