Continuing from part one.
#5 – Sega’s 1995 E3 surprise launch of the Saturn.
The History: Although Sega’s Genesis (known as Mega Drive pretty much everywhere else) did pretty good in the United States, it was a colossal flop in Japan. Hell, remember the TurboGrafx-16? In Japan, it was called the PC Engine, and it outsold the Mega Drive there when they were both in the prime of their existence. Thus, I’m sure the reaction in Sega’s Japanese offices to Saturn’s launch in their country was pure euphoria. Selling for almost $500 in American dollars, their entire launch inventory was sold in just minutes. It had no bundled software, so you can throw another $85 on top of that for Virtua Fighter, which sold at a nearly 1 to 1 ratio with it. It was the best response consumers ever had to a new console from Sega. When Sony launched PlayStation a couple of weeks later, their best software (Namco’s Ridge Racer) was not exactly as desirable as Virtua Fighter, and the response was far more subdued. To prove their alpha-dog status, Sega held some of their inventory until the day PS1 launched, so that the two would be sold side-by-side. PS1 did not sell out, and Saturn did again. Sony’s board of directors wasn’t exactly confident in this whole gaming bullshit, and Sega looked like they were going to assure their quick exit from the scene when it launched in the United States on September 2, 1995.
The Oopsie: When Sega debuted the Saturn for the American press at the first E3 in 1995, they announced it would cost $399 (probably too expensive, but far less spendy than its Japanese counterpart). Oh, and it was out now. The console had shipped to four retailers that were seemingly chosen out of a hat. Babbages, Electronics Boutique, and Software Etc (now all collectively known as Gamestop) and Toys ‘R Us. Sega came across like the biggest pussies on the planet. It stunk of a desperation move, and they had no reason to be desperate. Sony’s limited track record in gaming was hardly successful. Before making their own console, Sony’s most acclaimed gaming achievement was publishing Mickey Mania, which had been developed by Traveller’s Tales. On the flip side, they also published games using the ESPN license. These were widely recognized as being among the worst sports games on the market. The press was skeptical of Sony’s chances. So were third parties, even with Sony’s ultra-modest $10 flat-royalty. By this point, the ripples from Nintendo’s choice to go with cartridges over CDs were being felt, and Sega had the inside track to land several huge houses exclusively. Saturn was utterly dominating PlayStation in Japan. If anything, it should have been Sony coming across as desperate and grasping at straws. With Nintendo having announced that Nintendo 64 wouldn’t launch in 1995 or even be shown off at the conference, this really should have been Sega’s coronation.
It’s worth noting that Sega was handicapped by their Japanese offices in other ways. Like being told to remove the “Sega Scream” from their advertising. Why? Because it was considered undignified. I’m not kidding. Love it or hate it, that was one of the most successful marketing catchphrases of the 90s. But we wouldn’t want to offend the corporate suits in Tokyo, would we?
Instead, Sega’s showing at E3 in 1995 officially kicked off their downward spiral that ultimately knocked them out of the manufacturing business. And mind you, Sega had no way of knowing that Sony was going to drop their $299 bombshell moments later. For all they knew, they had every single imaginable advantage going into the show. I often asked myself “what were they thinking?” over the course of writing this feature. But for Sega’s early launch of Saturn, I asked it the most. It’s the only folly on the list where you simply can’t spin it in any way where it sounds remotely logical.
The Ramifications: Sega could have hired goons to take the stage and gun down those in attendance and done less damage. The four retailers Sega shipped the Saturn to hadn’t exactly been their most important partners with the Genesis. Kay*bee Toys, a powerhouse of retail during this era, had devoted a lot of their marketing and shelf space to Sega over the previous couple years. They responded to being cut-out of Saturn’s surprise launch by dropping Sega entirely. Walmart and Target wanted to renegotiate their agreement with Sega and put significantly more marketing effort into Nintendo’s products. Hell, Walmart even agreed to carry the Atari Jaguar, well past the point where it was a viable console, and guess whose shelf-space that ate into? Sega only sent out 30,000 units, which really hammers home how last-second and poorly thought-out the decision was. The 30,000 wasn’t enough to fill all the preorders at the locations that accepted them, and some of them didn’t even give what little qualities they received to the people who had reserved them. The press was offended. Retailers were offended. Third parties were offended. Consumers were offended. People credit Sony with making few mistakes in rolling out the PlayStation, but really, Sega made it easy for them. It opened doors for Sony, both to retail outlets and to third parties. Upon launch, Sony immediately took a lead on Saturn in the United States, secured exclusivity of Final Fantasy VII for Japan (which Sega was in contention to have themselves) to take the lead there, and never looked back. Today, Sega makes games for them. And it all started with the most ill-conceived surprise announcement in gaming history.
#4 – Nintendo double-crosses Sony over the Super Nintendo CD-ROM drive known as the Play Station.
The History: Back in 1988, when Nintendo was designing the Super Famicom, they struck up a working relationship with Sony. One of Sony’s lead engineers, a fellow by the name of Ken Kutaragi, had developed a high-performance, low-cost audio processor that was exactly what Nintendo was looking for. Sony wasn’t even aware he was working on the project. They had no interest in joining the highly competitive game industry, and were actually kind of pissed that one of their guys spent so much time and resources putting it together without their approval. If Nintendo hadn’t purchased it, he would have certainly been fired. Not only did Nintendo love it, but they were so impressed by Sony’s initiative that they hired them to develop a CD-ROM add-on for the SNES.
Here’s where it gets sketchy, and also gives me pause to think Nintendo must suck at making contracts for partnership. I mean, remember the fiasco where they almost signed over the rights for the NES to Atari without making sure Atari actually had to, you know, build and sell the damn thing? Well, this one is almost as bad. The deal they made gave Sony full control over all the software licensing and royalties for games on the CD format. So, in other words, Nintendo wouldn’t be able to power-trip over third parties like they had with the NES. No, in this case, it would be Sony doing that. While Nintendo would retain unlimited rights to make games themselves at a significantly smaller royalty rate, Sony would essentially own and control all aspects of the CD-ROM. Nintendo agreed to this because it was the only way Sony would agree to the project. Nintendo, knowing that Sega was working on a CD-ROM of their own, felt that they would give up claims of technological superiority over Sega as their customer base grew older and more sophisticated. They needed a CD-ROM drive, because it was as high-tech as electronics got at this point. The deal was struck and Sony began work on the project. At CES in 1991, at Sony’s lavish press conference, they unveiled the CD-ROM they had spent over two years working on: the Nintendo Play Station.
The Oopsie: The next day, Nintendo announced that they had a partner that would bring a CD add-on to the Super Nintendo: Phillips. Also known as Sony’s chief competitor in almost every facet of their business. Nintendo did not give any prior warning that they were doing this. As far as Sony knew, Nintendo was pleased with what they had done and their partnership would be long and prosperous. Nintendo’s announcement left them shell-shocked. The press was right there with them. Since Sony had focused so much time at their own conference on the Nintendo project and even showed off working hardware, people in attendance at Nintendo’s presser actually thought they had simply spoken the wrong company’s name by mistake. Several times.
No vaporware has ever come at as high a cost.
Sony was humiliated. Contrary to popular belief, they didn’t swear a blood-vendetta on the spot. In fact, once they went home and licked their wounds, they called Nintendo and re-entered negotiations. Presumably the call started out with “Yo bro, what the fuck?” In 1992, Nintendo and Sony agreed to new terms that reassigned all software and royalty rights back to Nintendo, but there was too much bitterness and it never completed due diligence. Sony’s board of directors, sick and tired of all this video game nonsense, overwhelmingly was ready to vote to abandon the project. However, Sony’s CEO, Norio Ohga, swayed the board to give this Kutaragi guy a chance to spin-off the Nintendo project as their own console. After deleting the space between “Play” and “Station”, Sony began the process of deleting Nintendo’s dominance over the industry.
The Ramifications: You’re living them right now. Because the world as you know it would not be the same if Sony never made a game machine of its own. Literally every single thing would be different. Despite what people think, the PlayStation wasn’t Sony’s revenge on Nintendo. Although I’m sure they were pleased once they took over the throne, the world just isn’t that black and white. The truth is, Ohga pushed forward on PlayStation because he had taken a shine to Kutaragi. Here was a guy who took it upon himself to do a high risk project that only had one specific customer in mind. A customer that they had never previously spoken to about selling any proprietary hardware to. Hell, Kutaragi didn’t know a single thing about the Super Famicom at the time he started creating what would end up being its audio system. He just assumed that Nintendo would make a next-gen platform at some point, and if they did, hell, why not buy something from Sony for it? The fucking gall it took quite frankly impressed Ohga. It reminded him of himself at that age. The real irony is, if Nintendo had been aware that the audio processor they had purchased from Sony for the SNES was entirely conceived by Kutaragi, without any of his superiors knowledge or approval, they would have simply hired him themselves. Sony never would have gotten into the game business, and we wouldn’t recognize the world today.
So why didn’t I put this #1, like most of my friends thought it should be? Because I’m not entirely convinced Ohga wouldn’t have just said “you know what, fuck it, let’s just make our own console” with or without Nintendo’s double-cross. You’ll note that Nintendo never came out with a CD-ROM from Phillips either. Let’s say they never sign with Philips and stick it out with Sony. Who is to say the Nintendo Play Station ever sees a retail shelf in this alternate history? PlayStation doesn’t exist because Nintendo fucked them. PlayStation exists because a man named Ken Kutaragi enjoyed playing video games with his daughter so much that he wanted to be a part of them. It makes the Oopsie list because PlayStation could have been Nintendo’s, not because PlayStation exists at all.
#3 – Nintendo chooses cartridges over CDs for Nintendo 64.
The History: This one is a lot more cut and dry than previous blunders I’ve listed. Nintendo had failed to bring out the CD-ROM add-on for the SNES, and by 1994, was the only major game manufacturer without a disc-based game system. In 1993, they announced their next console, known then as “Project Reality”, would be built by the same engineers that designed the super computers that made the special effects in Jurassic Park possible. When Nintendo released the conceptional specs, their new game machine clearly was technologically superior to anything Sony, Sega, or 3DO had built. Third-parties salivated. It looked like Nintendo would continue to dominate the worldwide gaming industry.
The Oopsie: After spending a few months leaking new details of Project Reality every couple of weeks, Nintendo announced on May 5, 1994 that their next console would use cartridges instead of CDs. Third parties, even those close to Nintendo, were dumbstruck. By this point, Sony had circulated their licensing plank around the game industry: a flat royalty rate of $10 per game, with Sony eating the cost of manufacturing themselves. Nintendo, on the other hand, would have a scaled rate and would set manufacturing parameters on game size and minimum orders for each region that would directly eat into their partners profit margins. In other words, developing a 650MB game for Sony would cost a third-party not a single cent in manufacturing. Making an 8MB cartridge on Nintendo 64, on the other hand, would cost a third-party around $20. And mind you, that’s before Nintendo’s licensing royalty came out. If you were not a studio with deep pockets, the choice of which platform to develop for was suddenly a no-brainer.
Cost of goods: $1 worth of plastic. $1.50 worth of silicon. Billions in industrial edge.
The speculation on why Nintendo chose carts includes many theories. Nintendo primarily said it was an issue of load times. In 1994, when the Nintendo 64 was being designed, load times for CD based games were brutal. Consumers were used to popping in a game, hitting the power button, and playing immediately. Nintendo felt that such load times were to blame for Sega CD’s mediocre sales. Privately, Nintendo president Hiroshi Yamauchi was not thrilled with the idea of Nintendo’s next platform being saturated by gimmicky full-motion-video titles, like what befell Sega CD, and thought going with cartridges would discourage it. The press speculated it was more about preventing piracy. In later years, Nintendo of America Chairman Howard Lincoln crowed that piracy on N64 was almost non-existent, while it was a major problem for Sony.
Most third parties, on the other hand, thought Nintendo had more sinister motivations. They believed Nintendo went with cartridges so that they could control the manufacturing and distribution of all the titles on their platform. Carts allowed Nintendo to hold all the cards. They could tell developers “you have to order X amount of cartridges at $X a pop or you can’t order at all.” This was a way of working around anti-trust issues that had landed Nintendo in court more than once over the previous two generations. Whether their speculation was accurate or not, it was being whispered. And, because the Nintendo 64 was now suddenly expensive to develop for, third parties began to rethink their business plans.
The Ramifications: Nintendo lost key third-party support to Sony, including iconic titles that ultimately gave them industrial leadership. Final Fantasy VII was suddenly a free agent. Square ultimately chose PlayStation after Sony offered to handle all the marketing for it internationally. Capcom abandoned plans to develop its remake of Famicom RPG/horror title Sweet Home for Project Reality, and instead made it for PlayStation and later Saturn as Biohazard in Japan and Resident Evil in the United States. Tekken, Ridge Racer, and Soul Edge, all by Namco, began life as projects for Nintendo’s new console, along with Rayman by Ubisoft and Tomb Raider by Eidos. Needless to say, these titles made a difference.
There were other issues. The extra cost of cartridges were passed on to consumers. Nintendo 64 games were typically more expensive than titles on PS1 or Saturn. Nintendo 64 still included memory cards, which was a little insulting. One of the major advantages of carts is they can use battery back-up and eliminate the need for external memory. But it caused a slight increase in the manufacturing cost of the game, so Nintendo included memory cards as an option to drive those costs down. Mind you, this mostly benefited Nintendo. Third parties still had to assume the expensive manufacturing costs, and what little they did save was not passed onto consumers. Games that used the memory card, like the highly anticipated Turok: Dinosaur Hunter by Acclaim, didn’t retail for less than games that did use battery back-up.
Ultimately, you can sum up the ramifications just by the game count. There were over 1,300 games released for the PlayStation. There was just under 600 games released for the Sega Saturn. For the Nintendo 64? 387 games worldwide. Three-hundred and eighty-seven. Now, don’t get me wrong, some of those Nintendo 64 games were giants in the annals of gaming. But, the Nintendo 64 had image problems and ultimately was not the “cool” platform, like the PlayStation was. With cutesy titles like Mario 64 and Banjo Kazooie, Nintendo 64 couldn’t shake the image of being a children’s platform. If the N64 had been the exclusive home of games such as Resident Evil, Final Fantasy VII, and Tekken, it not only would have been able to overcome that issue, but Sony (whose board of directors never wanted to be in gaming in the first place) might not have stuck it out for another generation and beyond.
Then again, being on Nintendo platforms seems to have an uncanny ability to uncoolify just about anything. This is an actual screenshot of a Final Fantasy concept from its days under Nintendo 64 development. As a friend told me, it looks very……….. Nintendo.
#2 – Atari’s inaccurate sales projections lead to the Great Video Game Crash.
The History: By 1982, Atari had become the most profitable company in the world, netting a $400,000,000 profit (after taxes, mind you). Atari alone accounted for 70% of the total operating profits in Warner Bros’ entire empire. In the weeks leading to Atari’s investor conference call in December, 1982, Warner executives had touted that Atari would post an increase of sales of 50% over the fourth quarter. Warner stock, and the stocks of every publicly traded company associated with video games, soared. Gaming looked unstoppable.
The Oopsie: The boasting of Warner executives was exaggerated. On December 7, 1982, Atari released their official projections for the 1982 holiday season: a 10% to 15% increase in sales. That’s right: games didn’t stop selling. They just didn’t sell at a fast-enough rate to satisfy speculators. Stock analysts were shocked, and they raced to see who could dump their shares the fastest.
The Ramifications: By the end of the day, Warner stock had fallen nearly seventeen points. Activision’s stock also tumbled. Mattel’s did. Coleco’s did. Newcomers to the scene Imagic, who were on the verge of having what was projected to be a very lucrative IPO, instead were cut off by banks and investors who stopped making payments to them (such actions are illegal now). Seed capital for gaming start-ups in the Silicon Valley evaporated overnight. Inventory managers working at major retail chains were told by corporate superiors that the ceiling on gaming had lowered and to reduce their orders for gaming related inventory. This came as a big surprise to them, since games were still generating the majority of their profits, and were one of the few “toy” related items that sold year-round. But they had their orders.
Pictured: something that gets too much credit for the industrial crash.
In short, the speculative bubble had burst and the video game industry had crashed. Despite what anyone says, poor quality games had little to do with it. The market was still growing. Sales were still increasing at a steady pace. It should be noted that in 1983, the year where the crash was at its most pronounced, video game sales were up over where they were the previous year. Seven-million consoles were sold in the United States in 1983 (not bad considering there were no new ones on the market), and 75 million cartridges were sold. That’s an increase of over 15 million from the year before. And only around 27% of them were sold below manufacturer’s suggest retail price, such as games on clearance sale. That’s only a couple of points higher than the industrial average today. In other words, games themselves didn’t die, just the money in games.
Don’t get me wrong. Crappy games didn’t help. But with only a few exceptions, the quality of the games wasn’t focused on. The media’s attention was squarely on the money. Stock speculators with itchy trigger fingers are what made the money disappear. A few days after Atari’s conference call, a scandal erupted when it was revealed that Atari president Ray Kassar had sold 5,000 shares of Warner stock just 23 minutes before the announcement was made. Kassar said he needed the money for another investment, only conceding that the timing was, quote, “unfortunate.” Yeah, I’ll say. When it came out that Kassar had committed insider trading, not only did Warner’s stock take another hit, but speculators further dumped shares of Mattel, Activision, and Coleco. Again. Kassar was somehow never charged for insider trading (even though what he sold was, adjusted for inflation, more money than what landed Martha Stewart in prison for the same thing), possibly because he returned all the money almost immediately after the report of his antics came out. Kassar claimed that if he was really bailing, he would have sold more shares. Critics accused him of selling the most he thought he could get away with without making waves. Whether his motivations were intentional or happenstance, it had a devastating effect on the entire industry.
Atari never once was profitable again under Warner Bros. Ray Kassar resigned in July, 1983. By then, Warner stock had been so decimated by Atari that they were targeted for a hostile takeover by Rupert Murdoch, owner of 20th Century Fox. To replace Kassar, Warner hired James Morgan, formerly of Phillip Morris, who had been instrumental in creating the Marlboro Man. He would later return to Phillip Morris and become their CEO, then claim that cigarettes were no more addictive than Gummy Bears. As a chain smoker myself, I agree with Mr. Morgan. Quitting is easy. I do it at least 60 times a day. Morgan only lasted ten months at Atari, long enough to slash their workforce by over 70%, consolidate their facilities from fifty buildings spread across the entire Silicon Valley down to four, and dump 20,000,000 units of inventory into the market for $2 a piece. However, when he submitted his budgets to Warner, the board unanimously vetoed them each time. They told Morgan that Atari would have to fund itself through its own profits, which were non-existent. In the second fiscal quarter of 1984, Atari lost $425,000,000 over a span of only three months. Warner finally gave up and sold the company to the recently beached Commodore founder Jack Tramiel for a stack of useless promissory notes that they never collected on. Between January of 1983 and July of 1984, Atari had lost over two billion dollars. All because of stock speculation, not because of Pac-Man or E.T.
This is James Morgan, the guy who led Atari for ten months. Doesn’t he just look like the type of suit who would tell people with a straight face that smoking isn’t deadly?
#1 – Sega does not go with DVDs for Dreamcast.
The History: Sega, having blown the inside track on dominating the Japanese game market with Saturn, licked their wounds and went about creating a new, more powerful, infinitely more easy to develop for game console. The new system, known as Dreamcast, would be based around a custom version of Windows CE and use DirectX drivers. It was higher performance than anything on the market, and Sega adjusted its licensing plank to be more competitive with Sony’s. Everything looked amazing.
The Oopsie: At this time, it was known that Sony was also developing its next generation console, and that it would likely include a DVD drive and probably play movies. This was a very attractive feature. One that Dreamcast would not include. Instead, Sega developed a proprietary media format called GD-ROM. Although GD-ROMs could store much more data than a CD, they held significantly less than DVDs. More importantly, DVDs were an emerging format for movies, and destined to explode worldwide.
Yes, including a DVD drive in Dreamcast would have significantly raised its costs. But not as much as you would think. If Dreamcast had launched with a DVD drive of similar quality to the one included in PlayStation 2, and retailed for $299.99 instead of $199.99, Dreamcast would have lost less money per unit than Sony did a year later with the PS2. That’s because Dreacmast used cheaper, less sophisticated components than PS2. Unlike PS2, the majority of Dreamcast owners over the console’s first year were very enthusiastic software buyers. Sega could have quickly recouped its losses on hardware based on the rate of software sales they had. For PS2, its primary function for most of the world was a DVD player first and a game player second. The most popular piece of software sold with PS2 at the point of sale was the Keanu Reeves film The Matrix on DVD, in both the United States and Japan. For a very large portion of the world, the PlayStation 2 was the first DVD player they ever owned. It could have, no, should have, been Dreamcast.
“I’m a killer app. Whoa.”
It’s also worth mentioning that, although it was less expensive than DVDs, GD-ROMs were hardly cheap. They cost more to mint than CDs. Sega wanted a proprietary format to prevent piracy. The PlayStation 1 had a huge issue with that. Unfortunately for Sega, GD-ROMs were almost immediately cracked. Pirating of Dreamcast games began before the system even made it to America. GD-ROMs offered no advantage over CDs, besides the higher capacity that really didn’t help all that much. Sega didn’t go with DVDs because they were convinced a low retail point would give them the edge over PlayStation 2. PS2 was widely speculated to launch at $400 to $600, based on the costs of materials used in it. Sega thought they had learned their lesson with the Saturn. The problem was, the price tag wasn’t the only advantage Sony had over them. Sega didn’t realize that until it was too late.
The Ramifications: After the Japanese launch of Dreamcast, Sony announced the final specifications for PlayStation 2, including confirming the long-expected DVD drive. Dreamcast was now obsolete before it even launched in America. Sega’s only hope was to sell as many units as possible before PS2 launched, and hope like hell the its price tag would be as high-ticket as top analysts in the industry expected it to be. It wasn’t. When Sony announced the $299 price tag at E3 2000, it was all she wrote for Sega. People who had been saving for a DVD player (at a time when they were relatively expensive) now could save up for a PlayStation 2 instead. Despite Dreamcast having a fairly impressive game lineup, a PlayStation 2 simply got you more for your dollar.
I put this #1 because the other Oopsies on this list don’t necessarily turn out better if the company goes the other way. If THQ doesn’t make the uDraw, they still eventually go bankrupt. If PlayStation 3 launches at $400, Microsoft had enough high-profile games to still sell a LOT of Xbox 360s and probably lives to fight another day. If Atari comes to terms with Nintendo, the Famicom still does good enough in Japan for Nintendo to do follow-up console and presumably not make the same mistake it made before. If 3DO launches at $300, it still lacks a first party to make killer exclusive games that differentiate itself from its competition. If Atari doesn’t sit on millions of unsold Pac-Man and E.T. carts, mouthy Warner Bros. executives would still probably over-inflate sales projections and speculators would still have bailed, crashing the industry. If Sega doesn’t launch the Saturn early, they still have to compete using inferior hardware to Nintendo’s iconic first-party games and Sony’s ultra-aggressive licensing program. If Nintendo doesn’t double-cross Sony, it doesn’t necessarily mean Super Nintendo’s CD-ROM ever sees the light of day, and Sony likely still would have developed their own platform. If Nintendo chooses cartridges over CDs, Sony’s aggressive licensing program (and all the ill-will Nintendo had built up over the years) still makes PlayStation a more attractive platform for third parties. If Warner executives never open their yap, Wall Street analysts had projected Warner would post 30% increases for Atari and speculators would have bailed anyway.
You’ll note that Sega tried to distance themselves from the “Sega” name as much as possible, using minimum amount of branding when promoting Dreamcast. Even the jewel cases of the games typically didn’t have the name “Sega” anywhere near “Dreamcast.” It was so awkward.
Dreamcast lacking DVDs is the only “Oopsie” where you know, beyond a shadow of a doubt, that things would have been better for Sega if they had gone the other way. A Sega Dreamcast with a DVD player survives well beyond year two. A highly acclaimed system with one of the most diverse and fucking awesome lineup of first-party games of all-time? PlayStation 2, GameCube, and Xbox launching against a console with one of the highest software sales penetration rates ever? I weep for the incredible battle we all missed out on. The Dreamcast is probably my favorite game console of all time. And if it could have played Forrest Gump, it doesn’t die an early death. What can they say? Oopsie!