Sega Dreamcast

## Company Description

The **Dreamcast** is a home video game console released by Sega on November 27, 1998, in Japan; September 9, 1999, in North America; and October 14, 1999, in Europe. It was the first sixth-generation video game console, preceding Sony's PlayStation 2, Nintendo's GameCube, and Microsoft's Xbox. The Dreamcast was Sega's final console, its 2001 discontinuation ending the company's eighteen years in the console market.

The Dreamcast was developed by an internal Sega team led by Hideki Sato. In contrast to the expensive hardware of the unsuccessful Saturn, the Dreamcast was designed to reduce costs with off-the-shelf components, including a Hitachi SH-4 CPU and an NEC PowerVR2 GPU. Sega used the GD-ROM media format to avoid the expenses of DVD-ROM technology and a custom version of the Windows CE operating system to make porting PC games easy. The Dreamcast was the first console to include a built-in modular modem for internet access and online play.

The Dreamcast was released to a subdued reception in Japan, but had a successful US launch backed by a large marketing campaign. However, interest steadily declined as Sony built anticipation for the PlayStation 2. Dreamcast sales did not meet Sega's expectations after several price cuts, and the company suffered significant financial losses. After a change in leadership, Sega discontinued the Dreamcast on March 31, 2001, withdrew from the console business, and restructured itself as a third-party developer. 9.13 million Dreamcast units were sold worldwide. Its bestselling game was *Sonic Adventure* (1998), the first 3D game in Sega's *Sonic the Hedgehog* franchise, which sold 2.5 million copies.

Despite its short lifespan and limited third-party support, reviewers have celebrated the Dreamcast as one of the greatest consoles. It is considered ahead of its time for pioneering concepts such as online play and downloadable content. Many Dreamcast games are regarded as innovative, including *Sonic Adventure*, *Crazy Taxi* (1999), *Shenmue* (1999), *Jet Set Radio* (2000), *Phantasy Star Online* (2000), and high-quality ports from Sega's NAOMI arcade system board.

## History

### Background

In 1988, Sega released the Genesis (known as the Mega Drive in most countries outside North America), in the fourth generation of video game consoles. It became the most successful Sega console ever, at 30.75 million units sold. Its successor, the Saturn, was released in Japan in 1994. The Saturn is CD-ROM-based and has 2D and 3D graphics, but its complex dual-CPU architecture was more difficult to program than its chief competitor, the Sony PlayStation. Although the Saturn debuted before the PlayStation in Japan and the United States, its surprise US launch, four months earlier than scheduled, was marred by a lack of distribution, which remained a problem. Losses on the Saturn contributed to financial problems for Sega, whose revenue had declined between 1992 and 1995 as part of an industry-wide slowdown.

Sega announced that Shoichiro Irimajiri would replace Tom Kalinske as chairman and CEO of Sega of America, while Bernie Stolar, a former executive at Sony Computer Entertainment of America, became Sega of America's executive vice president in charge of product development and third-party relations. After the 1996 launch of the Nintendo 64, sales of the Saturn and its software fell sharply. As of August 1997, Sony controlled 47 percent of the console market, Nintendo controlled 40 percent, and Sega controlled only 12 percent; neither price cuts nor high-profile games helped the Saturn.

> I thought the Saturn was a mistake as far as hardware was concerned. The games were obviously terrific, but the hardware just wasn't there.
>
>

As a result of Sega's deteriorating financial situation, Hayao Nakayama resigned as president of Sega in January 1998 in favor of Irimajiri, and Stolar acceded to become CEO and president of Sega of America. Following five years of generally declining profits, in the fiscal year ending March 31, 1998, Sega suffered its first parent and consolidated financial losses since its 1988 listing on the Tokyo Stock Exchange, reporting a consolidated net loss of ¥35.6 billion (US$269.8 million). Shortly before announcing its financial losses, Sega announced the discontinuation of the Saturn in North America to prepare for the launch of its successor. This effectively left the Western market without Sega games for more than a year. Rumors about the upcoming Dreamcast—spread mainly by Sega—leaked to the public before the last Saturn games were released.

### Development

As early as 1995, reports surfaced that Sega would collaborate with Lockheed Martin, The 3DO Company, Matsushita, or Alliance Semiconductor to create a new graphics processing unit, which conflicting accounts said would be used for a 64-bit "Saturn 2" or an add-on peripheral. Dreamcast development was unrelated. Considering the Saturn's poor performance, Irimajiri looked beyond Sega's internal hardware development division to create a new console. In 1997, he enlisted IBM's Tatsuo Yamamoto to lead an 11-person team to work on a secret project in the United States with the codename Blackbelt. Accounts vary on how an internal team led by Hideki Sato also began development on Dreamcast hardware; one account specifies that Sega tasked both teams, and another suggests that Sato was bothered by Irimajiri's choice to begin development externally and had his team start work. Sato and his group chose the Hitachi SH-4 processor architecture and the VideoLogic PowerVR2 graphics processor, manufactured by NEC, in the production of the mainboard. Initially known as Whitebelt, the project was later codenamed Dural, after the metallic female fighter from Sega's *Virtua Fighter* series.

Yamamoto's group opted to use 3dfx Voodoo 2 and Voodoo Banshee graphics processors alongside a Motorola PowerPC 603e central processing unit (CPU), but Sega management later asked them to also use the SH-4 chip. Both processors have been described as "off-the-shelf" components. According to Charles Bellfield, the former Sega of America vice president of communications and former NEC brand manager, presentations of games using the NEC solution showcased the performance and low cost delivered by the SH-4 and PowerVR architecture. He said that Sega's relationship with NEC, a Japanese company, likely also influenced the decision to use its hardware rather than the architecture developed in America. Stolar felt the US 3dfx version should have been used, but that "Japan wanted the Japanese version, and Japan won". As a result, 3dfx filed a lawsuit against Sega and NEC claiming breach of contract, which was settled out of court.

The choice to use the PowerVR architecture concerned Electronic Arts (EA), a longtime developer for Sega consoles. EA had invested in 3dfx but was unfamiliar with the selected architecture, which was reportedly less powerful. According to Shiro Hagiwara (a general manager at Sega's hardware division) and Ian Oliver (the managing director of the Sega subsidiary Cross Products), the SH-4 was chosen while still in development, following lengthy deliberation, as the only processor that "could adapt to deliver the 3D geometry calculation performance necessary". By February 1998, Sega had renamed the project Katana, after the Japanese sword, although certain hardware specifications such as random access memory (RAM) were not finalized.

Knowing the Saturn had been set back by its high production costs and complex hardware, Sega took a different approach with the Dreamcast. Like previous Sega consoles, the Dreamcast was designed around intelligent subsystems working in parallel, but the selections of hardware were closer to personal computers than video game consoles, reducing cost. It also enabled software development to begin before any development kits had been completed, as Sega informed developers that any game developed with a Pentium II 200 in mind would run on the console. According to Damien McFerran, "the motherboard was a masterpiece of clean, uncluttered design and compatibility".

The Chinese economist and future Sega.com CEO Brad Huang convinced the Sega chairman, Isao Okawa, to include a modem with every Dreamcast under opposition from Okawa's staff over the additional US$15 cost per unit. To account for rapid changes in home data delivery, Sega designed the modem to be modular.

Sega selected the GD-ROM media format. Jointly developed by Sega and Yamaha, the GD-ROM could be mass-produced at a similar price to a normal CD-ROM, avoiding the greater expense of newer DVD-ROM technology.

Microsoft developed a custom Dreamcast version of Windows CE with DirectX API and dynamic-link libraries, making it easy to port PC games to the platform, although programmers would ultimately favor Sega's development tools over those from Microsoft. A member of the Project Katana team speaking anonymously predicted this would be the case, speculating developers would prefer the greater performance possibilities offered by the Sega OS to the more user-friendly interface of the Microsoft OS.

Sega held a public competition to name its new system and considered over 5,000 different entries before choosing "Dreamcast"—a portmanteau of "dream" and "broadcast". According to Katsutoshi Eguchi, the Japanese game developer Kenji Eno submitted the name and created the Dreamcast's spiral logo, but has not been officially credited by Sega. The Dreamcast's startup sound was composed by the Japanese musician Ryuichi Sakamoto. Because the Saturn had tarnished its reputation, Sega planned to remove its name from the console and establish a new gaming brand similar to Sony's PlayStation, but Irimajiri's management team decided to retain it. Sega spent US$50–80 million on hardware development, $150–200 million on software development, and US$300 million on worldwide promotion—a sum which Irimajiri, a former Honda executive, humorously likened to the investments required to design new automobiles.

### Launch

#### Japan

With massive losses on the Saturn, including a 75 percent drop in half-year profits just before the Japanese launch of the Dreamcast, Sega was confident about the Dreamcast with significant outside interest and many pre-orders. However, Sega could not achieve its shipping goals for the Japanese Dreamcast launch due to a shortage of PowerVR chipsets caused by a high failure rate in the manufacturing process. As more than half of its limited stock had been pre-ordered, Sega stopped pre-orders in Japan. On November 27, 1998, the Dreamcast launched in Japan at a price of ¥29,000, and the stock sold out by the end of the day. However, of the four games available at launch, only one—a port of *Virtua Fighter 3*, the most successful arcade game Sega ever released in Japan—sold well. Sega estimated that an additional 200,000–300,000 Dreamcast units could have been sold with sufficient supply.

Sega had announced that *Sonic Adventure*, the next game starring its mascot, Sonic the Hedgehog, would launch with the Dreamcast and promoted it with a large-scale public demonstration at the Tokyo Kokusai Forum Hall, but it and *Sega Rally Championship 2* were delayed. They arrived within the following weeks, but sales continued to be slower than expected.

Irimajiri hoped to sell over 1 million Dreamcast units in Japan by February 1999, but sold fewer than 900,000, undermining Sega's attempts to build an installed base sufficient to protect the Dreamcast after the arrival of competition from other manufacturers. There were reports of disappointed Japanese consumers returning their Dreamcasts and using the refund to purchase additional PlayStation software. *Seaman*, released in July 1999, became the Dreamcast's first major hit in Japan. Prior to the Western launch, Sega reduced the price of the Dreamcast to ¥19,900, effectively making it unprofitable but increasing sales. The reduction and the release of Namco's *Soulcalibur* helped Sega gain 17 percent on its shares.

#### North America

Before the Dreamcast's release, Sega was dealt a blow when EA, the largest third-party video game publisher, announced it would not develop games for it. EA's chief creative officer Bing Gordon said that Sega had "flip-flopped" on the hardware configuration, that EA developers did not want to work on it, and that Sega "was not acting like a competent hardware company". Gordon also said that Sega could not afford to give them the "kind of license that EA has had over the last five years". According to Stolar, the EA president, Larry Probst, wanted exclusive rights as the only sports brand on Dreamcast, which Stolar could not accept due to Sega's recent US$10 million purchase of the sports game developer Visual Concepts. While EA's *Madden NFL* series had established brand power, Stolar regarded Visual Concepts' *NFL 2K* as superior and would provide "a breakthrough experience" to launch the Dreamcast. While the Dreamcast would have none of EA's popular sports games, "Sega Sports" games developed mainly by Visual Concepts helped to fill that void.

> Let's take the conservative estimate of 250,000 Dreamcast units at presage—that's a quarter of a million units at $200. We'll have a ratio of 1.5 or two games for every Dreamcast unit sold. That's half a million units of software. We think we'll be .5 to one on VMUs and peripheral items such as extra controllers and what have you. This could be a $60 to 80 million 24-hour period. What has ever sold $60 to 80 million in the first 24 hours?
>
>

Working closely with Midway Games (which developed four launch games for the system) and taking advantage of the ten months following the Dreamcast's release in Japan, Sega of America worked to ensure a more successful US launch with a minimum of 15 launch games. With lingering bitterness over the Saturn's early release, Stolar repaired relations with major US retailers, with whom Sega presold 300,000 Dreamcast units. In addition, a pre-launch promotion enabled consumers to rent Dreamcasts from Hollywood Video in the months preceding its September launch. Sega of America's senior vice president of marketing Peter Moore, a fan of the attitude previously associated with Sega's brand, worked with Foote, Cone & Belding and Access Communications to develop the "It's Thinking" campaign of 15-second television commercials, which emphasized the Dreamcast's hardware power. According to Moore, "We needed to create something that would really intrigue consumers, somewhat apologize for the past, but invoke [*sic*] all the things we loved about Sega, primarily from the Genesis days." On August 11, Sega of America confirmed that Stolar had been fired, leaving Moore to direct the launch.

The Dreamcast launched in North America on September 9, 1999, at a price of $199, which Sega's marketing dubbed "9/9/99 for $199". Eighteen launch games were available in the US Sega set a new sales record by selling more than 225,132 Dreamcast units in 24 hours, earning $98.4 million in what Moore called "the biggest 24 hours in entertainment retail history". Within two weeks, US Dreamcast sales exceeded 500,000. By Christmas, Sega held 31 percent of the North American video game market share. Significant launch games included *Sonic Adventure*, the arcade fighting game *Soulcalibur*, and Visual Concepts' football simulation *NFL 2K*. On November 4, Sega announced it had sold over one million Dreamcast units. The launch was marred by a glitch at one of Sega's manufacturing plants, which produced defective GD-ROMs.

#### Europe

Sega released the Dreamcast in Europe on October 14, 1999, at a price of £200. By November 24, 400,000 consoles had been sold in Europe. By Christmas of 1999, Sega of Europe had sold 500,000 units, six months ahead of schedule. The price was dropped to £149.99 from September 8, 2000, with sales at around 800,000 in Europe at this point. Announcing the drop, Jean-François Cecillon, CEO of Sega Europe, commented that "There are 'X' amount of core gamers in Europe; the early adopters. We have reached 80 or 90 per cent of them now and the market is screaming for a price reduction. We have to acknowledge these things and go with the market". Sales did not continue at this pace, and by October 2000, Sega had sold only about 1 million units in Europe. As part of Sega's promotions of the Dreamcast in Europe, it sponsored four European football clubs: Arsenal F.C. (England), AS Saint-Étienne (France), U.C. Sampdoria (Italy), and Deportivo de La Coruña (Spain).

#### Australia and New Zealand

Through the regional distributor Ozisoft, the Dreamcast went on sale in Australia and New Zealand on November 30, 1999, at a price of A$499. The launch was planned for September, but was delayed due to problems with Internet compatibility and launch game availability, then delayed again from the revised date of October 25 for various reasons. There were severe problems at launch; besides a severe shortage of the consoles, only six of the thirty planned launch games were available for purchase on day one with no first-party software included, and additional peripherals were not available in stores.

The Ozisoft representative Steve O'Leary, in a statement released the day of launch, explained that the Australian Customs Service had impounded virtually all the supplied launch software, including demo discs, due to insufficient labeling of their country of origin; Ozisoft had received them only two days before launch, resulting in few games that were catalogued and prepared for shipment in time. O'Leary also said that the Dreamcast's high demand in other markets had reduced the number of peripherals allotted to the region. Further complicating matters was the lack of an internet disc due to localization problems, and delays in securing an ISP contract, which was done through Telstra the day before launch. The online component was not ready until March 2000, at which point Ozisoft sent the necessary software to users who had sent in a filled-out reply paid card included with the console. The poor launch, combined with a lack of advertising and a high price point, produced lackluster sales in Australia; two large retail chains reported a combined total of 13 console sales over the first few days after launch.

### Competition

The PS2 provided tough competition for the Dreamcast.
Though the Dreamcast launch was successful, Sony held 60 percent of the overall video game market share in North America with the PlayStation at the end of 1999. On March 2, 1999, Sony revealed the first details of the PlayStation 2 (PS2), which Ken Kutaragi claimed would allow video games to convey unprecedented emotions. Sony estimated the PS2 could render 7.5 million to 16 million polygons per second, whereas independent estimates ranged from 3 million to 20 million, compared to Sega's estimates of more than 3 million to 6 million for the Dreamcast. The PS2 would also use the DVD-ROM format, which could hold substantially more data than the Dreamcast's GD-ROM, and would be backwards-compatible with hundreds of popular PlayStation games. Sony's specifications appeared to render the Dreamcast obsolete months before its US launch, although reports later emerged that the PS2 was not as powerful as expected and difficult to develop on. The same year, Nintendo announced that its next console, the GameCube, would meet or exceed anything on the market, and Microsoft began development of its own console, the Xbox.

US Dreamcast sales—which exceeded 1.5 million by the end of 1999—began to decline as early as January 2000. Poor Japanese sales contributed to Sega's ¥42.88 billion ($404 million) consolidated net loss in the fiscal year ending March 2000, which followed a loss of ¥42.881 billion the previous year and marked Sega's third consecutive annual loss. Although Sega's overall sales for the term increased 27.4%, and Dreamcast sales in North America and Europe greatly exceeded expectations, this coincided with a decrease in profitability due to the investments required to launch the Dreamcast in Western markets and poor software sales in Japan. At the same time, increasingly poor market conditions reduced the profitability of Sega's Japanese arcade business, prompting Sega to close 246 locations.

Moore became the president and chief operating officer of Sega of America on May 8, 2000. He and Sega's developers focused on the US market to prepare for the upcoming launch of the PS2. To that end, Sega of America launched its own internet service provider, Sega.com, led by CEO Brad Huang. On September 7, 2000, Sega.com launched SegaNet, the Dreamcast's internet gaming service, at a subscription price of $21.95 per month. Although Sega had previously released only one Dreamcast game in the US that featured online multiplayer, *ChuChu Rocket!*, the launch of SegaNet combined with the release of *NFL 2K1*, with a robust online component, was intended to increase demand for the Dreamcast in the US market. The service later supported games including *Bomberman Online*, *Quake III Arena*, and *Unreal Tournament*. The September 7 launch coincided with a new advertising campaign to promote SegaNet, including advertising on the MTV Video Music Awards that day, which Sega sponsored for the second consecutive year. Sega employed aggressive pricing strategies around online gaming; in Japan, every Dreamcast sold included a free year of internet access, which Okawa personally paid for. Prior to the launch of SegaNet, Sega had already offered a $200 rebate to any Dreamcast owner who purchased two years of internet access from Sega.com. To increase SegaNet's appeal in the US, Sega dropped the price of the Dreamcast to $149 (compared to the PS2's US launch price of $299) and offered a rebate for the full $149 price of a Dreamcast, and a free Dreamcast keyboard, with every 18-month SegaNet subscription.

Moore said that the Dreamcast would need to sell 5 million units in the US by the end of 2000 to remain a viable platform; Sega fell short of this goal, with some 3 million units sold. Moreover, Sega's attempts to spur increased Dreamcast sales through lower prices and cash rebates caused escalating financial losses. Instead of an expected profit, for the six months ending September 2000, Sega posted a ¥17.98 billion ($163.11 million) loss, with a projected year-end loss of ¥23.6 billion. This estimate more than doubled to ¥58.3 billion, and in March 2001, Sega posted a consolidated net loss of ¥51.7 billion ($417.5 million). While the PS2's October 26 US launch was marred by shortages, this did not benefit the Dreamcast as much as expected; many consumers continued to wait for a PS2, while the PSone, a remodeled version of the original PlayStation, became the bestselling console in the US at the start of the 2000 holiday season. According to Moore, "The PlayStation 2 effect that we were relying upon did not work for us... People will hang on for as long as possible... What effectively happened is the PlayStation 2 lack of availability froze the marketplace." Eventually, Sony and Nintendo held 50 and 35 percent of the US video game market, while Sega held only 15 percent. According to Bellfield, Dreamcast software sold at an 8-to-1 ratio with the hardware, but the small install base meant this did not produce enough revenue to keep it viable.

### Decline

We had a tremendous 18 months. Dreamcast was on fire - we really thought that we could do it. But then we had a target from Japan that said we had to make x hundreds of millions of dollars by the holiday season and shift x millions of units of hardware, otherwise, we just couldn't sustain the business. Somehow I got to make that call, not the Japanese. I had to fire a lot of people; it was not a pleasant day. So on January 31st 2001 we said Sega is leaving hardware. We were selling 50,000 units a day, then 60,000, then 100,000, but it was just not going to be enough to get the critical mass to take on the launch of PS2. It was a big stakes game. Sega had the option of pouring in more money and going bankrupt and they decided they wanted to live to fight another day.

On May 22, 2000, Okawa replaced Irimajiri as president of Sega. Okawa had long advocated that Sega abandon the console business. His sentiments were not unique; Sega co-founder David Rosen had "always felt it was a bit of a folly for them to be limiting their potential to Sega hardware", and Stolar had suggested Sega should have sold their company to Microsoft. In September 2000, in a meeting with Sega's Japanese executives and the heads of the company's major Japanese game development studios, Moore and Bellfield recommended that Sega abandon its console business and focus on software, prompting the studio heads to walk out.

Nevertheless, on January 31, 2001, Sega announced the discontinuation of the Dreamcast after March 31 and the restructuring of the company as a "platform-agnostic" third-party developer. Sega also announced a price reduction to $99 to eliminate its unsold inventory, which was estimated at 930,000 units as of April 2001. After a further reduction to $79, the Dreamcast was cleared out of stores at $49.95. The final Dreamcast unit manufactured was autographed by the heads of all nine of Sega's internal game development studios, plus the heads of Visual Concepts and Sega's sound studio Wave Master, and given away with 55 first-party Dreamcast games through a competition organized by *GamePro*. Okawa, who had previously loaned Sega $500 million in 1999, died on March 16, 2001; shortly before his death, he forgave Sega's debts to him and returned his $695 million worth of Sega and CSK stock, helping Sega survive the transition to third-party development. As part of this restructuring, nearly one third of Sega's Tokyo workforce was laid off in 2001.

9.13 million Dreamcast units were sold worldwide. After its discontinuation, commercial games were still developed and released for Dreamcast, particularly in Japan. In the United States, game releases continued until the end of the first half of 2002. Sega continued to repair Dreamcast units until 2007. As of 2014, it was still receiving new independently developed games formatted for MIL-CD, a multimedia-enhanced format developed by Sega and supported by Dreamcast. After five consecutive years of financial losses, Sega finally posted a profit for the fiscal year ending March 2003.

The announcement of Sega's exit from hardware was met with enthusiasm. According to *IGN*'s Travis Fahs, "Sega was a creatively fertile company with a rapidly expanding stable of properties to draw from. It seemed like they were in a perfect position to start a new life as a developer/publisher." Former Working Designs president Victor Ireland wrote, "It's actually a good thing ... because now Sega will survive, doing what they do best: software." The staff of *Newsweek* wrote that "from *Sonic* to *Shenmue*, Sega's programmers have produced some of the most engaging experiences in the history of interactive media ... Unshackled by a struggling console platform, this platoon of world-class software developers can do what they do best for any machine on the market." *Game Informer*, commenting on Sega's tendency to produce under-appreciated cult classics, wrote: "Let us rejoice in the fact that Sega is making games equally among the current console crop, so that history will not repeat itself."